Bell Group Ltd v Westpac: 2008 WA Supreme Court Insolvency Judgment

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION : THE BELL GROUP LTD (IN LIQ) -v- WESTPAC BANKING CORPORATION [No 9] [2008] WASC 239

CORAM : OWEN J

HEARD : 404 DAYS BETWEEN 22 JULY 2003 AND 22 SEPTEMBER 2006

DELIVERED : 28 OCTOBER 2008

FILE NO/S : CIV 1464 of 2000

BETWEEN : THE BELL GROUP LTD ACN 008 666 993 (IN LIQ)
First Plaintiff

THE BELL GROUP LTD ACN 008 666 993 (IN LIQ) as trustee separately for each of
DOLFINNE PTY LTD ACN 009 134 516 (IN LIQ)
INDUSTRIAL SECURITIES PTY LTD ACN 008 728 792 (IN LIQ)
MARANOA TRANSPORT PTY LTD ACN 009 668 393 (IN LIQ)
NEOMA INVESTMENTS PTY LTD ACN 009 234 842 (IN LIQ)
Second Plaintiff

BELL GROUP FINANCE PTY LTD ACN 009 165 182 (IN LIQ) (RECEIVER AND MANAGER APPOINTED)
Third Plaintiff

BELL GROUP (UK) HOLDINGS LTD (IN LIQ) (IN ADMINISTRATIVE RECEIVERSHIP)
Fourth Plaintiff

BELL PUBLISHING GROUP PTY LTD ACN 008 704 452 (IN LIQ)
Fifth Plaintiff

BELL GROUP NV (IN LIQ)
Sixth Plaintiff

AMBASSADOR NOMINEES PTY LTD ACN 009 105 800 (IN LIQ)
BELCAP ENTERPRISES PTY LTD ACN 009 264 537 (IN LIQ)
BELL BROS PTY LTD ACN 008 672 375 (IN LIQ)
BELL EQUITY MANAGEMENT LTD ACN 009 210 208 (IN LIQ)
DOLFINNE PTY LTD ACN 009 134 516 (IN LIQ)
GREAT WESTERN TRANSPORT PTY LTD ACN 009 669 121 (IN LIQ)
HARLESDEN FINANCE PTY LTD ACN 009 227 561 (IN LIQ)
INDUSTRIAL SECURITIES PTY LTD ACN 008 728 792 (IN LIQ)
MARADOLF LTD ACN 005 482 806 (IN LIQ)
MARANOA TRANSPORT PTY LTD ACN 009 668 393 (IN LIQ)
WANSTEAD PTY LTD ACN 008 775 120 (IN LIQ)
WESTERN TRANSPORT PTY LTD ACN 009 666 308 (IN LIQ)
WIGMORES TRACTORS PTY LTD ACN 008 679 221 (IN LIQ)
W & J INVESTMENTS LTD ACN 000 068 888 (IN LIQ)
DOLFINNE SECURITIES PTY LTD ACN 009 218 142 (IN LIQ)
NEOMA INVESTMENTS PTY LTD ACN 009 234 842 (IN LIQ)
TBGL ENTERPRISES LTD ACN 008 669 216 (IN LIQ)
WANSTEAD SECURITIES PTY LTD ACN 009 218 160 (IN LIQ)
WAON INVESTMENTS PTY LTD ACN 008 937 166 (IN LIQ)
WESTERN INTERSTATE PTY LTD ACN 000 224 395 (PROVISIONAL LIQUIDATOR APPOINTED)
Seventh Plaintiffs

GEOFFREY FRANK TOTTERDELL
in his capacity as liquidator (with ALJ Woodings) of each of First Plaintiff and of the first, second, third, fifth, ninth, tenth, eleventh, thirteenth, fourteenth, sixteenth, seventeenth and nineteenth named Seventh Plaintiffs
Eighth Plaintiff

ANTONY LESLIE JOHN WOODINGS
in his capacity as sole liquidator of the Third Plaintiff and of the Fifth Plaintiff and of the fourth, sixth, seventh, eighth, twelfth, fifteenth and eighteenth named Seventh Plaintiffs
and as liquidator (with GF Totterdell) of the First Plaintiff and of the first, second, third, fifth, ninth, tenth, eleventh, thirteenth, fourteenth, sixteenth, seventeenth and nineteenth named Seventh Plaintiffs
Ninth Plaintiff

GARRY JOHN TREVOR
in his capacity as liquidator of the Sixth Plaintiff
Twelfth Plaintiff

THE LAW DEBENTURE TRUST CORPORATION plc
as trustee of the BGNV Trusts as defined in the schedule to the writ of summons
Thirteenth Plaintiff

AND

WESTPAC BANKING CORPORATION ACN 007 457 141
First Defendant

SG AUSTRALIA LTD ACN 002 093 021 (formerly SOCIETE GENERALE AUSTRALIA LTD)
NATIONAL AUSTRALIA BANK LTD ACN 004 044 937
HSBC BANK AUSTRALIA LTD ACN 006 434 162 (formerly HONGKONGBANK OF AUSTRALIA LTD)
STANDARD CHARTERED BANK ARBN 097 571 778
COMMONWEALTH BANK OF AUSTRALIA ACN 123 123 124
Second Defendants

LLOYDS TSB BANK plc (formerly LLOYDS BANK plc)
BANCO ESPIRITO SANTO SA (formerly BANCO ESPIRITO SANTO E COMERCIAL DE LISBOA)
SEB AG (formerly BfG BANK AG) (formerly BANK FUR GEMEINWIRTSCHAFT AG)
BANK OF SCOTLAND plc (formerly THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND)
CREDIT AGRICOLE SA (formerly CAISSE NATIONALE DE CREDIT AGRICOLE)
BANK AUSTRIA CREDITANSTALT AG (formerly BANK AUSTRIA AKTIENGESELLSCHAFT)
CREDIT LYONNAIS
DRESDNER BANK AG
KBC BANK VERZEKERINGS HOLDING NV (formerly KREDIETBANK NV)
SKOPBANK
DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFTSBANK (formerly DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG)
THE GULF BANK KSC
GENTRA LTD (formerly ROYAL TRUST BANK)
CALYON (formerly CREDIT AGRICOLE INDOSUEZ) (formerly BANQUE INDOSUEZ)
Third Defendants

EQUITY TRUST (CURACAO) NV
Fifth Defendant

Catchwords:
Agency – General principles – Imputation of knowledge of agent to principal – Particular relationships – Syndicate of banks – Agency of lead bank – Extent of agency depends on instruments – Agency and knowledge – Meetings and dissemination of information – Solicitors as agents – Extent of agency depends on retainer

Banking and financial institutions – Banks – Banker and customer and business of banking – Loan facilities and agreements with corporate groups – Treatment of bond issues as debts or equity for purposes of calculating borrower’s financial position – Representations and reliance on information from borrower – turns on own facts

Banking and financial institutions – Banks – Banker and customer and business of banking- Financial arrangements with corporate groups – Negative pledge and guarantee arrangements – Refinancing – Securities and charging documents – Reduction of bank debt – Dealings by banks with borrowers in a precarious financial position – Decision-making structures and personnel – Bank officers’ knowledge of borrower’s financial position – Demands and waiver as evidence of banks’ knowledge of borrower’s financial position – turns on own facts

Bankruptcy – Statutory Claims – Meaning of “dispositions” or “alienations” of property under Bankruptcy Act 1966 (Cth) s120 and s121 and Property Law Act 1969 (WA) s89 – Meaning of “settlement” under Bankruptcy Act s 120 – Characterisation of types of transactions as dispositions or alienations of property – Share mortgages, directions and authorisations to give mortgages, guarantees and indemnities, mortgage debentures, loan agreements, subordination agreements – Whether dispositions or alienations of property

Bankruptcy – Statutory claims – Meaning of “intent to defraud creditors” under Bankruptcy Act s 121 (as it stood before 1996 amendments) and Property Law Act s89 – Requires proof of an “actual dishonest intent” –

Bankruptcy – Statutory claims – Non-registration of charges – Whether guarantees and indemnities, loan agreements and subordination agreements create registrable charges – turns on own facts

Contracts – General contractual principles – Construction and interpretation of contracts – Extrinsic evidence – The Codelfa principles – Ambiguity – Relevance of supplemental agreements to interpretation of main agreements – Non-availability of post-contractual conduct as aid to interpretation – Indentifying terms – Applicability of BP Refinery principles to implication of terms in informal contracts

Contracts – General contractual principles – Informal contracts – Classic offer and acceptance theory – Inferring or implying a contract from conduct – “Tacit understanding or agreement” or “manifested mutual assent” as bases of a contract – Resort to extrinsic evidence (including post-contractual conduct) to ascertain whether a contract was formed – Distinguished from rules limiting use of extrinsic evidence as an aid to interpreting contractual terms

Contracts – Informal contracts – Enforceability by non-party – Doctrine – of privity – General law principles applicable – Property Law Act s 11(2) not applicable to informal contracts

Corporations – Corporate finance – Fundraising by convertible subordinated bond issues – Whether funds so raised are debt or quasi equity – Operations of the Eurobond market – General principles relating to subordination – Types of subordination – Complete subordination – Springing or inchoate subordination – Bond-issuer lending funds to other companies in same corporate group – Materiality of subordinated status of the loans to decisions by investor to advance funds – Whether disclosure of subordinated status required

Corporations – Management and administration – Directors – Directors’ duties – Three duties: duty to act in the best interests of the company; duty not to exercise powers for improper purposes; duty to avoid conflicts of interest – Whether the duties are fiduciary in nature – The proscriptive: prescriptive dichotomy

Corporations – Management and administration – Directors – Directors’ duties – Duty to act in the best interests of the company – Duty is owed to the company – In corporate groups directors must consider interests of individual companies as well as the group

Corporations – Management and administration – Directors – Directors’ duties – Duty to act in the best interests of the company – Creditors – No independent duties owed direct to creditors – If company is in an insolvency context directors must take the interest of creditors into account

Corporations – Management and administration – Directors – Directors’ duties – Duty not to exercise powers for improper purposes – Overlap with duty to act in the best interests of the company

Corporations – Management and administration – Directors – Directors’ duties – Duty to avoid conflicts of interest – Duty not to exercise powers in own interest where position of conflict or potential conflict – Must be a real, sensible possibility of conflict – Conflict of interest and interest – Conflict of duty and interest – Personal interests extend beyond direct and contractual interests – Extent to which breach can arise if director acts in interests of a third party

Corporations – Management and administration – Directors – Directors’ duties – Test whether directors complied with duties is largely (but not entirely) subjective – Court can look objectively at surrounding circumstances – But court does not substitute its own views on commercial merits for views of directors – Business judgment rule – Relevance of directors’ evidence as to beliefs – question is whether beliefs professed by directors were genuinely held

Corporations – Management and administration – Meetings – What constitutes a meeting – No necessity for formal meetings – Minimum requirement is that there is a genuine meeting of minds so that subject matter is truly considered and decided – Minutes of meetings – Minutes may be prima facie evidence of content – Prima facie effect can be rebutted by evidence

Equity – General principles and maxims of equity – Equitable defences – Waiver – Abandonment – Election – Ratification and affirmation – Laches – Clean hands – Restoration to original position – Turns on own facts

Equity – Equitable fraud – General principles – Nature of equitable fraud – Compared with common law (actual) fraud – Equitable fraud not limited to conscious wrongdoing or overreaching

Equity – Equitable fraud – Imposition and deceit – Fourth limb of Earl of Chesterfield v Janssen – Based on public utility – Extension of composition cases to pre-insolvency commercial dealings – “Mala fide” – Not necessary to establish bad faith

Equity – Equitable fraud – Inequitable and unconscientious bargain – Meaning of “unconscionable bargain” – Need to establish a special disadvantage – Extent to which doctrine applies to dealings between large commercial entities

Equity – Fiduciary obligations – Barnes v Addy – Recipient liability (first limb) – Third party liability does not depend on dishonesty by fiduciary – First limb extends beyond breach of trust and applies to breach of fiduciary duty – Third party liability not confined to receipt of trust property strictly so-called – Liability applies to receipt of property misapplied in breach of a fiduciary obligation

Equity – Fiduciary obligations – Barnes v Addy – Recipient liability (first limb) – Degrees of knowledge required for knowing receipt – Baden Delvaux categories apply under Australian law – Categories 1 to 4 (but not 5) sufficient to establish knowledge – Test now the same for both limbs of Barnes v Addy – Recipient must know both that the property is subject to a fiduciary obligation (or trust) and that the obligation (or trust) has been breached

Equity – Fiduciary obligations – Barnes v Addy – Accessorial liability (second limb) – Third party assisting in a “dishonest and fraudulent design” by fiduciary – Directions in Farah Constructions not to abandon “dishonest and fraudulent design integer” – Effect is the fiduciary must have acted dishonestly – Mere breach of trust or mere breach of fiduciary duty by the fiduciary not sufficient for third party liability – Pleading rules that apply to fraud apply to pleading a “dishonest and fraudulent design”

Estoppel – General principles – Estoppel by representation, estoppel by convention, equitable (promissory) estoppel – Similarities and differences – Subject matter and clarity of representations – Intention that representations be relied on – Reliance and detriment a necessary element of all three forms of estoppel – Fashioning relief in various forms of estoppel

Evidence – Generally – Witnesses – Admissibility of hypothetical evidence of what a witness might have done in assumed circumstances – General principles relating to rules in Browne v Dunn and Jones v Dunkel – Documentary evidence – Best evidence rule – Oral evidence in relation to documents up to 20 years old – pragmatic approach

Evidence – Admissibility and relevance – General principles relating to state of mind evidence – Distinguished from proof of empirical facts – Organic theory of knowledge – Establishing the state of mind of a corporate entity – State of mind of directing mind and will of the entity is the state of mind of the entity – Aggregation of knowledge held by individuals within the organisation – The individuals must be “closely and relevantly connected with the company” – Importance of understanding the decision-making structures within an entity

Insolvency – General principles – Meaning of terms “insolvent”, “nearly insolvent”, “doubtful solvency” – Cash flow and balance sheet tests of solvency – sources of funds from which to pay debts – applicability of phrase “from its own money”

Insolvency – Assessment by a court – Time period over which solvency assessed – Difference between prospective and retrospective assessments of solvency – Relevance of hindsight in assessment of solvency – Difference between “endemic illiquidity” and “temporary illiquidity”

Limitation of Actions – Trusts and equitable causes of action – Claim by a beneficiary of a remedial constructive trust – Limitation Act 1935 (WA) – No application of six-year limitation period in s 47 Limitation Act 1935 (WA) in cases giving rise to merely remedial constructive trusts – Limitation by analogy – Finding that no applicable limitation period under statute and that no analogy can be drawn – Equity will only permit the application of a limitation period where it is just to do so

Remedies – Relief and remedies – turns on own (lack of) information
Legislation:
Bankruptcy Act 1966 (Cth) s 120(1), s 120(2) and s 121
Property Law Act 1969 (WA) s 11(2) and s 89
Limitation Act 1935 (WA) s 47
Result:
Plaintiffs – partially successful
First second and third defendants (plaintiffs by counterclaim) – partially successful
Category: A

Representation:
Counsel:
All Plaintiffs : Mr R McK Robson QC, Mr T K Tobin QC, Mr E M Corboy SC, Mr J W S Peters SC, Mr J T Svehla, Ms E A Cheeseman, Mr J E Castaldi, Mr D J Crennan, Mr G A Elliott & Mr C Slater
First, Second &
Third Defendants : Mr T M Jucovic QC, Mr D E J Ryan SC, Mr H K Insall SC, Mr A V McCarthy, Mr M C Goldblatt, Mr S Habib, Mr M D Howard & Mr S Davis
Fifth Defendant : No appearance
Solicitors:
All Plaintiffs : Blake Dawson Waldron
First, Second &
Third Defendants : Freehills
Fifth Defendant : No appearance

Case(s) referred to in judgment(s):
3
3M Australia Pty Ltd v Kemish (1986) 4 ACLC 185 306
A
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Agip (Africa) Ltd v Jackson [1990] Ch 265 258
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Angas Law Services Pty Ltd (In Liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507 1138
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Ashburton Oil NL v Alpha Minerals NL (1971) 123 CLR 614 1126
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588 2434
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Atkins v St Barbara Mines Ltd (1996) 135 FLR 119 1481
Attorney-General for the United Kingdom v Heinemann Publishers Australia Pty Ltd (1987) 8 NSWLR 341 2472
Attorney‑General v Guardian Newspapers (No 2) [1990] 1AC 100 2549
Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 915
Australia & New Zealand Banking Group Ltd v Coutts (2003) 201 ALR 728 2492
Australia and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344 1281
Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 374
Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 1279
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2002] FCA 62; (2002) 117 FCR 301 1279
Australian Competition and Consumer Commission v Radio Rentals Ltd [2005] FCA 1133; (2005) 146 FCR 292 279
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Australian Energy Ltd v Lennard Oil NL [1986] 2 Qd R 216 682
Australian Growth Resources Corp Pty Ltd (Recs and Mgrs apptd) v Van Reesema (1988) 13 ACLR 261 1175
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 1146
Australian National Industries Ltd v Greater Pacific Investments Pty Ltd (In Liq) (No 3) (1992) 7 ACSR 176 1191
Australian Securities and Investments Commission v Edwards [2006] QSC 1052; (2005) 220 ALR 148 292
Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052 1177
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B
Baden Delvaux v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 257
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Barker v Duke Group Ltd (2005) 91 SASR 167 2439
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Barnes v Addy (1874) 9 Ch App 244 1196
Barton v Armstrong [1976] AC 104 1276
Barton v Deputy Federal Commissioner of Taxation (1974) 131 CLR 370 2413
Barton v Official Receiver (1986) 161 CLR 75 2415
Beach Petroleum NL v Johnson (1993) 43 FCR 1 1237
Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 1215
Behn v Burness (1863) 3 B&S 751 877
Bell Group Finance Pty Ltd v Bell Group (UK) Holdings Ltd [1996] 2 BCLC 304 2465
Bell Group Ltd (In Liq) v Westpac Banking Corporation (1996) 18 WAR 21 195
Bell Group Ltd v Westpac Banking Corporation (2000) 104 FCR 305 196
Bell Group NV (In Liq) v Aspinall (1998) 19 WAR 561 197
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Boughey v R (1986) 161 CLR 10 256
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Brady v Stapleton (1952) 88 CLR 322 2542
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C
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Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 912
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Champtaloup v Thomas [1976] 2 NSWLR 264 2463
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CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 23 ABLR 401 1638
Citizens’ Bank of Louisiana v First National Bank of New Orleans (1873) LR 6 HL 352 896
Clay v Clay (2001) 202 CLR 410 2438
Clay v Clay [2001] HCA 9; (2001) 202 CLR  410 1160
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 443
Coghlan v H Lock (Australia) Ltd (1985) 4 NSWLR 158 909
Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41 1634
Commercial Bank Co of Sydney Ltd v Patrick Intermarine Acceptances Ltd (in liq) (1978) 19 ALR 563 2492
Commercial Bank of Australia Ltd v Colonial Finance, Mortgage, Investment and Guarantee Corporation Ltd (1906) 4 CLR 57 2491
Commercial Bank of Australia v Amadio (1983) 151 CLR 447 1259
Commercial Union Assurance Co of Australia Ltd v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735 1632
Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 280
Commissioner for Corporate Affairs v Guardian Investments Pty Ltd [1984] VR 1019 255
Commissioner of Customs and Excise v Pools Finance (1937) Ltd [1952] 1 All ER 775 1682
Commissioner of Taxation v Futuris Corporation Limited [2008] HCA 32 552
Commonwealth Bank of Australia v Ridout Nominees Pty Ltd, [2000] WASC 37 1280
Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 203
Companhia de Seguros Imperio v Heath (REBX) Ltd [2001] 1 WLR 112 2442
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 893
Construction, Forestry, Mining and Energy Union v Kavanagh [2008] WASC 146 2472
Consul Developments Pty Ltd v DPC Estates Pty Ltd (1974) 132 CLR 373 1201
Cornwall v Rowan [2004] SASC 384; (2004) 90 SASR 269 1636
Coulls v Bagots Executor and Trustee Co. Ltd [1967] HCA 3; (1967) 119 CLR 460 865
Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707 2441
Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 2463
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D
Dabbs v Seaman (1925) 36 CLR 538 911
Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371 1242
Dare v Pulham (1982) 148 CLR 658 199
Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 1189
Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 1148
Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189 1271
Derry v Peek (1889) 14 App Cas 337 1260
Discount & Finance Ltd v Gehrig’s NSW Wines Ltd (1940) 40 SR (NSW) 598 911
Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 900
DPC Estates Pty Ltd v Grey & Consul Developments Pty Ltd [1974] 1 NSWLR 443 1203
Drury v Hooke (1686) 1 Vern 412; 22 ER 553 1268
Duke Group Ltd v Pilmer (1999) 73 SASR 64 2552
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 860
Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446 261
E
Earl of Aylesford v Morris (1873) 8 Ch App 484 1264
Earl of Chesterfield v Jansen (1751) 2 Ves Sen 125 243
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Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 284
Emanuel Management Pty Ltd v Fosters Brewing Group Ltd (2003) 178 FLR 1; [2003] QSC 205 2410
Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1107 1148
Equiticorp Finance Ltd (In Liq) v Bank of New Zealand (1992) 32 NSWLR 50 1176
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QSC 194 894
Erikson v Carr (1945) 46 SR (NSW) 9 1637
Erlanger v New Sombrero Phosphate Co (1878) 3 AC 1218 2449
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 2474
Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175 893
Esplanade Developments Ltd v Divine Holdings Pty Ltd (1980) WAR 151 1125
ET Fisher & Co Pty Ltd v The English Scottish and Australian Bank Ltd (1940) 64 CLR 84 1265
Re German Mining Co 1120
Ex parte Mercer; Re Wise (1886) 17 QBD 290 2406
Ex parte Milner; In re Milner (1885) 15 QBD 605 1272
Ex Parte Russell; In re Butterworth (1882) 19 Ch D 588 2412
Expile Pty Ltd v Jabbs Excavations Pty Ltd [2004] NSWSC 284 203
F
Fabre v Arenales (1992) 27 NSWLR 437 276
FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 685
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 1197
Fardon v Attorney‑General (Qld) (2004) 223 CLR 575 1258
Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (In Liq) [1999] 1 VR 584 1177
Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) (2005) 220 CLR 592; [2005] HCA 20 1234
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187 2402
Ferrier & Knight v Civil Aviation Authority (1994) 55 FCR 28 2402
Ferrier v Stewart (1912) 15 CLR 32 893
Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 686
Fitzgerald v Masters (1956) 95 CLR 420 2451
Flack v Chairperson National Crime Authority (1997) 80 FCR 137 279
Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134 282
Foran v Wright (1989) 168 CLR 385 893
Forestview Nominees Pty Ltd v Perron Investments Pty Ltd (1999) 93 FCR 117 1637
Foss v Harbottle (1843) 67 ER 189 2534
Fryer v Powell [2001] SASC 59; (2001) 159 FLR 433 297
Furs Ltd v Tomkies (1936) 54 CLR 583 2470
G
Galaxidis v Galaxidis [2004] NSWCA 111 895
Garrett v Nicholson [1999] WASCA 32; (1999) 21 WAR 236 280
GEC Marconi Systems Pty Ltd v BNP Information Technology Pty Ltd (2003) 128 FCR 1 894
Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239 1160
Geneva Finance Ltd (Receiver and Manager Appointed) v Resource & Industry Ltd [2002] WASC 121; (2002) 169 FLR 152 1128
Gillett v Holt [2001] Ch 210 900
Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 891
Glegg v Bromley [1912] 3 KB 474 2423
Gould v Vagellis (1985) 157 CLR 215 900
Government Employees Superannuation Board v Martin (1997) 19 WAR 224 280
Greasley v Cooke [1980] 3 All ER 710 899
Greater Pacific Investments Pty Ltd (In Liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 1247
Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 1163
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 1126
Grove v Flavell (1986) 43 SASR 410 1128
Grundt v The Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 892
Gwembe Valley Development Company Ltd v Koshy [2003] EWCA Civ 1048 2441
H
Hall v Dyson (1852) 17 QB 785 1273
Hall v Potter (1695) Shower 76; 1 ER 52 1268
Hamilton v Whitehead (1988) 166 CLR 121 261
Hancock Family Memorial Foundation Limited v Porteous [1999] WASC 55; (1999) 151 FLR 191 1177
Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198 1242
Hannes v MJH Pty Ltd (1992) 10 ACLC 400 1148
Hardie v Hanson (1960) 105 CLR 451 2404
Harlowes Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co Ltd (1968) 121 CLR 483 1146
Harrison v Schipp [2001] NSWCA 13 2552
Hawkins v Bank of China (1992) 25 NSWLR 562 289
Hawkins v Clayton (1988) 164 CLR 539 682
Heggies Bulkhal Ltd v Global Minerals Australia Pty Ltd (2003) 59 NSWLR 312 894
Helton v Allen (1965) 112 CLR 517 1261
Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1 1636
Hermann v Charlesworth [1905] 2 KB 123 1264
Hesse Blind Roller Company Pty Ltd v Hamitovski [2006] VSCA 121 276
Hewett v Medical Board of Western Australia [2004] WASCA 170 277
Highwater Nominees Pty Ltd v Mead [2006] WASC 17 1627
HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Re; Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; [2002] NSWSC 171 279
Hindle v John Cotton Ltd (1919) 56 Sc LR 625 1189
Hirsche v Sims [1894] AC 654 1186
HL Boulton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 261
Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572 276
Holder v Holder [1968] Ch 353 2451
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 687
Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157 277
Hourigan v Trustees Executors and Agency Co Ltd (1934) 51 CLR 619 2451
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 1147
Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791 2471
Hutton v West Cork Railway Co (1883) 23 Ch D 654 1188
Hyhonie Holdings Pty Ltd v Leroy [2003] NSWSC 624 283
I
Immer (No 145) Pty Ltd v The Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 2463
In Re British and Commonwealth Holdings plc (No 3) (1992) 1 WLR 672 661
In re Johnson; Golden v Gillam (1881) 20 Ch D 389 2423
In Re Maxwell Communications Corporation plc (1993) 1 WLR 140 661
In re Montagu’s Trusts [1987] 1 Ch 264 1197
In re Patrick Lyon Ltd (1933) Ch 786 2404
In re Pope; Ex parte Dicksee [1908] 2 KB 169 2420
In the Matter of Bond Corporation Holdings Ltd (1989‑1990) 1 WAR 465 429
In the Matter of Bond Corporation Holdings Ltd (1990) 2 WAR 41 476
India v India Steamship Co Ltd [1998] AC 878 908
Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 683
International Harvester Co of Australia v Carrigan’s Hazledene Pastoral Co (1958) 100 CLR 644 1633
Item Software (UK) Ltd v Fassihi [2004] IRLR 928 1177
J
Jeffree v NCSC (1989) 7 ACLC 556 1128
JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 877
Jones v Dunkel (1959) 101 CLR 298 276
K
K & S Corporation Ltd v Sportingbet Australia Pty Ltd [2003] SASC 96; (2003) 86 SASR 312 1632
K Lokumal &Sons (London) Ltd v Lotte Shipping Co Pte Ltd (The ‘August Leonhardt’) [1985] 2 Lloyd’s Rep 28 908
Kadian v Richards [2004] NSWSC 382 283
Kalls Enterprises Pty Ltd (In Liquidation) &Ors v Baloglow & Anor [2007] NSWCA 191 1142
Karak Rubber Co Ltd v Burden [1972] 1 WLR 602 1204
Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722 1126
Kirwan v Cresvale Far East Ltd (In Liq) [2002] NSWSC 395; [2002] 44 ACSR 21 1178
KM v HM; Women’s Legal Education and Action Fund, Intervener (1992) 96 DLR (4th) 289 2443
Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 1148
Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Limited [1998] 3 VR 16 1217
Krakowski v Eurolynx Properties Ltd [1994] HCA 22; (1995) 183 CLR 563 261
L
L&D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 1857
Lamshed v Lamshed (1963) 109 CLR 44 2449
Lamshed v Lamshed (1963) 109 CLR 440 2451
Laurendi v Boral Contracting Pty Ltd [2002] WASCA 297 282
Law v Law (1735) 3 P Wms 391 1265
Legione v Hately (1983) 152 CLR 406 895
Lego Australia Pty Ltd v Paraggio (1993) 44 FCR 151 1643
Leighton Holdings Ltd v HIH Casualty and General Insurance Ltd [2001] WASC 34 867
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 252
Levi v Stirling Brass Founders Pty Ltd (1997) 36 ATR 290 2438
Levin v Clark [1962] NSWR 686 1163
Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 219 ALR 555 297
Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385 294
LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291; (2002) WAR 517 1217
Lincoln Hunt Australia Pty Ltd v Willesee (1986) 4 NSWLR 457 1264
Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 2450
Linter Group Ltd (In Liq) v Goldberg (1992) 7 ACSR 580 1176
Linton v Telnet Pty Ltd [1999] NSWCA 33; (1999) 30 ACSR 465 1142
Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division (In Liq) [1993] 2 VR 506 2543
Lloyd’s Bank v Dalton [1942] Ch 466 258
Logue v Shoalhaven Shire Council [1979] 1 NSWLR 537 1259
London and Counties Assets Company Ltd v Brighton Grand Concert Hall and Picture Palace Ltd [1915] 2 KB 493 293
Louth v Diprose (1992) 175 CLR 621 1278
Loxias Technologies Pty Ltd v Curacel International Pty Ltd [2002] FCA 753 1178
Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267 2427
M
Mackay v Douglas (1872) LR 14 Eq 106 2411
Mackenzie v Albany Finance Ltd [2003] WASC 100 282
Macquarie Bank Ltd v Lin [2005] QSC 221 898
Macquarie Bank Ltd v Sixty-Fourth Thone Pty Ltd [1998] 3 VR 133 1217
Maguire v Makaronis (1997) 188 CLR 449 2474
Maguire v Makaronis [1995] V Conv [54-533] 2475
Mahoney v McManus (1981) 180 CLR 370 2489
Marchesi v Barnes [1970] VR 434 1124
Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 899
Maronis Holding Ltd v Nippon Credit Australia Pty Ltd [2001] NSWSC 448; (2001) 38 ACSR 404 1177
McGellin v Mount King Mining NL [1998] WASC 96 1162
McLennan v Campbell [2003] WASCA 145 255
Mears v Safecar Security Ltd [1983] QB 54 685
Metropolitan Bank v Heiron (1880) 5 Ex D 319 2445
Meyers v Casey (1913) 17 CLR 90 2472
Micarone v Perpetual Trustees Australia Ltd [1999] SASC 265; (1999) 75 SASR 1 1279
Midalco Pty Ltd v Rabenalt [1989] VR 461 1643
Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd [2006] VSC 42; (2006) Aust Contract R 90 – 238 686
Mills v Mills (1938) 60 CLR 150 1122
Minion v Graystone Pty Ltd [1990] 1 Qd R 157 295
MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 891
Mogridge v Clapp [1892] 3 Ch 382 2417
Mohedo (Junior) v Mohedo (Senior) [2002] WASC 240 273
Moiler v Forge (1927) 27 SR (NSW) 69 2528
Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) HCA 2, (2001) 202 CLR 351 687
Moodemere Pty Ltd (in liq) v Waters [1988] VR 215 2528
Morcos v Advantage Credit Union Ltd [2003] WASCA 15 1282
Motor Terms Co Pty Ltd v Liberty Insurance Ltd (in liq) (1967) 116 CLR 177 2441
Mulkana Corporation NL (In Liq) v Bank of New South Wales (1983) 8 ACLR 278 1236
Munchies Management Pty Ltd v Belperio (1989) 84 ALR 700 1093
Muschinski v Dodds (1985) 160 CLR 583 1201
N
National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386 109
National Bank of Australasia v Morris (1892) AC 287 1631
National Commercial Banking Corporation of Australia v Batty (1985 ‑ 1986) 160 CLR 251 2466
National Westminster Finance New Zealand Ltd v National Bank of New Zealand Ltd [1996] 1 NZLR 548 911
Nationwide Building Society v Lewis [1998] Ch 482 900
NCR Australia Pty Ltd v Credit Connection Pty Ltd (In Liq) [2004] NSWCA 1 1216
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 1226
Nerot v Walker (1789) 3 TR 18 1273
Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 899
News Ltd v Australian Rugby Football League Ltd (1996) 58 FCR 447 1215
Ngurli Ltd v McCann (1953) 90 CLR 425 1126
Nicholson v Permakraft (NZ) Ltd [1985] NZLR 242 1133
Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1994) 8 ANZ Ins Cas 61-235 903
NIML Ltd v MAN Financial Australia Ltd [2004] VSC 449 1227
Ninety-Five Pty Ltd (In liq) v Banque Nationale de Paris [1988] WAR 132 1237
Noakes v J Harvey Holmes & Son (1979) 37 FLR 5 2403
Nocton v Lord Ashburton [1914] AC 932 1259
Norman v The Federal Commissioner of Taxation (1963) 109 CLR 9 858
North American Land and Timber Co Ltd v Watkins [1904] 1 Ch 242 2443
O
O’Donnell v Richards (1975) VR 916 278
Official Trustee v Marchiori (1983) 69 FLR 290 2417
Official Trustee v Pastro [1999] FCA 1631 2418
Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 2463
O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 1178
Orr v Ford (1989) 167 CLR 316 2451
Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 1 71 1137
P
P & V Industries Pty Ltd v Porto [2006] VSC 131; (2006) 14 VR 1 1177
Packer v Cameron (1989) 54 SASR 246 278
Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 2440
Pascoe Ltd (In Liq) v Lucas [1999] SASC 519; (1999) 75 SASR 246 1215
Paterson v The Queen [2004] WASCA 63; (2004) 28 WAR 233 280
Paton v Campbell Capital Ltd (1993) 46 FCR 30 1271
Payless Superbarn (NSW) Pty Ltd v O’Gara (1990) 19 NSWLR 551 284
Payne v Parker (1976) 1 NSWLR 191 278
Peddie v Stein (unreported, SCNSW, BC8701481, 26 March 1987) 685
Pegrum v Fatharly (1996) 14 WAR 92 683
Peldan v Anderson [2006] HCA48; (2006) 80 ALJR 1588 2412
Permanent Building Society (In Liq) v McGee (1993) 11 ACSR 260 1121
Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187 1121
Permanent Trustee Australia v FAI General Insurance Co Ltd (2001) 50 NSWLR 679 1635
Petersen v Moloney (1951) 84 CLR 91 1634
Phelan v Middle States Oil Corporation (1955) 220 F 2d 593 1161
Pichard v Sears (1837) 6 Ad & E 469 892
Pilmer v The Duke Group Ltd (In liq) [2001] HCA 31; (2001) 207 CLR 165 1125
Piwinski v Corporate Trustees Diocese of Armidale (1977) 1 NSWLR 266 2439
Plimmer v The Mayor, Councillors and Citizens of the City of Wellington (1884) 9 App Cas 699 2541
Plumrose Ltd v Real and Leasehold Estates Investment Society Ltd [1970] 1 WLR 52 575
Poliwka v Heven Holdings Pty Ltd (No2) (1992) 8 ACSR 747 1482
Polkinghorne v Holland (1934) 51 CLR 143 1638
Polly Peck International plc (In Administration) [1996] 2 ALL ER 433 845
Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769 1227
Polyaire Pty Ltd v K‑Aire Pty Ltd (2005) 221 CLR 287 1267
Poricanin v Australian Consolidated Industries Ltd [1979] 2 NSWLR 419 284
Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 904
Posgold (Big Bell) Pty Ltd v Placer (Western Australia) Pty Ltd [1999] WASCA 217, (1999) 21 WAR 350 685
Powell v Powell [2002] WASC 105 2451
Prestwich v Poley (1865) 18 CBNS 805; 144 ER 662 1638
Provident International Corporation v International Leasing Corporation [1969] 1 NSWLR 424 1126
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 2534
PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 2396
PW & Co v Milton Gate Investments Ltd [2004] Ch 142 575
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Quadrant Constructions Pty Ltd v HSBC Bank Australia Ltd [2004] FCA 111 896
Queensland Independent Wholesalers Ltd v Coutts Townsville Pty Ltd [1989] 2 Qd R 40 908
Queensland Mines Ltd v Hudson (1976) ACLC 40‑266, 2439
Queensland Mines Ltd v Hudson (1978) 18 ALR 1 1160
R
R v Associated Northern Collieries (1910) 11 CLR 738 200
R v Birks (1990) 19 NSWLR 677 283
R v Caratti; unreported, SCWA, Lib No 980460, 14 August 1998 539
R v Fitzsimmons (1997) 23 ACSR 355 1160
R v Nuri [1990] VR 641 257
R v Raad [1983] 3 NSWLR 344 254
R v Stones [1956] SR(NSW) 25 257
R v Turner [2002] TASSC 18; (2002) 10 Tas SR 388 1482
RCA Corporation v Custom Cleared Sales Pty Ltd (1978) 19 ALR 123 1633
Re a Debtor; Ex parte Official Receiver v Morrison [1965] 1 WLR 1498 2415
Re Abbott [1982] 3 All ER 181 2420
Re Apex Supply Co Ltd [1941] 3 All ER 473 1273
Re Australian Co-operative Development Society Ltd [1977] Qd R 66 306
Re Barnes, ex p Stapleton (1962) Qd R 231 2405
Re Barnes; Ex parte Stapleton [1962] Qd R 231 2417
Re Bond Corp Holdings Ltd [1990] 1 WAR 465 292
Re Bond Corporation Holdings Ltd (1991) 5 WAR 143 189
Re British and Commonwealth Holdings plc (No 3) (1992) 1 WLR 672 855
Re Broadcasting Station 2GB Pty Ltd [1964-65] NSWR 1648 1163
Re Brunner; Ex parte official Trustee in Bankruptcy (1984) 2 FCR 6 2420
Re Chisum Services Pty Ltd (1982) 1 ACLC 292 1629
Re City Equitable Fire Insurance Co [1925] Ch 407 1121
Re Dawson [1966] 2 NSWLR 211 2549
Re Eicholz [1959] Ch 708 2423
Re Exchange Securities & Commodities Ltd (In liq) [1988] Ch 46 896
Re Gabriel Controls Pty Ltd (1982) 6 ACLR 684 2528
Re Hyams, Official Receiver v Hyams (1970) 19 FLR 252 2415
Re International Vending Machines Pty Ltd & the Companies Act [1962] NSWR 1408 1236
Re JN Taylor Holdings Ltd (In Liq), JN Taylor Finance Pty Ltd (1991) 57 SASR 21 405
Re Kastropil; ex parte Official Trustee in Bankruptcy (1989) 33 FCR 135 2415
Re La Rosa; ex parte Norgard v Rocom Pty Ltd (1990) 21 FCR 270 1270
Re Land Allotment Co [1894] 1 Ch 616 1236
Re Marchiori; Ex parte Official Receiver (1983) 69 FLR 290 2420
Re Mendonca (a debtor); Ex parte Commissioner of Taxation (1969) 15 FLR 256 549
Re Morris v Bank of India [2005] 2 BCLC 328 1627
Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 1134
Re NIAA Corporation Ltd (in Liq) (1993) 33 NSWLR 344 661
Re North Australian Territory Co (Archer’s Case) (1892) 1 Ch 322 1113
Re Pacific Projects Pty Ltd (In liq) [1990] 2 Qd R 541 2418
Re Pahoff: ex parte Ogilvie (1961) 20 ABC 17 2415
Re Premier Permanent Building Association (1890) 16 VR 20 295
Re Taylor; Ex parte Century 21 Real Estate Corp (1995) 130 ALR 723 2492
Re Thomas Barton;Ex parte Official Receiver v Barton (1983) 52 ALR 95 2420
Re Tweeds Garages Ltd [1962] Ch 406 291
Re United Medical Protection Ltd [2003] NSWSC 1031; (2003) 47 ACSR 705 298
Re Wakim; ex parte McNally (1999) 198 CLR 511 196
Rees v Bank of New South Wales (1964) 111 CLR 210 295
Regal (Hastings) Ltd v Gulliver [1967] AC 134 1161
Regentcrest plc (in liq) v Cohen [2001] BCLC 80 1188
Registrar‑General v Harris (1998) 45 NSWLR 404 294
Reid Murray Holdings Ltd (in liq) v David Murray Holdings Pty Ltd (1972) 5 SASR 386 1191
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 448
Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569 2470
Richard Brady Franks Ltd v Price (1937) 58 CLR 112 1121
Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82; (2004) 61 NSWLR 75 1235
Robins v Incentive Dynamics Pty Ltd (in Liq) [2003] NSWCA 71; (2003) FLR 286 1113
Rogers v Kabriel [1999] NSWSC 368 1233
Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 1146
Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 277
Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 1200
RPS v The Queen [2000] HCA 3; (2000) 199 CLR 620 276
Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474 1236
S
S & E Promotions Pty Ltd v Tobin Brothers Pty Ltd (1994) 122 ALR 637 891
Sandell v Porter (1966) 115 CLR 666 235
Santos v Delhi Petroleum Pty Ltd [2002] SASC 272 894
Sargent v ASL Developments Ltd (1974) 131 CLR 634 1637
Say-Dee v Farah Constructions Pty Ltd & Ors [2005] NSWCA 309 1219
SBAP v Refugee Review Tribunal [2002] FCA 590 1266
Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121 276
Secretary, Department of Education, Employment, Training and Youth Affairs v Prince (1997) 152 ALR 127 1266
Selangor United Rubber Estates Ltd v Cradock (No 2) [1968] 1 WLR 310 1204
Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 1236
Seymour v Australian Broadcasting Commission [1977] 19 NSWLR 219 280
Shepherd v R (1990) 170 CLR 573 300
Shepherd v The Federal Commissioner of Taxation (1965) 113 CLR 385 858
Short v City Bank of Sydney (1912) 15 CLR 148 2402
Shum Yip Properties Development Pty Ltd v Chatswood Investment and Development Co Pty Ltd (2002) 40 ACSR 619 277
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 1187
Sidaway v The Governors of Bethlehem Royal Hospital [1985] AC 871 1172
Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 914
Sixty Fourth Throne Pty Ltd v Macquarie Bank Ltd (1996) 130 FLR 411 1215
Smith and Fawcett [1942] 1 Ch 304 1124
Smith v Samuels (1976) 12 SASR 573 277
Smith v Stalland and French (1919) 21 WALR 19 2528
Smith v Town & Country Bank, unreported, SCWA, Full Court, 970716A, 18 December 1997 2447
Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 81 ALJR 525 1236
Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 91 FLR 271 2473
Southern Cross Interiors Pty Ltd (In liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213 293
Southern Real Estate Pty Ltd v Dellow [2003] SASC 318; (2003) 87 SASR 1 1161
Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 56 SASR 455 1175
Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025; (2003) 47 ACSR 285 1232
Spector v Ageda [1973] Ch 30 1684
Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) 26 NSWLR 711 1637
Spence v Crawford [1939] 3 All ER 271 2475
Spence v Demasi (1988) 48 SASR 536 279
Spies v R [2000] HCA 43; (2000) 201 CLR 603 1128
Squires v AIG Europe (UK) Ltd [2006] EWCA CIV 7 2435
Standard Chartered Bank Australia Ltd v Bank of China (1991) 23 NSWLR 164 897
Standard Chartered Bank of Australia Ltd v Antico No 1 and 2 38 NSWLR 290 302
Stapleton v The Queen (1952) 86 CLR 358 2402
Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331 2548
Stilbo Pty Ltd v MCC Pty Ltd (in liq) (2003) 11 Tas R 63 2445
Sumampow v Mercator Property Consultants Pty Ltd [2005] WASCA 64 894
Sunrise Auto Ltd v Commissioner of Taxation (No 2) (1995) 61 FCR 446 549
Swiss Screens (Aust) Pty Ltd v Burgess (1987) 11 ACLR 756 1481
Sydney Bolsom Investment Trust Ltd v E Karmios & Co (London) Ltd [1956] 1 QB 529 896
T
Tableau Holdings Pty Ltd v Joyce [1999] WASCA 49 1201
Tara Shire Council v Garner [2003] QCA 232; [2003] 1 Qd R 556 1217
Taylor v Davies [1920] AC 636 2438
Territory Insurance Office v Adlington (1992) 2 NTLR 55 903
Tesco Supermarkets Ltd v Nattrass [1972] AC 153 261
The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 1) [2001] WASC 315 196
The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 3) [2004] WASC 93 196
The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 6) [2006] WASC 54 298
The Bell Group Ltd (In Liq) v Westpac Banking Corporation Bell (No 5) [2004] WASC 273 260
The Commissioner of Stamps (Western Australia) v Western Australian Trustee Executor and Agency Co Ltd (1925) 36 CLR 98 549
The Commonwealth v Verwayen (1990) 170 CLR 394 891
The Duke Group Ltd  v Alamain Investments Ltd [2003] SASC 415 2442
Thomas v Connell (1838) 4 M & W 267, 269 – 70; 150 ER 1429, 1430 272
Thomas v D’Arcy [2005] QCA 68 ; [2005] 1 Qd R 666 2534
Thompson v Palmer (1933) 49 CLR 507 892
Toal v Aquarius Platinum Ltd (No 2) [2004] FCA 550 864
Trade Practices Commission v Mobil Oil Australia Ltd (1984) 3 FCR 168 283
Trade Practices Commission v Service Station Association Ltd (1992) 109 ALR 465 2403
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 860
Troop v Gibson [1986] 1 EGLR 1 910
Trustees of the Property of Cummins (a bankrupt) v Cummins [2006] HCA 6; (2006) 80 ALJR 589 2413
Turner v Reeve (1901) 17 TLR 592 2529
Turton v Benson (1718) 1 P Wms 496; 24 ER 488 1264
Tweddle v Atkinson (1861) 1 B&S 393 865
Twinsectra Ltd v Yardley [2002] UKHL] 12; [2002] 2 AC 164 1209
U
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V
Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 2475
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W
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Table of Contents

1. ABOUT THESE REASONS 55
2. THE BACKGROUND EVENTS AND THE ISSUES IN THE LITIGATION: A SYNOPSIS 59
3. SOME PARTICIPANTS IN THESE EVENTS 66
   3.1. THE PARTIES TO THE LITIGATION 66
   3.2. SOME OTHER PARTICIPANTS 69
4. THE DISPUTE IN CONTEXT: A MORE DETAILED OVERVIEW 70
   4.1. THE CORPORATE GROUP: HISTORICAL CONTEXT 70
   4.1.1. TBGL: the beginning, the middle and the end 70
   4.1.1.1. The genesis and expansion under RHaC 70
   4.1.1.2. The October 1987 stock market crash 74
   4.1.1.3. Position in 1989 and following 76
   4.1.2. Administration of the group under RHaC 77
   4.1.2.1. The directors and officers 77
   4.1.2.2. Treasury and accounting functions 80
   4.1.3. BRL: incorporation and early history 81
   4.1.4. The takeover of the Bell group by BCHL 82
   4.1.4.1. Sale of shares by RHaC 82
   4.1.4.2. The BCHL takeover 82
   4.1.4.3. The BCHL takeover and the banks 85
   4.1.5. Administration of the group under BCHL 88
   4.1.5.1. TBGL directors 88
   4.1.5.2. BRL directors 89
   4.1.5.3. Other TBGL and BPG officers 89
   4.1.5.4. Treasury and accounting functions 89
   4.1.6. Financial administration of BGUK 91
   4.1.7. The Bond [BCHL] group of companies 92
   4.2. FINANCIAL ARRANGEMENTS WITH THE BANKS (BEFORE 1990) 93
   4.2.1. Some introductory comments 93
   4.2.2. Australian banks: CBA 94
   4.2.2.1. Facility arrangements 94
   4.2.2.2. Negative pledge agreement 94
   4.2.2.3. Supplemental negative pledge agreements 97
   4.2.2.4. Transfer of bill facility to BGF 97
   4.2.2.5. Negative pledge guarantee 98
   4.2.2.6. The takeover of TBGL by BCHL 99
   4.2.2.7. The CBA facility in 1988 and 1989 100
   4.2.2.8. Other lending to RHaC and Bond 101
   4.2.3. Australian banks: HKBA 101
   4.2.3.1. Facility arrangements 101
   4.2.3.2. Negative pledge agreement and guarantee 103
   4.2.3.3. The HKBA facility in 1988 and 1989 103
   4.2.3.4. Other lending to RHaC and Bond 104
   4.2.4. Australian banks: NAB 105
   4.2.4.1. Facility arrangements 105
   4.2.4.2. Negative pledge agreement and guarantee 107
   4.2.4.3. The NAB facility in 1988 and 1989 107
   4.2.4.4. Other lending to RHaC and Bond 108
   4.2.4.5. Appointment of receivers to BBHL 109
   4.2.5. Australian banks: SocGen 110
   4.2.5.1. Facility arrangements 110
   4.2.5.2. Negative pledge agreement and guarantee 111
   4.2.5.3. The SocGen facility in 1988 and 1989 111
   4.2.5.4. Other lending to RHaC and Bond 112
   4.2.6. Australian banks: SCBAL 112
   4.2.6.1. Facility arrangements 112
   4.2.6.2. Negative pledge agreement and guarantee 113
   4.2.6.3. The SCBAL facility in 1988 and 1989 113
   4.2.6.4. Other lending to RHaC and Bond 114
   4.2.7. Australian banks: Westpac 115
   4.2.7.1. Facility arrangements 115
   4.2.7.2. Negative pledge agreement and guarantee 115
   4.2.7.3. The Westpac facility in 1988 and 1989 116
   4.2.7.4. Other lending to RHaC and Bond 117
   4.2.8. The Lloyds syndicate banks 118
   4.2.8.1. The proposal 118
   4.2.8.2. The facility agreement and the initial participants 118
   4.2.8.3. Substitution of new banks 119
   4.2.8.4. The negative pledge guarantee: LSA No 1 & RLFA No 1 120
   4.2.8.5. Replacement of LMBL as agent by Lloyds Bank 121
   4.2.8.6. The facility after the BCHL takeover 121
   4.2.8.7. Lending to the wider RHaC group 121
   4.3. THE CONVERTIBLE BOND ISSUES 123
   4.3.1. Fundraising in the Eurobond market 123
   4.3.2. The five bond issues by the Bell group 123
   4.3.2.1. The three BGNV bond issues 124
   4.3.2.2. The bond issues by TBGL and BGF 125
   4.3.3. The bond issue trust deeds: the BGNV bond issues 126
   4.3.3.1. Bearer bonds and conversion bonds 126
   4.3.3.2. Events of default 127
   4.3.3.3. Covenants of issuer and guarantor 128
   4.3.3.4. Rights of conversion and redemption 129
   4.3.3.5. The subordination provisions 130
   4.3.4. The interposition of BGNV 130
   4.3.5. Continuing interest commitments 131
   4.3.6. Bond issues by BRL and BCHL 132
   4.4. DEALING WITH BELL GROUP ASSETS (TO 31 DECEMBER 1989) 133
   4.4.1. Late 1987 and early 1988 133
   4.4.2. Sales after the BCHL takeover 134
   4.4.2.1. Sale of miscellaneous overseas assets 134
   4.4.2.2. Sale of Bryanston 134
   4.4.2.3. The ITC contract 135
   4.4.2.4. Sale of miscellaneous Australian assets 136
   4.4.2.5. The Qintex receivable 136
   4.4.2.6. Sale of Wigmores and HJW Engineering 137
   4.4.2.7. Sale of Bell Group Press Pty Ltd 137
   4.4.3. Distribution of asset sale proceeds 138
   4.4.3.1. Reduction of bank debt 138
   4.4.3.2. Application of proceeds within the group 140
   4.4.4. Diversion of moneys to BCHL: BGF/BCF loan account 140
   4.5. THE BELL GROUP AND THE BANKS: 1989 AND EARLY 1990 142
   4.5.1. Negotiations for the refinancing in 1989 and January 1990 142
   4.5.2. Position of the directors: 1989 and early 1990 148
   4.6. OVERVIEW OF THE 1990 REFINANCING 150
   4.6.1. The 1990 refinancing: introduction 150
   4.6.2. The 1990 refinancing: the banks’ instruments 151
   4.6.2.1. The STD 151
   4.6.2.2. The ICA 151
   4.6.3. The 1990 refinancing: the main facilities agreements 152
   4.6.3.1. ABSA and LSA No 2 153
   4.6.3.2. ABFA and RLFA No 2 155
   4.6.4. The 1990 refinancing: charging documents and guarantees 156
   4.6.4.1. The BGF instruments 156
   4.6.4.2. The TBGL instruments 157
   4.6.4.3. The BPG group instruments 157
   4.6.4.4. Securities over the BRL shares 158
   4.6.4.5. Securities over the JNTH shares 159
   4.6.4.6. Securities given by other companies 160
   4.6.4.7. Securities given by BGUK and TBGIL 161
   4.6.4.8. Summary 163
   4.6.5. The 1990 refinancing: the subordination deeds 163
   4.6.5.1. The Principal Subordination Deed 163
   4.6.5.2. The BIIL Subordination Deed 164
   4.6.5.3. The BGNV Subordination Deed 164
   4.6.6. Ancillary transactions 165
   4.6.6.1. The UK debentures 165
   4.6.6.2. Other documents to satisfy conditions 165
   4.6.6.3. Amendments 166
   4.6.7. Waivers and consents: February 1990 and following 167
   4.6.7.1. The conditions precedent and subsequent 167
   4.6.7.2. Wind down of BGUK group 167
   4.6.7.3. Interest payments to the banks 168
   4.6.7.4. Asset sale proceeds: introduction 169
   4.6.7.5. Asset sale proceeds: Bryanston 169
   4.6.7.6. Asset sale proceeds: Bell Press 169
   4.6.7.7. Asset sale proceeds: the ITC contract payment 172
   4.6.7.8. Asset sale proceeds: the New York apartment 173
   4.7. OVERVIEW OF THE EVENTS: JUNE 1990 TO APRIL 1991 AND THE COLLAPSE 173
   4.7.1. Early restructuring proposals: June 1990 to August 1990 173
   4.7.2. Further restructuring proposals: September 1990 176
   4.7.3. Mixed fortunes: October and November 1990 179
   4.7.4. The gloom sets in: December 1990 to March 1991 185
   4.7.5. The innings ends: April 1991 189
   4.8. OVERVIEW OF ASSET REALISATIONS AFTER APRIL 1991 191
   4.8.1. The publishing assets 192
   4.8.2. Sale of the BRL shares 193
   4.8.3. Miscellaneous realisations 194
5. THE LITIGATION: A SHORT HISTORY 195
6. THE LITIGATION: THE PLEADED CASES 198
   6.1. THE PLEADINGS: A GENERAL COMMENT 198
   6.2. SOME DEFINITIONS 200
   6.2.1. Bell Participants and plaintiff Bell companies 201
   6.2.2. Directors 202
   6.2.3. The Transactions, the Scheme and the Scheme Period 202
   6.2.4. Creditors and debtors 203
   6.2.5. ACIL (BRL) shares and ACIL (BRL) shareholders 204
   6.2.6. Publishing and communication assets, the BPG group 204
   6.2.7. The negative pledge arrangements 204
   6.2.8. The Statements of Net Assets 205
   6.3. BACKGROUND MATTERS 205
   6.4. INSOLVENCY 207
   6.5. THE SUBORDINATION QUESTION 208
   6.6. THE EFFECT OF THE SCHEME 209
   6.7. THE DIRECTORS: CONDUCT AND BREACHES OF DUTY 210
   6.8. THE BANKS: THE AGENCY ARGUMENT 213
   6.9. THE BANKS: KNOWLEDGE AND CONDUCT 213
   6.10. THE BANKS’ RECEIPT OF MONEYS 215
   6.11. THE BARNES V ADDY CLAIM 216
   6.12. THE EQUITABLE FRAUD CLAIM 217
   6.13. CONDITIONS FOR RELIEF 220
   6.14. STATUTORY CLAIMS 221
   6.15. THE COUNTERCLAIM 223
   6.16. PRAYERS FOR RELIEF 224
7. THE LITIGATION: SOME CRITICAL ISSUES ARISING 225
   7.1. THE CASE: A BRACHYLOGY 225
   7.2. INSOLVENCY 229
   7.2.1. Some introductory comments 229
   7.2.2. Insolvency and cash flows 230
   7.2.3. Insolvency: a temporal concept 231
   7.2.4. The contentions about a cash flow shortfall 233
   7.2.5. Insolvency and the cl 17.12 issue 235
   7.2.6. The significance of the insolvency issue 236
   7.2.6.1. Insolvency and directors’ duties 236
   7.2.6.2. Insolvency and the equitable fraud claim 238
   7.2.6.3. Insolvency and the statutory claims 238
   7.2.6.4. Insolvency and the effect of the Scheme 239
   7.3. THE SUBORDINATION OF THE ON-LOANS 239
   7.3.1. The opposing contentions 240
   7.3.2. The significance of the subordination question 241
   7.3.2.1. The identification of creditors and prejudice 241
   7.3.2.2. Subordination, breaches of duty and Barnes v Addy 242
   7.3.2.3. Subordination, breaches of duty and equitable fraud 243
   7.3.2.4. Subordination and the statutory claims 244
   7.3.2.5. Subordination: the banks’ reliance on representations 244
   7.3.3. Summary 245
   7.4. THE PREJUDICIAL AND DETRIMENTAL EFFECT OF THE SCHEME 246
   7.4.1. The Scheme and detriment and prejudice 246
   7.4.2. Significance of detriment 247
   7.4.2.1. Breach of directors’ duties 247
   7.4.2.2. Insolvency 248
   7.4.2.3. Banks’ knowledge and conduct 249
   7.4.2.4. The equitable fraud claim 249
   7.4.2.5. Entitlement to relief in equity 249
   7.4.2.6. The statutory claims 249
   7.4.2.7. A restructuring of the financial position 250
   7.5. STATE OF MIND: THE DIRECTORS AND THE BANKS 251
   7.5.1. Significance of state of mind 251
   7.5.2. Formulations of state of mind and the pleading disputes 253
   7.5.2.1. Various states of mind 253
   7.5.2.2. State of mind, conscious wrongdoing: the pleadings 258
8. THE EVIDENCE: AN OVERVIEW 263
   8.1. EVIDENCE: PEOPLE, DOCUMENTS AND DISPUTES 263
   8.2. DOCUMENTS, MORE DOCUMENTS, AND YET MORE DOCUMENTS 265
   8.3. RELIANCE ON CONTEMPORANEOUS WRITTEN RECORDS 267
   8.4. PRAGMATIC APPROACH TO DOCUMENTARY EVIDENCE 268
   8.4.1. The best evidence rule 268
   8.4.2. Aides memoire 268
   8.4.3. Other documentary problems 269
   8.5. STATE OF MIND EVIDENCE 272
   8.6. HYPOTHETICAL EVIDENCE 274
   8.7. JONES V DUNKEL: GENERAL APPROACH 275
   8.8. BROWNE V DUNN: GENERAL APPROACH 280
   8.9. EXPERT EVIDENCE 285
   8.10. CREDIBILITY: SOME GENERAL COMMENTS 286
9. THE PLAINTIFFS’ CASH FLOW INSOLVENCY CASE 289
   9.1. INTRODUCTION 289
   9.2. MEANING AND ASSESSMENT OF INSOLVENCY 290
   9.2.1. The balance sheet and cash flow tests 290
   9.2.2. The importance of context 293
   9.2.3. The phrase ‘from its own moneys’ 294
   9.2.4. Likelihoods, prospects and possibilities 298
   9.2.5. The use of hindsight 301
   9.2.5.1. The problem and the respective positions 301
   9.2.5.2. Hindsight and the reasoning in Lewis v Doran 302
   9.2.6. The period over which the assessment extends 306
   9.2.6.1. An assessment period: the principles 306
   9.2.6.2. Applying those principles to this case 308
   9.2.7. Illiquidity: endemic and temporary 310
   9.3. ADVERSE FINANCIAL STATES OTHER THAN INSOLVENCY 312
   9.4. BELL GROUP CASH FLOW STATEMENTS 314
   9.4.1. Cash flows: some general comments 314
   9.4.2. Preparation of cash flows 316
   9.4.3. The relevant Bell group cash flows: July 1989 to February 1990 318
   9.4.3.1. Identifying the cash flow statements 318
   9.4.3.2. The style and content of each cash flow 321
   9.4.3.3. Significance of the closing cash balances 324
   9.5. THE PARTIES’ CASH FLOW STATEMENTS 324
   9.5.1. Importance of the parties’ cash flow materials 324
   9.5.2. The parties’ cash flows materials: their genesis 327
   9.5.3. The parties’ cash flows: their content 332
   9.5.3.1. Cash Flow 1 and Cash Flow A 332
   9.5.3.2. Cash Flow 2 and Cash Flow B 335
   9.5.3.3. The Honey cash flow 339
   9.6. THE BRYANSTON PAYMENT 343
   9.6.1. The sale of Bryanston 343
   9.6.2. Completion of the sale and dispersal of proceeds 344
   9.6.3. The deferred consideration 344
   9.7. THE ITC CONTRACT PAYMENT 345
   9.7.1. The ITC sale and the tax issue: an introduction 345
   9.7.2. The tax assessments 347
   9.7.3. Negotiations with Campania 349
   9.7.4. The position as at 26 January 1990 351
   9.7.4.1. The evidence of the English accounting officers 351
   9.7.4.2. The evidence of Aspinall and Mitchell 358
   9.7.4.3. The evidence of the experts: Love and Honey 360
   9.7.5. The ITC contract payment: conclusion 364
   9.8. THE SALE OF Q‑NET 367
   9.8.1. The relevant sale and purchase agreements 367
   9.8.1.1. The initial purchase of Q‑Net 367
   9.8.1.2. Intra-group sale of Q‑Net 368
   9.8.2. Cash flow implications of the Q‑Net sale 370
   9.8.3. Impediments to the sale of Q‑Net 371
   9.8.3.1. The Australian Broadcasting Tribunal 372
   9.8.3.2. Negative pledge, right of first refusal and guarantee 375
   9.8.3.3. Impediments: conclusion 376
   9.8.4. Proposals to sell Q‑Net 377
   9.8.5. The valuation of Q‑Net 379
   9.8.5.1. Hall’s valuation experience 379
   9.8.5.2. The instructions to Hall 381
   9.8.5.3. Hall’s methodology and conclusion 381
   9.8.5.4. Criticisms of Hall’s approach 385
   9.8.6. Other evidence 390
   9.8.6.1. The plaintiffs 390
   9.8.6.2. The banks 390
   9.8.7. Conclusion on Q‑Net 391
   9.9. JNTH MATTERS 391
   9.9.1. Relationship between TBGL and JNTH 391
   9.9.2. JNTH matters and the Bell group cash flows 393
   9.9.3. The parties’ contentions: JNTH matters 394
   9.9.4. The financial position of JNTH 395
   9.9.4.1. Cash flow considerations 396
   9.9.4.2. Balance sheet considerations 397
   9.9.4.3. Late 1989 and early 1990 399
   9.9.5. Likelihood of recovery of the JNTH receivable 399
   9.9.6. The accrued management fees 406
   9.9.7. The preference dividends 406
   9.9.7.1. The dividends generally 406
   9.9.7.2. The Academy transaction 407
   9.9.8. Ability to sell or mortgage the JNTH shares 408
   9.9.9. Conclusion on the JNTH matters 410
   9.10. THE BRL PREFERENCE DIVIDENDS (A FIRST LOOK) 410
   9.10.1. Relationship between TBGL and BRL 410
   9.10.2. Dividends, cash flows and financial statements 411
   9.10.3. The evidence of Henson and Hill (to January 1990) 412
   9.10.4. The expert evidence 416
   9.10.5. BRL preference dividend: preliminary conclusion 418
   9.11. THE GFH MATTERS 418
   9.11.1. Relationship between TBGL and GFH 418
   9.11.2. GFH preference shares; BRF subordinated loan 419
   9.11.3. Cash flows, receivables and dividends 421
   9.11.4. The GFH receivables 421
   9.11.5. GFH preference dividends 423
   9.11.6. The unpaid calls 424
   9.11.7. Ability to sell or mortgage the GFH preference shares 424
   9.11.8. GFH matters: conclusion 425
   9.12. THE BCF RECEIVABLES 425
   9.12.1. History of the BCF receivable 425
   9.12.2. BCHL: a troubled entity 427
   9.12.3. The realisable value of the BCF receivable 429
   9.12.4. The BCF receivable: conclusion 430
   9.13. THE PLAINTIFFS’ INSOLVENCY CASE: CONTINUING LOSSES 431
   9.13.1. The issue described 431
   9.13.2. Losses and insolvency 431
   9.13.3. The losses of the Bell group: to January 1990 432
   9.14. NECESSITY TO GAIN ACCESS TO ASSET SALE PROCEEDS 435
   9.14.1. The cl 17.12 issue described 435
   9.14.2. The provisions in the refinancing documents 436
   9.14.2.1. The provisions in the refinancing documents 436
   9.14.2.2. Specific disposals 438
   9.14.2.3. Non-specific disposals 438
   9.14.2.4. Application of proceeds of asset sales 441
   9.14.3. Is there a construction question? 442
   9.14.4. The pleaded case on cl 17.12 444
   9.14.4.1. Clause 17.12 in the insolvency pleadings 444
   9.14.4.2. Clause 17.12 and state of mind 448
   9.14.5. The assets subject to the cl 17.12 regime 449
   9.14.6. The cl 17.12 regime as a ‘mechanism’ 452
   9.14.7. The likelihood of access to asset sale proceeds 457
   9.14.8. Access to asset sales proceeds: conclusion 461
   9.15. ABILITY TO RAISE FUNDS FROM THE TWO MAIN ASSETS: INTRODUCTION 463
   9.16. VALUE OF THE BRL SHARES: THE BREWERY TRANSACTION 464
   9.16.1. Some introductory comments 464
   9.16.2. The brewery transactions: origins 465
   9.16.2.1. Background 465
   9.16.2.2. The Markland House loans and the Freefold facility 465
   9.16.2.3. Further borrowings 468
   9.16.2.4. The first brewery transaction (May 1989) 469
   9.16.2.5. The second brewery transaction (September 1989) 470
   9.16.2.6. The third brewery transaction (December 1989) 471
   9.16.3. Events in December 1989 and January 1990 473
   9.16.3.1. The receivership of BBHL 473
   9.16.3.2. Other events in December 1989 and January 1990 474
   9.16.3.3. The brewery transaction: February 1990 on 477
   9.16.4. Share trading in BRL and other indicia of value 483
   9.16.5. The BRL shares: the expert evidence of Love and Honey 485
   9.16.6. The BRL shares: conclusion 489
   9.17. THE VALUE OF THE PUBLISHING ASSETS 492
   9.17.1. The assets and their book value in 1989 492
   9.17.2. The valuation evidence 493
   9.17.3. Going concern versus forced sale 497
   9.17.4. FME and EBIT 503
   9.17.5. The capitalisation multiple 504
   9.17.6. A timetable for a sale 506
   9.17.7. Taking into account prior expressions of interest 508
   9.17.8. Adjustments to arrive at cash proceeds 509
   9.17.9. The value of the publishing assets: conclusion 510
   9.18. DEBT AND EQUITY STRUCTURE OF THE BELL GROUP: CASCADING DEMANDS 512
   9.18.1. The issue described 512
   9.18.2. Cascading demands: the pleadings. 513
   9.18.3. Debtor−creditor relationships within the Bell group 514
   9.18.3.1. Some introductory comments 514
   9.18.3.2. Debtor−creditor relationships: the BPG sub‑group 515
   9.18.3.3. Debtor−creditor relationships: the broader Bell group 519
   9.19. SPECIFIC LIABILITIES 521
   9.19.1. Introduction 521
   9.19.2. Bank and bondholder interest 522
   9.19.3. Other miscellaneous creditors 522
   9.19.4. Refinancing costs 523
   9.19.5. Conclusion 524
   9.20. THE PLAINTIFFS’ CASH FLOW INSOLVENCY CASE: CONCLUSION 524
10. THE PLAINTIFFS’ BALANCE SHEET INSOLVENCY CASE 530
    10.1. INTRODUCTION 530
    10.2. THE SNAS AND SUPPORTING DOCUMENTS 533
    10.2.1. Provenance, development and purpose 533
    10.2.2. The integrity of the financial model 535
    10.3. THE BOOK VALUE SNAS 536
    10.3.1. Matters of agreement 536
    10.3.2. Objections to specific inter‑company debts 537
    10.3.3. Admissibility and probative value 539
    10.4. THE VALUATION SNAS 540
    10.5. PROFIT AND LOSS CALCULATIONS: DISTRIBUTION COLUMNS 542
    10.6. IDENTIFICATION OF EXTERNAL CREDITORS 543
    10.6.1. Income tax liabilities 543
    10.6.1.1. Notice of assessment, objections and appeals 543
    10.6.1.2. The status of the DCT as a creditor 547
    10.6.1.3. Progress in the review process 552
    10.6.1.4. The income tax liabilities: conclusion 557
    10.6.2. Godine Developments Pty Ltd 559
    10.6.3. Miscellaneous creditors 563
    10.6.4. External creditors: conclusion 564
    10.7. FLOW OF FUNDS IN WESTERN INTERSTATE 565
    10.7.1. The problem described 565
    10.7.2. Flow of funds analysis 567
    10.7.3. The valuation SNAs: effect of non‑distribution 570
    10.8. BGF AS A BORROWER UNDER THE 1986 LOAN AGREEMENT 571
    10.8.1. The issue described 571
    10.8.2. The draw downs 573
    10.8.3. The construction question 574
    10.8.4. Subjective issues 577
    10.8.5. Conclusion 578
11. THE BANKS: DECISION‑MAKING STRUCTURES AND RELEVANT PERSONNEL 578
    11.1. THE PURPOSE OF THIS SECTION 578
    11.2. WESTPAC 580
    11.3. CBA 585
    11.4. HKBA 588
    11.5. NAB 591
    11.6. SOCGEN 593
    11.7. SCBAL 595
    11.8. LLOYDS BANK 599
    11.9. BANCO ESPÍRITO 602
    11.10. BOS 605
    11.11. INDOSUEZ 608
    11.12. BFG 613
    11.13. CRÉDIT AGRICOLE 617
    11.14. CRÉDIT LYONNAIS 622
    11.15. CREDITANSTALT 626
    11.16. DG BANK 630
    11.17. DRESDNER 633
    11.18. GULF BANK 637
    11.19. KREDIETBANK 640
    11.20. GENTRA 645
    11.21. SKOPBANK 649
12. THE CONVERTIBLE BOND ISSUES, THE ON‑LOANS AND SUBORDINATION 652
    12.1. INTRODUCTION 652
    12.1.1. The structure of these sections of the reasons 652
    12.1.2. The on‑loan question described 653
    12.1.3. The respective cases on the status of the on‑loans: a summary 654
    12.1.4. The significance of the subordination issue 655
    12.2. SUBORDINATED CONVERTIBLE BONDS: THE GENERAL CONTEXT 655
    12.2.1. The Eurobond market: an introduction 656
    12.2.2. The meaning of subordination in relation to debt 658
    12.2.3. Classification and mechanism of subordinated debt 662
    12.3. SUBORDINATION IN THE DOCUMENTATION OF THE BOND ISSUES 664
    12.3.1. The conditions in the offering circular and the bonds 664
    12.3.2. The terms of the trust deeds 665
    12.3.3. Subordination in the Transaction documents 668
    12.4. THE ON‑LOAN CONTRACTS: THE PLEADINGS 670
    12.4.1. Some introductory comments 670
    12.4.2. The on‑loans and the pleadings 670
    12.4.2.1. The on‑loans generally 671
    12.4.2.2. The contracts inter se 673
    12.4.2.3. The contracts inter partes 677
    12.4.2.4. Identifying the ‘on‑loan contracts’ from the pleadings 678
    12.5. INFORMAL CONTRACTS: SOME GENERAL LEGAL PRINCIPLES 681
    12.5.1. Formation of contract 681
    12.5.2. Post-contractual conduct 684
    12.5.3. Implied terms 686
    12.6. THE ONUS OF PROOF ON THE SUBORDINATION QUESTION 688
    12.6.1. Onus of proof: the parties’ contentions 688
    12.6.2. The onus of proof: general legal principles 690
    12.6.2.1. Onus or burden defined 690
    12.6.2.2. Shifting of the burden and distribution of issues 691
    12.6.3. The onus of proof: analysis 692
    12.7. THE FIRST BOND ISSUES (DECEMBER 1985) 695
    12.7.1. Some introductory comments 695
    12.7.2. The genesis of the convertible bond issues 696
    12.7.3. Implementation and finalisation of the first bond issues 700
    12.8. THE SECOND BOND ISSUES (MAY 1987) 711
    12.9. THE THIRD BOND ISSUE (JULY 1987) 715
    12.10. THE COMMERCIAL PURPOSE OF THE BOND ISSUES 717
    12.11. THE INTERPOSING OF BGNV AND THE SPLITTING OF THE ISSUE 725
    12.12. DEALINGS WITH THE BANKS 728
    12.12.1. Letter to banks: 11 December 1985 728
    12.12.2. The SocGen information memorandum 730
    12.12.3. The Information Memorandum 730
    12.12.4. Letter to the banks dated 15 April 1987 733
    12.12.5. The third BGNV bond issue and the NP guarantees 735
    12.12.5.1. Draft letter to banks dated 10 July 1987 735
    12.12.5.2. The NP guarantees 735
    12.13. THE ACCOUNTING TREATMENT OF THE BONDS AND THE ON‑LOANS 738
    12.13.1. The evidence to be considered 739
    12.13.2. Source documents, annual accounts and annual reports 739
    12.13.3. True and fair view 744
    12.13.4. Schedule 7 of the Companies Regulations 748
    12.13.5. International Accounting Standards 750
    12.13.6. Negative pledge reports: purpose and presentation 751
    12.13.6.1. Purpose of the negative pledge reports 751
    12.13.6.2. The form of the negative pledge reports 753
    12.13.6.3. The four categories of reports 755
    12.13.7. Negative pledge reports: the notional conversion thesis 772
    12.13.7.1. The notional conversion thesis explained 772
    12.13.7.2. Notional conversion: categories one and two reports 773
    12.13.8. Report categories three and four: another issue 773
    12.14. TWO SPECIFIC FACTUAL ISSUES 776
    12.14.1. Correspondence with the DCT 776
    12.14.2. Bell Group Finance (ACT) Ltd 779
    12.15. PRACTICES AND USAGES IN THE EUROBOND MARKET 784
    12.15.1. The evidence called and its relevance 784
    12.15.2. The offering circulars 788
13. THE CONTRACTS INTER SE AND SUBORDINATION 796
    13.1. WAS THERE AN ON‑LOAN CONTRACT? 796
    13.2. THE FORMATION AND TERMS OF THE ON‑LOAN CONTRACTS 798
    13.2.1. Decision‑making 798
    13.2.2. Terms of the on‑loan contracts: introductory comments 803
    13.2.3. Terms of the on‑loan contracts: the concept of subordination 805
    13.2.3.1. State of mind of the decision‑makers 805
    13.2.3.2. Communications concerning subordination 811
    13.2.3.3. Legal effectiveness of subordination 815
    13.2.3.4. The decision to split the 1985 issue 815
    13.2.4. Terms of the on‑loan contracts: quasi‑equity 819
    13.2.4.1. Importance of commercial purpose 819
    13.2.4.2. The state of mind of the decision‑makers 819
    13.2.4.3. Communications concerning convertibility 824
    13.2.5. ‘Bonds’ and ‘proceeds’ 829
    13.2.6. Three relevant issues relating to the on‑loan contracts 838
    13.2.6.1. Relationship of Eurobonds to domestic bonds 838
    13.2.6.2. The accounting records 841
    13.2.6.3. TBGL’s authority; BGNV as a contracting party 844
    13.2.7. A subordination term in the on‑loan contracts: a summary 847
    13.2.8. The precise term as to subordination 848
    13.2.8.1. The banks’ case 849
    13.2.8.2. The plaintiffs’ case 851
    13.2.8.3. Certainty of the subordination term: the trust deeds 852
    13.2.9. An implied term as to subordination 858
    13.3. ABILITY OF THE BANKS TO ENFORCE THE ON‑LOAN CONTRACTS: PRIVITY 860
    13.3.1. The privity argument described 860
    13.3.2. The parties’ cases 861
    13.3.3. Whether s 11(2) applies to informal contracts 863
    13.3.4. The other indicia of s 11(2) 866
    13.3.5. Trust of a contractual promise 869
    13.4. CONTRACTS INTER SE: CONCLUSION 870
14. THE CONTRACTS INTER PARTES AND SUBORDINATION 873
    14.1. INTRODUCTION 873
    14.2. THE CONTRACTS INTER PARTES: THE PLEADINGS 874
    14.2.1. The contracts inter-partes: contractual intent 876
    14.2.2. The contracts inter partes: conclusion 880
15. THE ESTOPPEL CASE AND SUBORDINATION OF THE ON‑LOANS 881
    15.1. INTRODUCTION 881
    15.2. THE ESTOPPEL CASE AS PLEADED 883
    15.2.1. The banks’ case 883
    15.2.2. The plaintiffs’ case 889
    15.3. ESTOPPEL: SOME GENERAL LEGAL PRINCIPLES 890
    15.3.1. Some introductory comments 890
    15.3.2. Estoppel by representation or conduct 891
    15.3.2.1. The nature of estoppel by representation 891
    15.3.2.2. The subject matter and clarity of the representation 892
    15.3.2.3. Estoppel by representation: intention 896
    15.3.2.4. Estoppel by representation: reliance 897
    15.3.2.5. Estoppel by representation: detriment 901
    15.3.2.6. Estoppel by representation: consequences 905
    15.3.3. Estoppel by convention 906
    15.3.3.1. The nature of estoppel by convention 906
    15.3.3.2. Conduct amounting to a common assumption 908
    15.3.3.3. The need for clarity 909
    15.3.4. Equitable estoppel 912
    15.3.4.1. The nature of equitable estoppel 912
    15.3.4.2. The clarity of the representation 915
    15.3.5. The three species of estoppels: conclusion 916
16. THE ESTOPPEL CASE: REPRESENTATIONS AND CONDUCT 917
    16.1. INTRODUCTION 917
    16.2. IDENTIFYING THE REPRESENTATIONS AND CONDUCT 918
    16.2.1. Some introductory comments 918
    16.2.2. Intention that representations be relied on 920
    16.2.3. The letters of 11 December 1985 and 15 April 1987 921
    16.2.4. The Information Memorandum 926
    16.2.5. Collapsing and replacing the NP agreements 927
    16.2.6. Provision of financial information 928
    16.3. THE ON‑LOANS REMAINING SUBORDINATED 930
    16.4. REPRESENTATIONS BINDING OTHER BELL GROUP COMPANIES 934
    16.5. INTENTION THAT REPRESENTATIONS BE ACTED ON 935
17. THE ESTOPPEL CASE: RELIANCE AND DETRIMENT 937
    17.1. SOME INTRODUCTORY COMMENTS 937
    17.2. THE PLEADED CASE 939
    17.3. RELIANCE AND DETRIMENT: A GLOBAL APPROACH 941
    17.3.1. Identifying the issues 941
    17.3.2. The representations (Q 1) 942
    17.3.3. Belief as to subordination (Q 2) 943
    17.3.4. Inducement (Q 3) 944
    17.3.5. A false hypothesis (Q 4(a)) 945
    17.3.6. Breach of the ratios (Q 4(b)) 947
    17.3.7. The remaining questions 947
    17.3.8. Miscellaneous matters raised by the plaintiffs 947
    17.3.8.1. BGF (ACT) 948
    17.3.8.2. Reaction to the on‑loan issue in 1989 and 1990 950
    17.3.9. Remainder of this section: the content 951
    17.3.9.1. The general approach 951
    17.3.9.2. The three composite questions 953
    17.4. WESTPAC 958
    17.4.1. General evidence of reliance and detriment 958
    17.4.2. Treating the bonds as equity for the NP ratios 959
    17.4.2.1. The December 1985 equity request 959
    17.4.2.2. The April 1987 equity request 960
    17.4.2.3. Conclusion on the equity requests 962
    17.4.3. Replacing the NP agreement with an NP guarantee 962
    17.4.4. Extension of the facilities from time to time 964
    17.4.4.1. The 10 August 1987 request 964
    17.4.4.2. The 12 November 1987 request 966
    17.4.5. Continued provision of the facilities: late 1987 and following 968
    17.4.5.1. Immediately after October 1987 968
    17.4.5.2. Support for TBGL facilities after BCHL takeover 972
    17.5. CBA 974
    17.5.1. General evidence of reliance and detriment 974
    17.5.2. The December 1985 request for equity treatment 976
    17.6. HKBA 977
    17.6.1. The December 1985 request for equity treatment 977
    17.6.2. The decision to approve the $100 million facility to BGF 979
    17.7. NAB 983
    17.7.1. The December 1985 request for equity treatment 983
    17.7.2. Extension of the facilities from time to time 985
    17.7.2.1. The June 1986 request 985
    17.7.2.2. The October 1987 request 986
    17.8. SOCGEN 988
    17.8.1. Treating the bonds as equity for the NP ratios 988
    17.8.1.1. The December 1985 equity request 988
    17.8.1.2. The April 1987 equity request 988
    17.8.2. Leading and extending the SocGen syndicated facility 991
    17.8.3. Replacing the NP agreement with an NP guarantee 994
    17.9. SCBAL 997
    17.9.1. The December 1985 request for equity treatment 997
    17.9.2. The April 1987 equity request 999
    17.9.3. Replacing the NP agreement with an NP guarantee 1000
    17.10. BANCO ESPÍRITO 1001
    17.10.1. Participation in the facility 1001
    17.10.1.1. Information and events 1001
    17.10.1.2. Conclusion 1005
    17.10.2. Treating the bonds as equity for the NP ratios 1007
    17.10.2.1. The April 1987 request for equity treatment 1007
    17.10.2.2. Conclusion 1010
    17.10.3. Replacing the NP agreement with an NP guarantee 1010
    17.10.3.1. Information and events 1010
    17.10.3.2. Conclusion 1012
    17.10.4. Continued provision of facilities: late 1987 and following 1013
    17.11. BOS 1017
    17.12. INDOSUEZ 1021
    17.12.1. Participation in the facility 1021
    17.12.2. Treating the bonds as equity for the NP ratios 1026
    17.12.3. Replacing the NP agreement with an NP guarantee 1028
    17.13. BFG 1030
    17.14. CRÉDIT AGRICOLE 1035
    17.15. CRÉDIT LYONNAIS 1039
    17.16. CREDITANSTALT 1042
    17.17. DG BANK 1047
    17.18. DRESDNER 1053
    17.18.1. Arrangements prior to the Lloyds syndicate facility 1053
    17.18.2. Participation in the facility 1054
    17.19. GULF BANK 1060
    17.20. KREDIETBANK 1065
    17.21. GENTRA 1071
    17.22. SKOPBANK 1074
    17.22.1. Participation in the facility 1074
    17.22.2. Later events 1079
    17.23. LLOYDS BANK 1080
    17.23.1. Participation in the facility 1080
    17.23.2. Treating the bonds as equity for the NP rations 1081
    17.23.3. Replacing the NP agreement with an NP guarantee 1083
18. THE SUBORDINATION ISSUE: CONCLUSIONS 1085
    18.1. BOND ISSUES, ON‑LOANS AND SUBORDINATION: A FINAL ANALYSIS 1086
    18.2. CLAIMS UNDER THE TRADE PRACTICES ACT AND IN RESTITUTION 1092
    18.2.1. The Trade Practices Act claims 1092
    18.2.2. The claim in restitution for mistake 1094
19. THE EFFECT OF THE SCHEME AND THE TRANSACTIONS 1095
    19.1. INTRODUCTION 1095
    19.2. PLEADING DISPUTES 1098
    19.3. THE NEED FOR A FINANCIAL RESTRUCTURE 1099
    19.4. PROSPECT OF LOSS; NO PROSPECT OF GAIN 1104
    19.5. PREJUDICE TO EXTERNAL CREDITORS: DCT 1107
    19.6. PREJUDICE TO THE BONDHOLDERS 1109
20. BREACH OF DUTIES BY DIRECTORS: SOME GENERAL LEGAL PRINCIPLES 1112
    20.1. DIRECTORS’ DUTIES AND BARNES V ADDY: STRUCTURE OF THE REASONS 1112
    20.2. THE RELEVANT DUTIES OF THE DIRECTORS 1113
    20.2.1. Some introductory comments 1113
    20.2.2. The duties (and breaches) relied on in this litigation 1114
    20.2.2.1. The duties as pleaded 1114
    20.2.2.2. The breaches of duty as particularised 1115
    20.2.2.3. The duties: a summary 1117
    20.2.3. Corporate governance and the role of directors 1118
    20.2.4. Directors’ duties: historical development 1120
    20.3. THE DUTY TO ACT IN THE INTERESTS OF THE COMPANY 1124
    20.3.1. The duty described 1124
    20.3.2. The duty is owed to the company 1125
    20.3.3. The position of creditors 1127
    20.3.3.1. The seminal authorities 1127
    20.3.3.2. The duty entails an obligation to creditors 1130
    20.3.3.3. Obligation extends beyond questions of ratification 1136
    20.3.3.4. The banks’ alternative submission 1140
    20.3.3.5. Obligation to creditors not necessarily paramount 1140
    20.3.3.6. Obligation may arise other than in actual insolvency 1142
    20.3.4. The board as a conglomerate of individuals 1145
    20.4. THE DUTY TO EXERCISE POWERS PROPERLY 1145
    20.4.1. The duty described 1145
    20.4.2. Nature and scope of the power 1149
    20.4.2.1. Introduction 1149
    20.4.2.2. The main Australian companies 1149
    20.4.2.3. Examples of other Australian companies 1154
    20.4.2.4. BGUK 1154
    20.4.2.5. BGNV 1155
    20.5. THE DUTY TO AVOID CONFLICTS OF INTEREST 1157
    20.5.1. The duty described 1157
    20.5.2. The duty: a more detailed analysis 1158
    20.5.2.1. Statement of the duty and its rationale 1158
    20.5.2.2. The basis for liability 1159
    20.5.2.3. Approach to a possibility of conflict 1160
    20.5.2.4. The concept of a personal interest 1161
    20.5.3. Some observations on the pleaded case 1162
    20.6. THE FIDUCIARY NATURE OF THE DUTIES 1166
    20.6.1. The fiduciary problem described 1167
    20.6.2. The proscriptive: prescriptive dichotomy 1169
    20.6.3. The proscriptive: prescriptive dichotomy and directors’ duties 1171
    20.7. SUBJECTIVE AND OBJECTIVE ASSESSMENT OF DIRECTORIAL CONDUCT 1183
    20.7.1. The problem described 1185
    20.7.2. The authorities 1186
    20.7.3. The law: a summary 1193
    20.7.4. A related issue: group considerations 1195
    20.7.5. Another related issue: conscious wrongdoing 1196
21. THE BARNES V ADDY CLAIM: SOME GENERAL LEGAL PRINCIPLES 1196
    21.1. INTRODUCTION 1196
    21.2. BARNES V ADDY: RELEVANT LEGAL PRINCIPLES 1198
    21.2.1. Barnes v Addy generally 1198
    21.2.2. Barnes v Addy: the modern authorities 1202
    21.2.2.1. The Consul Developments litigation 1202
    21.2.2.2. Recent developments in the English courts 1208
    21.2.2.3. The Australian position following Royal Brunei 1215
    21.2.2.4. The Farah Constructions litigation 1218
    21.2.3. Barnes v Addy and the dishonest fiduciary 1223
    21.2.4. Barnes v Addy and degrees of knowledge 1229
    21.2.5. Recipient liability and trust property 1233
    21.2.5.1. The concept of trust property 1233
    21.2.5.2. ‘Trust property’ and a voidable transaction 1241
    21.2.6. The Barnes v Addy pleadings in this case 1249
    21.2.6.1. The pleading arguments as a longueur 1249
    21.2.6.2. Pleading a dishonest and fraudulent design 1250
    21.2.6.3. The knowing receipt claim 1255
22. EQUITABLE FRAUD: SOME GENERAL LEGAL PRINCIPLES 1257
    22.1. THE EQUITABLE FRAUD CLAIMS: AN OUTLINE 1257
    22.2. THE JURIDICAL NATURE OF EQUITABLE FRAUD 1258
    22.2.1. Equitable fraud generally 1258
    22.2.1.1. What is an equitable fraud? 1258
    22.2.1.2. Equitable fraud and common law fraud compared 1260
    22.2.2. Imposition and deceit: fourth limb of Earl of Chesterfield 1261
    22.2.2.1. Earl of Chesterfield v Janssen 1261
    22.2.2.2. The fourth limb: ‘mala fide’ 1265
    22.2.2.3. The fourth limb: composition cases and public utility 1268
    22.2.2.4. The fourth limb: miscellaneous matters 1274
    22.2.3. An inequitable and unconscientious bargain 1276
    22.2.3.1. Unconscionability; unconscionable dealing 1277
    22.2.3.2. Special disadvantage 1279
    22.2.3.3. Knowledge of the special disadvantage 1281
23. FACTUAL DETERMINATIONS OF BREACHES OF DUTY: A FIRST LOOK 1283
    23.1. INTRODUCTION 1283
    23.2. THE DIRECTORS AND THEIR DUTIES: THE CONTEXT 1284
    23.2.1. Identifying the directors 1284
    23.2.2. A summary of the alleged breaches 1285
    23.2.3. Knowledge and belief: some common ground 1289
    23.2.4. Knowledge and belief: disputed matters 1290
    23.3. SOURCES OF FINANCIAL INFORMATION AVAILABLE TO DIRECTORS 1290
24. AUSTRALIAN DIRECTORS KNOWLEDGE AND CONDUCT 1292
    24.1. DAVID ASPINALL 1292
    24.1.1. Aspinall: an opening comment 1292
    24.1.2. Personal history 1293
    24.1.3. The period July 1989 to end of January 1990 1294
    24.1.3.1. Finance and Administration 1294
    24.1.3.2. The need for refinancing 1300
    24.1.3.3. Negotiations with the Australian banks 1304
    24.1.3.4. The CBA demand 1308
    24.1.3.5. Revised lending terms 1309
    24.1.3.6. The SCBAL crisis and the subordination issue 1310
    24.1.3.7. Documents are signed 1313
    24.1.3.8. Bell and Bond 1316
    24.1.3.9. Dealing with the UK directors and insolvency generally 1318
    24.1.3.10. The Bell group at the beginning of 1990 1321
    24.1.3.11. A 12‑month window 1321
    24.1.3.12. Aspinall’s plans for restructure 1322
    24.1.4. The publishing assets 1323
    24.1.4.1. Aspinall’s views about these assets 1323
    24.1.4.2. Whitlam Turnbull valuation 1324
    24.1.4.3. Expressions of interest in purchasing 1325
    24.1.4.4. The News Corporation negotiations 1327
    24.1.4.5. C&L audit report 1328
    24.1.4.6. The monopoly position of The West Australian 1330
    24.1.4.7. Profitability of the newspaper 1330
    24.1.4.8. Increasing readership 1333
    24.1.4.9. Efficiencies at the Herdsman plant 1333
    24.1.5. BRL shares 1335
    24.1.6. Bell Group Press 1340
    24.1.7. Financial information available to Aspinall to 26 January 1990 1341
    24.1.7.1. Cash flows and income sources 1341
    24.1.7.2. BPG cash forecasts 1342
    24.1.7.3. TBGL cash forecasts 1343
    24.1.7.4. TBGL balance sheets 1345
    24.1.7.5. The tax issue 1346
    24.1.8. Other asset sales and the clause 17.12 regime 1348
    24.1.8.1. Some introductory comments 1348
    24.1.8.2. Clause 17.12: an expectation 1349
    24.1.8.3. Q-Net proceeds 1354
    24.1.8.4. BCF loan 1355
    24.1.8.5. JNTH loan 1355
    24.1.8.6. JNTH management fees 1356
    24.1.8.7. BRF loan 1356
    24.1.8.8. ITC contract payment 1357
    24.1.8.9. New York apartment 1358
    24.1.9. The period end of January 1990 to end of 1990 1359
    24.1.9.1. The immediate cash crisis 1359
    24.1.9.2. Persuading the banks 1360
    24.1.9.3. February meeting with the banks in Perth 1361
    24.1.9.4. March meeting with the banks in London 1364
    24.1.9.5. Updated cash flow at 27 March 1990 1365
    24.1.9.6. April and the waiver crisis 1366
    24.1.10. May 1990 and the band of four 1370
    24.1.10.1. Continuing opposition to the waiver 1370
    24.1.10.2. Gulf Bank 1371
    24.1.10.3. Gentra 1373
    24.1.10.4. Creditanstalt 1373
    24.1.10.5. BoS 1374
    24.1.10.6. LDTC 1375
    24.1.10.7. TBGL board meeting of 7 May 1990 1376
    24.1.10.8. London meeting with the banks 1377
    24.1.10.9. The four banks and the conditions 1378
    24.1.10.10. The LDTC condition 1378
    24.1.10.11. The BGNV subordination deed condition 1381
    24.1.11. The May–June plans for debt restructure 1382
    24.1.11.1. The bond price rise 1382
    24.1.11.2. BRL negotiations 1384
    24.1.11.3. An equity injection into WAN 1384
    24.1.12. Aspinall’s involvement with LDTC 1386
    24.1.13. The period June 1990 to end of December 1990 1389
    24.1.13.1. Proposed sale to the Mirror group: June to August 1389
    24.1.13.2. The cash flow difficulties: September 1990 1391
    24.1.13.3. Interest payment moratoria 1392
    24.1.13.4. The October cash flows 1394
    24.1.14. Further concessions sought in interest payments: November 1395
    24.1.15. Dealing with the BCHL group: December 1990 1396
    24.1.15.1. Approaches to BCHL for repayment of debts 1396
    24.1.15.2. Advice taken from Corrs 1397
    24.1.15.3. BCHL’s inability to pay 1398
    24.1.16. Death by a thousand cuts: January 1991 to April 1991 1399
    24.1.17. The Mirror group (Maxwell): a postscript 1404
    24.1.18. The various plans for restructure 1405
    24.1.19. Aspinall’s evidence: conclusion 1408
    24.2. PETER MITCHELL 1409
    24.2.1. Mitchell: an opening comment 1409
    24.2.2. Personal history 1410
    24.2.3. The subordinated bond issues 1411
    24.2.4. The financial position of the Bell group 1416
    24.2.5. WAN 1418
    24.2.6. Shareholding in BRL 1420
    24.2.6.1. Mitchell’s involvement with BRL 1420
    24.2.6.2. The first brewery deal 1421
    24.2.6.3. The Lion Nathan joint venture 1422
    24.2.6.4. The third brewery deal 1423
    24.2.6.5. Other interest in the brewing assets of BCHL 1425
    24.2.6.6. Changes to the board of BRL 1426
    24.2.6.7. Receivership of BBHL 1426
    24.2.6.8. Planning for the Bond group 1429
    24.2.7. Bell group restructure plans 1434
    24.2.8. The refinancing Transactions 1435
    24.2.8.1. Mitchell’s involvement generally 1435
    24.2.8.2. The tax issue 1439
    24.2.8.3. TBGL board meetings generally 1441
    24.2.8.4. Meetings before the refinancing 1442
    24.2.9. TBGL in 1990: continuing the restructure plans 1443
    24.2.9.1. Knowledge of the Bell group cash flows 1443
    24.2.9.2. Carrying value of shares in BRL and JNTH 1444
    24.2.9.3. More restructuring proposals 1444
    24.2.9.4. Bond scheme of arrangement 1446
    24.2.9.5. LCAS planning 1447
    24.2.9.6. Mitchell and the bankers to TBGL 1447
    24.2.9.7. Mitchell and LDTC 1447
    24.2.10. Corporate benefit 1448
    24.2.11. Mitchell’s evidence: conclusion 1450
    24.3. ANTONY OATES 1452
    24.4. OTHER RELEVANT OFFICERS 1454
    24.4.1. Colin Simpson 1454
    24.4.2. John Corr 1455
    24.4.2.1. Corr’s role in CPDD 1455
    24.4.2.2. BCHL restructure plans generally 1457
    24.4.2.3. ‘Bond-centric’ plans 1463
    24.4.2.4. LeBow 1465
    24.4.2.5. Subordinated bonds and proceeds 1467
    24.4.3. Michael Swan 1470
    24.4.3.1. The role of Oates and Mitchell 1470
    24.4.3.2. The decision‑makers 1471
    24.4.3.3. Access to accounting information 1471
    24.4.3.4. Central Treasury 1473
    24.4.4. Graeme Baker 1473
    24.4.4.1. Administrative structure of BCHL 1474
    24.4.4.2. Transactions: Oates and Mitchell 1475
    24.4.4.3. The decision‑makers 1475
    24.4.4.4. Minutes and meetings 1476
    24.4.4.5. Cross‑defaults 1476
25. RECITALS; MINUTES; DIRECTORS MEETINGS; SOLICITORS’ INVOLVEMENT 1477
    25.1. INTRODUCTION 1477
    25.2. THE BACKGROUND 1478
    25.3. THE DISPUTE 1480
    25.4. THE MINIMUM REQUIREMENTS FOR MEETINGS 1481
    25.4.1. The fact of the meeting 1481
    25.4.2. The records of the meeting 1482
    25.5. AN OVERVIEW OF THE CONCLUSIONS 1483
    25.6. NEGOTIATION OF THE FINANCING DOCUMENTS 1486
    25.6.1. A&O 1487
    25.6.2. MSJL 1491
    25.6.3. The combined advice 1495
    25.6.4. P&P 1497
    25.6.5. Westpac’s in‑house lawyer 1498
    25.6.6. Senior counsel’s advice 1499
    25.6.7. The follow‑up to the advice 1501
    25.6.8. The recitals: background 1503
    25.6.9. Drafting the recitals 1504
    25.6.10. A problem arises 1505
    25.6.11. The ‘panic weekend’ 1507
    25.6.12. The lawyers to the Bell group 1510
    25.6.13. Watson’s evidence 1511
    25.6.14. Morison’s evidence 1512
    25.6.15. Drafting the company minutes 1513
    25.6.16. The 12 February 1990 meeting and the letters of comfort 1515
    25.7. THE COMPANY SECRETARY’S ROLE 1516
    25.7.1. The minutes 1517
    25.7.2. Resolutions 1517
    25.7.3. The minutes and resolutions for the Transactions 1518
    25.8. CORPORATE BENEFIT AND THE DOCUMENTS: CONCLUSIONS 1521
26. THE UK DIRECTORS’ KNOWLEDGE AND CONDUCT 1525
    26.1. THE UK DIRECTORS 1525
    26.2. EDWARDS 1527
    26.3. BGUK’S LEGAL ADVISERS 1528
    26.4. DRAFTS RECEIVED BY BGUK 1529
    26.5. S&M’S ADVICE 1530
    26.6. UK COUNSEL’S OPINION 1531
    26.6.1. The follow‑up to UK counsel’s opinion 1534
    26.6.2. S&M confer with A&O 1535
    26.7. C&L’S ADVICE 1537
    26.7.1. The position of BGUK 1537
    26.7.2. The position of TBGIL 1538
    26.8. JANUARY MEETINGS BETWEEN S&M AND A&O AND THEIR CLIENTS 1540
    26.8.1. The 2 January 1990 meeting 1540
    26.8.2. The 8 January 1990 meeting 1540
    26.8.3. The 10 January 1990 meeting 1541
    26.8.4. Letters of comfort 1542
    26.8.5. Financial information: TBGL 1543
    26.9. FURTHER ADVICE FROM COUNSEL ON 11 JANUARY 1990 1544
    26.9.1. The final proposal 1545
    26.9.2. The 21 January 1990 meeting 1546
    26.9.3. Edwards’ final request 1547
    26.9.4. Legg and Montgomery 1549
    26.10. KNOWLEDGE OF THE UK DIRECTORS 1550
    26.10.1. Alan Bond 1553
    26.10.2. Mitchell 1554
    26.10.3. S&M draft the minutes and resolutions 1554
    26.10.4. Identifying the creditors 1556
    26.10.5. Simpson’s draft letters received 1556
    26.11. THE MEETING ON 24 JANUARY 1990 1558
    26.11.1. The TBGIL meeting 1558
    26.11.2. The BGUK meeting 1559
    26.11.3. The critical issues 1559
    26.12. THE MEETING ON 13 FEBRUARY 1990 1563
    26.13. THE UK DIRECTORS’ KNOWLEDGE AND CONDUCT: CONCLUSION 1565
27. BIIL DIRECTORS’ KNOWLEDGE AND CONDUCT 1568
    27.1. EDWARDS AND WHITECHURCH 1568
    27.1.1. The advice received 1568
    27.1.2. The pre‑condition issue 1569
    27.1.3. The meeting on 13 February 1990 1572
    27.1.4. The meeting on 14 May 1990 1573
    27.2. BIIL DIRECTORS’ KNOWLEDGE AND CONDUCT: CONCLUSION 1574
28. EQUITY TRUST KNOWLEDGE AND CONDUCT 1574
    28.1. THE BGNV SUBORDINATION DEED 1575
    28.2. THE ALLEGED BREACHES BY EQUITY TRUST 1576
    28.3. HISTORY AND FUNCTION OF THE PARTICIPATION OF EQUITY TRUST 1577
    28.3.1. Knowledge of the financial state of TBGL and BGF 1578
    28.3.2. The request to enter the Subordination Deed 1581
    28.3.3. BGNV seeks legal advice 1582
    28.3.4. A&O intervene 1583
    28.3.5. Promes’ advice 1584
    28.3.6. Simpson’s response to Promes 1585
    28.3.7. The Subordination Deed dated 15 February 1990 1586
    28.3.8. The BGNV Subordination Deed 1588
    28.3.9. TBGL seeks advice from S&W 1588
    28.3.10. Ruoff’s response to Simpson 1590
    28.3.11. Simpson replies to Ruoff 1591
    28.4. LDTC AND EQUITY TRUST 1593
    28.4.1. Dealings and communications 1593
    28.4.2. The corporate benefit argument 1595
    28.5. EQUITY TRUST’S KNOWLEDGE AND CONDUCT: CONCLUSION 1595
29. BREACHES OF DUTY BY DIRECTORS: ANALYSIS AND CONCLUSIONS 1596
    29.1. INTRODUCTION 1596
    29.2. THE ESSENCE OF THE BREACHES 1597
    29.2.1. The Australian directors: summary 1597
    29.2.2. Corporate governance and stewardship 1608
    29.2.3. The pari passu principle and a valid and effective restructure 1608
    29.2.4. The subjective–objective dichotomy 1611
    29.2.5. Identifying the directors duties as pleaded 1613
    29.2.6. The UK and BIIL directors: summary 1614
    29.2.7. The BGNV director: a summary 1615
    29.3. THE BREACHES AND THE PLEADINGS 1616
    29.3.1. The Bell Participants generally 1616
    29.3.2. TBGL and BGF 1618
    29.3.3. Other named companies 1618
    29.3.4. Giving effect to the Scheme 1619
    29.4. CONFLICT OF INTEREST 1620
    29.5. CORPORATE BENEFIT 1622
30. BANKS’ KNOWLEDGE AND STATE OF MIND ISSUES 1622
    30.1. INTRODUCTION 1622
    30.2. LEGAL APPROACH TO DETERMINING KNOWLEDGE 1626
    30.2.1. Some introductory comments 1626
    30.2.2. The organic theory and aggregation of knowledge 1626
    30.2.3. The general principles of agency 1633
    30.2.4. Attribution of the knowledge of agents to principals 1639
    30.2.5. Abstention from enquiry 1642
    30.3. THE RELEVANT LAWYERS 1646
    30.3.1. Parker & Parker 1646
    30.3.2. Allen & Overy 1647
    30.3.3. Mallesons Stephen Jaques 1648
    30.4. PUBLIC INFORMATION 1649
    30.5. THE AGENCY CASE 1661
    30.5.1. The banks as agents 1661
    30.5.2. Westpac’s agency 1662
    30.5.3. Lloyds Bank’s agency 1673
    30.5.4. The banks’ lawyers as agents 1683
    30.5.4.1. Some introductory comments 1683
    30.5.4.2. Parker and Parker 1686
    30.5.4.3. Allen and Overy 1688
    30.5.4.4. Mallesons Stephen Jaques (London) 1689
    30.6. KNOWLEDGE OF BELL GROUP’S FINANCIAL POSITION 1689
    30.6.1. Some introductory comments 1689
    30.6.2. Sources of information and knowledge 1691
    30.6.2.1. The range of the enquiry 1691
    30.6.2.2. The 1 July cash flow 1691
    30.6.2.3. The September cash flow 1692
    30.6.2.4. The 1989 TBGL Annual Report 1692
    30.6.2.5. The 1989 BRL Annual Report 1692
    30.6.2.6. The 1989 BCHL Annual Report 1693
    30.6.2.7. The 1989 JNTH Annual Report 1693
    30.6.2.8. The November 1989 negative pledge report 1694
    30.6.2.9. The Garven cash flow 1694
    30.6.3. Knowledge source: the 1 July and September cash flows 1694
    30.6.4. Knowledge source: the 1989 TBGL Annual Report 1701
    30.6.5. The financial position of the Bond group 1704
    30.6.6. Promises to reduce bank debt: Wigmores and Bryanston 1706
    30.6.7. The GFH and JNTH assets 1716
    30.6.8. The BRL assets 1720
    30.6.8.1. Some introductory comments 1720
    30.6.8.2. The Australian banks and BRL: an overview 1722
    30.6.8.3. Knowledge of the BBHL syndicate banks 1731
    30.6.8.4. The other banks and the BRL assets 1755
    30.6.8.5. BRL and the brewery sale after 26 January 1755
    30.6.9. The financial position of BGUK and TBGIL 1764
    30.6.10. Financial position of Bell group after 26 January 1990 1765
    30.7. THE SHAPE OF THE NEXT GROUP OF SECTIONS 1766
    30.8. LEGAL ADVICE AND DOUBLE JEOPARDY 1767
    30.9. THE DEVELOPMENT OF THE TERMS SHEETS 1775
    30.9.1. Terms sheets and their content 1775
    30.9.2. A particular condition: certificates of solvency 1779
    30.10. THE AUSTRALIAN BANKS: SOME GLOBAL CONSIDERATIONS 1783
    30.10.1. The October meetings 1783
    30.10.2. The January meeting 1786
    30.10.3. The February meetings 1788
    30.10.3.1. Back ground to the meetings 1788
    30.10.3.2. Meetings of bank representatives 1789
    30.10.3.3. Meeting between bankers and TBGL officers 1791
    30.10.4. Further meetings: June 1990 1794
    30.10.5. The meetings: preliminary conclusion 1797
    30.11. THE LLOYDS SYNDICATE BANKS: SOME GLOBAL CONSIDERATIONS 1799
    30.11.1. The purpose of this section 1799
    30.11.2. Events before 26 January 1990 1800
    30.11.3. Events after 26 January 1990 1825
    30.11.3.1. The February meetings in Perth 1825
    30.11.3.2. Meeting on 12 March 1990 1827
    30.11.3.3. Further meetings: March to June 1990 1830
    30.11.4. The meetings: preliminary conclusion 1834
    30.12. THE ‘NO WORSE OFF’ THESIS 1835
    30.12.1. The thesis described 1835
    30.12.2. The Weir diagram 1836
    30.12.3. Individual banks and the no worse off thesis 1839
    30.13. THE HARDENING PERIOD 1841
    30.14. DESCRIBING THE FINANCIAL POSITION AS ‘PRECARIOUS’ 1845
    30.15. THE CBA DEMANDS 1848
    30.16. THE SCBAL DEMANDS 1851
    30.16.1. The issue and withdrawal of the demands 1851
    30.16.2. The lawyers’ knowledge of the SCBAL demands 1854
    30.16.3. Other banks’ knowledge of the demands 1855
    30.17. KNOWLEDGE OF THE STATUS OF THE BOND ISSUES 1858
    30.17.1. Some introductory comments 1858
    30.17.2. Knowledge of the terms on which the bonds were issued 1858
    30.17.3. Knowledge of LDTC’s capacity to wind up the issuers 1861
    30.18. KNOWLEDGE OF THE STATUS OF THE ON‑LOANS 1863
    30.18.1. A summary of the arguments 1863
    30.18.2. 1985 to the SCBAL demands: the banks’ assumptions 1864
    30.18.3. The SCBAL demands 1871
    30.18.4. The events of January 1990 1883
    30.18.5. The Westpac credit applications 1886
    30.18.6. Some issues affecting Lloyds Bank 1889
    30.18.7. January 1990 and the BGNV Subordination Deed 1892
    30.18.8. The period after 26 January 1990 1897
    30.18.9. Knowledge of the status of the on‑loans: conclusions 1905
    30.19. KNOWLEDGE OF OTHER EXTERNAL CREDITORS 1907
    30.20. KNOWLEDGE OF INTER‑COMPANY LENDING AND CORPORATE BENEFIT 1912
    30.20.1. Some introductory comments 1912
    30.20.2. Corporate benefit revisited 1913
    30.20.3. Acquiring knowledge: debts, credits and benefits 1914
    30.20.4. Knowledge of the cash flow position of the companies 1922
    30.21. INDIVIDUAL BANKS’ KNOWLEDGE: AUSTRALIAN BANKS 1926
    30.21.1. Introduction 1926
    30.21.2. Westpac 1927
    30.21.3. CBA 1951
    30.21.4. HKBA 1970
    30.21.5. NAB 1994
    30.21.6. SocGen 2011
    30.21.7. SCBAL 2033
    30.21.8. Some observations 2049
    30.22. INDIVIDUAL BANKS’ KNOWLEDGE: LLOYDS SYNDICATE BANKS 2051
    30.22.1. Some introductory comments 2051
    30.22.2. Lloyds Bank 2053
    30.22.3. Banco Espírito 2092
    30.22.4. BoS 2101
    30.22.5. Indosuez 2117
    30.22.6. BfG 2127
    30.22.7. Crédit Agricole 2141
    30.22.8. Crédit Lyonnais 2154
    30.22.9. Creditanstalt 2171
    30.22.10. DG Bank 2189
    30.22.11. Dresdner 2206
    30.22.12. Gulf Bank 2218
    30.22.13. Kredietbank 2229
    30.22.14. Gentra 2242
    30.22.15. Skopbank 2256
    30.22.16. Some observations 2267
    30.23. KNOWLEDGE: FAILURE TO ENQUIRE 2268
    30.23.1. Some introductory comments 2268
    30.23.2. Cash flow information 2275
    30.23.3. Audited financial statements 2280
    30.23.4. The restructure plans 2281
    30.24. THE BANKS AND THE CORPORATE BENEFIT ARGUMENT: A FURTHER LOOK 2285
    30.25. BANKS’ KNOWLEDGE OF THE LEGAL CONSEQUENCES OF THE TRANSACTIONS 2293
    30.26. BANKS KNOWLEDGE AND BARNES V ADDY: CONCLUSIONS 2303
    30.26.1. Some introductory comments 2303
    30.26.2. Barnes v Addy: a reprise 2304
    30.26.3. Knowledge: the critical findings 2307
    30.26.4. Knowing receipt: the conclusions 2312
31. LDTC’S KNOWLEDGE 2315
    31.1. LDTC: ORGANISATION AND OFFICERS 2316
    31.1.1. Relevant officers of LDTC 2316
    31.1.2. Office practices at LDTC 2318
    31.1.3. LDTC board meetings 2318
    31.2. THE BOND ISSUE TRUST DEEDS 2319
    31.3. KNOWLEDGE OF INSOLVENCY 2319
    31.3.1. The first indication of a problem 2319
    31.3.2. Linklaters’ involvement 2320
    31.3.3. The initial advice 2321
    31.3.4. Certificates of solvency 2322
    31.3.5. TBGL’s response 2323
    31.3.6. Restraining the boot 2325
    31.3.7. Concerns voiced by SGIC and other bondholders 2326
    31.3.8. McCall QC’s advice 2327
    31.3.9. LDTC and SGIC 2331
    31.3.10. The next round of certificates 2332
    31.3.11. The standoff 2334
    31.3.12. Knowledge of insolvency: conclusion 2335
    31.4. KNOWLEDGE OF THE REFINANCING 2336
    31.4.1. A suspicion 2336
    31.4.2. Communications concerning the 1989 Annual Report 2337
    31.4.3. January 1990 meetings with TBGL and SGIC 2338
    31.4.4. London meetings (May 1990) 2340
    31.4.5. Reporting to the board of LDTC 2341
    31.4.6. Knowledge of the refinancing: conclusion 2343
    31.5. LDTC’S ACTIONS 2345
    31.5.1. An overview 2345
    31.5.2. The BGNV Subordination Deed 2348
    31.6. THE ALLEGED EVENTS OF DEFAULT 2350
    31.6.1. The insolvency of TBGL and BGNV 2350
    31.6.2. The SCBAL demand 2351
    31.7. LDTC’S KNOWLEDGE: SOME FURTHER COMMENTS 2353
    31.7.1. Summary 2353
    31.7.2. The hypothetical evidence 2354
    31.7.3. Postscript 2356
32. EQUITABLE FRAUD CLAIM: ANALYSIS 2358
    32.1. INTRODUCTION 2358
    32.1.1. Overview 2358
    32.1.2. Imposition and deceit on non‑bank creditors 2360
    32.1.3. Imposition and deceit on LDTC 2362
    32.1.4. Imposition and deceit on Bell Participants 2363
    32.1.5. Inequitable and unconscientious conduct 2364
    32.2. THE PLEADINGS 2366
    32.3. EQUITABLE FRAUD IN CONTEXT 2366
    32.4. INEQUITABLE AND UNCONSCIENTIOUS CONDUCT 2368
    32.5. IMPOSITION AND DECEIT ON BELL PARTICIPANTS 2371
    32.6. IMPOSITION AND DECEIT ON NON-BANK CREDITORS 2372
    32.6.1. Events leading up to 26 January 1990 2372
    32.6.2. The SCBAL demands 2376
    32.6.3. Waivers of the need to comply with conditions 2378
    32.6.4. The factual findings concerning LDTC 2381
    32.6.5. The banks’ purpose 2382
    32.6.6. Imposition and deceit: other non‑bank creditors 2389
33. STATUTORY CLAIMS 2391
    33.1. INTRODUCTION 2391
    33.1.1. The general ambit of the statutory claims 2391
    33.1.2. Three categories of statutory claims outlined 2391
    33.1.3. The content of the statutory claims section 2393
    33.2. THE STATUTORY FRAMEWORK 2394
    33.2.1. Dispositions liable to avoidance 2394
    33.2.2. Non‑registration of charges 2398
    33.3. STATUTORY CLAIMS: GENERAL LEGAL PRINCIPLES AND FACTUAL CONTEXT 2400
    33.3.1. Dispositions with intent to defraud 2400
    33.3.1.1. Some introductory comments 2400
    33.3.1.2. The plaintiffs’ case on intent to defraud 2400
    33.3.1.3. Intent: inferences and natural consequences 2401
    33.3.1.4. Meaning of ‘intent to defraud’ 2403
    33.3.2. Intent to defraud: the pleaded case and conclusion 2413
    33.3.3. Meaning of the term ‘settlement’ 2414
    33.3.4. Good faith and valuable consideration 2416
    33.3.4.1. ‘Good faith’: some general comments 2417
    33.3.4.2. An enquiry under s 121 2418
    33.3.4.3. A s 120 enquiry 2418
    33.3.4.4. An enquiry under the Territory Legislation 2419
    33.3.4.5. An enquiry under the Property Law Act 2419
    33.3.4.6. Valuable consideration: some general comments 2420
    33.3.4.7. Antecedent debt and the giving of security 2420
    33.3.4.8. Valuable consideration in the various sections 2422
    33.3.4.9. Onus of proof 2423
    33.3.4.10. Intent to defraud: s 121 and the State Acts 2424
    33.3.5. Unregistered charges 2424
    33.4. DISPOSITIONS AND ALIENATIONS OF PROPERTY 2424
    33.4.1. Some introductory comments 2424
    33.4.2. Share mortgages, directions and authorisations 2425
    33.4.3. The subordination deeds 2426
    33.4.4. Guarantees and indemnities 2427
    33.4.5. The main refinancing documents 2427
    33.5. SECTION 120: CONCLUSIONS 2427
    33.6. NON-REGISTRATION OF CHARGES 2430
    33.6.1. Some introductory comments 2430
    33.6.2. Individual clauses said to create charges 2431
    33.6.3. What do these clauses mean? 2432
    33.6.4. The clauses as a charge, mortgage or a charge over book debts 2433
    33.6.5. A payment over and postponement clause as a charge 2434
    33.6.6. Non-registration of charges: conclusion 2435
34. SPECIFIC DEFENCES 2435
    34.1. DEFENCES BASED ON DELAY 2436
    34.1.1. Delay defences in outline 2436
    34.1.2. Limitation defences 2436
    34.1.2.1. Limitation Act 1935 (WA) 2437
    34.1.2.2. Limitation by analogy 2441
    34.1.2.3. Limitation defences: conclusion 2448
    34.1.3. Laches 2449
    34.1.3.1. The laches doctrine described 2449
    34.1.3.2. Delay with acquiescence 2451
    34.1.3.3. Delay with prejudice 2451
    34.1.3.4. Plaintiff Bell companies 2452
    34.1.3.5. LDTC 2455
    34.1.3.6. The banks 2459
    34.2. OTHER EQUITABLE DEFENCES 2460
    34.2.1. Waiver 2460
    34.2.2. Abandonment 2462
    34.2.3. Election 2462
    34.2.3.1. The concept of election 2462
    34.2.3.2. Did BGF affirm the Transactions? 2464
    34.2.3.3. The banks and election 2467
    34.2.4. Ratification 2468
    34.2.5. Clean hands 2471
    34.2.6. Restoration to original position 2474
35. FACTUAL BASIS FOR THE MONETARY CLAIMS 2480
    35.1. INTRODUCTION 2480
    35.2. CLAIM FOR INTEREST PAYMENTS 2481
    35.2.1. The issue described 2481
    35.2.2. Identifying the payments 2482
    35.2.3. Treatment of the payments in companies’ records 2484
    35.2.4. Banks’ responsive arguments described 2488
    35.2.5. The contractual obligation argument 2488
    35.2.5.1. The guarantee 2488
    35.2.5.2. Mahoney v McManus 2489
    35.2.5.3. The effect of the guarantee on non-WAN payments 2495
    35.2.6. Existing liabilities argument 2495
    35.2.6.1. The argument explained 2495
    35.2.6.2. Liabilities existing under RLFA No 1 2496
    35.2.6.3. Interest existing pursuant to other agreements 2497
    35.2.7. Interest payments: conclusion 2497
    35.3. CLAIM FOR BANK FEES, LEGAL FEES AND STAMP DUTY 2499
    35.3.1. The issue described 2499
    35.3.2. Bank fees 2499
    35.3.3. Legal fees 2502
    35.3.4. Stamp duty 2505
    35.3.5. The banks’ responsive arguments 2506
    35.3.5.1. The arguments described 2506
    35.3.5.2. Payments made pursuant to contractual obligation 2506
    35.3.5.3. BGF’s indebtedness to the banks 2507
    35.3.6. Bank fees, legal fees and stamp duty: conclusion 2509
    35.4. SALE OF THE PUBLISHING ASSETS 2509
    35.4.1. The issue described 2509
    35.4.2. The Harlesden sale agreement 2510
    35.4.3. The publishing assets sale: summary 2512
    35.4.4. Indebtedness of BGF and TBGL 2513
    35.4.5. Sale of the publishing assets as productive of ‘loss’ 2516
    35.4.5.1. The argument described 2516
    35.4.5.2. An actual loss 2518
    35.4.5.3. Notional loss of BGF 2518
    35.4.5.4. Notional loss of TBGL 2520
    35.4.6. Publishing assets sale: conclusions 2520
    35.5. SALE OF THE BRL SHARES 2521
    35.5.1. Securities and the dispute 2521
    35.5.2. Facts underlying the share sale 2522
    35.5.3. Loss scenarios 2523
    35.5.4. Loss to BRL shareholders 2523
    35.5.5. Loss to BGF 2524
    35.5.6. Loss to TBGL 2525
    35.5.7. The ‘but for’ argument and entry into the Transactions 2526
    35.6. THE BRL SHARE SALES: CONCLUSION 2526
    35.7. MISCELLANEOUS RECEIPTS 2527
    35.7.1. The Belcap receipt 2527
    35.7.2. The Bell Bros receipt 2528
36. RELIEF 2531
    36.1. A JEREMIAD 2531
    36.2. SETTING ASIDE THE TRANSACTIONS 2533
    36.3. THE CONSEQUENCES OF THE TRANSACTIONS 2539
    36.3.1. Some introductory comments 2539
    36.3.2. The remedial constructive trust 2540
    36.3.3. Tracing 2545
    36.3.4. Moulding the relief 2546
    36.3.5. Ancillary orders 2547
    36.4. MONETARY RELIEF 2548
    36.5. THE COUNTERCLAIM 2554
    36.6. RELIEF FOR STATUTORY CLAIMS 2555
    36.7. COSTS 2556
37. AT LAST; AN END TO THE LUCUBRATION 2556
    37.1. THE TRIAL: AN INITIAL REFLECTION 2556
    37.2. THE ISSUES AND THE RESULT: A REFLECTION 2558
    37.3. THE TRIAL: A FINAL REFLECTION 2565
38. THE SCHEDULES 2566
    38.1. GLOSSARY PART 1: ENTITIES 2566
    38.2. GLOSSARY PART 2: MISCELLANEOUS 2572
    38.3. LIST OF WITNESSES: CROSS‑EXAMINED 2582
    38.4. LIST OF WITNESSES (NOT CROSS-EXAMINED) 2595
    38.5. LIST OF BANK OFFICERS WHO GAVE EVIDENCE 2597
    38.6. LIST OF NEGATIVE PLEDGE AGREEMENTS AND NEGATIVE PLEDGE GUARANTEES 2600
    38.7. RECONSTRUCTED CASH FLOW 1 2601
    38.8. SNAS FOR THE PLAINTIFF BELL COMPANIES 2602
    38.9. TRIAL JUDGE’S RECONSTRUCTION OF CASH FLOW 1 2603
    38.10. TRIAL JUDGE’S RECONSTRUCTION OF CASH FLOW 2 2604
    38.11. LIST OF BANK REPORTING STRUCTURE MATERIALS 2605
    38.12. SUBORDINATION PROVISIONS IN BOND ISSUE TRUST DEEDS 2608
    38.13. SUBORDINATION PROVISION IN THE BGNV SUBORDINATION DEED 2610
    38.14. LIST OF NEGATIVE PLEDGE REPORTS 2611
    38.15. LIST OF SUBORDINATION RELIANCE EVIDENTIARY REFERENCES 2612
    38.16. DETAILS OF DIRECTORS’ MEETINGS: JANUARY 1990 AND FEBRUARY 1990 2613
    38.17. LIST OF NEWSPAPER ARTICLES IN BANK FILES 2618
    38.18. LIST OF ‘NO WORSE OFF’ EVIDENTIARY REFERENCES 2619
    38.19. LIST OF ‘HARDENING PERIOD’ EVIDENTIARY REFERENCES 2620
    38.20. CALLING FINANCIAL POSITION AS ‘PRECARIOUS’, ‘PARLOUS’ OR ‘FRAGILE 2621
    38.21. INDIVIDUAL BANK’S KNOWLEDGE 2622
    38.22. LIST OF TRANSACTIONS SUBJECT TO STATUTORY CLAIMS 2623
    38.23. LIST OF TRANSACTIONS PLAINTIFFS SEEK TO SET ASIDE 2626
    38.24. LIST OF ANNEXURES 2631

1 OWEN J: The Bell group of companies had a splendid radiance in the commercial life of Australia during the 1970s and early to mid‑1980s. The group also had aspirations to international prominence. It was a favourite of the stock market and had accumulated (at least on paper) a relative fortune. But as the Bard so wisely remarked: ‘You fools of fortune, trencher‑friends, time flies’. By the early 1990s fortune, friends and time had flown. This litigation is a result. It is a dispute of Brobdingnagian proportions that emerges wraithlike from the still‑smoking ashes of the late 1980s: an unfortunate period in this State’s business and political history.
2 In 1988 and 1989, as the Bell star waned, the group’s bankers became increasingly concerned about their exposure to the companies. Early in 1990, the banks took security over assets of group entities to support existing borrowings of some of those companies. In 1991 the companies were placed in receivership or liquidation. The banks realised on their securities. The liquidators raised concerns about the way in which the securities were given and taken. In 1995 they commenced this litigation seeking recovery of the proceeds of realisation and consequential relief.
3 The plaintiffs contend that, at the time the parties entered into the refinancing transactions (including the securities), the main companies in the group were insolvent. In the circumstances, the directors breached their duties to the companies by causing them to enter into the transactions. The plaintiffs say the banks are liable because (among other things) they knowingly assisted the directors to breach their duties, they knowingly received property arising from the breach of duties and they perpetrated an equitable fraud on the companies and their creditors. The banks deny all liability.

1. About these reasons
   4 These reasons can only be described as a megillah. I am uneasy about that (at least in relation to length) because I have in mind a passage from John Henry Cardinal Newman’s treatise, The Idea of a University Defined and Illustrated (1852):
   There are authors who are as pointless as they are inexhaustible in their literary resources. They measure knowledge by bulk, as it lies in the rude block, without symmetry, without design … Such readers are only possessed by their knowledge, not possessed of it.
   5 Nonetheless, the size of this judgment was inevitable given the reality that the reasons in effect cover 21 separate trials. There is an over‑arching claim against one of the banks in its capacity as agent for all banks (thus fixing all of the banks with the knowledge held by, and the consequences of the conduct of, the agent bank). Claims are also advanced against each of the 20 defendant banks individually.
   6 This goes some way to explaining the voluminous nature of this ‘literary resource’. There are parts of the reasons that, I acknowledge, might be characterised as a jeremiad. I had to keep reminding myself of the sage words of Joseph Addison, the 18th century English essayist:
   ‘A misery is not to be measured from the nature of the evil, but from the temper of the sufferer’.
   7 Perhaps monotony is a more apt description than misery, although my long‑suffering spouse may beg to differ. The monotony of reading, writing (and arithmetic) was ameliorated a little by sporadic resort to literary and other fanciful references and by an occasional (and admittedly mischievous) tendency to a sesquipedalian style. Some may be unkind enough to describe the style as euphuism without the elegance.
   8 I have structured these reasons in a way that I believe will assist the reader to understand the story. They are presented in five constituent parts, although there is no alpha or numeric identification of the several categories.
2. Judgment processing formalities common to all court judgments; including a description of the parties, their legal representatives, catchwords and a table of cases referred to in the reasons. This part also includes a table of contents identified by section numbers.
3. The text of the reasons, about which I will have more to say shortly.
4. A series of schedules which, with one exception, were created by me to help explain aspects of the reasoning process. The exception is a table describing the instruments subject to the statutory claims. This is a reproduction of a document prepared by the plaintiffs. Two of the schedules are glossaries of names, terms and abbreviations. Despite the existence of the glossaries I have, in the text of the reasons, described a person or entity by his, her or its full name when first referred to. In the glossaries I have identified the section in which a defined term first appears.
5. Endnotes, in which I have identified evidentiary, pleading and other similar references. I have not included juridical analysis in the endnotes. There are no links to the documents, texts or transcript pages referred to in the endnotes.
6. Annexures, being images of some of the main documents tendered as evidence or as aides memoire during the hearing. Copies of these images are available by links in electronic versions (disk and internet) of these reasons.
   9 I wish to make a few general comments about the text of the reasons. This part commences with the very general, moves to the general and then to the particular.
   10 Section 2, headed ‘The background events and the issues in the litigation – an overview’, is very general. In it I give a brief summary of events and a brief description of the issues that are alive in the proceedings so that the reader can appreciate the context in which the dispute arose and in which it falls to be resolved. It is a gloss, necessarily incomplete.
   11 I would describe Sect 3 to Sect 8 as general. In the first of these sections I will expand on the overview by adding detail of the corporate groups, the various banking relationships that developed over time, the negotiations for the impugned transactions, the events following the transactions, the eventual collapse of the group and the realisation of assets under the securities. There is then a group of sections in which I will describe the history of the litigation, outline the pleadings and identify what I see as the critical issues. The third part of these general sections will be devoted to an overview of some evidentiary issues that have arisen during the trial.
   12 Most of the material in these general sections (other than comments on evidentiary issues) is unlikely to be controversial, although matters in dispute between the parties will be identified.
   13 Having set the scene (and starting at Sect 9, headed ‘The plaintiffs’ cash flow insolvency case’) I will turn to particular areas of controversy that have to be resolved in order to decide the case. These sections start with the solvency question and then cover several specific issues that are germane to some or all of the causes of action raised by the plaintiffs and the defences to them. They include things such as the state of knowledge of the directors, the banks and the trustee to the bondholders; whether the directors breached duties they owed to the companies; whether the banks assisted such breaches as are found to have occurred; and whether there is an entitlement to relief.
   14 At the beginning of each section, and of many of the subsections, I have tried to explain in general terms what the section contains and the overall approach I have taken to the relevant material. Many of the sections and subsections end with a summary of the conclusions at which I have arrived. The sections tend to interrelate and the story builds. It is therefore necessary to read all of the conclusions together to arrive at an end result in the litigation.
   15 The process of outlining the dispute generally and then moving to the particular will inevitably involve repetition. But I think that is unavoidable, for two main reasons. First, because of the length of the reasons, there is a need from time to time to remind the reader of what has been said in a prior section, perhaps hundreds of pages earlier. Secondly, these reasons cover four time periods in the life of the Bell group: the period before December 1985; December 1985 until about May 1988; May 1988 to January 1990; and the period after January 1990. The significance of those dates and periods will become evident as the reasons develop. Events occurring in one period often have a significance in relation to things happening in a later period.
   16 In any case, many of the sections of the reasons are independent and yet interdependent: both a recurring theme of the whole story and an individual element of a chapter within it. Repetition is, therefore, a necessary part of the narrative. I have tried, wherever possible, to include cross‑references (by section numbers) to link the narrative between various parts of the reasons.
   17 A danger implicit in such a lengthy tome is inconsistency between the discussion of an issue in a general way and the treatment of the same issue when given more detailed analysis. If there is any perceived inconsistency between something said in a general section and a comment on the same point in a particular section, greater reliance ought to be placed on the latter. The reason for this will be obvious.
   18 I received extensive written closing submissions from the parties. From time to time I have adopted parts of the text of those submissions and included them in the reasons. This was a necessary part of the writing process. Due to the number of issues raised by the parties and the volume of the materials to be assessed, this has been a difficult judgment to write. The difficulties would have been compounded immeasurably had I not been able to draw, from time to time, on what is contained in the closing submissions. But I have only adopted the text of submissions after subjecting them to close consideration and having come to my own view that they represent the correct position on the legal or factual issue to which they relate.
   19 There is another difficulty that arises from the length of the reasons and the sheer volume of the factual material with which I have had to deal. The juridical process necessarily involves the acceptance or rejection of evidentiary material. But in dealing with particular pieces of evidence the formulaic recitation ‘I accept’ or ‘I reject’ has been used sparingly. Had I employed it on each occasion, the word count for ‘accept’ and ‘reject’ would have rivalled the results of a search for the phrase ‘I can’t recall’ in the proceedings of a Royal Commission. I am confident that the reasoning process will be clear and that the context will reveal where and why I have preferred a particular piece of evidence over another or others and the view I have taken as to the probative value of individual items of evidence.
   20 I should make another comment about length. I am conscious of the fact that many of the quotations from documents, transcript, judicial decisions and statutes that appear in these reasons are very long. I have tried to confine quotes to those that are essential, but a lot of lengthy ones remain. There are two reasons for the inclusion of the quotes. First, they are there to help explain why I have come to a particular view on a disputed legal or factual principle to which the authorities, statutes or evidence are relevant.
   21 Secondly, because of the peculiar nature of this litigation and the fact that the reasons would inevitably be long, I thought I should try to make them as self‑contained as possible. I can assure the reader that the long quotations have been included because I believe they are essential to a proper understanding of the reasoning process. I have not set out on a deliberate act of environmental vandalism.
7. The background events and the issues in the litigation: a synopsis
   22 The Bell Group Ltd (In Liquidation) (TBGL) was a listed public company controlled by interests associated with the late Robert Holmes à Court (RHaC). It was the holding company of a large group that I will call ‘the Bell group’. TBGL had a subsidiary, Bell Group Finance Pty Ltd (In Liquidation) (receiver and manager appointed) (BGF), which was created to act as the treasury entity for the group. TBGL had another subsidiary, Bell Group NV (In Liquidation) (BGNV), which was incorporated in the Netherlands Antilles. BGNV was the issuer of the bonds in several fundraising exercises in the Eurobond market.
   23 A further subsidiary of TBGL was Bell Group (UK) Holdings Ltd (In Liquidation) (In Administrative Receivership) (BGUK), a company registered in the United Kingdom. It was originally known as TVW (UK) Ltd. BGUK was, in turn, the holding company for a group of UK‑based entities. These included The Bell Group International Ltd (TBGIL) (which had originally been called Associated Communications Corporation plc (ACC)) and Bell International Investments Ltd (BIIL). From time to time I will call this ‘the BGUK group’.
   24 In addition to wholly owned subsidiaries, TBGL owned about 39 per cent of the shares in Bell Resources Ltd (BRL), which was a listed company in its own right. BRL had a number of subsidiaries including Bell Resources Finance Pty Ltd (BRF). TBGL also held a significant parcel of shares in JN Taylor Holdings Ltd (JNTH), another listed company. In January 1990 Bell group companies held about 28 per cent of the ordinary shares in JNTH. Both JNTH and (until mid‑December 1989) BRL were managed by, and under the effective control of, TBGL.
   25 In the mid‑1980s, TBGL or BGF had banking facilities of one sort or another with (among others) six banks operating in Australia. The facilities were unsecured but supported by negative pledge arrangements. The Australian banks were not a syndicate as that term is understood in banking parlance. Each of the loans was advanced independently, although there was a large degree of commonality in the loan documentation.
   26 In 1986 BGUK established a loan facility with a syndicate of 14 banks situated in Europe, Canada and the Middle East, known as the Lloyds syndicate. Like the arrangements with the Australian banks, the facility was unsecured but supported by a negative pledge.
   27 In the period between December 1985 and July 1987, the Bell group raised about $585 million through five separate bond issues: three by BGNV in the open market and one each by TBGL and BGF to other interests associated with RHaC. The issues were described as ‘convertible subordinated bonds’. The proceeds from the three BGNV bond issues (about $435 million) were on‑lent by BGNV to TBGL or BGF. The proceeds from the other two issues ($150 million) went direct to TBGL or BGF. The on‑loans were not formally documented and there is a dispute whether they were made on a subordinated or an unsubordinated basis. In 1988, the bonds that had been issued to RHaC interests were transferred to the Insurance Commission of Western Australia, at that time called the State Government Insurance Commission (SGIC). As that body was called the State Government Insurance Commission throughout the period in which the events the subject of this litigation occurred, I will use that name in these reasons.
   28 Following the stock market crash of October 1987 the Bell group was forced to revisit its business objectives and plans. It had previously operated on a relatively high‑level of borrowings. The group embarked on a programme of asset sales aimed at reducing debt to more comfortable levels.
   29 In April 1988, RHaC sold his interests in TBGL to Bond Corporation Holdings Ltd (BCHL) and SGIC. Because of the circumstances in which that transaction occurred, the National Companies and Securities Commission (NCSC) forced BCHL to make a takeover bid for the remaining shares (other than those held by SGIC). By August 1988, that process had been completed and BCHL held about 75 per cent of the ordinary shares on issue. According to the TBGL 1990 Annual Report, there were 326.1 million shares on issue and the relevant interest of BCHL was 242.8 million shares. BCHL thus controlled the Bell group. By the end of 1988 the boards of both TBGL and BRL consisted entirely of persons associated with BCHL.
   30 During 1988 and 1989, there was public speculation about the financial health of BCHL and, through it, the Bell group. Following the BCHL takeover, the Australian banks (or some of them) sought repayment of the facilities they had granted to TBGL and BGF. In the second half of 1988 and during 1989, the Bell group continued the programme (that had been commenced after the stock market crash) of asset sales to reduce debts. Officers of TBGL or BCHL indicated to the Australian banks that the indebtedness of the Bell group to them would be cleared. But by the middle of 1989 it had become apparent that TBGL and BGF could not repay the facilities.
   31 The Bell group had two main assets. Its most valuable asset was the publishing arm. The intermediate holding company at the apex of the sub‑group that held the publishing assets was Bell Publishing Group Pty Ltd (BPG). West Australian Newspapers Ltd (WAN) (a member of the sub‑group) held the masthead and other assets used in the publication of the sole daily newspaper in the Western Australian market. This was a successful operating business but its free cash flow was insufficient to cover fully the interest commitments to the Australian banks and the Lloyds syndicate banks on the existing facilities.
   32 The second major asset was the holding in BRL. By 1988 BRL had become a ‘cash box’ with liquid funds of about $1.2 billion. Apart from some oil and gas royalties, BRL had few other significant assets or sources of income. Historically, TBGL had received significant sums by way of management fees and dividends from BRL. But by May 1989 BCHL had removed about $996 million in cash from BRL by way of loans. BCHL encountered a problem in reporting these loans and decided to sell the BCHL brewery assets (held in a company called Bond Brewing Holdings Ltd (BBHL)) to BRL and to convert the loans into a deposit. The prospect of BRL taking control of the brewing assets had been in contemplation since about September or October 1988. There were minority shareholders in BRL and approval was necessary. It was a difficult and complex transaction.
   33 In the second half of 1989, after it had become clear that the debts owed to the Australian banks could not be repaid, negotiations began in earnest to restructure the facilities. The provision of security over assets held by the group, mainly the publishing assets and the BRL shares, was a central part of the negotiations. Because of the negative pledge arrangements it was necessary to include the Lloyds syndicate banks in the negotiations. By the end of 1989 TBGL or BGF owed the six Australian banks about $131.5 million in respect of facilities all of which were then ‘on demand’. The balance of the Lloyds syndicate banks’ facility stood at its principal amount of £60 million (equivalent to about $131 million), which was due for repayment on 19 May 1991. Accordingly, the total outstanding to all banks as at 26 January 1990 was $262.5 million or thereabouts. In addition, there was a $5 million overdraft facility with Westpac. A small parcel of the bonds issued by BGNV in 1985 had been converted into shares. The face value of the outstanding bonds (which were due to mature between 1995 and 1997) was about $546 million.
   34 During the course of the negotiations to restructure the facilities the banks received cash flows for the Bell group that had been prepared by Treasury officers of BCHL in July and September 1989. They also received the BCHL, TBGL and BRL financial statements issued in mid‑November 1989. The banks received no further cash flows and little additional financial information about the Bell group in the period after November 1989 and before the main refinancing documents were executed on 26 January 1990.
   35 In December 1989 three significant events occurred. First, TBGL raised with a bank the possibility that the bondholders might not be subordinated and might rank equally with the banks in a liquidation. By early to mid‑January 1990 other banks had been made aware of that contention. Secondly, BCHL lost control of the BRL board after a minority shareholder commenced court action alleging breaches of duty by the directors. Thirdly, a banking syndicate led by National Australia Bank Ltd (NAB) applied successfully to the Supreme Court of Victoria for the appointment of a receiver to BBHL, thus affecting control of the brewing assets.
   36 On 26 January 1990 the major refinancing and security documents were executed. Further documents in the package were executed over the ensuing days. Most of the documents were in place by 15 February 1990, although a couple were not completed until March and July 1990. The arrangements included the following:
   • The Australian banks’ facilities and the Lloyds syndicate banks’ facility were extended so as to be repayable on 30 May 1991.
   • The effect of one of the provisions was that (subject to nominated exceptions) if, during the currency of the facility, the group sold assets, the proceeds of sale were to go to the banks pro rata in reduction of the bank debt.
   • All intra‑group indebtedness (except for debts owed to BGNV and BIIL) was subordinated behind the claims of the banks.
   • TBGL was to use reasonable endeavours to have BGNV and BIIL execute deeds subordinating the debts due to them.
   37 In February 1990 the banks received new cash flow documents that one bank officer described as making ‘fairly grim reading’. In February 1990 the banks had taken control of about $24.3 million from sale proceeds of one of the publishing group assets. In accordance with the financing documents, this amount should have been available to reduce bank debt. But TBGL immediately asked the banks for access to those funds. Part would be used to pay stamp duty and legal costs on the refinancing documents and interest due to the banks at the end of February 1990. The balance was to be held to assist with the payment of interest due to the bondholders in May 1990. There was some initial resistance to these proposals, especially the retention of the balance for payment to the bondholders, but by May 1990 all of the banks had agreed.
   38 On 14 May 1990 BIIL executed a deed subordinating the indebtedness of other UK sub‑group companies to it. On 30 July 1990, BGNV executed a deed subordinating the debts of other Bell group companies to it.
   39 On 28 February 1990 the court order appointing the receiver to BBHL had been reversed on appeal. In October 1990 the board of BRL completed a transaction by which it acquired some of the brewing assets in a joint venture arrangement with a third party. No management fees or dividends were paid by BRL to TBGL during 1990 or 1991.
   40 On at least two occasions in the second half of 1990 the banks agreed, at the request of TBGL, to defer payment of the monthly interest due to them. Further extensions occurred in January, February and March 1991. In December 1990 interest payments of about $14.9 million were due to bondholders (including SGIC). Those payments were not made. During the first quarter of 1991 SGIC gave a series of extensions to the date for payment.
   41 During 1990 the management of TBGL was considering restructure proposals. Central to most of these proposals was the injection of additional capital by a sale or joint venture of the publishing assets. Another critical aspect was the negotiation of moratorium arrangements with the bondholders. In December 1990 and January 1991 meetings were held with bondholders. Nothing came of them. In March 1991 there were further restructure proposals, one element of which was for the banks to advance money to BRL to subscribe for shares in TBGL. The banks declined and on 16 April 1991 they issued formal notices of demand on TBGL and BGF in respect of unpaid interest.
   42 On 18 April 1991, TBGL applied to this Court for the appointment of a provisional liquidator. Over the ensuing weeks and months insolvency administrations of one sort or another were installed in other group companies, some at the behest of the banks. The banks realised on their securities and recovered about $283 million from the sale of the publishing assets, the sale of the BRL shares and the collection of debts.
   43 In 1995, the liquidators commenced proceedings against the banks and the directors challenging the way in which the securities were given and taken and seeking recovery of the proceeds of realisation and consequential relief. The trustee for the bondholders later joined in the action as a plaintiff. The action against the individual directors was discontinued at an early stage and the banks are the only remaining defendants against whom relief is sought.
   44 At the heart of the claims by the liquidators and the trustee is the contention that at the time when the securities were given and taken, the main companies in the group were insolvent. They say:
   • The directors of those companies knew that they were insolvent.
   • The directors also knew that the effect of the giving of the securities was that all valuable assets of the companies were made available to the banks for repayment of the debts owed to the banks by some only of those companies in priority to the claims of all other creditors of the companies.
   • There were shareholders and external creditors of the companies (in particular, the bondholders and the Deputy Commissioner of Taxation) who were prejudiced by the giving of the securities.
   • By giving the securities the directors breached duties that they owed to the companies.
   • The banks knew that the companies were insolvent, that the effect of the giving and taking of the securities was as set out in the second bullet point above and that the directors had breached their duties to the companies.
   45 In those circumstances, the liquidators and the trustee say, the banks are liable to disgorge the proceeds from the realisation of the securities or otherwise compensate them for losses suffered because:
   • The banks knowingly participated in the breach by the directors of their duties to the companies and received the proceeds from the realisation of the securities knowing of the breach of duty.
   • The conduct of the banks amounted to an equitable fraud on the companies and on the trustee.
   • The securities were void or voidable because the circumstances in which they were given contravened various provisions of the Bankruptcy Act 1966 (Cth) and other statutes.
   46 The plaintiffs want this Court to declare that the various transactions have been or should be set aside. They also seek monetary compensation. Their monetary claim is said to be in the region of $1.5 billion.
   47 Not surprisingly, the banks take a different view of events. They deny liability and say that the companies were not insolvent at the relevant time or, if they were, the banks had no knowledge of that state of affairs. They also contend that:
   • The directors believed that unless the securities were given the facilities would be called up and the companies would be placed in liquidation.
   • That being so, the directors were reasonably entitled to believe that the giving of the securities was in the best interests of the companies concerned. The directors believed that the giving of securities was of real and substantial benefit to the companies because it gave them time to restructure so the group could continue in business as a going concern and avoid liquidation.
   • The banks believed that the directors had those beliefs.
   • The directors did not breach their duties or, if they did, the banks had no knowledge of the breaches.
   • No creditors or shareholders of the companies were prejudiced by the giving of the securities.
   • In particular, the bondholders (as creditors) were not prejudiced because they were already subordinated behind the claims of the banks or, if they were not, the liquidators and the trustees are not now in a position to assert a claim based on the proposition that the bondholders ranked equally with the banks.
   • The banks had not knowingly participated in any breach of duty, there was no equitable fraud and the securities were not given and taken in circumstances that contravened the statutory provisions relied on.
8. Some participants in these events
   3.1. The parties to the litigation
   48 TBGL is a plaintiff in two capacities: first, in its own right and secondly, in its capacity as trustee for four of its subsidiaries on whose behalf it held shares in BRL. BGF and BGUK, the third and fourth plaintiffs, appear in their own right. The fifth plaintiff, BPG, was another subsidiary of TBGL. It was the intermediate holding company at the apex of the publishing group (which I will call ‘the BPG group’). BGNV, the sixth plaintiff, also appears in its own right.
   49 The seventh plaintiffs are 20 companies all of which were subsidiaries of TBGL. They include the four companies on whose behalf TBGL held shares in BRL.
   50 The ninth plaintiff (Antony Woodings) is, either jointly with the eighth plaintiff or solely, the liquidator of TBGL, BGF, BPG and the seventh plaintiffs. He is also the provisional liquidator of Western Interstate Pty Ltd (Provisional Liquidator Appointed) (Western Interstate), one of the seventh plaintiffs. The eighth plaintiff (Geoffrey Totterdell) is, jointly with the ninth plaintiff, the liquidator of some of those companies.
   51 There is no tenth plaintiff nor is there an eleventh plaintiff. The tenth plaintiff was Troika Holdings BV as liquidator of BGNV. Troika was replaced by Garry Trevor as liquidator. The eleventh plaintiff was Barbara Stephenson as liquidator of BGUK. The action was discontinued by Troika and Stephenson on 16 October 1996. I have set out these details for the sake of completeness. The reasons for the changes are of no relevance for present purposes.
   52 The twelfth plaintiff, Garry Trevor, is the liquidator of BGNV. The thirteenth plaintiff, The Law Debenture Trust Corporation plc (LDTC), is the trustee for the bondholders in the five convertible subordinated bond issues.
   53 Westpac Banking Corporation (Westpac) is the first defendant. The second defendants are the other five Australian banks. They are described in Table 1 below. The table also shows the name by which they were known in January 1990 (when the refinancing was effected) and the abbreviation by which they will be denoted in these reasons. In Sect 11 I have, in relation to each bank, set out some corporate history which explains the name changes that are reflected in the table. I will refer to these six banks together as ‘the Australian banks’.
   54 The third defendants are the 14 European, Canadian and Middle Eastern banks that formed the Lloyds syndicate. I will refer to these 14 banks together as ‘the Lloyds syndicate banks’. They are described in Table 2 along with the names by which they were known in January 1990 (when the refinancing occurred) and the abbreviation by which they will be denoted in these reasons. I have included in Sect 11 some material on the history of each bank, detailing the changes that are reflected in Table 2.
   55 There is no fourth defendant. When the litigation was commenced in the Federal Court of Australia in December 1995, David Aspinall, Peter Mitchell and Antony Oates (who were directors of TBGL, BGF and the other Australian Bell group companies) were named as fourth respondents. Michael Edwards QC, Alan Birchmore and Alan Bond, who (along with Mitchell) were directors of BGUK and TBGIL, were named as fifth respondents. The plaintiffs filed notices of discontinuance in relation to the then fourth and fifth respondents on 13 February 1997.
   56 The fifth defendant is Equity Trust (Curacao) NV. In January 1990 and July 1990 it was the sole director of BGNV. It was then known as Etrusco International NV. It will be referred to as ‘Equity Trust’. The writ was served on Equity Trust but no orders are sought against it and it has played no part in the proceedings.
   Table 1
   THE AUSTRALIAN BANKS
   CURRENT NAME NAME IN JAN 1990 ABBREVIATION
   SG Australia Ltd Societe Generale Australia Ltd SocGen
   HSBC Bank Australia Ltd HongKongBank of Australia Ltd HKBA
   Standard Chartered Bank Standard Chartered Bank Australia Ltd SCBAL
   National Australia Bank Ltd National Australia Bank Ltd NAB
   Commonwealth Bank of Australia Commonwealth Bank of Australia CBA

Table 2
THE LLOYDS SYNDICATE BANKS
CURRENT NAME NAME IN JAN 1990 ABBREVIATION
Lloyds TSC Bank plc Lloyds Bank plc Lloyds Bank
Banco Espírito Santo SA Banco Espírito Santo E Comercial De Lisboa SA Banco Espírito
SEB AG Bank Fur Gemeinwirtschaft AG BfG
Bank of Scotland plc The Governor and Company of the Bank of Scotland BoS
Crédit Agricole SA Caisse Nationale De Crédit Agricole Crédit Agricole
UniCredit Bank Austria AG Creditanstalt Bankverein Creditanstalt
Crédit Lyonnais Crédit Lyonnais Crédit Lyonnais
Dresdner Bank AG Dresdner Bank AG Dresdner
KBC Bank Verzekerings Holding NV Kredietbank NV Kredietbank
Skopbank (In Liq) Skopbank Skopbank
DZ Bank AG Deutsche Zentral-Genossenschaftsbank DG Bank Deutsche Genossenschaftsbank DG Bank
The Gulf Bank KSC The Gulf Bank KSC Gulf Bank
Gentra Ltd Royal Trust Bank Gentra
Calyon Banque Indosuez Indosuez

3.2. Some other participants
57 It will be convenient at this stage to introduce some other persons and entities who participated in the events the subject of this litigation and who are mentioned in these reasons.
58 Many firms of solicitors were involved. Parker & Parker (P&P), a Perth firm, gave advice to the Australian banks, generally through Westpac. Mallesons Stephen Jaques is an Australian firm, which at that time had offices (relevantly) in Perth, London, Melbourne and Sydney. I will refer to the London office as ‘MSJL’ and to the Perth, Melbourne and Sydney offices as ‘MSJA’ unless it becomes necessary to identify the particular office in Australia. MSJL gave advice to the Lloyds syndicate banks on matters of Australian law. Sly & Weigall (S&W) was an Australian firm that gave advice to the Australian Bell group companies and their directors. Corrs Chambers Westgarth (Corrs) gave some advice along the way to CBA and in late 1990 they assisted the directors of TBGL.
59 When the composition of the board of BRL changed in December 1989, the directors engaged lawyers and accountants to investigate aspects of BRL’s activities and situation. Blake Dawson Waldron (BDW) reported on the brewery transaction, Freehill Hollingdale & Page (Freehills) on other financial transactions involving BRL and the Bond group and Deloittes Haskins & Sells (Deloittes) on the solvency of BRL. BDW and Freehills later came to represent the plaintiffs and the defendants, respectively, in this litigation. Arthur Robinson & Hedderwicks (ARH), a Melbourne firm, was also involved at various stages of the saga.
60 Some English law firms also played a part in relevant events. Allen & Overy (A&O) advised the Lloyds syndicate banks, generally through Lloyds Bank. Slaughter & May (S&M) gave advice to the directors of the UK Bell group companies. Linklaters & Paines (Linklaters) advised LDTC and may also have given advice to TBGL in relation to the convertible bond issues at the time of the first issue. Clifford Chance gave some advice to DG Bank concerning aspects of the 1990 refinancing.
61 While TBGL and BCHL, between them, held a substantial percentage of the shares in BRL, there was a significant minority shareholder. Adelaide Steamship Company Ltd (Adsteam) held 19.9 per cent of the issued share capital of BRL. In December 1989 Adsteam precipitated events that led to BCHL losing control of the board of BRL.
62 The auditors of both TBGL and BCHL during the relevant period were Coopers & Lybrand (C&L).

4. The dispute in context: a more detailed overview
   4.1. The corporate group: historical context
   4.1.1. TBGL: the beginning, the middle and the end
   4.1.1.1. The genesis and expansion under RHaC
   63 TBGL was incorporated on 11 June 1923 as Western Australian Worsted & Woollen Mills Ltd. Its main object was to carry on business as a worsted and woollen manufacturer, yarn merchant and as a merchant and dealer in wool. A mill was established at Albany. Despite the fact that, in those days, Australia ‘lived off the sheep’s back’, it seems the company struggled in its early years. But by the late 1940s it had achieved financial stability and was seeking to expand its operations.
   64 The milling of wool and the manufacture of woollen products remained the company’s primary business at the time when RHaC appeared on the share register.
   65 RHaC acquired a controlling interest in Western Australian Worsted & Woollen Mills Ltd in the early 1970s. The interests of RHaC were held through a private family company called Heytesbury Securities Pty Ltd (Heytesbury Securities), later to be renamed Group Financial Holdings Pty Ltd (GFH). Generally speaking, in relation to events occurring up until about 1987, I will refer to the company as Heytesbury Securities. In relation to later events I will change to the terminology GFH. Heytesbury Securities was a subsidiary of Heytesbury Holdings Ltd (HHL). HHL was RHaC’s unlisted family company. It was an investor in listed securities and real estate and held a significant collections of art and of vintage cars. It also conducted a thoroughbred horse stud. RHaC was chairman of HHL. Janet Holmes à Court, Bert Reuter and Alan Newman were directors.
   66 In 1973, Western Australian Worsted & Woollen Mills Ltd acquired control of Bell Bros Holdings Ltd (Bell Bros Holdings), an established (but struggling) industrial conglomerate that was 10 times the size of the acquirer. The name of the company was changed from Western Australian Worsted & Woollen Mills Ltd to TBGL in 1976. A number of companies in the former Bell Bros group became wholly owned subsidiaries of TBGL and the businesses of those subsidiaries formed the main operating activities of TBGL. The directors’ report in the 1976 Annual Report noted that TBGL’s activities had been grouped into five main areas through which the company would conduct its future operations:
   (a) the traditional activities of the original Bell Bros business, namely, construction, plant hire and contract mining in Western Australia;
   (b) quarries supplying sand, gravel and concrete for the Perth market;
   (c) tyre businesses in several states;
   (d) freight forwarding and heavy haulage throughout Australia; and
   (e) Albany Woollen Mills Ltd, which conducted the traditional textile business of the parent company.
   67 As a completely unnecessary aside, I might mention that until the mid‑1960s many Western Australian children, certainly those who went to boarding school, slept under blankets made by Albany Woollen Mills. They were a dull grey in colour and felt like sandpaper. The 1976 Annual Report also indicated that the company had a sizeable investment portfolio, mainly in listed shares and real estate.
   68 In 1972 the gross assets of TBGL were valued at $2.4 million. Shareholders’ funds were $1.37 million. There were 1,357,360 ordinary shares on issue with a net tangible asset backing per ordinary share of 97 cents. Net profit for the group was $87,000 so that net earnings per ordinary share were 6 cents. No annual dividend was paid.
   69 By 1975 the net assets of the group had increased to $44.6 million. Shareholders’ funds amounted to $9.56 million. There were 1,510,162 ordinary shares on issue with a net tangible asset backing per ordinary share of $6.29. Net profit for the group was $1,265,000 so that net earnings per ordinary share were 84 cents. An annual dividend of 25 cents per ordinary share had been paid. The value of TBGL’s shareholding in listed subsidiaries was $10 million and in non‑related listed entities it was $851,000.
   70 Between 1974 and 1980, the Bell group became what is (not affectionately) known as a corporate predator. In other words, it made takeover raids on the share register of established companies. While not successful in terms of obtaining control of the targets, these attempts realised significant profits for the group.
   71 By 1980, interests associated with RHaC held about 48 per cent of the ordinary shares in the capital of TBGL. At that time the group decided to enter the media industry and it acquired control of TVW Enterprises Ltd. In March 1982, TVW Enterprises Ltd acquired all of the share capital of the UK company, ACC, which was later renamed TBGIL. This acquisition was achieved through a company called TVW Enterprises (UK) Ltd, later renamed BGUK.
   72 By the mid‑1980s TBGL was the holding company of an Australian‑based international group with activities in Australia, North America and the United Kingdom. The Bell group had four principal trading activities:
   (a) media and entertainment: film production and distribution, theatres and cinemas in the United Kingdom, cinemas, television and radio in metropolitan and regional Western Australia and South Australia and newspaper and music publishing;
   (b) industrial: equipment hire, transport, construction materials and distribution and manufacture;
   (c) investments, property and insurance; and
   (d) resources: holdings (through BRL, in which, as at 30 June 1985, TBGL had a 45 per cent interest) in the Bass Strait oil and gas royalties, Central Queensland Coal Associates and Gregory Joint Ventures and an increasing shareholding in Broken Hill Proprietary Company Ltd (BHP).
   73 The group enjoyed spectacular growth and by 30 June 1987 it employed approximately 5500 people worldwide. There are many financial indicators that testify to the rapid growth in the fortunes of the group. Total revenues had grown from $63.9 million in 1976 to $731.7 million in 1985. In the same period operating profit increased from $1.5 million to $65.7 million, total assets from $41.2 million to $983.4 million and shareholders equity from $14.6 million to $336.9 million. According to the 1985 Annual Report, TBGL’s share price had risen from 12 cents (bonus adjusted) on 30 September 1975 to $10.40 on 30 September 1985. The annual report further stated that the compound growth rate in the group’s share price of 56 per cent per annum was one of the highest in Australia and compared favourably with a growth of 14 per cent per annum in the Australian All Ordinaries Share Price Index over the same period.
   74 According to the chairman’s statement in the 1985 Annual Report, in the 12 months to 30 June 1985, and since the balance date, TBGL had been ‘progressively building its liquidity through an increase in equity and the disposal of assets’. The chairman also pointed to ‘a combination of low gearing ratios and the existence of a large disposable investment portfolio’ that meant the group had ‘substantial purchasing power and has the ability to make a major acquisition’. The annual report further stated that the group had a borrowing ratio of 37 per cent of total assets derived after a notional revaluation of the group’s intangible assets from historic book values to current market values. The intangible assets were said to represent Australian television and radio licences and film, television and music copyrights. The directors estimated the market value of those assets was approximately $225 million in excess of their book values.
   75 During 1985, TBGL investigated the feasibility of establishing a finance company to act as the internal financier of the group through which all or most of the external borrowings and investment of surplus funds could be channelled. To that end, BGF was incorporated on 11 February 1986 in Western Australia. On 24 February 1986, TBGL wrote a letter to its bankers advising them that BGF had been incorporated and said: ‘[BGF] is a wholly owned subsidiary of [TBGL] and will be used by the Bell Group to raise future capital requirements on behalf of the group’.
   76 Over the course of 1986, agreements supplemental to the negative pledge agreements were entered into causing BGF to become a negative pledge group company. The facilities in existence between the Australian banks and TBGL were progressively transferred to BGF. When the Lloyds syndicate banks’ facility was entered into in May 1986, BGF was named (together with BGUK) as a borrower.
   77 On 28 November 1985 BGNV was incorporated in the Netherlands Antilles as a wholly owned subsidiary of TBGL. The incorporation of this company was connected with the proposal to raise funds through the convertible bond issues. The deed of incorporation of BGNV recorded the purpose of BGNV in the following terms:
   [T]o finance directly or indirectly the activities of the companies belonging to the concern Bell Group Ltd, a company organised and existing under the laws of the State of West Australia, Australia, to obtain the funds required thereto by floating public loans and placing private loans, as well as to invest its equity and borrowed assets in the debt obligations of one or more companies of the concern, and in connection therewith and generally to invest its assets in securities, including shares and other certificates of participation and bonds as well as other claims for interest bearing debts however denominated and in any and all forms as well as borrowing and lending of moneys.
   4.1.1.2. The October 1987 stock market crash
   78 On 20 October 1987 the commercial world was turned on its head when stock markets everywhere crashed in spectacular fashion. Although TBGL had a relatively strong industrial base, it also had high‑levels of borrowings. Accordingly, it was not immune to the effects of the crash. In the ensuing weeks the share market value of TBGL and BRL experienced a dégringolade, falling by about 65 per cent. It is difficult to avoid the conclusion that the crash was the catalyst for the events of April and May 1988 in relation to the share register of TBGL, when effective control of the Bell group was transferred by RHaC to BCHL. The change in control of the company was, in turn, a significant factor in the events of 1989 and 1990 that are the subject of this litigation.
   79 Within days of the crash the company issued its annual report for the year ending 30 June 1987. The chairman’s statement contains the following comments:
   Since balance date the fall on world stock markets represents an event that will take its place in world economic history because of its severity and suddenness. While it is too early to assess or attempt to forecast the longer term effects of this event, it will certainly give rise to a substantially changed environment in the immediate future.
   80 TBGL’s annual report for the year ended 30 June 1987 disclosed that the consolidated group had total assets of $3.04 billion (equity accounted) and total liabilities of $1.86 billion. The convertible bonds were not included in total liabilities. Four of the five bond issues had been completed by June 1987. The last of the five issues occurred in July 1987. Total share capital, reserves and convertible bonds stood at $1.18 billion. Operating profit after tax and extraordinary items was $216.7 million.
   81 During the year ended 30 June 1987, TBGL acquired WAN, the publisher of The West Australian and a chain of suburban and regional newspapers.
   82 The 1987 Annual Report further noted that in the past the group’s property portfolio had mainly been situated in England. But, in the year ending 30 June 1987, the group had acquired properties in the Perth central business district. It had also acquired a significant shareholding in Dewey Warren Holdings plc, which was an accredited Lloyds insurance broker, and a 15 per cent shareholding in Standard Chartered plc. The corporate chart as at 30 June 1987 identified six areas of activity:
   (a) publishing and media: The West Australian and The Western Mail newspapers, television and radio interests;
   (b) Bell Group International: property, insurance, theatres, film production and distribution and costuming;
   (c) Bell Bros Holdings: freight, earthmoving, pre-mixed concrete, quarries, tyres and the Caterpillar franchise (known as Wigmores);
   (d) JNTH: woollen mills, electronics and chandlery;
   (e) Dewey Warren Holdings plc: insurance broking; and
   (f) Bell Resources: CQCA and Gregory joint ventures, Bass Strait royalties, Weeks Petroleum and a 30 per cent shareholding in BHP.
   83 At the beginning of November 1987, the negative pledge group companies owed various bank lenders a total of $1.5 billion. Officers of TBGL made presentations to the banks to allay concerns about the financial position of the group. One of the strategies that the board put in place to deal with the ‘substantially changed environment’ was a programme of asset sales to reduce debt. The programme was continued and extended by BCHL after it acquired control of TBGL in 1988.
   84 The asset sale and debt reduction programme immediately following the October 1987 stock market crash and its impact on the operating activities of the Bell group were described in the annual report for TBGL for the year ended 30 June 1988. For example, TBGL had sold its interests in TVW Channel 7 and SAS Channel 10. The company had also sold its interest in Wilson & Horton Ltd; pre-mixed concrete, quarrying and transport operations in Queensland and northern New South Wales (Bell Basic Industries); London theatres and costumiers businesses; and the balance of the group’s real estate interests in the United Kingdom and Europe.
   85 Negotiations were entered into for the sale of the group’s Western Australian transport, quarry, tyre retailing and foundry businesses. At the time of the review of operations it was proposed that the film production and distribution business of a subsidiary within the BGUK group be sold but the publishing and media division would be maintained.
   86 The corporate chart included in the 1988 Annual Report disclosed a similar list of the six operating divisions to that which had appeared in the previous year, although the extent of BRL’s holding in BHP was noted as having decreased to 7 per cent. In May 1988, TBGL delivered a three‑year business plan to the banks. This document postulated strong growth in the associated companies of TBGL, an $800 million programme to dispose of non‑strategic assets and ongoing but modest expansion of the group’s operating divisions. The introductory section of the plan stated that expansion within TBGL would come from ‘smaller incremental steps’ within the operating divisions of the group rather than ‘larger quantum jumps’. The intention was for TBGL to grow as a moderately geared operational company with benefits accruing in the associated companies. The associated companies (BRL and JNTH) were said to have high liquidity levels but low levels of operation.
   4.1.1.3. Position in 1989 and following
   87 As a result of the further sales of assets between July 1988 and December 1988, as at January 1989:
   (a) all of the significant assets of TBGIL had been sold apart from Bryanston Insurance Company Ltd (Bryanston); and
   (b) the remaining Australian assets of TBGL were the publishing assets, its shareholdings in BRL and JNTH and the Wigmores businesses and associated assets.
   88 It was then anticipated that both Bryanston and the Wigmores assets would be sold. This occurred in the second half of 1989. Following the sale of Wigmores and Bryanston, the only major operating subsidiary of TBGL was the BPG group. The main passive investments were the shareholdings in BRL and JNTH.
   89 By 26 January 1990 there were at least 80 companies remaining in the Australian arm of the Bell group. They included (among others) TBGL, BGF, the companies in the BPG group and the entities that held shares in BRL and in JNTH. At the same time there were about 39 companies in the BGUK group. In addition, a large number of companies in the BGUK group were in the process of being liquidated.
   90 The financial position of the Bell group during 1989 and 1990 can only be described as poor and in need of restructure. Some efforts were made in this respect during 1990 but they did not bear fruit. In April 1991 TBGL was placed in provisional liquidation and on 24 July 1991 an order was made that the company be wound up.
   4.1.2. Administration of the group under RHaC
   4.1.2.1. The directors and officers
   91 As at 30 June 1985, the board of TBGL comprised RHaC as chairman, and Edward Downing QC, John Murdoch and John Studdy as directors. In April 1988 John Dahlsen and Alec Mairs joined the board and Alan Newman (who had previously been chief general manager) became managing director.
   92 The board of BGF and the other group companies that are plaintiffs (other than BGNV, BGUK, BPG, Maradolf Ltd and W&J Investments Ltd) was the same as that for TBGL. BPG had some additional directors, apparently to provide media experience to the board. Maradolf Ltd (Maradolf) and W&J Investments Ltd (W&J Investments) did not become part of the group until after the BCHL takeover in 1988.
   93 The four directors of BGNV at the time of each of the three BGNV bond issues were Oliver Graham, Derek Williams, Katherine Burghard and Curacao Corporation Company NV. The latter was a management company situated in Curacao in the Netherlands Antilles. It ceased to be a director on 10 March 1988 and was replaced by Equity Trust, another Netherlands Antilles company. Pim Ruoff was the sole director of Equity Trust throughout the relevant period.
   94 Graham and Williams were employees in the Treasury division of TBGIL. Burghard was group legal counsel in the United States. Graham resigned as a director on 6 November 1987. Williams and Burghard both left the board on 26 August 1988. Thereafter, and until its resignation in June 1991, Equity Trust was the sole director.
   95 The boards of BGUK and TBGIL each had different membership. RHaC was the only TBGL director who was a director of the UK companies. Other members of the UK boards (of relevance to this litigation) were Newman and Michael Edwards QC. Newman was the managing director of TBGIL.
   96 The 1985 Annual Report contained a description of the management of the Bell group that stated that the management functions of the group were divided between the chairman’s office and divisional management. It was said that the chairman’s office functioned as the group’s ‘nerve centre’, providing the chairman with a wide range of corporate support services. Executives in the chairman’s office were said to be located in Perth, Melbourne, London and New York, providing treasury; financial planning and administration; legal and secretarial services; and research and investment group services. It was further said that the executives monitored the performance and planning of all group operations but had no direct line responsibility for those operations.
   97 The report stated that the group’s trading divisions were widespread, both in nature of activity and geographically. Further, senior line management operated with a high degree of autonomy and reported to Bert Reuter, chief general manager for all Australian activities and Newman, managing director of TBGIL. Newman was responsible for all international activities.
   98 In the 1985 and 1986 Annual Reports the listing of personnel in the chairman’s office was broken down by area of expertise and geographical location. In the 1987 Annual Report the chairman’s office was one of a number of areas listed under the heading of ‘Management’. Set out below by title and (in some instances) geographical location, are relevant officers of TBGL who were listed in the management section of the annual report as working in the chairman’s office. These are all people who gave evidence during the hearing or whose names appear, with varying degrees of prominence, in the relevant documentation:
   • Robert Holmes à Court – chairman.
   • Alan Newman, Managing Director – International Operations.
   • David Griffiths, Group Treasurer – Australia (Treasury).
   • Connie Chapman, Assistant Treasurer – Australia (Treasury).
   • John Cahill, Assistant Treasurer – Australia (Treasury).
   • Oliver Graham, Deputy Treasurer – UK (Treasury).
   • Peter Patrikeos, in‑house counsel – Australia (Legal).
   • Sue Wilson, lawyer – Australia (Legal).
   99 Steve Johnston, an Industrial Analyst (Research and Investment), Jose Martins (Research and Investment) and Ian Liddell (Internal Audit Services) are other names listed in the annual reports as members of the chairman’s office. Other officers of the Bell group also played a role in some of the events and are relevant to the matters in issue in the case. They include John Corr (Assistant Group Treasurer, Australia), Geoffrey Cornish (Company Secretary), Robert MacPherson (Deputy Company Secretary), Tony Davies (Group Financial Administrator), John Murray and Andrew Parkinson (taxation advisers within the Accounts department) and David Winstanley, Peter Dennis, and Santino di Giacomo (Accounts department). Some of these officers also gave evidence.
   100 It seems that most important matters concerning planning, strategy and corporate policy for the Bell group were overseen by the chairman’s office. It operated in a relatively ‘free form’ way: RHaC spoke to whoever was dealing with the particular issues in which he was then interested, often without regard to defined roles. The lists of personnel in the chairman’s office in the TBGL annual reports were not necessarily definitive. The group was primarily managed by RHaC and decisions on important matters of corporate policy and strategy or direction, including those related to financial matters, principally rested with and were made by him.
   101 The annual reports listed Williams and Graham in the management section as dealing with the chairman’s office in their capacity as TBGIL Treasury officers. But they differentiated between themselves and the office of the chairman, which they regarded as essentially being ‘Perth based’. Similarly, Studdy, a non‑executive director based in Sydney, understood the office of the chairman to designate head office in Perth.
   4.1.2.2. Treasury and accounting functions
   102 The Treasury division was situated within the chairman’s office and was responsible for raising money for the group and for monitoring external borrowings, borrowing capacity and compliance with borrowing covenants. In other words, TBGL, through Treasury, procured facilities for group companies and allocated and managed the flow of funds within the group. As group Treasurer, Griffiths had discussions with RHaC from time to time concerning the extent of the group’s borrowings and its capacity for future borrowings. Typically, Treasury received approaches from prospective lenders in respect of the provision of financial accommodation and made recommendations in respect of those proposals to RHaC or the board. Almost all major decisions concerning Bell group financing matters were made in the office of the chairman in Perth.
   103 Cahill reported to Griffiths. His major responsibility was to look after the group’s relationships with its banks, particularly the relationships with lenders to the Australian companies within the group. He described his role as administrative in nature and said he was not usually involved in determining the need or purpose of any funds to be raised. Graham and Williams, as employees of TBGIL, principally reported to Newman. But if they dealt with an issue for which Griffiths was responsible they reported directly to him about that issue. In addition to his responsibilities for TBGIL, Graham assisted Griffiths with finding and finalising fundraising opportunities in Europe on behalf of the group. Williams testified that he had regular contact with the officers in Treasury at head office and Graham also communicated with those officers and reported to him. When things had to be done in the northern hemisphere to put into effect decisions from the office of the chairman, TBGIL officers were often called upon to assist.
   104 Winstanley gave evidence concerning the accounting sub‑groups in the Bell group both prior to and after the BCHL takeover. His evidence is that there was at the Bell group head office an operational division known as ‘Bell Corporate’. Bell Corporate carried out the accounting work for the companies forming the Bell group. It collected accounting information and coordinated financial reporting of all other sub‑groups in the Bell group. The companies for which that work was performed comprised a number of Australian Bell group companies that did not actively carry on a trading business and whose only assets or liabilities were shares in other Bell group companies or associated companies or inter‑company loans either within the Bell group or with members of associated groups.
   105 Bell Corporate also had responsibility for the overall accounting functions for the Bell group and preparation of consolidated accounts for the group. It was also responsible for ASX reporting requirements and the preparation of management reports on the position of the entire Bell group, including cash flows and monthly profit and loss reports. Bell Corporate did not maintain the accounts for trading subsidiaries of the Bell group such as the BPG group and the BGUK group. The accounts of those sub‑groups were maintained by separate accounting departments within each group. But the preparation of accounting records for BGNV was done within Bell Corporate.
   4.1.3. BRL: incorporation and early history
   106 BRL was incorporated as Wigmores Limited on 23 August 1938. The 1983 Annual Report for Wigmores described the principal activities of the company as:
   (a) the sale and distribution of earthmoving equipment and diesel engines, undertaken by Wigmores Tractors Pty Ltd;
   (b) the manufacture and sale of earthmoving equipment, undertaken by HJW Engineering Pty Ltd;
   (c) the operation of a shipping agency business through Wigmores Shipping Agency Pty Ltd;
   (d) the operation of a transport business in conjunction with the shipping agency business; and
   (e) a finance business conducted by Wigmores Finance Pty Ltd that provided finance for the purchase of new and used earthmoving equipment.
   107 On 27 July 1983 the Bell group announced an offer for all the ordinary shares of Wigmores; by 12 August 1983, over 50 per cent of them had been accepted. On 13 August 1983, RHaC was appointed a director of Wigmores. Downing had been chairman of Wigmores since 30 October 1957. In January and February 1984, Edwards, Murdoch and Studdy were appointed as directors. RHaC became chairman during the 1984 financial year and Downing remained as a director until 11 May 1988.
   108 On 15 August 1983 Wigmores announced an offer to acquire the ordinary share capital of BHP. On 31 December 1983 Wigmores sold its principal business, the sale and distribution of Caterpillar earthmoving equipment, to Bell Bros Holdings.
   109 On 1 January 1984 the company changed its name to BRL. As at March 1987 BRL held 30 per cent of BHP. As at 24 March 1987 TBGL held 46.73 per cent of BRL. On 29 February 1988 BRL announced that it had raised $2.1 billion in cash by divesting its shareholding in BHP and that it was proposed to merge TBGL and BRL by way of a cash and scrip takeover offer from BRL for all of the shares in TBGL. But on 21 March 1988 BRL announced the withdrawal of its offer for TBGL.
   110 The information package for BRL included a balance sheet as at 29 February 1988, which had been prepared from the balance sheet as at 31 December 1987 (the end of the accounting year for BRL), adjusted to reflect the impact of asset sales by BRL, including the sale of its investments in BHP. The adjusted balance sheet disclosed total assets of about $4.2 billion and total liabilities of $2.02 billion, leaving net assets of around $2.2 billion. The figure for total assets included $2.12 billion cash on deposit: this explains the ‘cash box’ status of BRL at the time when BCHL effected the takeover of TBGL.
   111 The 1987 Annual Report for BRL was issued in April 1988 prior to the BCHL takeover. It shows that TBGL, its subsidiaries and associates (which would have included the personal interests of RHaC) held about 42 per cent of the ordinary shares on issue in the capital of BRL. The 1998 Annual Report, issued in April 1989 and therefore after the BCHL takeover, discloses that BCHL, its subsidiaries and associates (which would have included TBGL) held about 58 per cent of BRL’s ordinary shares. There is no evidence that TBGL’s shareholding in BRL changed markedly, if at all, in that period.
   4.1.4. The takeover of the Bell group by BCHL
   4.1.4.1. Sale of shares by RHaC
   112 On 29 April 1988 BCHL and SGIC announced that they had each acquired 19.9 per cent of the issued share capital of TBGL from RHaC. The sale price paid by BCHL was $2.70 per share; SGIC paid $2.50 per share. On 5 May 1988 TBGL wrote to the Australian banks advising of the sale. On 11 May 1988 Lloyds Bank informed the Lloyds syndicate banks of the sale.
   4.1.4.2. The BCHL takeover
   113 On 19 May 1988 the NCSC announced that it had commenced an inquiry into share disposals involving TBGL. On 3 June 1988 the NCSC said that it had decided to discontinue hearings into the acquisition of shares in TBGL by BCHL. An agreement was entered into between the NCSC, BCHL and SGIC that included the following provisions:
   • BCHL would make a full bid for the issued share capital in TBGL at $2.70 per share.
   • SGIC was to be excluded from the offer.
   • The NCSC would make declarations modifying the provisions of the Companies (Western Australia) Code to permit the implementation of the agreement.
   • SGIC would not sell any of its shares in TBGL prior to 6 October 1988.
   114 The agreement represented a ‘settlement’ of the inquiry commenced by the NCSC. BCHL entered into a separate agreement with SGIC, in which it agreed to indemnify SGIC if SGIC sold any of its shares between 6 October 1988 and 6 April 1989 at a price that was less than $2.70 per share. BCHL agreed to pay the difference between the sale price and $2.70.
   115 The announcement of the takeover bid was made on 5 June 1988. BCHL arranged finance of about $650 million from Midland Bank and the Hong Kong Banking Group (HKBG) for the bid. On 1 July 1988 BCHL issued a press release setting out its intentions in respect of its takeover bid for TBGL. Under the heading ‘Bond’s intentions’ and ‘Bond Corp’s proposal’ it was stated that BCHL supported the programme of asset disposal initiated by the directors of both TBGL and BRL. It was said that the objective of the takeover scheme was for BCHL to obtain control and consolidation of the Bell group and, through the further purchase of shares in BRL by TBGL, also to achieve the consolidation of BRL and BCHL. That would add substantially to the strength and further growth potential of BCHL. BCHL also proposed the merger of TBGL and Bond Media Limited (BML) and the merger of BRL and BCHL.
   116 Under the heading ‘The Bell Group Limited’ BCHL proposed that the debt of the Bell group be eliminated by asset sales and that the Bell group concentrate its business activities on the expansion of its newspaper and other media interests. BCHL’s intention (as disclosed) seems to have been for the Bell group to dispose of all of its assets other than its media interests and the investments in the shares of BRL, Dewey Warren Holdings plc and JNTH.
   117 BCHL said that it had not come to a final view about TBGL’s shareholding in Standard Chartered Bank, the film library or the UK properties, theatres and cinema interests. BCHL intended that BRL would acquire the brewing businesses and would become a subsidiary of BCHL but had not reached a final view concerning realisation of the various assets of BRL. A further step that was contemplated was for BRL to make a takeover offer for BCHL.
   118 The overall effect of the proposal was to provide for the effective merger of the Bell and Bond groups. That would be accomplished by the acquisition of BML by TBGL and the acquisition of BCHL by BRL. It was proposed that the principal business of TBGL would be newspaper, television, radio and related interests and that BRL would be involved in brewing. BRL would also hold the investment of the group in Bond Corporation International Limited (BCIL). The announcement went on to provide further details as to BCHL’s view of the impact of those various proposals on TBGL and BRL.
   119 These proposals represented a significant change in the direction of the Bell group from what had been contemplated in the three‑year business plan. Apart from the projected mergers between TBGL and BML, and BRL and BCHL, the announcement indicated that BCHL proposed to sell off many of the remaining assets held by the Bell group. Apart from BPG, the operating businesses that were then said to be the future focus of the group were to be sold. Consequently, there was a fundamental change in the basis upon which the financial forecasts contained in the three‑year business plan had been made.
   120 On 13 July 1988 Actraint No 81 Pty Ltd (Actraint81), a wholly owned subsidiary of BCHL, lodged its Part A statement and proposed offer to purchase shares in TBGL with the ASX. On 27 July 1988 Actraint81 published its offer with the attached Part A statement. The document included a statement about the intentions of the acquirer; that statement was along the lines set out in the 1 July 1988 press release.
   121 On 2 August 1988 Mitchell and Oates were appointed directors of TBGL. According to the minutes of the directors’ meeting, their appointment was made on the basis of an invitation for them to join the board of TBGL as non‑executive directors and ‘as representatives of the Bond Corporation Group which is the major shareholder in Bell Group’. The appointment was made subject to various conditions that reflected a potential conflict of interest arising out of the takeover offer made by Actraint81. On 18 August 1988 the directors of TBGL (other than Mitchell and Oates) released their Part B statement in response to the offer made by Actraint81. The directors recommended that the offer be accepted.
   122 The preliminary financial statement and dividend announcement for BCHL for the year ended 30 June 1988 was released on 22 August 1988. The statement indicated that BCHL held more than 50 per cent of TBGL, with the result that TBGL and BRL had become members of the Bond group of companies.
   123 On 26 August 1988, TBGL announced that BCHL was entitled to 59 per cent of its issued share capital and that the board of directors had resigned, apart from RHaC, Mitchell and Oates. JNTH and BRL also announced changes in the composition of their boards to reflect BCHL’s control. In BRL’s case, Dahlsen, Edwards and Studdy resigned as directors. Alan Bond was appointed chairman of BRL and Peter Beckwith, Mitchell and Oates were appointed to the board. RHaC remained a director. Newman resigned as chairman of Weeks Petroleum and Murray Cutbush, a senior financial officer of BCHL in the United States, was appointed chairman. In relation to JNTH, all of the former Bell group officers (including RHaC and Newman) resigned as directors. Alan Bond was appointed chairman and Beckwith, Mitchell and Oates were appointed to the board.
   124 The Australian banks and Lloyds syndicate banks were advised of the change of the composition of the board of TBGL by letter dated 30 August 1988. The letter advised that, concomitant with the board changes, moves were being made immediately to integrate the management and treasury operations of the Bell group and its related companies with BCHL’s Treasury. It was said that the intention of the board was to continue the asset sale programme outlined in the intentions clause contained in the Part A statement and to maintain the integrity of the asset base of the company. To that end, it was expected that the sale of the London theatres and costumiers would be completed that week. It was also anticipated that the company would be in a position to announce further asset sales in the following month.
   125 By the time the takeover bid closed (29 August 1988), BCHL owned about 68 per cent of TBGL.
   4.1.4.3. The BCHL takeover and the banks
   126 On 5 May 1988, TBGL advised the banks of RHaC’s sale of his shareholding in the company and of the intention of the company to give to the banks a copy of the three‑year business plan that was then in the course of preparation. Some of the banks sought (and obtained) further information from TBGL. The three‑year business plan was distributed to the banks on 17 May 1988.
   127 I think it is fair to say that not all of the banks relished the prospect of dealing with the Bell group under the control of BCHL. By way of example, on 6 June 1988, an internal communication within Crédit Lyonnais commented as follows:
   [Alan Bond’s] main target is to get the cash which is in [BRL], he may well dismantle [the Bell group] in order to get the liquid assets he needs … We have always been reluctant to take any form of commitment with the [BCHL] group and the latest course of events reinforces our wish to be as disassociated as possible, at least at this stage, with the [BCHL] group.
   128 Under one of the conditions in the facilities agreements, a ‘material adverse change in the business, assets or financial condition of the borrower’ could constitute an event of default. Some of the banks (for example, Kredietbank in an internal communication of 15 July 1988) sought to ascertain whether the change of control might amount to a material adverse change allowing them to accelerate repayment of the loans. But no such steps were taken. Some of the banks also expressed concern that assets or funds from the Bell group might be removed and transferred for use by BCHL group companies outside the Bell group.
   129 By letter dated 4 August 1988, TBGL wrote to the Australian banks and Lloyds Bank offering additional covenants in respect of their facilities on the understanding that the banks would maintain the arrangements. The letter commenced by noting that the acquisition of ordinary shares in TBGL by BCHL was well advanced and that Mitchell and Oates had been appointed to the board of TBGL. In essence, the letter suggested an extension of the three year plan previously circulated to banks but with a more vigorous asset disposal programme; this would give rise to a proposed merger with BML. The enlarged entity would create business opportunities for TBGL and one of its major objectives over the following three years was the creation of a strong international media company. It was recognised that those changes might inevitably lead to changes in the relationship between TBGL and the banks.
   130 The letter continued that in order to allow for those changes to occur in an orderly manner, BCHL had agreed with TBGL that additional covenants should be given which would ensure the integrity of the negative pledge group while those changes occurred ‘so that there was no deterioration in the bank’s credit nor in its security position’. BCHL wished:
   [T]o see these covenants provide sufficient comfort to the banks to enable them to maintain the status quo while Bond outlines in detail its plans for Bell and developed the appropriate banking structure for the new group.
   131 The additional covenants that TBGL offered to the banks were to the following effect:
   (a) TBGL and the Australian subsidiaries would not lend any money or grant any form of financial accommodation to any person or persons exceeding $25 million in aggregate without the prior written consent of the banks (except as between TBGL and the Australian subsidiaries);
   (b) TBGL would use its best endeavours to procure the continued listing for quotation of its issued share capital; and
   (c) TBGL would not give any security for the repayment of short‑term debt as it would otherwise be entitled to do under the negative pledge arrangements.
   132 The letter expressed the view that the covenants would have the following effects:
   • Any cash arising from the sale of assets within the negative pledge group would be maintained within that group.
   • Assets which might be purchased to improve cash flow or profitability of the group could only be purchased on commercial terms, on an arm’s length basis and at a fair market price.
   • The integrity of the banking structure would be maintained by having all negative pledge banks continue to lend on an unsecured basis without priority as to the repayment of debt.
   133 The letter proposed the issue of a further banking package in the ensuing weeks. The package would detail the financial position of both TBGL and BML as at 30 June 1988, the impact that merging those two companies would have on their financial positions and the basis on which any future banking relationships with the merged group would be conducted.
   4.1.5. Administration of the group under BCHL
   4.1.5.1. TBGL directors
   134 On August 1988 Oates and Mitchell were appointed to the board of TBGL and remained as such until 19 October 1990 and 18 January 1991 respectively. RHaC remained as a director for a short period but resigned on 24 October 1988. Aspinall became a director and managing director on 13 October 1989. Colin Simpson was appointed to the board on 17 August 1990. Both were in office in April 1991.
   135 From 1988, Aspinall’s role with the Bell group involved managing the operation of the publishing business, some aspects of the sale of Wigmores Tractors Pty Ltd (Wigmores Tractors) in 1989 and the negotiation of the refinancing with the banks from July 1989. During 1990 and until April 1991, he was involved in consideration of, and attempted implementation of, the restructuring of the Bell group. On 31 December 1989 Aspinall was formally appointed Chief Executive Officer and Chief Operating Officer of BPG and its subsidiaries pursuant to a restructuring of the management of those companies.
   136 Mitchell was a director of many companies in the Bond group. He was employed as the head of the Corporate Planning and Development Department of BCHL (CPDD). Although he was a director of TBGL and its subsidiaries, Mitchell held no executive position nor was he employed by TBGL. He was not involved in the day‑to‑day operation of the Bell group and its businesses.
   137 Oates was a director of BCHL until his appointment to the board of TBGL on 2 August 1988. He was involved in specific projects for BCHL and continued to fulfil those roles after he left the board. He was a director of many TBGL subsidiaries but did not hold any executive position within the group and he was not an employee.
   138 Simpson was Aspinall’s executive assistant and they worked closely together from July 1989 until the receivership of the Bell group in 1991. Simpson conducted most of the early negotiations with the banks and sent them information from time to time about the group. He reported regularly to Aspinall about his dealings with the banks. Simpson was primarily responsible for discussing the terms sheet with the banks throughout late 1989.
   4.1.5.2. BRL directors
   139 It is convenient here to mention changes in the board of BRL. The annual reports for BRL as at 30 June 1988 and 30 June 1989 indicate that the directors were all associated with BCHL. Alan Bond, Aspinall, Mitchell and Oates were members of the board of BRL. In December 1989, by way of settlement of a court action commenced by a minority shareholder of BRL, Aspinall and Oates resigned from the board but Alan Bond and Mitchell remained. An independent chairman and two other directors, not associated with BCHL, were appointed to the board. Mitchell was still a director (although Alan Bond was not) at the time when the 1990 Annual Report was issued.
   4.1.5.3. Other TBGL and BPG officers
   140 Bruce McPherson was the company secretary of TBGL in 1988 and 1989. Dennis, Brenton Walkemeyer and Winstanley were officers in the Accounts department of TBGL both before and after the BCHL takeover.
   141 John Reynolds was the managing director of BPG until late 1989 when he was replaced by Aspinall. In 1989 and 1990, Tom Garven acted as the Director of Finance of BPG and later of the Bell group. From the beginning of January 1990, when the operations of the Bell group were moved to the Forrest Centre, Aspinall and Garven spoke regularly in relation to the financial forecasting for the Bell group. During 1989 and 1990 Mary Tagliaferri was a legal officer employed by TBGL.
   4.1.5.4. Treasury and accounting functions
   142 In October 1988 BCHL altered the treasury arrangements for the BRL and TBGL groups. Thereafter, they fell under the umbrella of the Bond group central finance, treasury, accounting and administration division (the Finance and Administration Division), which was under Oates’ management. Simon Farrell was the head of the Bond group finance division, which was responsible for dealing with the banks. Farrell reported directly to Oates.
   143 Robin Devries and Maureen Noonan were the joint heads of the Treasury division, which was responsible for cash forecasts. Both Devries and Noonan reported directly to Oates. Noonan, who was a qualified lawyer, eventually became the sole head of the Treasury division.
   144 Until January 1990, the cash management responsibilities of the Bell group were dealt with by the Finance and Administration Division. It ‘swept’ the bank accounts of all of BCHL’s subsidiaries, including TBGL and its subsidiaries, and collected all the funds into a central pool over which it then had control. In this way, all income generated by the operating businesses of BCHL and its subsidiaries, including TBGL and its subsidiaries, was collected by the Finance and Administration Division. Funds were then allocated back to the operating businesses on a ‘needs’ basis according to the Finance and Administration Division’s assessment of cash flow requirements of the various businesses.
   145 WAN had a $5 million overdraft facility with Westpac. This was sufficient for its normal operating expenses, but not for large expenses, such as newsprint. Funds for those expenses had to come from the Finance and Administration Division. The other operating entities within the Bell group operated in a similar fashion through that division.
   146 In 1989 WAN’s management would generally deal with the Finance and Administration Division directly in the first instance whenever WAN required funds for large expenses. Aspinall only became involved when either Reynolds or Garven had tried and failed to obtain funds from the Finance and Administration Division for major expenditures. Problems with this system occurred throughout 1989. Aspinall approached both Oates and Beckwith and told them it was difficult to run WAN’s operations effectively and that he needed to have control of Bell group’s finances.
   147 From January 1990 Aspinall took control of the finances of the Bell group. He had been receiving weekly profit and loss statements and cash flows for the BPG group throughout 1989, but it was not until January 1990 that TBGL started to produce the combined Bell group cash forecasts.
   148 From 1984 until September 1989 Michael Swan was group financial accountant for BCHL and its subsidiaries. He reported to the group chief accountant, Chris Bennett, who reported to Oates. In about September 1989, Bennett resigned and Swan was appointed group chief accountant. Swan was assisted by Dennis, who was primarily responsible for the Bell group’s accounts, and Ron Nuich. The 1989 TBGL Annual Report shows Dennis as the group accountant for TBGL. Swan was ultimately responsible for the accounts of all of the companies in the Bond group, including TBGL and its subsidiaries, and BRL and its subsidiaries. Walkemeyer worked at Bell Corporate from April 1987 until approximately 19 January 1990. Winstanley was an assistant accountant or financial accountant at TBGL from November 1987 until late 1990.
   4.1.6. Financial administration of BGUK
   149 Richard Breese joined TBGIL in July 1986 and until November 1988 he was a financial accountant in the corporate division. He reported to Peter Shields, the group financial controller. From December 1988 to 14 August 1989 he was engaged mostly in the affairs of Bond Property UK Ltd (Bond Property) but on the latter date took up the position of financial controller of the BGUK group. The position carried responsibility for accounting matters across a range of subsidiaries of BCHL, including BGUK. His employment was transferred to Bond Property in January 1990 but his responsibilities did not change. Although he was made redundant in February 1990, he continued to provide accountancy services to BGUK until June 1990.
   150 As financial controller, Breese supervised the work of the Accounts department and was responsible for:
   (a) maintaining accounting records for the BGUK group, the BCHL companies in the United Kingdom, Bond Property and certain subsidiaries of BRL (most of which were dormant by this time);
   (b) providing management information and accounts as referred to above in relation to those companies; and
   (c) fulfilling statutory responsibilities in relation to annual accounts, VAT returns and the like.
   151 Many of the matters in which Breese was involved had taxation implications. For this reason he worked quite closely with Martin Brown, who was responsible for taxation advice across the same group of companies for which Breese had accounting responsibility. He also worked closely with Peter Whitechurch, whose role and perspective was that of a company secretary.
   152 Breese also dealt with his counterparts in the Perth and Sydney offices of TBGL and BCHL. So far as the BGUK group was concerned, the dealings with BCHL were essentially related to the provision of cash flow information, primarily to Noonan at Bond Treasury in Sydney. As far as accounting matters were concerned, his dealings were primarily with the TBGL accounting staff in Perth; principally Dennis and, after Dennis’ resignation, Winstanley and Walkemeyer.
   153 A key feature of the financial structure was the central supervision of cash within the BCHL group from the Bond Treasury in Sydney. All Bond companies in the United Kingdom, including the BGUK group, were required to provide weekly cash flow forecasts of anticipated receipts and expenditure. The requirement for weekly returns for the BGUK group companies was instituted in September 1988, shortly after TBGL was taken over by BCHL.
   154 Brown was a chartered accountant. He joined TBGIL as its group taxation manager in September 1987. Following the BCHL takeover of TBGL, Brown was employed as group taxation manager by the Bond companies in the United Kingdom. He continued to provide advice on UK tax matters as required to TBGL, its subsidiaries and the Bond companies. He took a redundancy package in March 1990, but continued to provide services on a consultancy basis until the appointment of a receiver in April 1991. In his evidence, Brown described his involvement with TBGL after the completion of the negotiations concerning the sale of the ITC Entertainment group (as to which, see Sect 4.4.2.3) as ‘minimal’.
   155 Whitechurch was a member of the Institute of Chartered Secretaries and Administrators. He joined the BGUK group in December 1988 and became company secretary of BGUK, TBGIL and BIIL on 3 January 1989. He was a director of BIIL from 3 January 1989 until 23 March 1992. He was a director of most of the companies in the BGUK group (except BGUK and TBGIL) and of some other BCHL and BRL offshore subsidiaries. As company secretary he was responsible for the maintenance of the company’s records (and in particular formal records of shareholdings and office holders), the lodgement of statutory returns, day‑to‑day administration and the drafting of minutes of directors’ meetings.
   4.1.7. The Bond [BCHL] group of companies
   156 Before proceeding further I need to say something of a descriptive nature about the BCHL group of companies. According to the 30 June 1988 Annual Report for BCHL, its directors at that date included Alan Bond (chairman), Beckwith, Oates and Mitchell. After 30 June 1988, Oates and Mitchell resigned from the board (due to licensing requirements for broadcasting stations), but in the 30 June 1989 Annual Report they are listed as ‘Senior Executives’.
   157 BCHL was a large conglomerate (a rough count of the list of subsidiary companies in the 1988 Annual Report puts the number at over 700 entities) with international and domestic interests in brewing (I have already mentioned BBHL), communications (I have already mentioned BML), resources (coal, nickel and petroleum) and property and share investments. The balance sheet as at 30 June 1988 showed total assets of $9.01 billion, total liabilities of $6.38 billion and shareholders’ funds of $2.63 billion. The profit and loss account disclosed an annual profit after extraordinary items and tax of $273.5 million. The 30 June 1989 Annual Report showed total assets of $11.70 billion, total liabilities of $9.91 billion and shareholders’ funds of $1.79 billion. In that year, the group made a loss after extraordinary items and tax of $980 million.
   158 BCHL was controlled by Alan Bond through a family company, Dallhold Investments Pty Ltd (Dallhold), in which he had a substantial interest. As at 30 June 1989, Dallhold held 52.5 per cent of the ordinary shares on issue in BCHL. Bond Corporation Finance Pty Ltd (BCF) was the treasury company for the BCHL group. From time to time during these reasons I will introduce other subsidiaries and companies associated with the BCHL group.
   4.2. Financial arrangements with the banks (before 1990)
   4.2.1. Some introductory comments
   159 To understand the 1990 refinancing it is necessary to have some appreciation of the financial arrangements that existed between the several banks and the Bell group in the preceding years. As I have already said, the Australian banks dealt individually with the group while the European banks were a true syndicate. I intend to trace the history of the relationship between each bank or the syndicate and the Bell group from inception through to the end of 1989. But I will not cover in any detail the negotiations for the facilities and, in particular, the contentious negotiations that occurred in the last half of 1989.
   160 The negative pledges were of a relatively standard form across the several banks. For this reason I will outline the negative pledges in some detail when dealing with the first of the banks, CBA, and then mention them only briefly in relation to the other banks. Up until 1987 the relationships were governed by negative pledge agreements. In mid‑1987 the negative pledge agreements were cancelled and replaced by negative pledge guarantees, again in relatively common form across the banks.
   161 In these reasons when I refer to the negative pledge agreements collectively I will call them ‘the NP agreements’. If I need to refer to the arrangement with a particular bank I will call it ‘the [bank] NP agreement’. The short description of the negative pledge guarantees (collectively) will be ‘NP guarantees’ and (individually) ‘the [bank] NP guarantee’. Bell group entities that were bound by the negative pledge arrangements from time to time will be referred to (collectively) as either ‘the NP group companies’ or ‘the NP group’ depending on the context.
   4.2.2. Australian banks: CBA
   4.2.2.1. Facility arrangements
   162 On 4 June 1982 CBA offered TBGL a bill facility of $5 million. The offer was conditional upon a negative pledge agreement being entered into between the Bell group and subsidiaries and CBA. By letter dated 29 June 1982 TBGL accepted CBA’s offer. The term of the facility was to be one year with an annual review (with a view to extend, by mutual agreement, the expiry date by a further one year). In the period prior to 1989 the bill facility agreement was varied from time to time. In May 1984 the term was extended to a two year revolving facility with annual reviews. The limit was progressively extended and by October 1987 it stood at $57 million.
   163 Over the period of the relationship (1982 to 1989), CBA also provided a number of other small facilities, money market dealing limits, foreign currency dealing limits and interest rate exposure limits to Bell group companies. All of these had been repaid and cancelled by 26 January 1990.
   4.2.2.2. Negative pledge agreement
   164 In September 1982 CBA, TBGL and the guaranteeing subsidiaries entered into a loan agreement incorporating a negative pledge schedule. The following year the negative pledge agreements were renegotiated and on 8 July 1983 TBGL and various of its subsidiaries entered into a new negative pledge agreement with CBA. This is one of the NP agreements. Details of the NP agreements entered into by CBA and all other defendant banks are set out in Schedule 38.6.
   165 Those entities (other than TBGL) bound by the arrangements were called ‘indemnifying subsidiaries’. TBGL and the indemnifying subsidiaries were the NP group companies.
   166 The NP agreement was in two parts: an eight clause agreement, and (annexed to the agreement) a common form negative pledge schedule, which contained all relevant operative provisions. The eight clause agreement provided that the terms of the NP agreement would apply to all advances provided by the bank from time to time to any of the NP group companies. The negative pledge schedule relevantly provided that each of the NP group companies would jointly and severally indemnify the bank against loss or damage suffered by the bank by reason of any non‑payment or other default. It also provided that upon any default by an NP group company in payment of any of the moneys indemnified, the indemnifiers would, on demand, pay to the bank an amount equal to the moneys indemnified.
   167 By cl 12.1 of the schedule, TBGL warranted that each of its wholly owned subsidiaries (other than those listed in an annexure to the schedule) was a party to the agreement as an indemnifying subsidiary. TBGL also gave an undertaking that it would cause each of its subsidiaries listed in a separate annexure to the schedule and any company that was later to become a wholly owned subsidiary (other than companies incorporated outside Australia or which the bank agreed to exclude) to become indemnifying subsidiaries. Clause 9 provided that by entering into a supplemental agreement any company not then an indemnifying subsidiary could become one. In that case, the additional entity would have all the rights and be subject to all the obligations of the original parties.
   168 All of the original parties to the CBA NP agreement were Australian companies. All of the companies listed in Annexure ‘A’, except BGUK and one other, were Australian companies. BGUK was the only non‑Australian company included in Annexure ‘B’. The essence of these agreements was that TBGL and all of its Australian subsidiaries (present or future) were, or would become, NP group companies unless they were specifically excluded by agreement with the banks. Non‑Australian entities, save for BGUK and any companies seeking to join under cl 9, would not be or become part of the NP group. It is to be remembered that BGNV was incorporated in the Netherlands Antilles and so was not a NP group company.
   169 Under cl 7.1 of the schedule TBGL undertook that so long as there remained outstanding any obligation to the bank it would not, without the prior written consent of the bank, at any time permit:
   • total liabilities (as defined) to exceed 65 per cent of total tangible assets (as defined); and
   • total secured liabilities (as defined) to exceed 10 per cent of total tangible assets.
   170 I will refer to these undertakings as ‘the NP ratios’. It is the former, rather than the latter, that is of practical importance in the litigation. Clause 7.1 went on to provide that a company could borrow or raise funds, even though it would put the borrower in breach of the NP ratios, provided that the proceeds of the borrowing were applied within three months so as to bring it back within the ratio.
   171 The definitions of ‘total liabilities’ and ‘total tangible assets’ are long and complex. ‘Total liabilities’ means, in summary, the aggregate amount (as disclosed in the latest audited consolidated balance sheet of the NP group) of all secured and unsecured liabilities of the NP group companies, with nominated additions and deletions (including the addition of contingent liabilities). The amount is calculated after eliminating inter‑company balances between NP group companies and making such further adjustments as the auditors believe are appropriate to make a proper determination of the liabilities.
   172 ‘Tangible assets’ is defined to mean all assets other than goodwill and like things that, according to current accounting practice, are regarded as intangible assets. ‘Total tangible assets’ is then defined in a way that mirrors the definition of total liabilities, save for the description of the permitted and required additions and deletions.
   173 TBGL also undertook that, for so long as moneys remained owing to the bank, it would furnish or cause to be furnished, among other things:
   (a) within four months of the close of each financial year, a report signed by the auditor setting out, as of the close of the financial year, calculations of total liabilities, total secured liabilities and total tangible assets and of the NP ratios; and
   (b) within four months of the end of each accounting period of six months, a report signed by the auditor and a separate report signed by two directors of TBGL setting out (as at the relevant date) the same matters referred to in (a).
   174 The negative pledge is to be found in cl 5. It hinges on the term ‘security’, which is defined to mean any security by way of mortgage, pledge, lien, charge, assignment, hypothecation, trust arrangement, title retention or other means (other than possessory liens or charges arising by operation of law). Clause 5.1 is in these terms:
   [Each NP group company] undertakes that it will not, without the prior consent of the [bank], create, assume, permit or cause to exist any Security over any of its then present or future revenue or assets … unless at the same time and at all times thereafter a Security of equivalent legal nature is created in favour of the [bank] with [at least equivalent value] but if [the NP group company] is unable or unwilling to give such Security … [it] shall be obliged to pay out its obligations [to the bank] at or prior to the creation [of the Security].
   175 The schedule also provided for events of default. These included an NP group company failing to pay any sum that was due and payable to the bank. It would also be an event of default if TBGL failed to comply with its obligations under the NP agreement (including, among other things, the NP ratios) and failed within seven days to remedy the default. On the happening of an event of default, the bank could give notice cancelling its obligation to advance further moneys and that all moneys then owing were immediately due and payable.
   176 On 11 December 1985 TBGL wrote to the banks, including CBA, requesting that the first BGNV bond issue be treated as equity for the purposes of the NP ratios. CBA, along with the other banks, agreed to do so. On 15 April 1987 TBGL again wrote to all the Australian banks requesting, on similar grounds, that the first 1987 BGNV bond issues be treated as equity. Once again, CBA and the other banks agreed to the request.
   4.2.2.3. Supplemental negative pledge agreements
   177 Between 8 July 1983 and 30 June 1987, eight supplemental agreements were entered into by CBA, TBGL and other TBGL subsidiaries, adding the latter entities as indemnifying subsidiaries and thus as members of the NP group.
   4.2.2.4. Transfer of bill facility to BGF
   178 On 24 February 1986 TBGL informed CBA, along with all other Australian banks, that BGF had been incorporated as a wholly owned subsidiary of TBGL on 11 February 1986 and that it would be used by TBGL to raise future capital on behalf of the Bell group. Then, on 23 October 1986, TBGL informed them that the Bell group intended to use BGF as the borrowing vehicle for all Bell group companies and that it intended to centralise the finance function within the group. CBA agreed to review its present facility with TBGL with a view to having a new facility put in place for BGF.
   179 By 13 November 1986 the facility had been transferred to BGF. By a supplemental agreement dated 4 March 1986, BGF became an indemnifying subsidiary under the negative pledge arrangements and from that time on was an NP group company.
   4.2.2.5. Negative pledge guarantee
   180 As early as 1985, officers of TBGL had been considering the reorganisation of the arrangements governing the NP group bank borrowings and the borrowings of other group companies outside the NP group. These deliberations continued through 1986 and the early part of 1987. In the middle of 1987, TBGL approached the banks with a proposal to collapse the NP agreements and replace them with a parent company guarantee for all loans from the participating banks to the NP group companies. This arrangement was to be documented as the NP guarantees.
   181 On 30 July 1987, CBA and TBGL agreed that TBGL and the other NP group companies would be released from their obligations under the CBA NP agreement and that the relationship would, in future, be governed by a negative pledge guarantee. All other banks entered into similar arrangements at around the same time. Details of the NP agreements entered into by CBA and all other defendant banks are set out in Schedule 38.6. By 30 September 1987, the new guarantee structure and the release of the NP group companies from their obligations under the NP agreements had become effective.
   182 The NP guarantees provided that borrowing by NP group companies was to be restricted to ‘nominated borrowers’. There was provision for the group to seek the banks’ consent to other entities being added to the list of nominated borrowers. It is common ground that the nominated borrowers were TBGL, BGF and BGUK. TBGL was the guarantor. The NP guarantees referred to the activities of ‘TBGL and the Australian Subsidiaries’. The term ‘Australian subsidiary’ was defined to include any wholly owned subsidiary of TBGL incorporated in Australia and any other subsidiary nominated by TBGL to be an Australian subsidiary. It also included BGUK, but expressly excluded TBGIL and its subsidiaries. The effect of this was to preserve the position that had applied under the NP agreements; namely, that BGUK was the only non‑Australian company included as a member of the NP group.
   183 The prescription of the negative pledge was not dissimilar to that which applied under the NP agreements, except that the proviso allowing for the creation of an equivalent security was omitted. The only material change to the NP ratios was the addition of a limit on the issue of redeemable preference shares. But there are some other differences between the NP agreements and the NP guarantees that need to be mentioned. The definition of ‘tangible assets’ was changed to include intangible assets that had been ‘the subject of a valuation by a qualified valuer chosen by [TBGL] and approved by the auditor’. The definition of ‘total liabilities’ was altered to read:
   [T]he aggregate amount of all liabilities of [the NP group companies] on a consolidated basis which would under accounting principles generally accepted in Australia be classified as liabilities (including Contingent Liabilities) together with such adjustments which in the opinion of the Auditor are appropriate to make a proper determination of the total amount of aggregate liabilities of the [the NP group] but excluding (insofar as they are included in the aggregate) non current Subordinated Debt.
   184 ‘Subordinated debt’ was defined to mean ‘the aggregate amount of all Borrowings expressly defined as subordinated and expressed in their terms to rank after all unsecured and unsubordinated debt of the [NP group]’. The ‘non‑current’ element of the exclusion related to subordinated debt that was not due within the following 12 months.
   4.2.2.6. The takeover of TBGL by BCHL
   185 By August 1988 BCHL had taken control of the Bell group. This had ramifications for its banking relationships, at least with some of the banks who were not well disposed to BCHL. CBA was one such bank. On 4 August 1988, TBGL wrote to CBA (and all other banks) advising that the BCHL takeover of TBGL was ‘well advanced’ and that changes were being made ‘in an orderly manner’. The letter went on to say that TBGL was prepared to offer additional covenants so as to maintain the integrity of the banking structure while the changes were implemented.
   186 On 16 September 1988 TBGL again wrote to CBA (and to all other banks) setting out some additional undertakings, including an undertaking that the NP group companies
   will not, except by way of short term deposit with corporation or corporations carrying a rating of A or above from Australian Ratings or other recognised Australian or overseas rating agency or to a company or companies being any of [the NP group companies], lend any moneys or grant any form of financial accommodation to any person or persons in the aggregate exceeding $25,000,000 without the prior written consent of [the bank].
   It should be noted that the restriction on‑lending was to include loans to companies in the Bond group.
   4.2.2.7. The CBA facility in 1988 and 1989
   187 On 27 September 1988 a BCHL Treasury officer was informed that CBA would be terminating the evergreen nature of the bill facility. The arrangement would be placed on a normal annual review basis with maturity in November 1989. On 5 December 1988 BCHL wrote to CBA advising that the bill facility would be repaid in two instalments: $32 million on 20 December 1988, with the remaining $25 million to be cleared by 31 March 1989. On 20 December 1988, $32 million worth of bills were paid and $25 million of bills were rolled over with a due date of 31 March 1989.
   188 By letter dated 5 January 1989, CBA informed TBGL that the evergreen nature of the bill facility had been terminated and that on receipt of $25 million on 31 March 1989, the facility would be cancelled. On 29 March 1989 CBA agreed to vary the arrangement made on 5 December 1988 and to extend $12.5 million of accommodation under the bill facility until 30 June 1989. The other $12.5 million was to be repaid on 31 March 1989. On 31 March 1989 $12.5 million worth of bills were paid and $12.5 million of bills were rolled over. New bills, due to mature on 28 April 1989, were drawn by BGF and accepted by CBA. The 31 March 1989 bills were rolled over on 28 April 1989 and $12.5 million of bills, due to mature on 30 June 1989, were drawn by BGF and accepted by CBA.
   189 On 28 June 1989 CBA agreed to a further variation of the arrangements and to extend $12.5 million of accommodation under the bill facility until 31 July 1989. On 30 June 1989 $12.5 million worth of bills were rolled over and 25 bills of $500,000, each maturing on 31 July 1989, were drawn by BGF and accepted by CBA.
   190 BGF did not pay the bills due 31 July 1989. CBA dishonoured them and on 1 August 1989 CBA issued a notice of dishonour to BGF and sent it to TBGL. On 3 August 1989, CBA wrote to TBGL indicating that it had debited the $12.5 million face value of the dishonoured bills to a nominated account with interest accruing at 23.5 per cent per annum and that ‘this amount is now due and payable’.
   191 On 6 September 1989, CBA issued and served a notice of demand on BGF for an amount of $12.7 million (this amount included interest accrued to 3 September 1988). The notice was served with a letter stating that CBA expected payment no later than 13 September 1989. BGF did not comply with the demand and the moneys remained outstanding on and after 13 September 1989.
   192 On 14 September 1989, CBA issued and served a notice of demand on TBGL as guarantor under the NP guarantee. The notice of demand was served with a letter referring to the failure of BGF to meet the 6 September demand and saying that CBA expected payment to be made no later than 21 September 1989.
   193 By notices dated 20 September 1989, CBA withdrew the demands on BGF and TBGL but reserved to itself the right at any time in the future to demand the payment of the moneys owing to it. It was around this time that CBA decided to participate in the negotiations to replace the NP guarantees with a secured financial arrangement. By 26 January 1990, the amount of $12.5 million was owed by BGF to CBA. It is common ground that the amount was payable on demand.
   4.2.2.8. Other lending to RHaC and Bond
   194 The wider RHaC group was a significant customer of CBA. By October 1987, CBA had loaned about $205 million to companies in the BRL group and the Heytesbury group. Australian European Finance Corporation Ltd, a subsidiary of CBA, had an additional exposure of about $21.6 million to BRL and Heytesbury.
   195 CBA had a distinct distaste for dealings with the wider BCHL group. During the relevant period it had virtually no exposure to Dallhold, BCHL or other Bond group entities.
   4.2.3. Australian banks: HKBA
   4.2.3.1. Facility arrangements
   196 Wardley Australia Limited (Wardley) was an Australian investment banking subsidiary of the Hong Kong and Shanghai Banking Corporation (HSBC). Wardley was later renamed Hong Kong Finance Limited (HKFL). HKFL became a wholly owned subsidiary of HKBA in December 1988. HKBA, which was incorporated in Australia in 1986, was a member of the HSBC group. In April 1990 Wardley merged with HKBA.
   197 Wardley had a relationship with the Bell group dating back to at least 15 August 1980, when it granted the group a $2 million facility. It was due to expire in August 1983 but was not renewed in view of negotiations for a separate and increased facility. In January 1984, TBGL entered into a commercial bill facility agreement with Wardley for $15 million, repayable on 30 December 1988. The facility was conditional upon TBGL entering into a negative pledge arrangement. In 1986 the facility was transferred from HKFL to HKBA. Even though the facility had been in the name of Wardley, it had been managed by HKBA staff.
   198 TBGL informed HKFL on 24 February 1986 that BGF had been incorporated as a wholly owned subsidiary of TBGL and that it would be used by TBGL to raise future capital on behalf of the Bell group. On 24 December 1986, HKBA offered BGF a cash advance accommodation to replace the TBGL bill facility. The offer comprised a $15 million commercial bill acceptance facility with discounting option to BGF. BGF accepted HKBA’s offer on 22 January 1987. The facility was to expire on 30 December 1988. It was accepted subject to the condition that BGF, TBGL and the other indemnifying subsidiaries entered into an NP agreement with HKBA.
   199 HKBA also offered BGF a standby credit facility on 5 June 1987. The offer comprised a $100 million commercial bill acceptance facility with discounting option to BGF. The offer included a covenant that the terms of the NP agreement would be observed. BGF accepted HKBA’s offer on 10 June 1987. The facility was to expire on 30 April 1990. HSBC Singapore covered HKBA for a portion of this facility and from that time on the Singapore office was included in most of the important decisions regarding the facility agreement.
   200 Under the terms of both arrangements, HKBA reserved the right to refuse to accept any bills and to terminate the facility if BGF, TBGL or an indemnifying subsidiary failed to meet the terms and conditions of the facility, or any security held by HKBA then or later. If a default event occurred, the terms allowed HKBA to demand that BGF immediately deposit sufficient funds to enable HKBA to meet all amounts outstanding. On 10 May 1988 HKBA advised BGF of a possible event of default under each of the $15 million and $100 million facilities; namely, the takeover of TBGL by BCHL without obtaining HKBA’s prior consent. HKBA informed BGF that it was currently reviewing its position.
   201 TBGL notified HKBA on 4 August 1988 that it intended to offer additional covenants to ensure that the integrity of the banking structure was maintained. On 16 September 1988, TBGL sent HKBA a formal letter of additional undertakings.
   202 At some time, and certainly by 15 December 1988, the $15 million facility and the $100 million facility appear to have been treated as a single $115 million facility to be repaid by 31 December 1988.
   4.2.3.2. Negative pledge agreement and guarantee
   203 On 27 January 1984, Wardley executed an NP agreement with TBGL and certain indemnifying subsidiaries. Between 27 January 1984 and 24 July 1986, Wardley and TBGL also entered into five supplemental agreements, each adding additional indemnifying subsidiaries. This was replaced by an NP agreement between HKBA and TBGL (and indemnifying subsidiaries) on 23 December 1986. Eight supplemental agreements were made pursuant to this NP agreement. The transition from the NP agreement to the NP guarantee occurred on the same dates as with CBA.
   204 TBGL wrote to Wardley on 11 December 1985 requesting that $150 million convertible bonds, which were to be issued that month and to mature in 1995, be treated as equity for the purpose of balance sheet ratios for banking covenants. The letter of request is in the same terms as that written to CBA. Wardley agreed to treat the bonds as equity.
   205 HKBA entered into an NP agreement with TBGL and the scheduled companies on 23 December 1986. HKBA entered six further supplemental agreements with various TBGL companies to add them as indemnifying subsidiaries under the NP agreement. On 3 June 1987 and 22 July 1987, HKBA entered into two additional supplemental agreements with TBGL companies to add them as indemnifying subsidiaries under the NP agreement.
   206 On 15 April 1987, TBGL requested that HKBA treat the liabilities arising from BGF convertible subordinated bonds and the first 1987 BGNV bond release as equity for the purpose of negative pledge covenants. HKBA agreed to this request on 4 May 1987. The sum of the liabilities at that time was $250 million. On 30 July 1987, HKBA released the TBGL companies (the indemnifying subsidiaries) from the NP agreement, and entered into a NP guarantee with TBGL. The release and the guarantee became operative on 30 September 1987.
   4.2.3.3. The HKBA facility in 1988 and 1989
   207 On 12 December 1988 HSBC entered an agreement with TBGL that the $115 million facility would be repaid by a $90 million repayment by 31 December 1988, and the remaining $25 million would be held over until 31 March 1989. By March 1989 BGF had made the $90 million repayment and the remaining $25 million repayment was extended to 1 May 1989. On 28 April 1989 HKBA agreed to extend repayment of the $25 million until 12 May 1989, pending the receipt of $12.5 million from the sale of Wigmores. The remaining $12.5 million repayment was extended to 30 June 1989.
   208 The payment due on 12 May 1989 was extended to 19 May 1989. The payment then due on 19 May 1989 was not made. On 31 May 1989, the due date for payment was extended to 30 June 1989. The extension was on an on‑demand basis. The facility was to be rolled over daily and interest charged at two per cent per annum over HKBA’s overnight lending rate, payable weekly in arrears. On 3 July 1989, HKBA extended the facility, again on an on demand basis, from 30 June 1989 to 31 July 1989.
   209 Between 3 July and 29 December 1989, the facility was extended seven times until the end of each month, with the final extension due on 31 January 1990. There were no further changes to the facility until the refinancing of 26 January 1990. As at 26 January 1990, $25 million remained owing by BGF to HKBA. This amount was payable on demand.
   4.2.3.4. Other lending to RHaC and Bond
   210 HSBC worldwide had exposure to a number of companies associated with RHaC. By March 1986, it had provided the following facilities to companies other than TBGL:
   (a) $2.5 million to Heytesbury through HKFL Perth;
   (b) separate facilities of £4 million and £1 million to TBGIL in London;
   (c) US$10 million to BRL as part of a US$100 million Euronote facility arranged by Citibank through HSBC Singapore; and
   (e) US$1 million foreign exchange line for BRL through HKFL Perth.
   211 Wardley arranged for HSBC to provide to Dallhold with a facility of approximately US$585 million from August to October 1987. This facility was later reduced to US$256 million, and remained outstanding as at September 1987. In March 1988 Wardley arranged for a US$220 million letter of credit facility to be provided by HSBC to Dallhold. The letter of credit facility was later reduced to US$180 million and was due to mature in July 1990. In May 1989 a facility of $93 million, due to mature on 1 November 1989, was made available to Dallhold.
   212 The HSBC group provided various credit facilities to companies in the Bond group. Wardley, HSBC and Hong Kong International Trade Finance provided a $330 million credit facility to BCHL. As at October 1989, $139 million remained outstanding from a facility (known as Actraint No 72) in the sum of $142 million, which was made available to a BCHL subsidiary for the purpose of taking over TBGL. A $600 million cash advance was provided from August 1989 until 15 December 1989, repayable on demand. A $50 million cash advance, offered as a short‑term bridging facility due to mature on 31 October 1989 but repayable on demand, was drawn to an amount of $43 million at its due date.
   213 Wardley provided BRL with an aircraft lease facility worth $25 million. The term of the facility was seven years, and it was secured against the aircraft. HKBA offered BRL a $200 million option/bond facility in July 1989 to support the refinancing of BRL’s debt. BRL accepted the facility but the put option was not exercised.
   214 Internal memoranda disclose that in July 1989, HKBA considered the Bond group’s debt levels to be ‘dangerously high’. HKBA undertook a review of BCHL’s financial position. The report of the review was entitled ‘Project Occam’s Razor’. It set out a strategy to facilitate asset and corporate rationalisation of BCHL with the intention of consolidating asset holdings down to core operating businesses. The strategy recommended that HKBA provide BCHL with a $200 million standby facility to enable realisation of the plan.
   215 Subject to the Project Occam’s Razor review, HKBA offered BCHL two facilities. First, a facility of HK$300 million for a period of one month, drawn on 3 July 1989, was provided to meet urgent working capital requirements. Secondly, a HK$270 million facility was drawn on 7 July 1989 to enable BCHL to repay an inter‑company loan to BCIL. Both of these facilities were repaid in full on 4 August 1989.
   216 HKBA and HSBC also participated in the BBHL syndicate led by NAB. As at 15 December 1989, HKBA’s exposure under this facility was $27.5 million and HSBC’s exposure was $160.5 million.
   4.2.4. Australian banks: NAB
   4.2.4.1. Facility arrangements
   217 NAB is a trading bank incorporated in Australia. From May 1981, NAB (which was known prior to October 1984 as the National Commercial Banking Corporation Limited) provided banking facilities to TBGL and its subsidiaries and associates, including BRL, HHL and TBGIL. NAB also made banking facilities available to members of the Bond group.
   218 In April 1984 NAB and TBGL entered into a commercial bill facility of $25 million, repayable on 31 December 1986. The terms of the agreement contemplated the parties later entering a negative pledge arrangement. By letter dated 29 November 1985, NAB offered to increase its facility to $45 million. The TBGL directors resolved to accept this offer on 11 December 1985. Under the facility agreement, TBGL warranted that it would give notice to NAB if and when any event of default occurred. NAB was entitled to terminate the facility upon occurrence of a default event. Such a termination would render all outstanding amounts due and payable.
   219 In January 1986, the 1985 $45 million facility agreement was renewed. This facility was to be available until 31 January 1990 and subject to annual review. The facility was secured by a loan agreement and NP agreement dated 14 July 1983.
   220 In light of TBGL’s stated intention to use BGF as the borrowing vehicle for all Bell group companies, NAB agreed in October 1986 that BGF would be permitted to draw bills from the bill facility.
   221 NAB entered into an agreement with TBGL on 16 June 1986 to increase the loan facility to $145 million. The agreement provided for a new advance of approximately $90 million. At the same time, a portion of TBGL facilities worth $10 million, which had previously been made available to BGUK (then called TVW (UK) Ltd), was reallocated back to TBGL. This agreement was due to expire on 31 July 1990 (subject to annual reviews), and was also secured by the loan agreement and NP agreement executed on 14 July 1983.
   222 On 24 April 1987 NAB offered to renew the $145 million facility but with the expiry date reverting to 31 January 1990. The renewed facility was to be available to TBGL, BGF and BGUK. TBGL accepted the offer on 12 October 1987.
   223 TBGL’s facilities were rearranged in October 1987. The facility limit of $145 million was again increased to $156 million. All other terms continued from the earlier facility. On 19 May 1988 NAB informed TBGL that it was not likely to renew its commitment beyond six months; however, the facility was renewed on a further three occasions, up until 31 December 1988.
   4.2.4.2. Negative pledge agreement and guarantee
   224 NAB entered into an NP agreement with TBGL on 14 July 1983. Between 14 July 1983 and 29 June 1987, NAB also entered into eight supplemental agreements with various TBGL entities.
   225 The June 1986 renewal and extension of the bill facilities contemplated the establishment of a guarantee. This occurred in April 1987, with the replacement of the 1983 NP agreement. The same NP ratios were to apply. TBGL acknowledged that the $90 million provided to acquire preference shares issued by JNTH would become due and payable upon their conversion into ordinary shares. It was envisaged that the facility would be renegotiated at the time of the conversion.
   226 In December 1985 and April 1987, TBGL requested that NAB treat liabilities arising from the 1985 and first 1987 BGNV issue of convertible subordinated bonds as equity for the purposes of calculation of NP ratio covenants. NAB agreed to these requests. NAB entered into the NP guarantee with TBGL on 30 July 1987, releasing the Bell group companies from the NP agreement.
   4.2.4.3. The NAB facility in 1988 and 1989
   227 By letter dated 4 August 1988 TBGL informed NAB of its plans for asset disposal leading to a proposed merger with BML. To facilitate these changes, TBGL agreed to give additional covenants to NAB in order to protect the integrity of the banking structure. TBGL unilaterally covenanted that it would not lend money or grant financial accommodation to any person in an aggregate exceeding $25 million and it would not grant any security for repayment of short‑term debt. TBGL also promised to use its best endeavours to procure listing for quotation of TBGL’s issued capital on the ASX official list.
   228 TBGL wrote to NAB on 9 December 1988 proposing to repay $106 million on 20 December 1988 and seeking an extension until 31 March 1989 for repayment of the balance. NAB agreed to extend the facility until 31 March 1989, but at a reduced level of $44 million.
   229 On 3 March 1989 BCHL requested an extension of TBGL’s bill facility for a further six months. By letter dated 28 March 1989 NAB sought clearance of the bill facility by 31 March 1989. The following day, TBGL requested a rollover of the bills until 5 July 1989. NAB allowed the maturing bills to be taken up into the overdraft on 31 March 1989.
   230 NAB wrote to BCHL on 9 May 1989, offering to continue TBGL’s $44 million facility on condition that it was provided with a lien and charge over BRL shares and a payment of $8 million. TBGL made a $22 million repayment on 19 May 1989 from the proceeds of the sale of Wigmores, reducing the outstanding balance to $22 million.
   231 On 17 July 1989 NAB informed TBGL that repayment was overdue and requested immediate repayment of the outstanding principal and interest. By letter to TBGL dated 28 August 1989 NAB confirmed that the facility remained on demand, as at 26 January 1990, BGF owed $24 million to NAB.
   4.2.4.4. Other lending to RHaC and Bond
   232 By October 1987 NAB had lent a total sum of over $325 million to companies in the Bell group, the BRL group, the JNTH group and the Heytesbury group. In securing business from those groups, NAB believed it had succeeded in becoming the ‘second bank’ to companies associated with RHaC, after Westpac.
   233 As well as TBGL, NAB maintained lending facilities to other companies within the Bond group. As at August 1989 NAB had outstanding facilities with BML totalling $280 million, Dallhold totalling $30 million and BBHL in the amount of $216 million.
   234 In December 1988 NAB’s share of a $420 million syndicated facility with BML amounted to $316 million. The BML facility was due to expire on 31 January 1990. During May and June 1989 NAB carried temporary excesses totalling $10 million, which allowed BML to honour its obligations without undue pressure from creditors. These excesses were both cleared by 29 June 1989. As at 30 August 1989, the BML facility was outstanding in the amount of $280 million.
   235 In September 1989 NAB wrote to BML advising that it had decided against extending the facility beyond the termination date of 31 January 1990. BML continued to meet its obligations when they fell due, but no formal arrangements were finalised for repayment or refinancing of the syndicated debt. A credit application and review dated 7 February 1990 noted that BML’s exposure at that time totalled $16.5 million.
   236 On 15 December 1988 NAB had provided a facility to Dallhold for $30 million, which was to expire on 31 January 1989. On 30 August 1989 the facility remained outstanding in the sum of $30 million. A notice of demand for payment of all moneys owing was served on 29 November 1989. In response, Dallhold proposed partial repayment from the proceeds of sale of assets. NAB declined the proposal and advised that it was seeking legal advice to proceed with the demand.
   237 NAB was the leader of an $880 million syndicated facility entered into with BBHL on 21 November 1986. The facility was governed by a document called a Loan and Credit Agreement. A term of the agreement required that all funds raised under it were to be dispensed from BBHL as borrower to the other BCHL subsidiaries. While NAB had not entered a facility with BCHL, a specific undertaking had been given by BCHL to ensure that the Bond group always had sufficient liquidity.
   4.2.4.5. Appointment of receivers to BBHL
   238 NAB had extensive exposure to the Bond group, including BBHL. As at 15 December 1988 its total exposure to the Bond group amounted to $1.2 billion, and its primary exposure was in the amount of $792 million. NAB’s exposure to BBHL was approximately $604 million; this formed part of BBHL’s total debt of $1.6 billion at that time.
   239 Around December 1989, BBHL had liabilities of approximately $880 million to the syndicate of lenders led by NAB pursuant to a loan agreement between BBHL, some of its operating subsidiaries and the syndicate. By December 1989 the syndicate had lost confidence in BBHL and its operating subsidiaries and declared an event of default: It sought repayment of the facility of $800 million.
   240 On 29 December 1989 Beach J of the Supreme Court of Victoria appointed a receiver over the assets of BBHL pursuant to NAB’s ex parte application. The appointment removed BBHL’s assets from the control of BCHL directors and officers, particularly Alan Bond, Beckwith, Oates and Mitchell. A detailed outline of these events is found in the case report of later proceedings concerning the receivership: National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386.
   241 The receivership and the likelihood of associated cross‑defaults from BBHL into other BCHL facilities threatened the overall position of BCHL. On the appointment of the receivers, the ASX suspended trading of shares in BBHL and BRL. BCHL informed the ASX on 15 January 1990 that the freezing of assets had prevented interest payments being made to US holders of BBHL debentures.
   242 The US Trust Company of New York was the trustee for holders of US$510 million in BBHL subordinated debentures. While the receivership was under challenge in the Supreme Court of Victoria, the US Trust Company delivered a notice of default in respect of a payment of US$32.2 million due 1 December 1989 for interest on the BBHL debentures, making the principal and interest immediately due and payable. The non‑payment of interest followed a stop‑payment order issued by NAB on 23 December 1989.
   243 On 12 January 1990, BBHL commenced proceedings in this Court to challenge the validity of the notice of default. The US Trust Company issued a further statutory notice of demand on BBHL for approximately US$672 million on 15 January 1990; the demand required payment in full within 21 days, failing which winding up proceedings would be commenced. This Court granted an injunction against the US Trust Company on 23 January 1990, restraining them from pursuing winding up proceedings until further notice.
   244 While BCHL sought to restrain the US Trust Company from commencing winding up proceedings, BBHL challenged the receivership in the Supreme Court of Victoria. On 2 January 1990 an action was commenced challenging the appointment made at the ex parte hearing on 29 December 1989. The challenge was dismissed by the primary judge on 9 February 1990. An appeal against the primary judge’s orders was heard by the Full Court on 21 February 1990. The Full Court handed down its decision on 28 February 1990 and ordered that the receivers be removed immediately and that control of BBHL be returned to BCHL. On 28 March 1990 the High Court of Australia rejected NAB’s application for leave to appeal the Full Court’s decision.
   4.2.5. Australian banks: SocGen
   4.2.5.1. Facility arrangements
   245 On 13 January 1984 SocGen offered TBGL a multi‑currency revolving credit/standby letter of credit facility to $10 million, replacing a similar facility entered into on 29 May 1982. The new facility was available for use by either TBGL or TVW (UK) Ltd, which later became BGUK. The 13 January 1984 facility was replaced by a new facility, offered on 30 January 1985, for a $13 million combined multi-currency revolving credit/standby letter of credit facility repayable on 31 July 1988. By 20 March 1985 TBGL had advised SocGen of its acceptance of the offer (I will call this the 1985 facility). By about August 1985, the amount of the 1985 facility had been increased to $30 million. The repayment date of the 1985 facility was extended several times prior to 1989 and the terms were varied.
   246 SocGen was also the lead manager of a $50 million syndicated loan facility, established in April 1986, of which SocGen’s participation was $10 million. In January 1987 the syndicated facility was increased to $110 million, with SocGen’s participation increased to $20 million. The syndicated facility was repaid on 23 December 1988.
   4.2.5.2. Negative pledge agreement and guarantee
   247 SocGen, TBGL and several indemnifying subsidiaries entered into an NP agreement on 22 July 1983. On 30 July 1987 these parties agreed to release each other from their obligations under the NP agreement. This was replaced by an NP guarantee, which was entered into on 30 July 1987. This became operative on 30 September 1987, at the same time the NP agreement was released. Both of these agreements were in the same form as those with the other banks. On 24 February 1986 SocGen received similar advice to that given to the other banks about the incorporation of BGF. In October 1986, the SocGen facility was transferred from TBGL to BGF.
   4.2.5.3. The SocGen facility in 1988 and 1989
   248 On 4 August 1988, following the BCHL takeover of the Bell group, TBGL informed SocGen, along with the other banks, that it intended to offer additional covenants to maintain the integrity of the banking structure. These undertakings took the same form as the covenants with CBA.
   249 A new facility negotiated on 7 September 1988 replaced the 1985 facility. The new facility (the 1988 facility) was to be repaid on 31 January 1989. SocGen agreed to extend the repayment date of the 1988 facility on several occasions during 1988 and 1989 subject to certain conditions.
   250 On 7 July 1989 SocGen informed TBGL that it required payment of $15 million so as to return it to pari passu status in terms of repayment received by other lenders. On 13 July 1989 SocGen agreed to extend the repayment date of the 1988 facility until 31 July 1989, provided it received an immediate repayment of $15 million. If the $15 million was not received by 14 July 1989, the entire $30 million would be at call from that date. BGF did not pay $15 million to SocGen on 14 July 1989 and the facility was left on an on call basis until the refinancing occurred in 1990. As at 26 January 1990, BGF owed a total of $30 million to SocGen; it is accepted that the amount was payable on demand.
   4.2.5.4. Other lending to RHaC and Bond
   251 In the period before the October 1987 stock market crash, SocGen had expressed interest in securing a share of the banking business of companies in the Bell group and the BRL group. By mid‑1986, SocGen and SocGen London had provided facilities totalling approximately FF872,875 to companies associated with RHaC of which the sum of over FF764,875 had been provided by SocGen. SocGen also committed to provide a further $1 billion as part of a facility advanced by several banks for the purposes of BRL’s attempt to take over BHP.
   252 SocGen had exposure to the wider BCHL Group through its involvement in a syndicated facility to BBHL led by NAB for $880 million. SocGen became a member of the facility on 21 May 1987. SocGen’s total participation was in the amount of $27.5m which equated to about 3 per cent of the total facility.
   4.2.6. Australian banks: SCBAL
   4.2.6.1. Facility arrangements
   253 On 20 December 1982, TVW Enterprises Ltd and TVW (UK) Ltd (which later became BGUK) entered into a $5 million multi‑currency facility with Standard Chartered Australia Ltd (SCAL) and its UK parent company, Standard Chartered Bank plc. The facility was for a term that ended on 20 December 1984. On 13 June 1985 the amount was increased to $15 million and it was extended to 15 July 1987. On 13 May 1986 SCAL entered into a novation arrangement transferring the facility to SCBAL.
   254 SCBAL commenced operations as a bank in Australia on 4 April 1986. On 13 May 1986 SCAL and SCBAL advised TBGL that, as a consequence, SCAL had ‘assigned to [SCBAL] the facility and the benefit of the securities (if any) and all other documentation associated with the facility’. In other words, there was a novation of the facility.
   255 In 1986 SCAL received similar advice to that given to the other banks about the incorporation of BGF. In December 1986 the bank, by then SCBAL, offered a new facility to BGF that replaced the existing facilities with Bell group companies. On 31 December 1986 the accommodation was changed to a bill acceptance and discount facility between SCBAL and BGF. On 19 March 1987 SCBAL and BGF agreed on a $15 million facility to be repaid on 15 July 1987 but, subject to satisfactory annual reviews, the facility would be extended for a minimum of three years. The security was to be an NP agreement.
   256 On 30 June 1987 this arrangement was replaced by a new commercial bill discount facility of $15 million. The facility was to be available until 15 July 1990, subject to satisfactory annual reviews and conditional upon entry into a NP agreement.
   4.2.6.2. Negative pledge agreement and guarantee
   257 An NP agreement between SCAL and TBGL had existed since about July 1983. Around 26 March 1987, this was replaced by a fresh NP agreement between SCBAL, TBGL and certain indemnifying subsidiaries. Six supplemental agreements were made to the NP agreement. On 30 July 1987 SCBAL and TBGL entered into an NP guarantee. The NP guarantee became operative on 30 September 1987, at the same time the NP agreement was released. The SCBAL NP agreement and the SCBAL NP guarantee were in the same form as those entered into with the other banks.
   4.2.6.3. The SCBAL facility in 1988 and 1989
   258 On 4 August 1988, following the BCHL takeover of the Bell group, TBGL informed SCBAL, along with the other banks, that it intended to offer additional covenants to maintain the integrity of the banking structure. These undertakings took the same form as the covenants with CBA.
   259 In November 1988 SCBAL and BGF agreed that all of the $15 million advanced pursuant to the 1987 facility would be repaid on 31 December 1988. Following that agreement, SCBAL agreed to extensions of the payment date as follows:
   • on 28 December 1988 to 31 January 1989
   • on 27 January 1989 to 28 February 1989
   • on 28 February 1989 to 7 April 1989
   • on 7 April 1989 to 15 May 1989.
   260 On 11 May 1989, in response to another extension request, SCBAL informed BCHL that it was not inclined to grant further extensions to BGF to repay the $15 million. On 18 May 1989 SCBAL confirmed the repayment date was extended to ‘such date as SCBAL in its complete and unfettered discretion thinks fit’, with all moneys outstanding being repayable on demand by SCBAL.
   261 On 25 May 1989 SCBAL sent BGF a letter requesting immediate payment of $7.5 million of the facility. SCBAL agreed on 2 June 1989 to extend the repayment date to 30 June 1989 on the basis that BGF repaid $5 million by 15 June 1989. The $5 million was not paid, and on 26 June 1989 SCBAL wrote to BGF offering another variation of the facility on the basis that the facility remain on demand; that the $5 million was to be paid by 30 June 1989; and that SCBAL receive an assignment of $10 million from the proceeds of the sale of the Wigmores machinery dealership business. SCBAL offered BGF further extensions subject to similar, though varied, conditions on 4 July, 17 July and 21 July 1989.
   262 Between late August 1989 and 4 December 1989, SCBAL participated in negotiations to refinance the BGF facility. On 4 December 1989 SCBAL issued both BGF and TBGL (as guarantor) with a letter of demand for repayment. BGF and TBGL were also served with notices pursuant to s 364(2) of the Companies (Western Australia) Code. On 19 December 1989 the demands were withdrawn by SCBAL.
   263 No further changes to the facility occurred until the refinancing of 26 January 1990. As at 26 January 1990 the amount of $15 million was owed by BGF to SCBAL: It was payable on demand.
   4.2.6.4. Other lending to RHaC and Bond
   264 By mid-1986 SCBAL and its parent, Standard Chartered Bank, were substantial lenders to the BRL group. Standard Chartered Bank and SCBAL were participants, in the sum of $2.08 billion and $100 million respectively, in the credit facility provided by a syndicate of banks led by Westpac to finance BRL’s attempts to take over BHP.
   265 It should also be noted that companies associated with RHaC held a substantial shareholding (as much as 15 per cent) in Standard Chartered Bank.
   266 In February 1989, SCB had an exposure of about £309 million to the BCHL group. I do not think there was any significant exposure of SCBAL direct to the BCHL group.
   4.2.7. Australian banks: Westpac
   4.2.7.1. Facility arrangements
   267 Westpac (then Bank of New South Wales) commenced lending to TBGL in 1981. The facilities were subject to a NP agreement executed in June 1982 and renegotiated in 1983. From this time, Westpac provided numerous facilities to Bell group companies, including overdrafts, money market lines and multi‑currency lines. In July 1984 Westpac provided TBGL with a bill acceptance line facility of $22 million; in December 1985, a second bill facility of $10.5 million was made available to TBGL. Both these facilities were subject to the NP agreement. On 13 October 1986, both facilities were transferred from TBGL to BGF. These facilities were repaid and retired prior to 26 January 1990.
   268 On 23 January 1987 Westpac offered WAN $38.1 million of additional facilities; this increased Westpac’s lending to WAN to $60 million. In January 1987 Westpac provided an additional $100 million facility that was repaid and retired prior to 26 January 1989. On 24 August 1987 Westpac confirmed approval of a $200 million bill acceptance line facility. The facility was provided at the discretion of the bank and unless otherwise specifically stated was repayable on demand with clearance by no later than 31 December 1987. The term of the facility was extended on several occasions and reduced to a $100 million debt by 27 January 1988.
   4.2.7.2. Negative pledge agreement and guarantee
   269 On 17 June 1982 TBGL and Westpac executed an NP agreement. This was renegotiated in 1983, and on 28 June 1983 Westpac entered into a new NP agreement with TBGL and several indemnifying subsidiaries. From 28 June 1983, four supplemental agreements were entered into by Westpac with various Bell group companies to add them as indemnifying subsidiaries under the NP agreement.
   270 TBGL and the indemnifying subsidiaries were released from their obligations under the NP agreement pursuant to an agreement made by letter dated 30 July 1987 and amended by letter dated 30 September 1987. The NP agreement was replaced by an NP guarantee on 30 July 1987. The NP guarantee became operative by 2 October 1987 and the NP agreement was released at the same time. Like the NP agreement, the NP guarantee was in the same form as those with the other banks.
   271 On 24 February 1986 TBGL had notified Westpac of BGF’s incorporation and of its proposed use. On 13 October 1986 both TBGL’s bill facilities were transferred from TBGL to BGF. The facilities provided subsequent to October 1986 were such that the borrower could be TBGL or a subsidiary (as defined in the letters of offer from the bank).
   272 After the BCHL takeover of the Bell group, TBGL informed Westpac, as it did the other banks, that it intended to offer additional covenants to maintain the integrity of the banking structure. These undertakings, made on 4 August 1988 and confirmed by letter dated 16 September 1988, took the same form as the covenants with CBA.
   4.2.7.3. The Westpac facility in 1988 and 1989
   273 By mid‑1988 the Westpac facility had been reduced to $100 million. It was still being utilised by BGF. On 28 June 1988 Westpac agreed to extend the date for clearance as follows:
   (a) $35 million to 30 June 1988;
   (b) $20 million to 30 September 1988 (but on call at the bank’s option), to be paid from asset sale proceeds or by 30 September 1988; and
   (c) $45 million to 30 September 1988 (but on call at the bank’s option), to be paid in the interim pro rata with other lenders in the event of asset sale settlements taking place.
   274 The $35 million was repaid by 30 June 1988. As at 22 September 1988, the sums of $20 million and $45 million remained on demand. On 22 September 1988 Westpac agreed to continue to provide the $65 million of bills on demand. The agreement provided that bills could not be drawn on the facility with a maturity date beyond 31 December 1988.
   275 By 22 December 1988 a further $15 million had been repaid, with the bill facility reduced to $50 million. Westpac agreed to extend the date for repayment of the $50 million to 31 March 1989 on the basis that the facility remained on demand. On 30 March 1989 Westpac again agreed to extend the repayment date, on the basis that $25 million would be repaid by the earlier of 31 May 1989 or the receipt of asset sales proceeds (to be disbursed on a pari passu basis with other banks). The remaining $25 million would be repaid by 30 September 1989. It was envisaged that Westpac would be given an equitable charge over BRL shares.
   276 On 4 April 1989 another $16 million was repaid to Westpac from the proceeds of the sale of the group’s Australian television interests. BGF did not pay the remaining $9 million due on 31 May 1989. Westpac wrote to BGF on 9 June 1989 and stated that the outstanding bills had been debited to a new debit account and that the sum was immediately due and payable. On 9 June 1989, Westpac agreed to extend the repayment of the outstanding $9 million at a rate of $2.25 million per week commencing 9 June 1989. By 30 June 1989 the $9 million had been paid.
   277 On 14 September 1989, Westpac informed TBGL that it would continue to provide the $25 million facility for 12 months and continue to provide a $5 million overdraft to WAN for a five‑year period so long as security was given by BPG, and TBGL agreed to guarantee the debts and interest. On 19 September 1989 Westpac informed TBGL that the maturity date for the $25 million facility could be extended to 30 April 1991.
   278 As at 26 January 1990, BGF owed $25 million to Westpac and WAN was indebted to Westpac in an amount of $1.97 million in respect of the $5 million overdraft. It is common ground that both amounts were payable on demand.
   4.2.7.4. Other lending to RHaC and Bond
   279 Westpac had conducted business with the wider RHaC group (including HHL, Heytesbury Securities and BRL) since at least 1974, when RHaC gained control of TBGL. Westpac was a co‑manager of the third BGNV bond issue. From 1985 to the October 1987, Westpac regarded itself as the main banker to the RHaC group. The connection was seen by Westpac as prestigious for the bank’s Western Australian division and it was the largest single contributor to the profit of that division.
   280 Westpac granted numerous facilities to companies associated with RHaC in the period before the October 1987 stock market crash. The bank’s exposure to the group increased from $189.9 million in November 1985 to $1.7 billion in May 1987. At the time of the crash, Westpac had exposures totalling $1.4 billion, made up as follows:
   • the Bell group $387.5 million
   • the Heytesbury Group $ 43.0 million
   • the BRL group $877.7 million
   • the JNTH group $113.2 million.
   281 In May 1986 Westpac agreed to participate in a facility made available to support BRL’s attempt to acquire a controlling interest in BHP. The extent of the participation was initially $500 million by way of a non‑revolving credit facility. In November 1986 Westpac agreed to increase its participation to $1 billion.
   282 In credit applications of 6 December 1989 and 9 January 1990, Westpac recorded total global exposures to the wider BCHL group (excluding the Bell group) of a little over $100 million. In addition Westpac had syndicate participations of $25 million to BCHL associates called Austotel Pty Ltd and Junenet Pty Ltd.
   4.2.8. The Lloyds syndicate banks
   4.2.8.1. The proposal
   283 Lloyds Merchant Bank Ltd (LMBL) was a subsidiary of Lloyds Bank. TBGL approached LMBL in January 1986 about arranging a syndicated facility. By letters dated 21 February 1986 and 25 February 1986, LMBL offered to underwrite a £60 million syndicated loan to TBGL; on 28 February 1986 the offer was accepted. On 5 March 1986 LMBL agreed that BGUK or BGF could be the borrower provided there was a TBGL guarantee. In the period from 28 February 1986 to about 3 April 1986 a document was prepared in the nature of a prospectus that set out details of the corporate group, the terms and conditions of the proposed facility and details of the proposed negative pledge arrangements. This document, called the Information Memorandum, was finalised on or around 1 April 1986.
   284 LMBL intended to underwrite the facility of £60 million but to syndicate it in its entirety and not to have exposure for any part of the loan commitment. Officers of LMBL envisaged that Lloyds Bank might take up a commitment of £10 million. The Information Memorandum was distributed to a large number of banks.
   4.2.8.2. The facility agreement and the initial participants
   285 By May 1986 eight banks had agreed to participate. On 19 May 1986 those banks, TBGL and the indemnifying subsidiaries executed a facility agreement (the 1986 Loan Agreement) and the Lloyds NP agreement. On the same day, the banks and TBGL executed a side letter agreement. In addition, LMBL (as agent), TBGL and some additional indemnifying subsidiaries signed four supplemental agreements.
   286 The 1986 Loan Agreement provided for a term loan facility repayable on 19 May 1991. Clause 3 said: ‘The proceeds of the loans shall be used initially for the repayment of existing borrowings and thereafter for general corporate purposes’. BGF and TVW (UK) Ltd (later renamed BGUK) were shown as ‘the Borrowers’. The term ‘Borrower’ was defined as: ‘either [BGF] or [BGUK]’ and the term ‘Borrowers’ as: ‘[BGF] and [BGUK]’. LMBL was appointed as agent for the banks. The agreement envisaged that a participating bank could, with the consent of the borrower, transfer its rights to another bank or financial institution. The agreement had as an annexure a form of substitution certificate to be used by banks wishing to do so.
   287 The side letter related to the exercise by the banks of rights under the 1986 Loan Agreement and the NP agreement. The NP agreement was similar in form to those entered into with the Australian banks. The four supplemental agreements were entered into to add to the list of indemnifying subsidiaries. Three further supplemental agreements were entered into between October 1986 and July 1987. The commitment of each of the eight participating banks was as follows:
   • LMBL: £27.5 million.
   • Banco Espírito, BfG, BoS, Creditanstalt, Crédit Lyonnais and Dresdner: each £5 million.
   • Indosuez: £2.5 million.
   288 BGUK drew down all of the £60 million available under the facility in four tranches. On 22 May 1986 BGUK gave notice of a proposed borrowing of £37.5 million, with instructions that the money be delivered on 29 May 1986 to an account in the name of ACC Investments ‘a/c [BGUK]’. The other three draw downs were processed in the same manner on 2 June 1986, 11 June 1986 and 19 June 1986 for £7.5 million, £10 million and £5 million respectively.
   4.2.8.3. Substitution of new banks
   289 On 21 May 1986 Lloyds Bank was substituted as a participant in the facility for all of the £27.5 million of participation that LMBL had agreed to take. The substitution was effected by a substitution certificate in the form provided for in the 1986 Loan Agreement.
   290 LMBL and Lloyds Bank made an assignment agreement dated 25 February 1987, which included agreements in respect of LMBL’s rights and benefits arising from the Lloyds NP agreement and an agreement that Lloyds Bank would be bound by the terms of the 1986 Loan Agreement, the side letter agreement and the Lloyds NP agreement.
   291 Lloyds Bank’s participation in the syndicated facility was reduced over time. On 11 June 1986 Kredietbank was substituted for £5 million of Lloyds Bank’s participation in the syndicated facility. On 26 August 1986 Gentra was substituted in the amount of £3 million. Gulf Bank was also substituted in the amount of £3 million on 11 September 1986. On 26 September 1986 DG Bank was substituted for £3 million of Lloyds Bank’s participation. The substitution of these four banks was effected by substitution certificates. The evidence does not disclose whether assignment agreements in respect of rights and benefits arising from the NP agreement were executed in respect of these four banks. But there is nothing to suggest their participation was on any different terms to those applying to other Lloyds syndicate banks.
   292 On or about 25 February 1987 Crédit Agricole was substituted for £5 million of Lloyds Bank’s participation by a substitution certificate dated 26 February 1987. Lloyds Bank and Crédit Agricole entered an assignment agreement dated 25 February 1987, which included agreements in respect of Lloyds Bank’s rights and benefits arising from the NP agreement and an agreement that Crédit Agricole would be bound by the terms of the 1986 Loan Agreement, the side letter agreement and the NP agreement.
   293 On 28 July 1988 Skopbank was substituted for £3.5 million of Lloyds Bank’s participation. Again, the substitution was effected by a substitution certificate. Following the substitution of Skopbank, Lloyds Bank remained as a participant in the syndicated facility in an amount of £5 million.
   4.2.8.4. The negative pledge guarantee: LSA No 1 & RLFA No 1
   294 On 27 August 1987 LMBL (as agent) the Lloyds syndicate banks (other than Skopbank), BGF, BGUK and TBGL executed a document called Supplemental Agreement No 1 (LSA No 1), which had as an appendix a document called Form of Restated Loan Agreement (RLFA No 1). LSA No 1 provided that the 1986 Loan Agreement would be amended and restated as set out in RLFA No 1.
   295 LSA No 1 included a number of conditions precedent that were satisfied by about 10 September 1987. For example, in accordance with cl 3 the agreement would become operative only if all amounts owing pursuant to the 1986 Loan Agreement were repaid by 30 September 1987 and only upon a new loan or loans being drawn down. To satisfy those conditions, on 28 September 1987 BGUK repaid £60 million to LMBL as agent and borrowed £60 million from LMBL as agent.
   4.2.8.5. Replacement of LMBL as agent by Lloyds Bank
   296 On 17 November 1988 LMBL informed the Lloyds syndicate banks that it was proposed that Lloyds Bank replace LMBL as the agent. The Lloyds syndicate banks were asked to execute a document signifying agreement. On 27 January 1989 Lloyds Bank informed the syndicate by telex that it was now the agent under LSA No 1. On 1 February 1989 Lloyds Bank and LMBL executed an agreement by which Lloyds Bank replaced LMBL as agent.
   4.2.8.6. The facility after the BCHL takeover
   297 On 4 August 1988, TBGL informed LMBL it intended to offer the additional covenants that I have previously mentioned: see Sect 4.2.2.6. In early December 1988 Lloyds Bank informed TBGL that if £20 million was repaid on 30 December 1988 it would constitute an irrevocable pre‑payment of the facility. On 9 December 1988 TBGL informed Lloyds Bank that it would rollover the full £60 million to 31 March 1989 at which time it expected to be in a position to repay. LMBL informed the Lloyds syndicate banks of that expectation by telex on 16 December 1988. But by 16 March 1989 the Lloyds syndicate banks knew that the loan would not be repaid by 31 March 1989 as expected.
   298 As at 26 January 1990 BGUK had borrowed £60 million pursuant to the terms in RLFA No 1. The amount was repayable on 19 May 1991, subject to earlier repayment on demand should an event of default occur.
   4.2.8.7. Lending to the wider RHaC group
   299 Some of the member banks of the Lloyds syndicate had a banking relationship with the wider RHaC group before the commencement of, or during, their participation in the syndicate.
   300 By mid‑1987, Lloyds Bank had provided a £10 million overdraft facility to TBGIL and was proposing to lend a further £10 million to that company.
   301 Creditanstalt’s London branch recommended that the bank participate in the Lloyds syndicate facility. In so doing, it noted that the branch had, as a result of intensive marketing to TBGL, established a strong relationship with that company and had already lent approximately £8 million to companies in the Bell group. By late 1987, Creditanstalt had provided the following financial accommodation to companies in the Bell group and the BRL group:
   (a) £5 million participation in the Lloyds facility;
   (b) £5 million in a syndicated loan to TBGIL maturing in February 1989;
   (c) £5 million unsecured direct facility to TBGIL maturing in October 1990;
   (d) US$10 million participation in an unsecured syndicated loan to BRL maturing in February 1989;
   (e) US$10 million participation in an unsecured syndicated loan to BRL maturing in May 1987; and
   (f) US$25 million guarantee for a facility provided by another bank to BRF.
   302 Similarly, between May 1986 and about 15 June 1987, Crédit Lyonnais’ head office approved the provision by the bank’s London branch of the following further facilities to various companies in the Bell group and BRL group:
   (a) £5 million participation in a £40 million three‑year evergreen syndicated facility provided to TBGIL;
   (b) US$5 million participation in a US$220 million Euronote issuance facility provided to BRL; and
   (c) US$10 million participation in a US$100 million four‑year facility provided to BGF.
   303 Further, by May 1987 Crédit Lyonnais’ Singapore branch had provided facilities totalling approximately $13.06 million to companies associated with RHaC, and Crédit Lyonnais Australia Limited had applied for authority to provide a further $50 million in facilities to BRF. In June 1987 Crédit Lyonnais’ head office approved a total lending limit to companies in the Bell group and the BRL group in the sum of FF500 million. Crédit Lyonnais Australia Limited became the ‘pilot’ with regard to banking services provided by Crédit Lyonnais and Crédit Lyonnais Australia Limited to the BRL and Bell groups.
   304 Before the October 1987 stock market crash, in addition to its participation in the Lloyds facility, Dresdner:
   (a) acted as a co-manager of and underwriter to each of the three BGNV bond issues;
   (b) granted a £2 million facility to TBGIL in January 1986;
   (c) participated as a sub-underwriter to a BRL rights issue;
   (d) participated as a co-manager of and underwriter to a US$200 million convertible subordinated bond issue made by Bell Resources Financial Services NV;
   (e) increased the limit of its facility to TBGIL to £10 million; and
   (f) made a short‑term loan of US$350 million to Weeks Petroleum Ltd Bermuda, a subsidiary of BRL.
   305 As at May 1986, Indosuez and its subsidiaries, including Indosuez Australia Limited (ISAL) were, already lending to companies in the Bell group and the BRL group. ISAL had agreed to commit $250 million as a standby facility for the purposes of BRL’s attempt to take over BHP.
   4.3. The convertible bond issues
   4.3.1. Fundraising in the Eurobond market
   306 In the 1970s and 1980s, the Bell group was a rapidly expanding industrial and investment conglomerate. It was constantly in need of funds to finance its acquisitions and growth. Until the early 1980s, most of the requisite funding came from conventional banking sources. The 20 defendant banks were by no means the only ones with which the Bell group companies had banking relationships.
   307 In 1984 and 1985, the Bell group was approached by various European financial institutions with a proposal that it raise funds by issuing convertible bonds into the Eurobond market. This is a largely self‑regulated market that emerged in the early 1970s for the handling of transactions involving ‘innovative’ financing structures where the funds were provided, in the main, by private rather than institutional investors. Until the mid‑1980s, the Eurobond market was not commonly used by Australian companies. It seems that prior to the entry of the Bell group into the market, one of the few (and certainly the largest) fundraising exercises by an Australian company was a US$160 million issue by Elders IXL Ltd in 1984.
   4.3.2. The five bond issues by the Bell group
   308 The Bell group raised funds by five convertible subordinated bond issues in 1985 and 1987. In three of those issues, the issuer was BGNV, each of TBGL and BGF issued bonds in one issue.
   4.3.2.1. The three BGNV bond issues
   309 The first BGNV bond issue occurred in December 1985. Bearer bonds with a value of $75 million were issued by BGNV to the public and listed on the Luxembourg stock exchange. The obligations of BGNV were guaranteed by TBGL. The bonds were for a term of 10 years with a final redemption date of 10 December 1995. The bonds carried interest at 11 per cent per annum payable on 10 December each year. The issue was the subject of a trust deed dated 20 December 1985 with LDTC as the trustee. The bonds could be converted to ordinary shares in TBGL at any time between 20 February 1986 and 1 December 1995. In fact, some of these bonds were converted leaving an amount outstanding as at 30 June 1989 (and thereafter) of $60.4 million. The proceeds from the bond issue were on‑loaned by BGNV to TBGL.
   310 The second BGNV bond issue occurred in May 1987 and involved bonds with a face value of $175 million. It was for subordinated convertible bearer bonds issued on almost identical terms to the first BGNV issue. Once again, TBGL was the guarantor and LDTC was the trustee. The trust deed is dated 7 May 1987 and the final redemption date was 7 May 1997. Interest at 10 per cent per annum was payable on 7 May each year. None of these bonds were converted, meaning that the entire $175 million remained owing in January 1990. The proceeds from the bond issue were on‑loaned by BGNV to BGF.
   311 In the third BGNV bond issue, BGNV raised £75 million by the issue of subordinated convertible bearer bonds subject to a trust deed dated 14 July 1987. The final redemption date was 14 July 1997 and the interest rate was 5 per cent per annum. Interest was payable on 14 July each year. Again, the terms of the issue were almost identical to those for the first BGNV bond issue, except that the bondholders had a put option by which they could require BGNV to redeem the bonds. I will describe the put option in a little more detail shortly. None of these bonds were converted or redeemed and the face value of £75 million remained owing during the relevant period. TBGL provided a guarantee and LDTC was the trustee. As with the earlier issues, the proceeds from the third BGNV bond issue were on‑loaned by BGNV to BGF.
   312 I will call the three bond issues made by BGNV ‘the first BGNV bond issue’, ‘the second BGNV bond issue’ and ‘the third BGNV bond issue’ respectively. Collectively, they will be called ‘the three BGNV bond issues’ or simply ‘the BGNV bond issues’. The on‑lending by BGNV of the proceeds from the three issues will be referred to, individually, as ‘the first BGNV on‑loan’, ‘the second BGNV on‑loan’ and ‘the third BGNV on‑loan’ respectively and, collectively, as ‘the BGNV on‑loans’ or simply ‘the on‑loans’. The TBGL bond issue and the BGF bond issue are sometimes together referred to as ‘the domestic bond issues’. When I refer to the five bond issues collectively I will call them ‘the five convertible bond issues’. The terms of the first BGNV bond issue, the TBGL bond issue and the BGF bond issue were each the subject of a supplemental deed, but the amendments brought about by those instruments are not relevant for present purposes.
   4.3.2.2. The bond issues by TBGL and BGF
   313 At the same time as the first BGNV bond issue, TBGL issued convertible subordinated bonds to the value of $75 million to Heytesbury Securities. I will call this ‘the TBGL bond issue’. Initially, the arrangement was documented by a simple agreement in which TBGL and Heytesbury Securities agreed that the bonds were to be issued on terms ‘identical in all respects to the convertible notes [in the first BGNV bond issue]’ save that (for income tax reasons) some different considerations would apply to the conversion regime. Another difference was that these were registered, rather than bearer, bonds. On 20 December 1985, Heytesbury Securities advanced $75 million to TBGL.
   314 Before July 1988, Heytesbury Securities had transferred the bonds to Drayton Capital Pty Ltd. Both Heytesbury Securities and Drayton Capital Pty Ltd were associated with TBGL. A trust deed covering this issue was not executed until 25 July 1988. LDTC became the trustee for the issue.
   315 This issue carried interest at 11 per cent per annum payable annually on 10 December each year. It had a final redemption date of 10 December 1995. The terms of the trust deed were very similar to those in the trust deed for the BGNV bond issues. None of the bonds were converted and the whole amount of $75 million remained owing at the time TBGL went into liquidation.
   316 At the same time as the second BGNV bond issue (May 1987), BGF issued convertible subordinated registered bonds to the value of $75 million to Heytesbury Securities. Attached to those bonds was a conversion bond issued by TBGL. I will call this ‘the BGF bond issue’. Again, the arrangement was initially documented by a simple agreement between BGF, TBGL (as guarantor) and Heytesbury Securities, which provided that the bonds were to be issued on terms ‘which were standard to convertible bond issues in the Eurobond market at this time’, save to the extent set out in the schedule to the agreement. Like the TBGL bond issue, these were registered, rather than bearer, bonds. On 9 May 1987 Heytesbury Securities advanced $75 million to BGF.
   317 A trust deed covering this issue was not executed until 25 July 1988, by which time Heytesbury Securities had transferred the bonds to Drayton Capital Pty Ltd. LDTC became the trustee of the issue.
   318 This issue carried interest at 10 per cent per annum payable on 7 May each year. It had a final redemption date of 7 May 1997. The terms of the trust deed were very similar to those in the trust deed for the BGNV bond issues. None of the bonds were converted and the whole amount of $75 million remained owing at the time BGF went into liquidation.
   319 On or about 28 July 1988, SGIC became the sole holder of the bonds the subject of the TBGL bond issue and of the BGF bond issue. It is not clear from the evidence what mechanism was used to transfer the bonds to SGIC. They were registered bonds and it appears the original papers may have been lost and fresh bonds issued for the purpose of the transfer. Nor is it clear from the evidence whether SGIC acquired the bonds at full face value or at a discount. Registered bonds were issued in the name of SGIC on 13 September 1988.
   4.3.3. The bond issue trust deeds: the BGNV bond issues
   320 The trust deeds for the five bond issues are very similar. Of course there are some differences because the three BGNV bond issues were of bearer bonds while the domestic bond issues were not. I will describe the terms of the trust deeds using the instrument for the third BGNV bond issue as an example. In explaining the effect of the terms, I will use the present tense even though the deeds have since passed into history.
   321 Each trust deed is governed by English law and has as schedules the forms of the bonds and the conversion bonds are schedules to the deed.
   4.3.3.1. Bearer bonds and conversion bonds
   322 BGNV issued bearer bonds executed on its behalf as issuer. Each bond has a face value of either £1000 or £10,000 and each has attached to it a conversion bond entitling the bearer to convert the BGNV bond into shares in TBGL. The conversion bonds are non‑detachable (that is, they could not be separated from the bearer bond) and do not carry interest. The conversion bonds are issued paid up to one pence (£1000 bonds) or 10 pence (£10,000 bonds) and provide as follows:
   The bearer of the Bond is entitled to require [BGNV] to redeem this Bond at its principal amount and applying the principal in paying up in full the Conversion Bond of [TBGL] attached to this bond, which conversion bond will thereupon forthwith be converted into Ordinary Shares of A$1.00 each of [TBGL] all in accordance with and subject to the Conditions endorsed hereon and on such Conversion Bond.
   Subject as aforesaid, [BGNV] for value received hereby promises to pay to the bearer on 14 July 1997 or on such earlier date as the principal sum hereunder mentioned may become repayable in accordance with the Conditions endorsed hereon the principal sum of [£1000/£10,000] together with interest on the said principal sum at the rate of 5 per cent per annum payable annually in arrears on 14 July together with such premium and other amounts as may be payable, all subject to and in accordance with the said Conditions.
   323 The bonds were issued in written form. The bearer bond and the conversion bond are on the front of the sheet and the terms and conditions of both appear on the reverse side. Attached to the document is a series of 10 coupons, one for each year, which could be torn off and presented to the paying agent on the date on which interest was to be paid. This was the mechanism by which the bondholder (the bearer) could claim the interest. The conversion bonds (executed on behalf of TBGL) provide as follows:
   The unpaid amount of [£999.99/£9999.90] on this Conversion Bond may be paid up at the election of the bearer hereof, in accordance with and subject to the Conditions endorsed hereon, in which event this Conversion Bond shall forthwith be converted into Ordinary Shares of A$1.00 each of [TBGL] in accordance with and subject to such conditions.
   Subject as aforesaid [TBGL] for value received hereby promises to pay to the bearer on 14 July 1997 or such earlier date as the principal sum hereunder mentioned may become repayable in accordance with the Conditions endorsed hereon the principal amount of [A$0.01/A$0.05] being the amount paid up on this conversion bond.
   4.3.3.2. Events of default
   324 Condition 10 of the conditions attaching to the bearer bonds provides that if there is an event of default the trustee may, in its discretion, and must (if requested by one‑fifth of the bondholders or by an extraordinary resolution of bondholders) give notice to the issuer and the guarantor that the bonds are immediately due and payable. This is subject to the proviso that in respect of certain nominated events of default the trustee must first form the opinion that the event is ‘materially prejudicial to the interests of bondholders’. The nominated events include:
   • A failure to pay the principal or interest on the bonds (with a seven‑day grace period for interest).
   • A failure by the issuer or the guarantor to comply with the terms of the bonds or the trust deed, which failure (unless incapable of being cured) continues unremedied for 30 days after notice.
   • Any indebtedness for borrowed money of the issuer or the guarantor or a ‘principal subsidiary’ becoming due and payable prior to its scheduled maturity.
   The ‘terms of the bonds or the trust deed’ in the second bullet point include, relevantly, cl 14(A)(i) (requiring the company to carry on and conduct the affairs of the business in a proper and efficient manner), cl 14(A)(ii) (obliging the companies to give to the trustee ‘such information and evidence as it shall reasonably require’) and cl 14(A)(vi) (requiring the companies forthwith to give notice of events of default or of occurrences which, if notice were given, would become events of default even though the trustee has not taken action).
   4.3.3.3. Covenants of issuer and guarantor
   325 In cl 3(A) of the trust deed, the issuer covenants with the trustee that, as and when the bonds become due to be redeemed, the issuer will pay the principal to the trustee. The issuer also covenants to pay to the order of the trustee interest on the principal sum annually in arrears. In cl 3(B) TBGL covenants to pay the amount paid up on the conversion bonds and in cl 4(A) TBGL unconditionally and irrevocably guarantees the due and punctual payment of all moneys payable by the issuer under the bearer bonds and the interest. The obligations under the guarantee are those of a principal debtor, not merely those of a surety (cl 4(F)).
   326 Clause 7 provides that the conditions of the bearer bonds and the conversion bonds are binding on the issuer and the guarantor. Condition 11 of the bearer bonds provides that only the trustee may pursue the remedies available under the general law or under the trust deed to enforce the rights of the bondholders. No bondholder is entitled to proceed against the issuer or the guarantor unless the trustee, having become bound to do so in accordance with the terms of the trust deed, fails to do so. Clause 9(C) of the trust deed is to similar effect. Clause 27 preserves general law rights, which are expressed to be in addition to rights conferred by the trust deed.
   4.3.3.4. Rights of conversion and redemption
   327 In each case there is a short period after the issue date and a short period before the maturity date during which the bonds could not be converted to shares in TBGL. For the third BGNV bond issue, the period during which conversion could take place was between 14 October 1987 and 4 July 1997 and 14 July 1997 (maturity date): see condition 6(A) of the conditions attached to the conversion bonds.
   328 The initial conversion price is set in the conditions of the conversion bonds but is subject to adjustment in specified circumstances. The conversion prices for each issue, as disclosed in the initial documentation and in the TBGL annual reports as at 30 June 1989 and 5 October 1990 are summarised in Table 3:
   Table 3
   CONVERTIBLE BOND ISSUES – CONVERSION PRICES
   ISSUE INITIAL DOCUMENTATION ANNUAL REPORT TO 30 JUNE 1989 ANNUAL REPORT TO 5 OCTOBER 1990
   First BGNV bond issue $13.92 $3.21 $3.21
   TBGL bond issue Formula, rather than dollar value $3.21 $3.21
   Second BGNV bond issue $13.37 $10.02 $10.02
   BGF bond issue Formula, rather than dollar value $10.02 $10.02
   Third BGNV bond issue $10.28 $10.28 $10.28

329 Each of the trust deeds confers on the issuer a right of early redemption, usually at a slight premium to the face value.
330 The bondholders in the third BGNV bond issue (but not in any of the other issues) have an additional right. They could require the issuer to redeem the bonds at 123.13 per cent of the face value. This ‘put option’ could only be exercised on 14 July 1992. To exercise it, the bondholder is required to give to a paying agent notice of intention to redeem not more than 45 nor less than 30 days before 14 July 1992: see condition 6(C).
4.3.3.5. The subordination provisions
331 For each of the three BGNV bond issues, the form of the bonds and the trust deeds contain similar provisions relating to subordination. I will have more to say later about meaning of the term ‘subordination’ and its application to the affairs of the Bell group. At the moment, and acknowledging the risks always present in attempting to summarise long and complicated documentary provisions, it is sufficient to say that, in a liquidation of BGNV (or TBGL), no moneys would be distributed to bondholders until other unsecured creditors had been paid in full. In essence it is what is called a ‘turnover subordination’; that is, the trustee for the bondholders was expected to prove in the liquidation but to hold any moneys distributed to it on trust and not pay them over to bondholders unless and until other unsecured creditors had been satisfied.
332 Each of the trust deeds for the BGNV bond issues contains a provision stipulating that on a winding up of BGNV the claims of bondholders and coupon holders (or of LDTC as trustee) against BGNV would be subordinated to the claims of all other creditors of BGNV who were not subordinated. There is a similar provision in each of the trust deeds for the TBGL bond issue and the BGF bond issue.
4.3.4. The interposition of BGNV
333 While there was some controversy about the reasons why BGNV was incorporated and about its involvement in these fundraisings, I think some things are reasonably clear. When the first bond issue was initially being planned (in the second half of 1985), the idea of using an entity such as BGNV drifted in and out of favour.
334 As the proposal developed, it was planned to raise $150 million. To avoid the percentage holding of RHaC associated entities in TBGL being diluted (if and when the bonds were converted into shares), it was decided that half of the Eurobond issue should be taken up by Heytesbury Securities. It was also decided that the issue should be structured in such a way that the interest payments by TBGL would be a deductible expense for TBGL, and that the interest payments made to bondholders would not be subject to withholding tax under the terms of the Australian income tax legislation. In relation to the latter, unless the Deputy Commissioner of Taxation (DCT) issued an exemption certificate, the bondholders would be liable to have part of their interest payments withheld.
335 TBGL took legal and accounting advice on the appropriate structures necessary to achieve these ends. The advice that TBGL ultimately accepted was that to ensure that interest on the bonds was a deductible expense of TBGL and that interest paid to bondholders was not subject to withholding tax the bond issue would be made by a wholly owned subsidiary incorporated offshore. But further advice indicated that if half of the bond issue were taken up by Heytesbury Securities (an Australian company) a withholding tax exemption certificate would not be granted. But a certificate could be granted if the bonds to be taken by the Australian company were issued directly to it by TBGL. As a result, the structure finally adopted had these features:
• A wholly owned subsidiary of TBGL incorporated in the Netherlands Antilles (that is, BGNV) was incorporated with a view to it issuing bonds with a face value of $75 million in the Eurobond market.
• A separate issue of bonds was to be made by TBGL to Heytesbury Securities ‘identical in all respects to [the first BGNV bond issue]’.
336 Because the later conversion of bonds held by RHaC (or interests associated with him) would have meant the issue of shares to those interests, the initial proposal to issue bonds to RHaC required shareholder approval. In relation to the 1985 issue, a shareholder meeting was held on 12 November 1985. At that time, the decision to use BGNV had not been made. The shareholders resolved to approve the issue of convertible notes for an amount up to $150 million, of which up to $75 million could be issued to RHaC or interests associated with him. A question arose whether the shareholder approval was sufficient to authorise the separate issues. Legal advice confirmed that the approval was valid.
337 A similar structure was used at the time of the second BGNV bond issue, except that the separate issue was made by BGF rather than TBGL. All of the bonds in the third BGNV bond issue were issued by BGNV in the Eurobond market.
4.3.5. Continuing interest commitments
338 The ongoing interest commitment of the Bell group to the bondholders, as that commitment stood in 1989 and 1990 (bearing in mind that some of the bonds from the first BGNV bond issue had been converted), is summarised in Table 4. In relation to each issue, interest was payable annually in one instalment. The July interest payment, which is quoted in pounds sterling converts to approximately $8 million.
Table 4
CONVERTIBLE BOND ISSUES – INTEREST COMMITMENTS
BOND ISSUE FACE VALUE INTEREST DATE INTEREST AMOUNT
First BGNV issue $75 million 10 December $6.64 million
TBGL issue $75 million 10 December $8.25 million
Second BGNV issue $175 million 7 May $17.5 million
BGF issue $75 million 7 May $7.5 million
Third BGNV issue £75 million 13 July £3.75 million

4.3.6. Bond issues by BRL and BCHL
339 Although they only play a minor part in these proceedings, I should make passing mention of bond issues made in the mid‑1980s by BRL.
340 Between October 1986 and May 1987 BRL made three bond issues in the Eurobond market using a similar structure to that employed by TBGL. The issuer was Bell Resources Financial Services NV, a wholly owned subsidiary of BRL. The bonds were guaranteed by BRL and were convertible into shares in BRL. The face value of the first issue was US$200 million, with the bonds maturing in 1996 and carrying interest at the rate of 5.25 per cent payable on 13 November each year. The bonds in the second issue (also maturing in 1996) had a face value of Swiss francs 200 million. They carried interest at the rate of 2.25 per cent payable on 20 November each year. The face value of the third issue was US$200 million, with the bonds maturing in 2002 and carrying interest at the rate of 5.25 per cent payable on 2 June each year.
341 The reason I mention these matters is that, in relation to the two US dollar denominated issues, LDTC was the trustee for the bondholders. The interest commitment on the bond issues is also relevant to the financial position of BRL in late 1989 and early 1990. In a cash flow prepared for BRL in January 1990 the interest commitment on these bonds for the 1990 calendar year was shown as $23.5 million.
342 For the sake of completeness, I should mention that BCHL was also involved in raising funds through bond issues. In June 1987, Bond Finance International (a Cayman Islands registered company) launched two issues. One was for US$200 million and the other for £80 million. Both issues were guaranteed by BCHL and were of subordinated bonds convertible into shares in BCHL. In May 1988 Bond Finance (DM) Ltd (an Australian company) made an issue of DM150 million; the issue was guaranteed by BCHL but no conversion bonds were involved.
343 In December 1986, BBHL issued subordinated debentures in the United States. By January 1990, this issue was the subject of demand notices by the trustee of the issue based on alleged defaults by BBHL: see Sect 4.2.4.5.
4.4. Dealing with Bell group assets (to 31 December 1989)
344 The October 1987 stock market crash dealt a blow to the fortunes of the wider RHaC group as well as those of BRL and TBGL. The officers of TBGL realised that assets would have to be sold to reduce debt. I have already mentioned (Sect 4.1.1.2) the asset sale programme that was undertaken under by the RHaC regime in late 1987, the first half of 1988 and the further sales that occurred between August 1988 and December 1989. But I need to go into a little more detail concerning some of these transactions.
4.4.1. Late 1987 and early 1988
345 The three‑year business plan distributed to the banks in the middle of May 1988 indicated that, since October 1987, the wider Bell group (including BRL) had raised over $5 billion, mainly from the sale of shares and surplus properties. The group reported that companies associated with TBGL then had over $500 million cash on deposit (net of senior debt) and a further $1.25 million in liquid assets.
346 Major asset sales undertaken by the broader Bell group in this period include the following:
• Sale by JNTH of shares in John Fairfax Ltd for $225 million and Sears plc for $417 million.
• Disposal by TBGL of various properties in the Perth central business district for $206 million.
• Sale by TBGL of shares in Pioneer Concrete Services Ltd for $344 million.
• Disposal by BRL of shares in BHP, Ampol Petroleum Ltd and Texaco Inc for a total sum well in excess of $2 billion.
4.4.2. Sales after the BCHL takeover
347 In the Part A statement issued by BCHL in July 1988 as part of its takeover of TBGL, BCHL indicated that it would continue with the asset sale programme so that debt could be eliminated and the company could concentrate on its newspaper and other media interests.
4.4.2.1. Sale of miscellaneous overseas assets
348 In the second half of 1988 and in 1989 the Bell group sold a number of overseas assets, including these sales by TBGIL:
• The Stoll Moss Theatres (London) and Bermans & Nathans Costumiers for about $77 million (October 1988).
• Various assets known as the Bentray properties for £131 million (October 1988).
• Cascade Culvert (a US subsidiary) for £2.17 million (November 1988).
• Its entire holding of shares in Standard Chartered Bank for £164.6 million (November 1988).
• Its shares in Dewey Warren Holdings plc for $53.4 million (December 1988, settled 27 January 1989).
• The Le Bourget warehouse in France for $10.1 million (March 1989, settled 7 June 1989).
• A property in Cumberland Place, London for $1.26 million (June 1989).
349 In addition, in September 1988 TBGL sold its interest in Wilson & Horton Ltd, the publisher of a New Zealand newspaper, for $33 million.
4.4.2.2. Sale of Bryanston
350 Bryanston was a UK insurance company, the shares in which were held by TBGIL. Late in 1988, it was the subject of a management buy-out for consideration of £40 million. A non‑refundable deposit of £3 million was received by TBGIL in December 1988. For reasons that are not particularly relevant the management buy‑out did not proceed.
351 On 17 August 1989 a further agreement was entered into to sell Bryanston to GFA Holdings Ltd (GFA) for £20 million payable on completion. The sale was conditional on the Department of Trade and Industry (DTI) approval of the change of ownership. It was anticipated that it would take between six weeks and three months for the department to announce its decision.
352 The August 1989 agreement with GFA did not proceed to completion due largely to concerns about the adequacy of the reserves or provisions Bryanston had made for future claims. A fresh arrangement was negotiated with GFA. On 13 December 1989, three agreements were executed. One was a sale contract by which GFA agreed to purchase the shares in Bryanston for £5 million payable in cash on the day following the day on which the conditions precedent were satisfied which included:
• the Department of Trade and Industry approval; and
• the discharge by performance of every amount owing by any member of the Bell group to Bryanston.
353 The second agreement was a deferred consideration contract. This provided that if, following an actuarial review after the end of each of the next five calendar years, the state of Bryanston’s ‘fund’ had improved, three‑quarters of the value of the improvement would be paid by GFA to TBGIL up to a maximum of £15 million. The ‘fund’ was, in effect, the reserve or provision for future claims.
354 The third agreement provided, in effect, that a debt of £2.98 million owed by TBGIL to Bryanston (which had apparently arisen because of the capitalisation and use by TBGIL of tax losses incurred by Bryanston) would be forgiven.
355 The sale was completed on 30 January 1990. The manner in which the sale price of £5 million was dealt with is described in a later section of these reasons. No part of the deferred consideration had been received by April 1991, nor was it ever received.
4.4.2.3. The ITC contract
356 In the BGUK group there was a sub‑group known as ITC Entertainment that had a film library and a film production and distribution business located primarily in the United States. TBGIL owned the shares in ITC Entertainment Holdings Ltd, which in turn held the shares in ITC Entertainment Group Ltd, which held the assets. In these reasons I will refer generally to the ITC Entertainment Holdings Ltd sub‑group as ITC.
357 By an agreement dated 8 November 1988, TBGIL sold ITC to Campania Ltd by way of a management buy‑out. The agreement provided for the sale of the shares in ITC and the assignment to Campania of certain receivables for a total consideration of US$112 million. The TBGL 1989 Annual Report records the proceeds of the sale of ITC as a total of $140.9 million comprising $53.9 million net tangible assets plus $87 million attributable profit.
358 Of the contract consideration, US$17.9 million was transferred to the United Kingdom and is part of what came to be referred to as ‘the Stockton‑loan’: see Sect 9.16.3.2. The balance of US$94.1 million seems to have been remitted to Australia on 9 December 1988 and was probably taken up as part of the transactions involving the issue of redeemable preference shares in Western Interstate.
359 A dispute was later to arise between TBGIL and Campania concerning the tax liabilities of ITC and retention moneys from the consideration. I will deal with the dispute later in these reasons.
4.4.2.4. Sale of miscellaneous Australian assets
360 In the period August 1988 to December 1989, TBGL sold a number of assets, including:
• The quarrying, concrete manufacture and bulk haulage businesses of Bell Basic Industries in Queensland for $71.06 million (October 1988).
• The industrial assets of Bell Basic Industries in Western Australia for $165 million (October 1988).
• Kirkland Bros Omnibus Services Pty Ltd for $8.75 million (December 1988).
• Waugh & Josephson Holdings Ltd, the operator of the Caterpillar dealership in New South Wales, for $68.7 million (February 1989).
• Land in Alexandria for $9.02 million (June 1989).
4.4.2.5. The Qintex receivable
361 On 6 April 1988 TBGL announced the sale of TVW Enterprises Ltd (Perth and Adelaide television stations) to the Qintex group. The purchase price was $126.5 million with three possible further payments up to a maximum of $30 million depending on the performance of the stations. A deposit of $12.6 million was paid with the balance to be paid in full by 31 March 1989. As matters eventuated, the final payment, due 31 March 1989, was $113 million. The amount of the final payment was known at least by 15 December 1988.
4.4.2.6. Sale of Wigmores and HJW Engineering
362 Wigmores Tractors owned the Caterpillar franchise for Western Australia and some land from which the business was conducted. HJW Engineering Pty Ltd (HJW) owned some land and a business associated with the Caterpillar dealership.
363 In May and June 1989 agreements were reached for the sale of the Wigmores business (excluding receivables) to Morgan Equipment and for the sale of land owned by Wigmores and by HJW Engineering to other parties. Funds received in respect of those agreements were as follows:
• For the Wigmores business: $51.6 million (19 May 1989).
• For the HJW land: $250,000 (1 June 1989) and $2.5 million (4 August 1989).
• For the Wigmores land: $250,000 (1 June 1989) and $7.56 million (30 August 1989).
• For the HJW business: $1.77 million (15 September 1989).
364 In April 1989, the Wigmores receivables (which were to be retained by the Bell group) were estimated to be $12.7 million. As at 18 August 1989 the figure stood at $4.28 million. As things eventuated, the Wigmores receivables generated $19.65 million in the period to 26 January 1990.
4.4.2.7. Sale of Bell Group Press Pty Ltd
365 Bell Group Press Pty Ltd (Bell Press) was a subsidiary of BPG and thus of TBGL. It carried on a heatset commercial printing business from premises in Canning Vale. For some time, the officers of TBGL had been concerned about the financial performance of Bell Press and in July 1989 a proposal was drafted for the sale of the business to News Corporation Ltd. At the same time an alternative proposal was put for Bell Press to print all News Corporation Ltd’s publications in Western Australia. This never eventuated. Negotiations for the sale continued through the remainder of 1989.
366 By three separate agreements, two dated 12 February 1990 and one dated 20 February 1990, contracts of sale were entered into for the sale of the Bell Press business and freehold land to Nationwide News Ltd. Settlement occurred on 12 February 1990. The following payments were made by the purchaser pursuant to the contract:
• $20.03 million for the plant and freehold (12 February 1990).
• $168,000 for a piece of equipment (1 March 1990).
• $5.6 million for stock and work in progress (1 March 1990).
4.4.3. Distribution of asset sale proceeds
367 As at 6 November 1987, the total borrowings of the NP group companies stood at $1.79 billion. This included liabilities other than bank debt but it did not include the convertible bonds. By 19 August 1988, this figure had been reduced to $1.19 billion, mainly due to asset sales. In the discussion that follows I want to concentrate on activity after the BCHL takeover and on movements in bank debt.
368 The plaintiffs prepared a spreadsheet designated Bell Table P2128A. It is entitled ‘Schedule of Asset Sales and Application of Proceeds’ and it deals with asset realisations and the use of proceeds in the period 1 July 1988 to 26 January 1990. A copy is attached to these reasons as an Annexure: see Schedule 38.24 ‘A’. I accept the accuracy of the material documented in the spreadsheet. I propose only to summarise the main features.
4.4.3.1. Reduction of bank debt
369 As at 1 July 1988, BGF and TBGL had $56.4 million cash on deposit and they owed $952 million to various banks, including the six Australian banks. This is in addition to the £60 million owed to the Lloyds syndicate banks.
370 Between September 1988 and December 1988, a total of $731.37 million was received from the sale of Wilson & Horton, Bell Basic Industries, Kirkland Bros and from the Western Interstate moneys. The transaction concerning Western Interstate will be described in more detail later. Briefly, the Western Interstate moneys accounted for $449.9 million of the sums received and they emanated (in the main) from the realisations referred to under the headings ‘sale of miscellaneous overseas assets’ and ‘ITC contract payment’: see Sect 4.4.2.1 and Sect 4.4.2.3. Of this, $667 million was applied in reduction of bank debt. With two exceptions, those payments eliminated entirely the debt due to lending institutions other than the Lloyds syndicate banks and the Australian banks. The two exceptions were Citibank and CIBC, which were left with debts of $25 million and $20 million respectively.
371 In the period January 1989 to September 1989, a total of $348.58 million came into the Bell group from asset sales. The proceeds arose from the sale and lease‑back of a printing press and the sales of Dewey Warren Holdings plc (again part of the Western Interstate moneys), the Wigmores and HJW lands and businesses, the Le Bourget warehouse, the Cumberland Place property and the Alexandria land. The Qintex receivable, the Wigmores receivables and a residual payment from the ITC transaction were further sources of funds.
372 Of these moneys, $27.5 million (together with a further $17.5 million from working capital and from BRL dividends) was used to eliminate the $45 million due to Citibank and CIBC. The proceeds were also applied, to the extent of $22 million, to reduce the NAB debt and, to the extent of $21 million (together with a further $4 million from working capital), in part satisfaction of the Westpac debt. During December 1989 there was a $2 million increase in the NAB debt.
373 There were no reductions in the debts due to the Australian banks after May 1989. In the period 1 July 1988 to 26 January 1990 asset sale proceeds (together with the funds held on deposit) totalled $1.14 billion. From these proceeds, a total of $803 million was used to reduce commitments to lending institutions. This does not include $17.5 million that was paid to Citibank and CIBC in April and May 1989 from sources other than asset sales. The Lloyds syndicate banks received no payments in reduction of the principal moneys owing to them. The Australian banks received a total of $493.5 million. The position of the Australian banks is summarised in Table 5.
Table 5
AUSTRALIAN BANKS – MOVEMENTS IN DEBIT BALANCES
BANK DEBIT BALANCE: 1 JULY 1988 DEBIT BALANCE: 26 JANUARY 1990 REDUCTION
CBA $57 million $12.5 million $44.5 million
HKBA $115 million $25 million $90 million
NAB $156 million $24 million $132 million
SCBAL $15 million $15 million nil
SocGen $85 million $30 million $55 million
Westpac $197 million $25 million $172 million

4.4.3.2. Application of proceeds within the group
374 The bulk of the proceeds of sales in the period 1 July 1988 to 31 December 1988 was used to reduce debt to lending institutions. There was a balance of $64.37 million. Some of the balance was used for the interest payments due in December 1988 on the first BGNV bond issue, the TBGL bond issue ($14.9 million) and for dividends of TBGL ($16.5 million). From those funds, $18 million was utilised in the purchase of a printing press. Other moneys were loaned throughout the group.
375 Of the $348.58 million received from asset sales in the period 1 January 1989 to 26 January 1990, $83 million was utilised in the reduction of bank debt and the remainder was used within the group. Much of it was loaned to BCF.
376 As will appear later in these reasons, the banks had an expectation of reductions in their debts coming from two particular sales: the Qintex receivable and the Wigmores sale. I will give a brief description of the applications of those proceeds.
377 The Qintex receivable of $113 million arrived on 31 March 1989. $12.5 million was paid to each of Citibank and CIBC and $2 million to Westpac. The balance of $67 million was loaned to BCF and JNTH.
378 When the Wigmores business was sold (May 1989) $15 million went to CIBC and $22 million to NAB. The balance was loaned to BCF. The bulk of the proceeds from the sale of the Wigmores land and the HJW land also went to BCF by way of loan.
379 In summary, the total proceeds from asset sales (together with the funds on deposit) in the period 1 July 1988 to 26 January 1990 of $1136.3 million were applied as follows:
• reduction of bank debt from sale proceeds: $803 million
• reduction of bank debt (other): $17.5 million
• transfers to BCF (net): $240 million
• other group uses (net): $75.8 million.
4.4.4. Diversion of moneys to BCHL: BGF/BCF loan account
380 As I have already said, up until January 1990 the debt and cash resources of the Bell group were controlled by the Treasury section of BCHL. During 1988 and 1989, BCHL’s financial position was not sound and from time to time cash and assets of Bell group companies were transferred to other companies within the BCHL group for their use.
381 The transfers were reflected in a loan account conducted between BGF and BCF. The loan account included both cash and non‑cash transactions. The consolidated balance sheet of TBGL as at 31 December 1989 included as an asset an advance to BCF (incorrectly referred to as Bond Corporation Pty Ltd) of $13.5 million. The BGF general ledgers show credit transactions on the loan account of about $2.2 million in January 1990.
382 Over the course of the liquidation, Woodings and his staff conducted an analysis of the loan account for the period 1 January 1989 to 26 January 1990. The results of that analysis are recorded in a spreadsheet designated Bell Table P2092A. While the authors of the spreadsheet were not able to examine and explain every transaction, I am satisfied that the analysis is basically accurate and that it gives the broad flavour of the financial dealings between the Bell group and the BCHL group.
383 The analysis reveals that the adjusted difference between total debits and total credits to the loan account as at 26 January 1990 was $11.8 million in favour of BGF. This is not materially different from the balance in the 31 December 1989 balance sheet (adjusted for the January 1990 transactions) reflected in the general ledger. In relation to cash transactions, the analysis shows that $330.9 million flowed from BGF to BCF and that $102.7 million came back: a net flow of cash of $228.2 million. There was a large number of non‑cash transactions, mainly transfers of assets and the provision of services. Non‑cash transfers from BCF to BGF totalled $217.7 million, while transactions amounting to $7.1 million went the other way. The net result was $210.6 million in favour of BCF. The non‑cash transactions had the effect of reducing what would have been a sizeable balance due by BCF to BGF to a more respectable total of around $18 million.
384 Some of the non‑cash transactions (the first two of which are the subject of more detailed comment in Sect 9.11.2) are worthy of note:
(a) five ‘conditional repayments’ to eliminate a $100 million subordinated loan from BRL to BGF;
(b) purchase of shares in GFH for $38.4 million;
(c) fees charged by BCHL for effecting the sale of TBGL assets amounting to $27.5 million and $2.4 million;
(d) a transfer of $37.1 million related to a transaction known as the ‘Weeks unwind’; and
(e) a $6.7 million promissory note endorsement to eliminate some inter‑company balances as part of the brewery deposit.
4.5. The Bell group and the banks: 1989 and early 1990
4.5.1. Negotiations for the refinancing in 1989 and January 1990
385 Later in the reasons I will describe in detail the course that the negotiations took in 1989 in relation to each bank. In this section, I propose only to give a broad summary to put in context the position that the directors were in as 1989 wore on.
386 During 1988 and the first half of 1989, responsibility for dealing with the banks fell largely to Oates, Farrell and Devries, all of whom were officers of BCHL. From July 1989 the negotiations were carried out by Aspinall and Simpson.
387 By December 1988 the Australian banks (other than SCBAL) were anticipating clearance of their respective facilities by 31 March 1989. In the case of SCBAL, the anticipated repayment date was 31 January 1989. The banks’ expectations were not met.
388 During the first half of 1989, TBGL put various proposals to the banks for what came to be referred to as the BPG club facility; that is, involving a syndicate of banks. It was initially put forward as part of the proposal that TBGL should be merged with BML but later it came to be focussed on the publishing assets of TBGL. In its various guises, the club facility was to be secured over the assets of BPG and to be for an amount of $350 million, later reduced to $300 million, then $250 million and finally to $200 million. The intention was to use the proceeds to pay out existing bank debt, other than the Lloyds syndicate banks and the banks that were rolling their existing facilities into the new arrangement.
389 At various times Westpac, SocGen and HKBA (or to be more accurate, other entities within the HSBC group) are said to have expressed interest in participating in the club facility without giving a formal commitment. Many other banks, some of whom (such as ANZ Bank and Bank of Nova Scotia) were not involved in the January 1990 refinancing, looked at the proposal and either dismissed the idea summarily or considered but declined to participate. SCBAL, NAB and CBA fall into that category.
390 In April 1989, the Lloyds syndicate banks were advised of the club facility proposal. They were asked to release the NP guarantee so that the publishing assets could be offered to the participating institutions as security for an advance of $300 million. The Lloyds syndicate banks were offered a charge over TBGL’s shares in BRL to replace the NP guarantee. There was little support forthcoming from the Lloyds syndicate banks.
391 By June 1989, the proposal was for an advance of $200 million for three years secured over the publishing assets. It was envisaged that three banks might participate equally. Only SocGen gave anything approaching a firm commitment of participation. It is difficult to identify the exact date when the club facility proposal was finally abandoned but it seems to have been some time in the second half of July 1989. On 14 July 1989, Simpson (who had only just entered the negotiations) advised SocGen that he wanted ‘to discuss the resolution of a position whereby all lenders to Bell remain in situ until June 30 1991’. In the week commencing 17 July 1989, Simpson had meetings with some of the Australian banks in Sydney. On 20 July 1989, Simpson wrote to Beckwith, Aspinall and Oates to report on those meetings. He said: ‘The approach has been that the Bell Group is unable to repay its outstanding Australian dollar obligations by the end of September … I have asked the banks to extend their facility on an unsecured basis until June 1991’.
392 This suggests that by then the relevant officers had come to the view that the club facility could not be arranged. It marks the commencement, in earnest, of the negotiations that were to culminate in the January 1990 refinancing.
393 There are several cash flow documents prepared by or for TBGL in the period between July 1989 to February 1990 that are relevant to this litigation. The first of them has an estimated date of 1 July 1989. It (and all other consolidated Bell group cash flows until mid‑January 1990) were prepared by the Treasury division within the Finance and Administration division of BCHL. Simpson sent the 1 July cash flow to the Australian banks in the second half of July 1989.
394 The proposal put to the Australian banks by Simpson in July 1989 was for an extension of the date for repayment until June 1991, basically under the existing negative pledge structure and without giving security. The reaction of the Australian banks is said to have been ‘hostile’. Some bank officers expressed dissatisfaction that previous promises concerning repayment had not been met. They also expressed concern about the independence of the Bell group from BCHL.
395 Aspinall says that by this time he had come to the view that it was not then possible for the Bell group to repay the banks. On 25 July 1989, Simpson wrote to Aspinall setting out some possible scenarios, a feature of which was the provision of security. On 27 or 28 July 1989, TBGL sent to the Australian banks and Lloyds Bank a draft terms sheet for a secured facility through to May 1991 covering both the Lloyds syndicate banks and the Australian banks. The security was to be an equitable charge over BPG. On 2 August 1989, the draft terms sheet (and other information including the 1 July cash flow) was circulated to the Lloyds syndicate banks.
396 During the remainder of July 1989 and throughout August 1989, Aspinall and Simpson had further meetings with the bankers and provided information about the financial position and the plans for the group. Then Aspinall went to London and on 31 August 1989 he participated in a meeting with officers of Lloyds Bank. A large amount of correspondence flowed between TBGL and individual banks during this period.
397 A revised cash flow document was prepared by the Treasury division of BCHL in early September 1989 and forwarded to Westpac on 4 September 1989. It is common ground that all of the Australian banks received this document during September 1989 and that Lloyds Bank forwarded it to the Lloyds syndicate banks on 9 October 1989.
398 On 13 September 1989, Westpac sent to TBGL a terms sheet that it had prepared for a syndicated facility with shared securities covering the Lloyds syndicate banks’ loan and the loans of all of the Australian banks. The proposal was for a 12‑month facility with security over the assets of the BPG group. On 18 September 1989 a revised terms sheet was delivered. The main change was an extension of the facility to 30 April 1991 ‘to accommodate the [Lloyds syndicate banks’] syndicated loan’. On 19 September 1989 this terms sheet was distributed to the other banks (including CBA). On 6 and 14 September 1989, CBA had issued formal demands for recovery of its loan. These demands were withdrawn on 20 September 1989.
399 Lloyds Bank prepared its own version of a terms sheet and sent it to Westpac on 21 September 1989. It was for an advance to BPG of $136.5 million and £60 million to be used to repay the exiting facilities of the Australian banks and the Lloyds syndicate banks. The term of the loan was through to 19 May 1991 with security over the BPG group assets and over TBGL’s shares in JNTH and BRL. Westpac distributed the terms sheet to other banks.
400 The terms sheet was discussed at a meeting in Sydney on 4 October 1989 attended by representatives of each of the Australian banks and of Lloyds Bank. Simpson was present for part of the meeting. One of the topics raised by Lloyds Bank and discussed at the meeting was legal advice it had received to the effect that there was a danger of ‘double exposure’. The problem was that if BPG, BGF and BGUK went into liquidation within six months, the banks might have to disgorge the repayment to them by BGF and BGUK of the existing facilities and, in addition, suffer the setting aside of the securities taken for the new advance to BPG. I will call this the ‘double exposure problem’.
401 On 9 October 1989, Westpac prepared and distributed to the other banks a revised terms sheet. It was basically in the same form as the Lloyds Bank version but took into account comments that had been made at the 4 October 1989 meeting. Further amendments were made to the terms sheet as October 1989 progressed.
402 Meanwhile, additional legal advice was being taken in the light of the double exposure problem. On 18 October 1989, the banks received a memorandum of advice prepared jointly by MSJL and A&O identifying three possible structures for the refinancing. One was a new advance to BPG with the funds being used to repay the existing commitments of BGF and BGUK (‘fresh advance structure’). Another was the continuation of the existing loan facilities but with security over the assets of BPG (‘existing borrower structure’). A third alternative envisaged the banks assigning to BPG of their rights under the existing loans together with a deferred purchase price equal to the amount of the loans (‘assignment structure’).
403 P&P sought an opinion from Ken Hayne QC and Julian Burnside, two Melbourne barristers, on the alternative structures. Advice was received on 27 October 1989 and it was to the effect that the existing borrower structure would avoid the double exposure problem and was the best of the alternatives. Although it was to be some time before a final decision was made on the structure to be adopted, the eventual form of the refinancing utilised the existing borrower structure.
404 On 27 October 1989 representatives of the Australian banks met in Sydney. They received a verbal report of the conference with Hayne and Burnside and discussed the security that might be taken. By this time, the banks were becoming concerned at the length of time it was taking to finalise the negotiations. Further legal advice was taken from MSJL and from P&P during November and December 1989, mainly concerning possible preference issues.
405 In the middle of November 1989, TBGL gave to the banks copies of the annual reports for TBGL and BRL. Other financial information was provided from time to time but no cash flows were delivered after the 4 September cash flow. A&O produced further versions of the terms sheet (based on the existing borrower structure) during November 1989.
406 Four things occurred during December 1989 that are worth noting. First, SCBAL issued notices of demand in respect of its facility on 4 December 1989. The demands were withdrawn on 19 December 1989. There is no evidence that any of the other banks (with the exception of HKBA) were aware of the demands. The second issue relates to the BGNV on‑loans. The banks contend that at all times, the BGNV on‑loans were subordinated to unsecured creditors so that in a liquidation they would have ranked behind the claims of the banks in any event. But by mid‑December 1989, at least some of the banks became aware of a contention put by Aspinall to officers of SCBAL that the on‑loans might not be subordinated. SCBAL sought legal advice from MSJA. The lawyers indicated that they could not give a conclusive answer without seeing documentation but thought there was a risk that the subordinated debt ‘may rank equally with unsecured creditors notwithstanding the subordination arrangements’.
407 Thirdly, on 8 December 1989 (a Friday), Adsteam filed a petition in this Court seeking the appointment of a receiver and manager over the property of BRL. On the same day Adsteam issued a press release saying that it had commenced proceedings to ensure that ‘control of the affairs of BRL was placed in independent hands’. The NCSC intervened in the receivership proceedings. On 11 December 1989, BCHL and Adsteam reached an agreement (with the approval of the NCSC) that the board of BRL would be changed to consist of two representatives of each of BCHL and Adsteam and an independent chairman. By 15 December 1989, that arrangement had been put into effect with Geoffrey Hill as the chairman.
408 The banks were aware of these developments. On 9 December 1989, P&P wrote to Westpac referring to the ‘developments concerning [BRL]’ and suggesting that ‘the security which was to have been given as part of the intended restructuring of the existing facilities be taken immediately. There is some evidence (for example, a file note made by Sally Ascroft of MSJA on about 7 December 1989) to suggest that the banks were prepared to demand immediate repayment unless security was given.
409 It was envisaged that the necessary documentation would be prepared ‘over the weekend’ and signed in London and in Perth on 11 and 12 December 1989. There were what have been described as ‘intense events’ over the weekend relating to the drafting of documents. The phrase ‘panic weekend’ (a description to which the banks took exception during the hearing) was also used in connection with the relevant period. Drafts of various documents were circulated among the banks. But it seems that after the announcement of the agreement between the NCSC, BCHL and Adsteam concerning the composition of the board of BRL, the banks decided not to proceed with the immediate taking of security and to revert to the transactions as originally planned.
410 The fourth of the December 1989 incidents was the appointment by the Supreme Court of Victoria (at the initiative of the banking syndicate led by NAB) of a receiver over BBHL. It was significant for at least three reasons. First, it raised questions as to the future of the negotiations for the acquisition by BRL of the BCHL brewing operations, or an interest in them. Secondly, it (coupled with the change of control of the board) placed doubt on the receipt by TBGL in the future of management fees and dividends from BRL. Thirdly, it caused NAB to reconsider whether it should participate in the refinancing. But on 4 January 1990, NAB confirmed to Westpac that it would participate.
411 By the end of December 1989 each of the banks had indicated that it would participate in the refinancing. There was some discussion and correspondence within and between banks concerning the subordination question. During January 1990 the process of drafting of documents continued. On 16 January 1990 A&O produced what appears to have been the final version of the terms sheet. The main refinancing instruments were signed on 26 January 1990.
412 January 1990 also saw the production of at least four cash flows for the consolidated Bell group. It seems that two of them, dated 19 January 1990 and 26 January 1990 respectively, were prepared by the officers within the Treasury division of TBGL, rather than by BCHL officers as had previously been the case. None of the January 1990 cash flows were seen by the banks.
4.5.2. Position of the directors: 1989 and early 1990
413 The things that I am about to say reflect my view of the evidence that was led during the trial. They will all be explained in more detail later in the reasons. All I propose to do here is to give a brief summary to place later sections in context.
414 The debt reduction strategy (although not necessarily the method of its implementation) that had been put in train by the officers of TBGL in the aftermath of the 1987 stock market crash was continued after the BCHL takeover. In late 1988 Treasury officers informed the Australian banks that their facilities would be cleared by either 31 January 1989 or 31 March 1989. That did not happen. The banks were not entirely amused at this turn of events. Nor were they (or at least some of them) happy that the proceeds from the sale of certain assets had been used to pay down the debts owed to some financial institutions and not to all on a pro rata basis. The proposal to refinance the bank debt by a club facility came to nought.
415 Public sentiment in relation to BCHL worsened during 1988 and 1989. This did not assist TBGL because it was seen as being under the control of BCHL executives (who, generally speaking, the banks did not trust) and thus as being guilty by association.
416 From July 1989, Aspinall’s view was that ‘the only way for [the Bell group] to survive was to de‑Bond it, in other words disassociate itself from [BCHL] and untangle the web so to speak’. The repatriation to TBGL of its treasury functions in January 1990 was one step in the process of ‘de‑Bonding’. But it was a long process and it had not been completed at the end of February 1990.
417 By the end of July 1989 the TBGL officers, or at least Aspinall, seem to have come to the view that BGF could not then repay the Australian banks’ facilities. They needed to refinance what were, by then, on‑demand facilities so that they had a fixed term. To do this they would have to offer security over the publishing assets. Because of the negative pledge arrangements this would have required the consent of the Lloyds syndicate banks and it was unlikely that consent would be forthcoming unless the Lloyds syndicate banks shared equally in the security.
418 The negotiations that took place in the second half of 1989 have to be seen against that background. The points that I am about to list seem to be common ground between the parties (or if they are not, they seem to me to be clear from the evidence) concerning the belief of the directors as to the position immediately before 26 January 1990:
• If any one of the Australian banks had demanded repayment of its facility it is probable that the others would have followed suit.
• Had that occurred, neither BGF (as borrower) nor TBGL (as guarantor) could, then and there, have met the demand.
• Such an occurrence would have been an event of default under RLFA No 1 and would probably have precipitated a call by the Lloyds syndicate banks for repayment of their facility.
• Had a demand been made neither BGUK nor BGF (assuming for the moment that it had a liability under RLFA No 1) nor TBGL (as guarantor) could, then and there, have met the demand.
• If the demands had not been met and no other steps had been taken, it was probable that the companies would have been wound up.
419 But that is where the common ground ends. The consequences of the decisions made by the directors to commit the various Bell Participants to the refinancing, and the range of interests that were, were not or should have been taken into account in reaching those decisions, is the subject of the diametrically opposed contentions advanced by the respective parties in the litigation. The key to the dispute lies in the phrase appearing in the last of the bullet points above: ‘and no other steps had been taken’.
420 The plaintiffs say that the directors were not confined to a choice between the Transactions and an insolvent liquidation. The plaintiffs acknowledge that the Bell group needed to restructure its financial position. The plaintiffs say it is not part of their case that the directors should have taken any particular decision. They allege that the directors ought not to have taken the decision they did. They say that the directors had at their disposal alternatives to liquidation, including an informal or a statutory scheme of arrangement. This would have ensured the participation of all interested parties (particularly creditors), proper disclosure of relevant information and procedural fairness, all of which were lacking in the scheme that was eventually implemented.
421 In their closing submissions, the banks say that the directors believed (reasonably) that there was no sensible or practical alternative available to them. To avoid a winding up of the companies (and with it a fire sale of valuable assets) it was necessary to consider and implement a restructure of the financial position for each company in the group. And the first step in a successful restructuring of the financial position of the group was to convert current liabilities due to the Australian banks into non‑current liabilities. This could only be done by replacing the negative pledge arrangements with security. To do that required the consent and participation of the Lloyds syndicate banks. All of this led, inevitably, to the refinancing transactions that were entered into in January 1990.
4.6. Overview of the 1990 refinancing
4.6.1. The 1990 refinancing: introduction
422 The refinancing was effected by a series of transactions entered into at various times between 8 January 1990 and 31 July 1990. A few documents were executed after 31 July 1990 but (with one possible exception, namely SAABFA, see Sect 4.6.6.3) they are of little significance in the litigation.
423 The transactions that constituted the refinancing can conveniently be categorised according to type and provenance. First, there are instruments to which only the banks were parties and which were to govern the relationship between them. Secondly, there are the main facilities agreements between the banks and the relevant Bell group companies relating to the group borrowings. Thirdly, there are the security and similar instruments executed by Bell group companies relating to the assets of those companies. Fourthly, there are deeds subordinating intra‑group indebtedness. The fifth group includes documents that were brought into existence as required by the terms of the instruments in the second and third categories.
424 The relevant transactions are identified in the particulars to the statement of claim and in a document prepared by the plaintiffs entitled ‘Schedule of Transaction Documents’. A copy of that document is attached as an Annexure: see Schedule38.24 ‘B’. It contains the references for the source documents. I do not propose to go through the list. But I will describe the categories of documents that I have identified and, in relation to the major instruments, give enough detail to facilitate an understanding of their significance.
425 The plaintiffs prepared charts of the relevant companies within each of the Australian and the UK arms of the Bell group. The charts identified some of the sub‑groups and indicated whether, and to what extent, individual companies had been involved in transactions as part of the refinancing. Copies of those two charts are attached as Annexures: see Schedule 38.24 ‘C’ and ‘D’ respectively.
4.6.2. The 1990 refinancing: the banks’ instruments
426 There are three instruments in this category: the Security Trust Deed dated 8 January 1990 (STD), the Inter‑Creditor Agreement dated 8 January 1990 (ICA) and a letter of amendment dated 8 January 1991. By the letter of amendment, the banks agreed to some variations to the ICA, but they are of no present significance.
427 The STD and the ICA were executed contemporaneously. The parties to both documents were the Australian banks, the Lloyds syndicate banks, Lloyds Bank (as the Lloyds syndicate agent) and Westpac (as the Security Agent and as the Australian banks’ agent).
4.6.2.1. The STD
428 By the STD, the banks appointed Westpac as the Security Agent, as a trustee and an agent to hold all trust funds, documents, proceeds and other moneys for all banks as beneficiaries on the terms as set out in the agreements.
429 The securities arising from the refinancing arrangements and all moneys payable by the Bell group companies under those arrangements were to be held by Westpac as part of a trust fund. Moneys payable by the Bell group included, among other things, recurrent interest commitments, and the proceeds from certain asset sales and the proceeds from the enforcement of securities. By cl 5 of the STD, moneys in the trust fund were to be applied in accordance with cl 6 of the ICA.
4.6.2.2. The ICA
430 The purpose of the ICA was to tie the Australian banks and the Lloyds syndicate banks together and to regulate the relationship between them. The STD and the ICA together governed the legal basis upon which Westpac would act and distribute funds to the banks.
431 The ICA set out the steps to be taken to give effect to the refinancing arrangements. It provided that the Australian banks and the Lloyds syndicate banks were to agree to continue to make their respective facilities available to the Bell group. Certain Bell group companies would then give securities and guarantees, and inter‑company lending was to be subordinated behind the debts due to the banks.
432 Of major import in the ICA was the creation in cl 3 of the agency relationships between the banks generally and Westpac and Lloyds Bank:
3.1(a) Notwithstanding anything in any Financing Document …
(i) each [bank] irrevocably appoints [Westpac];
(ii) each Lloyds Syndicate Bank irrevocably appoints the Lloyds Syndicate Agent; and
(iii) each Australian Bank irrevocably appoints the Australian Banks Agent;
its respective agent with authority on its behalf to perform such duties and to exercise such rights and power under this Agreement and each Financing Document as are specifically delegated to each such Agent by the terms of this Agreement and each of the Financing Documents, together with such rights and powers as are necessary for the purposes thereof or are reasonably incidental thereto.
3.1(b) The Agents shall have only those duties and powers which are expressly specified in this Agreement or under the Financing Documents. The Agents’ duties hereunder are solely of a mechanical and administrative nature.
433 The ICA also contemplated that, from time to time during the currency of the refinanced facilities, the banks might be called on to make decisions affecting the relationships. It recognised that some decisions had to be taken by the banks unanimously and some by a majority. In relation to the latter, the ICA introduced a concept of instructing banks; namely, banks that held more than 67 per cent in value of the total principal then outstanding under the facility agreements. By cl 2.2 of the ICA, each bank and Westpac undertook not to exercise any right or assume any obligation under any of the refinancing documents that was expressed to be subject to the consent of all banks or the instructing banks without obtaining that consent. Further, no bank would exercise any right or discretion under the refinancing documents other than in accordance with the terms of the STD and the ICA.
434 Clause 6 of the ICA was intended to operate so that all moneys received by Westpac under the refinancing documents and available for distribution to banks were to be distributed by it on a pro rata basis on a ‘Recovered Money Distribution Date’, usually the last business day in each month. The order of distribution could be altered by the instructing banks. In these reasons I will refer to the Recovered Money Distribution Date as ‘RMDD’.
4.6.3. The 1990 refinancing: the main facilities agreements
435 There are three documents that contain the major terms and conditions of the refinancing. They are:
(a) The Australian Banks Supplemental Agreement dated 26 January 1990 made between BGF and WAN (as the Australian borrowers), TBGL (as guarantor), the Australian banks and Westpac (as the Australian banks agent and as the Security Agent) (ABSA);
(b) The Australian Banks Facilities Agreement dated 26 January 1990 made between the same parties (ABFA); and
(c) The Lloyds Supplemental Agreement No 2 dated 26 January 1990 made between BGF and BGUK (as the original UK borrowers), TBGL (as guarantor), the Lloyds syndicate banks, Lloyds Bank (as the Lloyds syndicate agent) and Westpac (as the Security Agent) (LSA No 2).
436 The LSA No 2 has as an appendix a document called Form of the Restated Lloyds Facility Agreement No 2 (RLFA No 2). The appendix has the same parties as LSA No 2 except for BGF, which is not included. RLFA No 2 is not separately executed and so does not stand as an instrument separate and apart from LSA No 2. ABFA was also an appendix to ABSA, but ABFA was executed by or on behalf of all parties and thus stands as a separate instrument in its own right.
437 Put simply, the main facilities agreements were designed to do the following:
• Change the status of the Australian banks’ respective facilities from on demand to term loans expiring on 31 May 1991.
• Bring the Australian banks into a syndicate arrangement.
• Extend the term of the Lloyds syndicate banks’ facility to 31 May 1991.
• Create an equality of position between the Australian banks and the Lloyds syndicate banks.
• Convert what had previously been unsecured facilities into secured facilities.
4.6.3.1. ABSA and LSA No 2
438 ABSA and LSA No 2 set out the arrangements on which the several Australian banks’ loans and the Lloyds syndicate loan respectively were deemed to be amended according to their respective appendices ‘with effect as of the Operative Date’. They contained a number of conditions precedent that had to be satisfied by the operative date for the amendment and restatement of the loans to occur. The operative date was defined to mean the date on which the conditions precedent were satisfied. The conditions precedent required the agent bank to receive ‘in form and substance satisfactory to it (unless waived by all banks)’ the following (among other things):
(a) directors’ and shareholders’ resolutions and powers of attorney in relation to the transactions;
(b) a legal opinion that entry into the transactions would not contravene the bond issue trust deeds; and
(c) debentures executed by BGUK.
439 ABSA and LSA No 2 both contain conditions subsequent that were to be satisfied by close of business (London time) on 15 February 1990 ‘or such later date as agreed in writing by all the banks’. If the conditions subsequent were not satisfied, then ‘unless waived in writing by all the banks’ the banks’ loans would become immediately due and payable upon demand by the Security Agent, as directed by the instructing banks. The conditions subsequent included:
(a) the receipt by the Securities Agent of a deed subordinating inter‑company indebtedness executed by nominated group companies (but not including BGNV); and
(b) directors’ and shareholders’ resolutions of the group companies referred to in (a).
440 By cl 7 of ABSA, the guarantee given by TBGL under the NP guarantees was to remain in full force and effect notwithstanding the execution of the refinancing instruments.
441 ABSA and LSA No 2 also contained covenants obliging the borrowers and TBGL to meet or reimburse all stamp duties, legal costs fees and other costs and expenses associated with the refinancing.
442 A material feature of ABSA and LSA No 2 is that they contained schedules identifying the companies that were to provide securities (called security providers) and the securities (called charging documents and guarantees) to be given by those companies. The security providers were the existing borrowers and guarantors; the publishing group companies; group companies holding shares in BRL and those holding shares in JNTH; some Australian Bell group companies with debt and equity links to BGUK; and, finally, TBGIL.
443 The charging documents were:
(a) mortgage debentures being first registered fixed and floating charges over all assets (including mastheads) and a first mortgage over shares;
(b) share mortgages over specified shares;
(c) real property mortgages over specified property; and
(d) TBGIL’s security assignment and charge on cash.
444 The schedules indicated that the guarantees of the borrowers (BGF, WAN and BGUK) and the guarantee of TBGL would be unlimited, but those of all other security providers (other than TBGIL) would be limited to the gross value of assets held by that company or the gross value of shares the subject of a mortgage, as the case may be. TBGIL’s guarantee was to be limited to
the net proceeds of the sale of Bryanston Insurance Company Limited as are from time to time received and set aside to meet [TBGIL’s] liabilities or otherwise paid to the Security Agent as a pre-payment of the Facilities.
445 I have already introduced the subject of the sale of Bryanston. The significance of the proceeds of the sale of assets will be explained later.
446 ABSA and LSA No 2 contemplated that, in addition to the Australian banks’ facilities, WAN would continue to have the overdraft with Westpac that was then used for the trading operations of the publishing group.
4.6.3.2. ABFA and RLFA No 2
447 I turn now to the main provisions of ABFA and RLFA No 2. The parties to ABFA were the same as the parties to ABSA. There was also a commonality of parties between LSA No 2 and RLFA, except that BGF was named as a borrower in LSA No 2 but not in RLFA No 2. There is a good deal of commonality in the provisions of ABFA and RLFA No 2. In the main, such differences as there are can be explained by the fact that ABFA sought to amend the terms of each of the existing Australian banks’ facilities, while RLFA No 2 was a restatement of the existing Lloyds syndicate banks’ facility.
448 ABFA and RLFA No 2 contained quite complex provisions relating to the ability of TBGL or any of its subsidiaries to dispose of assets, and for the application of the proceeds from permitted disposals. These provisions are to be found in cl 17 of the agreements. The regime for the application of the proceeds of sale is to be found, in particular, in cl 17.12. I will explain the regime in some detail later in the reasons. Clause 17 also placed restrictions on the ability of the group to incur further indebtedness.
449 ABFA provided that, with effect from the operative date, the existing Australian banks’ facilities would be amended and thereafter governed exclusively by the terms of ABFA. The operative date was defined in the same way as in ABSA. LSA No 2 had a similar provision for the amendment and restatement of the Lloyds syndicate banks’ facility.
450 The operative date was originally intended to be 30 January 1990. It was extended, by agreement of all banks, to 1 February 1990. Not all the conditions precedent were satisfied by 1 February 1990 but the banks extended the time for compliance and the refinancing arrangements came into effect on that date.
451 In cl 17.6 of ABFA and RLFA No 2, TBGL undertook that, by 15 February 1990, it would cause certain nominated Bell group companies to execute agreements subordinating inter‑company indebtedness. It also undertook that it would procure BGUK to arrange the subordination by members of the BGUK group of debts owed to them by the borrowers or security providers. It further undertook to use reasonable endeavours to procure BGNV to subordinate debts due to it from the borrowers or security providers.
4.6.4. The 1990 refinancing: charging documents and guarantees
452 There is a large number of documents in this category. I will mention only the main ones.
4.6.4.1. The BGF instruments
453 On 1 February 1990 BGF executed a deed of guarantee and indemnity in favour of Westpac. There is a dispute between the parties as to whether Westpac entered into the deed (and other deeds of guarantee and indemnity) as trustee and agent, or simply as agent, for the other banks. By the deed, BGF guaranteed payment of all amounts due by WAN to Westpac (in its capacity as the Westpac overdraft borrower) and by BGUK (in its capacity as the UK borrower) to the Lloyds syndicate banks.
454 By a mortgage debenture dated 1 February 1990 BGF granted a first registered fixed and floating charge over all its assets, property, undertakings and goodwill to secure its liabilities to the Lloyds syndicate banks under its guarantee, and its liabilities to the Australian banks under ABFA and ABSA. In the instrument, Westpac is described as contracting as ‘agent under the [ICA] and trustee under the [STD] for itself and [the banks]’.
4.6.4.2. The TBGL instruments
455 TBGL’s existing guarantees in respect of the debts owed to all banks remained on foot, but it agreed to provide a further guarantee in respect of the obligations arising out of the transactions.
456 By a deed of guarantee and indemnity dated 1 February 1990 in favour of Westpac, TBGL guaranteed payment of all amounts payable by BGF to the Australian banks, by WAN in respect of the $5 million Westpac overdraft facility and by BGUK to the Lloyds syndicate banks. The charging documents that TBGL was required to enter into comprised certain share mortgages over shares it held in BPG and also over certain shares that it held as bare trustee in BRL and JNTH.
4.6.4.3. The BPG group instruments
457 By deeds of guarantee and indemnity dated 1 February 1990 in favour of Westpac, BPG and each other company in the BPG group guaranteed payment of all amounts payable by each of BGF and BGUK to the banks.
458 The guarantees and indemnities executed by all members of the BPG group, save for WAN, were limited ‘to the value from time to time of the gross assets of the Guarantor, as shown in the then most recent accounts of the Guarantor’.
459 WAN’s guarantee and indemnity was not limited in that way because it was one of the ‘Australian Borrowers’ and as such was a party to ABSA and ABFA.
460 By mortgage debentures dated 1 February 1990 in favour of Westpac, BPG and each other company in the BPG group granted a first registered fixed and floating charge over all of its assets, property, undertakings and goodwill (including mastheads) to secure its liabilities to the banks as guarantor under its guarantee and indemnity. The mortgage debentures entered into by BPG and the other companies in the BPG group included a legal mortgage of shares that each of these companies held in other members of the BPG group.
461 In addition, on 1 February 1990 those companies in the BPG group that owned real property from which the publishing operations were conducted granted, in favour of Westpac, first registered real property mortgages over that property. By these charging documents, the banks obtained a first registered security interest over the publishing assets that were, at the time, the most valuable of the Bell groups’ holdings. Because the banks took security over both the assets and the shares, they had the ability to recover debts owed to them either by selling the assets or by dealing with BPG’s shares in other group companies.
4.6.4.4. Securities over the BRL shares
462 As at 26 January 1990 various companies in the Bell group held shares in BRL; namely, 216,727,342 fully paid ordinary shares, 74,889 partly paid ordinary series C shares and 23,141,272 convertible preference shares. I will call these ‘the BRL shares’.
463 The BRL shares were beneficially owned by seven of the Bell group companies, all of whom are plaintiffs in the action: Bell Equity Management Ltd (Bell Equity), Dolfinne Pty Ltd (Dolfinne), Dolfinne Securities Pty Ltd (Dolfinne Securities), Industrial Securities Pty Ltd (Industrial Securities), Maranoa Transport Pty Ltd (Maranoa Transport), Neoma Investments Pty Ltd (Neoma) and Wanstead Securities Pty Ltd (Wanstead Securities). I will call them ‘the BRL shareholders’.
464 TBGL and one of its subsidiaries, Ambassador Nominees Pty Ltd (Ambassador), each had registered legal ownership of some of the BRL shares. They had no beneficial interest in those shares and held them as bare trustee for various of the BRL shareholders. Two of the BRL shareholders, Dolfinne and Maranoa Transport, were not registered owners of any of the BRL shares, although they had a beneficial interest in various parcels. All other BRL shareholders had both legal and beneficial title to various of the BRL shares. TBGL was the registered owner and Dolfinne was the beneficial owner of all of the convertible preference shares.
465 Five of the BRL shareholders gave guarantees to support the obligations of the borrowers under the facilities agreements. By deeds of guarantee and indemnity dated 1 February 1990 in favour of Westpac, each of Bell Equity, Dolfinne Securities, Industrial Securities, Neoma and Wanstead Securities guaranteed repayment of all amounts payable by BGF and BGUK to the banks. Each of these guarantees and indemnities was limited to the realisable value from time to time of the shares held by the guarantor in the capital of BRL or, in the case of Industrial Securities and Wanstead Securities, in the capital of BRL and JNTH.
466 Dolfinne and Maranoa Transport did not execute a guarantee and indemnity as they were not the registered legal owner of any BRL shares. There was no separate guarantee by TBGL because, by its main guarantee and indemnity, it had given support for the repayment of BGF’s debts to the Australian banks and BGUK’s debts to the Lloyds syndicate banks. TBGL’s guarantee was not subject to the limitation applying to the BRL shareholders’ guarantees.
467 In addition, Ambassador, as bare trustee of BRL shares, entered into a guarantee and indemnity dated 1 February 1990 in favour of Westpac, by which it guaranteed repayment of the debts due by BGF and by BGUK to the banks. Ambassador’s guarantee was ‘limited to the realisable value … of the shares held by the Guarantor in the capital of [BRL] and [JNTH]’.
468 By share mortgages dated 1 February 1990 in favour of Westpac, the registered legal owners of the BRL shares granted a legal mortgage over all of the fully paid ordinary BRL shares. Where the BRL shareholders were the beneficial, but not the registered legal, owners of the fully paid ordinary BRL shares, they executed a written direction and authorisation addressed to TBGL or Ambassador, as bare trustee, directing and authorising the bare trustee to grant the securities. By the share mortgages the companies bound themselves, as principal obligors, to pay all moneys due under the guarantees and indemnities.
469 In relation to the convertible preference shares, neither the direction and authorisation executed by Dolfinne, nor the share mortgage executed by TBGL included them in the list of shares to be covered by the security. It appears that the omission was discovered some time later. On 29 March 1990, TBGL granted a further mortgage over the preference shares. Dolfinne did not execute a separate direction and authorisation for the March 1990 transaction.
470 No security was taken by the banks over the 74,889 partly paid ‘C’ class shares.
4.6.4.5. Securities over the JNTH shares
471 As at 26 January 1990, Bell group companies held 10,203,426 ordinary fully paid shares and 316,000 preference shares in the capital of JNTH. Wanstead Securities, Industrial Securities, Wanstead Pty Ltd (Wanstead) and WAON Investments Pty Ltd (WAON) were the beneficial owners of those shares. TBGL and Ambassador, as bare trustees, were the registered legal owners of some of the ordinary and preference shares held beneficially by Industrial Securities. I will call these companies ‘JNTH shareholders’.
472 By deeds of guarantee and indemnity dated 1 February 1990 in favour of Westpac, each of the JNTH shareholders guaranteed repayment of all moneys payable by BGF and BGUK to the banks. Two of the shareholders, Industrial Securities and Wanstead Securities, were also BRL shareholders and their guarantees have already been mentioned. WAON’s guarantee was ‘limited to the realisable value from time to time of the shares held by the guarantor in the capital of … [JNTH]’. Wanstead’s guarantee was limited ‘to the value from time to time of the gross assets of the guarantor, as shown in the then most recent accounts of the Guarantor’. The guarantees and indemnities given by TBGL and Ambassador have already been mentioned.
473 By share mortgages dated 1 February 1990 in favour of Westpac, the registered legal owners of the JNTH shares mortgaged the JNTH shares to secure their liabilities to the banks under guarantees. Industrial Securities, as the beneficial holder of ordinary and preference shares, executed written directions and authorisations dated 1 February 1990 addressed to TBGL and Ambassador, as bare trustees, authorising and directing them to enter into the legal mortgages over those shares.
4.6.4.6. Securities given by other companies
474 The next category of charging documents and guarantees required by the banks were from those Australian Bell group companies that had material debt and equity links with the BGUK group. The relevant debt and equity links between the Australian Bell group companies and the BGUK group were as follows:
• Western Interstate was the single largest creditor of BGF; it was owed $537.4 million by BGF.
• Bell Bros Pty Ltd (Bell Bros) (which held all the ordinary shares in Western Interstate) was the third largest creditor of BGF, in an amount of $253.8 million.
• Bell Bros Holdings held all the issued shares in Bell Bros. The ultimate shareholder of Bell Bros Holdings was TBGL. BGF was owed $118.27 million by Bell Bros Holdings.
• BGUK held redeemable preference shares in Western Interstate and those shares represented the largest single asset at book value recorded in BGUK’s books. These shares were the means by which BGUK would receive any moneys from the Australian Bell group companies.
• Group Color (WA) Pty Ltd (Group Color) held all the ordinary issued shares in BGUK.
475 The plaintiffs contend that the initial links would be debt flows out of BGF followed by equity flows from these creditors. The only route by which moneys would flow into BGUK would be by way of equity. Subsequently all substantial outflows from BGUK, if any, into Australian Bell group companies would also be by way of equity. To capture these debt and equity flows within the arrangements, charging documents and guarantees were entered into by Western Interstate, Bell Bros, BGUK and Group Color.
476 By deeds of guarantee and indemnity dated 1 February 1990 in favour of Westpac, Bell Bros, Group Color and Western Interstate guaranteed payment of all amounts payable by BGF and BGUK to the banks. The guarantees of Bell Bros and Western Interstate were limited to the value of the gross assets of each such guarantor from time to time and, in the case of Group Color, it was limited to the value from time to time of its shares in BGUK.
477 By share mortgages dated 1 February 1990 in favour of Westpac, Bell Bros and Group Color secured to the banks their liabilities under their guarantees. By these share mortgages, Bell Bros granted a legal mortgage over its ordinary shares in Western Interstate, and Group Color granted a legal mortgage over its ordinary shares in BGUK.
478 On 1 February 1990, Western Interstate executed a mortgage debenture in favour of Westpac to secure to the banks its liabilities under its guarantee. The debenture was a fixed and floating charge over all of its assets and undertakings.
4.6.4.7. Securities given by BGUK and TBGIL
479 In ABSA and LSA No 2 BGUK had undertaken to give a guarantee and other securities by the operative date. TBGIL was to provide, again by the operative date, a schedule of anticipated liabilities (being an estimate of the existing creditors of TBGIL as at that date) and which creditors were to be paid from the proceeds of the sale by TBGIL of its shares in Bryanston. Neither company was able to fulfil these undertakings by 1 February 1990. The banks extended the time for compliance to 15 February 1990, which was the date for compliance with the conditions subsequent.
480 By a deed of guarantee and indemnity dated 15 February 1990 in favour of Westpac, BGUK guaranteed repayment of all amounts payable by BGF and WAN (in respect of its $5 million Westpac overdraft facility) to the Australian banks.
481 By a mortgage debenture and share mortgage dated 15 February 1990 in favour of Westpac, BGUK executed a registrable first fixed and floating charge over all of its assets, property, undertaking and goodwill and a registrable first legal mortgage over its redeemable preference shares in Western Interstate and its ordinary shares in TBGIL. These securities were provided in respect of BGUK’s liabilities to the Australian banks as guarantor under its guarantee, and also to secure its liabilities to the Lloyds syndicate banks under RLFA No 2.
482 By a deed of guarantee and indemnity dated 1 February 1990 in favour of Westpac, TBGIL guaranteed the payment of all amounts payable by BGF, BGUK and WAN to the banks. TBGIL’s guarantee was limited to the net proceeds of the sale of Bryanston as from time to time received and not set aside to meet TBGIL’s anticipated liabilities or otherwise paid to the Security Agent as a pre‑payment of the facilities. On 15 February 1990, TBGIL entered into two charging documents, namely, a security assignment and a charge on cash. They were given in favour of Westpac to secure TBGIL’s liabilities under its guarantee.
483 By the charge on cash, TBGIL had to deposit £3.7 million by 16 February 1990 into an account in London held by the Security Agent together with accrued interest. TBGIL charged the deposit and the debt it represented as a fixed charge ranking behind claims of the creditors of TBGIL in respect of the anticipated liabilities, but ranking in priority to other creditors.
484 The amount of £3.7 million was the balance of the £5 million sale consideration received by TBGIL from the sale of Bryanston. By 15 February 1990 some £1.3 million of the £5 million had been expended in meeting liabilities of TBGIL. This left the balance of £3.7 million subject to the charge on cash. The £3.7 million had to be applied first in satisfying the anticipated liabilities.
485 By the security assignment, TBGIL assigned and charged to the Security Agent its interest in an agreement dated 13 December 1982 between TBGIL and Heytesbury Securities relating to the payment of up to £15 million as an additional consideration for the sale by TBGIL of all its shares in Bryanston.
486 The certificate of the anticipated liabilities, signed by two directors of TBGIL, was also provided to Lloyds Bank on 15 February 1990.
4.6.4.8. Summary
487 By 15 February 1990, all charging documents and guarantees that were contemplated by the recitals to the ICA, and as required by the conditions precedent to ABSA and LSA No 2, had been entered into. The plaintiffs contend that by the force of these instruments the banks had obtained security over all significant and worthwhile assets of the Bell Participants for repayment of their debts. These securities encompassed the publishing assets, the BRL shares, the JNTH shares, the relevant debt and equity links from Australian Bell group companies to BGUK, and the proceeds from the sale of Bryanston.
4.6.5. The 1990 refinancing: the subordination deeds
488 I have already mentioned the undertakings in cl 17.6 of ABFA and RLFA No 2 by TBGL to procure the subordination of inter‑company indebtedness. I will describe the three instruments that dealt with subordination.
4.6.5.1. The Principal Subordination Deed
489 By a deed dated 15 February 1990 in favour of Westpac (the Principal Subordination Deed), those Bell group companies (called subordinated creditors) that were creditors of the Australian security providers agreed to subordinate the debts owed to them by those companies until the banks’ debts had been repaid. The definitions in some financing documents, such as ABSA, were incorporated into the Principal Subordination Deed. ‘Australian security providers’ was defined in ABSA to mean companies incorporated in Australia entering into charging documents and guarantees.
490 By the terms of the Principal Subordination Deed, until all banks’ debts had been repaid, the subordinated creditors would:
(a) subordinate their rights and claims as a creditor of any Australian security providers to any rights and claims by the banks against such companies;
(b) not demand any moneys owing, or seek to enforce their rights or claims against any Australian security providers, without the consent of the Security Agent until liquidation of any such Australian security providers;
(c) hold on trust for the Security Agent any payment received as a creditor of any Australian security providers prior to their liquidation and would also hold on trust for the Security Agent distributions received in any such liquidation;
(d) not petition for, or vote in favour of, any resolution or take any other action whatsoever for, or which may lead to, the winding up, appointment of a liquidator, provisional liquidator or entry into a scheme of arrangement or composition with or for the benefit of creditors of an Australian security provider; or
(e) seek repayment of the debt or liability owed by an Australian security provider to the extent of the surplus assets remaining after payment in full of the whole of the senior liabilities.
491 Senior liabilities refers, in this context, to the debts due to the banks. One of the conditions subsequent required that the parties entering into the Principal Subordination Deed deliver directors’ and shareholders’ resolutions authorising that action. This condition was satisfied by 15 February 1990.
492 Insofar as certain of the nominated subordinated creditors did not execute the Principal Subordination Deed on 15 February 1990, the conditions subsequent requiring that those Bell group companies execute such deeds and provide such directors’ and shareholders’ resolutions were waived by the banks.
4.6.5.2. The BIIL Subordination Deed
493 As at 26 January 1990 BIIL was the largest creditor of BGUK; it was owed some $516.4 million. By a deed dated 14 May 1990 in favour of Westpac (the BIIL Subordination Deed), BIIL agreed to subordinate the debt owed to it by BGUK until all the banks’ debts had been repaid. The subordination was on the same terms (including the provision for trusts and the like) as in the Principal Subordination Deed. There is a dispute between the parties as to whether either TBGL or BGUK was obliged by cl 17.6 of ABFA and RLFA No 2 to procure BIIL to subordinate its debts.
4.6.5.3. The BGNV Subordination Deed
494 During the first half of 1990, officers of TBGL negotiated with the corporate director of BGNV with a view to having BGNV execute a subordination deed. Eventually the corporate director agreed and the articles of association of BGNV were amended to include in the objects clause a power to guarantee or secure the obligations of a third party.
495 By a deed dated 31 July 1990 in favour of Westpac the BGNV Subordination Deed, BGNV subordinated the BGNV on‑loans until the banks’ debts had been repaid. There is a dispute between the parties as to whether the BGNV subordination deed was on the same, similar or materially different terms to the Principal Subordination Deed. I will return to that question later.
4.6.6. Ancillary transactions
496 The final category of the refinancing instruments is miscellaneous documents required by the banks’ instruments or the main facilities agreements.
4.6.6.1. The UK debentures
497 Under one of the conditions precedent to LSA No 2, the Lloyds syndicate agent was to receive the UK debentures duly executed by BGUK in London. The UK debentures were said to be solely for the purpose of acknowledging BGUK’s indebtedness in respect of the commitment of each of the Lloyds syndicate banks as at the operative date. This was to be without creating any additional rights or imposing any additional obligations other than those which are created under or imposed by RLFA No 2.
498 On 26 January 1990 BGUK executed common form debentures in favour of each of the Lloyds syndicate banks. The debentures documents were short (one page) and contained this provision: ‘The terms and conditions set out in [RLFA No 2] shall apply to this UK Debenture’.
499 As I understand it, the UK debentures merely served to confirm the pre‑existing indebtedness of BGUK to the Lloyds syndicate banks. They did not create any charge or other security interest over property. And they were not granted in favour of the Australian banks.
4.6.6.2. Other documents to satisfy conditions
500 In satisfaction of further conditions precedent, the banks’ agents received or were made aware of a number of documents. One condition stipulated that the documents were to be ‘in form and substance satisfactory to’ the agents. The documents were to be provided by the amended operative date as part of the requirements of the banks to give effect to each of the charging documents and guarantees. They included:
(a) directors’ resolutions from each borrower, TBGL and each security provider ‘approving each of the Financing Documents to which it is, or is to become, a party in the transactions contemplated’;
(b) unanimous shareholders’ resolutions of each borrower and each security provider (excluding TBGL) ‘approving and/or ratifying the granting of the Financing Documents to which it is, or is to become, a party and the transactions contemplated hereby and thereby’;
(c) powers of attorney referable to the execution of each of the transactions;
(d) certificates under s 230(8) of the Companies (Western Australia) Code; and
(e) certificates of appointment of representatives under s 244(3) of the Companies Codes.
501 It was also a condition precedent that Lloyds Bank, in its agency capacity, receive ‘copies of all relevant documents pertaining to the issue of conversion bonds by BGL, BGF and [BGNV]’. These documents were provided to Lloyds Bank by the operative date. A further condition precedent, which was satisfied by the operative date, was the receipt of a legal opinion from A&O on English law ‘stating that the entry into the financing company documents by the Obligors will not constitute an event of default under the documents covering the terms of issue of any conversion bonds’.
4.6.6.3. Amendments
502 The main refinancing documents were amended by four instruments that are themselves part of the impugned arrangements.
503 By a letter of acknowledgement dated 9 March 1990 and signed by the Lloyds syndicate banks, TBGL as the ‘Original UK Guarantor’ and by BGF and BGUK as the ‘Original UK Borrowers’, some minor amendments were made to LSA No 2. Those amendments took effect on execution of the document.
504 A further letter of acknowledgment dated 27 April 1990 was signed by all banks and by the subordinated creditors and the security providers. The letter made minor amendments to the Principal Subordination Deed. Those amendments took effect upon all parties signing the letter.
505 By the Supplemental Agreement to the Australian Banks Facilities Agreement (SAABFA), dated 31 August 1990 and executed by all banks, TBGL, BGF, WAN and the security providers, ABFA was amended to vary the NAB’s rate of interest and in other respects. The relevance of SAABFA is disputed by the parties.
506 A letter of amendment dated 8 January 1991 and addressed to Westpac as the Security Agent was executed by all banks, including Lloyds Bank as the Lloyds syndicate agent and Westpac as the Australian banks agent, and made extensive changes to the ICA. Once the letter was signed by all parties, the changes took effect from the operative date.
4.6.7. Waivers and consents: February 1990 and following
507 In the period after the signing of the main documents on 26 January 1990, the banks granted a number of waivers and consents. They fall into four categories. First, there were waivers of strict compliance with conditions precedent and conditions subsequent. Secondly, the banks gave consents to the wind down of the BGUK group. Thirdly, they granted indulgences in relation to interest payments on the banks’ facilities. Fourthly, the banks waived rights concerning asset sale proceeds.
4.6.7.1. The conditions precedent and subsequent
508 Unless otherwise agreed in writing by all banks, all charging documents and guarantees had to be executed and delivered to the Security Agent by 30 January 1990. On that date, the banks agreed to extend the operative date to 1 February 1990. BGUK and TBGIL were not able to comply with the conditions precedent by 1 February 1990; that is, they did not enter into their charging documents or guarantees, obtain the associated directors’ and shareholders’ resolutions or have the directors of TBGIL provide the certificate of anticipated liabilities. So on 1 February 1990 the banks waived the requirement and extended the date to 15 February 1990.
509 Some of the Bell group companies that were required to execute the Principal Subordination Deed and provide directors’ and shareholders’ resolutions by 15 February 1990 did not do so. On 15 February 1990 the banks waived that requirement.
4.6.7.2. Wind down of BGUK group
510 By a letter of consent dated 22 June 1990 and addressed to Westpac as Security Agent, consents were granted and waivers provided to ‘permit BGUK to liquidate or strike off or otherwise transfer the dormant companies to the control of a third party’. Each consent was requested by BGUK and TBGL and provided by the banks to the Security Agent prior to the relevant transaction occurring. The consents related to:
• The payment of dividends (ABFA cl 16.7(a)).
• The disposal of assets (ABFA cl 17.8(a) and cl 17.15(a)).
• The disposal of shares in a group company and the transfer of inter‑company indebtedness (ABFA cl 17.9(a)).
• A waiver of the right to have asset sale proceeds paid to the Security Agent.
4.6.7.3. Interest payments to the banks
511 The interest commitment to the Australian banks and the Lloyds syndicate banks under ABFA and RLFA No 2 was approximately $4.2 million per month. It seems that the commitment was met in each month from January 1990 to August 1990.
512 Shortly before 27 September 1990, officers of TBGL approached the banks and advised that the interest payment due at the end of September 1990 could not be made. The banks agreed to extend the time for payment of the interest by seven days to 5 October 1990. On 4 October 1990 the Lloyds syndicate banks agreed to a further seven day extension, while the Australian banks provisionally agreed to defer interest until 30 November 1990. On 15 October 1990 the Australian banks and the Lloyds syndicate banks formally agreed to extend time for payment of the September and October 1990 interest (at the default rate) to 30 November 1990.
513 Late in November 1990 the banks gave a further extension, to 31 January 1991, for the interest instalments originally due on 28 September and 30 October 1990 on condition that the monthly instalments due at the end of November 1990 and in following months were paid. It appears that the monthly instalments of interest due to the banks at the end of each of November and December 1990 and January 1991 were paid.
514 During 1991, the banks agreed to further extensions of the time for payment of the September and October 1990 instalments as follows:
• 31 January 1991: time extended to 11 February 1991
• 11 February 1991: time extended to 28 March 1991.
515 The undertaking to pay the September and October 1990 interest instalments by 28 March 1991 was not met; the interest due at the end of March 1991 was not paid. There is no evidence that a further formal extension was given in respect of any of those commitments.
4.6.7.4. Asset sale proceeds: introduction
516 As a broad generalisation (and subject to many exceptions), the regime under cl 17.12 of ABFA and RLFA No 2 entitled the banks to receive the proceeds from the sale of assets as pre‑payments of the principal amounts owing under the facilities. In the period February to July 1990, receipts from sale of assets of Bell group companies came from:
(a) the sale of the shares in Bryanston;
(b) the sale of the assets and business of Bell Press;
(c) part payment of a receivable due by BCF to BGF;
(d) an amount due under the contract for the sale of the ITC Entertainment assets; and
(e) the sale of an apartment in New York.
517 There are significant disputes between the parties as to the effect of cl 17.12 and whether individual assets were caught by it. What follows is intended only as a summary of what happened. Resolution of the contentious aspects will occur later in the reasons.
4.6.7.5. Asset sale proceeds: Bryanston
518 In accordance with the 13 December 1989 sale contract, TBGIL received the initial instalment of £5 million on 30 January 1990. On 15 February 1990, approximately £1.3 million was utilised to meet expenses or liabilities of TBGIL and to pay BGUK’s legal and accounting advice associated with the refinancing. On the same day, the balance of the £3.7 million was transferred into an escrow account in the name of Westpac in London. This was the account from which the anticipated liabilities were to be met. It was intended that any balance would be applied as a pre‑payment of the banks’ loans. As things turned out, virtually all of the escrow account was taken up in payment of the anticipated liabilities.
4.6.7.6. Asset sale proceeds: Bell Press
519 The total consideration received from the sale of Bell Press was approximately $25.8 million. On 12 February 1990 $20.03 million was received and deposited in an escrow account in Westpac’s name. The balance of the moneys was received on 27 February 1990 and deposited into the escrow account on 1 March 1990.
520 Before completion of the Bell Press transaction, TBGL had sought the consent of the banks to deduct approximately $1.33 million from the net sale proceeds to meet the commitments to employees whose services were not being taken over by the purchaser. The majority of the banks agreed to this course and, on 14 February 1990, $1.3 million was released from the escrow account to meet those commitments.
521 Representatives of the banks and officers of TBGL held meetings in Perth on 22 and 23 February 1990. At that time the balance in the escrow account was about $18.6 million. At the February 1990 meetings, TBGL requested release of part of the Bell Press sale proceeds in the escrow account to meet liabilities.
522 By a letter of waiver dated 27 February 1990 executed by all banks, TBGL, BGF, WAN, BGUK and the security providers, the terms of ABFA, RLFA No 2 and the ICA were varied so that the moneys in the escrow account were not required to be distributed on the next RMDD (at the end of February 1990) to the banks as a pre‑payment. It was agreed that:
(a) of the moneys then held in the escrow account, an amount of $7.7 million should be applied towards:
(i) satisfaction of costs, charges, and expenses incurred by the agents that were payable by the borrowers under the facility agreements;
(ii) payment of fees to due to the banks under the facility agreements; and
(iii) payment of interest due under the facilities.
(b) the balance of the moneys in the escrow account was to be held and applied on the RMDD before March 1990 as a pre‑payment.
523 Pursuant to the 27 February 1990 waiver, in the period 28 February 1990 to 30 March 1990, $7,678,463.62 was released from the escrow account to:
(a) refund to Bell group companies the banks’ facility fees, the agency fees of Westpac and Lloyds (in part) and stamp duty; and
(b) pay legal fees of various firms of solicitors involved in the refinancing.
524 During and after February 1990, discussions took place concerning the obligations of the Bell group to pay interest in May 1990 to the bondholders under the BGF bond issue and the second BGNV bond issue and, in particular, whether the balance of the Bell Press proceeds (or any part of it) should be utilised for that purpose. Until May 1990 there was no unanimity of view on that question.
525 On 30 March 1990 the same parties as had joined in the 27 February 1990 waiver executed a further letter of waiver that amended ABFA, RLFA No 2 and the ICA. In accordance with the terms agreed in the 27 February 1990 waiver, TBGL requested, and each bank agreed, that the balance of the Bell Press proceeds then held in the escrow account not be applied on the RMDD for March 1990 as a pre‑payment, but be retained and applied in April 1990 unless otherwise agreed in writing by all the banks.
526 A further letter of waiver was entered into by the same parties on 27 April 1990. The waiver letter also varied some of the provisions of ABFA, RLFA No 2 and the ICA. As required by the 30 March 1990 waiver, TBGL requested, and each bank agreed, that the balance in the escrow account not be applied as a pre‑payment on the April 1990 RMDD, but that it should be held over to be so applied on the May 1990 RMDD unless otherwise agreed.
527 By 11 May 1990 the parties that had executed the earlier letters executed a further letter of waiver. This 11 May 1990 waiver constituted a further amendment to ABFA, RLFA No 2 and the ICA. As required by the 27 April 1990 waiver, TBGL requested, and the banks agreed, that the balance in the escrow account not be applied as a pro rata pre‑payment of the banks’ loans on the May 1990 RMDD, but rather be paid to the order of TBGL for application towards interest payment obligations of BGF and BGNV due on 7 May 1990 in respect of the bond issues.
528 Four of the Lloyds syndicate banks imposed conditions on their agreement to grant to waiver. Three of them (BoS, Gentra and Gulf Bank) insisted that a subordination deed be entered into by BGNV. Two of them (Creditanstalt and Gentra) directed that TBGL should approach LDTC ‘to negotiate concessions (which may include a moratorium acceptable to the banks) with the [bondholders]’. By July 1990, both Creditanstalt and Gentra had agreed to defer the requirement that TBGL negotiate with LDTC until the group’s future strategy had been determined.
529 On 11 May 1990, the interest payment of $7.5 million that had been due by BGF in respect of the BGF bond issue on 7 May 1990 (then in the seven day grace period) was paid. To make this payment, BGF had obtained $5.83 million from BCF on 4 May 1990 in part repayment of BCF/BGF receivable. The balance of $1.67 million came from WAN. This was in line with the stipulation made by some banks during the negotiations, and reflected in the 11 May 1990 waiver, that TBGL seek repayment of loans from BCHL group companies and utilise those moneys to meet interest obligations on the bondholder interest payments due in May 1990.
530 Also, on 11 May 1990 (within the seven day grace period), the interest payment of approximately $17.5 million due on 7 May 1990 on the second BGNV bond issue was paid by applying the balance of the Bell Press sale proceeds then held in the escrow account (approximately $17.45 million). The remaining $60,000 came from WAN.
4.6.7.7. Asset sale proceeds: the ITC contract payment
531 The ITC companies were incorporated in the United Kingdom and were subject to UK tax laws. In November 1988, when the sale agreements were executed, assessments for corporations tax liabilities for the period 1984 to 1988 had not been issued. It was a term of the agreement that TBGIL would ensure that the corporation tax liability of ITC did not exceed £7.6 million by, if necessary, surrendering group relief. If, as a result of the surrender, the corporation tax liability fell below £7.6 million, ITC (in effect, Campania) would pay the difference to TBGIL. Disputes arose between Campania and TBGIL about the interpretation of the November 1988 agreement in relation to the tax liabilities. The disputes between Campania and TBGIL were resolved and the parties entered into an agreement for ‘Surrender of Group Relief’ on 25 June 1990 (the June 1990 agreement).
532 Under the terms of the June 1990 agreement, £4 million was deposited by ITC (Campania) into an escrow account to be paid for the benefit of BGUK, provided that assessments were issued by the Inland Revenue Commissioner by 30 September 1990 on terms that gave effect to agreements between the parties as to the surrender or procurement of surrender of group relief. BGUK effected the relevant group surrender and, as a consequence, TBGIL or BGUK received approximately £4.6 million, being:
(a) £0.7 million from the Inland Revenue on 29 June 1990; and
(b) £3.9 million from ITC (Campania) on 2 July 1990.
533 These funds were not dealt with in accordance with the regime envisaged by cl 17.12 of ABFA and RLFA No 2. The bulk of the £4.6 million received in settlement of the ITC contract dispute was applied in July 1990 in to meet the interest payment due to bondholders on the third BGNV bond issue and part of the Lloyds syndicate banks’ July 1990 interest payment.
4.6.7.8. Asset sale proceeds: the New York apartment
534 A subsidiary in the ITC group owned an apartment in New York. As part of the November 1988 arrangements between TBGIL and Campania, the latter acquired an option to purchase the apartment. A sale was finally effected in July 1990. The net proceeds of sale, approximately $1.15 million, were received by Western Interstate on 20 and 25 July 1990. Again, the proceeds were not dealt with in accordance with the cl 17.12 regime. The bulk of the moneys were applied in August and September 1990 under company transfers to WAN, BGF and other group companies.
4.7. Overview of the events: June 1990 to April 1991 and the collapse
4.7.1. Early restructuring proposals: June 1990 to August 1990
535 At some time, probably May 1990, Aspinall commenced discussions with Lloyds Corporate Advisory Services Pty Ltd (LCAS) concerning a possible restructure of the Bell group. The mandate letter dated 20 June 1990 describes the task as ‘to negotiate … the conversion of three series of TBGL convertible bonds into direct equity in [BPG], [WAN] or such other entity as may seem appropriate’.
536 One of the conditions precedent to the brewery sale agreement was the repurchase (funded by BCHL) of BBHL’s subordinated debentures in the United States. A meeting of the BRL directors was held on 3 July 1990, at which Oates reported that the offer of 40 per cent for the repurchase of the BBHL US debentures expired on 4 July 1990 and that the required acceptances had not been received. However, Oates reported that negotiations would take place with the bondholders within the following two weeks. Oates also said that the repurchase was required if the acquisition of the BBHL Australian assets were to be completed.
537 On 5 July 1990 the BCHL CPDD prepared a proposal for a scheme of arrangement and capital reduction for BCHL and TBGL. It proposed an interest moratorium from BCHL convertible bondholders and an agreement from shareholders to reduce the company’s existing share capital.
538 A further meeting of BRL directors was held on 20 July 1990. At this meeting, the BRL directors recommended that the shareholders approve the brewery sale agreement only if the BBHL debenture repurchase was successful to at least 51 per cent of the outstanding amount of the debentures.
539 The BCHL directors met on 30 July 1990. Oates reported to the board that the bondholders had indicated that they would accept the BBHL debenture purchase at 70 cents in the dollar. Mitchell presented a proposal for a scheme of arrangement that would necessitate a negotiation with various classes of creditors. The board resolved to approve the proposal in general terms and authorised Mitchell to continue discussions with creditors.
540 On 31 July 1990, the BGNV Subordination Deed was executed. This was (leaving to one side SAABFA) the last of the Transaction documents.
541 By letter dated 1 August 1990, lawyers in the Netherlands Antilles provided the banks with an opinion on the BGNV Subordination Deed. The opinion confirmed that all necessary corporate action had been duly taken by or on behalf of BGNV and all necessary authorisations and approvals under the laws of the Netherland Antilles had been obtained for the authorisation, delivery and performance by the company of the deed.
542 By memorandum dated 2 August 1990 to Cruttenden, Latham (Lloyds Bank) reported on the passing of the six‑month preference period. Apparently, their lawyers had anticipated the happening of this event. On 27 July 1990, Perry (A&O) had invited the lawyers involved in the refinancing arrangements and some of the Lloyds bank officers to what he described as a ‘six‑month celebratory lunch’ to be held at Café du Marche on 1 August 1990. When he was cross‑examined, I asked Perry if the restaurant was still in operation. He confirmed that it was and said it could be found ‘two left turns out of Barbican tube’. I can confirm the accuracy of those directions and can report (circa 2004) that Café du Marche is worth a visit.
543 BCHL developed a further restructuring proposal dated 3 August 1990. The proposal involved the purchase of BBHL debentures, a restructure of TBGL, repayment of the balance of the BRL inter‑company debt by asset sales in exchange for BRL shares, and procedural matters relating to the execution of the proposal through creditors’ meetings and the courts. On the same day, the ‘Brewery Sale Amendment Agreement No 10’ was executed on behalf of BCHL, Manchar and BRL. The agreement provided for an extension of the completion date from 31 July 1990 to 15 August 1990. On 13 August 1990 Lloyds Corporate Advisory Service (LCAS) prepared a recapitalisation proposal for TBGL.
544 Hill wrote to the BRL shareholders on 15 August 1990 announcing the formation of a joint venture with Lion Nathan to acquire the Australian brewing operations of BBHL. On the same day, Hill chaired a general meeting of BRL shareholders in Perth. The shareholders resolved to approve the brewery transaction.
545 The TBGL directors held a meeting on 17 August 1990. According to the minutes:
(a) Simpson was appointed as a director;
(b) efforts were being made to conclude the agreement with Mirror Group Newspapers (Maxwell); and
(c) additional reports from LCAS were being obtained as alternatives to the Maxwell agreement.
546 On 28 August 1990, Maxwell faxed a letter to BCHL. Due to the uncertainties associated with the crisis in Iraq, Maxwell indicated that he would postpone the Foreign Investment Review Board (FIRB) application for the proposed purchase of an interest in the BPG assets.
547 By memorandum dated 30 August 1990 Mitchell wrote to members of the board of BCHL regarding the restructuring. Mitchell noted that a proposal had been put by BCHL for the capitalisation of the BGNV bonds, but that it did not have the support of LCAS. It was critical for TBGL to obtain an interest moratorium and efforts would be made to pursue this goal. Mitchell also commented that BCHL wished to pursue a proposal to release the shares of BRL in exchange for the debt that BCHL would owe after the completion of the brewery sale and finalisation of the sale of some land in Rome. The proposal required BCHL to obtain the BRL shares held by TBGL, which in turn would require a deal with the bondholders of TBGL.
548 On 31 August 1990 the SAABFA was executed: see Sect 4.6.6.3. On the same day, a meeting of BCHL directors was held. At that meeting, Oates advised that the repurchase offer to the BBHL debentures holders would be extended once again.
4.7.2. Further restructuring proposals: September 1990
549 On 3 September 1990 Aspinall wrote to Tilley of LCAS in relation to the proposal for the defeasance of TBGL’s Eurobonds. Aspinall asked LCAS to reconsider its opposition to the restructuring proposals. Tilley responded by letter dated 7 September 1990, in which he remarked that BCHL’s objectives were incompatible with those of the TBGL bondholders as they provided no certainty of a positive outcome. They would require the bondholders to commit to a restructure that was conceptual in nature and that removed the BRL shares from their security while offering little in return.
550 LCAS then developed a proposal, dated 19 September 1990. The proposal involved two stages – an interest moratorium and the restructure of BPG:
The interest moratorium would apply to each series of convertible bonds for a period of 12 months and would be based on the fundamental understanding that if the interests of TBGL’s bond holders and banks are not restructured the only option is a liquidation of TBGL, and that upon a liquidation of TBGL the convertible bond holders will get nothing.
The restructure depends on BPG continuing as an ongoing viable entity and accordingly it is essential to maintain the banks’ involvement and to implement the proposal before 31.5.91 (the date by which the bank debt is to be refinanced).
The banks would not agree to release the BRL shares, notwithstanding to the Banks the BRL share may have no value, unless the bank debt is restructured.
The convertible bond holders will not agree to any proposal (either an interest moratorium or a restructuring of their interests) unless they realise a benefit. Benefit does not necessarily mean, however, increased value.
551 The potential benefits to bondholders should an interest moratorium be granted (as outlined by LCAS) included the avoidance of liquidation; the provision of an opportunity to develop a proposal that would offer bondholders real prospective value; and the absence of any real cost, given that TBGL was likely to default on interest payments to the bondholders during this period. LCAS also identified the potential benefits to the bondholders in the event of a successful restructuring: certainty of investment, an investment in a viable ongoing entity, the prospect of real value, and independence from BCHL. LCAS went on to add that:
The convertible bondholders would only give up part of their current interest (that is, the BRL shares) for a tangible, certain quid pro quo. Although BRL shares may be worthless to the convertible bond holders, they will not give up their interest in BRL shares unless their restructured interest is of greater value and/or certainty than their current interest.
552 On 20 September 1990, Aspinall wrote a memorandum to all directors regarding ‘Cash flow/Banks’, in which he said:
Any attempt to get an interest moratorium from our banks at short notice would I believe receive a very negative response from three banks in particular [BoS, Gentra and Creditanstalt]. Whilst I am not suggesting that the other banks will automatically agree, I believe the above three banks have made it very clear in the past that they would not agree to an interest moratorium.
[Gentra] told Simpson and myself on one or two occasions when we met with him earlier in the year that there would be no use in us coming forward and asking for an interest moratorium. He feels very strongly about the matter.
553 The TBGL directors held a meeting on 24 September 1990. The minutes record that the negotiations with Maxwell were discussed briefly. They also note that Tilley and McFadden were invited to join the meeting. Tilley presented the board with the reasoning behind the LCAS proposal. The board resolved that LCAS be given responsibility for the presentation to the bondholders. It was also resolved that a legal opinion be sought as a matter of urgency on the ramifications of the proposal.
554 At some time in September 1990 Westpac was informed that TBGL could not meet its interest obligation to the banks that month.
555 On 26 and 27 September 1990 and 1 October 1990, LCAS presented its first proposal for restructuring to the banks. Elements of the proposed restructure included:
(a) an interest moratorium between convertible bondholders and TBGL for 12 months;
(b) an effective interest moratorium between banks and TBGL;
(c) the elimination of inter‑company indebtedness between BPG and TBGL by the assumption of the existing bank debt by BPG;
(d) an equity injection into BPG of not less than $100 million from a new investor;
(e) convertible bondholders receiving a convertible security in BPG; and
(f) TBGL retaining its residual investments, most particularly, its shareholding in BRL.
556 The Australian banks met on 27 September 1990. Aspinall, Simpson and Garven attended, along with Tilley and McFadden of LCAS. At the meeting Aspinall requested a five‑month moratorium on bank interest, to allow time for LCAS to implement its proposals for restructuring. It appears from notes made by Devadason (SCBAL) that the banks thought that Oates and Mitchell should resign.
557 Smith (CBA) wrote a memorandum dated 27 September 1990, in which he summarised aspects of that meeting:
In summary it is fair to report that the new cash flow projections although conservative in nature are nevertheless extremely disappointing and certainly confirm the view that Bell is unable to service its huge debt load. In fact without the banks agreeing to waive distribution of asset sale proceeds, the non-payment of interest and a consequent event of default would have occurred several months ago. Because of the need to maintain the security position for the statutory 6 months the banks had little option but to agree to the non-distribution of sale proceeds (I wonder if this could be used against the banks in a preference challenge).
558 The Lloyds syndicate banks also met in London on 27 September 1990 to consider TBGL’s request for a moratorium. They were concerned to avoid an interest default that could trigger the bonds. On the same day, Latham wrote to Aspinall and Simpson about the matter, as well as to Browning and Youens at Westpac. Westpac in turn wrote to P&P seeking advice as to enforcement procedures.
559 On 28 September 1990 the banks agreed to extend the time for payment of interest by seven days. NAB did so on the condition that TBGL permit a representative of the banks to inspect the premises, books and records of TBGL and its subsidiaries. TBGL agreed to the condition and C&L was appointed to carry out the inspection.
560 In September 1990 Mitchell and Oates resigned as BCHL executives.
4.7.3. Mixed fortunes: October and November 1990
561 On 1 October 1990 the Lloyds syndicate banks met with Aspinall, Simpson and Tilley. The banks suggested that Mitchell and Oates should resign from the board of TBGL.
562 On 2 October 1990 Aspinall wrote to Latham formally requesting a two‑or three‑month bank interest moratorium; he also proposed a 12‑month moratorium on interest due to the convertible bondholders. Simpson wrote to LDTC enclosing an indicative timetable for a restructure of TBGL. On the same day, P&P advised Westpac on the mechanical steps that would have to be taken to serve notices declaring the facilities immediately due and payable. P&P also advised that the BGNV Subordination Deed ‘may be vulnerable to challenge arising from the fact that [the deed] has only recently been executed’.
563 The acquisition of the Australian brewing assets was completed on 2 October 1990. BRL (Manchar) acquired 50 per cent of the ordinary shares of BBHL and all the preference shares of BBHL. It entered into a joint venture arrangement with Lion Nathan, who acquired the remaining 50 per cent of the ordinary shares. Approximately 88 per cent of the BBHL subordinated debentures in the United States were repurchased at a discount of 42.6 per cent.
564 Garven wrote to Flinn (Westpac) on 3 October 1990, requesting a two‑or three‑month interest moratorium on bank interest to go with the proposed 12‑month moratorium on convertible bondholder interest. On 4 October 1990 the Australian banks met and agreed in principle to defer interest until 30 November 1990, provided certain conditions were met. One condition was that Oates and Mitchell resign from the various Bell company boards within 14 days.
565 The Lloyds syndicate banks also met on 4 October 1990 in London and agreed to a further seven‑day extension on interest until 12 October 1990. The outcome of the meeting was reported to Westpac.
566 Edward (SocGen) wrote a memorandum to the SocGen credit committee, dated 10 October 1990, reporting on the restructuring proposal. He commented that the proposals had ‘a number of hurdles to overcome, as approval was required from bankers, bondholders and shareholders’. Edward also reported that the restructuring plan was attractive to the banks.
567 Edward suggested that the critical element of the proposal was the search for a credible equity investor for BPG. He noted that, whilst the preference period had now passed, ‘it is still possible that the subordinated bondholders could challenge our position. Consequently the banks as a group are keen to pursue all avenues for re-structure to avoid receivership or liquidation’.
568 On 12 October 1990 LCAS sent two letters to Aspinall. The first contained an alternative proposal for Maxwell to acquire 50 per cent of the equity in BPG. In the second, LCAS enclosed advice it had received from S&M and ARH concerning the responsibility of directors. Apparently, LCAS and Aspinall were investigating the possibility of securing the approval of the bondholders at a meeting in December. ARH had advised LCAS that the directors owed a duty to the creditors as well as the shareholders of TBGL, and that the directors would not be absolved from their responsibility to seek the best commercial deal for the bondholders even if the restructure were approved at the December meeting.
569 S&M advised that it was not possible to introduce new business at a meeting that had already been adjourned. Since there was a requirement that bondholders be given full details of the moratorium and restructuring and it was necessary for the trustee to approve the circular, it would be impossible to achieve a composite resolution by December. S&M also suggested to LCAS that the banks’ moratorium on interest payments would be an event of default.
570 Between 15 October 1990 and 19 October 1990, LCAS produced final copies of the Information Memorandum, which were to be distributed to potential investors in TBGL.
571 By a letter signed on 15 October 1990, agreement was reached between the Lloyds syndicate banks, the Australian banks and TBGL and its subsidiaries to extend the time for payment of interest to 30 November 1990. The conditions included the appointment of a business adviser and the submission of an acceptable restructuring plan or the commissioning of a report on the sale of the BRL shares. On that day, Ord Minnett was appointed to report on the BRL shares. C&L were appointed to inspect the books and records on 17 October 1990, in order to comply with NAB’s approval of the extension of interest payment.
572 LCAS sent a fax to Simpson on 17 October 1990, copied to Aspinall, containing a list of potential equity investors in BPG, some of whom had already been approached.
573 On 18 October 1990, LCAS prepared a revised equity restructuring for presentation to the banks. LCAS advised that a restructure involving introduction of new equity with the support of all existing creditors offered the best opportunity to maximise returns.
574 LCAS gave a presentation to SGIC on 19 October 1990 outlining the restructure, including the request for a moratorium on bond interest. On the same day, Simpson wrote to Latham enclosing an announcement to the ASX of Oates’ resignation as a director of TBGL.
575 At a BCHL directors’ meeting on 26 October 1990, it was resolved that an application would be filed in this Court proposing a scheme of arrangement under s 315 of the Companies (Western Australia) Code and seeking leave to convene meetings with various classes of creditors. Lucas, as chairman of BCHL, provided an explanation to the BCHL directors of the scheme of arrangement documents that had to be lodged with the court.
576 On 31 October 1990, LCAS sent a fax to LTDC providing a copy of draft explanatory statements regarding the proposal for a reconstruction of TBGL.
577 On the same day, Ord Minnett provided TBGL with its report as to the value of BRL shares held by TBGL and any strategies that might be implemented to realise that value. Ord Minnett valued the BRL shares at $0.25 per share (or $60 million for 240 million shares). However, Ord Minnett reported that the realisation of the value of the BRL shares was unlikely to be achieved. Until BRL could establish a performance record in both relative and absolute terms, Ord Minnett reported that the level of institutional investor support for BRL shares would remain low.
578 On 1 November 1990 Aspinall wrote a memorandum to the TBGL directors regarding his meeting with Maxwell on 24 October 1990. Aspinall reported that Maxwell would not lodge an FIRB application for the purchase of 49 per cent of BPG because of concerns that the then Australian Treasurer would oppose the acquisition.
579 On the same day, Christopher Duffett (Executive Director of LDTC) requested certificates of compliance and solvency from TBGL, BGF and BGNV. Later that day, Cooper (a partner at Freehills acting for LDTC) sent three faxes to Duffett concerning the proposed interest moratorium and LCAS’ explanatory statement dated 30 October 1990.
580 On 2 November 1990 Brian Keelan, who was the managing director of corporate finance at Swiss Bank Corporation International Ltd (SBCIL), wrote to Kay Jackson (then Kay Bicket) at LDTC, about a conversation with McFadden of LCAS. Keelan indicated that McFadden had admitted that the draft circular was ‘perhaps deficient’ and that, as a result, LCAS was willing to improve the level of disclosure in it. Keelan reported McFadden’s comments that:
[T]he banks had indicated that if the bondholders did not meet before the 10 December coupon date and grant at least an adjournment on the moratorium issue, they would move to have a receiver appointed.
581 On 5 November 1990 LCAS forwarded revised drafts of the explanatory statements prepared for consideration by the bondholders.
582 On 6 November 1990 a meeting was held between Norris and Bicket of LDTC, Phipson and Neal of Linklaters, Keelan and Rosalsky of SBCIL, Horner of S&M and McFadden. According to a file note (discovered by LDTC) of discussions at the meeting, the banks were to meet with TBGL and LCAS later that month, at which time an update would be given on progress with the bondholders’ interest moratorium and the search for an equity investor. The meeting was informed that the next interest payment to the banks (of deferred interest) was due on 30 November 1990.
583 McFadden advised the other parties that the banks were seeking a reduction in the facility by the amount of the new equity involved, which she expected to be $150 million. The banks were said to be secured against everything except the finance leases. Phipson asked when the security had been taken, and McFadden advised January 1990. She added that she was unaware of any imperfection in the security, although she acknowledged that it had been questioned in her presence at other meetings. Keelan said that it was important that this was confirmed, preferably in writing from solicitors. He said the banks’ security was fundamental to this whole review.
584 It appears that McFadden further told the meeting that she thought the banks would appoint a receiver if LDTC did not agree to delay any action until the interest moratorium had been approved. She thought she could convince the banks against appointing a receiver if she had a written undertaking from LDTC.
585 According to the note, Keelan said that he could not see why the banks would wish to appoint a receiver before an event of default under the trust deed. If their interests were secured, there would be no reason for them to fear enforcement by the bondholders of their interests.
586 On 7 November 1990 LCAS wrote to LDTC referring to their meeting earlier that day. LCAS said that, in their assessment, TBGL would be unable to pay interest due on two series of bonds in December and that the Bell group required a restructuring. LCAS said its lengthy discussions with the banks had led it to believe the banks would not support a restructuring proposal unless they were provided with evidence of bondholder support. LCAS said:
In particular, we believe that the banks will act to realise their security unless there is evidence that neither the trustee nor the convertible bondholders will take action to accelerate.
LCAS said that, if the banks enforced their security, it believed that the bondholders were ‘unlikely to realise any value for their investment’.
587 On the same day, Aspinall wrote to Duffett, informing him that TBGL would not be providing a solvency certificate until the question of the bondholders’ interest moratorium was settled. He added that the TBGL directors were seeking legal advice regarding the provision of the certificate.
588 On 8 November 1990 Latham wrote to LDTC in relation to the proposed meeting of the banks and BGNV bondholders on 5 December 1990 to consider the interest moratorium. Latham referred to the banks having ‘moved to a fully secured basis in January’ and said ‘we therefore consider our exposure to TBGL to be fully secured’. Latham did not refer to the BGNV Subordination Deed.
589 Also on 8 November 1990, Aspinall wrote to Carmel McClure of Corrs Chambers Westgarth (Corrs) requesting urgent advice on whether or not certain paragraphs referred to in a draft of the Information Memorandum to the bondholders could ’cause the [TBGL] directors a difficulty under s 556 of the Company’s Code’. That section visited civil and criminal consequences on directors whose company incurred a debt at a time when there were reasonable grounds to expect that it was unable to meet its debts as and when they fell due. McClure responded to Aspinall by letter dated 14 November 1990, opining that (based on the information provided to Corrs) the companies were able to meet their liabilities and thus s 556 was not likely to cause difficulties to the directors.
590 A meeting of TBGL directors was held on 16 November 1989. The minutes record that Aspinall invited Tilley and McFadden of LCAS to address the meeting and report on the progress of their discussions with potential investors in BPG.
591 Aspinall, Simpson, Tilley, McFadden and Williams met with the Australian banks on 19 November 1989. The meeting was a general review about the then current situation. In a note of the meeting, Devadason (SCBAL) recorded that the banks requested TBGL to provide them with a written proposal ‘which deals with their cash flow shortfall’ and to provide a report on developments in London to facilitate a coordinated approach with the Lloyds syndicate.
592 In November 1990, Sally Ascroft (MSJL) prepared a memorandum summarising the risks to the banks’ security. The memorandum indicated that, as six months had passed since the grant of the security, certain risks had been eliminated. However, other threats to the security arrangement still existed, including questions over whether the security arrangements and associated guarantees could satisfy the ‘corporate benefits’ test, and whether the relevant transactions could be impeached under s 120 of the Bankruptcy Act.
593 On 20 November 1990 LCAS sent Simpson copies of offers that it had received from Heytesbury Holdings Ltd and Australian Capital Equity Pty Ltd. Heytesbury Holdings Ltd had offered $180 million for 100 per cent of the share capital of BPG. Australian Capital Equity Pty Ltd had offered $250 million for the assets of or interests in BPG. LCAS also reported that it had received an expression of interest from a third party which LCAS could not then name.
594 By letter addressed to Westpac and Lloyds Bank dated 22 November 1990, Aspinall requested an extension of time for interest payments that were due to the banks on 31 March 1991.
595 On 23 November 1990 Tilley wrote to Westpac reporting on its meeting with Maxwell. The crux of this letter was that Maxwell was still interested in bidding for the publishing assets but for some undisclosed reason was not able to do so until after 28 November 1990.
596 On 28 November 1990 TBGL released its 1990 Annual Report (for the period ending 5 October 1990). The directors’ report is short. In it, the directors advised that they recognised the need to restructure the debt of the group and had appointed LCAS to develop a proposal. The restructure proposal being developed by LCAS was in progress but the earliest time by which it could be completed was March 1991. The key elements of the proposal included:
(a) the bondholders agreeing to defer interest for six months (and that bondholders would be meeting in London on 5 December 1990 to consider that question);
(b) seeking a new controlling shareholder of BPG;
(c) reducing secured debt to the Australian banks and the Lloyd syndicate banks by the introduction of new equity; and
(d) bondholders agreeing to exchange their convertible bonds for new securities convertible into shares in BPG.
597 Turnbull & Partners wrote to Westpac on 29 November 1990 offering an alternative restructuring proposal on behalf of SGIC. On the same day, LCAS wrote a letter to Westpac and Lloyds Bank reporting its receipt of the proposal from Turnbull & Partners. In the letter, LCAS advised that the proposal was not appropriate or acceptable at the time. LCAS’ view was based on its assertion that it would be possible (contrary to the assumption made by Turnbull & Partners) to secure a new equity investor ‘at an acceptable price’. In addition, it was LCAS’ opinion that the SGIC proposal arose from inaccurate information because it was based on information available solely in the public domain. The ‘actual cash flow’ was said to be less than that estimated by Turnbull & Partners, and therefore their proposal would be unsustainable.
598 On 30 November 1990, the bank interest for September and October 1990 was again deferred until 7 December 1990. The Lloyds syndicate banks did so by executing a letter circulated by A&O, and the Australian banks by a letter circulated by Westpac.
4.7.4. The gloom sets in: December 1990 to March 1991
599 At meetings held in London on 5 December 1990, a proposal was put to the BGNV bondholders for a restructure and moratorium on interest. The chairman declared the meeting inquorate and the meetings were adjourned until 15 January 1991. An informal meeting then took place.
600 Later that day a meeting of TBGL directors was held. On the same day, SGIC wrote to TBGL seeking to defer consideration of the proposal for the moratorium on convertible bond interest for 40 days.
601 The banks agreed on 7 December 1990 to defer the bank interest until 10 December 1990. On 10 December 1990 the banks again extended the time for payment of December interest to 31 January 1991.
602 In December 1990 BGNV and TBGL defaulted on interest payable on the TBGL bond issue and the first BGNV bond issue. The due date was 10 December 1990.
603 Meetings of BGNV bondholders were held on 15 January 1990. Informal discussions also took place. At those meetings, the BGNV bondholders unanimously adjourned consideration of a six‑month interest moratorium until 18 March 1991. TBGL reported to the ASX by letter dated 16 January 1991 that the bondholders had determined to create informal committees among themselves to participate in the restructure process and to represent the interest of bondholders. The informal committee of bondholders met on 23 January 1991.
604 On 18 January 1991 Edwards was appointed as a director of TBGL at a TBGL directors’ meeting. On 31 January 1991 Westpac and Lloyds wrote to TBGL deferring the due date for bank interest from 31 January 1991 to 11 February 1991. In late January 1991 Hill approached TBGL expressing an interest in acquiring or placing TBGL’s parcel of BRL shares and acquiring, for cash, shares in BPG and TBGL.
605 Between 1 February 1991 and 15 February 1991, LCAS developed the BRL proposal for the restructuring of TBGL. It appears to have first been raised with the Australian banks on 1 February 1991.
606 On 11 February 1991 Westpac and Lloyds executed a letter extending the interest moratoriums until 28 March 1991. On 14 February 1991 BRL wrote to TBGL proposing a restructure as follows:
(a) TBGL would sell its BRL shares at 20 cents per share with the proceeds of the sale to be applied in reducing the existing bank indebtedness of TBGL to its bankers. The sale was to be by placement or in some other manner acceptable to BRL;
(b) TBGL would obtain shareholder approval to consolidate or reduce its capital;
(c) the disputed claims between BRL and TBGL would be released for $20 million, to be satisfied by the allotment to BRL of further shares in TBGL;
(d) BRL would subscribe for shares in TBGL and in BPG totalling $45 million. This was conditional on BRL obtaining finance for $45 million and on TBGL agreeing to apply the amount so received in part satisfaction of bank debt;
(e) TBGL would procure the conversion of convertible bonds into ordinary shares in TBGL;
(g) TBGL would procure its bankers to subscribe for $75 million in preference shares, with the $75 million to be applied in part satisfaction of bank debt; and
(h) the TBGL bankers would have to agree to provide a new bank facility to BPG for $135 million.
607 On 14 February 1991, BRL and TBGL both issued press releases informing the market of the proposed BRL restructure arrangements. Aspinall signed a letter of understanding with BRL agreeing to pursue the proposal.
608 On 15 February 1991, LCAS prepared a TBGL discussion paper for the banks to inform a discussion with the Lloyds syndicate banks on 20 February 1991, and a discussion with the Australian banks on 22 February 1991. This discussion paper reviewed the proposed restructure of TBGL, noting that:
(a) meetings with the convertible bondholders and SGIC had been convened, and adjourned until March 1991;
(b) LCAS had been unable to sell a controlling shareholding in BPG at a value which would enable the restructuring to proceed; and
(c) BRL had approached TBGL’s directors with an interest in participating in a restructure of TBGL in late January 1991.
609 On 20 February 1991 LCAS prepared a discussion paper for the informal bondholders’ committee. The paper put forward BRL’s proposal for purchase of TBGL’s BRL shares and acquisition of 15 per cent of BPG by BRL.
610 On 27 February 1991 Simpson wrote to Lloyds Bank requesting that the extension of TBGL’s interest payments be further extended from 28 February 1991 to 15 March 1991. On the same day, the banks executed a letter of extension for the payment of certain interest due from TBGL, BGF, WAN and BGUK on 28 February 1991 to 15 March 1991. Robinson Cox (acting for SGIC) wrote to LCAS on 28 February 1991, rejecting the restructuring proposal of TBGL.
611 SGIC wrote to LDTC on 1 March 1991 advising that, on 10 December 1990, TBGL had defaulted on its interest payments in respect of the TBGL bond issue. SGIC requested that the bonds be declared due and payable, and that the BGF bond issue also be declared due and payable by reason of cross‑default.
612 Acceding to SGIC’s request, on 6 March 1991 LDTC gave TBGL notice that the TBGL bonds were due and payable at their principal amounts, together with accrued interest. On 12 March 1991 Aspinall replied to SGIC requesting further discussion of the issue.
613 LCAS prepared a report dated 13 March 1991 and entitled ‘The Bell Group Ltd Status Report for and Recommendation to the Banks’. In the report, LCAS indicated its view that, as well as SGIC’s refusal of the proposed TBGL restructure, there was insufficient cash flow to meet the interest payments due to bondholders and banks. This, LCAS reported, led to TBGL having no reasonable prospect of being able to pay its debts as and when they fall due. The report also stated that the TBGL directors had recommended that the banks should move to appoint a receiver over the assets of TBGL.
614 On 19 March 1991, Turnbull & Partners provided Aspinall, Simpson, Tilley and McFadden with a draft alternative proposal for the restructure of TBGL involving the participation of Australian Consolidated Press (ACP).
615 SGIC wrote to LCAS on 20 March 1991 advising that it would not take any further steps regarding its demand for payment of interest until 27 March 1991.
616 On 21 March 1991, Turnbull & Partners sent a fax to Westpac with a more detailed draft alternative proposal for the restructure of TBGL.
617 LCAS prepared a paper dated 26 March 1991 and entitled ‘The Bell Group Ltd – Discussion paper for the Banks’. The paper provided a history of the proposed TBGL restructure. The paper also stated that the only remaining option, should the proposed restructure of BRL not proceed, was the appointment of a receiver and manager of TBGL’s publishing assets.
618 SGIC wrote to TBGL on 27 March 1991 advising that it would take no further steps to pursue its demand for payment of interest until 1 May 1991. This extension was subject to a number of conditions, including:
(a) BRL confirming that it was pursuing a restructure of TBGL;
(b) holders of security over BCHL shares contracting to vote in favour of a reconstruction by 19 April 1991;
(c) TBGL agreeing to sell up to 90 million BRL shares at a price of not less than 20 cents per share; and
(d) a letter from Turnbull & Partners being drafted in a form acceptable to the directors of TBGL and the banks.
619 On 28 March 1991, this Court granted leave to BCHL to convene meetings of its members and creditors to consider a scheme of arrangement: Re Bond Corporation Holdings Ltd (1991) 5 WAR 143.
620 On the same day, TBGL directors met and resolved to execute another letter of extension with the banks so as to achieve a further delay of the payment of the September 1990 and October 1990 interest instalments until 12 April 1991. The TBGL directors also resolved to pursue the BRL proposal of 14 February 1991. The banks agreed to TBGL’s request for a deferral of interest.
621 Henson (BRL) wrote to Aspinall on 28 March 1991, confirming BRL’s continued interest in the TBGL restructure in accordance with its proposal on 14 February 1991.
4.7.5. The innings ends: April 1991
622 On 4 April 1991, Henson wrote a letter to Flinn. Henson stated that BRL was seeking $45 million from the banks to fund its acquisition of TBGL shares. On the same day, Henson also wrote to Aspinall indicating that BRL required the banks to approve the release of 200 million BRL shares rather than approximately 85 million BRL shares owned by TBGL.
623 Flinn replied to Aspinall on 9 April 1991, stating that the banks would reject BRL’s request for $45 million to finance the acquisition of TBGL shares.
624 On 9 April 1991, Aspinall also wrote to Hill stating that neither TBGL nor the banks agreed to the release of BRL shares unless all of the conditions relating to BRL’s acquisition of TBGL and BPG were satisfied (other than the conditions relating to bondholders’ approval and court confirmation of TBGL’s reduction of capital).
625 On 10 April 1991, Latham wrote to LCAS advising that there was very little prospect of the Lloyds syndicate banks, individually or collectively, providing funding of $45 million to BRL. Latham also expressed his view that the Lloyds syndicate banks would only contemplate the sale of 200 million BRL shares in the context of a successful TBGL restructure.
626 The following day, Aspinall wrote to Flinn indicating that the TBGL directors would have no option other than to move to appoint a provisional liquidator to TBGL, unless:
(a) the banks collectively or individually agreed to fund BRL’s acquisition of TBGL and BPG shares; and
(b) BRL obtained funding for the acquisition of those shares upon the sale of all BRL shares owned by TBGL.
627 On 12 April 1991, Tilley and McFadden of LCAS wrote to ACP asking it to put forward a proposal for the TBGL restructure incorporating ACP’s participation. LCAS also wrote to the TBGL directors recommending that they move to appoint a provisional liquidator to TBGL due to a number of factors, including:
(a) BRL being unable to raise $45 million for the acquisition of TBGL shares;
(b) there being no agreement as yet to a TBGL restructure; and
(c) TBGL having no reasonable prospect of being able to pay its debts as and when they fell due.
628 On 12 April 1991, LCAS wrote to the TBGL directors and recommended that they petition for the appointment of a provisional liquidator to TBGL and that the banks examine the securities and appoint receivers and managers. By letter the same day, Aspinall wrote to Flinn and Latham explaining the failure of the attempts to restructure and to notify the banks of the intention to petition for the appointment of a provisional liquidator to TBGL.
629 Westpac as Security Agent served a notice of demand on WAN, BGF and BGUK on 16 April 1991, giving notice of events of default arising from (among other things) non‑payment of bank interest due as at 12 April 1991 and non‑payment of bond interest due in December 1990, and demanding immediate repayment of outstanding interest.
630 On 16 April 1991, ACP sent a fax to LCAS outlining a proposal for the TBGL restructure. However, ACP indicated that its interest was limited to BPG. LCAS immediately advised Flinn of ACP’s proposal, but said they had not been able to identify any value for the bondholders in the proposal.
631 On 17 April 1991, Corrs sent a letter to TBGL expressing the view that TBGL would not be in a position to consider restructuring proposals unless the banks:
(a) agreed to a further extension of the interest payment from 12 April 1991 to a ‘date sufficiently advanced to enable the restructuring proposals to be properly considered’;
(b) immediately withdrew the notice of demand; and
(c) agreed to indemnify each of the individual TBGL directors for any liability for insolvent trading.
632 Later that day, Aspinall sent a letter to Westpac stating that the TBGL directors would have no alternative but to consider the commencement of a form of external administration unless the three conditions outlined in Corrs’ letter were met.
633 By circular resolution signed between 16 and 18 April 1991, the directors of TBGL resolved to apply for the winding up of TBGL and the appointment of a provisional liquidator, on the grounds that TBGL was insolvent, having been unable to pay the TBGL bonds and the outstanding bank interest.
634 On 18 April 1991, TBGL petitioned this Court for its winding up and for the appointment of a provisional liquidator. The petition was supported by an affidavit of Aspinall. The Court made the necessary orders and Totterdell was appointed provisional liquidator of TBGL that day.
635 By notice of demand dated 18 April 1991 to BPG, Westpac as Security Agent demanded immediate repayment of the principal debt and interest owed to the banks. Westpac also appointed receivers and managers to BGF and BPG that day. The TBGL directors sent a letter to the ASX dated 18 April 1991, announcing the appointment of Totterdell as the provisional liquidator of TBGL.
636 On 19 April 1991, LDTC served notices that the bonds were due and repayable at their principal amount together with accrued interest.
4.8. Overview of asset realisations after April 1991
637 In Sect 2 I mentioned that the banks eventually realised on their securities and recovered about $283 million from the sale of the publishing assets, the sale of the BRL shares and the collection of debtors. In this section I will give a little more detail about the realisation of assets after April 1991. This is not intended to describe the full scope of the factual basis for the monetary claims made by the plaintiffs against the banks. This is covered in more detail in Sect 35.
4.8.1. The publishing assets
638 On 16 April 1991, the banks issued notices of demand for the immediate payment of outstanding interest that, under the latest of the extension letters, had fallen due on 12 April 1991. The demands were not met. On 18 April 1991, the banks issued a further notice of demand declaring all of the secured liabilities immediately due and payable. The board of TBGL met on the same day. The directors noted the inability of TBGL to pay its debts and the receipt of legal advice to apply for a winding up. The directors resolved to apply for a winding up and to appoint Totterdell (of the accounting firm then known as Price Waterhouse) as provisional liquidator.
639 On or about 18 April 1991 Westpac, on behalf of the banks, appointed Maxsted and Fear (of the accounting firm then known as KPMG Peat Marwick) as receivers and managers of each of BGF and BPG, pursuant to the mortgage debentures granted by BGF and BPG as part of the refinancing arrangements.
640 A company named West Australian Newspaper Holdings Limited (WANH) was incorporated on 29 August 1991 and floated on the stock exchange. The WANH prospectus indicates that WANH was incorporated: ‘for the purpose of acquiring Harlesden Investments Pty Ltd and subsidiary companies, which together comprise the West Australian Newspapers Group’.
641 On 5 September 1991, an agreement for the sale of all of the shares in Harlesden Investments Pty Ltd (which I will call the Harlesden sale agreement) was entered into between Fear and Maxsted as vendor and WANH as purchaser. It is common ground that the sale of the publishing assets was effected pursuant to this agreement.
642 It was a requirement of the Harlesden sale agreement that certain share transfers would occur so as to create a group structure by which the companies that owned the publishing assets became wholly owned subsidiaries of Harlesden Investments Pty Ltd (Harlesden Investments). As well as the majority of the companies in the BPG group, certain other Bell group companies and non‑Bell group companies were brought within the Harlesden group under that arrangement. The companies transferred included Albany Advertiser Pty Ltd (Albany Advertiser), Bell Press, Western Mail Pty Ltd (Western Mail) and Western Mail Developments Pty Ltd (Western Mail Developments). By purchasing the shares in Harlesden Investments, WANH thereby gained control of the Harlesden group and ownership of the publishing assets. Completion of the sale occurred on 31 December 1991. Broadly speaking, the effect of the Harlesden sale agreement was:
(a) Fear and Maxsted sold to WANH the whole of the shares held by BPG in Harlesden Investments;
(b) in addition to the purchase price of $2, WANH paid to BGF the ‘Discharge Amount’ (as defined in the Harlesden sale agreement) of approximately $270 million. This was the substantive consideration for the purchase of the Harlesden group;
(c) WANH procured the payment of the discharge amount by bank cheque to Westpac and P&P at completion, in accordance with the directions of the vendor;
(d) certain payments and assignments were effected so that no Harlesden group company was indebted to BPG or any of its associates, including BGF. This was a condition precedent to settlement; and
(e) Westpac executed a deed acknowledging that the banks accepted the discharge amount in full and final satisfaction of all liabilities of the Harlesden group companies, discharging all securities issued by Harlesden group companies to the banks and fully releasing those companies.
643 The discharge amount is defined in the Harlesden sale agreement as the amount of $259.5 million subject to adjustment as provided for in the agreement. The discharge amount was adjusted at completion by the addition of $9.3 million to make a total of $268.8 million.
644 It is unnecessary to describe the complicated arrangements by which the sum of $268.8 million was disbursed. It is sufficient to say that Westpac received $222.3 million, which it used to discharge WAN’s overdraft. The balance was (then or later) distributed among the banks.
4.8.2. Sale of the BRL shares
645 As part of the refinancing agreements, the registered owners of the shares in BRL held by various Bell group entities granted share mortgages in favour of Westpac and, as required by the terms of the share mortgages, executed transfer forms transferring the shares to Westpac. The directors of BRL initially declined to register the transfers but by the end of August 1990 the various registrations had been effected.
646 On 6 March 1992 a company called Rossington Holdings Pty Ltd (Rossington) made a bid for all BRL shares at 23 cents per share. The bid was later raised to 25 cents per share. By 21 May 1992, Westpac had sold all of the BRL preference and ordinary shares either on‑market or by acceptance of the Rossington bid at 25 cents per share, save for a small parcel that was sold separately for 23 cents per share.
647 On 28 May 1992 the proceeds from the sale of the BRL preference shares in the amount of $5.8 million were received by Westpac. The sale price equates, approximately, to 25 cents per share. The proceeds were disbursed to the banks the following day. On 12 June 1992 the proceeds from the sale of the BRL ordinary shares in the amount of $54.1 million were received by Westpac. The proceeds were disbursed to the banks the same day. The total sum received in respect of the sale of the BRL shares and distributed among the banks was around $59.9 million.
4.8.3. Miscellaneous realisations
648 Two reasonably substantial debt recoveries also feature in the litigation, one concerning Belcap Trading Pty Ltd (Belcap Trading) and the other from Bell Bros Holdings.
649 It is common ground between the parties that in or about 1992, BGF was a creditor of Belcap Trading in an amount exceeding $732,000. On 5 August 1992, liquidators were appointed to Belcap Trading. In the course of the administration of the affairs of Belcap Trading, the liquidator realised, net of expenses, the sum of $731,993. In October 1996, Westpac, on behalf of the banks, and pursuant to the mortgage debenture granted by BGF, received the sum of $731,993 from the liquidator of Belcap Trading.
650 It is also common ground that in or about 1992, BGF was a creditor of Bell Bros Holdings in an amount exceeding $146,000. On 4 November 1992 a liquidator was appointed to Bell Bros Holdings. In the course of the administration of the affairs of Bell Bros Holdings, the liquidator realised, net of expenses, the sum of $146,222. In September 1995, the receiver and manager of BGF received the sum of $146,222 from the liquidator of Bell Bros Holdings and applied it towards the payment of the receivers and managers’ remuneration and costs.

5. The litigation: a short history
   651 The path from inception to resolution of this litigation has been long and tortuous. And this is one only of many pieces of litigation concerning the demise of the Bell group. The conduct of the parties became an issue in its own right in the proceedings. For that reason it is necessary to say something about the fate and fortunes of the proceedings and associated litigation in the period before trial. Full chronologies of the history of this action and related proceedings are set out in the parties’ written closing submissions. I will not repeat what is set out in those chronologies. But I will summarise the more significant events.
   652 This action was commenced in the Federal Court on 18 December 1995. On the same day, the plaintiffs commenced proceedings in the English High Court of Justice against the banks and the former directors of TBGL and certain of its subsidiaries. The relief sought in the English proceedings was almost identical to the relief sought in this action. By notice dated 3 December 1996, the plaintiffs in the English proceedings discontinued those proceedings against the former directors, including Equity Trust. On 9 December 1996 the English proceedings were stayed, by consent, until further order.
   653 During 1995 and 1996 the liquidators conducted compulsory examinations of some of the directors and employees of Bell group companies and of some bank officers in this Court and the English courts. They also conducted a compulsory examination of Pim Ruoff, the sole director of Equity Trust, in the Dutch courts.
   654 On 1 October 1996 the banks commenced the LDTC action in this Court, essentially to prevent the liquidators and LDTC from executing deeds amending the bond issue trust deeds to alter the subordinated status of the bonds. In October 1996, Templeman J heard an application by the liquidators under Corporations Law s 564 for orders that creditors of the companies who were funding this action (then in the Federal Court) would receive some advantage in relation to any property or expenses recovered. Templeman J ruled that there was no jurisdiction to make such an order unless and until a judgment had been obtained: see Bell Group Ltd (In Liq) v Westpac Banking Corporation (1996) 18 WAR 21.
   655 Between 1996 and the middle of 1998, there were many interlocutory skirmishes in the Federal Court as the pleadings developed. In November 1997 Carr J set the action down for hearing commencing 3 August 1998. In June 1998 the banks sought leave to amend the defence. Carr J granted leave and adjourned the commencement of the trial for one month. The plaintiffs were successful in an appeal against those orders and the Full Court vacated the trial dates.
   656 In January 1998 this Court acceded to an application by the plaintiffs that the LDTC action be stayed generally pending the finalisation of this action.
   657 In June 1999 Carr J commenced hearing an application by the plaintiffs for leave to file the eighth amended statement of claim and by the banks to amend the defence. Before the hearing had been completed, the High Court handed down its decision in Re Wakim; Ex parte McNally (1999) 198 CLR 511 in which it found that the legislation giving the Federal Court cross‑vested jurisdiction in State matters was invalid. Because of the uncertainty caused by Re Wakim, Carr J adjourned the proceedings until the question whether or not the Federal Court had jurisdiction could be determined.
   658 In December 1999 the plaintiffs applied to the Federal Court to have the action transferred to this Court. In April 2000 Carr J made orders in relation to the jurisdiction questions and transferred the proceedings to this Court. Carr J determined that although the Federal Court did have jurisdiction, the Supreme Court was the more appropriate forum and that the action ought to be transferred: Bell Group Ltd v Westpac Banking Corporation (2000) 104 FCR 305.
   659 Meanwhile, the banks had put in train attempts to move across into this action those aspects of the LDTC action that overlapped with the subject matter of this action. LDTC and ICWA opposed the attempts. In April 2000, Templeman J lifted the stay in the LDTC action. This action was formally transferred to this Court in April 2000 and I took the disastrous step of agreeing to manage it.
   660 There was a substantial hearing in relation to the plaintiffs’ application to introduce 8ASC. In large measure, the application was successful: see The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 1) [2001] WASC 315 (Bell (No 1)). During the course of the substantive hearing, I dealt with the overlap issues between the LDTC action and this action. I decided that the best course was to deal with as many of the issues as possible in the course of this hearing: see The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 3) [2004] WASC 93 (Bell (No 3)). In their written closing submissions, the banks suggest that the LDTC action stands reserved in respect of amendment matters and the joinder of additional parties. I have no idea what that means and shudder at the thought that some other judicial officer may have to pick up the remaining pieces. In any event, after delivery of the reasons in Bell No 3 the liquidators gave certain undertakings to the banks and the banks discontinued many of the causes of action in the writ.
   661 As a result of the demise of the Bell group there have been 75 different actions commenced in this Court: for the winding up of companies, appeals against the admission or rejection of proofs of debt, and applications for leave to examine persons. In addition, BGNV commenced an action against C&L alleging negligence in the audit of the 1989 – 1990 BGNV accounts; the action was settled. BGNV also commenced an action against Aspinall, Mitchell and Oates alleging breaches of directors duties: see Bell Group NV (In Liq) v Aspinall (1998) 19 WAR 561. I am not sure what is the status of those proceedings. The writ must have been based on an allegation that the Aspinall, Mitchell and Oates were de facto directors or shadow directors of BGNV. That was an allegation made when this action was commenced but it is no longer pursued: see Sect 23.1.
   662 In December 1995 BGF applied to the High Court of Justice of England and Wales for an order winding up BGUK. Westpac opposed the application. In the course of delivering reasons acceding the application the trial judge observed: ‘Westpac’s opposition to the petition is based, solely, on a desire to frustrate, or at least to impede, an attack on its security’. Not surprisingly, the plaintiffs seize on this finding and on comments from judges in interlocutory applications in this Court in related actions to the effect that the applicants have a prima facie case for relief. This, the plaintiffs say, is dead right and shows the real motivation for, and the dastardly nature of, the banks’ defence to this action.
   663 For their part, the banks attacked Woodings for a decision he took declining consent for Lonergan (then and in 1989 a partner of C&L) to give expert valuation advice to the banks. The thinly veiled suggestion was that Woodings refused consent because he knew that Lonergan was likely to take a view of the value of the publishing assets that was contrary to the plaintiffs’ case and that the refusal was inconsistent with Woodings’ obligation to the court to act impartially. The banks also cross‑examined Woodings on the basis that in December 1999 he issued press releases about this litigation that were of a biased nature and that he did so to place maximum and inappropriate pressure on the banks to settle.
   664 To my mind these attacks resulted in a nil‑all draw. I do not believe that the finding in the English proceedings raises any sort of issue estoppel and the comments of the judges in interlocutory applications in related actions are not binding on me; nor, given the differences in the proceedings, are they of much help. So far as concerns Woodings, I regard his explanation of the Lonergan episode and the issue of the press releases as satisfactory.
6. The litigation: the pleaded cases
   665 It is appropriate that I give a broad description of the critical issues that I have identified as the ones on which the case will turn. I intend only to describe the critical issues and to leave their resolution until later in the reasons. But before I turn to the critical issues I need, again in a relatively brief fashion, to do three things. First, to make some general comments about the pleadings. Secondly, to describe some of the phrases and terms that are used in the pleadings and in the case generally. Thirdly, to describe the cases advanced by the plaintiffs and the defendants on the pleadings.
   6.1. The pleadings: a general comment
   666 The plaintiffs’ case is pleaded in the Amended Eighth Amended Statement of Claim dated 1 December 2004 (8ASC) covering some 109 pages. The statement of claim is supported by further and better particulars also dated 1 December 2004, which extend over 1013 pages. I will refer to these particulars as ‘PP’.
   667 The plaintiffs have also filed a Reply to Amended Defence and Defence to Counterclaim. It is a document dated 11 November 2002, amended by leave granted on 14 August 2006, and extending over 191 pages. I will refer to this document as ‘PR’ (an acronym that should not be taken as an indication that I regard the pleading as what is called, in modern political parlance, ‘spin’). It is supported by Particulars to the Reply, which are also dated 11 November and take up 435 pages. I will refer to the Particulars to the Reply as ‘PRP’.
   668 The banks’ case is pleaded in a document entitled Amended Defence and Counterclaim of the First, Second and Third Defendants and dated 15 February 2005. I will call this document ‘ADC’. It runs to 159 pages. The ADC is supported by further and better particulars dated 4 April 2006. I will refer to these particulars as ‘DP’. They extend over 598 pages.
   669 In ADC the banks have generally followed the paragraph numbering used by the plaintiffs in 8ASC and have used additional lettering for paragraphs containing matters of amplification of the primary response to the allegations in the statement of claim.
   670 Much of the defence involves matters that are simply denied or not admitted. But there are some substantive issues raised in the defence and in the discussion that follows I will concentrate on them.
   671 The statistics that I have set out should indicate the quantitative difficulty that I have experienced in dealing with the pleadings. But the difficulties are also qualitative. The pleadings are complex, confusing and not easy to read. They do as much to cloud as they do to illuminate the real issues. They rely heavily on internal cross‑referencing and the provisions tend to imbricate, one on another. If that comment is seen as a criticism then so be it. Nonetheless, I tried to overcome my frustration in fashioning a general approach to pleading questions.
   672 During the hearing there were many contested pleading applications. The submissions made in the course of those applications often tended to generate as much heat as they did light. So often the retort to a pleading objection was: ‘they don’t understand our case’. If the parties, who had lived with and developed the pleadings since 1995, could not appreciate what their opponent was on about it did not bode well for the trial judge. I tried always to take an ataraxic approach that placed fairness at the forefront of the process but which, nonetheless, allowed the pleadings to fulfil something approaching their proper function.
   673 With those remarks in mind, I should set out what I understand to be the proper function of pleadings and particulars. In Dare v Pulham (1982) 148 CLR 658 the High Court said at 664 (omitting authorities and citations):
   Pleadings and particulars have a number of functions: they furnish a statement of the case sufficiently clear to allow the other party a fair opportunity to meet it; they define the issues for decision in the litigation and thereby enable the relevance and admissibility of evidence to be determined at the trial; and they give a defendant an understanding of a plaintiff’s claim in aid of the defendant’s right to make a payment into court. Apart from cases where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on the pleadings. But where there is no departure during the trial from the pleaded cause of action, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Particulars may be amended after the evidence in a trial has closed, though a failure to amend particulars to accord precisely with the facts which have emerged in the course of evidence does not necessarily preclude a plaintiff from seeking a verdict on the cause of action alleged in reliance upon the facts actually established by the evidence.
   674 In R v Associated Northern Collieries (1910) 11 CLR 738, Isaacs J put it this way, at 740 ‑ 741:
   I take the fundamental principle to be that the opposite party shall always be fairly appraised of the nature of the case he is called upon to meet, shall be placed in possession of its broad outlines and the constitutive facts which are said to raise his legal liability. He is to receive sufficient information to ensure a fair trial and to guard against what the law terms ‘surprise’, but he is not entitled to be told the mode by which the case is to be proved against him.
   675 This is a commercial dispute that evolved over a long period and which arose from a series of business dealings that occurred between six and 10 years before the first run of the pleadings and between 14 and 18 years before the commencement of the trial. My aim was to allow the parties to litigate the issues that they saw as fundamental to achieving a just result. I could not ignore the pleadings and I have not done so. But I tried to steer clear of strict, technical readings of what are often quite convoluted pleas. My general approach was to give the pleadings a commonsense interpretation even though from time to time that may have been described as ‘expansive’. On the other hand, I always had in mind the necessity to avoid prejudice to one or other of the parties. Prejudice will inevitably occur if an issue is raised that takes a party by surprise and which (whether because of its nature or the time at which it is raised) the party is not able fairly and properly to confront. There were instances where, because of an apprehension of real prejudice, I held the parties strictly to the pleadings. Examples of both the relaxed and the strict approach to the pleadings will emerge in later sections of these reasons in the course of discussing particular legal and factual questions.
   6.2. Some definitions
   676 I have already defined a number of entities, events and things that have played a part in the litigation. I will not repeat them. But I think I should introduce here some other terms and phrases that are used in the pleadings.
   6.2.1. Bell Participants and plaintiff Bell companies
   677 I have already mentioned the several documents executed by the Bell group companies between 25 January 1990 and 31 August 1990 as part of the refinancing arrangements. In all there were 71 companies that were party to one or more such documents. Those companies are referred to as ‘Bell Participants’.
   678 The 20 companies that are the seventh plaintiffs, together with TBGL, BGF, BGUK, BPG and BGNV, are referred to in the pleadings as ‘plaintiff Bell companies’. It follows that there are some companies that were members of the Bell group and neither entered into transactions as part of the refinancing but which are not named as plaintiffs. I do not need, at this stage, to explain in detail why that is so. Briefly, it is because of the way funds would flow if the transactions were set aside and there was a distribution in a liquidation in accordance with the statements of net assets prepared by the liquidators. Of the Bell Participants, 25 companies are plaintiffs and the remaining 46 are not.
   679 The companies that are plaintiffs in these proceedings fall into the following categories:
   (a) the companies with pre‑existing obligations to the banks either as borrower or guarantor: BGF, BGUK and TBGL;
   (b) BPG, the parent of the companies in the Bell Publishing group;
   (c) the BRL shareholders (see Sect 6.2.5);
   (d) companies required to ensure a flow of any proceeds recovered by the BRL shareholders from the banks to TBGL or BGF: Harlesden Finance Pty Ltd (Harlesden Finance), Western Transport Pty Ltd (Western Transport) and Maradolf;
   (e) companies required to ensure a flow of the proceeds of any funds recovered by BGF from the banks to companies that had outstanding income tax assessments issued by the Deputy Commissioner of Taxation (DCT) and to ensure that the balance of any sums remaining flowed back to BGF: WAON, Great Western Transport Pty Ltd (Great Western Transport), Wigmores Tractors, Western Transport, Western Interstate, Bell Bros Holdings, Bell Bros, TBGL Enterprises Ltd (TBGLE), Wanstead, and Industrial Securities;
   (f) two miscellaneous companies: Belcap Enterprises Pty Ltd (Belcap Enterprises) and W&J Investments Ltd (W&J Investments); and
   (g) BGNV.
   680 In all there are 25 Bell group companies that are plaintiffs. All of them, save for BGUK and BGNV, were incorporated in Australia.
   6.2.2. Directors
   681 David Aspinall, Peter Mitchell and Antony Oates were directors of TBGL and most of its subsidiaries, including all plaintiff Bell companies incorporated in Australia and all other Bell Participants incorporated in Australia. They are defined in 8ASC as ‘the Directors’ and, generally speaking I will refer to them (collectively) as ‘the Australian directors’.
   682 Michael Edwards, Peter Mitchell, Alan Birchmore and Alan Bond were the directors of BGUK and TBGIL. They are defined in 8ASC as ‘the UK directors’ and I will adopt that terminology. In addition, BIIL had a board of directors separate from BGUK, which consisted of Michael Edwards and Peter Whitechurch. They are named as such in 8ASC par 6(ab) and, although it is not a defined term in the pleading, I will call them ‘the BIIL directors’.
   683 I should also mention Equity Trust, the fifth defendant, which was the sole director of BGNV.
   684 From time to time I will refer to the Australian directors, the UK directors, the BIIL directors and Equity Trust compendiously as ‘the directors’.
   6.2.3. The Transactions, the Scheme and the Scheme Period
   685 In pleading the case, the plaintiffs have identified the various documents brought into existence during the refinancing and called them ‘Transactions’. They have then characterised the combination of Transactions as a ‘Scheme’. The term ‘a Transaction’ is defined to encompass:
   (a) the several instruments executed by the Bell Participants between 25 January 1990 and 31 July 1990 as part of the refinancing;
   (b) the STD and the ICA, which were executed by the banks on 8 January 1990 but to which the Bell Participants were not parties; and
   (c) other documents required by one of the main instruments, including minutes, certificates and legal advices.
   The instruments and documents, each of which is ‘a Transaction’, are referred to collectively as ‘the Transactions’.
   686 In 8ASC par 19A, the plaintiffs plead that the series of transactions entered into between 8 January 1990 and 31 July 1990, which together form ‘the Transactions’, constitute a scheme (called ‘the Scheme’) entered into by all of the banks and all of the Bell Participants
   whereby all significant and worthwhile assets of the Bell Participants 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 Bell Participants (save for certain immaterial exceptions).
   687 Some of the documents that are captured by the definition of ‘a Transaction’ did not come into existence until after 31 July 1990, but that does not seem material for the purposes of the definitions. The term ‘the Scheme Period’ is defined as the period 8 January 1990 to ‘on or about 31 July 1990’.
   6.2.4. Creditors and debtors
   688 The pleadings refer in several places to ‘creditors, future creditors or indirect creditors’. So far as I am aware, the term ‘creditor’ has never been defined in legislation governing corporations, certainly not in the Companies (Western Australia) Code, the Corporations Law or the Corporations Act. In looking at the affairs of the Bell group companies in January 1990, ‘creditor’ must bear its ordinary meaning, namely, a person to whom a debt has to be repaid.
   689 To understand the phrase ‘future creditor’, it is instructive to compare it with the term ‘contingent creditor’. The latter is a person towards whom, under an existing obligation, a company may or will become subject to a present liability on the happening of some future event or at some future date: Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455, 459. A future claim is distinguishable from a contingent claim in that, while both are founded on an obligation existing as at the relevant enquiry date, a future claim will arise at some time thereafter, while a contingent claim may arise: Expile Pty Ltd v Jabbs Excavations Pty Ltd [2004] NSWSC 284 [37] (Palmer J). A typical example of a future claim is a claim for rent that will become due in the future under a lease that is in existence at the enquiry date.
   690 The term ‘indirect creditor’ of a company refers to a creditor of another company, that is in turn a creditor of the first debtor company (or a creditor in a chain of creditors leading to the ultimate debtor company). ‘Indirect debtor’ bears the corresponding meaning.
   691 The phrase ‘external creditor’ is used to encompass the liabilities of nominated Bell Participants to entities other than Bell group companies. It should be noted that BRL and its subsidiaries were not Bell group companies.
   6.2.5. ACIL (BRL) shares and ACIL (BRL) shareholders
   692 I have already referred to the shareholding of the Bell group in BRL. In 8ASC the plaintiffs refer to ‘ACIL’, ‘ACIL Shares’ and ‘ACIL Shareholders’. On 12 December 1990 BRL changed its name to Australian Consolidated Investments Ltd, hence the acronym ‘ACIL’. But as the contemporaneous documents refer to ‘BRL’ I will continue to use that acronym and, consequently, will also refer to ‘BRL shares’ and to ‘BRL shareholders’.
   693 In Sect 4.6.4.4 I have identified the group companies that are BRL shareholders.
   6.2.6. Publishing and communication assets, the BPG group
   694 In 8ASC the term ‘Publishing and Communication Assets’ is used to describe (in effect) the business of publishing The West Australian newspaper and associated endeavours. This business was operated by a sub‑group of the BPG group. The intermediate holding company of the sub‑group was Harlesden Investments. For sake of economy I will, wherever possible, refer simply to ‘the publishing assets’ as encompassing not only the newspaper business but all other assets of the BPG group. This would include, for example, the assets of Bell Press.
   695 The ‘BPG group’ is also a defined term in 8ASC. As defined, it includes these companies: BPG, Bell Press, WAN, Harlesden Investments, Albany Advertiser, Colorpress Australia Pty Ltd (Colorpress), Hocking & Co Pty Ltd (Hocking), South West Printing and Publishing Co Pty Ltd (South West Printing), WA Broadcasters Pty Ltd (WA Broadcasters), Western Mail, Western Mail Developments and Western Mail Operations Pty Ltd (Western Mail Operations).
   6.2.7. The negative pledge arrangements
   696 8ASC also contains one definition that is relevant to the negative pledges that were part of the financing arrangements between the banks and the Bell group companies prior to January 1990. ‘Negative Pledge Bell Group Companies’ is defined to have the same meaning as I have described earlier using the abbreviation ‘NP group companies’.
   6.2.8. The Statements of Net Assets
   697 For the purpose of these proceedings, the liquidators prepared (in Excel spreadsheet format) statements setting out the estimated assets and liabilities of each Bell group company as at 26 January 1990, immediately prior to the Bell Participants entering the Transactions. The liquidators also prepared a consolidated statement for the Bell group as a single entity. Intra‑group debts and share ownerships were eliminated in the consolidated statements.
   698 The spreadsheet presentations are referred to in PP (for example, PP par 7C) as ‘Statements of Net Assets’. In the particulars, and in these reasons, the Statements of Net Assets are referred to as ‘SNAs’.
   699 Each SNA contains three columnar tables and a number of additional calculations. The columns are:
   (a) first, the value of assets and liabilities as determined by the liquidators from the books and records of the Bell group companies;
   (b) second, the liquidators’ valuations of assets and liabilities estimated as at 26 January 1990, which in some cases differ from the book values; and
   (c) third, the notional distribution from total assets at valuation in respect of each liability listed, arrived at by operation of the financial model on which the spreadsheets were developed.
   700 Insofar as the statements reflect the material in the first and second columns, they are sometimes referred to as ‘book value SNAs’ and ‘valuation SNAs’ respectively.
   701 Against those general comments I turn now to describe the pleaded cases generally, under subject matter headings.
   6.3. Background matters
   702 In the Bell group, as in most large corporate groups, there are interlocking relationships arising from shareholdings and borrowings. In the collapse of such a group the task of identifying those relationships and unravelling them is often a complex but necessary aspect of the administration. It is a significant feature of this litigation.
   703 8ASC describes the group structure and directorships and emphasises the interlocking nature of shareholdings and debtor–creditor relationships immediately prior to the commencement of the Scheme Period. It goes on to describe the liabilities of the companies to the banks (which were unsecured but supported by negative pledge arrangements), to the bondholders and to other external creditors. The two most significant of the other external creditors are the DCT in respect of assessments that had been issued but which were under objection and BRL or related companies in respect of futures trading accounts. The plaintiffs do not include as a liability of BGF any obligation to the Lloyds syndicate banks under the Lloyds syndicate banks’ facility.
   704 The plaintiffs then introduce the documents that were executed between 8 January 1990 and 31 July 1990 (but in the main between 26 January 1990 and 15 February 1990) as part of the refinancing arrangements and by which security was given and taken. They also plead the main terms of those agreements.
   705 I have already described par 19A that encapsulates a feature that the plaintiffs say is at the heart of the case; namely, that all worthwhile assets of the group were made available to the banks for repayment of their debts in priority to the claims of other creditors.
   706 The banks’ case takes little exception to the way the plaintiffs have approached the group structure, directorships, the interlocking nature of shareholdings and debtor–creditor relationships and the nature of the Transaction documents. There is little controversy in relation to those matters. One exception to that statement is the relationship between Western Interstate and Bell Bros, which I will develop later. Another exception is found in ADC par 10(b) in which the banks allege that, immediately prior to the commencement of the Scheme Period, BGF was also liable to the Lloyds syndicate banks for the principal sum and interest under the Lloyds syndicate banks’ facility.
   707 But when it comes to the liabilities of the group companies the banks take a different view from that proffered by the plaintiffs. In ADC par 7A(a) the banks admit that BGNV was a creditor of TBGL and BGF but say the borrowings were ‘non‑current, subordinated liabilities’. In par 12 the banks deny, in particular, that there was any indebtedness to the DCT (in respect of the disputed assessments) or to the BRL companies (in relation to the futures trading accounts).
   6.4. Insolvency
   708 A nidus in the plaintiffs’ case is the allegation that at the commencement of, and during, the Scheme Period the main companies in the Bell group were insolvent. Lack of solvency is an element of almost all of the causes of action contended for by the plaintiffs.
   709 In 8ASC par 20A to par 29B, it is pleaded that each of the main companies in the group (including most of the plaintiff companies) was, by 26 January 1990, insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent. Further or alternatively, upon entry into the Scheme or as a consequence of entry into the Scheme, the companies became insolvent or inevitably would become insolvent. Yet another alternative is set out in par 33B; namely, that as at the commencement of the Scheme period, unless the companies ‘were able to enter into a valid and effective restructuring of their financial position’, they would be wound up and have their assets liquidated.
   710 There were myriad references throughout the case to the phrases ‘insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent’. In these reasons, unless it is necessary to distinguish between the various financial states described in those phrases, I will refer to them compendiously as ‘an insolvency context’.
   711 The plea of insolvency is supported by extensive particulars. In essence, the plaintiffs say that an examination of the cash flows demonstrates that, as at 26 January 1990, the companies had no, or no reasonable, prospect of paying from their own moneys their liabilities as those liabilities fell due. This is because cash outflows would exceed cash inflows and the ability to raise funds by the sale, mortgage or pledge of assets was restricted by provisions in the Transaction documents that ceded control over those assets to the banks.
   712 In ADC, the banks simply deny that the companies were in an insolvency context. But there are extensive particulars in DP concerning what the banks say was the financial position of the Bell Participants as at 26 January 1990. In DP par 20A to par 33B(d), the banks say there was a reasonable prospect that in the period 1 January 1990 to 31 May 1991 the net trading cash flow would have been $125 million and that this would have been available to meet expected liabilities.
   6.5. The subordination question
   713 The five bond issues were described as ‘convertible, subordinated bonds’. A leitmotif in the case is the question whether or not the on‑loans made by BGNV to TBGL and BGF of the proceeds from the three BGNV bond issues were subordinated.
   714 In ADC par 12(i) to par 12(n), the banks, in effect, say that any liability of TBGL or BGF to bondholders under the TBGL and BGF bond issues would, in a liquidation, be subordinated to the claims of all other senior creditors.
   715 ADC par 11A to par 11ER contain a long and complex plea dealing with the on‑loans made by BGNV to BGF or TBGL of the proceeds of the three BGNV bond issues. I will describe these pleas in more detail in a later section. It is sufficient here to say four things. First, in par 11E the banks say that the on‑loans were ‘non‑current subordinated liabilities of TBGL and BGF’. Secondly, they say that the on‑loans were subordinated either by contracts made between the companies concerned at the time of the loans or (in relation to the on‑loans from the first two issues) by contracts made between the banks and the companies at around the time of the bond issues. Thirdly, they say that if the on‑loans were not subordinated then as between TBGL, BGF and BGNV and as between the plaintiffs and the banks, there was and is an estoppel that is a bar to the making of any assertion that the on‑loans were unsubordinated. Fourthly, if the on‑loans were not subordinated, the banks have rights under the Trade Practices Act 1974 (Cth) and under the doctrine of restitution for benefit conferred by mistake. There was a further ground, namely, that in equity BGNV would hold any funds distributed to it in the liquidation of TBGL and BGF on trust for the banks. This ground was abandoned during closing submissions.
   716 Different considerations apply in relation to the contracts for which the banks contend in respect of the three on‑loans, especially the last of them. But for sake of brevity I will, for present purposes, overlook those differences.
   717 The banks submit (again in summary) that because the liability of TBGL and BGF to the bondholders (directly under the TBGL and BGF bond issues and indirectly through the on‑loans made by BGNV of the proceeds of the three BGNV bond issues) would in any event have been subordinated, the bondholders were not relevantly prejudiced by the Scheme.
   718 I have reversed the order in which the respective cases are described because the status of the on‑loans is raised, expressly, for the first time in the defence in the way that I have just outlined. There is a dispute between the parties as to where the onus of proof lies on this question.
   719 In 8ASC par 12, the plaintiffs include the bondholders in the list of creditors of TBGL and BGF as at the commencement of the Scheme Period. The bondholders are said to be creditors in respect of the liabilities arising under the TBGL bond issue and the BGF bond issue. In par 11E and par 11F, the plaintiffs plead that the moneys raised under the three BGNV bond issues were on‑loaned to TBGL or BGF and that the loans carried interest. In par 11K the plaintiffs say that, as at the commencement of the Scheme Period, TBGL and BGF had principal liabilities of $60.4 million and $338.8 million respectively in relation to the BGNV on‑loans.
   720 In the PR, the plaintiffs say that the BGNV on‑loans ‘were ordinary unsecured unsubordinated liabilities of TBGL and BGF to BGNV’. They also deny the existence of contractual terms or estoppels as contended for by the banks in ADC par 11EA to par 11ER.
   6.6. The effect of the Scheme
   721 A key issue in the case is the effect of the various Transactions on the creditors (other than the banks) and shareholders of the Bell Participants and the way in which those Transactions are said to have constituted the Scheme.
   722 8ASC par 33C is significant because it encapsulates what the plaintiffs say is the effect of the Scheme and the Transactions. In summary it is this. Some companies incurred liabilities to the banks that they did not previously have and, by doing so, they, and their shareholders and creditors were deprived of the prospect of material increase in the value of their assets and had cast on them the probable prospect of loss. This involved a detriment or prejudice to those companies. Even if a particular company did not incur such a liability to the banks, that company, and its shareholders and creditors suffered a similar detriment or prejudice because of the effect on the other companies that did so suffer. There was, the plaintiffs plead, a corresponding advantage to the banks.
   723 In ADC par 33C, the banks deny that the effect of the Scheme was as alleged by the plaintiffs. In particular, they say that the Transactions did not affect the realisable value or worth of the assets. They go on, in par 33C(d), to assert that the directors believed that the time provided by the Transaction documents gave the directors an opportunity ‘to exercise their commercial acumen and business judgment to pursue steps to order the affairs of the Bell group in the interests of each company as a whole in the Bell group’. This would allow them to continue to carry on business so as to restructure the financial position of the group. Had the directors been able to effect a restructure, they would have had an opportunity to maximise, over time, the commercial worth of the assets, particularly the publishing assets.
   6.7. The directors: conduct and breaches of duty
   724 Another of the fundamental elements of the case is the plaintiffs’ allegation that the directors of the various Bell companies had fiduciary duties to those companies and that their actions in causing the companies to enter into the Transactions constituted a breach of those duties.
   725 Having dealt with the effect of the Scheme, the statement of claim then turns to the conduct of the directors of the Bell Participants. The impugned conduct can be described in three broad categories. First, the plaintiffs say that the directors caused the companies to enter into the Scheme and the Transactions and did so ‘knowing, believing, suspecting, or when they ought to have known or recklessly disregarding’ numerous things, including that the companies were insolvent or in an insolvency context and that the effect of the Scheme was as pleaded in par 33C.
   726 Secondly, the pleading goes to some lengths to spell out the relationship between the directors of the Australian Bell companies and BCHL, proposals put forward to restructure the BCHL group (including the Bell group) and threats to the survival of BCHL. This culminates in a plea that Aspinall, Mitchell and Oates had a conflict between their duties as directors of the Bell Participants and their personal interests in relation to BCHL.
   727 Thirdly, the plaintiffs point to certain steps that they say were taken ‘to facilitate and protect the Scheme’. These steps include the following:
   (a) SCBAL making and (following representations from the directors about matters adverse to the interests of the banks) then withdrawing a formal demand for payment of its facility;
   (b) the banks and (or) the directors procuring the execution by BGNV of the BGNV Subordination Deed;
   (c) the banks and the directors agreeing that TBGL should meet with LDTC to discuss the financial position of the group and the restructure proposals; and
   (d) the banks (by arrangement with the directors, to avoid an event of default occurring under the bond issue trust deeds and to extend the time elapsing after the Transactions) waiving compliance with some of the conditions of the refinancing arrangements.
   728 In the pleading, the plaintiffs deal separately with the Australian directors, the UK directors, the BIIL directors and Equity Trust as the director of BGNV. In this section of the reasons I will deal with the directors globally without making that differentiation.
   729 In par 37, the plaintiffs plead the relevant duties owed by the directors to the companies of which they were directors, as follows:
   Each of the [directors], as directors respectively of the Bell Participants, owed fiduciary duties to each such company of which he or it was a director:
   (a) to act bona fide in the best interests of the company as a whole, including, with respect to each Bell Participant whose financial position was such that it was insolvent, nearly insolvent, of doubtful solvency or inevitably would become insolvent as pleaded in paragraphs 20A to 29B, further, or alternatively, 33B, to act in the best interests of all its creditors, including future creditors;
   (b) to exercise his or its powers properly; and
   (c) where there existed a conflict or potential conflict of interest between the interests of the director or others and those of the company, not to exercise his or its powers in the interests of himself, itself or others and/or to the disadvantage of the company.
   730 In par 39A to par 39F, it is said that in causing the relevant companies to enter into each Transaction and to enter into and give effect to the Scheme when they knew of the matters ascribed to them, and in the circumstances of their relationships with BCHL, the directors breached those duties. Alternatively some directors knowingly participated in and assisted the breaches of duties by others.
   731 The banks deny many of the factual matters asserted by the plaintiffs (in par 36A to par 36O) and they deny the allegation of a conflict of interest in par 36P.
   732 The banks admit many of the factual matters asserted in the section of 8ASC that deals with the SCBAL demand in December 1989. But they deny the allegation in par 36AC that the demand was withdrawn to avoid a threat to the banks’ ability to obtain security and to avoid the bondholders ranking equally with the banks. Similarly, they admit the contention that they waived compliance with certain requirements of the Transactions but deny that they did so in order to protect the Scheme.
   733 In relation to the alleged breaches of duty by the directors, the banks plead to 8ASC par 37 in this way:
   As to par 37 of the statement of claim, the Defendants:
   (a) admit that each of the [directors] owed to each Bell Participant of which he was a director fiduciary duties to:
   (1) act bona fide in the interests of the company as a whole;
   (2) exercise his powers properly;
   (b) otherwise deny each and every allegation pleaded therein.
   734 There is a blanket denial in ADC par 39A to par 39E that the directors breached their duties as alleged by the plaintiffs. Similarly the banks deny the alternative allegation in par 46 to par 48 that the directors knowingly participated in the breaches of duty by the directors of BGF.
   735 The denials of a breach of duty are taken further in ADC par 48A. The banks say that in entering into the Transactions, the directors were the persons entitled to manage the companies and had a discretion so to act. They also contend that the directors considered the interests of the companies as a whole as well as their creditors and formed the view that:
   (a) they were acting in the best interests of the companies;
   (b) the Transactions were of real and substantial benefit to the companies;
   (c) they were providing the companies with the opportunity to continue to carry on business; and
   (d) the value of the assets had a real potential to exceed liabilities.
   736 The banks also say in par 48A that the directors believed that unless the Transactions were entered into, a likely result was that various companies in the group would be wound up with a consequent loss of the real potential for improvement in the value of assets. To avoid a winding up it would be necessary to restructure the financial position of each company in the Bell group. The first step in such a restructure was to have the Australian banks agree to convert the liabilities then due to the banks from current to non‑current status. The directors also believed, or were entitled to believe, that it was possible to restructure the financial position so that the companies could meet their obligations as they fell due and that the banks would not agree to continue their facilities unless they were given a level of control or prudential supervision. There are similar pleas in relation to the UK directors and Equity Trust.
   737 In ADC par 48AA, the banks say that the views the directors formed were not views that no reasonable person could consider.
   6.8. The banks: the agency argument
   738 The question of what each bank knew and how it came to have that knowledge is another critical issue in the case. In this respect the relationships that existed between the several banks have to be examined.
   739 In 8ASC par 49 to par 49D, the plaintiffs plead that between September or October 1989 and the end of the Scheme Period, an arrangement existed for the banks to cooperate (including to obtain, communicate and share information) largely through Westpac and Lloyds Bank as agents. This culminates in the pleas in par 49C that each bank was the agent of the others for obtaining and communicating information and in par 49D that information known by one bank was ‘known to, obtained, believed or suspected’ by all banks.
   740 The essence of the plea was somewhat narrower in focus than the wording would suggest. The case advanced was that Westpac was the agent of the Australian banks and Lloyds Bank was the agent of the Lloyds syndicate banks for the designated purpose. I will describe this in more detail in Sect 30.5.1.
   741 There is a simple denial by the banks of the plaintiffs’ assertion that the arrangement for sharing of information among the banks and the position of Lloyds Bank and Westpac meant there was an agency relationship between the banks or that information known to one bank was known to them all.
   6.9. The banks: knowledge and conduct
   742 Although it is the directors who are alleged to have acted in breach of fiduciary duties, it is the banks, not the directors, against whom relief is sought. For this reason, the conduct of the banks is another critical element in the case.
   743 In 8ASC par 50 to par 59A, the plaintiffs plead that, either actually or by calculated abstention from enquiry, the banks knew, believed, suspected or ought to have known a number of things. These include the insolvency or insolvency context of the companies and the effect of the Scheme as set out in par 33C. These pleas are supported by extensive particulars that relate to the banks globally and individually.
   744 The pleas of banks’ knowledge are expanded in par 59B to par 59T, including knowledge of the following matters (in the main, from early to mid‑December 1989 or immediately before the commencement of the Scheme Period):
   (a) if one bank called up a facility it was likely others would do likewise and, if that happened, none of TBGL, BGF or BGUK could repay the loans;
   (b) in those circumstances, there would be an event of default under the several bond issues and, if that were to happen, and a call were to occur, the companies could not meet it;
   (c) if the loans were called, the companies would be placed in liquidation within a short time unless they entered into a valid and effective restructuring of their financial position;
   (d) in a winding up, the BGNV on‑loans might not be subordinated behind the claims of the banks;
   (e) the companies were insolvent or in an insolvency context;
   (f) some Bell Participants might be wound up within six months of entry into the Transactions and the banks might recover less than the full amount of their debts;
   (g) the positions and duties of the Australian directors with BCHL and the existence of conflicts of interest;
   (h) there was a significant risk that some or all of the Transactions might be set aside; and
   (i) the longer the time that elapsed after the Transactions had been entered into the greater the chance of avoiding the Transactions being set aside.
   745 This leads to the important pleas in par 59TA, par 59TB and par 59U that with the knowledge, belief or suspicion pleaded, the banks did certain things. For example, until mid‑February 1990 they refrained from seeking adequate information about the current financial position of the Bell Participants, or about the restructure proposals, or about the effect of the Transactions on creditors. They also instructed solicitors to draft and settle the Transaction documents (including some corporate documents such as minutes of directors’ meetings), took steps to facilitate and protect the Scheme, gave effect to the Scheme and received certain gains. The plaintiffs allege that the banks did these things with the belief and with the intention that they would be no worse off (than their present position) if the Transactions were set aside or undone and they had to disgorge any gains they received.
   746 In the main the banks simply deny that they knew, believed, suspected or ought to have known of the matters alleged by the plaintiffs in 8ASC par 59 to par 59T and of the consequences asserted by the plaintiffs in par 59TA, par 59TB and par 59U. This includes a denial that they:
   (a) refrained from seeking information as to the current financial position of the companies; or
   (b) proceeded with the Scheme with the belief and intention that they would be no worse off if the Transactions were set aside.
   6.10. The banks’ receipt of moneys
   747 It is trite to say that this litigation would not have been commenced were it not for the fact that the banks eventually exercised rights under their various securities and received funds as a result.
   748 In 8ASC par 63A to par 65G, the plaintiffs set out the various receipts and gains said to have been made by the banks as a consequence of the Scheme and the Transactions. They include gains in the form of interest, fees and legal fees received on or in respect of the facilities between 26 January 1990 and 31 December 1991 totalling about $67.5 million. They also include the proceeds from the sale of the publishing assets and the BRL shares, as well as the receipt of certain debts, amounting to approximately $283 million.
   749 In ADC par 63A to par 65G, the banks admit receipt of funds as alleged by the plaintiffs but deny those aspects of the allegations asserting that the moneys were no longer available to ‘Bell Participants and their creditors, future creditors, shareholders and indirect creditors’.
   6.11. The Barnes v Addy claim
   750 The pleading then moves to the Barnes v Addy claim, being the first of the three substantive causes of action on which the plaintiffs’ claims are based.
   751 In short, the plaintiffs say in 8ASC par 65H to par 65J that the banks, alternatively Westpac as trustee and agent for the banks, knowingly participated and assisted in the breaches of duty by the directors and obtained the rights under the Transaction instruments and made the gains pleaded knowing of those breaches.
   752 The plaintiffs also plead (8ASC par 65K) that the banks received and became chargeable with the property of the companies or its traceable product and that this renders the banks liable as constructive trustee for those gains or for the rights obtained. In alleging ‘knowing’ participation and assistance, the plaintiffs refer to all of the matters (with one minor exception) that I have mentioned above when commenting on 8ASC par 50 to par 50U. The claims sound under both limbs of the Barnes v Addy doctrine, that is, accessory liability and recipient liability.
   753 The gravamen of the banks’ answer to the Barnes v Addy claim is to be found in ADC par 65KA. This plea proceeds on an assumption (which the banks deny) that the directors breached a relevant fiduciary obligation. The banks say that even if that were the case, they did not know:
   (a) that the directors did not hold a genuine belief that the Transactions were in the best interests of the companies concerned;
   (b) that the exercise of power by the directors was other than reasonably incidental to the scope of carrying on the business of those companies; or
   (c) that the decisions were not ones a reasonable person could consider to be in the best interests of the companies and within the scope of carrying on the business of the companies.
   754 In 8ADC par 65KA(d) to par 65KA(h), the banks set out several things that they (the banks) believed or were entitled to believe. These include:
   (a) the matters mentioned in my earlier summary of 8ADC par 48A;
   (b) that the directors were entitled to believe and act on the basis that the BGNV on‑loans were subordinated to and ranked behind the indebtedness to the banks;
   (c) that the assumptions made by the banks that the BGNV on‑loans were subordinated were correct;
   (d) that prior to January 1990, BGF (as well as BGUK) was a borrower and had obligations under the Lloyds syndicate banks’ facility;
   (e) that it was legitimate for the banks to require a level of control and prudential supervision, which was achieved by the terms of the Transactions; and
   (f) that it was legitimate for the directors to agree to such control and prudential supervision being given to the banks.
   755 The Barnes v Addy claim, so far as it is founded on matters that had not been included in 7ASC, is subject to a limitation defence by analogy to the Limitation Act 1935 (WA).
   6.12. The equitable fraud claim
   756 The second of the substantive causes of action is a claim that the Transactions and the Scheme were an equitable fraud perpetrated by the banks. The plaintiffs’ equitable fraud claim is to be found in two places in the statement of claim. First, all plaintiffs other than LDTC make a claim, pleaded in pars 65L to 65MA, that the Scheme and the Transactions were an equitable fraud constituted by:
   (a) an imposition and deceit on the Bell Participants and their creditors (including LDTC and the bondholders); or alternatively
   (b) an inequitable and unconscientious bargain on each Bell Participant.
   757 Secondly, in par 108 to par 125, LDTC mounts a claim that the Scheme and the Transactions were an imposition and deceit on it and thus an equitable fraud entitling it to relief. LDTC does not allege that, insofar as they were affected by it or them, the Scheme and the Transactions were inequitable and unconscientious.
   758 As a matter of structure, much of the factual basis for the equitable fraud claim is to be found in the specific pleas concerning LDTC’s position, which is then incorporated by reference in aid of the claim by the plaintiff companies. LDTC relies specifically on two things that are said to be events of default, about which TBGL was obliged to (but did not) notify LDTC, namely:
   (a) the insolvency of TBGL and BGNV; and
   (b) SCBAL making the demand for repayment in December 1989 and the failure of TBGL and BGF to make repayment.
   759 Similarly, the plaintiffs say that entry by each Bell Participant into a Transaction and the entry by BGNV into the BGNV Subordination Deed was a failure by TBGL (and in the latter case BGNV) to comply with the terms of the bond issue trust deeds. Again, the plaintiffs allege that TBGL and BGNV were under an obligation to notify LDTC of the non‑compliance and did not do so. The plaintiffs plead that the banks knew (this includes the alternative states of knowledge) of the event of default and non‑compliance and of the failure by TBGL and BGNV to notify LDTC of them. They also plead that at all material times during the Scheme Period, LDTC did not know about those things.
   760 The plaintiffs then say that with that knowledge, the banks took the benefit of the Transactions and took the pleaded steps to facilitate and protect the Scheme, thus damaging and prejudicing the property held by LDTC for the benefit of the bondholders. This is what the plaintiffs say constitutes the imposition and deceit and thus the equitable fraud.
   761 With some differences, much of this same material is called in aid of the claim under 8ASC par 65MA that the Scheme and the Transaction constitute an inequitable and unconscientious bargain. This appears most clearly from PP. In PP par 65MA(h), par 65MA(i) and par 65MA(j), the plaintiffs say that the directors breached their duties and the companies
   ‘thereby suffered the disadvantage of not having the benefit of an independent and free guiding mind and will brought to bear upon their decision whether to enter into their Transactions and to give effect to the Scheme, which they were entitled to have’.
   762 The plaintiffs go on to say that the Bell Participants did not protect the interests of all their creditors or their interests as a whole and ‘were placed in a position of disadvantage in a situation where they suffered a special disability’. It is also alleged that the banks knew of the position of special disadvantage and ‘took unconscientious advantage of the position of disadvantage in which the Bell Participants were placed’.
   763 The banks deny that the Scheme and the Transactions were an imposition and deceit on the plaintiff companies or on LDTC and deny that the Scheme and the Transactions constituted an inequitable and unconscientious bargain on the companies. They also call in aid the material in ADC par 65KA in answer to the equitable fraud claim.
   764 In relation to the equitable fraud claim the plaintiffs rely, in part, on the SCBAL demand for repayment of the facility in December 1989. In their answer to the LDTC equitable fraud claim (which is incorporated into the claim by the plaintiff companies) the banks say the circumstances in which the December 1989 demand was made raise an estoppel. The estoppel would have prevented SCBAL from asserting (at the time) the validity of the demand and now prevents the plaintiffs from contending that non‑payment of the demand was an event of default under the bond issue trust deeds.
   765 The banks deny that entry into the Transactions was a failure to comply with the covenants of the bond issue trust deeds. They also deny that the failure to notify was a breach of the covenants. They go on to say a number of things about the position of LDTC. They include that LDTC:
   (a) as trustee under the bond issue trust deeds had the power, right and duty to obtain information about the financial position of TBGL and BGNV and to require the provision of certificates about events of default;
   (b) knew that the companies were insolvent (if that be the case) and that they were proposing to give, and gave, securities to the banks;
   (c) formed the view that events of default had occurred; and
   (d) took advice on whether events of default had occurred and the options available to it.
   766 The banks also plead that if LDTC was unaware of the events of default, that lack of knowledge arose because of its failure and neglect to use the rights and powers available to it and it had been guilty of neglect and delay in making the claims it now advances. In these circumstances, the banks contend that LDTC is disentitled from seeking the equitable relief it now claims. This is expanded in ADC par 125 to include a plea that LDTC has been guilty of waiver, acquiescence and laches and is generally not entitled to equitable relief of the type sought.
   767 In ADC par 130(a), the equitable fraud claims of LDTC and of the other plaintiffs are subject to a limitation defence by analogy to the Limitation Act 1935 (WA).
   6.13. Conditions for relief
   768 Stripped to its core, this litigation centres on the Transactions. The plaintiffs say that they are entitled to relief, and in particular equitable relief, in respect of the Transactions. This apparently bland statement has several consequences.
   769 In the next section of the pleading the plaintiffs set out some conditions entitling them to relief. They are:
   (a) the companies (or some of them) have suffered and continue to suffer loss and damage and are entitled to compensation;
   (b) in particular, the plaintiffs are entitled to relief in equity, and
   (c) each of the Transactions that constituted an agreement, mortgage, guarantee, charge or deed is void or voidable ‘and has been, or is hereby, so avoided or rescinded’.
   770 The banks admit that notice of avoidance has been given but deny the remainder of the plea concerning avoidance or rescission. And, peppered throughout the defence, is a challenge to the plaintiffs’ entitlement to any relief of an equitable nature. But the banks also raise a number of matters that can conveniently be dealt with under the heading ‘conditions for relief’.
   771 First, they say that BGF, prior to giving notice of avoidance, elected not to avoid certain of the Transactions entered into by it. Secondly, the banks say that certain of the Bell Participants, in their dealings with TBGL, BGF, BPG and other Bell companies, were entitled to rely on the so-called indoor management rule, an example of which is s 68A(3)(f) of the Companies (Western Australia) Code. Thirdly, the banks plead that the plaintiffs are not entitled to equitable relief for a number of reasons including that:
   (a) they have not offered to restore the banks to the position they were in prior to the discharge of debts;
   (b) prior to the purported avoidance they stood by while the banks exercised rights under the instruments; and
   (c) certain of the Bell Participants have not purported to avoid the Transactions and have not been joined as parties to an action based on a breach of fiduciary duties amounting to an equitable fraud on them.
   772 The banks also raise a severance argument. In ADC par 71AC, they plead that parts only of the instruments could be found to be unconscionable and it is only those parts that could be void and, if so, those parts would be severable from the instruments. The remainder of the instruments would remain valid and enforceable.
   6.14. Statutory claims
   773 Some (but not all) of the Transactions are attacked as being vulnerable to challenge under statutory provisions. In the main, the Transactions that are impugned by recourse to the statutes are guarantees and indemnities, mortgage debentures, share mortgages, subordination deeds and the facilities agreements entered into by TBGL and BGF.
   774 One set of allegations (to be found in 8ASC par 86A to par 90) is that the Transactions are dispositions or alienations of property under s 121 of the Bankruptcy Act 1966 (Cth), s 89 of the Property Law Act 1969 (WA) or Pt 7 of Sch 2 of the Imperial Acts (Substituted Provisions) Act 1986 (ACT). In these reasons I intend to refer to Pt 7 of Sch 2 of the Imperial Acts (Substituted Provisions) Act 1986 (ACT) as ‘the Territory legislation’. In essence, the allegation is that each of the impugned Transactions was a disposition of property with intent to defraud creditors. It is also alleged that the banks took the benefit of the Transactions without giving consideration, without acting in good faith and with notice of the intent to defraud creditors.
   775 Many of the same Transactions are subject to a further claim that they constituted settlements within the meaning of s 120 of the Bankruptcy Act and, as they were made within either two or five years of the commencement of the winding up of the companies concerned, they are voidable against, and have been avoided by, the liquidators. These allegations appear in par 91 and par 91A. The circumstances in which the plaintiffs claim to be entitled to relief on these accounts are then set out in par 92 and par 92A.
   776 In par 126 to par 129, LDTC also mounts claims under s 89 of the Property Law Act and the Territory legislation. LDTC does not call in aid s 121 or s 120 of the Bankruptcy Act.
   777 Finally in this section, the plaintiffs say that the subordination deeds executed by BGNV and other Bell Participants and the guarantees and indemnities executed by some Bell Participants created a charge over book debts. Those charges should have been (but were not) registered under the Companies (Western Australia) Code or the Corporations Law. The plaintiffs allege that, to the extent that the Transaction documents created a charge and were not registered, they are void as against the liquidators. These pleas are to be found in par 93 to par 101.
   778 The banks do not concede that all of the impugned Transactions are ‘dispositions’ or ‘alienations’ of property within the meaning of the statutes. The banks also plead that they did not know that the directors had acted dishonestly or fraudulently (if that be the case) and that they believed that the directors were of the view that the Transactions were of real and substantial benefit to the companies.
   779 There is a timing issue extant on the pleadings. The banks say that the moneys were received from the sale of the publishing assets and the BRL shares at a time before the liquidator of the relevant companies had purported to avoid the Transactions. By the time notice of avoidance was given, the moneys had been received for consideration, had been used to discharge an indebtedness to the banks and were no longer identifiable in the hands of the banks. It would therefore be unjust and inequitable to allow recovery of those moneys.
   780 In ADC par 92A, the banks plead that the claims under s 89 of the Property Law Act and the Territory legislation are bad at law because the statutes have no application where the alleged alienation prefers one creditor over another and does not entitle any party (other than a creditor or a liquidator of a creditor of the disponor) to the benefit of the provisions.
   781 In ADC par 92AA, the banks say (in effect) that the fact that the BGNV on‑loans were (or should be treated as) subordinated to the debts due to the banks is an answer to any claim based on lack of good faith or an intent to defraud.
   782 In ADC par 96A to par 101, the banks deny that any aspects of the instruments referred to in 8ASC par 93, par 97 and par 98 created a charge on a book debt and that accordingly there was no requirement that they be registered. The banks also raise a severance argument as an alternative should parts of those instruments be found to constitute a charge.
   6.15. The counterclaim
   783 The counterclaim is devoted largely to the preservation of the status of the BGNV on‑loans contended for by the banks; namely that they were, and always have been, subordinated behind the debts due to the banks.
   784 The banks plead that the plaintiffs are not entitled to the relief they seek and that they (the banks) are at liberty to enforce the instruments to their full force and effect. They say that if some of the instruments created charges that should have been registered, then they are entitled to an extension of time for registration. They also plead that, in breach of the subordination deeds (being some of the Transaction instruments), certain of the plaintiffs have lodged proofs of debt in the liquidations of other Bell companies. They say that if the plaintiffs who have lodged proofs of debt succeed in this action and receive moneys in the liquidations, they will be liable to indemnify the banks in the amount of those receipts.
   785 The balance of the counterclaim sets up the factual matrix for claims in contract, estoppel and under the Trade Practices Act 1974 (Cth) in relation to the subordination question. It incorporates the material in ADC par 11EA to par 11ER.
   786 In large measure, the defence to the counterclaim in the PR is a joinder of issue on the various allegations contained in the counterclaim. But the plaintiffs raise limitation defences in relation to:
   (a) those aspects of the contract claim in respect of which the banks call in aid s 11(2) of the Property Law Act (by analogy to the Limitation Act);
   (b) the claims for relief under s 80 or s 87 of the Trade Practices Act (by analogy to s 82(2) and s 87(1CA) of that statute); and
   (c) relief consequent on or conformable with the nature of the estoppel alleged (by analogy to the Limitation Act).
   787 The plaintiffs also plead that the banks have been guilty of laches, waiver, abandonment and acquiescence, giving rise to equitable defences. They also raise defences by analogy to the Limitation Act and say that in any event the relief claimed is disproportionate to the detriment alleged to have been suffered. There is also a general plea that the banks have been guilty of inequitable conduct and do not have clean hands and as such are not entitled to equitable relief.
   6.16. Prayers for relief
   788 The plaintiffs’ prayers for relief are long, complicated and unintelligible. At this stage their description must remain crepuscular. In the statement of claim, individual companies seek different forms of relief. But in broad compass the plaintiffs say they are entitled to the following relief (among other things):
   (a) declarations that the Transactions are not binding in equity or are void or are voidable and liable to be set aside;
   (b) orders that Westpac, alternatively the banks, account to or pay to the companies the gains referred to in the pleadings; and
   (c) orders for an account of profits, equitable compensation, damages and compound interest.
   789 In opening the case, senior counsel for the plaintiffs indicated that if an account of profits were to be ordered then, as at 30 June 2003, the amount to which the plaintiffs would be entitled could be around $1.4 billion. With the passage of time and the further accrual of interest I understand that this is now $1.5 billion. This is based on a calculation, by reference to the profitability of the various banks, of an approximate return on the funds that were received by them.
   790 Most of the banks’ prayers for relief relate to declarations and (or) injunctions. The banks seek declarations that:
   (a) the Transaction instruments are valid and effectual;
   (b) the on‑loans were subordinated; and
   (c) if the on‑loans were not subordinated, the plaintiffs are estopped from asserting that position.
   791 The banks also seek orders:
   (a) restraining the plaintiffs from seeking or consenting to a variation of the subordinated status of the bonds issued by TBGL and BGF;
   (b) restraining the plaintiffs from lodging proofs of debt in competition with the banks;
   (c) requiring the plaintiffs to pay over to the banks any funds received in the liquidation of other Bell companies; and
   (d) if necessary, moulding relief under s 80 or s 87 of the Trade Practices Act or at law conformable with the estoppel.
   792 The banks also say that if the on‑loans were not subordinated, there was a breach of contract entitling them to damages.
   793 Again, for the sake of brevity, I have not mentioned the fact that in some instances the relief sought by the banks is fashioned differently in relation to the contracts for each of the three on‑loans. For the same reason I have also ignored, for the purposes of this summary, the fact that not all banks seek all items of the relief.
7. The litigation: some critical issues arising
   794 Literally hundreds of legal and factual issues have arisen in this litigation. Some are more important than others. Some are relatively self‑contained, but others have a flow‑on effect that reverberate throughout the case. I wish now to stand back from the minutiae of the pleadings and do two things. First, in the alembic that I quaintly call a mind I think I have been able to reduce the case to its fundamental core. This has been a useful exercise because the critical issues that I have identified flow from the core. I am embarking on this distillation without any pretence to precision in the description of things such as differing states of mind, degrees of financial instability and the like.
   795 Secondly, I want to introduce what I see as the questions that will have the greatest impact on the way the case is finally to be decided. Those questions are insolvency, subordination of the on‑loans, the detrimental effect of the Scheme and the state of mind of the directors and of the banks. Once again, this section is general in nature. I will come back to each of the issues and discuss them in more detail in later sections.
   7.1. The case: a brachylogy
   796 The plaintiffs’ case centres on a number of propositions that can be broadly stated. First, at the time when the securities were given and taken, the main companies in the group were (to the knowledge of the directors) insolvent. A significant plank in that argument is that known recurrent liabilities (including bondholder interest payments) falling due in the foreseeable future could not be met from known income sources. The only way they could be met was by recourse to asset sales and one effect of the Transactions was to relinquish control over the proceeds from asset sales to the banks.
   797 Secondly, the effect of the securities was to give to the banks priority over the claims of all other creditors of the companies. As a consequence, shareholders and creditors of the companies (in particular, the bondholders and the DCT) were prejudiced by the giving of the securities. A significant factor in that argument is whether the on‑loans made by BGNV to TBGL and BGF of the proceeds from the three BGNV bond issues were subordinated or unsubordinated. If the loans were unsubordinated from inception and if the Transactions had not been entered into, BGNV (and thus, effectively, the bondholders) would have ranked equally with the banks in a winding up. Under that scenario, the taking of securities was to the advantage of the banks and to the prejudice of the bondholders. If, on the other hand, the loans were subordinated from inception, the prejudicial effect on bondholders of the taking of security by the banks is much less clear.
   798 Thirdly, the giving of the securities involved a breach by the directors of duties that they owed to the companies to act in the best interests of the companies as a whole, to act only for proper purposes and to refrain from acting in a position of conflict of interest. Because of the financial predicament of the companies, the directors were obliged (when considering the best interests of the companies) to take into account the interests of creditors. The essence of the breaches lies in the fact that the directors:
   (a) looked simply at the group globally and failed to take into account the interests of the individual group companies that entered into a Transaction and the interests of the creditors and shareholders of those individual companies;
   (b) acted for an improper purpose, namely, to keep the banks at bay so as to ward off liquidation, in the interests of the banks and of BCHL rather than in the interests of the Bell group companies and their creditors; and
   (c) because of their involvement with BCHL, were in a position of conflict or potential conflict between (on the one hand) their interests in furthering the position of BCHL and their own pecuniary interests in BCHL, and (on the other hand) the interests of the Bell group companies.
   799 During the negotiations, it had been recognised that unless there was a corporate benefit to a company granting a security, there was a risk that the securities might be set aside. This was particularly so where the company was financially unstable. In such a case, a company could not enter into a transaction, even if the transaction was in the best interests of the group as a whole, unless the transaction was also in its own interests and in the interests of its creditors. The corporate benefit argument loomed large in the correspondence and discussions between the solicitors for the banks and for the companies and between the banks’ solicitors and the banks. The plaintiffs argue that although the recitals to the Transaction documents and the minutes or resolutions refer to corporate benefit there was, in reality, a signal failure of the directors to apply their minds to the corporate benefit accruing to individual group companies. This is at the heart of the case concerning breach of directors’ duties.
   800 It is also alleged that the banks knew of all (or at least most) of these things. In particular, the banks knew that the companies were insolvent and they knew of the lack of corporate benefit. The plaintiffs are especially critical of the banks over a number of things they say the banks did or failed to do. First, the banks pressed ahead with the Transactions knowing of the parlous financial state of the companies, without seeking adequate information about the cash flow situation and without satisfying themselves that there was a real and substantial benefit to the entities concerned. Secondly, they did so after becoming aware of the argument that the BGNV on‑loans might be unsubordinated. Thirdly, they did so having formed a view they would be no worse off if the securities were eventually set aside. Fourthly, they knew of that the directors were breaching the duties they owed to the companies. Finally, they took steps (including waiving compliance with some obligations under the Transaction documents) to avoid defaults that might have precipitated a liquidation of the companies within the six‑month preference period. They did so as a means of enhancing the ability of the banks to resist a challenge to the validity of the securities.
   801 The plaintiffs say that in engaging in this conduct, the banks knowingly assisted the directors to breach their fiduciary duties. They received property from the companies knowing that it arose from a breach of a fiduciary duty. They perpetrated an equitable fraud on the companies and on companies’ creditors. They received the property in circumstances that contravened certain provisions in the Bankruptcy Act and other legislation. When they stepped in to sell property over which they had taken security they made gains for themselves and caused loss to the Bell group companies. The amount recovered by the banks from the realisations was approximately $283 million. The plaintiffs say the banks must now account to the plaintiffs for the gains so made. In addition, they must compensate the companies for their losses.
   802 The banks’ response to the plaintiffs’ case can be distilled into four broad propositions. First, the companies were not insolvent and the directors could rely on the banks to release asset sale proceeds if required to meet recurrent outgoings. If the companies were insolvent the banks did not know about it. Secondly, no creditors were relevantly prejudiced by the Transactions. The bondholders were not prejudiced because the on‑loans were, from inception, subordinated and thus they always ranked behind the banks. The DCT was not (at that stage) a ‘creditor’ and no other creditors suffered a detriment.
   803 Thirdly, there was no breach by the directors of their duties to the company. It was reasonable for the directors to believe that the group had valuable assets and that it could continue as a going concern. But there needed to be a restructure of the financial position of each company in the group. Such a restructure could not take place unless the borrower companies first regularised their banking relationships. This was an essential first step that provided time for the financial restructure to be put in place. Without that first step it was likely that liquidation would ensue and the opportunity for the group to continue as a going concern would be lost. And therein lay the corporate benefit. The banks also say that if (unknown to them) the directors did contravene their obligations, the duties they breached were not of a fiduciary nature.
   804 Finally, even if there were breaches of duty by the directors, the circumstances are such that the banks have no obligation to account for the proceeds of the realisations or to compensate the companies. Further, due to the conduct of the plaintiffs and for myriad other reasons the plaintiffs cannot now claim any relief.
   805 I now intend to pose a series of questions that will have to be answered in order to reach a final decision. The reader should keep this list in mind as the reasons develop. Towards the end of the reasons I will return to the list and attempt to provide succinct answers.
8. Were the Bell group companies insolvent as at 26 January 1990?
9. Did the directors know the companies were insolvent?
10. In causing the companies to enter into the Transactions (including giving securities over all worthwhile assets), did the Australian directors breach the duties they owed to the Australian Bell group companies?
11. In causing the companies to enter into the Transactions, did the UK directors breach the duties they owed to the UK Bell group companies?
12. In causing BGNV to enter into its Transaction, did its directors breach the duties it owed to BGNV?
13. Were the duties that were breached fiduciary in nature?
14. Are the banks liable under the first limb of Barnes v Addy, that is, that they received trust property knowing that it arose from a breach of the directors’ fiduciary duties?
15. Are the banks liable under the second limb of Barnes v Addy, that is, that they knowingly assisted in the breach of the directors’ fiduciary duties?
16. Are the banks liable under any of the heads on which the equitable fraud claims are based?
17. Are the banks liable under any of the three species of statutory claims; namely, transactions done with intent to defraud creditors, voidable settlements or unregistered charges?
18. Has it been established that the holders of convertible subordinated bonds (including the effect of the on lending within the group of the bond issue proceeds) were and remain effectively subordinated behind the claims of unsubordinated creditors including the banks?
19. Is there anything in the myriad defences raised in the litigation disentitling the plaintiffs to relief?
20. To what (if any) relief are the parties (or either of them) entitled?
    7.2. Insolvency
    7.2.1. Some introductory comments
    806 The plaintiffs contend that throughout the Scheme Period, many of the Bell group companies were insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent. This is fundamental to many, perhaps most, aspects of the causes of action contended for by the plaintiffs.
    807 Put at its most basic, an entity is insolvent if it is unable to pay its debts as those debts fall due. The term ‘insolvent’ is one that has been recognised and defined in statutes and in decided cases. That is not to say that the precise meaning of the term is devoid of controversy. The contrary is the case and I will mention one of the contentious areas a little later, when discussing what has become known as ‘the cl 17.12 issue’.
    808 It is more difficult to find precise definitions of the phrases ‘nearly insolvent’, ‘of doubtful solvency’ or ‘would inevitably become insolvent’. It will be necessary for me to give them a relatively definite meaning in the context in which they arise in the case. I will return to the definitions and meanings of these phrases in due course. In the meantime, I can say something of a general nature about the notion of insolvency and its importance in determining the questions that I have to decide.
    809 When looking at a group of companies there is a tendency to slip into language that suggests the focus of attention is the solvency of ‘the group’. But solvency is a concept that applies to individual entities, not to the group. So it is, then, that the enquiry here must be as to the solvency of TBGL, BGF, BGUK, BGNV and the other Bell Participants, not to the solvency of the Bell group on a consolidated basis. Material disclosing the financial position of the group is relevant. It is a necessary starting point but the ultimate enquiry must focus on the state of individual companies. If from time to time I use language that smacks of the group insolvency heresy, it will be inadvertent or made necessary by the context. The reader should be in no doubt that I am aware of the need to look at the financial position of individual companies.
    810 In the discussion that follows, I will, unless the context otherwise requires, refer only to ‘insolvency’ or ‘insolvent’ without adding the descriptions ‘nearly insolvent’ or of ‘doubtful solvency’ or ‘would inevitably become insolvent’.
    7.2.2. Insolvency and cash flows
    811 Insolvency is largely a cash flow question; that is, whether there are sufficient sources of liquid assets available to pay debts as and when they have to be paid. In exchanges with counsel during the hearings, I referred, from time to time, to ‘cash flow insolvency’ and to ‘balance sheet insolvency’. I recognise that the latter phrase is an unhappy one because a balance sheet is directed more at ascertaining whether assets exceed liabilities rather than whether debts can be met as and when they fall due. Nonetheless, the value of some of the assets and an alleged excess of liabilities over assets are factors on which the plaintiffs rely in one of the arguments about insolvency. This is one of the reasons why the balance sheet approach has to be considered.
    812 A balance sheet approach is also useful in identifying linkages between group companies and intra‑group indebtedness. This is important because of the possibility of a series of cascading demands. To take an example, if group company A owes money to a third party and A’s only asset is a debt owed to it by group company B, a demand by the third party on A is likely to result in a demand by A on B.
    7.2.3. Insolvency: a temporal concept
    813 Insolvency has significant temporal aspects. This can be seen in the way that the plaintiffs raise the solvency issue. First, they say that at the time when the Transaction instruments were executed on 26 January 1990 and following, 18 named companies (all of which are plaintiffs) were insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent. This is referred to as ‘pre‑Transactions’ insolvency. Secondly (and this is put as an additional or an alternative allegation), upon entering into, or as a consequence of entering into, the Transactions, those 18 companies and three others, also plaintiffs, then became insolvent or inevitably would become insolvent. This is referred to as ‘post‑Transactions’ insolvency. Post‑Transactions insolvency does not encompass the allegations of ‘near insolvency’ or ‘doubtful insolvency’.
    814 The plaintiffs explain the significance of the distinction between pre‑Transactions and post‑Transactions insolvency in this way. They say that pre‑Transactions insolvency is what activates and conditions the duties that the directors owed to the companies at the time when they made the decision to commit the companies to the Transactions. I will explain that in more detail in Sect 7.2.6.1. Post‑Transactions insolvency focuses on the consequences of the companies entering into the Transactions. In relation to the 18 companies the subject of the pre‑Transactions insolvency plea, if they were not already insolvent they became so (or would inevitably become so) because they had entered into the Transactions. If they were already insolvent, they remained in that state. And the additional three companies became insolvent (or would inevitably become so) because they entered into the Transactions.
    815 In relation to the pre‑Transactions insolvency allegation, the plaintiffs contend that had the Transactions not been entered into, BGF would have been wound up in about January 1990 and the other 17 companies would have been wound up at the same time or shortly thereafter. But there is no time specification on when insolvency would have occurred in the post‑Transactions insolvency scenario. The plaintiffs contend that the companies would have defaulted in the observance of the obligations under the Transaction instruments. When that happened, the banks would have been in a position to exercise rights under the securities and take control of the assets and they would have done so.
    816 The plaintiffs advance a related argument, which is put as an alternative. It applies to all Bell Participants, not just to the 21 companies caught by the pre‑Transactions and post‑Transactions insolvency allegations. The plaintiffs say that as at ‘the commencement of the Scheme Period’, save for some companies that had no assets or which were solvent and readily saleable, unless there could be a ‘valid and effective restructuring of their financial position’ the companies would have been wound up or would otherwise have had their assets liquidated. I will call this ‘the par 33B argument’ (which is a reference to the paragraph in 8ASC in which the contention is put).
    817 Another temporal aspect arises in this way. It is necessary to fix on a date (or a period between nominated dates) and ask whether at that time the entity was insolvent. In some ways this is like a balance sheet: a snapshot of the financial position as at the nominated time. But in other ways it is quite different. It is necessary, as part of the enquiry, to project into the future and to ascertain when particular liabilities will fall due for payment, when sources on the revenue or income side of the equation will materialise and whether there is a matching of the two.
    818 From time to time during the hearing I used the phrases ‘objective insolvency’ and ‘subjective insolvency’. While I recognise (and acknowledged at the time) that those phrases are imprecise and prone to inaccuracy, they are a convenient way to label what I see as an important distinction between two concepts. I have used the term ‘objective insolvency’ to describe the actual financial position of the entity as at the snapshot date. In other words, I have to decide whether, as a matter of fact, as at 26 January 1990 nominated Bell group companies were insolvent. My use of the phrase ‘subjective insolvency’ is intended to cover whether, as at the same date, the directors and the banks were aware that those companies were insolvent.
    819 Of course, the factual decision whether or not an entity is insolvent at a particular date is not entirely objective. I say this because it is necessary to project into the future and make a value judgment as to what might or is likely to occur in relation to, for example, the realisation of a particular asset. But neither is a person’s belief as to the solvency of an entity entirely subjective. When a trier of fact is required to ascertain what a person believed, he or she may have to make a value judgment as to whether something that the person professes to have believed is objectively reasonable in the circumstances.
    820 Temporal considerations intrude into the decision‑making process on these questions. If the exercise is fixed on the snapshot date, for how long into the future is it legitimate to prognosticate? Do you only look forward, say 12 days or 12 weeks and ask whether the liabilities likely to fall due in that time could be met? Is it permissible to look 12 months (or longer) into the future? And is it appropriate to use hindsight? I will give an example. If a debt owed to an entity by a related entity has been repaid wholly or in part three months after the snapshot date, is it permissible to use that fact to say that as at the snapshot date it was likely that the debt would be satisfied within that time and to that extent? And is there any difference in the legitimate use of hindsight depending on whether it is being applied in relation to objective insolvency or to subjective insolvency?
    821 At this stage I do no more than raise these questions. They are better left for resolution in the substantive sections on insolvency. I have mentioned them here because they are central to a proper understanding of the role of the insolvency issue in the litigation.
    7.2.4. The contentions about a cash flow shortfall
    822 I also want to make some comments about the way the plaintiffs’ cash flow insolvency case has emerged. In their cash flow case, the plaintiffs focus initially on the capacity of the companies to meet their debts in the period immediately after the Transactions had been entered into, especially the problems BGNV and BGF encountered in paying the $25 million interest payment due to the bondholders in May 1990. But the plaintiffs also focus on what they say is a systemic disconformity between the recurrent income of the Bell group and the recurrent interest expenditure that it had to meet. Put another way, they allege an endemic or terminal lack of liquidity of the Bell group throughout the refinancing period from 26 January 1990 to May 1991.
    823 Between early July 1989 and the end of February 1990, officers in the BCHL or Bell Treasury division prepared numerous cash flows for the group. Some of them were distributed to some or all of the banks at the time, others were not.
    824 In the course of their initial investigations, the liquidators took some of these cash flows, particularly the ones prepared during January 1990 and February 1990, and re‑cast them to highlight potential cash inflows that they considered to be questionable. One result of these investigations was the production by the liquidators of pro‑forma cash flow spreadsheets entitled ‘Cash Flow 1’ and ‘Cash Flow 2’. When referring to these documents together I will call them ‘the Liquidator’s cash flows’.
    825 These, in turn, formed the basis on which the person engaged by the liquidators to give expert accounting and insolvency evidence on behalf of the plaintiffs (Andrew Love) prepared his cash flows. There are two of them. One, called ‘Cash Flow A’, proceeds on an assumption that the Transactions had not been entered into. The other, ‘Cash Flow B’, sets out the position once the Transactions had been completed. When referring to these documents together I will call them ‘the Love cash flows’.
    826 The banks, too, engaged an accountancy expert (Barry Honey) to give evidence on their behalf. Honey also utilised some of the cash flows prepared by the Bell Treasury division in January and February 1990 in the preparation of a document entitled the 1990 hypothetical cash flow but which I will call ‘the Honey cash flow’. The banks rely on it to counter the plaintiffs’ assertion that the companies were insolvent.
    827 The joinder of issue between the parties on the solvency question appears clearly from a comparison of the Love cash flows and Honey cash flow. There is little between them on the expense side. But they diverge markedly in their treatment of individual cash inflow items. There are several items in dispute and I will deal with each in a later section of the reasons. It appears that the difference between Honey and Love in relation to the cash inflows is approximately $94.6 million. It has to be borne in mind that the total of the net trading results (inflows) for the group reflected in the Honey cash flow is $124.3 million and the interest on the bond issues alone is $79.3 million. Against that background, it is not difficult to see the impact that a difference of $94.6 million would have on any assessment of solvency.
    828 There are many reasons for the differences between the experts. I will mention three issues that I will have to resolve in order to make findings about the true cash flow position. First, what is the proper test to be used in determining whether or not a particular item should be included in a cash flow? The plaintiffs say that an item ought not be included unless there is a ‘likelihood’ that it would be received. The defendants say that all that is required for inclusion of an item is a ‘reasonable prospect’ of it being received.
    829 Secondly, if there were to be a cash flow shortfall in recurrent income and expenditure, how, if at all, could it be covered? The plaintiffs say there was a cash flow shortfall. They also say that the major assets of the group, namely the publishing assets and the shares in BRL, were of insufficient value and beset by too may adverse circumstances for them to be realised, mortgaged or pledged so as to generate enough cash to cover the shortfall. It is common ground between the parties that the publishing assets could not be sold in the short term to meet recurrent expenditure. They were the only assets generating recurrent income sufficient to meet the interest liabilities that would have remained following any such sale.
    830 On the Honey cash flow, the monthly closing cash balance was in surplus for all but the first and last months. But on the banks’ case, there was ample value in the major assets to cover the deficit at the end of the period. The plaintiffs’ case is that the group could only survive if the free cash flow from the publishing assets was sufficient to service debt. That situation would only arise if, by the end of the period, the companies were able to reduce overall debt levels from $800 million to $200 million (or thereabouts). This, according to the plaintiffs, was never going to happen.
    831 The third question is related to the second. A possible source of funds to cover a shortfall of recurrent income and expenditure was to use the proceeds from the sale of assets occurring after 26 January 1990. The banks say these proceeds were available to cover any shortfall. The plaintiffs say they were not. That leads me to a discussion of the cl 17.12 issue.
    7.2.5. Insolvency and the cl 17.12 issue
    832 The definition of insolvency came, originally, from the general law and from s 95 of the Bankruptcy Act through decisions such as Sandell v Porter (1966) 115 CLR 666, 670: an inability to pay debts as they fall due out of the debtor’s own money. The statutory definition now found in s 95A of the Corporations Act is different in that it omits the phrase ‘out of the debtor’s own money’. I will have more to say later about the consequences (if any) of that omission. It is sufficient for present purposes to say that in assessing solvency it is necessary to look not just at ready cash but also at assets that could realise cash in time to meet known liabilities when those liabilities fall due.
    833 So it is, then, that in looking at the solvency of Bell group companies at 26 January 1990, it is necessary to project into the future and identify liabilities, and the dates when those liabilities are likely to fall due, and to ascertain available sources of cash to meet them at the relevant times. One possible source of cash was the proceeds from asset sales.
    834 This raises a question of the practical application of cl 17 (and in particular cl 17.12) of ABFA and of RLFA No 2. The clause requires the proceeds from the sale of assets (subject to exceptions) to be passed 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. There was, the plaintiffs contend, a transfer of control from the companies to the banks and the companies were thereafter at the mercy of the banks. The plaintiffs also say that once the funds arising from an asset sale were placed with the Security Agent on behalf of the banks, property in them passed to the banks. If they were then released back to companies it would constitute a fresh advance, something not contemplated by the refinancing agreements.
    835 But the banks say that as at 26 January 1990, the ‘overwhelming probabilities’ were that if Bell group companies required the release of asset sales proceeds to service current liabilities, the relevant consent would have been forthcoming. So understood, the banks say, cl 17.12 was not an impediment to the commercial solvency of the Bell group companies. 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.
    836 I will have more to say about the cl 17.12 issue later. But it raises a significant question in relation to those aspects of the case in which insolvency is an element. The plaintiffs contend that the companies could not pay their debts as they fell due without access to those proceeds and that those funds were under the control of the banks, to be applied in pre‑payment of the principal debt. If that is so, the question arises whether it was reasonable for the directors to expect that the banks would consent to the release of sale proceeds so they could be used to meet a cash flow shortfall.
    7.2.6. The significance of the insolvency issue
    837 Having explained the nature of the insolvency issue, I turn now to comment briefly on its importance in the litigation.
    7.2.6.1. Insolvency and directors’ duties
    838 At its heart, this is a case about a breach of directors’ duties. Leaving to one side the allegation of a conflict of interest, the duties said to have been breached are a duty to act in the best interests of the company as a whole and to exercise powers only for a proper purpose. In an insolvency context, the duty to act in the interests of the company as a whole may involve an obligation to take into account the interests of creditors and to refrain from doing something that may prejudice creditors’ interests. This is why the plaintiffs say that the financial state of the companies referred to in the pre‑Transactions insolvency allegation activates the duties for which they contend. If the company was actually insolvent, there can be little doubt that a duty to consider the interests of creditors would arise. Indeed, the directors should cause the company to cease trading. I suspect that the same could be said of the notion that the company ‘would inevitably become insolvent’. Whether similar considerations would apply if the company was nearly insolvent or of doubtful solvency might depend on how ‘near’ or how ‘doubtful’. Certainly, serious questions arise in relation to the nature and content of directors’ duties in those circumstances.
    839 For their part, the banks deny that there is an obligation to take into account the interests of creditors. The duty is a duty to act bona fide in the interests of the company ‘full stop’. Even if that duty involves an obligation to consider the interests of creditors, the obligation arises when the directors believe the company is insolvent. Put another way, the obligation only arises if there is actual knowledge of a financial position that is sufficiently grave to invoke the consideration of insolvency.
    840 A fundamental question to be resolved is whether the directors knew, or ought to have known, or believed or suspected that the financial position of the Bell Participants was one of insolvency. As a matter of logic, in order to decide whether a person knew about ‘circumstance A’ it would be necessary to determine whether ‘circumstance A’ existed as a matter of fact. So it is, then, that to decide whether the directors knew that the companies were insolvent it is necessary to decide whether they were in fact insolvent.
    841 Again as a matter of logic, it would be possible to arrive at a finding that the companies were, as a matter of fact, insolvent but that the directors were unaware of it. But I have difficulty in seeing how a trier of fact could find that the directors knew that the companies were insolvent unless it was accompanied by a finding that the companies were indeed insolvent. The position becomes less clear when the focus of attention shifts from knowledge to belief and suspicion, although similar questions arise. Again, they might be susceptible to differing answers.
    842 The insolvency of the companies is included expressly as an element of the allegation that the directors failed to act in the best interests of the company as a whole and thus breached the duties they owed to the companies. This allegation is at the heart of the Barnes v Addy claim because it is said that the banks knew (or believed or suspected) that the companies were insolvent and, with that knowledge, participated in the breach and made gains. Of course, liability under Barnes v Addy is predicated on there being a breach of duty by the fiduciary.
    843 The insolvency question also intrudes into the allegation that, in causing the companies to enter into the Transactions, the directors were motivated by an improper purpose. For instance, was the power exercised so as to provide a mechanism by which the banks could deal with the existing or inevitable insolvency of BGF, BGUK and TBGL?
    7.2.6.2. Insolvency and the equitable fraud claim
    844 Insolvency is a critical component of the equitable fraud claim by LDTC and the other plaintiffs.
    845 LDTC alleges that the insolvency of TBGL and BGNV was an event of default under the three BGNV bond issue trust deeds. That event of default should have been (but was not) communicated to LDTC. The failure so to communicate was a breach of the terms of the trust deeds. The banks knew, believed or suspected that the companies were insolvent; that the directors had not communicated this fact to LDTC; and that the companies were therefore in breach of their obligations. These matters (all of which depend on insolvency) are constituent elements of the imposition and deceit limb of the equitable fraud claims of LDTC and of the other plaintiffs.
    846 In addition, the unconscientious and inequitable bargain limb of the equitable fraud claim of the plaintiffs other than LDTC has, as one of its constituent elements, the breaches of duty by the directors. They, in turn, rely on the fact of insolvency.
    7.2.6.3. Insolvency and the statutory claims
    847 Insolvency is not a necessary element of a claim that a transaction that is carried out with intent to defeat or defraud creditors is liable to avoidance as a settlement of property or was an unregistered charge under the statutory provisions previously mentioned. Rather, (save for s 121 of the Bankruptcy Act, s 89 of the Property Law Act and the Territory legislation) such claims depend on the entities having entered into a winding up, which usually (but not necessarily) connotes insolvency. But as a practical matter, the true financial position of the entity at the time the transaction was entered into will be a relevant factor in determining the issues that arise under those provisions. For example, the banks’ beliefs as to the solvency of the companies will be relevant to the test of good faith under s 120 of the Bankruptcy Act. For this reason, the insolvency question will also be important for the resolution of the statutory claims.
    848 The plaintiffs’ contentions about the activation of the requirement to take into account the interests of creditors (as part of the duty to act bona fide in the best interests of the company) are also relevant to the statutory claims. The plaintiffs say that the dominant purpose of the directors in causing the companies to enter into the Transactions was to avoid dealing with the insolvency or inevitable insolvency of the Bell group companies. The directors wished to delay having to approach creditors, including LDTC, as to do so would have forced them to deal with the insolvency or inevitable insolvency of the companies. This is at the heart of the plaintiffs’ case that the directors intended to defeat, delay or defraud creditors.
    7.2.6.4. Insolvency and the effect of the Scheme
    849 I will shortly turn to describe another critical issue in the litigation, namely, the prejudicial and detrimental effect of the Scheme on creditors and shareholders. All I need say at this stage is that one of the alleged prejudicial effects of the Scheme is that creditors, future creditors and shareholders were provided with no probable prospect of benefit and a probable prospect of loss. Furthermore, the factual matrix said to give rise to that prejudice includes the allegation of insolvency in 8ASC par 20A to par 29B.
    7.3. The subordination of the on-loans
    850 It is common ground that the proceeds from the three BGNV bond issues were on‑lent by BGNV to either TBGL or to BGF. But the terms of those on‑loans are a matter of controversy.
    851 I do not think that anyone seriously contends other than that the indebtedness of BGNV to its bondholders was subordinated to the claims of ordinary unsecured creditors in accordance with the terms of the trust deeds and the conditions attaching to the bonds: see Sect 4.3.3. The same can be said about the liability of TBGL, as guarantor of the obligations of BGNV, to the bondholders. Nor, I think, is there any doubt that the indebtedness of TBGL and of BGF to the bondholders under the terms of their respective bond issues (and of TBGL under its guarantees) is likewise subordinated. But there is an argument as to whether the indebtedness of TBGL and BGF to BGNV in respect of the BGNV on‑loans was subordinated.
    7.3.1. The opposing contentions
    852 Put at its simplest, the banks say the liabilities of the issuers (BGNV, TBGL and BGF) to their respective bondholders and coupon holders were, and remain, subordinated to their claims. Likewise, the claims of BGNV against BGF and TBGL in respect of the on‑loans were, and remain, subordinated to their claims. In this respect the banks say that the subordination of the on‑loans applied at all times from and after the date on which the loans were made. The case put by the banks is that the plaintiffs should be held to the position that the on‑loans were subordinated because:
    (a) there were contractual terms to that effect; or, alternatively
    (b) the plaintiffs are estopped from asserting that the status of the on‑loan was other than subordinated.
    853 It is not possible to find a piece of paper that is, or a series of pieces of paper that form, a ‘contract’ setting out neatly the terms of the on‑loans. But the banks contend that the way in which TBGL negotiated the bond issues, including negotiations with, and information supplied to, the banks creates a factual matrix from which certain consequences flow. Those consequences include the following.
    854 First, in respect of the three BGNV on‑loans, there were on‑loan contracts between BGNV and TBGL and between BGNV and BGF containing either express or implied terms to the effect that BGNV would, on a winding up of TBGL and BGF respectively, be subordinated to the claims of other unsubordinated creditors of those companies. This aspect of the litigation came to be described by the phrase ‘the contracts inter se’.
    855 Secondly, if there were no such contractual terms, then the same circumstances give rise to an estoppel that could have been asserted by TBGL and BGNV at the time the Transactions were entered into, to the effect that BGNV was subordinated to other unsubordinated creditors of TBGL and BGF. In the light of this estoppel, the entry into the Transactions had no material prejudicial effect on BGNV or the BGNV bondholders. This is called ‘the estoppels inter se’.
    856 Thirdly, in relation to the first and second BGNV on‑loans only, those same circumstances give rise to contracts between the Bell companies who were members of the NP group and the banks. Those contracts were to the effect that the liabilities of TBGL and BGF to BGNV in respect of those on‑loans would, on a liquidation of TBGL and BGF, be subordinated to other unsubordinated creditors of those companies. In this aspect of the claim the banks place particular emphasis on their agreement, at the request of the companies, to treat the liabilities under the bonds as equity rather than debt in calculating the NP ratios.
    857 Fourthly, in relation to each of the BGNV on‑loans, those circumstances dictate that, in respect of the plaintiffs’ allegation that BGNV and the BGNV bondholders were prejudiced by the Transactions, each company is estopped, as against the banks, from asserting that the on‑loans were unsubordinated. Again, the banks rely on their agreement to treat the bonds as equity.
    858 Fifthly, if the on‑loans were not subordinated, the companies were guilty of misleading and deceptive conduct and the banks are entitled to relief under the Trade Practices Act.
    859 Finally, again assuming the on‑loans were not subordinated, that situation was unintended and arose by mistake. Accordingly, BGNV is obliged to give restitution for any benefits mistakenly conferred on it. The banks had initially advanced an alternative argument to the effect that BGNV was an agent for TBGL and the funds coming into BGNV’s hands were impressed with a trust obliging BGNV to pass them on to TBGL and BGF on a subordinated basis. That argument was abandoned during closing submissions.
    860 For their part the plaintiffs contend that the on‑loans were never subordinated. Briefly, the reasons advanced by the plaintiffs are that the on‑loans were ordinary unsecured unsubordinated liabilities and there were no contractual provisions effecting a subordination. And further, there were no representations that engendered the beliefs said to have been held by the banks or that could, in equity or at law, have found the estoppels or the misleading and deceptive conduct alleged against the companies. The plaintiffs also say that in any event the conduct of the banks in and around the taking of the securities disentitles them from relying on any estoppel or equity that would otherwise have been available to them.
    7.3.2. The significance of the subordination question
    7.3.2.1. The identification of creditors and prejudice
    861 Like the insolvency issue, the subordination question is central to the plaintiffs’ allegations concerning the prejudicial effect of the Transactions and the Scheme. I will turn to the question of prejudice shortly. I am here concerned primarily with the prejudice alleged in relation to creditors. For present purposes it is sufficient to repeat the wording of 8ASC par 19A, which describes it in these terms:
    [A]ll significant and worthwhile assets of the Bell Participants were made available to the banks for repayment of the debts owed to the banks … in priority to the claims of all other creditors and future creditors of Bell Participants …
    862 The largest creditor of both TBGL and BGF was BGNV in respect of the on‑loans. The BGNV Subordination Deed (executed in July 1990) is one of the impugned Transactions. It certainly reflected the subordinated status of the on‑loans and, as such, is encompassed by par 19A. But if the on‑loans, from their inception, ranked behind the banks’ debt and if, as a result, the bondholders did not suffer any altered ranking in relation to the proceeds from the choses in action represented by the on‑loans, a question arises whether the BGNV Subordination Deed had any prejudicial effect on the bondholders. The same question arises whether the bondholders are viewed as indirect creditors of TBGL or BGF (through BGNV as a direct creditor of TBGL and BGF) or of any other Bell company (through BGNV as a direct creditor of TBGL and BGF which were, in turn, direct creditors of other group companies).
    863 If it be the case that there was no prejudicial effect in relation to bondholders, the question whether there were other creditors and, if so, whether they suffered any prejudice, assumes additional significance. If there were other creditors, it is likely that, prior to the Transactions, they ranked equally with the banks. The prejudicial effect (if any) of the Scheme would then lie in the elevation of the banks from unsecured to secured status (thus giving them priority over the other identified creditors) rather than from those parts of the Transactions that effected a subordination of the BGNV on‑loans.
    7.3.2.2. Subordination, breaches of duty and Barnes v Addy
    864 Again, insofar as it affects the allegation of breach of directors’ duties, the subordination question is concerned primarily with the arguments about the prejudicial effect of the Scheme. If the on‑loans were not subordinated then the bondholders were prejudiced by the Transactions. The plaintiffs contend that the directors knew of the prejudicial effect that the Transactions would have on creditors, and in those circumstances causing the companies to enter into the Transactions was not in the best interests of the companies and nor was it for a proper purpose.
    865 Like the insolvency question, the impact of the subordination question arises at different levels. The first line of enquiry is whether the on‑loans were, as a matter of fact, subordinated. This is essentially the contract argument. But it is necessary then to move to the next level and to ascertain what the directors believed about the status of those loans. As a result of those enquiries it might turn out that:
    (a) the on‑loans were, as a matter of fact, unsubordinated and the directors believed that they had always been unsubordinated;
    (b) the on‑loans were, as a matter of fact, unsubordinated but the directors believed that they had been subordinated from inception;
    (c) the on‑loans were, as a matter of fact, subordinated and the directors believed that they had always been subordinated; or
    (d) the on‑loans were, as a matter of fact, subordinated but the directors believed them to have been unsubordinated.
    866 Insofar as the subordination question is an element of the breaches of duty for which the plaintiffs contend, different consequences may flow in relation to the Barnes v Addy cause of action depending on which of these alternatives is found to accord with what actually happened. And it may also affect the available remedies.
    7.3.2.3. Subordination, breaches of duty and equitable fraud
    867 The prejudicial effect of the Scheme on creditors is also a critical element of the equitable fraud cause of action.
    868 The first limb of the equitable fraud claim is that the Transactions and the Scheme were an imposition and deceit on LDTC or the bondholders and on the Bell Participants and their creditors (including LDTC). The argument is based on the dicta of Lord Hardwicke LC in Earl of Chesterfield v Jansen (1751) 2 Ves Sen 125 to the effect that an ‘underhand bargain’ is an imposition and deceit on those affected by it and is thus an equitable fraud. His Lordship said, at 156:
    Particular persons in contracts shall not only transact bona fide between themselves, but shall not transact mala fide in respect of other persons, who stand in such a relation to either as to be affected by the contract or the consequences of it; and as the rest of mankind beside the parties contracting are concerned, it is properly said to be governed on public utility.
    869 His Lordship cited as an example of an equitable fraud of this type the misuse of a deed of composition between a debtor and his or her creditors. It is an imposition and deceit on creditors for a debtor to enter into a deed of composition with creditors by which each creditor is to receive a specified dividend in the dollar for the debt but for the debtor then privately to agree with one creditor to pay or secure to that creditor a greater sum. In this respect, it is important to know whether the effect of the Transactions was to elevate the banks above the position of the bondholders (as indirect creditors). The plaintiffs seek such a finding and then say, by analogy to the composition cases, that there was an imposition and deceit on creditors (including indirect creditors).
    870 The second limb of the equitable fraud claim is that the Transactions and the Scheme were an unconscientious and inequitable bargain. An important feature of this part of the case is that the companies were in a position of special disability, namely, that they did not have the benefit of an independent and free guiding mind when considering whether or not to enter into the Transactions. This relies, in part, on the breaches of duty said to arise from causing the companies to enter into transactions the effect of which was to confer advantages on the banks to the disadvantage of the companies and their creditors (including indirect creditors).
    7.3.2.4. Subordination and the statutory claims
    871 The claims made under ss 120 and 121 of the Bankruptcy Act, s 89 of the Property Law Act and the Territory legislation depend, in part, on there being an absence of good faith. Section 121 also depends, in part, on there being an intent to defraud creditors. Whether the directors and the banks were entitled to believe and did believe that the on‑loans were subordinated (and thus ranked behind the banks) is relevant to the questions of intent to defraud and to good faith. Again, in deciding what beliefs were held (or whether a person was entitled to hold those beliefs) in relation to the status of the on‑loans, it is important to know whether the on‑loans were, in fact, subordinated.
    7.3.2.5. Subordination: the banks’ reliance on representations
    872 The subordination issue looms large in the banks’ arguments concerning the course of their dealings with the Bell group, particularly (but not solely) at or around the time of each of the bond issues. One question is whether, as a matter of contract, the on‑loans were made on an unsubordinated basis. If so, the next question is whether representations were made to the banks that the funds raised and deployed from the bond issues would rank behind the debts due to other creditors, including the banks.
    873 The banks’ case is, of course, that such representations were made and that they ground the estoppels contended for and entitle them to relief under the Trade Practices Act.
    874 There is a particular aspect of the arguments concerning reliance on representations that requires comment. It concerns the accounting treatment of the bonds. I do not think it is controversial to say that, according to generally accepted accounting principles, the relationship between the issuer of bonds and the bondholders is one of debtor and creditor. It is not a relationship of a kind that exists between, for example, a corporation and the holders of securities, as that term is defined in s 92 of the Corporations Act 2001. The fact that the bonds may one day be converted into shares does not alter the position. They remain debt unless and until they are converted into equity.
    875 At the time of each of the first four of the five bond issues, TBGL sought and obtained the consent of the banks to treat the bond issues as equity rather than as debt for the purposes of the NP ratio calculations. When the third BGNV bond issue came to be made in July 1987, it had been agreed that the NP agreements would be replaced by the NP guarantees. The latter dealt specifically with debt of the type represented by the bond issues and a separate consent was not sought.
    876 The extent, if any, to which the banks’ consent to the treatment of the bonds as equity for NP ratios calculations was based on representations about the subordinated status of the bonds and the on‑loans is a significant issue in the case.
    7.3.3. Summary
    877 At one point in the hearing, counsel for the plaintiffs described the subordination issue as being like a spider’s web that permeated almost every aspect of the case. Counsel continued with the analogy by saying that to unravel the spider’s web would require particular treatment of each thread at particular parts of the case. The analogy is apt. But as the person faced with the task of unravelling the component parts, I find it distinctly unnerving. The spider silk from which a web is made has a tensile strength that exceeds that of steel. And a web is a tangled obstacle course that the spider uses to disorient and knock down (and then consume) its prey.
    878 The banks contend that unless the plaintiffs can establish that the on‑loans were unsubordinated and can defeat the estoppel and other claims preventing them from now asserting that position, they cannot succeed. To resort to a tennis analogy (mine, not the banks), it is game, set and match: they (the banks) must win. It is neither possible nor appropriate in this part of the reasons to summarise why the banks say this is so.
    879 On the other hand, the plaintiffs assert that the breaches of duty for which they contend are actionable even in the absence of a finding of prejudice or detriment to the bondholders. And, again, a discussion of why they say that is so is better left to a later part of the reasons.
    880 All I need do at present is to acknowledge that the issue of prejudice and detriment is critical to the case. The bondholders, who were by far the largest group of external creditors, are the easiest ones to identify as persons who might be affected by securities given to other creditors. Accordingly, whether the effect on the bondholders was prejudicial (a consideration linked inextricably to the subordination question) is an obvious area of interest.
    7.4. The prejudicial and detrimental effect of the Scheme
    881 It will be apparent from what I have already said that the effect of the Scheme is a cornerstone of the plaintiffs’ case. I need to remind readers what ‘the Scheme’ is and what are its pleaded effects.
    7.4.1. The Scheme and detriment and prejudice
    882 The Scheme is constituted by the Transactions, broadly a series of instruments or documents that were executed or created during the period 8 January 1990 to 31 July 1990 for the purposes of the refinancing. Under the Scheme ‘all significant and worthwhile assets’ of the Bell group were made available to the banks in priority to other creditors.
    883 The ‘effects of the Scheme’, as contended for by the plaintiffs, can be summarised as follows:
    (a) some group companies incurred a liability to the banks that they did not previously have;
    (b) the liability position of each Bell Participant was worsened;
    (c) the asset position of each Bell Participant was worsened;
    (d) the assets of Bell Participants would not be available to creditors (other than the banks) until after the banks had been paid in full;
    (e) it was inevitable that between February and May 1990, TBGL, BGF, BGUK and BGNV would have defaulted in their obligations to the banks or the bondholders and, as a consequence, the banks would have exercised their rights under the securities and would have enforced recovery of the debts due to them;
    (f) due to the endemic illiquidity of the companies, it was inevitable that before 31 May 1991 the banks would become entitled to take control over the Bell Participants;
    (g) accordingly, creditors and shareholders of Bell Participants were faced with a probable prospect of loss; and
    (h) in any subsequent winding up, the claims of creditors (other than the banks) would rank behind the banks’ claims and not be satisfied until the banks’ claims had been paid in full.
    884 In this recitation, the word ‘creditor’ includes creditors, future creditors and indirect creditors and the phrase ‘winding up’ includes liquidation of assets and a valid and effective restructuring of the financial position of the companies.
    885 All of the circumstances listed in (a) to (h) are said to constitute ‘detriment and prejudice’. In the remainder of this section, I will use the word ‘detriment’ to cover both detriment and prejudice. The plaintiffs then say that in a winding up of a Bell Participant (X), other Bell Participants that were shareholders of X (Y and Z) would suffer that detriment as would, in turn, the creditors of Y and Z. But even if no detriment was caused to X, Y or Z or their creditors, then X, Y and Z entered into the Transactions to give effect to the Scheme with the result that other Bell Participants or their creditors suffered detriment. Finally, the plaintiffs say there was a corresponding advantage conferred on the banks.
    886 So it is, then, that the notion of detriment is an indispensable feature of the effects of the Scheme.
    7.4.2. Significance of detriment
    887 An appeal to the effects of the Scheme and thus to the notion of detriment is a familiar refrain in many aspects of the case.
    7.4.2.1. Breach of directors’ duties
    888 The plaintiffs complain about the conduct of the directors in causing the companies to enter into the Scheme knowing, among other things, of the effects of the Scheme. That conduct is integral to the allegation of a breach by the directors of their duty to act in the best interests of the company as a whole and of the duty to exercise powers only for proper purposes. For example, it is put squarely against the banks that a breach of duty occurred when the directors caused TBGL and BGF to enter into the Transactions with the effects contended for. One of the effects for which the plaintiffs contend is a situation where there was no prospect of benefit and a probable prospect of loss. The plaintiffs contend that, in these circumstances, the Transactions were not in the interests of the companies as a whole including their creditors.
    889 It is not surprising that detriment should be a critical factor in the allegation of a breach of duty. In commercial life, transactions that confer benefits on a third party happen every day. That, in itself, is not objectionable. The problem comes when adverse consequences are visited upon other entities with an interest in the affairs of the acting party. Suppose, for example, that a company owes a financier $100,000 on an unsecured basis and that it requires a further $20,000. If the financier were to make the fresh advance conditional on the whole loan becoming secured and the company were to agree to that condition, there would be a benefit conferred on the financier. But the mere fact of the conferral of the benefit would not, of itself, make the transaction colourable. There would have to be something else to bring about that situation. And the ‘something else’ could well be that another party with a genuine interest in the affairs of the company would suffer unfairly.
    7.4.2.2. Insolvency
    890 It will be necessary to decide whether the companies were insolvent at or immediately before 8 January 1990 or whether that state arose at some time during the Scheme Period. One of the reasons why, the plaintiffs say, the companies could not pay their debts as and when they fell due after 26 January 1990 and during the Scheme Period is because of the effects of the Scheme.
    891 When discussing the insolvency question, I mentioned the cl 17.12 issue. It has relevance here. The description of the Scheme in 8ASC par 19A includes the statement that the assets were ‘made available’ to the banks. The effects of the Scheme, as listed in the particulars to par 33C, include the statement that certain assets were ‘no longer available’ to the companies. In this respect the cl 17.12 issue may be material.
    7.4.2.3. Banks’ knowledge and conduct
    892 The nature and effects of the Scheme are matters about which it is said the banks had knowledge. It is also said that with that knowledge the banks entered into the Scheme and received benefits under it and did so in the belief that they would be no worse off should the Transactions later be set aside.
    893 Questions that might also arise in this context concern ‘the natural effects and consequences’ of the Transactions that the banks entered into and whether the banks can be taken to have known of those effects and consequences.
    7.4.2.4. The equitable fraud claim
    894 The unconscientious and inequitable bargain limb of the equitable fraud claims has, as one of its elements, the assertion that the effect of the Transactions conferred benefits on the banks to the disadvantage and detriment (with no probable prospect of gain) of the companies and their creditors (other than the banks).
    895 There are, of course, other bases on which the equitable fraud claim is advanced. But in a practical sense, the elements of detriment and corresponding advantage are significant features of this cause of action.
    7.4.2.5. Entitlement to relief in equity
    896 In their prayers for relief the plaintiffs claim that certain instruments are voidable and should be set aside in equity. The effects of the Scheme are an integral part of the plaintiffs’ assertion that they are entitled to relief in equity.
    7.4.2.6. The statutory claims
    897 In their claims under the Bankruptcy Act, the Property Law Act and the Territory legislation, the plaintiffs contend that inferences should be drawn that the Transactions were entered into with intent to defeat, delay or defraud creditors and that the banks did not act in good faith. They also say that various of the plaintiff Bell companies are persons prejudiced by the impugned dispositions.
    898 Part of the factual matrix from which the plaintiffs say those inferences should be drawn or the findings made are the effects of the Scheme.
    7.4.2.7. A restructuring of the financial position
    899 I have already mentioned the vexed question of a restructure of the group’s financial position (Sect 4.5.2) but because of its significance it will do no harm to repeat it.
    900 The plaintiffs and the banks agree on one thing: immediately before the commencement of the Scheme Period, the Bell group needed to restructure its financial position. If, at that time, a bank had made a demand for repayment of its facility, other banks would have followed suit. Had that happened the demands could not have been met. In that event, and had no other steps been taken, a bank or the banks would then have moved to wind up either or both of TBGL and BGF and the liquidation of other group companies would inevitably have followed.
    901 But the parties take differing positions about the consequences of the need to transform the fortunes of the group. The plaintiffs introduced the concept of a ‘valid and effective restructuring’ of the financial position of the Bell Participants. They do not descend to detail of what would be, or would have been, a ‘valid and effective restructuring’. But they are clear on one point: the Scheme, with its consequent detriment, is a trope for a valid and effective restructuring. Because of the financial predicament of the companies the directors were obliged, in considering any restructure plans, to take into account the interests of (among others) the creditors, including the bondholders. This they failed to do. By committing the companies to Transactions that, by their terms, took away the assets the companies would need to meet their obligations, the directors condemned the companies, if they were not already insolvent, to insolvency. The Transactions did not restore the solvency of the insolvent companies but rather condemned them to a position where they were not able to pay their liabilities as they fell due. And therein lies the detriment.
    902 The banks, of course, deny that what happened was a ‘scheme’. But they go further and say that the effect of the Transactions is the antithesis of that contended for by the plaintiffs. The banks contend that the directors had no practical alternative other than to enter into the Transactions: there were no other steps that could realistically have been taken. They say that far from causing detriment, the refinancing provided the directors with time to engage in the necessary restructuring. In particular, the refinancing gave them the opportunity to pursue steps that would allow the group to avoid liquidation and to continue as a going concern. In so doing it would avoid a ‘fire sale’ of assets, maximise the commercial worth of major undertakings (such as the BRL shares and the publishing assets) and permit an orderly disposition of holdings that were not essential to the core businesses of the group.
    7.5. State of mind: the directors and the banks
    7.5.1. Significance of state of mind
    903 Earlier, and in particular in relation to insolvency (Sect 7.2.6.1) and the subordination of the on‑loans (Sect 7.3.2.2), I commented on the need to look both at states of fact and states of mind. State of mind is described in the pleadings in a number of ways, not all of which apply to each allegation in which a state of mind is relevant. In divers places the allegation is that a person ‘knew’ or ‘believed’ or ‘suspected’ something or that the person ‘ought to have known’ or ‘recklessly disregarded’ the thing and there are various combinations of those states.
    904 What follows is not intended to be an exhaustive list of all of the issues to which state of mind is relevant. But it picks up what I regard as significant areas in which state of mind is crucial to the determination of the causes of action or defence. In this section, I will summarise the contentious points without assiduous adherence to the wording used in the pleadings.
    905 The plaintiffs’ case is that the directors breached their duties by committing the Bell Participants to the refinancing in the prevailing circumstances. And the prevailing circumstances include that the directors, knew, believed, suspected or ought to have known or recklessly disregarded certain things. Those things include the following matters. In describing them I will use the phrase ‘were aware’ to encompass the various formulations of state of mind mentioned above.
    906 First, the directors were aware of the financial position of the companies. Secondly, in relation to the companies involved in the pre‑Transactions insolvency allegation and the par 33B argument, they were aware that without the refinancing and in the absence of a valid and effective restructuring, the companies would have been wound up by January 1990 or shortly thereafter. I might add that this proposition is advanced as a statement of objective fact (rather than one of state of mind) in relation to the equitable fraud claim. Thirdly, they were aware that the BGNV on‑loans were or might be subordinated. Finally they were aware of the prejudicial and detrimental effect the refinancing would have on certain Bell Participants and on creditors.
    907 The state of mind of the banks is also relevant. To speak of a corporation having a state of mind is almost orphic in its conception. A corporation is a legal entity separate and apart from its directors and shareholders. It can only act through the intervention of the human condition. The classic statement of this principle is to be found in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, where Lord Haldane said at 713:
    My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.
    908 Generally speaking, to discover what a corporation knows it is necessary to ascertain what individuals within the corporation know. This is a question that arose during the trial and I will return to it shortly. But for now (and despite its infelicity) I will adopt the formula of a state of mind attributable to the banks.
    909 For the purpose of their respective cases, the parties raise some additional formulations of a relevant state of mind. For example, in some instances the banks contend that there were certain things that they (the banks) ‘were reasonably entitled to believe’. It is also put against the banks, in at least one area, that knowledge arose from a ‘calculated abstention from inquiry’. Again I will use the phrase ‘were aware’ to encompass all relevant states. The banks are said to have been aware of numerous things including these.
    910 First, it is said that the banks, too, were aware of the financial position of the relevant companies. Secondly, at least in relation to TBGL, BGF and BGUK, they were aware that, without the refinancing and in the absence of a valid and effective restructuring, the companies would have been wound up within a relatively short time. While they regard as eristic the entire notion of the ‘valid and effective restructuring’ the banks concede that they believed that without the refinancing a bank would have caused TBGL and BGF to be wound up and the winding up of other Bell group companies would have followed. Thirdly, in relation to the status of the BGNV on‑loans, it is put that the banks were aware they were or might be unsubordinated and that the directors were aware of the same thing. The banks, of course, contend that they believed, and that it was the fact, that the on‑loans were always subordinated. Fourthly, it is said that the banks were aware of the prejudicial and detrimental effect the refinancing would have on the Bell Participants and their creditors. Finally, the plaintiffs contend that the banks were aware of the financial position of BCHL, of plans by BCHL to restructure its financial position, of the connection between Oates, Mitchell and Aspinall and BCHL, and of the conflict the directors had between their duties to the Bell Participants, on the one hand, and their personal interests and the interests of BCHL on the other.
    911 As I have said, this is not a complete list. But it demonstrates the critical nature of state of mind questions to the resolution of the dispute between the parties.
    7.5.2. Formulations of state of mind and the pleading disputes
    912 I should mention two particular matters that affect state of mind questions. One relates to the various formulations of states of mind. The other arises from a pleading dispute that bedevilled the case during the interlocutory stages and throughout the hearing, namely, the extent to which the case, as pleaded, entitled the plaintiffs to raise questions of dishonesty or conscious wrongdoing by the directors or by the banks.
    7.5.2.1. Various states of mind
    913 The first state of mind contended for is that certain people or entities ‘knew’ certain things or that they ‘did not know’ other things. We all know instinctively what we mean when we say we ‘know’ something. Or do we? The former US Defence Secretary Donald Rumsfeld famously said:
    As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns; the ones we don’t know we don’t know.
    914 It is almost impossible to avoid crepuscular distinctions when attempting to enunciate the differences between knowledge and belief. It is not surprising that the law should find the distinctions troubling. Western philosophy has been grappling with them for millennia. Plato recognised the distinction between opinion and knowledge and, in relation to the latter, between conjecture and belief. For Plato, belief denoted the comparatively firm assent that the ordinary person gives to whatever is directly seen, heard or felt. Aquinas also distinguished between belief and knowledge. But for Aquinas, belief was acceptance of an assertion as true on the testimony of someone else rather than as something that a person could see or what could be proved. Hume defined belief as practical certainty about matters that cannot be justified theoretically. Kant looked upon belief as the subjectively adequate but objectively inadequate acceptance of something as true.
    915 The Macquarie Dictionary (4th ed, 2005) (the Macquarie Dictionary) defines the verb ‘know’ as: ‘to perceive or understand as fact or truth, or apprehend with clearness and certainty … to be cognisant or aware of, as of some fact, circumstance or occurrence; have information, as about something’. And the noun ‘knowledge’ has a concomitant meaning: ‘the fact or state of knowing; perception of fact or truth; clear and certain mental apprehension … the state of being cognisant or aware, as of a fact or circumstance’.
    916 Relevantly, knowledge is the result of the cognitive process by which information is gained. To say that we ‘know’ something does not signify that the subject information is infallibly or immutably true. Directors of a company might, for example, ‘know’ that the general ledgers postulate a level of current liabilities of $10. But if (for any reason) the immutable truth is that the level of current liabilities is $11 the ‘known’ would not thereby be converted into an ‘unknown’.
    917 The noun ‘belief’ is defined in the Macquarie Dictionary as: ‘an accepted opinion … conviction of the truth or reality of a thing, based upon grounds that are insufficient to afford positive knowledge’. The verb ‘believe’ has a concomitant meaning.
    918 Butterworths Encyclopaedic Australian Legal Dictionary (1997) (the Australian Legal Dictionary) captures a meaning of ‘belief’ (at least in the context of criminal law), defining it as:
    An inclination of the mind towards assenting to, rather than rejecting, a proposition, based on facts that are sufficient to create that inclination of the mind in a reasonable person: George v Rockett (1990) 170 CLR 104; 93 ALR 483. Belief may be something less than knowledge, as a person can hold a belief while having a degree of doubt about the matter, but it is more than mere suspicion: R v Raad …
    919 In R v Raad [1983] 3 NSWLR 344 a statute required proof that the accused had disposed of property ‘knowing’ that it was stolen. The court held that ‘knowing’ included an actual belief by the accused that the property was stolen, in the sense that the accused accepted the truth of that belief. Thus, ‘knowing’ did not mean that the person’s mind was conclusive on the issue, but a belief could be sufficient.
    920 The Macquarie Dictionary defines the verb ‘suspect’ as: ‘to imagine to be guilty, false, counterfeit, undesirable, defective, bad, etc, with insufficient proof or no proof’. The New Shorter Oxford English Dictionary (1993) (the Oxford Dictionary) includes this formulation of the verb ‘suspect’: ‘imagine (something) to be possible or likely, have an impression of the existence or presence of; believe tentatively’. Both dictionaries point out that the word ‘suspect’ usually refers to something wrong or considered as undesirable.
    921 In the Australian Legal Dictionary ‘suspicion’ is defined (again in the context of criminal law) as:
    A state of conjecture or surmise where proof is lacking; a positive feeling of actual apprehension or mistrust, amounting to a slight opinion, but without sufficient evidence.
    922 In Raad the Court held that suspicion was insufficient to make a finding of knowledge, and that it was a weaker state of mind than belief. Suspicion is, however, more than mere speculation: Commissioner for Corporate Affairs v Guardian Investments Pty Ltd [1984] VR 1019, 1025 (Ormiston J).
    923 In McLennan v Campbell [2003] WASCA 145, Pullin J discussed the differences between ‘suspicion’, ‘belief’ and ‘knowledge’, at [10] ‑ [11], using other parts of the dictionary definitions that I have quoted, but they are to similar effect. His Honour pointed out, by reference to what was said by the Court of Appeal in Wicks v Marsh; Ex parte Wicks [1993] 2 Qd R 583, 586, that the ordinary meanings of ‘suspicion’ and ‘belief’ and ‘knowledge’ reveal that the words are located on a graded scale of meaning.
    924 The distinctions drawn in this case are susceptible of explanation by reference to the Rumsfeld trichotomy. The allegation that a person ‘knew’ certain things must refer to ‘known knowns’. Logically something can only be a ‘known unknown’ if the person concerned has turned his or her mind to the subject but has been unable to come up with an answer. But the person could still have a belief or suspicion about the subject. Again logically, an ‘unknown unknown’ could only arise where the person has not turned his or her mind to the subject. And in that instance, the person could not have a belief or suspicion about it.
    925 The phrase ‘ought to have known’ can present difficulties in a legal context. In Bank of New Zealand v Fiberi Pty Ltd (1993) 14 ACSR 736 the New South Wales Court of Appeal considered s 68A of the Companies Code. The section provides that a person is entitled to make certain assumptions when dealing with a company, except where the person ‘ought to know’ that the assumption is not correct. Priestley JA said, at 751:
    The meaning of the words ‘ought to know’ in [the section] is a matter of some difficulty in that, it seems to me, the words can reasonably be read as carrying various meanings, not all markedly dissimilar from one another, but some having different consequences from others in the circumstances of the present case.
    One possible meaning of the words is that the person in question, because of facts actually in that person’s possession should have realised the true position about the matter assumed. A second possible meaning is that the person in question was under some kind of obligation to inform himself or herself about the facts of the matter assumed. A third possible meaning is that the person in question would reasonably be expected, in the particular circumstances of that person in relation to the assumption being made, to know the true position about the matter assumed.
    There are other possibilities. For instance, the first possibility is itself capable of various meanings, depending on what is ‘possession’, a word which could pose difficulties when the person in question is a corporation whose only reality is as a legal entity. However, the three possibilities I have selected seem to me to be the three approaches to the meaning of the words most material for present purposes.
    It is the third possibility which to my mind fits best with the context in which the words appear. This is particularly so because the matter which the person ought to know is something that he ought to know because of ‘his connection or relationship with the company’. This seems to me to indicate that a judge considering whether [the section] applies to the facts of a case is required to look at the person in question, consider the full factual circumstances of that person’s connection or relationship with the company in regard to the particular matter in question and then decide whether in those circumstances that person acting reasonably would know the true position about the matter assumed.
    926 Kirby P held that the section had the effect of putting the party ‘on inquiry’. In contrast, Priestley and Clarke JJA were of the opinion that ‘ought to know’ requires the court to assess what the person in the particular situation acting reasonably would have known, whereas the concept of being ‘put upon inquiry’ involves the court in asking whether there were features of the particular situation which required the person to make further enquiries.
    927 Essentially, it appears that the phrase ‘ought to have known’ combines both objective and subjective elements. It looks at what a person, with their particular knowledge and capacity, would reasonably have been expected to know: Boughey v R (1986) 161 CLR 10, 28 ‑ 29. But in determining whether a person ought to have known something, the finder of fact might be required to consider the actual knowledge, intelligence and expertise of the person concerned.
    928 Another relevant formulation is that a person ‘recklessly disregarded’ certain things. In some ways the phrase ‘reckless disregard’ is a tautology because the word ‘reckless’ itself implies a disregard of the consequences of an act. According to R v Nuri [1990] VR 641, reckless conduct occurs when a person can foresee some probable or possible harmful consequence but nevertheless decides to continue with those actions with an indifference to, or disregard of, the consequences. Similarly, the Court commented in R v Stones [1956] SR(NSW) 25, 34:
    If he applied his mind to the consequences and without concluding that they would happen (which is criminal intent) his state of mind was that he did not care whether they happened or not, that is recklessness.
    929 Recklessness is therefore considered to require more than just negligence, but something less than intent.
    930 Yet another phrase used in the pleading and bearing on this topic is a ‘calculated abstention from inquiry’. I will defer discussion of that notion until later in the reasons.
    931 This brings me back to the circumstances of this case where a central allegation against the banks is knowing assistance and knowing receipt in the Barnes v Addy sense. It is trite to say that ‘knowledge’ can be actual or constructive. Peter Gibson J in Baden Delvaux v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, 574 ‑ 87, analysed the concept of ‘knowledge’ in cases of this type and identified five categories:
21. Actual knowledge.
22. Wilfully shutting one’s eyes to the obvious.
23. Wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make.
24. Knowledge of circumstances that would indicate facts to an honest and reasonable person.
25. Knowledge of circumstances that would put an honest and reasonable person on enquiry.
    932 Items (2) and (3) are often referred to as species of actual knowledge. The latter two categories are forms of constructive knowledge. Item (2) is commonly called ‘Nelsonian blindness’. Proof of the kinds of knowledge in (4) and (5) may be sufficient to allow a court to infer, in the absence of proof to the contrary, that a person had one of the subjective states of mind referred to in (1), (2) or (3): Agip (Africa) Ltd v Jackson [1990] Ch 265, 293 (Millett J). In H Malek (ed), Phipson on Evidence, 14th ed, (2005) it is put in this way: ‘actual knowledge may be inferred circumstantially, from the fact that a party had reasonable means of knowledge’. See also Lloyds Bank v Dalton [1942] Ch 466.
    933 An inference of knowledge can be drawn if a person has possession of, or access to, or has acted upon certain documents containing the knowledge in question: Wright v Doe d Tatham (1837) 7 Ad & E 313; 112 ER 488. Knowledge will be imputed where it is a party’s duty to know: Re Wincham Shipbuilding, Boiler & Salt Company, (Hallmark’s Case) (1878) 9 Ch D 329. The test of constructive knowledge is principally objective, but has the subjective element that allowance may be made for the social and professional background of the particular person, in certain circumstances.
    934 I will come back to these categories in more detail when I examine the various causes of action. All of these concepts and considerations meld together in arriving at findings from the factual matrix in this case. It is important that they be borne in mind. The reality of gradations in meaning between knowledge, belief and suspicion is an obvious example. So, too, is the fact that when it comes to the Barnes v Addy causes of action, knowledge has a particular meaning.
    7.5.2.2. State of mind, conscious wrongdoing: the pleadings
    935 The defendants in this case are the 20 banks and the corporate director of BGNV. No relief is sought against the latter. It is fair to say, therefore, that the primary defendants are the banks. That having been said, the case is, at its heart, about the conduct of the directors of the Bell Participants in causing the companies to enter into the refinancing and whether that conduct amounted to a breach of the duties owed by the directors to the companies.
    936 The plaintiffs cannot succeed in their Barnes v Addy claim unless they establish that the directors breached those duties. The equitable fraud claims also rely heavily on the underlying conduct of the directors. What the directors knew, believed or suspected about the matters referred to in Sect 7.5.1 (among other things) is critical to establishing whether or not the impugned conduct amounted to a breach of duty or an equitable fraud.
    937 During the pre‑trial processes, the plaintiffs made two decisions that have relevance here. First, they commenced then discontinued the action against the Australian directors and the UK directors. Secondly, they framed the pleaded case expressly disavowing any allegation of conscious wrongdoing by the directors. This was argued at length at the time of the application to amend the statement of claim in 2000 and is dealt with in Bell (No 1). At no stage during the trial did the plaintiffs seek to resile from that position.
    938 There is nothing on the court record to indicate why the two decisions that I have mentioned were made. When leave was sought to discontinue against the directors, all that was said was that the directors did not wish to be parties and did not want to be heard in the proceeding. At no time was monetary relief or an account of profits sought against the individual directors. And at the time when the action was discontinued against them, the causes of action were those based on Barnes v Addy and the statutory claims.
    939 In relation to a Barnes v Addy claim, it has been decided in other jurisdictions that it is not necessary to join the person who is said to have breached a fiduciary duty in order to succeed against a third party: see, for example, Chan Kern Miang v Kea Resources Pty Ltd [1999] 1 SLR 145, 151. I can see no reason why the common law of Australia should be different in this respect. I do not think anything turns on the fact that the directors are not parties to the action.
    940 But the same cannot be said of the absence from the pleadings of an allegation of conscious wrongdoing against the directors. This had a significant impact on the course of the hearing and on the juridical exercise involved in its resolution.
    941 Throughout the trial I preferred to use the phrase ‘conscious wrongdoing’ rather than the word ‘dishonesty’. The latter was much favoured by counsel for the banks, no doubt for its dramatic effect. When I used the phrase ‘conscious wrongdoing’ I took it to mean a person deliberately engaging in conduct knowing that the objectives of the conduct did not accord with good, fair or proper dealing in all of the prevailing circumstances. In the facts of this case, the conduct concerned is entering into the Transactions. I do not think there is much doubt that both the directors and the banks ‘deliberately engaged’ in that conduct. It is the second part of the phrase, namely, ‘knowing that the objectives of the conduct [did] not accord with good, fair or proper dealing’, that bears the rub of the conscious wrongdoing problem. For a start, the parties do not agree on what constitutes the ‘objectives’ of the Transactions and the banks certainly do not agree that those objectives were at odds with good, fair or proper dealing. If I were to find that the objectives failed to accord with good, fair or proper dealing it would not amount to conscious wrongdoing unless the pleadings permitted me to find, and I went on to find, that the directors and the banks knew that to be the case.
    942 The conscious wrongdoing problem arose again on 1 December 2004 (approximately 200 days into the trial) when I was dealing with an application to amend the pleadings. I had made some remarks referring to Bell (No 1) and the disavowal of any allegation of conscious wrongdoing. This caused counsel for the plaintiffs to submit that it was a misstatement of the October 2000 amendment application to say that anything in it amounted to a disavowal by the plaintiffs of an allegation of conscious dishonesty by persons other than the directors. He said that the plaintiffs had not been asked about the banks’ position and that my comments concerning the need to give particulars related to the allegation that the banks were aware that the directors were acting with conscious dishonesty. Counsel went on to say this:
    The disavowment about an allegation of conscious dishonesty was, with respect, the directors. Our effectual allegations against the banks are as in our pleadings and we say they shouldn’t be read down by any statement. Our learned friends have sought to characterise those allegations as involving conscious dishonesty. What we’ve alleged against the banks is as in the pleadings. We weren’t asked to make a disavowment with respect to them. We haven’t. I’m not standing here saying that that’s the allegation; we allege conscious dishonesty. What I’m saying is that what [we] allege is in the pleadings against the banks and they should not be read down in any way.
    943 I understood counsel to be saying something along these lines: ‘I am not saying we allege conscious wrongdoing, but we have pleaded what we have pleaded and it should not be read down’. I felt that this injected an element of uncertainty about the nature of the case being advanced and that it could not be left in that state. I heard further argument and made a considered ruling that, on the state of the pleadings as they then stood, the plaintiffs were not at liberty to advance a case based on conscious wrongdoing by bank officers. The reasons for that ruling are contained in The Bell Group Ltd (In Liq) v Westpac Banking Corporation Bell (No 5) [2004] WASC 273 (Bell (No 5)). As I mentioned, [62], the ruling was directed at the case as then pleaded. Neither at that time nor at any time thereafter did the plaintiffs seek to amend the statement of claim in order to allege conscious wrongdoing by the banks.
    944 I do not wish to repeat what I said in Bell (No 5) but I think I need to relate it more specifically to the state of mind question. I have already referred to the orphic notion of state of mind of a corporation. It was explained by Lord Reid in Tesco Supermarkets Ltd v Nattrass [1972] AC 153, 170 (in a passage approved by the High Court in Hamilton v Whitehead (1988) 166 CLR 121, 127):
    I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one and the same person. The person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company … He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company.
    945 Further elucidation of these principles is to be found in Brambles Holdings Ltd v Carey (1976) 15 SASR 270, 279 (Bright J):
    Always when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company. This process is often necessary in cases in which companies are charged with offences such as conspiracy to defraud.
    946 This dictum was cited with approval in Krakowski v Eurolynx Properties Ltd [1994] HCA 22; (1995) 183 CLR 563. In that decision, the High Court also confirmed that it is not necessary to identify a single officer of the company and say that that individual’s knowledge is the state of mind of the company. Knowledge of several persons can be aggregated to form the state of mind of the company: see Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446, 485.
    947 The point made by Bright J in Brambles Holdings v Carey, namely, that a state of mind can only be attributed to a company if it is held by a person ‘closely and relevantly connected with the company’, was also made by Denning LJ in HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159. His Lordship said, at 172 ‑ 173, that the intention of the company can be derived from the intention of its officers and agents. Whether their intention is the company’s intention depends on the nature of the matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case.
    948 In the light of these principles, I identified at least three problems with the contention of the plaintiffs that they could advance a case based on conscious wrongdoing by the banks. All of these problems are aired in Bell (No 5). First, I had not read the pleadings as incorporating such a case and could accept that the banks had proceeded (and by that stage cross-examined the plaintiffs’ witnesses and opened their case) on a similar understanding.
    949 Secondly, it is a serious matter to accuse someone of dishonesty (resorting to the banks’ phraseology) and the rules of pleading require that such a case be clearly pleaded. On one view of it, the seriousness of the allegation would be compounded by the fact that the erring fiduciary was not said to have been dishonest but the participating third party was. In my view if it were the plaintiffs’ intentions to limit the disavowal to the directors, it was not something that was clear on the face of the pleadings.
    950 Thirdly, the particulars to the relevant parts of 8ASC did not spell out with any particularity which bank officers were said to have engaged in conscious wrongdoing and what aspects of their position and connection with the entity could lead to the attribution of their ‘guilty’ mind as the ‘guilty’ mind of the bank concerned.
    951 The case proceeded on the basis that the plaintiffs had the burden of establishing the Barnes v Addy cause of action where neither the erring fiduciary nor the participating third party was said to have engaged in conscious wrongdoing. The gravamen of this aspect of the plaintiffs’ case is that the conduct of the banks and the directors was wrong because they went into the Transactions with a particular store of knowledge or with a particular belief or suspicion about matters such as the financial predicament of the companies and the prejudicial effects of the Scheme. In such a case, the absence of an allegation of conscious wrongdoing is not without difficulty in relation to at least some of the Baden categories of knowledge and other elements of a Barnes v Addy cause of action. Again, this is a matter to which I will return in the discussion on Barnes v Addy.
26. The evidence: an overview
    8.1. Evidence: people, documents and disputes
    952 Over the 404 hearing days that this trial occupied, a little bit of evidence was led. Disputes about the admissibility of evidence were as tedious as they were numerous; and there were lots of them. Many of the disputes were about relevance. The attitude of the parties to the relevance of evidence seemed to be: ‘If it suits my case it’s relevant, if it doesn’t, it isn’t’. This philippic was less than helpful. From time to time, I was reminded of the words of Joseph Addison:
    Our disputants put me in mind of the Skuttle Fish; that when he is unable to extricate himself, blackens all the water about him, till he becomes invisible.
    953 Whether the rules of evidence and the practices and procedures that the courts have developed over the centuries to deal with the rules are appropriate for litigation on this scale is debatable. In my dotage, I might even write something (extra‑judicially) on the subject, although I doubt it. But it is necessary to say something of a general nature about the way I approached the evidence, given the peculiarities of this case. There are at least four things that I regard as peculiarities, each of which contributed to the length and complexity of the trial and made dealing with evidence more difficult than usual.
    954 First, it is, in reality, 20 or 21 trials because the case (especially in terms of knowledge) has had to be proved against each of the 20 banks individually and one of them as agent. Secondly, the events occurred a long time ago and over an extended period. The negotiations for the impugned transactions occurred between July 1989 and January 1990 but critical events took place from October 1985 and through to April 1991. Thirdly, the events took place in many different parts of the world. Finally, whenever a large commercial group of companies fails there will inevitably be congeries of intra‑group dealings to be untangled. The collapse of the Bell group is not an exception.
    955 Before I explain what I intend to cover in this section, I will set out some statistics relating to the trial. It is necessary to bear these statistics in mind when considering the evidentiary problems that surfaced before and during the trial. I should also say that all of the statistics quoted in this section have been extracted electronically. I would not want it thought that I have spent much of the last two years counting things.
    956 The parties sent to the court for inclusion in the electronic trial book 134,680 documents (452,178 pages). By the end of the trial, 86,340 documents (318,819 pages) had been tendered. Documents were tendered by lists or categories, not individually. A protocol was developed by which objections to the admissibility of documents in a tender list were itemised in a corresponding objection list. I have no idea how many objections were made to the whole or parts of individual documents. But the number runs into the thousands. There were 363 tender lists covering the 86,340 tendered documents and 350 of them had corresponding objections lists.
    957 During the trial, I was presented with written and (or) oral testimony from numerous witnesses. In fact, 166 individuals gave evidence. There were 156 people who provided oral testimony, one of whom was not cross‑examined. Another 10 individuals produced statements but were not required to attend for cross‑examination. Of the 166 individuals who gave evidence, 154 were lay witnesses and 12 were experts. I have included three schedules that identify the witnesses who gave evidence, documentary references for their witness statements and transcript references for their testimony:
27. Schedule 38.3: a list of all witnesses who were called and cross‑examined.
28. Schedule 38.4: a list of witnesses who provided statements but were not required to attend for cross‑examination or, in one case, attended but was not cross‑examined.
29. Schedule 38.5: a list of the bank officers who gave evidence.
    958 My records indicate that I dealt with 5,589 objections to parts (and, on occasions, the whole) of witness statements. That figure would have been much higher had I not introduced, about half way through the trial, protocols directing the legal representatives actually to meet (rather than send terse letters) in an attempt to sort out evidentiary objections before the tender of witness statements.
    959 The myriad objections to passages in witness statements on the grounds of relevance presented a particular problem. Because of the vast range of issues in the case I was reluctant, especially in the early stages of the hearing, to reject evidence as irrelevant. There were a few instances in which the objection was clearly unfounded or well founded and I made the necessary rulings. I took the view that, unless the outcome was obvious, I should defer the ruling and deal with the impugned evidence in the reasons. There were literally hundreds of these objections. I have no intention of listing them and announcing a ruling on each one. I am confident that it will be apparent from the reasons how I have treated individual items of evidence. If they are mentioned, and are part of the reasoning process, it can be taken that I regard them as relevant. If they are not mentioned, it can be taken that I regard them as irrelevant or, more likely, of insufficient weight or probative value to influence the reasoning process.
    960 I will ignore the old adage about lies and statistics and add a further set of numbers to the record. The transcript of the hearing extends over 37,105 pages and the parties’ written closing submissions take up 36,933 pages. I am not going to say that I read each and every page but I did have cause to examine and consider an uncomfortably large percentage of them. The task could hardly be described as gelogenic and if I never hear the terms cash flow, insolvency or subordination again and never meet a Mr Barnes or a Mr Addy or the Earl of Chesterfield, it will still be too soon.
    961 In this section of the reasons I wish to do a number of things. First, I will make some comments on the use of documents in the trial. Secondly, I have placed particular importance on the contemporaneous written records; I will explain why. Thirdly, I took what I acknowledge to be a pragmatic approach to documentary evidence and, again, I will explain why. Fourthly, various types or categories of evidence presented peculiar problems. I have in mind material going to a person’s state of mind, evidence of a hypothetical nature and the expression of expert opinion. I will make some general comments on the approach I have taken to each. Fifthly, no trial of any substance would be complete without our old friends Jones v Dunkel and Browne v Dunn raising their not particularly attractive heads. They certainly did in this case and I will outline the general approach that I took in that respect. Finally, I want to make some general comments about credibility issues as they relate to the testimony of individuals.
    8.2. Documents, more documents, and yet more documents
    962 It was reasonably clear to me from the outset that the plaintiffs’ case would, in large measure, be a documentary one. Much of the evidence given by witnesses who were called by the plaintiffs was of an expert nature (relating to the financial position and the valuation of assets). The banks’ case was of a different nature because of the focus on the extent of the knowledge of the financial position of the companies held by individual bank officers. But documents formed a large part of the banks’ case as well.
    963 The fact that the plaintiffs’ case was likely to rely heavily on the documents and the sheer volume of the documentary material left me with a dilemma: how best to deal with the openings. One approach was to proceed in the conventional manner with a (relatively) short opening that identified the issues and outlined the evidence to be called. But I would then have been left with one of the curses of modern litigation – ‘trial bundle’ – many of the documents in which would not have seen the light of day until cross‑examination of the defendants’ witnesses or even until closing submissions. The other course was to require the parties to take me to the documents on which they intended to rely and to explain their relevance and importance. I took the latter option. This explains the length of the opening statements (163 days).
    964 At the risk of incurring the wrath of the reader, I will once again resort to statistics. As I have already said, 86,346 documents were tendered in evidence. But not all of them were referred to during the trial. The number of documents referred to at various stages of the hearing is as follows, (within each category, treating multiple references to a document as one reference only):
    (a) in opening statements: 10,906;
    (b) during the oral evidence of witnesses, procedural applications or oral closing statements: 3816;
    (c) in written witness statements: 21,347; and
    (d) in written closing submissions: 25,471.
    965 I think it is unlikely that there are any documents that are referred to in any or all of categories (a), (b) and (c) that are not also referred to in the written closing submissions. Assuming that to be correct, 60,875 documents were tendered but no‑one has seen fit to refer to them. I have made no attempt to identify those documents. It is probable that many of them are copies of a document otherwise in evidence. But it is possible that lying Morpheus‑like in a dark corner of the electronic trial book is a document that was not brought to my attention but which might, when the parties come to review the judgment and for other purposes, assume a previously unrecognised significance. This is not something that has caused, or will cause, me to lose a wink of sleep. My commiserations to anyone coming after me who has to deal with such arguments.
    8.3. Reliance on contemporaneous written records
    966 Most of the texts on the law of evidence refer to the oral tradition of the common law: witnesses give evidence of events that they have personally observed and that remain in their memories. This fundamental premise underpins many practical applications of the rules of evidence, such as the ‘best evidence’ principle, many of the hearsay rules and principles governing the use of aids to refresh memory. But, again as many of the text writers acknowledge, the strict reliance on the oral tradition is something of a fiction, especially where the subject matter of the litigation is complex and where a long time has elapsed between the happening of the event and its re‑telling in court. Both of those problems apply in this case.
    967 Witnesses were forced to cast their minds back between 15 and 20 years to recount what they wrote, did, said or thought at the time. That is an extraordinarily difficult exercise for most human beings. Had anyone said to me that they could remember word for word what was said at a meeting held on, say, 20 December 1985, I would have been either intensely suspicious or immensely impressed. It would more likely have been the former.
    968 Of course, there may be triggers that make a particular event memorable and unlikely to recede from memory. For instance, if you were an English banker being wined and dined on a customer’s boat on the Swan River at night and the boat ran aground, you might well remember it. I mention in passing that I never did find out who (if anyone) had a hand on the tiller at the critical time. But that sort of thing aside, an exact memory, able to be recounted reliably without external aids, would be the exception rather than the rule.
    969 For this reason, I placed particular emphasis on the contemporaneous written records of the various organisations involved in the events of the time. Wherever possible, I looked first to the documents and, where a witness’s testimony was brought to bear on the subject matter, tried to assess it against the written record. I am not here talking about the circumstances in which a person is permitted to use a document to refresh memory. Nor I am talking about the difference between recollection and reconstruction. I will deal with those issues separately. What I am saying is that, generally speaking, the contemporaneous documents were my first port of call and I have relied on them wherever possible.
    8.4. Pragmatic approach to documentary evidence
    8.4.1. The best evidence rule
    970 In its original formulation, the ‘best evidence’ rule required that a party produce the best evidence that the nature of the case would allow, and that any less good evidence would be excluded. The rule has largely passed into history, other than in the context of documentary evidence: Butera v Director of Public Prosecutions (Vic) (1987) 164 CLR 180, 194 (Dawson J). Broadly, if a party wishes to rely on the contents of a document, the original must be produced; and secondary evidence is only admissible if the original cannot be produced and the reason for its absence is explained. But as the author of Ligertwood A, Australian Evidence (1988), [7.08] observes, judges are a pragmatic breed and the rule is rife with exceptions.
    971 It follows from the best evidence rule that where a document is admitted into evidence, secondary evidence as to its meaning or contents cannot be adduced. In this litigation the problems with the best evidence rule did not lie with the authentification of documents or the use of copies rather than originals (all of which was generally agreed) but rather with the admission of oral evidence to explain what phrases in a document actually meant.
    972 I was anxious to get the best evidence possible in the circumstances. The tyranny of time was a significant obstacle in this respect. The witnesses needed the assistance of the documents to give the best evidence. But a strict application of the conventional rules and practices governing the use of documents may not necessarily have been fair to the witnesses in this respect and may not have resulted in the production of the most satisfactory evidence. Accordingly, in some respects I had to tailor the approach to fit the circumstances of this case. I acknowledge that the approach may sometimes offend the purists in evidentiary theory. Students of the law of evidence should approach what I say with caution.
    973 Given the tyranny of the passing of time, I took pragmatism a step further so as to give the parties and their witnesses the opportunity to adduce the most reliable evidence possible in the circumstances. The easiest way for me to explain my approach is to give some examples of problems that arose during the trial.
    8.4.2. Aides memoire
    974 From time to time the parties prepared charts, tables, schedules of accounting entries and other analyses that summarised factual information. These documents are identified by the prefix MISP (plaintiffs) and MISD (banks). Examples are the charts of the Bell group companies and the tables or schedules dealing with intra‑group loan accounts. To my mind there is nothing wrong with this approach. Summaries derived from basal information are often used in trials, especially where complex accounting transactions have to be understood and unravelled. Sometimes the source documents are included in the table. I asked the parties to identify inaccuracies within the tables. There are some instances in which problems were identified in the written closing submissions. I do not believe I have relied on summaries the underlying material for which is established to have been wrong.
    975 Many of the MISP and MISD documents on which I have relied are identified in the endnotes to these reasons. Some of them are cited as examples of many documents of the same or a similar genre. It would have been a practical impossibility for me to cite every single table or chart that I saw during the trial or referred to in the course of preparing these reasons and I do not pretend to have done so. Strictly speaking, these documents are aides memoire rather than evidence in their own right. But it seems to me that the distinction is not of great moment in a case such as this. The important thing is whether the source material from which the summary has been derived is otherwise in evidence and is something that I accept.
    8.4.3. Other documentary problems
    976 Once again, the tyranny of the passing of time presented difficulties for witnesses in giving evidence about, or based on, documents with which they had a relevant connection. I will give some examples to illustrate what I mean. In each case, the first step was to establish some relevant connection between the witness and the document. For example:
    (a) the witness was the author;
    (b) it was addressed to the witness and in accordance with usual practice he or she was likely to have seen it;
    (c) in accordance with usual practice of organisation it was likely to have come to the attention of the witness; or
    (d) it referred to things the witness is recorded as having said at a meeting which the witness acknowledged having attended.
    977 In par 8 of his witness statement, John Cahill (TBGL) referred to a file note dated 28 January 1990 that he had prepared following a conversation with Peter Edward (SocGen). In his statement, Cahill said: ‘Whilst I cannot now recall the conversation with Peter Edward referred to in that memorandum, I have no reason to doubt that the note accurately records that conversation’. In ruling on an objection to this sentence, I said:
    Given the circumstances of a case like this where people are being asked to recollect things that occurred up to 20 years ago, a statement like that as in paragraph 8 means what it says. Unless I am told to the contrary, either in evidence in chief or in cross examination, I take a statement like that to mean something along these lines, ‘I was not in the habit of making false records and if I had made a false record, I would remember it’.
    978 There were instances in which a witness was taken to a document and said something to the effect that the document ‘is consistent with my recollection concerning’ a particular event. I rejected evidence of that sort because it could only be characterised as secondary evidence of the contents of a document. There were other instances in which the witness said that the document ‘accords with my understanding then, and at all time since,’ about a certain state of affairs. I allowed that evidence because it went to the witness’ state of mind. The important distinction is between ‘consistent with’ (inadmissible) and ‘accords with my understanding’ (admissible).
    979 The importance of understanding the work practices of an individual and of the employer will be evident from what I have already said. In his witness statement, Geoffrey Farr (HKBA) outlined the history of his employment with this bank, his relationship with the Bell group, various levels of authority within the HKBA structure and the way decisions were made in respect of facilities of the size of the Bell group facilities. He then explained the mechanisms for review of credit facilities and his involvement in preparation of the annual reviews and other applications. He then said:
    Whilst I now have no recollection of doing so, from a recollection of the way I worked at the time, I am confident that I would not have prepared [a review] without first reading the most recent prior review … It is also likely that I initially read the most recent review shortly after commencing as the Relationship Executive for the Bell group … This was the practice I followed whenever I took over responsibility for a new account. I know of no reason why I would not have followed that practice in relation to the Bell group account
    980 In ruling that this evidence was admissible, I said that, provided the witness first identified the relevant work practices upon which he or she relied, it was unobjectionable to say that it is likely that ‘X’ or ‘Y’ would have occurred.
    981 In his witness statement, Philip Deer (Westpac) referred to a credit application of which he had no present recollection. He said that in accordance with his usual working practice he would have read it. He referred to a particular page on which there is mention of $556 million subordinated convertible bonds being included in surplus. He then said: ‘I understand that to be because of their subordinated status and I know of no reason why I would have understood that differently in 1988’.
    982 There are numerous other examples of similar evidence. In essence, the witness was saying: ‘I do not now recall this document. I would have seen it at the time. As I read it now, it means ‘X’ and that is what it would have meant to me at the time’. It has to be borne in mind that, insofar as there is a reference to ‘X’, the evidence only went to the witness’s state of mind about ‘X’, not to the substantive issue whether ‘X’ was true. In ruling that this evidence was admissible, I said:
    Look at it as evidence of state of mind as to what I will call state of affairs A in, for example, 1985. That is a relevant issue in the case. What the witness says is, ‘I’ve read a document that was created in 1985. From reading that document I believe now in state of affairs A and I infer from the fact that I believe state of affairs A now that I would have believed state of affairs A in 1985’.
    983 Anthony Keane (NAB) gave evidence about a credit application he had prepared and in which he had referred to the option of serving demand on the company in the hope that the bank could be repaid from ‘other sources’. In his witness statement he said: ‘My reference to “other sources” is a reference to possible asset sales, refinancing from equity raisings or borrowings from financiers other than NAB. I was not referring to liquidating the company’. I admitted that evidence. I recognised that, technically, it was evidence of the contents of a document. But I admitted the evidence on the basis that what the witness was really saying was, at the time, he held the state of mind to which he referred.
    984 For similar reasons, I admitted evidence from Richard Breese (BGUK) concerning a memorandum containing a comment that the solvency of the Bell group would not be threatened by the non-renewal of a bank loan. In his witness statement he described this comment as ‘tongue in cheek’ because he did have, and had previously expressed, concerns about that question.
    985 The final example I want to give about peculiar documentary problems relates to notes of meetings. Weir (Westpac) chaired a meeting of the Australian banks on 4 October 1989. It was attended by, among others, Walsh (SCBAL). Walsh prepared a note of the meeting and in it he recorded comments attributed to Weir. There is no evidence that at any time the note or a copy had been sent to, or discussed with Weir. Nonetheless, during cross‑examination I permitted counsel to put the note to Weir and then to ask ‘whether that accords with either your memory or your understanding of events and what was said at the time and whether there’s anything in it that you say would not have occurred at that meeting’. The answer that Weir gave is not relevant for the purposes of explaining the evidentiary approach.
    8.5. State of mind evidence
    986 State of mind evidence looms large in this litigation. My understanding of the relevant principles, and their application in the circumstances of this case, will be apparent from Sect 7.5: see also Sect 30.2. There is only one aspect of state of mind evidence on which I need to spend time here.
    987 Generally, a witness must give a plain account of his or her perceptions of events, devoid of opinion and inference. A party may, however, lead evidence of a person’s state of mind when that state of mind is a material issue.
    988 Evidence of a person’s state of mind, if relevant to a matter in issue, can only be used to prove the existence of that state of mind and cannot be used to prove any other fact. So for example, a bankrupt’s statement that he knew he was insolvent is admissible to prove his knowledge of that fact at the time when he made a payment to the defendant: Thomas v Connell (1838) 4 M & W 267, 269 – 70; 150 ER 1429, 1430. It is settled law that evidence which indicates a person’s state of mind does not infringe the rule against hearsay: Walton v R (1989) 166 CLR 283, 288 – 9, 301, 307. It is only when a party seeks to rely on the evidence to establish some fact over and above the person’s state of mind that it becomes hearsay.
    989 The tyranny of time intrudes yet again to raise a particular problem relating to the use of state of mind evidence in this case. In general terms, the relevant state of mind is that which the witness held at the time (1985 through to 1990) rather than what he or she may believe now. It may be argued that the degree of reliability will depend on the degree of contemporaneity between the events in question and the statement relied upon. The plaintiffs argue that where a witness testifies about what their state of mind was at a given time in the past, there is a real concern that the evidence will be self-serving. In particular, where a significant period of time has elapsed since the relevant events a witness who has little recollection of the events will ‘reconstruct’ their state of mind rather than recollect it, which will be of little evidentiary value.
    990 However, in Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation [1983] 1 NSWLR 1, Hunt J recognised that the remoteness of the statements to the acts goes to the weight, not to the admissibility, of the evidence. This must be correct. Obviously, a court will always have to decide on the weight to place on a particular piece of evidence in light of factors that may make it more or less reliable: Mohedo (Junior) v Mohedo (Senior) [2002] WASC 240, [5] – [6] (Wheeler J).
    991 The plaintiffs submit that where a witness has little recollection of the relevant events, but then attempts to testify as to his or her state of mind at that time, there is a real risk that the state of mind will be ‘reconstructed’. That is, the state of mind may be shaped to support the witness’ ‘own’ case; or alternatively, the witness may ‘create’ or ‘substitute’ a state of mind based on the current reading of the relevant documents that does not necessarily reflect his or her earlier state of mind. While such an inference may be open on the facts, given evidence of such a risk, the authorities do not indicate that the mere fact a witness is testifying about a past state of mind raises a risk or presumption of distortion, doubt and unreliability.
    992 In the end, it seems to me to come down to a question of weight or probative value. It would be quite unfair, in the circumstances of this case, to say that, because a witness is testifying to a state of mind from 15 years ago (or longer), the evidence is necessarily (or even probably) reconstruction and inherently unreliable. It has to be assessed against the entire factual matrix and its reliability assessed accordingly. The fact that the evidence relates to a long‑distant period is, of course, relevant. But it is only one of the relevant factors and it is not determinative.
    993 Ultimately, the weighing of the evidence is a matter for the court. It may be open to the court to find that contemporaneous evidence that indicates a person’s state of mind should be preferred to the in‑court testimony, in light of all the circumstances, but there is no requirement that this should be the case.
    994 The banks argue that the plaintiffs are asking the court to revisit evidence that it has already ruled admissible. In their written closing submissions, the plaintiffs contend that the banks have relied on evidence that should be inadmissible. But they followed it up with the statement that they ‘do not of course traverse the rulings as to admissibility already made’. Further, they accept that in general ‘direct evidence of what the witness thought at a time in the past’ is admissible. This is how I propose to approach the matter.
    8.6. Hypothetical evidence
    995 The admission of hypothetical evidence created a great deal of controversy during the hearing. It was another instance where the parties were chameleon‑like in their approach. Hypothetical evidence arose in two main areas.
    996 First, the plaintiffs adduced evidence from officers of LDTC about what they would have done had they known of certain things. For example, Christopher Duffett said he was not aware, at the time, of the insolvency of TBGL and BGNV, and of the grant of the securities and the execution of the BGNV Subordination Deed. He was asked to assume that he had become aware of those matters at the time and, with that knowledge, what steps he would have taken. In his third witness statement he said, in summary, he would have taken advice and if the advice was that there had been material prejudice, he would likely have taken further advice ‘to determine whether it would then be in the interests of the bondholders to accelerate the bonds’.
    997 Secondly, the banks sought to lead evidence from Cahill about what he would have done had if he had learned the on‑loans were not subordinated. Similar problems arose in the testimony of bank officers as part of the reliance and detriment element of the banks’ estoppel claims. The banks’ position was that the relevant bank officers believed that the on‑loans from the BGNV bond issues had been made on a subordinated basis. They had relied on this assumption in agreeing that the bonds could be treated as equity, not debt, in calculating negative pledge ratios. The plaintiffs’ case is that the on‑loans were not subordinated. As part of the reliance and detriment element of their estoppel case, the banks sought to lead evidence from bank officers as to what steps they would have taken had they discovered that the on‑loans were not subordinated. For example, Chantal Gautier (Indosuez) testified that she believed the on‑loans were subordinated. She said that had she known they were not subordinated she would have felt the bank had been misled. If the situation were not remedied, she said she would have had no hesitation in demanding repayment of the facility.
    998 The banks objected strongly to the evidence being led from officers of LDTC. I allowed the plaintiffs to adduce the evidence, although I did rule out some of the assumptions on which the hypothetical was based. The plaintiffs objected strongly to the evidence being led from bank officers. I also allowed that line of testimony, again with some constraints. In this instance, I do not propose to outline the reasons why I was persuaded to admit the evidence. I am prepared to rest on what I said during the hearing.
    8.7. Jones v Dunkel: general approach
    999 The parties exchanged 612 witness statements for about 290 individuals (including experts). On the database under ‘Images’ there are over 3800 individuals who are listed as the author of one or more of the documents that have been tendered. That means there are over 3800 people whose fingerprints are on the dealings to which this litigation relates. As I have already said, during the trial 167 individuals gave evidence. I am sure the remaining 120 persons (or thereabouts) who had provided witness statements and the 3500 or so other authors (or so many of them as still cling to this mortal coil) are all delightful people. Nonetheless, I had no wish to make the acquaintance of any more of them than was absolutely necessary.
    1000 I will take that comment a little further by giving an example that, in my view, justifies the taking of a realistic approach to the failure to call witnesses. One (admittedly an important one) of the hundreds of issues raised in this case is whether the banks relied, to their detriment, on representations that the BGNV on‑loans were subordinated. In their written closing submissions, the plaintiffs identified over 130 bank officers who played a part in decisions that are relevant to that issue and who were not called as witnesses. It will be apparent from the preceding paragraph that I would have been less than amused at the prospect of hearing from all of them. The task of assessing evidence of another 130 individuals (on this single issue) would likely have driven me even closer to insanity without necessarily advancing the cause of achieving a just result in the litigation.
    1001 At an early stage in the proceedings, I made it clear that I intended to apply the rule in Jones v Dunkel in a realistic way. So far as I am concerned, the rule in Jones v Dunkel is grounded in commonsense. It falls to be applied in the accordance with the circumstances of the case. The trier of fact is the person in the best position to assess the importance that the testimony of a witness would play, or would likely have played, in relation to the issue concerned. The circumstances of this case compel a sparing use of the principle.
    1002 Nonetheless, I should outline what I apprehend to be the basic jurisprudence that has developed in relation to the rule and that has governed the way in which I have approached its application.
    1003 The unexplained failure by a party to give evidence or to call a witness or tender certain documents may, in appropriate circumstances, lead to an inference that the uncalled evidence would not have assisted the party’s case: Jones v Dunkel (1959) 101 CLR 298, 308, 312 and 320 ‑ 321.
    1004 The failure to call a witness or tender documents can allow evidence that might have been contradicted by such witness or document to be more readily accepted. Further, where an inference is open from facts proved, the absence of the witness or document may be taken into account as a circumstance in favour of the drawing of the inference: Jones v Dunkel 308, 312 and 320 ‑ 321; RPS v The Queen [2000] HCA 3; (2000) 199 CLR 620 [26]. But the absence of a witness or document cannot be used to make up any deficiency in the evidence. Thus it cannot be used to support an inference that is not otherwise sustained by the evidence. The rule cannot fill gaps in the evidence or convert conjecture and suspicion into inference: Jones v Dunkel 308, 312 and 320 ‑ 321; Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121 [53]; Hesse Blind Roller Company Pty Ltd v Hamitovski [2006] VSCA 121 [28].
    1005 The principle can operate against a party who bears the burden of proof or against a party who does not bear the onus: Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572 [16].
    1006 Whether the failure to call a witness or tender a document gives rise to any inference depends upon a number of circumstances. In Fabre v Arenales (1992) 27 NSWLR 437, 449 ‑ 450 Mahoney JA (Priestley and Sheller JJA agreeing) said that the significance to be attributed to the fact that a witness did not give evidence depends in the end upon whether, in the circumstances, it is to be inferred that the reason why the witness was not called was because the party expected to call him feared to do so. There are circumstances in which it has been recognised that such an inference is not available or, if available, is of little significance. A party may not be in a position to call a witness. The party may not be sufficiently aware of what the witness would say to warrant the inference that he feared to call him. The party may simply not know what the witness will say. A party is not required, under pain of the drawing of an adverse inference, to call a witness ‘blind’.
    1007 These statements were referred to with approval by Miller J in Hewett v Medical Board of Western Australia [2004] WASCA 170. See also Heydon JD, Cross on Evidence (7th Aust ed) [1215]; Cubillo v Commonwealth (No 2) [2000] FCA 1084, (2000) 103 FCR [358].
    1008 No adverse inference can be drawn if the failure to call a witness is explained by, for example, illness or other unavailability or by loss of memory: Cross on Evidence [1215]; Hewett [205].
    1009 The hostility of a witness towards a party may be an adequate explanation for the failure to call that witness: Smith v Samuels (1976) 12 SASR 573, 581; Cross on Evidence [1215].
    1010 Where the rule would otherwise operate, the onus is upon the party failing to call the witness to establish the unavailability of the witness: Smith v Samuels (1976) 12 SASR 573, 581; Cubillo (No 2) [356].
    1011 The significance of the inference depends on the closeness of the relationship between the absent witness and the party who did not call the witness: Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157 [64]; Cross on Evidence [1215]. Thus no inference will arise where the relationship with the party criticised for not calling the witness has ceased and a relationship between the witness and the opposing party has begun: Shum Yip Properties Development Pty Ltd v Chatswood Investment and Development Co Pty Ltd (2002) 40 ACSR 619 [64].
    1012 The rule only applies where a party is ‘required to explain or contradict’ something. What a party is required to explain or contradict depends on the issues in the case as thrown up in the pleadings and by the course of the evidence in the case. No inference can be drawn unless evidence is given of facts requiring an answer: Schellenberg v Tunnel Holdings [51]; Cubillo (No 2) [355]; Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 [81]; Hesse Blind Roller Company Pty Ltd v Hamitovski [2006] VSCA 121 [28]; Cross on Evidence [1215].
    1013 When no challenge is made to the evidence of witnesses who are called, no Jones v Dunkel inference can arise in respect of other witnesses who could have been called to give the same evidence: Cross on Evidence [1215]; Cubillo (No 2), 120; Hesse Blind Roller [29]; Ronchi v Portland Smelter Services Ltd [81].
    1014 As it is expressed in Cross on Evidence [1215], the rule does not require a party to give merely cumulative evidence. However, potential evidence will not be regarded as cumulative unless it could not have affected the complexion of the evidence already called: Ronchi [85]. The rule as to cumulative evidence does not provide a shield against a justifiable criticism that a party has deliberately kept less favourable witnesses from testifying: Packer v Cameron (1989) 54 SASR 246, 253; Cubillo (No 2) [360]; Ronchi [85].
    1015 In the case of a witness who is not a party to the proceedings, the rule cannot be applied unless it would be natural for a particular party to call the witness: Cross on Evidence [1215]. This requirement was discussed by Glass JA in Payne v Parker [1976] 1 NSWLR 191, 201 ‑ 202. Glass JA said that it would be natural to expect that a witness would be called by one party rather than the other where:
    (a) the witness would be expected to be available to one party rather than the other;
    (b) the circumstances excuse one party from calling the witness but require the other party to call him or her;
    (c) the witness might be regarded as in the camp of one party so as to make it unrealistic for the other party to call him or her;
    (d) the knowledge of the witness may be regarded as the knowledge of one party rather than the other; or
    (e) a witness’s absence should be regarded as adverse to the interests of one party rather than another.
    See also O’Donnell v Richards [1975] VR 916, 920 ‑ 921; Cubillo (No 2) [356]; Cross on Evidence [1215].
    1016 A party is not necessarily to be expected to call the party’s own employees although the higher the office of the employee within the party the more reason there is for thinking that the employee’s knowledge is available to the employer party rather than to any other party: Cross on Evidence [1215]; Earle v Castlemaine District Community Hospital [1974] VR 722; Ronchi [33].
    1017 In order for the principle to apply, the evidence of the missing witness must be such as would have elucidated a matter: Payne v Parker, 202; Cubillo (No 2) [360]. It is not enough to conclude that a party may have knowledge. Unless the tribunal of fact concludes, on the balance of probabilities, that the missing witness would have knowledge, there is no basis for an adverse inference from the failure to call the witness.
    1018 The rule does not prevent the drawing of an inference favourable to the party who failed to call the witness. What inferences are to be drawn from the whole of the evidence remains a question to be determined in all the circumstances. Other evidence may justify the drawing of an inference in favour of the party who has failed to call the witness: Flack v Chairperson National Crime Authority (1997) 80 FCR 137, 149; Cubillo (No 2) [359].
    1019 The appropriate inference to draw is a question of fact to be answered by reference to all the circumstances of the case. It may be that no inference at all may be appropriate: Spence v Demasi (1988) 48 SASR 536; Cubillo (No 2) [357].
    1020 In some cases, the passage of time between the event in question and the trial, and the inability of various witnesses who do give evidence to recall relevant matters may support an inference that witnesses not called would not have been able to contribute evidence useful to the resolution of matters in issue: Australian Competition and Consumer Commission v Radio Rentals Ltd [2005] FCA 1133; (2005) 146 FCR 292, [149] ‑ [151].
    1021 In Re: HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; [2002] NSWSC 171, ASIC proceeded against three former directors of HIH for breaches of the Corporations Law. Santow J made a Jones v Dunkel inference against the directors in respect of their failure to give evidence, which strengthened the adverse inference that his Honour drew from other evidence; that they had failed to exercise reasonable care and diligence as directors. The Jones v Dunkel inference was drawn because of the personal involvement of the directors in the transactions in question, their status as parties and their presence in court during the trial (and thus obvious availability to be called).
    1022 The principles of Jones v Dunkel can apply to the failure by a party to ask a witness called by that party questions in‑chief, at least where the most natural inference is that the party feared to do so: Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389, 418 ‑ 419. Whether an inference is to be drawn depends upon all the circumstances. In Government Employees Superannuation Board v Martin (1997) 19 WAR 224, 246 Ipp J concluded that, in the circumstances of that case, the inference that the plaintiff had relied upon an assumption so clearly arose from the documents that the inference should be drawn notwithstanding the absence of direct evidence of reliance from the relevant persons who were called as witnesses for the plaintiff at the trial.
    8.8. Browne v Dunn: general approach
    1023 The parties were not in substantial dispute about the general principles that arise from Browne v Dunn (1893) 6 R 67 (HL). Their dispute was about the application of those principles to the evidence given at the trial. Like Jones v Dunkel, this is essentially a commonsense principle that is sensitive to the context of the litigation. Again, the trier of fact is in a privileged position from which to assess the impact of any perceived breach.
    1024 In Allied Pastoral Holdings (16), Hunt J described the rule in Browne v Dunn as follows:
    It has in my experience always been a rule of professional practice, that unless notice has already clearly been given of the cross-examiner’s intention to rely upon such matters, it is necessary to put to an opponent’s witness in cross‑examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. Such a rule of practice is necessary to both give to the witness the opportunity to deal with that other evidence, or the inferences to be drawn from it, and to allow the other party the opportunity to call evidence either to corroborate that explanation or to contradict the inference sought to be drawn.
    1025 That formulation has been cited with approval in many cases: see, for example, Garrett v Nicholson [1999] WASCA 32; (1999) 21 WAR 236 [37]; Paterson v The Queen [2004] WASCA 63; (2004) 28 WAR 233 [197].
    1026 The rule in Browne v Dunn is an aspect of the principle that a trial must be conducted fairly, so as not to defeat its purpose as a means of ascertaining where, in the case as developed by the parties, the truth lies: Seymour v Australian Broadcasting Commission [1977] 19 NSWLR 219, 235 ‑ 236. The application of the rule in the context of a trial depends upon an impressionistic assessment based upon all of the circumstances: Seymour (236). The rule is not absolute. In some circumstances there is no requirement on the cross‑examiner to put the case to the witness whose evidence he or she proposes to contradict. As is said in Cross on Evidence [17445]:
    The rule does not apply where the witness is on notice that the witness’s version is in contest. The notice may come from the pleadings, or a pre‑trial document indicating issues, or the other sides’ evidence, or the other sides’ opening; it may come from the general manner in which the case is conducted.
    1027 Mahoney JA observed in Seymour that the question whether notice is given of the contest depends upon the circumstances of the case and the nature of its particular issues. His Honour said, at 236:
    Browne v Dunn provides an illustration of one of the ways in which a trial may miscarry. Where, in a civil case, a witness is not cross‑examined, it may normally be assumed that the evidence of that witness is not in contest. Therefore, as was there decided, in such a case a party who has not cross‑examined a witness will not normally be entitled to submit in address that the witness’s evidence should not be accepted.
    But the circumstances of the particular case may negative such an assumption. Whether it is right to make such an assumption will depend upon, for example, whether counsel has at the time, given an adequate reason for not cross‑examining the witness or otherwise made it clear that it is not a proper case in which to make that assumption; ibid at 71 per Lord Herschell LC. It may be that the witness’s evidence is fanciful or such as not to warrant cross‑examination; ibid at 79 per Lord Morris; or that cross‑examination is foregone for other adequate reasons, for example, delicacy; see Phipson on Evidence, 12th ed, (1976) par 1543 at 618 ‑ 619 and Halsbury’s Laws of England, 4th ed, vol 17, par 278 at 194.
    Similarly, failure to cross‑examine a witness may not found such an assumption or render the course of the trial unfair if it is clear from the manner in which generally the case has been conducted that his evidence will be contested. This was pointed out by Lord Herschell (at 71). The nature of the defendant’s case and the particulars given, and otherwise the conduct of it make it sufficiently clear that such an assumption is unwarranted and there has been no surprise or prejudice concerning the matter.
    1028 In Allied Pastoral Holdings (26) Hunt J reviewed a number of cases and concluded:
    Unless notice has already clearly been given of the cross‑examiner’s intention to rely upon such matters, it is necessary to put to an opponent’s witness in cross‑examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings.
    1029 There are many cases in which it has been held that the opposing party and the witness were on notice that the relevant aspects of his or her evidence were in dispute so that a failure to cross‑examine did not infringe the rule in Browne v Dunn.
    1030 In Laurendi v Boral Contracting Pty Ltd [2002] WASCA 297 the plaintiff appellant had sued for negligence, claiming damages for the personal injuries he had suffered. A ground of appeal alleging that the rule in Browne v Dunn had been infringed, because the appellant had not been cross‑examined on various matters the subject of adverse findings by the trial judge, was rejected. The Full Court found [29] that it was apparent from the medical reports that had been brought into existence well before the hearing that the appellant would be obliged to address some unusual features of his physical condition and that it had been open to the appellant, during cross‑examination, to comment on the matters that eventually proved to be significant.
    1031 In Mackenzie v Albany Finance Ltd [2003] WASC 100 the plaintiff was not cross‑examined in relation to a particular topic. McLure J held that the plaintiffs had been put on notice of the evidence in question by a responsive witness statement. Further, her Honour pointed out that the plaintiffs had no independent recollection of the events the subject of the relevant evidence. Her Honour concluded that there was no unfairness necessitating the exclusion or rejection of the evidence contradicting that of the plaintiff.
    1032 In Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134 the full Federal Court held that there was no need to put matters in cross‑examination to a witness who has notice that there is other material in the proceedings that will be relied upon to contradict the evidence of the witness. Further, the Full Court held that statements of issues and the service of documentary evidence could give rise to adequate notice.
    1033 In West v Mead [2003] NSWSC 161 Campbell J reviewed a number of cases where adequate notice had been given that a witness’s account would be challenged. He referred to cases in which it was held that documents exchanged between the parties to litigation before the commencement of the trial are able to give notice that a witness’s account of events will be challenged in particular ways. In such a case there is no breach of Browne v Dunn if the witness’s account is not challenged in cross‑examination. Thus the circumstances in which the rule in Browne v Dunn requires matters to be put to a witness in cross‑examination depends upon the nature of the pre‑trial preparation and whether it has been sufficient to give notice to a witness of the submission ultimately intended to be put to the court. His Honour concluded that, even where there has been an exchange of affidavits or statements, the rule in Browne v Dunn will require cross‑examining counsel to put to a witness the implications which counsel proposes to submit can be drawn from the evidence if those implications are not obvious from the evidence or from other pre‑trial procedures or the course of the case.
    1034 The approach taken in West v Mead has been followed in other decisions in New South Wales: see, for example, Hyhonie Holdings Pty Ltd v Leroy [2003] NSWSC 624 [94] ‑ [95]; Kadian v Richards [2004] NSWSC 382 [1] ‑ [7].
    1035 In Trade Practices Commission v Mobil Oil Australia Ltd (1984) 3 FCR 168, 181 Toohey J said that where a witness had said that he had no recollection of a conversation there was nothing to be gained by taking the witness through the detail of the conversation.
    1036 If a trial judge concludes that there has been a breach of the rule in Browne v Dunn, a court has a broad discretion about how to respond to any such breach. The proper response to a failure to observe the rule in Browne v Dunn will vary according to the circumstances of the case, but will usually be related to the central object of the rule, which is to secure fairness: R v Birks (1990) 19 NSWLR 677, 689.
    1037 In Allied Pastoral (26) Hunt J concluded that non‑compliance with the rule in Browne v Dunn does not mean that the court is obliged to accept the evidence of the witness in question. However, his Honour said that in many cases it would be wrong, unreasonable or even perverse to reject evidence upon which there has been no relevant cross‑examination. His Honour concluded that it would usually be unfair to do so where the rule in Browne v Dunn has not been complied with, and where the witness has not otherwise been given the opportunity to deal with the suggestion made for the first time in the final address.
    1038 In Seymour (236 ‑ 237) Mahoney JA said as follows:
    This kind of problem may arise at different times in the litigation. It may arise during the trial. Thus, where a party fails to cross‑examine a witness at all or on a particular matter, it may be prudent for the trial judge at the time to draw the attention of counsel in an appropriate way to the effect this may have on the later conduct of the trial. It may be that the question arises at a later stage in the trial when counsel seeks to call evidence contradicting the witness or discrediting his evidence, or seeks to address upon the basis that the witness’ evidence is untrue. The trial judge may then have to determine what course should be followed. Sometimes the interests of justice may be served by having the witness recalled for cross‑examination. Sometimes the circumstances may be such that the only way in which justice can be achieved is by directing that, for example, it is not open to counsel, in address, to make such suggestion. What is to be done will depend, as I have said, upon the circumstances of the case. In other cases, the problem may arise only on appeal. This, in my opinion, is what happened in Precision Plastics Pty Ltd v Demir (1975) 132 CLR 362. The appellant had argued successfully before the Court of Appeal that the amount awarded to her by the jury was so small that it was out of proportion to her injuries. The respondent defendant had apparently argued before the High Court that the amount awarded would not have been out of proportion if the jury had concluded that the plaintiff, uninjured, would not have continued to work as she had sworn that she proposed to do. Gibbs J (at 370 ‑ 371) pointed out that the plaintiff had not been cross‑examined upon her evidence in that regard and that therefore it would not have been open to the jury to reject that part of her case. It would have been ‘unreasonable’ for them to have taken a contrary view, and his Honour concluded that it was not open to the respondent to support its case upon the basis that it had.
    1039 This statement has been cited with approval many times: see, for example, Payless Superbarn (NSW) Pty Ltd v O’Gara (1990) 19 NSWLR 551, 557.
    1040 The appropriate response to a failure to comply with the rule in Browne v Dunn is a matter of discretion for the trial judge, taking into account all the circumstances of the case: Payless (556 ‑ 557). One approach that can be used to cure a breach is to permit the recalling of a witness and the reopening of the cross‑examination. Another response may be that the party in breach is not permitted to address the court by making the submission the subject of the breach.
    1041 A tribunal of fact may (and generally should) have regard, in deciding what findings of fact should be made, to the failure of a party to cross‑examine the opposing witness on evidence which has been given: Poricanin v Australian Consolidated Industries Ltd [1979] 2 NSWLR 419, 426. The fact that the evidence is unchallenged does not oblige the court to accept it: Poricanin 436; Ellis v Wallsend District Hospital (1989) 17 NSWLR 553, 586 ‑ 588; Cross on Evidence [17460].
    8.9. Expert evidence
    1042 Throughout my judicial career I have been concerned at the amount of time, energy and expense devoted to (often arid) arguments about the use, abuse and admissibility of expert evidence. This case is no exception. I could have increased the length of these reasons by several hundred pages had I dealt compendiously with all of the arguments raised by the parties, especially the banks, about expert evidence. I do not have the slightest intention of doing so.
    1043 I am content to repeat what I said in the draft ruling on admissibility of expert evidence. The two areas that I flagged for further attention (the ITC contract payment and the Godine matter) can be dealt with when I come to them in the text. One area that is not mentioned in the draft ruling is the banks’ challenge to the admissibility of the evidence of Vern Grinstead concerning the workings of the Eurobond market. This, too, can be left over to the section in which that discussion appears.
    1044 I should say something about the evidence of Woodings. The banks objected to the reception of Woodings’ expert evidence because he is not sufficiently independent. The banks contend that he is biased. I ruled that Woodings’ status as a party did not render his opinions inadmissible but that in assessing the weight that I should give to his evidence, the banks were at liberty to raise issues and make submissions.
    1045 This is a significant and long running dispute and I can imagine that the parties feel there is a fair bit at stake. It is by no means the lowest profile case that I have heard. Against that background, I am not minded to draw inferences from the way the case was conducted or from some of the interlocutory (and media) skirmishes that occurred before the hearing commenced. The banks have not satisfied me that Woodings is biased or is so lacking in independence that I should afford his opinions no weight. I will deal with his evidence (lay and opinion) on its merits and according to the substance of what I have to decide.
    1046 That having been said, there is one aspect of Woodings’ evidence on which I will comment. There were some occasions on which Woodings took an opinion expressed by Love and said little more than that he agreed with it. I will give an example. In the cash flows that he prepared, Love did not include receivables from JNTH, GFH and BCF. In his witness statement, Woodings said that he also excluded them and that he did so ‘based on the opinion of [Love] with which I agree’. I gave leave (over objection) for the plaintiffs to lead further examination in chief from him explaining that statement. This exchange (over objection) occurred:
    Why did you agree with Mr Love, Mr Woodings?—Because on receipt of Mr Love’s reports, I read them all carefully, considered them all, using my knowledge and experience as an accountant, and I agreed with the reasoning that he had adopted and applied in his reports.
    Thank you?—and from my knowledge of The Bell Group’s records which I had developed over the years.
    1047 I have placed little weight on Woodings’ affirmation of opinions expressed by Love. The evidence of Love can, indeed must, stand or fall on its own. That Woodings has had custody of the Bell group’s records for many years, has investigated those records and has built up a store of knowledge of them is a self evident fact. He is an experienced liquidator. His knowledge of the records is a factor that I have taken into account.
    1048 It seems to me that litigants (and their advisers) too often lose sight of the fact that expert evidence is just that – it is evidence. At least in relation to this aspect I understand my role as a trial judge perfectly, even though observers may feel that in some instances the execution of the role has fallen a good way short of perfect. My role is to scrutinise the evidence thoroughly and ascribe to it such weight as I think it deserves. But in the end it is for me, not the experts, to decide the critical issues in the case. That is what I have done.
    8.10. Credibility: some general comments
    1049 I am not going to pretend that I have decided this case on the demeanour of witnesses whom I had the advantage of seeing and hearing in the witness box. In fact, there are very few instances in which demeanour was important. If I think they are material, I will mention them in the discussion of the issue to which they relate. For present purposes I will give one example, to explain what I mean. When it was put to Aspinall that in January 1990 he was motivated primarily by a desire to protect BCHL from threats to its survival, he said:
    I couldn’t have cared less about [BCHL] on 26 January 1990. I was over it by then, Bond Corporation. I can assure you of that.
    1050 There was a pause during that answer. I do not suggest that Aspinall is normally given to the use of what the Commonwealth Censor would call medium to coarse language . But I gained the clear impression that had the exchange taken place in the front bar of the Railway Hotel (most country towns in this State have, or had, a public house of that name) the language may have been rather more explicit. Aspinall meant what he said in that exchange.
    1051 As I will mention elsewhere, I was disappointed by a particular aspect of the evidence given by some of the witnesses in the case. In some instances they showed a mystifying reluctance to accept the plain meaning of language used in a contemporaneous document. And some of them appeared unduly cautious.
    1052 Having said that, I do not believe that any witness set out deliberately to lie to me. I think most witnesses did their best to present a reasonable account of events and their participation in them. The reliability of that account is, of course, a different matter. In the end, my assessment of the oral testimony was based primarily on its intrinsic reliability, rather than on any appeal to credibility in the sense of deliberate and calculated obfuscation. As I have already said, my primary port of call in assessing reliability was the contemporaneous documentation.
    1053 In a case of this nature, the distinction between recollection and reconstruction is important. And it has a direct impact on reliability. There can be a tendency, with the passing of time, to meld the two. In that process, a propensity might develop, albeit innocently, to adopt a position advantageous to the case being presented.
    1054 The distinction between recollection and reconstruction is well known and I do not need to describe it: see Cross on Evidence, [17230]; Ligertwood A, Australian Evidence (1988) [7.36]. The question is whether the court can be satisfied the witness is speaking from personal knowledge. If not, the statement is probably hearsay. But even if it is not, evidence affected by reconstruction must be given less weight than testimony that is not so affected.
    1055 But going back to the documentary problems mentioned in Sect 8.4.3, it seems to me that a witness can still give evidence about a document (to which he is relevantly connected) even if he has no present recollection of it. It does not necessarily follow that anything the witness says about the document must necessarily be reconstruction, and therefore hearsay. Again, it comes down to reliability.
    1056 The plaintiffs contend that much of the banks’ evidence falls into the category of reconstruction. I am not sure that is right. Although the witness may not remember reading the particular document, they testified to a practice of reading similar documents generally, and on a daily basis. Thus, the reading and understanding of the same document is capable of application over time. It has to be borne in mind that much of the impugned evidence relates to the witnesses’ state of mind, rather than to the truth of what happened. A pure expression of the witnesses’ state of mind does not necessarily suffer from the same difficulties.
    1057 The plaintiffs also contend that there was no reasonable attempt to revive witnesses’ memories in the conventional way, or that memories were revived with only part of the information available at the time. This, too, is a difficult area. But again, I do not wish to say anything more than what I said in exchanges with counsel and rulings during the hearing. I do not think the rules were infringed in a way that renders the evidence inadmissible. If there are issues in relation to the way memory was refreshed, they will sound in weight rather than admissibility.
    1058 In their closing submissions, the banks characterised the plaintiffs’ contentions as baseless because the witnesses were not challenged in cross‑examination. I do not accept that. Counsel for the plaintiffs were assiduous in exploring how the banks’ witnesses came to prepare their statements (a line usually met with howls of protest that legal professional privilege was being trampled on) and the range of documents to which the witnesses had been given access.
    1059 At the risk of tedious repetition, in my view the problems of refreshing memory (if they exist) go to weight rather than to admissibility. And the problems of reconstruction, as distinct from recollection, fall to be assessed according to reliability; how the evidence fits within the factual matrix of which it is part.
    1060 The last comment I wish to make about credibility concerns Peter Mitchell. A lot of evidence was led concerning, or related to, what has become known in common parlance as the ‘BRL strip’: see Sect 9.16.2. It is a matter of public record that some people, including Mitchell, have been convicted of offences arising from the BRL strip and have spent time in prison because of those convictions. This case is not about the BRL strip, although those events are relevant in some respects. I have not approached Mitchell’s evidence on the basis that his testimony in this case was necessarily tainted. Nor have I approached it on the basis that because he failed in his duties as a director of other companies he must necessarily (or even probably) have breached his duties to the Bell group companies.
30. The plaintiffs’ cash flow insolvency case
    9.1. Introduction
    1061 As has been pointed out by commentators the question of insolvency may appear to be academic, yet it can be of great practical importance: see, for example, Keay A and Murray M, Insolvency: Personal and Corporate Law and Practice (2002) 14. While insolvency as such is neither a criminal offence nor a condition to which legal sanctions apply, a vast range of consequences can flow from a finding that a company is insolvent at a particular date. Usually, the consequences will be unpleasant. Often, the time at which the relevant expectations as to the company’s financial capacity are to be judged will be central to the issues to be decided: Hawkins v Bank of China (1992) 25 NSWLR 562, 567. This is so in the present case. The solvency of the relevant Bell group companies ‘by 26 January 1990’ is one of the key facts to be determined in this trial. The phrase ‘by 26 January 1990’ effectively means ‘on 26 January 1990’: see Bell (No 1)  [252]. The banks, of course, argue that the companies were not insolvent at that date. Save for one issue, I did not understand anyone to argue that if the companies were insolvent in January 1990 they somehow, magically, regained solvency at a later point during the Scheme Period.
    1062 The exception referred to in the preceding sentence is an argument by the banks that the Transactions removed the ‘on demand’ status of the Australian banks’ facilities and converted them to fixed‑term arrangements. The Transactions provided the Bell group with the opportunity for further dealings with its bankers in relation to its future requirements. In that sense, according to the banks, the Transactions alleviated the state of tight liquidity that existed as at 26 January 1990. But the Transactions, by themselves, did not change the available cash and realisable assets that the Bell group companies had; nor did they affect recurrent liabilities, although they did render the companies liable for the costs, fees and expenses of the refinancing. The liquidity situation, whatever it was before 26 January 1990, was the same immediately after the Transactions had been entered into.
    1063 In Sect 6.4, I introduced the pleaded case on insolvency and in Sect 7.2 I made some preliminary comments about insolvency and its importance in the litigation. In this section, I propose to cover a number of topics all relating to insolvency. First, I will embark on a more detailed exegesis of the various financial states that are advanced by the plaintiffs in their pleading: ‘insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent’. Secondly, I will examine some other aspects of the test of insolvency; in particular, whether it is permissible to use hindsight and the degree of satisfaction that must be enjoyed before a receipt or expense can be taken into account. Thirdly, I will consider the factual arguments about various disputed cash inflow items. Fourthly, I will deal with the impact on solvency of trading losses made in the period from 1 July 1989 to 26 January 1990. Fifthly, I will cover the arguments relating to the cl 17.12 issue. Sixthly, I will consider the ability of the Bell group to raise funds from its two main assets, namely, the publishing assets and the BRL shares. Seventhly, I will review the plaintiffs’ arguments about cascading demands. And finally, I will look at various liabilities that the companies were obliged to meet in the relevant period.
    9.2. Meaning and assessment of insolvency
    1064 The central feature of the insolvency concept is clear: a person is insolvent if he or she is unable to pay debts as they become due. But thereafter, the fog descends. An examination of previous cases reveals the nuances surrounding the concept of insolvency. The application of the concept in individual cases can be both vexed and difficult.
    9.2.1. The balance sheet and cash flow tests
    1065 At common law, the solvency of a company is assessed by one or other (or a combination) of two measures: the ‘cash flow’ test and the ‘balance sheet’ test. Both tests are advanced by the plaintiffs in this case. The former focuses on income sources that were available to the entity and expenditure obligations it had to meet. The latter concentrates on the value of the assets and liabilities reflected in the company’s books.
    1066 The ‘cash flow’ or ‘commercial insolvency’ test is an assessment of solvency based on a company’s ability to meet its debts (current liabilities), as and when they fall due. This test assesses the financial health of a company by reference to its capacity to finance its current operations. In other words, it looks at whether the company’s business is viable and can continue to operate by meeting the present demands upon it. As the authors of Ford, Austin and Ramsay, Ford’s Principles of Corporations Law (12th ed, 2005) point out, the essential features of the cash flow test include an assessment of the company’s existing debts and debts that will arise in the near future, the date each debt is due for payment, the company’s present and expected cash resources and the date each inflow item will be received (at [25.050]).
    1067 The ‘balance sheet’ test is different. It considers whether a company’s total external liabilities are greater than the value of its assets. If they are, and therefore there are insufficient assets to satisfy all claims on the company, the company is insolvent.
    1068 Neither test is invariably accurate in ascertaining the true financial position of a company. Both have defects. One of the major problems with the balance sheet test is that not all of the company’s book value assets are severable or can readily be exchanged for money. Consider, for example, the goodwill of a company or other accounting constructs such as ‘deferred IT costs’. Disciples of the ‘if you can’t kick it, you shouldn’t count it’ school of accounting have strong views about the valuation of items of this type. There are other problems with ascertaining the real or realisable value of a company’s assets at any particular time. For example, are asset values to be assessed in a liquidation scenario under ‘fire sale’ conditions or should they be calculated on the assumption that the company will continue as a going concern?
    1069 The cash flow test on the other hand has been criticised as being vague and uncertain and as posing difficult questions with regard to timing: see, for example, Keay AR, ‘The Insolvency Factor in the Avoidance of Antecedent Transactions in Corporate Liquidations’ (1995) 21(2) Monash University Law Review 306. In an article, Margret JE, ‘Insolvency and Tests of Insolvency: An Analysis of the ‘Balance Sheet’ and ‘Cash Flow’ Tests’ (2002) 12 Australian Accounting Review 59, the author says:
    [T]he emphasis in this test is on an entity’s ability to pay its debts as they fall due. This idea suggests a focus on an entity’s level of liquidity or short‑term financial state … On the other hand, in a purely financial sense, solvency focuses on long term calculations of an entity’s ability to pay. This is because the concept of solvency includes identifying whether the entity has a short term financial problem. It is evident that difficulties have arisen for the courts when using the cash flow test of insolvency, particularly in deciding what debt to recognise at a particular time.
    1070 To add to the confusion, it is possible that a company might be cash flow insolvent but show a positive balance sheet where assets exceed liabilities. A company may be, at the same time, insolvent and wealthy. It may have wealth locked up in investments that are not easy to realise. Regardless of its wealth (in this sense), unless it has assets available to meet its current liabilities, it is commercially insolvent and therefore liable to be wound up: Re Tweeds Garages Ltd [1962] Ch 406, 460 (Plowman J, referring to an extract from the Buckley’s Companies Acts, 13th ed, 1957).
    1071 There are comments to similar effect in Re Bond Corp Holdings Ltd [1990] 1 WAR 465, 473 ‑ 474. Ipp J commented that the task of the court is to determine whether the company is then able to meet its current liabilities as they fall due. The court is not required to determine the probabilities of circumstances arising ‘at some future time which will then cause [the company] to be in a position whereby it will not be able to meet the liabilities which will then exist’.
    1072 There is no unanimity of approach across common law jurisdictions. In Australia, however, the cash flow test is generally viewed as the more appropriate mechanism for assessing solvency, both for individuals and companies. For example, in Bank of Australasia v Hall (1907) 4 CLR 1514, 1521, Isaacs J said: ‘The debtor’s position depends on whether he can pay his debts, not on whether a balance sheet will show a surplus of assets over liabilities’. The cash flow test is more in keeping with the definitions of solvency in the Bankruptcy Act and the Corporations Law.
    1073 That having been said, it would be wrong to dismiss the balance sheet test as irrelevant. It can be useful, for example, in providing contextual evidence for the proper application of the cash flow test. In Coburn N, Coburn’s Insolvent Trading (2nd ed, 2003) 66, the author says that:
    The courts have moved to a far wider consideration of solvency, rather than just applying a cash flow test, which is viewed as a basic starting point in the consideration of solvency. This is because the statutory emphasis is on ‘solvency’ rather than ‘liquidity’. The consideration will be as a question of fact: in the light of commercial reality, all things considered, could the company pay its debts as and when they became due? Such an approach includes the balance sheet test, and other commercial realities such as access to money from third parties, raising capital or credit and financial support are all relevant considerations in determining a company’s ability to pay debts.
    1074 The proposition that a balance sheet assessment continues to have some relevance is supported by other authorities: see, for example, Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148, 96; Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 44.
    1075 In this litigation, my primary focus is on the cash flow test. But, as will become apparent, it is necessary to look at the balance sheets to resolve some particularly contentious issues.
    9.2.2. The importance of context
    1076 There are difficulties in ascribing a definitive meaning to the phrase ‘ability to pay debts as they fall due’. These difficulties are compounded by the fact that the concept of solvency can, and does, differ according to the context in which it is used. On occasion, the principles which have evolved through the cases do not seem to reflect differences in context: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213, [35].
    1077 In London and Counties Assets Company Ltd v Brighton Grand Concert Hall and Picture Palace Ltd [1915] 2 KB 493, Pickford LJ noted that the principles of solvency may vary according to the statute under which solvency was being assessed. In Southern Cross Interiors, Palmer J referred to the different ‘categories’ of solvency that might come before the courts for analysis. His Honour recognised that when assessing the ‘actual’ solvency of a company, a court will apply different criteria from those it will use when considering whether an individual had ‘reasonable grounds to expect’ solvency. At [35], Palmer J pointed out that the test of solvency arises (relevantly) in three types of case: applications to wind up a company on the ground of insolvency; claims to recover preferences; and claims to recover particular debts from directors on the ground of insolvent trading. Under previous statutory regimes, a plaintiff in an insolvent trading case had to prove only that there were ‘reasonable grounds to expect’ insolvency at the time that the relevant debt was contracted. The necessity to prove actual insolvency was common to winding up and preference cases. It follows that winding up and preference cases may be treated as one category, while insolvent trading cases can be regarded as a different category. Statements of principle as to insolvency in one category of case have often been cited in the other category of case without necessarily appreciating the contextual differences.
    1078 ‘Prospective’ and ‘retrospective’ assessments of solvency present another contextual difference. A prospective assessment is required when, for example, the court is entertaining a winding up application. The company’s ability to pay its debts has to be determined not only by reference to debts payable as at the date of the hearing, but also by reference to its ability to pay debts which will fall for payment sometime in the near future. The question of a company’s solvency can arise retrospectively where, for example, a liquidator is seeking to recover an unfair preference or to set aside an insolvent transaction. In those cases, the issue concerns the solvency of the company at a date prior to the winding up: Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385, 107.
    1079 Care needs to be taken when reading the authorities because the meaning and application of the phrase ‘unable to pay debts as they fall due’ can differ depending on the context in which the issue arises. In this case I am confronted by a mix of concepts and contexts. I have to decide as a question of fact whether the companies were insolvent as at 26 January 1990; this is the issue I have previously described as ‘objective insolvency’. It equates (broadly) with what was called ‘actual’ insolvency in Southern Cross Interiors. I also have to decide the directors’ state of mind on that question as at the same date. This is what I have termed ‘subjective insolvency’ and it equates (again broadly) with the reasonable expectation test referred to in Southern Cross Interiors. In determining objective or actual insolvency, I will be engaging in a retrospective assessment. But when I come to look at the state of mind of the directors, the distinction between retrospective and prospective becomes more difficult to apply. The juridical task may combine elements of both approaches.
    9.2.3. The phrase ‘from its own moneys’
    1080 The starting point for the assessment of solvency is the broad definition that a company is insolvent if it is unable to pay its debts as they become (or fall) due, out of its own moneys. Those last words, ‘out of its own moneys’, have created controversy over the years. The plaintiffs see them as words of limitation: the available sources are only those that can be garnered from the company’s assets. The banks contend that the words are not essential to the definition. They say that none of the plaintiffs’ causes of action involves the application of a statute incorporating, as a statutory integer, the requirement of insolvency. Accordingly, the general law meaning of ‘insolvency’ is relevant for present purposes. At law, the focus of attention is on the company’s ability to pay debts when they fall due, not on the source of funds.
    1081 There is some support in the authorities for the approach advocated by the banks. In London and Counties Assets Company, Buckley LJ (at 501) defined the word ‘insolvent’ as meaning commercial insolvency, that is to say, ‘inability to pay debts as they become due’. That case concerned a provision in the articles of association disqualifying a person from holding office as a director if ‘insolvent’. A similar approach is to be found in Registrar‑General v Harris (1998) 45 NSWLR 404, 414 (claims against the assurance fund under land titles legislation) and in Minion v Graystone Pty Ltd [1990] 1 Qd R 157, 161 (a provision in a contract for excavation works). But none of those decisions included a discussion of the sources of funds that could be taken into account in deciding whether the debtor was able to pay its debts as they fell due.
    1082 Prior to 1992, neither the Bankruptcy Act nor the relevant corporations legislation contained a definition of ‘insolvency’. In applying the legislative provisions concerning preferences, the courts treated the statutory formulation ‘unable to pay his debts as they become due from his moneys’ as meaning the same as ‘insolvency’. And they afforded to the words ‘from his own moneys’ a particular meaning or content: see, for example Bank of Australasia v Hall at 1528; Rees v Bank of New South Wales (1964) 111 CLR 210 at 229 ‑ 230. The most oft‑cited authority is Sandell v Porter, a preference recovery action under s 95 of the Bankruptcy Act 1924 (Cth). Barwick CJ said, at 670:
    An essential step in making out that a payment is a preference under s.95 is to establish by evidence to the satisfaction of the court that the payer was at the time of the payment insolvent. 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.
    1083 Another provision of the Corporations (Western Australia) Code (as it existed in 1990) is relevant to this argument. Under s 364(1)(e), a company could be wound up on the ground that it ‘is unable to pay its debts’. Under s 364(2)(c), a company was deemed to be unable to pay its debts if ‘the court… is satisfied that the company is unable to pay its debts’. Ignoring the deeming aspect, this section enabled a court to order a winding up if satisfied, on evidence, that the company was unable to pay its debts. This has been interpreted as referring to insolvency in the commercial sense, namely, an inability to meet current demands: Re Premier Permanent Building Association (1890) 16 VR 20, 22 ‑ 23.
    1084 I raise this because the context in which the insolvency question arises involves the proposition that the companies might become subject to a winding up. This is the tenor of the plaintiffs’ case in a number of areas. For example, given (among other things) the allegation of insolvency, unless there was a valid and effective restructuring, the companies would have been wound up: 8ASC par 33B. Further, TBGL was insolvent and had any of its creditors made a demand, it would have been wound up: PP par 26A(b)(ix). It is also alleged that the banks knew that the companies were insolvent and may be wound up: 8ASC par 58G and par 58I. That having been said, there are, of course, the statutory claims. But they do not proceed under the provisions that correspond to s 95 of the Bankruptcy Act 1924 (Cth). And insolvency (at the time the Transactions were entered into) is not a necessary element of the statutory claims that are pleaded in this litigation, although it has practical significance: see Sect 7.2.6.3.
    1085 I wish now to return to the subject of statutory definitions of insolvency. The Corporate Law Reform Act 1992 introduced, for the first time, a definition of insolvency. The Corporations Law was amended to include s 95A:
    (1) A person is solvent if, and only if, the person is able to pay all the persons debts, as and when they become due and payable.
    (2) A person who is not solvent is insolvent.
    1086 In 1996, the Bankruptcy Act s 122 (the successor to s 95) was substantially redrafted. Among the changes were the removal of the words ‘unable to pay his debts as they become due from his own moneys’ and the insertion of the word ‘insolvent’. At the same time, definitions in identical terms to the Corporations Law s 95A were introduced by the enactment of s 5(2) and s 5(3). So far as I can see, neither the explanatory memoranda to the amending Bills nor the second reading speeches indicate why the words ‘from his own moneys’ were omitted from the definition. Nor is there any indication that the legislature intended to bring about any particular change in the law in this respect. Those definitions have remained unchanged in the Bankruptcy Act and in successive versions of the legislation governing corporations.
    1087 The change in wording has been the subject of judicial comment. In Lewis v Doran, Palmer J considered the difference in the two formulations when deliberating on solvency under the Corporations Act 2001 (Cth). In that case, insolvency was an element of various claims bought by the liquidator against the directors. His Honour noted that in many of the authorities decided since 1993 the Sandell v Porter definition had been followed notwithstanding the legislative change. Palmer J proffered the view that the purpose behind the statutory inclusion of the words ‘from its own moneys’ was to preclude unreliable or speculative claims to funds from the determination of insolvency in a winding up. His Honour said, at [109] ‑ [111]:
    Where the question is prospective insolvency … [one] can appreciate the Court’s reluctance to conclude that a company will be able to pay those debts which must be taken into account as a matter of commercial reality as at the relevant date only because it claims to have access to funds which a third party is said to be willing to lend without security.
    In such a case there is a considerable measure of trust, if not speculation, that ‘things will turn out all right in the end’. If the third party is free to change its mind after the winding‑up application is dismissed, the company’s creditors are left with their hopes disappointed and their debts unpaid. Doubtless, it is this consideration which brought about the requirement in the predecessors of s 95A [of the Corporations Act] that a company’s solvency must depend on its ability to pay by recourse to its own assets rather than by recourse to the benevolence or to the whim of others.
    In my opinion, the omission of the words ‘from its own monies’ from the definition of insolvency in s 95A now leaves the Court free to determine the question of retrospective insolvency free of a qualification which might well be appropriate to determine only prospective insolvency. The omission leaves the Court free to determine insolvency, whether retrospective or prospective, as a question of commercial reality having regard to the particular facts of the case.
    1088 Palmer J’s conclusion as to the effect of the omission of the words ‘from the debtor’s own moneys’ was approved by the Court of Appeal in Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 219 ALR 555, [106] ‑ [109].
    1089 While Lewis v Doran is distinguishable on the facts (the external sources there were borrowings available from third parties, which is not the case here), I find Palmer J’s analysis of the effect of s 95A compelling and will adopt it. See also Fryer v Powell [2001] SASC 59; (2001) 159 FLR 433, [75].
    1090 But this does not mean that it is ‘open slather’. Insolvency is to be judged by a proper consideration of the company’s financial position, in its entirety, based on commercial reality. It is not to be found or inferred simply from evidence of a temporary lack of liquidity. Nor should it be assessed as if the company had to keep cash reserves sufficient to meet all outstanding indebtedness, however distant the date of payment might be in the fullness of time. But nor can directors rely on some faint hope that help is at hand and that all will be well. The word ‘reality’ in the phrase ‘commercial reality’ has a bite. Commercial reality dictates that the assessment of available funds is not confined to the company’s cash resources. It is legitimate to take into account funds the company can, on a real and reasoned view, realise by sale of assets, borrowing against the security of its assets, or by other reasonable means. It is a question of fact to be determined in accordance with the evidence. In this respect, I affirm (without repeating) what I said about the concept of ‘commercial reality’ in The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 6) [2006] WASC 54, [101] ‑ [107].
    1091 Raising funds by sale or mortgage of assets can be a two‑edged sword. In Re United Medical Protection Ltd [2003] NSWSC 1031; (2003) 47 ACSR 705, [57], Austin J noted that despite a present ability to pay debts, problems can arise if the company ‘would be unable to pay [its] debts as and when they fell due at some future time, because of an unidentified future reduction or absorption of cash flow’. Take, for example, the sale of the company’s major income generating asset. The sale might provide sufficient funds to meet liabilities that are due immediately, yet at the same time rob the company of the ability to meet other liabilities due later but nonetheless in the foreseeable future. If that were to be the case, it could lead to a conclusion of insolvency, notwithstanding the present ability to meet commitments.
    1092 In my view, none of the disputed cash inflow items should be ruled out on the grounds that they could not be considered as ‘the company’s own moneys’ and that it would therefore be legally inapposite to take them into account. It does not follow that they must necessarily, as a matter of commercial reality, be regarded as reasonably available to the company in the sense that I have explained. That will depend on an item‑by‑item assessment.
    9.2.4. Likelihoods, prospects and possibilities
    1093 This brings me to a related question. In the cash flows that were prepared by the Bell Treasury officers in January and February 1990, various cash inflow items were included. When the expert witnesses came to examine the financial affairs of the companies and to prepare their own cash flows, they took differing views as to whether individual items should or should not be included. This is at the very heart of the factual dispute about the solvency of the companies at the relevant time.
    1094 The plaintiffs argue that the legal test for inclusion or exclusion of a cash inflow item is whether there was a ‘likelihood’ of receipt of the relevant item. They contend that this is in line with the authorities and that it is consistent with the base question that falls to be answered: is the company able to meet its debts? The banks say that there is no legal test. They say that the court must find the facts by reference to the level of satisfaction the particular finding requires, bearing in mind the gravity of the allegation in the context of these proceedings. The banks introduce their cash flow defence by saying that, as at 26 January 1990, the companies ‘did have a prospect, which was reasonable, of paying their liabilities as they fell due’.
    1095 At the same time, the banks say that Honey developed his predictive cash flow according to what he considered ‘reasonable’ in light of the uncertainties relating to each disputed item. They say that Honey assessed the prospect or likelihood of each item by looking for a ‘sufficient likelihood’. He only included a particular item in his predictive cash flow if he had formed a view that there was sufficient likelihood that it would be received. If there was, it warranted inclusion. In their closing submissions, the banks put it this way:
    Mr Honey approached each of the disputed items by assessing the uncertainties relating to them, and in that context, came to a view as to whether the degree of uncertainty was such as to warrant exclusion or enable inclusion in his cash flow. In that sense, he considered the ‘likelihoods’ … He took a view as to whether, in that sense, it was reasonable in light of the uncertainties to include the relevant item in his cash flow.
    1096 The plaintiffs contend that in substance there is no real difference between the tests enunciated by the three corporate recovery practitioners who gave evidence. Honey proffered the view that the directors of a financially distressed company need to ‘be sure’ or ‘be confident’ of their company’s solvency. Love considered that the directors would have to make a decision as to ‘the likelihood of assets of the Bell group yielding ready cash in sufficient time for the purposes of meeting its debts as and when they fall due’. Woodings considered the directors would have to make a decision as to what was ‘probable or likely to materialise’.
    1097 I doubt that there is a ‘legal test’ that can be applied rigidly on each and every occasion that a court is called upon (in effect) to reconstruct a cash flow in order to assess the solvency of a company at a particular time. What I have to do is decide whether or not, as at 26 January 1990, the relevant Bell group companies were able to pay their debts as the debts became due. I have to be satisfied of that on the balance of probabilities. To get to that point, I am obliged to look at the cash flows and decide whether each disputed item should be included or excluded. But does it mean that I have to be satisfied on the balance of probabilities as to each disputed item? I think not. The question is the weight to be given to the united force of all of the circumstances put together: Chamberlain v R (No 2) (1984) 153 CLR 521, 535.
    1098 In a sense, the juridical task is not unlike that explained by the Court in Shepherd v R (No 5) (1990) 170 CLR 573. A jury can draw an inference of guilt even though not each and every fact is proved beyond reasonable doubt. But if a conclusion on a particular fact is an indispensable intermediate step in the reasoning process leading to the inference of guilt, then the jury must be satisfied of that fact beyond reasonable doubt. Take as an example, a trier of fact having to determine solvency based on six disputed cash flow items. He or she might conclude that it is almost certain item ‘A’ would have materialised and that ‘B’ would not; that it is probable (in the balance of probabilities sense) that ‘C’ would have materialised and that ‘D’ would not; and that it was possible (but not probable) that ‘E’ might have been received, but that there was no possibility of ‘F’ arriving in time. The question is whether the combined effect of ‘A’, ‘C’ and ‘E’ (ascribing to each the weight that the circumstances require) leaves the trier of fact with a degree of satisfaction necessary to justify a conclusion that it is more probable than not the company was (at the relevant date) able to pay its debts as they became due.
    1099 I acknowledge that Chamberlain and Shepherd are criminal cases and that the consequences of a finding of guilt are more serious than findings made in civil litigation of the type with which I am dealing. Criminal cases involve the liberty of the subject. This case is only about money, albeit a lot of money, with some reputational aspects thrown in. Nonetheless, I can see no reason why the general approach to fact finding where there are individual strands or fibres going to make up a rope (an analogy sometimes used) should not be applied in a case such as this.
    1100 Generally speaking, I am comfortable with the formulation that it is appropriate to take an item into account if it is likely to materialise. But I am less comfortable with a position that equates likelihood with the balance of probabilities. Certainly, the dictionary definitions of ‘likely’ all include, as one integer, ‘probable’. But there are other meanings, such as ‘having an appearance of truth or fact; that looks as if it would happen, be realised or prove to be what is alleged or suggested’: the Oxford Dictionary. To my mind, a likelihood test does not mean that each and every disputed item has to be established on the balance of probabilities. But nor do I accept the ‘reasonable prospect’ formulation if that is understood as sanctioning an overall conclusion in which none of the constituent parts are established to that level. I think the word ‘likelihood’ is an apt description if it is understood in the sense suggested by Woodings as ‘likely to materialise’, and by Honey as a view arrived at after assessing the degrees of certainty and uncertainty. In the end, it probably (there is that word again) comes back to commercial reality. In the discussion that follows, I am going to use the words ‘likely’ and ‘likelihood’ in relation to the disputed cash flow items. When I do, the words have to be understood in the light of the discussion in this section.
    1101 The level of satisfaction must rise well above a mere hope or vague expectation. The reasoning process must be assiduous and disciplined. It is fitting to bear in mind the words of the Roman philosopher Lucius Seneca:
    If you are wise, you will mingle one thing with the other: not hoping without doubt, not doubting without hope.
    1102 Of course, ‘hope’ must translate into the requisite level of satisfaction and ‘doubt’ demands sceptical questioning and analysis where and when it matters.
    9.2.5. The use of hindsight
    9.2.5.1. The problem and the respective positions
    1103 The Macquarie Dictionary defines ‘hindsight’ as the perception of the nature and exigencies of a case after the event. The Oxford Dictionary defines it as seeing what has happened and what ought to have been done after the event. The latter also calls it ‘wisdom after the event’.
    1104 The way in which hindsight arises in this case can be illustrated by reference to a factual example. One of the disputed cash flow items is the ITC contract payment. A cash flow prepared in February 1990 made provision for the receipt in June 1990 of the ITC contract payment, in an amount of $17 million. Early in July 1990 the ITC contract payment was received, but in an amount of £4.6 million. The question is, is evidence that £4.6 million was received in July 1990 admissible as going to the question of solvency as 26 January 1990 and (or) the state of mind of the directors concerning the likelihood of receipt of funds from the ITC contract payment and, if so, to what extent?
    1105 The banks contend that events occurring after 26 January 1990 are relevant and admissible to determine solvency to the extent that they throw light on the ability, as at 26 January 1990, of the relevant assets to produce sufficient funds to enable debts to be paid as and when they fall due. Admissible and relevant evidence is confined to that which concerns the inherent, intrinsic quality of the asset or matters arising from the asset and does not include evidence of independent or supervening events. The banks also say that it is the quantitative (rather than qualitative) aspect of the financial position that is relevant.
    1106 The plaintiffs, on the other hand, argue that the banks’ approach to hindsight is based on valuation and damages cases and as such ought not be used for determining insolvency. For example, they say that in determining the appropriate measure of loss in a damages case, the court can, and does, enquire whether what occurred in hindsight was ‘intrinsic in the thing itself or was something supervening or independent or accidental, for which it would not be appropriate to award compensation’. The plaintiffs contend that the rule regarding hindsight is designed to ensure that a plaintiff in a successful action for damages obtains a true measure of his loss, but no more, whereas (according to the plaintiffs) insolvency is a very different enquiry from the assessment of appropriate compensation. In support of their argument, the plaintiffs quote Hodgson J in Standard Chartered Bank of Australia Ltd v Antico (No 1 and 2) (1995) 38 NSWLR 290, 329: ‘The question is one of ability to pay, not the fact of payment’.
    1107 Furthermore, the plaintiffs contend that, in the application of the test, the banks have been selective and partisan by ‘cherry picking’ certain events in hindsight while omitting others as and when it suited their argument. The plaintiffs say that, properly analysed, the banks have not applied the hindsight test which they propound.
    9.2.5.2. Hindsight and the reasoning in Lewis v Doran
    1108 Looked at in one way, hindsight is a relatively straightforward concept: it is essentially a question of relevance. Put simply, facts occurring after the event that were not known or knowable at the determinative date cannot be applied in a later assessment of ability to pay as at that date, because they are not relevant. But that simple proposition belies the complexity that has arisen in this area.
    1109 In Lewis v Doran, at [108], Palmer J opined that when assessing retrospective solvency, the court has available to it ‘the inestimable benefit of the wisdom of hindsight’ aided by the whole picture, both before, as at and after the alleged date of insolvency. His Honour went on, at [112], to explain why it was ‘an inestimable benefit’:
    Where retrospective insolvency is in issue, the Court can take into account that as at and after the alleged date of insolvency the company actually paid all its debts as they fell due … The Court can look at the arrangements which were actually made rather than artificially excluding them from consideration … To look at what actually happened avoids the possibility that the Court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as a matter of fact, the company clearly did pay those debts. (emphasis in original)
    1110 Palmer J concluded that the company was in fact solvent at the relevant date, and the decision was affirmed in the Court of Appeal. But in his reasons in the Court of Appeal, Giles JA (with whom Hodgson and McColl JJA agreed), said, at [103]:
    Solvency or insolvency is a state on which directors or others act in current conduct … [the definition of solvency] speaks of objective ability to pay debts as and when they become due and payable, but ability must be determined in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight. There must of course be ‘consideration … given to the immediate future’ … and how far into the future will depend on the circumstances including the nature of the company’s business and, if it is known, of the future liabilities. Unexpected later discovery of a liability, or later quantification of a liability at an unexpected level, may be excluded from consideration if the liability was properly unknown or seen in lesser amount at the relevant time. (emphasis added, authorities omitted)
    1111 This passage indicates that hindsight can apply equally to the outflow as well as to the inflow side of the cash flow equation, although in this case I am primarily concerned with inflows. The plaintiffs contend that the Court of Appeal ‘expressly disapproved’ the reasons espoused at first instance, at least insofar as those reasons sanctioned the use of hindsight. I am not sure that this is so: see, for example, Giles JA at [118]. I do not think that Palmer J intended to make a sweeping and all-embracing statement about the use of hindsight as a principle in an assessment of solvency. As Giles JA pointed out at [95], Palmer J’s conclusion that the company was solvent was based on more than the simple fact that the company had paid its debts for a period after the relevant date. Palmer J was discussing the availability or otherwise of unsecured borrowings and the effect, if any, that the new definition of solvency in the Corporations Act has had on that question. In saying that, when assessing retrospective insolvency, the court has ‘the inestimable benefit of hindsight’, his Honour was merely confirming the position from previous authorities that have recognised that unsecured borrowings can, in certain circumstances, be included in an assessment of solvency. Those circumstances include a situation where there is sufficient evidence that they were in fact available (in the case of retrospective solvency) or would be available as a matter of commercial reality (in the case of prospective and retrospective solvency).
    1112 I do not think it is controversial that the issue of solvency is a question of fact that has to be determined in light of all the circumstances as they were known or ought to have been known at the time. Consequently, there are two issues to be determined.
    1113 The first issue that the court must determine is the prevailing circumstances at the relevant time (often referred to as ‘the commercial realities’ or ‘state of affairs’) upon which the directors acted. In other words, the trier of fact has to determine the actual state of affairs and in doing this she or he can consider any relevant event or fact (both before and after the relevant date) if it helps ‘throw a reflected light as to the actual state of affairs’: Bank of Australasia v Hall (1529) (Griffiths CJ).
    1114 Having determined the circumstances (or commercial realities) of the past the trier of fact must then move to consider whether or not, at the relevant date and under the circumstances referred to above, the company had the ability to pay its debts. This involves balancing existing debts with available assets and resources over a period of time.
    1115 In my opinion, Giles JA’s reference in Lewis v Doran to an assessment made ‘without the intrusion of hindsight’ means that, when determining the company’s ability to pay, it must be done according to the circumstances or state of affairs which were known or ‘knowable’ at the time. In other words, if an event or fact was either not in existence or was not properly knowable, it is impossible that anyone would have or should have considered it. That fact, therefore, cannot be relevant to an assessment of a company’s ability to pay. Giles JA at [95] gives an example (on the inflow side) of ‘a hopelessly insolvent person who wins the lottery’, and at [103] (on the liabilities side) of an ‘unexpected later discovery of a liability’.
    1116 In my view, a court can take into account facts available in hindsight (that is, after the determinative date of solvency) if the facts help determine which version of conflicting accounts as to the state of affairs is the more likely. The fact that an event actually took place might weigh in favour of the alleged expectation as being a commercial reality. But that fact alone is not determinative. It is one only of a host of matters that may intrude into the decision‑making process.
    1117 Consequently, the court can apply its knowledge of post‑event facts to determine whether the proffered expectations of the parties (the commercial realities with regard to cash flow) were or were not realistic. From there, the court can make an assessment of the company’s ability to pay. But the trier of fact cannot simply look at the facts in hindsight, determine the value of a particular asset or liability which could not have been anticipated at the time, and, without more, include that amount in a cash flow analysis.
    1118 I should not be taken as endorsing the entirety of the approach for which the banks are contending. The banks submit that the phrase ‘without the intrusion of hindsight’ (as used by Giles JA) is to be understood as a reference to the exclusion of matters that are supervening, unrelated or accidental (as discussed in the valuation cases) or that are events having no connection with the state of affairs as at the relevant date. This would include the example of the hopelessly insolvent person who wins the lottery. I think that the analysis places too narrow a construction on those words. It does not give sufficient ambit to the overriding question of relevance. To be admissible, the evidence must shed light on the state of affairs at the time and on what was, or ought then to have been, known about that state of affairs. For example, the reason why a later windfall from a lottery cannot be considered is not just because it is a supervening event, but because the event was properly unknown at the time and therefore can shed no light on the state of affairs.
    1119 Applying this conclusion to the situation with which I am confronted in this litigation, the phrase ‘circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight’ used by Giles JA would seem to encompass (in relation to the objective solvency):
    (a) documents which came into existence after 26 January 1990, but which record a state of affairs as at 26 January 1990 and which a reasonable observer looking at all of the circumstances would have appreciated; and
    (b) events occurring post 26 January 1990 that a reasonable observer at the relevant date, looking at all of the circumstances in which the company then found itself, would have considered likely to occur.
    1120 Because of the vagaries that inevitably attend such prognostications, I will approach evidence of events occurring after the relevant date with appropriate caution to ensure that it is not accepted simply because it happened.
    1121 In relation to subjective solvency, the trier of fact must make an assessment of the actual state of mind of the directors and, to the extent that the banks are said to have been aware of the insolvency of the companies, of the relevant bank officers. Ultimately, this state of mind is a question of fact which may or may not accord with the actual solvency of the company. To determine state of mind, the trier of fact can use facts available with the benefit of hindsight if those facts are relevant and ‘throw a reflected light’ onto the issue. But looking at what occurred with regard to payments is not, of itself, determinative.
    1122 In the preceding discussion, I have concentrated on Lewis v Doran, building, as I believe it did, on Bank of Australasia v Hall. There are other decisions that lend some support for the conclusion to which I have come. 3M Australia Pty Ltd v Kemish (1986) 190 ACLR 371; (1986) 4 ACLC 185, 191 ‑ 192 (Foster J) and Re Australian Co-operative Development Society Ltd [1977] Qd R 66, 75 ‑ 76 (Dunn J) are two such cases. Both stress the limited nature of permissible hindsight evidence and both express the need to approach such evidence with caution, as I have indicated I will do.
    9.2.6. The period over which the assessment extends
    9.2.6.1. An assessment period: the principles
    1123 A further question that arises is the period of time over which the assessment of solvency extends. Put another way, the question is whether, as at 26 January 1990, the company could have paid its debts as those debts fell due. This answer inevitably involves prognostication or a ‘degree of forward analysis’ (as Austin J called it in Re United Medical Protection Ltd at 719) to identify the debts that will become due and the resources that will be available at the time when each debt must be paid. But for how long into the future do you look? Is it one day, or one week, or one month, or one year? What is it that determines the length of the assessment period?
    1124 I will commence by referring, once again, to the reasons of Giles JA in Lewis v Doran and in particular to a passage from [103] that I have already quoted: ‘There must of course be “consideration … given to the immediate future” … and how far into the future will depend on the circumstances including the nature of the company’s business and, if it is known, of the future liabilities’. The words in double quotation marks are taken from passage from Bank of Australasia v Hall, where Griffiths CJ said, at 1528:
    The words ‘as they become due’ require… that some consideration shall be given to the immediate future; and, if it appears that the debtor will not be able to pay a debt which will certainly become due in say, a month… by reason of an obligation already existing… how can it be said that he is able to pay his debts ‘as they become due’ out of his own moneys? (emphasis added)
    1125 In Sandell v Porter, at 670 ‑ 671, Barwick CJ opined that the time period over which the court will consider the company’s ability to pay was relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor.
    1126 The banks contend that the court should look no further than the immediate future; that is, until the end of February 1990, which is approximately one month from 26 January 1990. Their alternative submission is that the court should look no further than the pleaded obligation of the Bell group to pay interest to bondholders in May 1990. The banks say that to look any further would be contrary to the guidance given in Bank of Australasia v Hall and be contrary to the need to confine the court’s consideration to the immediate future from the relevant date. The primary submission and the ‘guidance’ referred to in the alternative submission is, presumably, a reference to the words ‘in say, a month’ appearing in Griffith CJ’s reasons.
    1127 The plaintiffs advocate a consideration extending to May 1991. They say that the phrase ‘immediate future’ means the reasonably immediate future. This can only be judged in the light of circumstances as they exist at the snapshot date. In this case, bearing in mind the circumstances faced by the Bell group companies on 26 January 1990, projecting forward to May 1991 can be characterised as ‘the reasonably immediate future’.
    1128 This is quintessentially an area in which each case must be determined according to its own peculiar circumstances. I do not think much can be taken from a passage specifying a particular time period (as opposed to a general statement of principle) in a 1907 case, even when the guiding hand is Sir Samuel Griffiths’. Many of the cases referred to by the parties in submissions regarding issues of timing relate to a winding up order; that is, cases of ‘prospective insolvency’. In that situation, a court must be mindful of the fact that a company’s circumstances may change for the better, and to conclude hastily that a company is insolvent can have dire consequences. The financial difficulties may, for example, be temporary and might be amenable to cure by a successful restructuring. A court will, however, be reluctant to look too far into the future because there are so many unknowns and contingencies. As a consequence, a court may be inclined to limit the analysis to a future which is on any view ‘immediate’.
    9.2.6.2. Applying those principles to this case
    1129 The banks suggestion that the enquiry should stop at the end of February 1990 was, in my view, one of the more ambitious submissions made during the hearing. The plaintiffs contended that the appropriate period was through to the maturity date on the facilities, that is, 31 May 1991. That is not quite as audacious as the banks’ position, but I think it is too far into the future. The plaintiffs’ fall back position was through to 31 May 1990. I have come to the view that the relevant period over which the assessment should extend is, in the circumstances confronting the Bell group companies, approximately 12 months. This takes the period through to the end of 1990. But the primary focus of attention will be on the period from 26 January 1990 until the end of May 1990. A fully reasoned explanation as to why I have come to this conclusion will emerge as the facts of the case are subjected to more scrutiny. But I can give a summary of the reasoning process which has led me to this conclusion.
    1130 The balance sheet of TBGL, as at 31 December 1989, showed total assets of $1.3 billion and total liabilities of $955 million. The press announcement that accompanied the release of the balance sheet disclosed an operating loss of $125 million on total operating revenue of $202.4 million (down from $1.9 billion in the previous corresponding period). The Bell group was, on any view, a significant commercial venture. It has to be borne in mind that in January 1990 it still graced the boards of the ASX as a listed public company and it still had a presence in several jurisdictions.
    1131 By January 1990 the only substantial operating business was the publishing arm. Save for February 1990, the publishing businesses were projected to have a solid positive cash flow and recurrent trade creditors were therefore covered. The other significant asset, the BRL shares, was in effect a passive investment and not likely to involve further outflows, save for restructuring costs or (if necessary) costs associated with recovery action against BCHL over the deposit on the brewery transaction. From September 1989 BGUK had effectively been in a wind down scenario. All remaining external assets were being sold, no new business undertakings were being entertained and various companies were being wound up or were dormant. In January 1990, the known or anticipated liabilities of TBGIL were covered by the arrangement to retain part of the Bryanston sale proceeds.
    1132 Leaving to one side the income tax assessments, the known recurrent expenses were the monthly bank interest and the bondholder interest in May, July and December 1990. It is not part of the plaintiffs’ case that the directors should have known, in January 1990, how they were going to refinance the principal of the banks’ facilities in May 1991. The next bondholder interest payment (after the December 1990 commitment) was due in May 1991, at about the time when the bank debt would have to be repaid or refinanced.
    1133 Aspinall testified that there came a point in late 1989 or early January 1990 when he appreciated that ordinary business activities could be continued by the sale of the assets alone for a limited period only. He believed that the Bell group had ‘non core’ assets which could be sold, which gave him about 12 months to organise a restructuring of the group. The 12-month period (roughly) is referred to in a contemporaneous communication. In a note from the then Director of Finance (Tom Garven) to Aspinall dated 20 February 1990, the author said: ‘If we retain all proceeds from asset sales and are fully paid our loan balances by [BCHL] and [JNTH] we will have enough cash to last until 31/12/90’. The underlining appears in the original document.
    1134 Mitchell realised that the critical times for the Bell group for cash flow at that time were the due dates for bank and bondholder interest payments. I am not sure that the period of 12 months within which to effect a restructure was ever put squarely to Mitchell. But Mitchell did say that in January 1990, while he had not personally reviewed accounting information of the Bell group, he ‘did have a general knowledge of where the Bell group was at in terms of its income and its obligations over the next few months’ (emphasis added). He also realised that it was not possible to carry on indefinitely using asset sales to cover interest shortfalls.
    1135 I accept that Aspinall believed he had about 12 months in which to restructure the group. By that I mean that if a restructure could not be effected within that time, the failure of the group was all but certain. It seems to me that it would be reasonable to allow a 12‑month period within which to effect a wholesale restructure of the finances of a commercial operation the size and complexity of the Bell group. But this assumes that the group could have continued as a going concern for so long as it took to complete the reorganisation. The fact that I have accepted the 12‑month time frame does not carry with it a finding that the companies were, or would be, solvent during that period.
    1136 The banks’ submission comes perilously close to saying (in effect): ‘all we have to worry about is our ability to meet commitments due in the next 35 days; don’t worry about the $40 million or so we know we have to pay in interest in the ensuing three months, that will take care of itself’. In my view, that would stretch beyond breaking point even the most elastic understanding of the term ‘commercial reality’. If it be the case that a ‘sink or swim’ restructure (my words) had to be put in place, and that 12 months was a reasonable estimate of the time it would take to do so, extending the assessment over the entire period of the mooted restructure would be consistent with commercial reality.
    1137 I accept that the greater the period of the assessment, the greater the uncertainties and contingencies that can intrude. As the uncertainties and chance of contingencies increases, so too does the possibility that the entire picture will change. I am not suggesting that there are no uncertainties within the 12‑month period. Whether, and if so to what extent, a brewery deal could be put in place is one example. But the longer the period, the more unreliable the prognostications are likely to become. It seems to me, therefore, that to take the assessment beyond the 12‑month period would involve unacceptable speculation. This is especially so, given that the final weeks or months of that period would coincide with a time when, in the normal course, the refinancing of the bank facilities would have been a live issue.
    1138 It is for these reasons that I believe that a period of about 12 months (but with the primary focus being on the period to 31 May 1991) is reasonable in the circumstances in which the Bell group found itself in January 1990. I am here speaking about the reasonableness of the assessment period. Whether or not it was reasonable to believe that the companies could survive for that long, or that a restructure could be effected within the designated time, is a different question.
    9.2.7. Illiquidity: endemic and temporary
    1139 As Barwick CJ said in Sandell v Porter, at 670, ‘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’. In Southern Cross Interiors, at 225, Palmer J drew a distinction between ‘surmountable temporary illiquidity’ and ‘insurmountable endemic illiquidity’. The former does not necessarily connote insolvency, while the latter does.
    1140 While labels can be misleading, I think that the language of temporary and endemic illiquidity is appropriate to describe the task that confronts me. No‑one has argued that, immediately prior to 26 January 1990, the Bell group companies were flush with funds and ready take the business world by storm. Indeed, the opposite is the case and it was common ground that had the Transactions not occurred, winding up may well have followed. The banks concede that the financial position of the companies at that time was one of ‘tight liquidity’. The plaintiffs, on the other hand, rely on the allegation of endemic illiquidity in support of their alternative plea that there was an inevitability of insolvency. I must say I am attracted to the phrase ‘insurmountable endemic illiquidity’ as a convenient description of a financial state that amounts to insolvency as defined in the authorities and the statutes.
    1141 This is a factual question and no point would be served by an analysis of the authorities that have used similar language. The question is also inextricably linked to the concept of a valid and effective restructuring. The plaintiffs contend that the insurmountable endemic illiquidity which would have resulted in the inevitable insolvency of the Bell group companies was apparent by 26 January 1990 from:
    (a) its forecast continuing cash flow deficiencies;
    (b) the substantial disconformity between its recurrent cash inflows and recurrent liabilities;
    (c) the deterioration in value of its assets;
    (d) the disconformity between the profits from its only operating business and its overall interest expense;
    (e) the pattern of overall losses continuing to be incurred through 1989 and 1990; and
    (f) the deficiency of assets to liabilities as shown in the consolidated valuation SNA for the Bell group companies, including the substantial deficiency of current assets to current liabilities.
    1142 The plaintiffs say that any beliefs of the directors that a restructuring was possible were at best speculative and were vague hopes which had no realistic basis. The banks say that the companies were not insolvent, but that it was necessary to restructure the financial opposition. The Transactions were a necessary first step in the restructuring process: they gave the directors time to embark on that course.
    1143 The notion of ‘restructure’ is one that is well known in corporate circles. Some of the larger legal and accounting firms use the nomenclature ‘Insolvency and Restructuring’ or ‘Corporate Advisory and Restructuring’ to describe work groups or divisions within the practices dealing with businesses under stress. It cannot be defined and covers a plethora of possibilities through which a business entity is reconstructed, rebuilt or rearranged (either wholly or in part) through formal or informal administrations. Given the financial circumstances facing the Bell group companies in late 1989 and early 1990, it comes as no surprise that the parties agree a ‘restructure’ was necessary. But whether a feasible plan had been, or could be, developed, is something on which the parties take diametrically opposed positions.
    1144 I will deal with the restructure argument in detail in the section covering the breaches of duty alleged against the directors.
    9.3. Adverse financial states other than insolvency
    1145 The plaintiffs plead that certain Bell Participants were insolvent by 26 January 1990; or alternatively that they were nearly insolvent or of doubtful solvency, and would inevitably become insolvent. Further or alternatively, the plaintiffs plead that each of those Bell Participants, and each of BPG, Western Interstate and Wanstead, became insolvent or inevitably would become insolvent upon entry into or as a consequence of entry into the Transactions and the Scheme.
    1146 The phrases ‘nearly insolvent’ or of ‘doubtful solvency’ probably do not need much explanation. Similar phrases have been used in the authorities: see the cases referred to in Sect 20.3.3.6. ‘Approaching insolvency’, ‘impending insolvency’ and ‘marginal insolvency’ are to much the same effect. The notion has both a temporal and a quantitative aspect. I note in passing that the phrase ‘near insolvency’ appears in the report issued by the Corporate and Markets Advisory Committee entitled Rehabilitating Large and Complex Enterprises in Commercial Difficulties (October 2004) 28 and 112, in a context that gives it a similar meaning to ‘insolvency’ for some purposes.
    1147 I have had greater difficulty with the phrase ‘would inevitably become insolvent’. As a matter of grammar and of logic, the phrase ‘would inevitably become insolvent’ operates in the future. Accordingly, it must mean that as at the snapshot date, the entity is solvent. If that were not the case, it is difficult to comprehend how, at some time in the future, it could ‘become insolvent’.
    1148 Take a hypothetical example. A company has one asset, namely $2 million in cash on deposit, and it has a debt of $3 million that it is paying off at the rate of $1 million per month on the last day of each month. Assume that the company has no capacity to borrow money (so cannot increase the asset base of $2 million) and has no other income or source of funds. It seems to me that as at the snapshot date and looking three months ahead, the entity is insolvent. This is because it is known that in the third month the final instalment on the debt repayment schedule cannot be met. I do not think it would be correct to say that for the first two months the entity is solvent because it can meet the instalments due in that period, but that it would inevitably become insolvent in the third month.
    1149 The problems are illustrated by a further example. Using the same basic figures, add a further asset, namely, a piece of real estate that is readily saleable within a three‑month period for a net return of somewhere between $0.75 million and $1.25 million. A value judgment would have to be made as to whether the property would fetch $1 million or more. If it would, the entity is solvent. If it would not, the entity is insolvent. In terms of the test that is relevant for this case, I doubt it would be correct to say that the entity would inevitably become insolvent unless the property could be sold within three months and for a net return exceeding $1 million. If the view were to be formed that the property could not be sold within three months or that it would not reach $1 million, it would thereupon be insolvent.
    1150 It seems to me, therefore, that the phrase ‘would inevitably become insolvent’, as it is used in 8 ASC par 21A, par 24B, par 25B, par 26B par 27B and par 28B, has little meaning other than as describing a financial state short of actual insolvency. If this is correct, I doubt that there is much work for it to do that is not already encompassed within the phrases ‘nearly insolvent’ or ‘of doubtful solvency’. The phrase also appears in 8ASC par 29B. I have little difficulty in understanding it in that context because there it refers to insolvency arising as a consequence of the relevant companies entering into the Transactions and the Scheme.
    1151 I do not think this does serious damage to the plaintiffs’ case because their primary contention is that as at 26 January 1990 the companies were actually insolvent. The work to be done by the pleas of near insolvency, doubtful solvency and ‘would inevitably become insolvent’ (assuming I am correct in characterising the last of these as another way of describing a financial state short of actual insolvency) is to mould the content of the directors’ duties to the companies. As I will explain later, the content of the duties may change where the financial state amounts to an insolvency context: see, for example, Sect 20.3.3. Those phrases may also have a significance when it comes to assessing the state of knowledge that the banks had as to the financial state of the companies: see 8ASC par 50 to par 56; Sect 30.6.1.
    9.4. Bell group cash flow statements
    9.4.1. Cash flows: some general comments
    1152 A cash flow statement can be described as a statement of movements of cash, in and out, of an entity resulting from transactions with third parties. The major elements of a cash flow statement are cash flow from operations, from other sources and from applications. Reporting entities have always been obliged to comply with the relevant accounting standards in the preparation of their accounts. Under the Companies Codes and the Corporations Law (until 1998), ‘accounts’ were defined to include profit and loss and balance sheet but there was no mention of cash flow statements. But during the 1980s, the relevant accounting standard (ASRB 1007) included reference to a statement of source and application of funds and it was customary for a reporting entity to include such a statement in its financial reports: see, for example, the TBGL 1987 Annual Report note 28. In 1998, AASB 1026 (which had effectively replaced ASRB 1007) was reissued and s 295 of the Corporations Law was amended to make specific reference to a cash flow statement as part of the annual financial report of a reporting entity.
    1153 As I understand it, the difference between a cash flow statement simpliciter and a source and application of funds statement, is that the latter includes ‘cash equivalents’ as well as cash. ‘Cash equivalents’ are highly liquid investments with short maturity periods, readily convertible into cash at the option of the holder, and subject to insignificant risk of valuation change. The regime under AASB 1026 includes ‘cash equivalents’ in cash flows but that is not material for present purposes.
    1154 In the period with which we are concerned in this case (1988 to 1991), cash flow statements (as distinct from the source and application of funds statement mandated by ASRB 1007) were primarily prepared for internal management reasons rather than for external reporting.
    1155 I have been able to extract from the evidence some general propositions about which the expert witnesses were in broad agreement. Cash flow forecasts are a tool used by management to predict future cash flows for business planning and treasury management purposes. In a large commercial operation, such as the Bell group, cash flows are generally prepared by in‑house accounting staff and presented to the directors and senior management. There may be matters affecting cash flows that are known to directors and senior management but that are not known to the accounting staff. The statements reflect the expectations of the person preparing the forecast at a specified time, based on a particular set of assumptions. Cash flow forecasts cannot reflect all possible alternative scenarios that may be under consideration by the directors of a company. Rather, they reflect the expectations of what the cash flow outcome is likely to be, given a particular set of assumptions.
    1156 While a cash flow forecast is a static document (representing the outcome anticipated at a specified time given a particular set of assumptions), cash flow management is a dynamic process. Accordingly, as part of cash flow management, the assumptions underlying cash flow forecasts may vary over time as management and directors respond to emerging issues that have an impact on the entity’s cash flow. Once the forecast has been made, management monitors the implementation of plans, reflected in the estimates and changes in circumstances that have an impact on cash flow. As part of the monitoring process, management must respond to significant variances from the forecast by revising and updating plans and estimates in relation to asset realisation, revenue generation and expenditure. This may lead to an updated or amended cash flow forecast based on a revised set of assumptions and on any adjustments to plans that management might make.
    1157 Cash flow management, therefore, takes place on an ongoing basis. An assessment of an entity’s capacity to manage its cash flow requirements over an extended period based on a cash flow forecast at a specified time will necessarily be limited. It is unlikely that the forecast itself will reflect the role of management in managing cash flow through developing strategies and plans in response to changing circumstances. The extent of management effort devoted to managing cash flow and the frequency with which cash flow forecasts are updated will depend on myriad factors many of which will be peculiar to the circumstances of the business entity concerned.
    1158 The plaintiffs submit that the cash flows prepared by the Bell group ‘demonstrated’ that by 26 January 1990, the group, on a consolidated basis, was unable to pay its debts as and when they fell due out of projected cash flow. I think that is too broad a statement. The various cash flow statements are critical features of the insolvency case and I have already noted their significance: see Sect 7.2.4. But they are part only of the factual matrix in which the decision concerning solvency falls to be made. They are not, of themselves and by themselves, determinative of the issue. As the recitation of the general principles governing cash flow statements demonstrates, the forecasts will usually be the work of accounting staff members and may not necessarily incorporate all sources of funds known to senior management and the directors. And the assumptions on which the forecasts are based can change from time to time.
    1159 In saying that, I do not underestimate the importance of the cash flows prepared by or within the Bell or Bond structures in this period. The plaintiffs contend that it should have been obvious to anyone perusing these documents that the companies did not have sufficient funds to meet their commitments. Secondly, they showed the steadily worsening financial position of the group. The banks (in their cash flows) have also included some items that do not appear in any of the cash flows prepared by the companies before January 1990. These additional items are a significant part of the banks’ case that the companies were not insolvent as at 26 January 1990. I accept the broad thrust of those submissions as to the importance of the cash flows. Indeed, as will been seen later, I have prepared my own cash flow analyses to gauge the effect of findings that I have made concerning the contentious items.
    9.4.2. Preparation of cash flows
    1160 I will commence by making some more detailed comments about the way in which cash flow statements were prepared within or for the Bell group over time.
    1161 The accounting staff member primarily responsible for the preparation of the cash flows was Brenton Walkemeyer. He joined the Bell group in 1984 as an internal auditor. From April 1987, he worked at Bell Corporate, which functioned as the head office for all Bell group companies. This division was responsible for the overall accounting system of the group. Shortly after the October 1987 stock market crash, Walkemeyer assumed responsibility for management accounting, including the preparation of cash flows for the Bell group.
    1162 After the BCHL takeover of the Bell group in August 1988, and through to 19 January 1990 (when he was retrenched), Walkemeyer continued to take responsibility for management reporting. During this period he worked under Peter Dennis, the chief accountant in Bell Corporate, and also under the guidance of BCHL officers, Mike Issakov and Chris Bennett. They ran the financial section of the BCHL group under the supervision of Oates. Walkemeyer was ultimately responsible to Aspinall once Aspinall became managing director of the Bell group. He had very limited contact with Aspinall, but both Dennis and he were involved regularly with Simpson. Walkemeyer said he seldom, if ever, spoke to Mitchell or Oates.
    1163 At some time after August 1988, Walkemeyer was told by Issakov or Bennett that BCHL was preparing consolidated cash flows for all the companies in the BCHL group, including Bell. They would need a consolidated cash flow for the Bell group companies in the standard BCHL format so that it could be incorporated into the overall group cash flow document. A new cash flow format was subsequently adopted. Cash flow forecasts were often prepared using different time frames, although they were still in the BCHL format.
    1164 Walkemeyer explained the system used within the Bell group for preparing the cash flows. In order to prepare the consolidated cash flows, he collected information sent to the Bell Corporate office by the accountants in the various divisions. The information he received included actual cash flow results for the year to date, cash flow forecasts for the relevant period and other matters such as prospective transactions that were yet to be quantified. The information was usually provided on a weekly basis. The divisions from which information was received were Bell Corporate, Bell International (the BGUK group), Bell Publishing, Wigmores, Albany Broadcasters, Western International Travel, Q‑Net and Bond Communications.
    1165 Walkemeyer testified that his role was to record the information with which he was provided. If the information he was given was not correct, the cash flows would reflect the inaccuracy. He said that he did not review primary source documents, such as contracts. Items were included or excluded by him on the basis of the advice of accountants in the various divisions or, in the case of Bell Corporate, on the basis of instructions of senior Bell Corporate or BCHL officers.
    1166 Aspinall’s evidence was that he formed the view commencing in July 1989 that the only way for the Bell group to survive was to ‘de‑Bond it’, in other words to disassociate the Bell group from BCHL ‘and untangle the web so to speak’. The phrase ‘de-Bond’ is, in itself, interesting. Aspinall testified that it was a phrase he used at the time (1989 and 1990) but he was not aware of it being used by others. In fact, he testified, ‘people didn’t like me using it’. The phrase also appears in a note made by Ian Smith (CBA) after he attended a meeting on 22 February 1991 between representatives of the Australian banks and LCAS concerning a restructure proposal. I could not find any other references to ‘de‑Bonding’ in the evidence adduced at trial.
    1167 When Aspinall became managing director of TBGL, he continued to pursue the goal of ‘de‑Bonding’. From 2 January 1990, the operations of the Bell group were removed physically from the BCHL offices and installed in the Forrest Centre on St Georges Terrace; this was part of the ‘de‑Bonding’ process. From that time on, all of the accounting and financial functions (including cash forecasts) of the Bell group entities were conducted within the Bell group itself. During and after January 1990, responsibility for the preparation of cash flow forecasts fell to Garven, who had previously been the finance director for BPG. During January 1990 the format of the cash flow statements changed, indicating the transfer of responsibility for their preparation from BCHL to TBGL.
    1168 As a matter of format, each of the relevant cash flows commenced with a spreadsheet setting out the inflows, outflows and balances for the consolidated group and notes identifying assumptions such as exchange rates and interest rates. The pages that followed were separate spreadsheets for the individual divisions, such as Bell Corporate, Bell Publishing, Bell International, Wigmores and so on. The spreadsheets for individual divisions (other than the Bell Publishing) were not included in the tendered copies of some of the statements prepared in January 1990. Several cash flows covered different time frames and were based on differing reporting intervals (daily, weekly, monthly or quarterly).
    9.4.3. The relevant Bell group cash flows: July 1989 to February 1990
    9.4.3.1. Identifying the cash flow statements
    1169 In the discovery process for the litigation, 191 cash flow forecasts prepared between January 1989 and March 1992 were identified. In the period between July 1989 and February 1990, 36 cash flow statements were prepared for the group. Some, but not all of them, were distributed to the banks. The cash flow statements are relevant for at least three purposes. First, they are part of the factual matrix from which the issue of objective insolvency falls to be determined. Secondly, as they were part of the financial information available to the directors, they are relevant to the state of knowledge possessed by the directors and thus to the issue of subjective insolvency. Thirdly, as some of them were distributed to the banks, they reflect the state of knowledge possessed by the banks about the financial position of the companies. In the next few paragraphs, I will identify the cash flow statements that are of particular significance in this litigation and the reasons why they are significant.
    1170 Two cash flows were prepared and dated 1 July 1989; one of them was distributed to all the banks other than HKBA and the other seems only to have gone to HKBA. I will refer to the first of them as ‘the 1 July cash flow’. Another statement was prepared and dated 4 September 1989; I will refer to it as ‘the September cash flow’. It was distributed to all banks. It is significant for a number of reasons. First, it was the last Bell group cash flow provided to the banks prior to 26 January 1990. Secondly, it was relied on by Garven when he came to prepare the document that I will shortly define as ‘the Garven cash flow’. The latter was presented to a meeting attended by representatives of the banks on 22 and 23 February 1990.
    1171 Cash flows dated 29 September 1989, 11 October 1989, 1 December 1989 and 4 January 1990 were also prepared. There is no evidence that these were given to the banks. The plaintiffs say that these statements are significant because they disclose a deterioration in the financial position of the group.
    1172 The next forecast was prepared by Walkemeyer in January 1990 and is called ‘the undated January cash flow’. It was not provided to the banks but is significant because it was relied on by Honey in preparing his cash flow (see Sect 7.2.4) and by the banks in their particulars.
    1173 A forecast called ‘the 19 January cash flow’ was probably the first to be prepared after the transfer of responsibility back from BCHL to TBGL. It follows a different format to those prepared in 1989 and early January 1990 and is significant for a number of reasons. First, it is very close (in time) to 26 January 1990. Secondly, it is one of the three baseline cash flows utilised by Woodings in the preparation of the Liquidator’s cash flows which, in turn, formed the basis for the Love cash flows: see Sect 7.2.4. Thirdly, it is one of the cash flows particularised in the defence underlying the Australian directors’ beliefs as to the cash flow position of the companies.
    1174 A further cash flow was prepared on 26 January 1990 and it will bear that name. It bears the same the date as the date on which ABFA, ABSA and LSA No.2 were executed. It is the second of the baseline cash flows utilised by Woodings in preparation of the Liquidator’s cash flows.
    1175 On 7 February 1990, the Australian directors held a meeting. A cash flow was tabled at that meeting but it is difficult to identify that document amongst the tendered exhibits. As will appear later, the minutes of the meeting refer to a discussion about the cash flow and the ‘$10 million deficit’ disclosed by it. I was unable to identify, in any of the tendered exhibits, a deficit in that amount. This suggests that the cash flow discussed at the 7 February 1990 meeting was not one of the ones that I have listed in this section of the reasons. The directors resolved to instruct Garven to liaise with the Treasury division in the preparation of a more detailed cash flow for the group through to 30 June 1990. The result was ‘the 16 February cash flow’.
    1176 The last in the series is a cash flow dated 19 February 1990. It was prepared by Garven and is a more refined version of the 16 February cash flow. The copy introduced into evidence has a covering note headed ‘Summary of Cash Flow Projections’ dated 21 February 1990 and a schedule entitled ‘Academy No 2 Sale Proceeds’. These documents are together referred to as ‘the Garven cash flow’. To avoid confusion, I should mention that, during the hearing, this cash flow spreadsheet was sometimes identified as bearing the date 21 February 1990. The Garven cash flow was presented to the banks at the meetings held in Perth on 22 and 23 February 1990. It was the third of the base line forecasts utilised by Woodings in the preparation of the Liquidator’s cash flows. It was also used by Honey in putting together his cash flow. And it is one of the cash flows set out in the particulars to the defence as reflecting the Australian directors’ beliefs.
    1177 Some adjustments have to be made to enable a direct comparison between the several forecasts. Of the most relevant ones, the 1 July, September, 19 January, 26 January, 16 February and Garven cash flows are cumulative; that is, they add the income or expenditure for each month on to the total of the previous months to arrive at an escalating total. The 4 January and undated January cash flows are discrete; that is, each monthly total stands alone, although there is a separate cumulative total for each row of figures. The plaintiffs prepared documents (the accuracy of which I accept) that re‑cast the 4 January and undated January cash flows on a cumulative basis to facilitate comparison. To do so, it was necessary to make a further adjustment to the 4 January cash flow because it does not include an opening cash balance. In the re‑casting process, the plaintiffs took the opening balance from the TBGL consolidated half‑yearly accounts for 31 December 1989 (negative $4.633 million). In preparing his cash flow, Honey adopted the same approach.
    1178 I have attached as Annexures (see Schedule 38.24 ‘E’ to ‘J’ respectively), copies of the summary page (that is, the consolidated statement) from each of the 1 July, September, undated January, 19 January, 26 January and Garven cash flows.
    9.4.3.2. The style and content of each cash flow
    1179 In this section I do not intend to discuss all of the cash flows. I will describe the 1 July cash flow because it was distributed to all of the banks (except HKBA). Other than that, I will mention only the cash flow statements that were relied upon by the expert witnesses in the preparation of their respective documents. I will identify (without comment) how the several disputed cash flow items were treated in each of them. To save me repeating it on each occasion, none of the statements prior to the Garven cash flow provided for receipts from the sale of Bell Press, the New York apartment or Q‑Net or from the ITC contract payment. Collection of Bond receivables does not appear before the undated January cash flow.
    1180 The 1 July cash flow gave totals for each month from July 1989 to June 1990, and thereafter at quarterly intervals through to 30 June 1991. The monthly or quarterly closing cash balances are negative in July 1989 ($3.2 million) and October 1989 ($0.67 million) but are otherwise positive; the highest positive figure was $12.55 million in April 1990. The June 1990 and June 1991 figures were, respectively, $6.35 million and $11.06 million. These balances were arrived at by including management fees and dividend income for BRL and JNTH, dividends from GFH and the Bryanston proceeds with an aggregate total of $109.2 million in the year ending 30 June 1990. On the other hand, they also provide for facility maturity repayments of $30 million by June 1990 and a further $30 million by June 1991.
    1181 The September cash flow also gave totals for each month from July 1989 to June 1990, and thereafter at quarterly intervals to 30 June 1991. It showed negative closing cash balances for July 1989 to September 1989 and positive balances for each month or quarter through to June 1991. There was a negative balance of $4.18 million in September 1989. The highest positive figure was $39.25 million in November 1989. The June 1990 and June 1991 figures were, respectively, $29.6 million and $30.9 million. As with the 1 July cash flow, these balances were arrived at by including management fees and dividend income for BRL and JNTH, dividends from GFH and the Bryanston proceeds with an aggregate total of $123.5 million in the period ending 30 June 1990. This document also provided for facility maturity repayments of $30 million by June 1990 and a further $30 million by June 1991.
    1182 The undated January cash flow shows monthly amounts for the 12 months from January to December 1990. When adjusted to show cumulative figures, it shows a spike in April 1990 representing a short‑lived projected positive cash balance ($5 million) for that one month. It then shows a closing cash balance deficiency in May 1990 of $11.8 million. All balances are negative to the end of the cash flow period, so that by December 1990 the accumulated deficiency is $32.2 million. Cash inflows in the statement include Bond receivables, the Bryanston proceeds and JNTH preference dividends totalling about $45.6 million.
    1183 The 19 January cash flow shows weekly figures from 22 January to 25 May 1990, and then monthly to January 1991. The closing cash balances are all negative: $11.2 million at the end of January 1990, $24.1 million by 2 March 1990, $49.2 million in June 1990, $72.3 million in December 1990 and $75.1 million in January 1991. The statement includes BRL and JNTH preference dividends and receipts from Bryanston.
    1184 The figures in the 26 January cash flow are daily to the end of February, weekly to the end of May and monthly from June 1990 to January 1991. Again the closing cash balances are all negative: $10.3 million at the end of January 1990, $24.2 million by 2 March 1990, $49.4 million in June 1990, $72.4 million in December 1990 and $75.2 million in January 1991. Receipts from BRL or JNTH are shown. It is the first of the cash flows to provide for costs associated with the refinancing ($5.1 million on 30 January 1990).
    1185 The spreadsheets in the Garven cash flow show monthly figures through to May 1991. They, too, indicate negative closing cash balances starting with $11 million at the end of February 1990, $25.2 million by June 1990, $58.4 million in December 1990 and $87.7 million in May 1991. The outflows include $3 million for refinancing costs and $3.8 million for interest due to the banks at the end of February. The inflows include preference dividends from BRL and JNTH. In the summary attached to the spreadsheets, the author highlights the differences between the projections and those set out in the September cash flow. The result is a deterioration in the cash position of $154 million, partly offset by the removal from outflows of $60 million in facility maturity payments over the period. The differences are shown in Table 6.
    1186 In the summary, Garven went on to say ‘summarising the position shown in the cash flows, Bell group can generate sufficient cash from asset sales and loan repayments to support the existing debt structure through to 31/12/90’. The additional sources of cash (identified in the summary but not included in the spreadsheets) totalled $53.9 million, were made up as follows:
    • Bell Press proceeds $24.3 million
    • Q-Net proceeds $7.5 million
    • Bond receivables $22.1 million
    1187 The figure of $53.9 million is significant. The spreadsheets show a closing cash balance in December 1990 of negative $58.4 million. The additional sources of cash together with the WAN overdraft of $5 million seem to correspond with that deficit.
    Table 6
    CHANGES: SEPTEMBER CASH FLOW TO GARVEN CASH FLOW
    Inflows removed Management fees (BRL and JNTH) ($42.9 million)
    Dividend income (BRL, JNTH and GFH) ($88.7 million)
    Bryanston proceeds ($32.1 million)
    Outflows added Refinancing costs ($7.3 million)
    Inflows added ITC contract payment $17 million
    Changes ($171 million) $17 million
    Net change ($154 million)

9.4.3.3. Significance of the closing cash balances
1188 In my view, if regard were to be had to the spreadsheets, and only the spreadsheets, there could be little doubt that the companies were insolvent as at 26 January 1990. The closing cash balances are telling in this respect. The plaintiffs prepared a line graph of the closing cash balances in selected spreadsheets over the period without making adjustments for the disputed cash flow items. I accept the accuracy of the graph.
1189 The graph shows that almost all of the closing cash balances are positive in the September cash flow and in the forecasts of 29 September and 11 October 1990, although the positive balances are generally smaller in each of the latter two forecasts than they were in the September cash flow. But (with the exception of one spike mentioned earlier) all of the closing cash balances are negative in each of the 4 January, undated January, 19 January, 26 January and Garven cash flows. And the deficit is material: it could not have been cured by raiding the petty cash tin. If the continuing, continuous and material negative balances shown in the spreadsheets had been a complete and accurate reflection of the financial position, the companies could not have paid their debts as the debts fell due. They would have been insolvent.
1190 If only it were that simple. A conclusion of insolvency based solely on the spreadsheets would offend the principle that insolvency relates to individual entities rather than to a group of companies. And it would ignore other sources of funds and changing circumstances that have the potential to alter the picture. The banks say that there were numerous additional sources of funds and that, when they are taken into account, a completely different (and much more benign) picture emerges. On the other hand, the liquidator prepared a document in which he made some adjustments to the September cash flow and then subjected the forecast to sensitivity analyses. The plaintiffs say that this exercise demonstrates that, with even minor adjustments, the situation was much worse than disclosed in the September cash flow.
9.5. The parties’ cash flow statements
9.5.1. Importance of the parties’ cash flow materials
1191 In Sect 7.2.4, I identified the various predictive cash flows prepared by the parties for the purpose of this litigation. I have attached copies of the summary sheets of Cash Flow 1 (short form), Cash Flow 2 (short form) and the Honey Cash Flow as Annexures: see Schedule 38.24 ‘K’, ‘L’ and ‘M’ respectively.
1192 In Sect 9.2.1, I explained the balance sheet and cash flow tests for assessing solvency. Risking all of the heresies to which generalisations can give rise, it is possible to present a broad summary of the Bell group financial position in January 1990. Leaving to one side the recurrent trade creditors of the publishing businesses and the disputed cash flow inflow items, the Bell group had liabilities of about $800 million: $260 million to the banks and $540 million to the bondholders. It had two significant assets: the publishing businesses and the BRL shares.
1193 On a balance sheet basis, if the combined value of the publishing businesses and the BRL shares was in excess of $800 million, and assuming that the group could support the servicing costs of the liabilities and continue as a going concern through to the maturity of those liabilities, then the companies were solvent. The valuation of those two assets is a significant factor in the balance sheet insolvency case. But therein lies the rub: could the group muster sufficient cash to cover the servicing costs of the liabilities so as to continue as a going concern? This brings into play the cash flow test of insolvency. As I have already said, in Australian jurisprudence, and in commercial practice generally, the cash flow test is the primary indicia of insolvency. This is certainly so in the circumstances in which the Bell group found itself in January 1990.
1194 Both parties expended considerable effort in subjecting the contemporaneous Bell group cash flows and other financial material to analysis and scrutiny by experts. The result was a series of cash flow statements produced by the experts and tendered as evidence (along with explanatory reports) to support the respective contentions that the relevant companies were or were not insolvent. This is not the entirety of the evidence adduced by the parties relating to the financial and valuation matters. For example, both parties led evidence concerning the value of the publishing assets and one of the plaintiffs’ experts testified as to the value of the shares in BRL, JNTH and GFH. I will deal with those matters elsewhere in the reasons. Here, I am only concerned only with the movements of cash and other liquid assets as a pointer to the state of solvency of the companies.
1195 The banks submitted that I should approach the cash flow allegations in a holistic manner. It is for the plaintiffs to prove that, having regard to all the available resources of the Bell group, the companies were unable to pay their debts as and when they fell due. They submitted that the court should not engage in the production of its own cash flow, including or excluding individual items, based on a separate determination on each disputed item. Such an approach would divert attention from the onus that the plaintiffs bear in establishing the requisite inability to meet liabilities as they fell due having regard to the overall resources available to the Bell group. Such an approach would also suggest that the exercise could be reduced to a mathematical equation of scientific accuracy. Commercial solvency or insolvency, according to the banks, is not susceptible to such an exercise in other than the most obvious or uncomplicated situations.
1196 I accept that I must approach the question in an holistic manner. And I agree that commercial solvency is not susceptible of determination as a precise scientific fact. It involves matters of judgment. But I can see no alternative to a line‑by‑line examination of the cash flows to determine whether and, if so when, debts arose for payment and whether, and if so when, sources of cash (from which those liabilities could be met) would materialise. As I have already indicated, part of the holistic approach will be to look at what actually happened. But that is not determinative and hindsight can assist only in a limited way: see Sect 9.2.5.2.
1197 In the end, I think the only feasible approach is to reconstruct the relevant cash flows based on findings of fact. The reconstructed cash flows are not themselves evidence and they cannot establish insolvency. But they reflect findings from the evidence. To the extent that the exercise of judgment is required, they will be a guide to the way in which that function falls to be determined.
1198 Literally hundreds of pages of material were adduced during the hearing concerning cash flow matters. I will be able to deal with the spreadsheets that constitute the cash flows of the respective parties in a relatively general fashion. But the same cannot be said of the material adduced in relation to the disputed cash flow items which go to explain why the end results disclosed in the respective cash flow statements are about as close as are the warring factions in the Middle East.
1199 I now turn to the parties’ cash flow materials. I will commence by identifying the cash flows and reports relating to the cash flow insolvency cases of the respective parties. This will include some discussion about how those documents came into being. I will then examine the major areas in which their content differs. In short, the difference lies in the treatment of the several disputed cash flow items. Once I have identified the materials and explained the differences, I will move to discuss each of the disputed items.
9.5.2. The parties’ cash flows materials: their genesis
1200 For the purposes of the litigation, the plaintiffs prepared and tendered six spreadsheets in the form of predictive monthly consolidated cash flows for the Bell group for the period 27 January to 31 January 1990 and thereafter monthly to the end of May 1991. They are:
• Cash Flow 1 (long form)
• Cash Flow 1 (short form)
• Cash Flow 2 (long form)
• Cash Flow 2 (short form)
• Cash Flow A
• Cash Flow B
1201 Each of the documents has attached to it a schedule or schedules of bank interest calculations. The long and short forms of Cash Flows 1 and 2 differ in that the former has a series of line items for cash inflows that nominate the source but do not allocate a dollar figure, while the latter omits those line items entirely. The line items that are blank in the long form and omitted from the short form are the disputed cash flow items. The short form version of Cash Flow 1 and Cash Flow A are the same. The short form version of Cash Flow 2 and Cash Flow B are also the same. Cash Flow 1 and Cash Flow A were prepared as if the January 1990 refinancing had not occurred. Cash Flow 2 and Cash Flow B were prepared on the basis that the refinancing would go ahead. As I have already noted, these statements are based largely on the 19 January, 26 January and Garven cash flows.
1202 The plaintiffs’ cash flows cannot be understood in a vacuum. They fall to be considered in the light of Love’s First Further Amended Report dated 8 April 2004 (Love’s first report) (which is an updated version of the report lodged with the Federal Court in February 1998, referred to below) and his Second Report dated 15 July 2003 (Love’s second report). Other relevant material is to be found in the basis of preparation document dated 19 December 1997, again referred to below. Woodings filed a number of witness statements for use in the litigation. One was an affidavit which he swore on 4 August 2000 in support of an application for leave to amend the statement of claim (Woodings affidavit).
1203 Woodings also prepared eight witness statements. The first is dated 1 March 2003 and I will call it ‘Woodings 1’. The dates and short form abbreviations of the other witness statements are as follows: second, 4 May 2003 (Woodings 2); third, 11 June 2003 (Woodings 3); fourth, 27 June 2003 (Woodings 4); fifth, 17 October 2003 (Woodings 5); sixth, 14 November 2003 (Woodings 6); seventh, 23 March 2004 (Woodings 7); and eighth, dated 29 March 2004 (Woodings 8).
1204 The materials that are most relevant to the cash flow issues are the Woodings affidavit and Woodings 1, 3, 5 and 7. Cash Flows 1, 2, A and B are annexed to Love’s first report and to the Woodings affidavit.
1205 Much controversy arose during the hearing as to the order in which the various documents that form the basis of the plaintiffs’ cash flow insolvency case were prepared. I initially thought that the Liquidator’s cash flows were prepared by the liquidators and presented to Love as the instructions upon which he was to proceed in the preparation of the Love cash flows. It seems that this was not the case.
1206 Love gave evidence that he was initially instructed by the plaintiffs’ lawyers in June 1997 to consider a range of topics, including the SNAs and the cash flows, and to express opinions on a range of assets. In early October, he received subsequent instructions and was asked to prepare two predictive cash flows, one assuming that the bank loans were refinanced and the other assuming no refinancing occurred. The June instructions were general but in October he was given the September and Garven cash flows. He reviewed and analysed those forecasts.
1207 When he received the October instructions, Love was provided with the 19 January and 26 January cash flows and was asked to use them and the Garven cash flow rather than the September cash flow. Love and members of his staff commenced preparation of the predictive cash flows with accompanying explanatory notes. They also worked on a document outlining the basis of the preparation of his report and the predictive cash flows. From time to time he received information on the factual matters that were to be excluded or included. He said that in generating the predictive cash flows, he looked at the three Bell group cash flows. As part of the analysis, he looked at the surrounding circumstances of each of the line items which dictated the steps taken as the basis of preparation document. He said that he had not made the decision which of the various line items should or should not be considered in the analysis. However, he had considered each of the items presented to him and he had formed opinions about whether those matters should or should not be included in the cash flows.
1208 On 11 November 1998 Carr J made programming orders that required the plaintiffs to serve, no later than 19 December 1998, any cash flow analyses of the Bell group as at 26 January 1990 on which they intended to rely, together with a summary of the basis of such analyses. It appears that around this time the plaintiffs made a forensic decision that the factual information about cash flows, which was extracted from the company’s records, should be evidence coming from the liquidators rather than from Love as an expert.
1209 On 2 December 1998 Love was advised of the consequent change in his instructions. He was told he would not be required to give evidence in relation to the SNAs and the basis of preparation document, or on the companies’ cash flows. But he was asked to give evidence on two predictive cash flows, which were to include the opinions upon which he had received instructions. These were the cash flow analyses that the plaintiffs were required to serve on 19 December 1998 in compliance with the orders of 11 November 1998. By 2 December 1998 the predictive cash flows and the basis of preparation document were about 80 per cent or 90 per cent complete. In the period between 2 December and 19 December 1998, Love completed his opinions on the various assets as instructed. He also completed Cash Flows A and B, which included his opinions. The documents were served on the banks.
1210 In January 1999 Love was requested to remove from Cash Flows A and B all items of opinion and to provide the resulting document to the plaintiffs’ lawyers. Subsequently, he received back two cash flows, which were identified as Cash Flows 1 and 2. He was asked to include them to explain the instructions he had been given; they were inserted in his report served in February 1999.
1211 Woodings’ evidence was that the change in Love’s instructions occurred at a time when things were being done in a rush to comply with Carr J’s orders. The result was that Cash Flows A and B were created in December 1997, before Cash Flows 1 and 2. Both Cash Flows A and B and the basis of preparation document were reviewed by the liquidators before they were served. Woodings said that he continued to work on the cash flows in January and deleted matters on which Love had been asked to opine. They were the items left blank, thus creating Cash Flows 1 and 2. He also said that Cash Flows 1 and 2 were prepared by his staff from essentially the same information that was in Cash Flows A and B. That information was taken from the company’s records.
1212 Woodings also gave evidence that at the time Cash Flows A and B were created in 1997, and again prior to preparing his own witness statement, he and his staff reviewed and checked all the cash flow items except those upon which Love opined. Their contents were checked against the three Bell group cash flows and the other forecasts located in the books and records of the Bell group in his possession. He and his staff also reviewed and checked the specific matters in the basis of preparation document which applied to those items.
1213 It was put to Love and Woodings in cross‑examination that their reports and statements created the impression that Cash Flows 1 and 2 pre‑dated Cash Flows A and B and that the former had initially been prepared by the liquidators, not by Love. They denied this, although some of the material in their reports and statements is a little ambiguous. The banks submitted that the ambiguity and Woodings’ ‘refusal to accept the obvious’ reflected badly on him and demonstrated his partisanship. The banks also submitted that the issue demonstrated a lack of objectivity and independence on the part of Love. The banks were critical of Woodings and Love for creating the impression (not corrected until oral evidence in chief) that Love only opined in a disinterested way, on the disputed cash flow items and that the rest of the work was done by the liquidators. They pressed me not to place any material reliance on opinions expressed by Love or Woodings on contentious matters as they had demonstrated themselves to be unworthy of such reliance.
1214 I accept that the wording of some of the plaintiffs’ reports and witness statements is problematic. It would have been better had it been corrected earlier. That having been said, I have seen and heard Woodings and Love, and have taken into account the evidence about the ‘December 1998 rush’ and the motivation for the forensic decision to change the way in which this aspect of the case was to be approached. I have come to the conclusion that there is nothing sinister in these events and that it should not to affect the way that I approach the plaintiffs’ cash flow material. I will review the materials on their merits. The extent of the instructions given by the plaintiffs’ legal representatives to Love and the way the various reports, witness statements and cash flows came to be prepared are clear. From my perspective, the issues are ones of substance: should the opinions expressed by Love and Woodings concerning the disputed cash flow items be accepted?
1215 The banks, too, were assiduous in subjecting the Bell group financial material to scrutiny by experts. Honey provided a number of reports to the court. His First Amended Report is dated 16 January 2006 (Honey’s first report). He also provided a Second Expert Report dated 18 May 2004 (Honey’s second report), a Supplementary Report dated 16 January 2006 (Honey Supp 1) and a Second Supplementary Report dated 30 January 2006 (Honey Supp 2). The spreadsheet that constitutes the Honey cash flow is Appendix 13 to Honey’s first report.
1216 Honey’s instructions were to look at financial and other related materials of the Bell group and to express opinions, as at 26 January 1990, on a range of matters including the cash resources and commitments of the Bell group up to 31 May 1991.
1217 The major criticism made by the plaintiffs of Honey’s approach was that he failed to test the likelihood that each of the contentious cash inflow items would eventuate. I have dealt with this question in Sect 9.2.4. Honey described his hypothetical cash flow as reflecting a potential cash flow outcome for the Bell group, based broadly on the undated January cash flow but recognising that additional sources of funding were available ‘to be considered’ during January 1990. He said that he had identified additional sources of cash that could have been contemplated by management during January 1990 and brought them into the cash flow.
1218 The plaintiffs criticise this approach. They contend that simply identifying sources of income available for directors to consider is of little, if any, use in concluding whether a company was in fact able to pay its debts as those debts fell due. Accordingly, the plaintiffs say, Honey’s evidence is of little probative value.
1219 I think the correct approach is to concentrate on the substance of each of the disputed cash flow items rather than on differences of methodology used by expert witnesses. In the end it is the trier of fact, not the experts, who must reach a conclusion. Questions of judgments must be brought to bear as there are no absolutes. What the experts say about individual items, the method they employed in reaching conclusions and the conclusions themselves must all be considered. But these things cannot take on a character other than that of evidence. They are not binding on the court. Therefore, the test that I will apply is the one set out in Sect 9.2.4.
9.5.3. The parties’ cash flows: their content
9.5.3.1. Cash Flow 1 and Cash Flow A
1220 The plaintiffs say Cash Flow 1 represents what would have been the position of the Bell group from 27 January 1990 to 31 May 1991 had the refinancing not proceeded. It is based on a series of assumptions.
1221 First, the opening cash balance is $999,000. That figure was calculated by adding the ‘cash’ and ‘bank overdraft’ figures for the relevant companies from the book value SNAs.
1222 Secondly, without the refinancing there would have been a default under the facilities between the companies and the Australian banks and the principal sums due under those facilities would have become due and payable. That, in turn, would have been a default under the Lloyds syndicate facilities, which have also fallen due for payment. It would also have been a default under the trust deeds governing the five convertible bond issues and the face value of the bonds would have become payable. Cash Flow 1 assumes that the Australian banks facilities were all due and payable before the end of January 1990, and that the principal amounts of the Lloyds bank facilities and of the five convertible bond issues fell due in February 1990. But Cash Flow 1 had been constructed on the basis that although the principal sums are shown as cash outflows in January and February 1990, the interest commitments remained as obligations the companies had to meet each month, or year, as the case may be.
1223 Thirdly, all cash inflows were available, irrespective of entitlement, to any one or more of BGF, TBGL, BGUK and BGNV, and could be disbursed by them to their creditors. The cash inflows included the Bell Press proceeds and the net trading cash flows from BPG and Western Interstate. Cash Flow 1 records total inflows to 31 May 1991 of $43.169 million from BPG and $815,000 from Western Interstate.
1224 Fourthly, no receipts are brought to account from any of the disputed cash flow items. This is, of course, a matter of contention between the parties and their absence has to be borne in mind when considering Table 7 and Table 8, which appear below. Cash Flow 1 has been constructed on the basis that proceeds would come in from Wigmores, W & J and from the sale of the New York apartment and the radio stations and that these sums would be available to the companies. These items are not in dispute.
1225 Fifthly, they show corporate overheads for TBGL and BGUK totalling $4.78 million over the period to 31 May 1991. They reflect the figures set out in the Garven cash flow. There appears to be little dispute between the parties about those figures.
1226 Cash Flow 1 shows massive deficits in the closing cash balances for each of the months covered in the statement ($136.3 million in January 1990, $859.2 million in December 1990 and $891.5 million in May 1991). They are, of course, cumulative figures, as are all of the closing cash balances in the tables in this section of the reasons.
1227 Because the closing cash balances in Cash Flow 1 include the principal sums due under the banks’ facilities and the five convertible bond issues, it is not, in itself, of great probative value. Unusually for this case, there is a degree of unanimity between the parties as to the consequences that would have followed had the refinancing not been completed. If one bank had changed the ‘at call’ status of its loans to ‘called’, it is likely that other banks would have followed. It is unlikely that the companies could have met multiple calls for repayment of the facilities. On a cash flow basis, and therefore leaving to one side the realisable value of the main assets, the consequences of a series of calls would have been dire. There is nothing particularly novel about that and the presentation in Cash Flow 1 of massive cash deficits stands to reason.
1228 In my view, it is of greater interest to gauge the effects of other assumptions on which the forecasts have been based. To facilitate easy comparison between Cash Flow 1 and Cash Flow 2, it is necessary to remove from the former the principal repayments to the banks. Once this has been done, and with no other adjustments to the figures set out in either Cash Flow 1 or Cash Flow 2, the manner in which the assumptions reflect in the result becomes readily apparent. A pro forma version of Cash Flow 1, adjusted in this way, appears as Schedule 38.7. The Schedule covers the period from January 1990 to 31 December 1990. The significance of that period will be obvious from Sect 9.2.6.2.
1229 Cash Flow 1, and the exercise reflected in Schedule 38.7, assumes (contrary to the case advanced by the plaintiffs but in accordance with the position contended for by the banks) that the Bell Press proceeds would be available to meet ongoing interest commitments. It also focuses on the liabilities that would have to be satisfied by one or more of BGF, TBGL, BGUK and BGNV.
1230 The particular significance of the adjustment exercise is threefold. First, it shows that the closing cash balances were generally negative and that the deficit was increasing. Secondly, it demonstrates that in most months there was insufficient free cash inflow to cover cash outflows. Thirdly, it illustrates the importance of the Bell Press proceeds and thus the significance of the cl 17.12 issue. To explain these three points, a summary of the material in Schedule 38.7 appears in Table 7 at the end of this section.
1231 Were it not for the receipt of the Bell Press proceeds ($25.8 million) in February 1990, the cash deficit at the end of January 1990 would not have been covered and the closing cash balances would have been negative for the whole of the period under review. As can be seen from the table, the closing cash balance is negative in May 1990 and, save in November 1990, the size of the deficit increases in each month thereafter. While it is not reflected in either Table 7 or Schedule 38.7, the deficit in the closing cash balance continues to increase in each month from January 1991 to May 1991. By the end of May 1991 the closing cash balance was in deficit to the tune of $79 million or thereabouts.
1232 The table also demonstrates that in each month from May 1990 to December 1990, again save for November 1990, the net cash inflow was insufficient to meet the bank interest, bondholder interest (if applicable) and corporate overheads falling due in that month. Sometimes the monthly deficiency was minimal (for example, June and October 1990), but on other occasions it was significant.
1233 Looked at immediately before the refinancing was agreed to on 26 January 1990, it is only in the period February to April 1990, and again in November 1990, that there was sufficient free cash flow to cover the interest commitments and overheads. In May 1990, and in each succeeding month (with the one exception), the position worsens. All of the relevant cash inflows and liabilities are described in cash flows prepared before, on or immediately after, 26 January 1990. In my view, if there were no other sources of cash available to the companies the situation in May 1990 and following could properly be described as insurmountable endemic illiquidity. This would have been apparent as at 26 January 1990. On the basis of Cash Flow 1, the companies concerned would have been objectively insolvent (as I have used that phrase) as at 26 January 1990.
Table 7
SUMMARY OF ADJUSTED CASH FLOW 1
MONTH (1990) FREE CASH INFLOW [MILLIONS] CASH OUTFLOW [MILLIONS] CLOSING CASH BALANCE [MILLIONS]
January $0.298 ($4.106) ($4.807)
February $21.003 ($6.114) $10.082
March $6.048 ($5.233) $10.897
April $1.572 ($4.567) $7.902
May $4.986 ($29.492) ($16.604)
June $4.368 ($4.402) ($16.638)
July $2.231 ($12.700) ($26.807)
August $2.099 ($4.485) ($29.193)
September $2.898 ($4.402) ($36.493)
October $4.369 ($4.485) ($36.609)
November $4.745 ($4.402) ($36.266)
December $2.879 ($19.406) ($52.793)

9.5.3.2. Cash Flow 2 and Cash Flow B
1234 Cash Flow 2 is constructed on the basis that the refinancing would be implemented (as it was). It uses the same opening cash balance ($999,000) and it proceeds on the assumption that all cash inflows are made available to BGF, TBGL, BGUK and BGNV according to their respective needs and to the extent to which it is possible to satisfy them. Unlike Cash Flow 1, this document assumes that the Australian banks would not have made demand for the debts owing to them by BGF and TBGL in January 1990. It does not provide for any of the principal amounts in respect of bank or bondholder debts being called up in the period to 31 May 1991. Instead, it sets out the recurrent and other obligations, including interest due by BGF,TBGL, BGUK and BGNV. These were the amounts the Bell group companies would have been required to find, if they were to continue as a going concern, following the execution of the agreements the subject of these proceedings.
1235 Cash Flow 2 assumes that, under those agreements, the proceeds of sale of Bell Press were paid to the banks in reduction of principal. In other words, unlike Cash Flow 1, it does not treat the Bell Press proceeds as being generally available to meet recurrent obligations of the group companies. Because of the assumed payment of the Bell Press proceed to the banks in reduction of principal, the monthly interest commitment to the banks is a little less than in Cash Flow 1.
1236 Another assumption underlying Cash Flow 2 (as with Cash Flow 1) is that the proceeds of sale of the other assets that are not in dispute were available for general use and were not applied in reduction of principal sums due to the banks. But the disputed cash flow items have not been included. The net inflows from BPG and Western Interstate, and the outflows for the bondholder interest, Bell Press redundancies, corporate overheads and BGUK expenses, are the same as in Cash Flow 1.
1237 I have extracted information from Cash Flow 2 for the period 27 January 1990 to 31 December 1990 in order to create a table that is comparable with Table 7. The result is Table 8, which appears at the end of this section.
1238 Because the recurring interest commitment to the banks is lower than shown in Cash Flow 1, there are more individual months in which the net cash inflows for the month exceed the cash outflows. They are March, June, October and November 1990. But the significance of the non‑availability of the Bell Press proceeds for general cash flow purposes is readily apparent. The closing cash balances are all negative and the size of the deficiency is much greater than in Cash Flow 1 (as adjusted in Table 7). Between May and December 1990, the deficit in the closing cash balance increases from $49.2 million to $75.6 million. While not reflected in the table, the deficit continues to increase between January 1991 and May 1991. By the latter date it stands at $104.4 million.
1239 It should be noted that in both Cash Flow 1 and Cash Flow 2, the net trading results for BPG in February 1990 are negative $5.5 million, contributing to a net cash inflow for the group of negative $4.8 million. There is evidence that the WAN overdraft was drawn down to the extent of $2 million (approximately) as at 26 January 1990. If an assumption were made that the remaining $3 million of the overdraft was available to be drawn down in February 1990, the deficit in the cash flow of BPG for that month would be lessened accordingly. This would flow through to the closing cash balance. On that assumption, the closing cash balance deficits would decrease by $3 million for each month. But they would still be significant.
1240 The assumption that the closing cash balances could be improved by the drawing down of the WAN overdraft is one that I would not make lightly. It would ignore any consequent increase in the monthly interest commitment and, more importantly, any obligation to repay the overdraft. As I understand the evidence, WAN operated at a profit but it used the overdraft within its normal operating regime. If the overdraft were fully drawn down, WAN’s normal operations might have suffered.
1241 In his report, Love extracted information from Cash Flow B (which is the same as Cash Flow 2) and applied it to BGF, TBGL and BGUK individually, again assuming that all opening cash balances and net cash inflows were available to each company. In the tables that he created, Love assumed that the $5 million WAN overdraft had been drawn down before 26 January 1990. This explains the difference between the opening cash balance in Cash Flow 2 and Love’s calculations. A summary of this aspect of Love’s work appears in three tables below: Table 9, Table 10 and Table 11. In this instance, I will limit the presentations to the period January to May 1990. It can be assumed that the trend they disclose continues for the remainder of 1990.
1242 Love opined that BGF had an entitlement to most of the likely group cash inflows shown in Cash Flow B. He also opined that, on a strict ‘entitlements basis’, the cash position of each of BGF, TBGL, BGUK would not be better than that illustrated by those forecasts and in the summary tables.
1243 In my view, Cash Flow 2, Table 8 and the summaries in Table 9, Table 10 and Table 11 show a position of insurmountable endemic illiquidity from January 1990. Assuming no other sources of funds, the relevant companies would have been insolvent in the objective sense.
Table 8
SUMMARY OF CASH FLOW 2
MONTH (1990) FREE CASH INFLOW [MILLIONS] CASH OUTFLOW [MILLIONS] CLOSING CASH BALANCE [MILLIONS]
January $0.298 ($9.208) ($9.909)
February ($4.822) ($8.509) ($23.241)
March $6.048 ($5.181) ($22.373)
April $1.572 ($4.526) ($25.327)
May $4.986 ($28.849) ($49.190)
June $4.368 ($3.770) ($48.592)
July $2.231 ($12.171) ($58.532)
August $2.099 ($3.842) ($60.275)
September $2.898 ($3.790) ($61.167)
October $4.369 ($3.909) ($60.707)
November $4.745 ($3.770) ($59.732)
December $2.879 ($18.779) ($75.632)

Table 9
LOVE SUMMARY: BGF
$ MILLIONS JANUARY 90 FEBRUARY 90 MARCH 90 APRIL 90 MAY 90
Opening cash balance $4.001 ($4.806) ($16.022) ($14.213) ($16.810)
Net cash inflows $0.298 ($4.822) $6.048 $1.572 $4.986
Net cash outflows ($9.105) ($6.394) ($4.239) ($4.169) ($11.148)
Closing cash balance ($4.806) ($16.022) ($14.213) ($16.810) ($22.972)

Table 10
LOVE SUMMARY: TBGL
$ MILLIONS JANUARY 90 FEBRUARY 90 MARCH 90 APRIL 90 MAY 90
Opening cash balance $4.001 ($4.806) ($16.022) ($14.213) ($16.810)
Net cash inflows $0.298 ($4.822) $6.048 $1.572 $4.986
Net cash outflows ($9.105) ($6.394) ($4.239) ($4.169) ($28.648)
Closing cash balance ($4.806) ($16.022) ($14.213) ($16.810) ($40.472)

Table 11
LOVE SUMMARY: BGUK
$ MILLIONS JANUARY 90 FEBRUARY 90 MARCH 90 APRIL 90 MAY 90
Opening cash balance $4.001 ($4.806) ($16.022) ($14.213) ($16.810)
Net cash inflows $0.298 ($4.822) $6.048 $1.572 $4.986
Net cash outflows ($9.105) ($6.394) ($4.239) ($4.169) ($3.648)
Closing cash balance ($4.806) ($16.022) ($14.213) ($16.810) ($15.472)

9.5.3.3. The Honey cash flow
1244 Honey said that his analysis of the Bell group’s accounting systems revealed the relevant officers took a global view in managing cash resources throughout the group. Cash flow forecasts were prepared on a consolidated basis for the group and did not consider intra-group receipts and payments. There was a history of channelling funds through BGF for use in other entities within the group as required. BGF acted as treasurer to the Australian operations of the group, borrowing moneys externally, providing banking facilities and lending money to other companies within the group. Because of this history, Honey prepared his hypothetical cash flow on a consolidated basis and he took issue with Love’s analysis of the position of individual companies on an ‘entitlements basis’.
1245 While I can see the logic of an approach that attempts to mirror, as far as possible, the way in which the group actually operated, it does not obviate the necessity to look at each company individually to see if it could pay its debts as they fell due.
1246 Honey explained that his analysis of cash flow forecasts and the hypothetical cash flow statement were concerned with the cash flow position of the Bell group on the basis that the refinancing agreements would be completed. The hypothetical cash flow statement indicates that the Bell group had the potential to manage its cash flow requirements over the period from 1 January 1990 to 31 May 1991, subject to the directors and management doing the following:
(a) managing the short‑term deficiency in available cash anticipated in January 1990;
(b) monitoring key transactions and significant (uncertain) events; and
(c) formulating appropriate plans to respond to any negative implications for cash flow of the group arising out of those key transactions and significant events.
1247 The hypothetical cash flow takes as its starting point 1 January 1990 (rather than 27 January 1990 as Love has done). It adopts (as the opening cash balance) the figure of negative $4.6 million derived from the 31 December 1989 consolidated balance sheet. It includes (in common with the Love cash flows) receipts from Wigmores, W & J, the New York apartment and the sale of the radio stations. The amounts taken into account are the same, except for W & J (where Honey has allowed about $350,000 less than Love).
1248 The net cash flows from BPG for the whole period reflected in the work of Love and Honey are much the same: the former says $43.2 million and the latter $41.9 million. There are timing differences from month to month, especially in February 1990. Love has forecast a deficiency of $5.5 million while Honey’s document suggests that the deficit would be $2.6 million. There is no appreciable difference in the net cash flow expected from the operations of Western Interstate: $815,000 forecast by Love and $961,000 by Honey. The aggregate of those differences is that Love has proceeded on an assumption of cash inflows about $1.5 million in excess of those on which Honey’s work is based. In the grand scheme of things, I do not think these differences are material.
1249 As I have already said, there is not much dispute between the parties concerning the corporate overheads and the BGUK expenses that are part of the forecast cash outflows. Nor is there much difference between Love and Honey in the calculation of ongoing interest commitments to the banks and the bondholders. Indeed, the interest figures in the Love cash flows are a little higher than those chosen by Honey. But, once again, I will ignore the differences. Honey also included refinancing costs of $5.44 million (to be contrasted with Love’s total figure of $9.36 million), all of which was payable in January 1990.
1250 Leaving the refinancing costs to one side, the real point of contention between Love and Honey lies in the treatment of the disputed cash flow items. In the main, Honey has included them and Love has excluded them. The major cash inflows included by Honey but excluded by Love are the Bell Press proceeds, BRL preference dividends, BCHL receivables and Q‑Net. The result is a material difference between what Love and Honey say was the available cash on an ongoing basis. I have extracted some material from the Honey cash flow and have used it to create Table 12, which appears at the end of this section.
1251 Table 12 is constructed in a similar format to Table 8 to facilitate comparison. In the hypothetical cash flow (from which Table 12 was created), the corporate overheads, BGUK expenses and the refinancing costs have been included above the line, that is, before the net cash inflows have been determined. Accordingly, the net cash outflows represent the ongoing interest commitments.
1252 The Honey cash flow predicts positive closing cash balances in each month from February 1990 to December 1990. The amount of the surplus would, I think, be regarded as comfortable in each month between March 1990 and December 1990, the lowest being the December figure of $8.2 million. The February 1990 surplus is lower, but that is explained by the high opening cash deficit due to the January 1990 results. In the period after December 1990 (which falls outside what I regard as the appropriate investigation period), the closing cash balances are $2.5 million (January 1991), $385,000 (February 1991), $508,000 (March 1991), $4.8 million (April 1991) and negative $20.1 million (May 1991).
1253 In my view, if the assumptions underlying the Honey cash flow are accepted, the cash deficiency in January 1990 (although significant) would properly be regarded as ‘temporary illiquidity’ because it would have been cured within a month. The closing cash balances though to December 1990, even to April 1991, could not be described as insurmountable endemic illiquidity. On that basis, it would be inappropriate to conclude that the companies were insolvent as at 26 January 1990.
1254 Thus have the battle lines been drawn. I turn now to consider the disputed cash flow items and their impact on the respective cash flows and on the insolvency case generally.
Table 12
SUMMARY OF HONEY CASH FLOW
MONTH (1990) FREE CASH INFLOW [MILLIONS] CASH OUTFLOW [MILLIONS] CLOSING CASH BALANCE [MILLIONS]
January ($12.728) ($3.969) ($21.330)
February $29.416 ($3.969) $4.117
March $11.706 ($3.969) $11.854
April $18.026 ($3.969) $25.911
May $12.202 ($28.969) $9.144
June $24.311 ($3.969) $29.486
July $3.493 ($11.496 $21.510
August $2.099 ($3.969) $19.640
September $1.283 ($3.969) $17.544
October $3.414 ($3.969) $16.999
November $9.622 ($3.969) $22.652
December $4.405 ($18813) $8.244

9.6. The Bryanston payment
9.6.1. The sale of Bryanston
1255 I describe the activities of Bryanston and the process by which it came to be sold in Sect 4.4.2.2. Neither Love nor Honey included any of the Bryanston sale proceeds in their respective cash flows and it is not (so far as concerns the objective insolvency case) a disputed item. Nonetheless, it has relevance for other purposes and I will describe the circumstances in a little more detail.
1256 An agreement for the sale of Bryanston for £20 million was entered into in August 1989. Almost immediately, doubts began to emerge about the provision in Bryanston’s accounts for outstanding claims (customarily the largest single item on the liabilities side of a general insurer’s balance sheet) and the purchaser sought to renegotiate the terms of the arrangement. The September cash flow provided for a receipt of $42.5 million, with sale expenses of $2.1 million, in October 1989. Early in November 1989, Richard Breese (the group financial controller for BGUK), in the course of communicating cash flow information to BCHL Treasury and Walkemeyer at TBGL, indicated that the sale was being renegotiated and was ‘likely to include an element of deferred (and contingent) consideration’. He included £5 million for Bryanston in the BGUK cash flow provisionally for 30 November 1989 and did not include anything for the deferred consideration.
1257 On 13 December 1989 the final version of the sale agreement was executed. It provided for an initial payment of £5 million and a deferred consideration of a further £15 million. Payment of the deferred consideration depended on actuarial assessments annually over a five‑year period to 31 December 1994 of the provisions for outstanding claims. The relevant clause in the agreement provided that until the final review date (31 December 1994), 75 per cent of any diminution in the insurance liabilities of Bryanston (after allowing for liabilities met in the meantime), from the agreed state of those liabilities as at 30 September 1989, would be paid by the purchaser to TBGIL. Until the final review date, 25 per cent of the amount payable by the purchaser was to be paid into an escrow account and could be clawed back to the extent of any reversal of a previous year’s improvement.
9.6.2. Completion of the sale and dispersal of proceeds
1258 The 4 January and undated January cash flows each predicted a $10 million receipt from the Bryanston sale in January 1990. But that entry was eliminated in the 19 and 26 January cash flows.
1259 Early in January 1990, the UK directors received legal advice in relation to their ability to agree to the subordination of all inter‑company debts between subsidiaries of BGUK and TBGIL, including BIIL. On 18 January 1990, Michael Edwards wrote to Lloyds Bank indicating that it may not be appropriate for TBGIL (and others) to agree to subordinate debt in whole or in part unless it was satisfied that the interests of its own creditors had been safeguarded. By 23 January 1990, Breese had finalised a list of the amounts owed by TBGIL to external creditors and to other group companies. The total amounts were £3.5 million and £1.3 million respectively. Clause 17.10(e) of RLFA No 2 reflected an agreement that TBGIL could hold the Bryanston sale proceeds in a separate account and apply them to satisfy the claims of its creditors (in the case of intra‑group debts, to a maximum of £1.4 million). One of the transaction documents was a charge on cash that reflected these arrangements.
1260 On 30 January 1990, the Bryanston sale was completed. The expense of the sale and some other debts were met. The balance of £3.7 million was transferred to the separate account. The liabilities that the account was designed to cover were eventually certified at £3.7 million. None of the Bryanston proceeds were available for other cash flow demands of the Bell group companies other than TBGIL.
9.6.3. The deferred consideration
1261 It is common ground that none of the £15 million deferred consideration was ever received. The 4 January cash flow predicts a receipt of $30 million in 1993. None of the undated January, 19 or 26 January or the Garven cash flows go past May 1991, and none of them reflects a receipt on account of the deferred consideration.
1262 In a note of 16 March 1990 concerning preparation of the February management accounts, Breese told Winstanley that there was a deferred element to the consideration of £15 million; it was contingent on Bryanston meeting fund‑related targets. He opined that it was unlikely that Bryanston would meet those targets in the foreseeable future and the deferred element of the consideration had not been accrued. Breese had made a similar comment in a fax to the Perth office on 24 January 1990.
1263 In my view, this material sustains a conclusion that it would not be appropriate to take the £15 million deferred consideration, or any part of it, into account. It should be eliminated from any assessment of the sources of cash from which the companies could meet their liabilities in the 12 months to December 1990 (whether or not the Transactions were entered into) or, indeed, in the book value SNAs as at 26 January 1990.
9.7. The ITC contract payment
9.7.1. The ITC sale and the tax issue: an introduction
1264 I made some introductory comments about the ITC contract payment in Sect 4.4.2.3. The ITC sale contract was entered into on 8 November 1988. In the weeks and days leading up to completion of the agreements, tax elements had become an important issue in the negotiations. Martin Brown and Richard Thornhill (a partner of S&M) were primarily responsible for the negotiations.
1265 ITC’s audited accounts for the year ending 30 June 1988 disclosed a liability on the part of ITC to pay UK corporation tax in an amount of £7.6 million. This was only a provision, as the tax liability of this and other companies in the BGUK group had not then been finalised. Brown had been responsible for the figure and believed that it overstated the tax liability; in particular, because other companies in the TBGIL group had already made payments on behalf of ITC to the Inland Revenue totalling approximately £2.8 million and Advanced corporation tax of £1.726 million had already been surrendered.
1266 The position advanced by TBGIL in the negotiations was that the purchase price should be increased to reflect the fact that ITC was £4.5 million better off than disclosed in its accounts. The increase was resisted by the representatives of the purchaser, Campania. In the end, the deal reached was that TBGIL would have irrevocable authority to negotiate and settle ITC’s tax returns for the years in question. TBGIL undertook to ensure that the tax payable by ITC was no greater than £7.609 million. Campania undertook to pay TBGIL the amount by which the tax liability was reduced below that amount, by surrender of group relief or other tax benefits. Brown expected that because of losses available elsewhere in the TBGIL group, it would be possible to surrender additional group relief to reduce further the amount of tax payable by ITC.
1267 Clause 4.05 of the 8 November 1988 agreement included provisions to the following effect:
(a) TBGIL would cause group tax relief to be surrendered to ITC;
(b) the amount of group tax relief required to be surrendered to ITC would be sufficient to ensure that its liability for corporation tax for the periods prior to 30 June 1988 did not exceed the sum of £7.609 million, being the liability provided for in its audited accounts;
(c) to the extent that group tax relief and (or) other tax benefits were surrendered to ITC beyond that which was necessary to limit ITC’s liability for corporation tax to £7.6 million, that is, to the extent that relief surrendered reduced ITC’s tax liability below £7.6 million, Campania would cause ITC to pay TBGIL the difference between £7.6 million and the amount of the tax; and
(d) any amount payable to TBGIL under the provision identified in the preceding paragraph was to be paid within 30 days of the issue of the final tax assessment to ITC in respect of the periods prior to 30 June 1988 to which the sum of £7.6 million related (the final assessment).
1268 The effect of these provisions was that if, for example, ITC’s tax liability was reduced to nil, Campania would be required to pay TBGIL £7.6 million. The negotiations between TBGIL and the Inland Revenue, and between TBGIL and Campania, were long and tortuous. As at 26 January 1990 a final tax assessment had not been issued. But on 25 June, BGUK and Campania entered into an agreement by which they settled their differences in relation to cl 4.05 of the stock purchase agreement. Pursuant to that agreement, as consideration for BGUK and its subsidiaries agreeing to surrender or procuring a surrender of group relief, Campania agreed to cause ITC to pay £4 million to TBGIL (which it did on 2 July 1990) and to direct Inland Revenue to pay any repayment of corporation tax for the accounting periods ending 30 June 1984 and 30 June 1985 to BGUK. That amount turned out to be around £733,000, received by BGUK around 29 June 1990. Accordingly, the amount that was received in compromise of the claim under cl 4.05 of the stock purchase agreement was £4.7 million.
1269 The ITC contract payment is not mentioned in any of the cash flows prepared by or for TBGL until the Garven cash flow (19 February 1990), where it is included as a June 1990 receipt of $17 million. It is also mentioned as a change from the September cash flow in the covering summary to the Garven cash flow. In his hypothetical cash flow, Honey includes it as a cash inflow item in the same amount and the same month. There is no allowance for it in any of Cash Flows 1, 2, A or B.
1270 In short, the plaintiffs say that the amount and timing of any payment under cl 4.05 was uncertain because the payment depended on a favourable decision by Inland Revenue and that this outcome was itself far from certain. Accordingly, there was no likelihood of the ITC contract payment yielding cash in time to enable the Bell group companies to pay their debts. The banks’ position is (largely, though not entirely) an appeal to the onus of proof. They say that the plaintiffs have failed to prove facts in relation to the position of Campania and its financiers, the merits of the dispute or the prospects of a satisfactory resolution of all matters. And they say that the plaintiffs have not adduced admissible evidence to gainsay the prima facie evidence of TBGL’s business records, namely, the TBGL directors’ minutes of 7 February 1990 and the Garven cash flow.
9.7.2. The tax assessments
1271 Brown (who commenced employment with BGUK in September 1987) was the person primarily responsible for BGUK’s dealings with Inland Revenue, including matters relating to the ITC matter. On 2 February 1989, Inland Revenue issued an assessment for ITC for the 1988 tax year and Brown lodged an appeal against the assessment on 17 February 1989. The appeal sought to reduce the assessments by, among other things, claims for group relief. Under UK tax law, group relief is available where one company in a group of companies that have common ownership to the extent of 75 per cent or more, surrenders losses to another company in the group to reduce its taxable profits.
1272 As part of the appeal process, Brown provided computations of profits for group companies to the Inland Revenue. At the time of the sale of ITC in November 1988, computations had been submitted for the years 1984 to 1987, but not agreed. In December 1989 Brown submitted a computation to the Inland Revenue for the 1988 year.
1273 Brown conducted negotiations with the Inland Revenue (mostly with a Mr Griffin) for a settlement of the appeals and claims for ITC and other group companies for all tax years from 1984 to 1987. In his evidence he explained his general approach to dealings with Inland Revenue in this way:
My strategy in dealing with [Griffin] was to ensure that matters proceeded as unexceptionably as possible. In addition, I thought it might be possible to obtain his agreement, if a controversy arose, by indicating that the company was essentially winding up, so that he might conclude that he had more important matters to attend to and his resources would be more effectively devoted to companies with continuing businesses and capacity to pay … Where there were disputes, I was prepared to offer to settle matters on a practical compromise basis … I was also prepared to make concessions because the immediate prospect of a refund or of a payment from ITC were attractive for the BG(UK) Group at this time … I was hopeful that Mr Griffin would be agreeable to resolving issues on that basis out of sensible pragmatism.
1274 Exchanges of correspondence between Brown and officers of Inland Revenue occurred during 1989 and January 1990. By that time three issues remained outstanding between ITC and the Inland Revenue as at 26 January 1990: double taxation relief, a question concerning cost of sales and the assessments for the 1986 and 1987 tax years.
1275 Double taxation relief was relief from taxation in the United Kingdom on profits on which tax had already been paid in countries with which the United Kingdom had tax treaties. In November 1989, Griffin wrote to Brown about the claims for double taxation relief in the 1984 to 1987 tax years, commented upon some of the material submitted to support the claim for the 1988 year (on the basis of which a request had been made to allow the 1984 to 1987 claims) and proffered the opinion that it was of limited value. Brown felt that Inland Revenue was amenable to some form of compromise. In January 1990 Brown replied to Griffin’s letter, explaining that the sale of ITC meant that its UK accountants had been made redundant and records shipped to Los Angeles, that the vouchers could not be found and that, in those circumstances, he could only put forward a proposal to settle the matter. He proposed that Inland Revenue allow 75 per cent of the sums claimed. Brown’s view was that there was a reasonable prospect of settling the matter within two or three months, although it might be necessary to offer a settlement less favourable to ITC, given the deficiency in its records.
1276 In the relevant tax years the cost of sales figure for ITC was around £40 million. In considering ITC’s appeals, Inland Revenue had questioned the basis on which ITC determined its cost of sales for each of the tax years under consideration. The cost of sales principally related to payments made by ITC to its US subsidiaries, pursuant to arrangements they had concerning participation in the profits of films and television programmes made or distributed by ITC. It seems that the US subsidiaries may not have been liable to taxation in the United Kingdom. The cost of sales issue was of particular concern to Brown. He perceived that if the Inland Revenue investigated the arrangements, it might disallow the cost of sales and increase ITC’s profits in an amount that could have exceeded the losses otherwise available to be surrendered to it by way of group tax relief. If that occurred, TBGIL would have no entitlement to the ITC contract payment.
1277 Brown considered that if Inland Revenue pursued the cost of sales issue, it could take several years for ITC’s profits to be agreed with Inland Revenue and for the assessments to be finally determined. He was concerned that it could blow up into a major issue, leading to further enquiries about the allocation of income and expenses between ITC’s UK and US companies for the years 1984 to 1988. This could have taken a number of years to resolve because ITC’s records were incomplete. Staff with direct knowledge of the relevant transactions were no longer available and the arrangements for booking revenue and expenses had not necessarily been made on an arm’s length basis.
1278 The outstanding items relating to the 1986 and 1987 tax years were set out in correspondence from Griffin to Brown in November 1989. The substance of those items is not germane to the current problem. They had not been resolved by January 1990.
1279 Brown gave evidence that by February 1990, Graeme Pepper (the tax manager for BCHL) was taking an active interest in the resolution of the ITC dispute. According to Brown, he was told by Pepper to settle the matter as soon as possible and, if necessary, to accept a lesser sum in exchange for an earlier settlement. Early in March 1990, Brown had a discussion with Griffin. Brown said that he felt he had reached the position where he just had ‘to roll the dice’ and invite Inland Revenue to put forward a settlement proposal. He described it as a ‘high‑risk strategy’ but one he had discussed with Pepper. He set out for Griffin the overall position regarding the wind down of the BGUK group, the reduction in resources, the financial difficulties and the problems of obtaining information. He expressed the view that the only way forward was to negotiate a resolution of the taxable profits for the open years by way of a round sum adjustment. On 2 March 1990 Brown wrote to Griffin setting out a settlement proposal. On 19 March 1990 Griffin responded and accepted the proposal in relation to double taxation, proposing a settlement in relation to cost of sales and foreshadowing agreement on most of the outstanding taxation issues. Negotiations continued through April and matters were finally resolved in June 1990.
9.7.3. Negotiations with Campania
1280 Of course, the finalisation of the tax assessments was only half of the story, because TBGIL could only benefit from a successful conclusion to the tax saga under the regime set out in cl 4.05 of the agreement with Campania. Once ITC’s profits and the losses of other relevant group companies for the relevant income years were agreed with Inland Revenue, TBGIL would need to surrender to ITC the tax losses of the other group companies so as to finally determine ITC’s corporation tax liability. ITC would obtain the tax benefit once losses of other companies were surrendered, but TBGIL would only have a contractual right under the purchase agreement to the ITC contract payment.
1281 In November 1989, a dispute arose between TBGIL and Campania as to how cl 4.05 would operate. Between March and November 1989, Brown had been communicating with Touche Ross (representing Campania) and officers within ITC about the tax computations for ITC and the progress of negotiations with Inland Revenue. Around August 1989, Brown learned that ITC had a different view of the interpretation of cl 4.05. Under ITC’s construction the maximum liability would be less than £7.6 million, because ITC would have the benefit of an offset of payments made on account and the advanced corporation tax would be surrendered.
1282 In November 1989 the dispute crystallised and lawyers became involved. Those representing Campania alleged that, during negotiations, Richard Thornhill had represented that the liability of ITC under cl 4.05 would be limited, probably nil. Touche Ross asserted that Brown’s calculations of ITC’s potential liability did not give ITC the benefit of tax sums that had already been paid of £2.8 million and £1.73 million and which were not reflected in ITC’s 1988 accounts. They said they understood from the negotiations for the purchase agreement that they would benefit from these sums. TBGIL’s position was that these sums were the reason cl 4.05 was negotiated. Touche Ross further asserted that a calculation as at that date of ITC’s tax position, in a manner comparable to that used in the 1988 accounts, reduced ITC’s liability to around £2 million. They also contended that Brown’s calculation of group relief surrendered actually represented a payment by ITC, resulting in no liability on ITC to make a payment to TBGIL.
1283 On 23 November 1989 Thornhill wrote to the solicitors representing ITC setting out a view concerning the construction of cl 4.05. His suggestion would require a payment if ITC’s tax liability was less than £7.6 million and (while not mentioning the word) implicitly denied any allegation of misrepresentation during the negotiations.
1284 There was some further correspondence through to January 1990 and on 2 January 1990 Touche Ross sent to Brown some detailed calculations and schedules explaining their position. In essence, Touche Ross were contending that the figure in the contract of £7.609 million in the accounts as at 30 June 1988 was a compilation of figures from 1984 to 1988 that already took into account surrender of significant amounts of group relief. By 26 January 1990, Brown had not formulated a response to the Touche Ross letter and calculations. This underlies the proposition that as at 26 January 1990 the dispute was, in essence, embryonic. In May 1990 TBGIL received advice from senior counsel confirming the strength of its position on the construction question. The dispute was eventually settled in June 1990 when ITC agreed to pay £4 million.
9.7.4. The position as at 26 January 1990
9.7.4.1. The evidence of the English accounting officers
1285 Brown gave evidence that it was his practice, if he had reasonable certainty of receipt of a payment arising from areas within his responsibility, to advise the person responsible for preparing cash flows of the company in question of such an impending payment. Up to 26 January 1990 he had not advised Richard Breese, who was responsible for preparing BGUK group’s cash flows, of any impending payment in relation to the ITC contract payment. He said he was not sufficiently confident as to the amount of such a payment or when it would be received. He also said that he had not, prior to 26 January 1990, put a figure or a range of figures of any best estimates of what TBGIL might reasonably expect to receive from ITC and when that would be received, nor had he been asked by anyone to undertake such a task.
1286 The reasons proffered by Brown for his lack of confidence in the amount or timing of the receipt include the following:
(a) Touche Ross were suggesting that the maximum amount for which ITC would be liable was £2.1 million but he had not then formulated a response either by way of rebuttal or by way of counter‑proposal;
(b) he had received preliminary advice only from Thornhill and it was his experience that S&M would obtain counsel’s advice on a dispute of this magnitude, and such advice had not then been obtained;
(c) there remained a degree of uncertainty as to the timing of a settlement of taxation matters with Inland Revenue;
(d) he doubted the capacity of ITC to pay the full amount claimed because he felt that ITC had not appreciated that it was incurring a liability of up to £7.6 million, they were suggesting that misrepresentations had been made, the management buy-out had been at ‘close to the limit of ITC’s borrowing capacity’, and it was unlikely to have either the cash or the borrowing capacity to make the payment;
(e) the precise parameters of the dispute had not been determined and if the matter proceeded to litigation (which appeared quite possible), it was likely that that litigation would be protracted and costly, when TBGIL did not have cash available to fund such litigation;
(f) if TBGIL were to receive a payment ‘within the next few months’, it would have to be for an amount negotiated with Campania which would be less than what TBGIL had sought.
1287 In their closing submissions the banks contend that Brown’s evidence was untruthful and unreliable. The banks argue that he had fabricated his account of events and persisted in this fabrication after inconsistencies had been disclosed in cross‑examination. The inconsistencies for which the banks contend include: whether or not Brown was present at the ‘final’ or ‘final final’ negotiations with Campania in ITC (when the drafting of cl 4.05 was accepted); whether he had ever informed Pepper that an amount in excess of £7.6 million might be received; and whether, in March 1990, he had told Edwards about the uncertainties relating to the ITC contract payment. In any event, the banks say, the plaintiffs’ case is founded on the alleged personal perceptions, personal character traits and idiosyncrasies of Brown, which, if true, were no more than unfounded suppositions by him, not supported by facts, or any investigation of facts, either by him or any other witness.
1288 There is no shortage of hyperbole in those submissions and that often tends to make me cautious. The banks went on to remind me that I could not allow Brown to usurp the function of the court and to substitute for the court’s judgment that of Brown (or for that matter the judgment of Love based on his assessment based on the personal perceptions of Brown). On the other hand, the banks submitted that I should accept the opinion of Honey to the effect that although there was some uncertainty in relation to the recovery of the full amount of £7.6 million, the uncertainty was not such during January 1990 as to preclude the inclusion of the ITC payment in that amount in the predictive cash flow until such time as the contrary became apparent. This seems to me to smack of geese and gander. I have dealt, in a general way, with arguments of this type in Sect 8.9.
1289 I do not propose to set out in greater detail the criticisms made by the banks of Brown’s evidence. They are neatly summarised in the plaintiffs’ responsive submission and, save for some particular matters with which I will deal below, I am generally satisfied with Brown’s evidence for much the same reasons as set out in that submission. But the fact remains that Brown’s first witness statement was signed a little over 13 years after the events about which he testified. Memories fade over time and nowhere is this more so than in the realm of impressions and beliefs, rather than empirical fact.
1290 Be all that as it may, there are some things that can be said about this aspect of the evidence. The general tenor of Brown’s evidence was not that uncertainties concerning the receipt from the ITC contract payment lay more in the amount and timing of the receipt rather than as to whether there would be a receipt at all. He believed a number of things that are not seriously in dispute. First, the agreement between TBGIL and Campania was based on accounts that overstated the tax liability by about £4.5 million. Secondly, that there were tax losses for some of the open tax years that could not otherwise be utilised and which could, if necessary, be surrendered to reduce ITC’s tax liability below £7.609 million. Thirdly, cl 4.05 of the purchase agreement had been included after detailed negotiations between TBGIL and Campania about the tax liabilities and the method of reaching finalisation.
1291 I should mention another aspect relating to the second of those points. In his first witness statement, Brown said that BGUK had no other use for the group tax losses but that he ‘was not interested in reducing ITC’s liability for tax (benefiting ITC) and then ending up with a situation where ITC and Campania refused to pay TBGIL under the Stock Purchase Agreement’. I do not read this as indicating any reluctance on Brown’s part to use group losses (that would otherwise go to waste) to bring the ITC tax liability below £7.61 million. He was merely expressing the view that there would not be much point in doing so unless ITC honoured its contractual obligation to reimburse TBGIL to the required level.
1292 It seems to me that here, as in many other aspects of this case, I ought to rely primarily on the contemporaneous record; that is, documents created at around the relevant time. The correspondence between Brown and Inland Revenue over the period concerned appears to be measured and courteous. It is constituted by a series of requests for information, the provision of information and, finally, suggestions for a settlement of the dispute. It is not uncommon for correspondence between taxpayers and the revenue authorities engaged in a large audit or tax dispute to be redolent with bellicose statements, expression of entrenched positions, threats, claims and counterclaims that usually hinder, rather than help, the process of resolution. There is none of that apparent on the face of the correspondence between Brown and Griffin. On the other hand, it is also common experience that disputes with revenue authorities can take time to resolve. Contrary to the plaintiffs’ submissions, I do place some weight on the tenor of the correspondence between Brown and Inland Revenue.
1293 On 22 November 1989 (following discussions with Touche Ross that caused Brown to think that there might be differences over the tax issue), Brown wrote to Thornhill that he was ‘hoping to receive some £5.5 million from ITC plus a share of the interest on overdue tax saving which probably amounts to some £2 million’. He also told Thornhill that he had not finalised the tax affairs of ITC Entertainment Holdings Ltd and that it was possible ‘this company will have a tax exposure which the purchasers have not protected by an appropriate warranty’. I do not understand this to relate directly to the ITC contract payment issue, although existence of such a liability might have affected Campania’s willingness to pay TBGIL for any reduction in the tax liability of ITC.
1294 The 22 November letter had attached to it some schedules that Brown had earlier sent to Touche Ross. The schedules contained Brown’s estimates (which were dependent on the outcome of negotiations with Inland Revenue) of the taxation position. Brown estimated the total tax liability to be £9.2 million, some £1.6 million above the amount mentioned in the sale agreement. He also estimated the tax value of the group relief that would be available as £7.1 million. The difference between the group relief and the increase in the tax provision over that specified in the sale agreement is (roughly) the figure of £5.5 million referred to in the 22 November letter.
1295 There is nothing in the correspondence to suggest that Brown did not believe what he said to Touche Ross and to TBGIL’s solicitor (Thornhill) at the time; namely, that his best estimate was that TBGIL would have a claim against ITC for ‘some £5.5 million’. There is no evidence to suggest that anything happened after November 1989 that altered Brown’s perception. When he wrote to Touche Ross on 28 February 1990, Brown confirmed the estimated total tax liability of £9.2 million and said that ‘the vendor has sufficient tax losses to eliminate the need for ITC to make any payments to the Revenue for all open years’.
1296 The contemporaneous record also includes the BGUK cash flows and it is the case that the ITC contract payment does not feature in them. This is, I think, an important feature of the evidence. I accept that Brown harboured concerns about the timing and amount of the ITC contract payment. I accept his evidence that, in accordance with his usual practice and absent such concerns, he would have passed to Breese the information necessary to have it included in the BGUK cash flows.
1297 It seems to me, therefore, that as at 26 January 1990 there was a likelihood that the tax problems would eventually be resolved in favour of the position being advanced by TBGIL, namely, that the ITC tax liability would be reduced below the £7.609 million provision specified in the sale agreement and that a receipt of an amount of around £5.5 million was a possible outcome. But the amount and the timing were both uncertain.
1298 I place some, although less, weight on Brown’s evidence that had the tax problems been resolved quickly, and in favour of TBGIL’s position, there was doubt about Campania’s ability to pay the debt. A distinction must be drawn between the merits of the dispute and Campania’s capacity to meet its commitments. There is little corroborative evidence suggesting that the merits of any dispute between TBGIL and Campania over the interpretation of cl 4.05 lay in favour of Campania. Brown’s oral evidence contained nothing to suggest that he thought TBGIL’s position on the construction of cl 4.05 was suspect. There is no suggestion in the letters Thornhill wrote to the solicitors for ITC on 23 November 1989 and 26 January 1990 that he had any concern about the issue. So far as I can see, Thornhill did not address the ITC question at all in his oral evidence.
1299 No evidence was led as to the financial position of Campania or ITC in relation to their capacity to pay an amount of up to £7.6 million or of any limitations on their ability to borrow that sum should it have become necessary to do so. Nor was any evidence led about the effect (if any) that an additional tax impost on ITC Entertainment Holdings Ltd would or might have had on ITC’s preparedness to honour its contractual obligation under cl 4.05 of the purchase agreement. Thus, there is only Brown’s oral evidence that he held that opinion. That having been said, there is some evidence emerging from a meeting on 12 March 1990 about Campania’s ability to pay: see Sect 9.7.4.2.
1300 I need to look at evidence other than that of Brown before expressing a final view on the amount and timing of the projected receipt.
1301 The plaintiffs contend that the absence of any mention of the ITC contract payment in cash flows prior to the Garven cash flow is a strong argument in favour of the conclusion that, as at 26 January 1990, its receipt was so uncertain that it cannot be considered in any assessment of objective solvency. I have already mentioned Brown’s evidence in this respect. I turn now to the evidence of Breese, who was primarily responsible for the preparation of BGUK’s cash flows.
1302 Breese said that over the period September 1989 to February 1990 he had ongoing discussions with Brown about the ITC contract. It was one of only two or three significant transactions that were taking place in London at that stage. He had been informed by Brown that he (Brown) had been making slow progress on the finalisation of the figures with Inland Revenue, so that it could not be reasonably estimated at that time when such payment would be received and in what amount. Breese said he did not include any amount in respect of the taxation adjustment arising on the sale of ITC in the cash flows that he prepared up to the end of January 1990, because he did not consider any reasonable estimate could be made at that stage as to the timing of any payment and the amount which TBGIL might be entitled to. He also mentioned in evidence his doubts about Campania’s capacity or willingness to pay such an amount but, once again, I place less (although some) weight on that evidence. Breese had no recollection of ever having notified any of the accountants for the Bell group or Simpson or Oates of the possibility of a payment being received at some time in the future by TBGIL in respect of the ITC contract payment. He had no recollection of discussing it with Pepper, although he knew of Pepper’s involvement in this matter in March 1990 and he knew that Brown was working with Pepper.
1303 Breese said that during the period September 1989 to February 1990, he was also liaising with Michael Edwards about the cash flows, including the ITC contract. As Edwards was not called to give evidence, I do not think this takes the matter much further. Breese said that he had had some experience in tax matters and in deciding whether or not to include items he was relying partly on his own views but primarily on what Brown had been telling him.
1304 The first appearance of the ITC contract payment in a Bell group cash flow was in the Garven cash flow (19 February 1990). I will deal shortly with the evidence (such as it is) as to how that came about. On or about 2 March 1990 Breese received via Lloyds Bank, the Garven cash flow. He said this was the first full Bell group cash flow he had seen and it was the first time he had been made aware that the ITC contract payment was included in a cash flow. He said he played no role in the inclusion of this amount in the Garven cash flow or of the choice of the date when it was supposed to be received. So far as he was aware, decisions in this respect were made in Perth.
1305 On 15 March 1990 Breese sent an updated cash flow for the BGUK group as of 9 March 1990. The statement included a tax refund of £7.6 million in the week ending 22 June 1990. I do not think there is any dispute that this is the ITC contract payment. In his witness statement Breese explained why he had made this entry. He said that it was not because he had changed his view of the amount that would be received and when, but because it had been included by Garven and he wanted his cash flow to be consistent with the Bell group cash flow produced by Garven in Perth. He also said: ‘Including the payment in the cash flow also enabled me to communicate my view that its receipt was very uncertain’.
1306 Breese sent the cash flow to Bernie New of the Bond (or Bell) Treasury in Australia, under the cover of a memorandum dated 15 March 1990. He commenced with the words ‘as discussed’. He proceeded to mention a tax refund on some dividends (par 2) and some sale proceeds (par 4) to which there attached a ‘large degree of uncertainty’. Yet the paragraph concerning the tax refund from the ITC contract payment included no such qualification. This was pointed out in cross‑examination. Breese’s explanation was that he had not needed to add such a qualification because it was a high profile transaction and his communication of a view that the ITC receipt was uncertain was probably made in the discussions with New prior to the 15 March 1990 memorandum. When asked to explain why he had mentioned the level of uncertainty in only two of the three items, he said:
I fully accept that I have used the word ‘uncertain’ in paragraph 2 and in paragraph 4 and not in paragraph 3, but to my mind I have three items there which I’m flagging as being items which are worthy of note and the fact that I’m stating in there that I’m including its maximum value to me is highlighting a degree of uncertainty.
1307 I accept that explanation. I do not think that Breese was being untruthful. I am also mindful that in cross‑examination he was asked whether he could recall Brown telling him in the period after January to March that he was making good progress in agreeing the tax computations. Breese responded: ‘He may have mentioned he was making progress but as I say, there’s nothing that he said that made me change my view on whether we should include that payment on it’. This, too, suggests to me that the degree of uncertainty surrounding the ITC contract payment was such that the officers directly concerned with compiling the cash flow information were worried about it.
1308 There were other accounting officers who were, or might have been, privy to some information concerning the ITC contract payment. None of Peter Whitechurch (the company secretary of TBGIL), Michael Swan (the group financial accountant for BCHL from September 1989), David Winstanley (an accountant with TBGL and later BCHL) or Graeme Baker (company secretary of TBGL from January 1989) gave any relevant evidence concerning the ITC contract payment.
1309 Walkemeyer (an accountant with TBGL until 19 January 1990) gave evidence that he could not recall ever being told or made aware of a potential receipt from the ITC contract payment. When asked about it in cross‑examination, he could not recall what the ITC contract payment was.
9.7.4.2. The evidence of Aspinall and Mitchell
1310 Aspinall testified that, to the best of his recollection, the ITC contract payment became known to him in late January or early February 1990. He may not have been aware of it until a meeting with Mitchell and Oates on 7 February 1990. According to his usual practice, he would have discussed the issue with Garven before the latter produced the Garven cash flow. He acknowledged that he had no independent recollection of how the figure of $17 million was arrived at, or precisely how it arose, except to say that he had a general recollection that it was an amount owing under the terms of the management buy‑out of ITC.
1311 On 12 March 1990 Aspinall (together with Simpson, Garven and Edwards) met representatives of the Lloyds syndicate banks, Bob Weir (Westpac) and Damien Perry (A&O). He reported in writing on 12 March 1990 to Beckwith and Oates in relation to that meeting. In the course of that report, Aspinall said that ‘there was also a genuine concern about the ability of ITC to pay us most of the approximately A$17 million tax grouping’. In his evidence, he could not recall ‘details of the uncertainty’ but said he was obtaining regular advice as to what was happening in that regard from Oates.
1312 Aspinall was not cross‑examined about the reference to the ITC contract payment in the 12 March 1990 memorandum. I cannot therefore say by whom the concern was expressed, or whether it related to all or any combination of doubts about the outcome of the negotiations with Inland Revenue, the dispute with Campania about the construction of the purchase agreement or the ability of ITC to pay the amount if a demand were to be made. However, the fact that Aspinall saw fit to report that there was ‘genuine concern’ about the matter lends some support to the expression of opinion by Brown and Breese that ‘there may be a problem with ITC meeting the liability’.
1313 On 10 April 1990, Aspinall received a memorandum from Pepper saying that he expected that sufficient group losses would be available to allow a claim to be made for the full amount of £7.6 million. Pepper also said that ITC had raised some technical and numerical matters and that ITC wished to ‘meet and discuss the claim prior to agreeing to make payment’. He said that he would meet the Chief Executive of ITC ‘within a few weeks’ to discuss timing and the amount of payment, which would be due within 30 days after the issue of an assessment. Pepper was hopeful of receiving payment by 30 June 1990. In his witness statement, Aspinall referred to this memorandum and said: ‘On the basis of this advice I believed that £7.6 million would be received from ITC by the middle of May 1990 and, at the latest, payment was expected by 30 June 1990’. I think it is stretching things too far to say that the memorandum supports a conclusion that the amount would be received by the middle of May 1990. In my view, the combination of ‘a few weeks’ within which a meeting was to occur and a 30 day period following the issue of an assessment (even if they were to overlap) supports the 30 June 1990 thesis, but not the projection of a receipt by mid‑May 1990.
1314 In cross‑examination Aspinall agreed that until late January or early February 1990 he had little knowledge of the detail of the ITC contract payment or the stage to which negotiations with Inland Revenue had reached or whether he was aware that Campania might dispute its obligation. Aspinall could not say whether Garven had spoken to anyone from BGUK before including the ITC contract payment in the Garven cash flow.
1315 The ITC contract payment was not included in the 19 January or 26 January cash flows. The TBGL directors met on 7 February 1990 and there is a reference in the minutes to the 7 February cash flow with this notation:
The Directors considered the cash flow as tabled, and the advice from Mr Oates that the $10 million deficit, will be covered by tax refunds due to certain United Kingdom subsidiaries of the Group in the sum of approximately £8 million.
1316 This entry suggests that the ITC contract payment was not included in the cash flow considered at the 7 February meeting, a document that I have not been able to identify in the evidence. Neither Garven nor Oates was called to give evidence. There is no other evidence as to when or how Garven came to learn of the ITC contract payment. Brown’s evidence was that he had not spoken to Oates about the ITC contract payment in January or up to 7 February 1990. I think it is reasonable to infer that Garven found out about it, or at least assembled sufficient detail concerning it, at some time between 26 January and 7 February 1990 and that the discussions referred to by Aspinall occurred during that period. I am not able to be any more exact than that.
1317 Pepper knew about the ITC contract payment issue and it is likely that he had discussions with Brown about it. He might have told Oates about it. But neither Pepper nor Oates were called to give evidence. It would be pure speculation to conclude that Pepper told Oates or Aspinall (or Mitchell) about it, and proffered an opinion concerning the likely timing and amount of any receipt, before the end of January 1990. I do not intend to engage in speculation
1318 In his witness statement, Mitchell identified an anticipated payment from the ITC contract as a non‑core asset that was available ‘to further reduce debt or to assist in future cash flow requirements’.
1319 In cross‑examination, he said that while he could not (in 2005) recall what the ITC contract was, he believed that he would have known about it in 1990. He said someone must have brought it to his attention at the time because it was not the sort of thing he handled on a day‑to‑day basis. But he could not say by whom or when. He could not recall whether the entity obliged to make the payment to TBGIL was challenging the obligation or whether agreement had been reached with Inland Revenue concerning the surrounding taxation implications. He agreed that he was not able to say anything about the value of the ITC asset.
1320 I am not sure that I can take anything much from the evidence of Mitchell (or for that matter Aspinall) on questions surrounding the ITC contract payment for the purposes of assessing objective solvency.
9.7.4.3. The evidence of the experts: Love and Honey
1321 Love described the question that he considered in these terms: whether, as at 26 January 1990, TBGIL could have obtained cash promptly by selling or mortgaging its right to receive payment from ITC under the ITC contract. He opined that, at the end of January 1990, it would not have been possible to sell or mortgage such a contingent and unusual receivable. First, as the final assessment had not been issued, the amount (if any) of the potential receivable and its timing was not known with certainty. Secondly, and more importantly, it was not like a trade debt, generated in the ordinary course of a business, where there is a ‘bad debt’ history which can be examined in assessing the risk associated with purchasing or factoring an entity’s trade receivables. Instead, it was a unique transaction, arising out of a commercial agreement which included other terms, all of which were embodied in a long formal contract. Thirdly, the extent of the right was the subject of dispute between the contracting parties as at January 1990. Love believed it would have been commercially imprudent to invest in that right while the dispute remained unresolved.
1322 According to Love, even beyond January 1990 and after the amount of the debt had been crystallised by issuance of the final assessment, it was unlikely that the right could have been sold or mortgaged. He felt that, although the right could not have yielded cash by sale or mortgage, the contract had the potential to yield some amount of cash by a payment under it, once the final assessment had been issued and if the dispute were resolved and provided ITC had the capacity to pay.
1323 In his February 1998 report, Love had formed a different view concerning the ITC contract payment. He said:
As at late January 1990, it could not reasonably have been expected that the amount, if any, of the payment would be determined for some months. Without forming an opinion on the likely outcome of events, for the purposes of elucidating the cash flow position of certain Bell group companies in section 11 of this report, I have included the receipt of the sum of $8.530 million in June 1990, that being approximately one half of the maximum sum payable and being the month prior to when moneys were actually received.
1324 I accept the banks’ submission that when the first and final versions of the reports are compared, the only real difference in the reasoning process disclosed by Love (and which caused him to exclude the amount entirely) was his assessment of the opinions and perceptions of Brown and Breese. In particular, Love felt that the level of uncertainty reflected in the first report was amplified by those matters. In summary, the matters were:
(a) the opinions of Brown and Breese, both of whom considered that, as at 26 January 1990, the ITC contract payment should not be included in the BGUK cash flow. It was not, in their opinions, sufficiently certain for Brown to raise it with Breese as a possible cash flow item and it was not sufficiently certain for Breese to include it in his cash flow;
(b) that the dispute relating to the terms of the purchase agreement and the maximum amount payable under it was in its infancy as at 26 January 1990. Brown’s view was that TBGIL would have to accept a lesser amount or await the outcome of litigation, which affected Brown’s assessment of the likely recovery both as to time and amount;
(c) that the amount of group relief TBGIL would be able to provide was uncertain, especially in circumstances where final assessments had not been issued; appeals had been lodged against interim assessments, which raised concerns about the disallowance of cost of sales (which could take years to be agreed); and there had been an adverse determination on a dispute with the Inland Revenue about a loss of £43 million claimed by ITC Holdings, which could substantially increase its tax liability; and
(d) Brown considered that there was a real likelihood that Campania would refuse to pay the amount claimed and had concerns about its financial capacity to pay; while TBGIL was a distressed and anxious vendor, which could impair its capacity to settle the dispute.
1325 I have serious doubts whether Love’s evidence on the ITC contract payment is admissible as an expert opinion. This is because it depends, materially, on forming a judgment about UK tax law and practice and I did not understand Love to profess any particular expertise or experience in those matters. Love is an experienced insolvency practitioner. One of the things that insolvency practitioners do in almost every administration is collect debts owed to the insolvent entity. There are two aspects to this. First, the range of areas in which such debts arise is almost infinite. A liquidator might one day be dealing with a troubled building sub‑contractor, where debtor–creditor relationships are (usually) relatively standard fare, and the next with a failed general insurer with complex reinsurance claims to be recovered. A liquidator must rely on advice from people with expertise in the area. But what is not clear is the extent to which Love applied his own mind to the concerns expressed by Brown (concerning the tax issues) or whether he simply accepted the view that Brown had expressed.
1326 The second aspect is that, in deciding whether to pursue the recovery of a debt, liquidators generally look at a whole range of considerations including the merits of the claim, the likely cost to be expended in recovery processes and, importantly, the ability of the debtor to pay if the action is successful. In relation to the last of these considerations, liquidators will no doubt question the debtor’s management about their assessment of the debtors’ means. But the liquidator should make his own assessment. In his evidence about cash flow forecasting generally, Woodings said that whether a cash inflow or outflow was likely to materialise required ‘an objective judgment based on a consideration of all information known and which can be obtained by inquiry’. In assessing a debtor’s ability to pay, a liquidator would not generally limit himself or herself to what management says but would take into account ‘all information known and which could be obtained on inquiry’. There is nothing in Love’s evidence to indicate that he made any independent assessment of Campania’s ability to pay. I am not aware of much, if any, documentary material tendered in this case that went to that issue.
1327 An expert opinion is only as good as the factual matrix on which it is based. I have to make findings of fact on Brown’s evidence and if my assessment of Brown’s views differs from that which was accepted by Love, then Love’s opinion must, at least to that extent, suffer. And there are some relevant areas in which an issue of this type is raised. For example, I have said that there is no empirical evidence to support Brown’s view concerning the willingness or preparedness of Campania to pay the debt if it were found to be owing. This is one of the factors that influenced Love. Similarly, Love has proceeded on the basis that there were doubts about the availability of group losses that could be surrendered if necessary. That is not how I read Brown’s evidence. He was reluctant to surrender losses if ITC then turned around and refused to pay. But that is a different thing to saying that sufficient losses might not be available.
1328 It is difficult to disentangle the various factors that together influence a final conclusion. This is one of the reasons why the law says that the underlying facts on which an expert opinion is based must be disclosed and proved. I cannot say what Love would have concluded had, for example, these two additional assumptions on which he relied been absent from his instructions.
1329 For these reasons, I place no weight on Love’s opinion about the ITC contract payment. But I must stress that this discussion is limited to the ITC contract payment and I have had regard to Love’s opinion in other areas.
1330 Honey concluded that, as at 26 January 1990, it could have been anticipated that £7.6 million would be recovered from ITC pursuant to cl 4.05 of the purchase agreement, if the tax liability of ITC could be reduced to nil by the surrender of group relief. He acknowledged that there was some uncertainty in relation to the recoverability of the full amount of £7.6 million, but thought that the uncertainty was not such during January 1990 as to preclude the inclusion of the ITC contract payment in the amount of $17.1 million in any predictive cash flow, until such time as the contrary became apparent. He said that, in the light of the uncertainty that existed at January 1990, part of the role of the directors and management of the Bell group would have been to monitor recovery of the ITC contract payment and to formulate appropriate responses in managing the implications of the ultimate realisation for the cash flow.
1331 If there is an admissibility problem with Love’s evidence on the basis that he has not demonstrated expertise in UK tax law and practice, it applies equally to Honey. In the next section I will have more to say about the concept of monitoring cash flows. But, as with Love, I prefer to base my conclusions about the ITC contract payment on the primary facts and on what I think should be drawn from them, rather than on the opinion expressed by Honey.
9.7.5. The ITC contract payment: conclusion
1332 What do we know about the ITC contract payment as at 26 January 1990? The answer is: a number of things.

1. TBGIL had an agreement under which it was entitled to receive some moneys from ITC depending on the finalisation of tax assessments for the years ending 1984 to 1988.
2. Brown and Thornhill believed that the proper construction of the agreement entitled TBGIL to receive up to £7.609 million and the full amount would be payable if final tax assessments reduced the tax liability of ITC to nil.
3. Brown believed that there were group losses that could be surrendered in favour of ITC (if necessary) to bring about the position in (b), at least to the extent necessary to raise in favour of TBGIL an entitlement to £5.5 million.
4. Negotiations with Inland Revenue were progressing but it could not be said that final resolution was imminent. Brown was concerned not to place undue pressure Inland Revenue for a quick settlement because of fears that it might cause them to open or reopen other areas of enquiry that might rebound on the companies.
5. A dispute had arisen with ITC, but it was embryonic. On the materials then available, those representing ITC were suggesting (at least on one view of it) that the maximum liability was around £2 million. Brown and Thornhill were clear on their interpretation of the purchase agreement.
6. There were some concerns about ITC’s ability to pay if and when the tax dispute was resolved. The ITC contract payment had not (at that stage) appeared in any of the cash flow information prepared by the BGUK group for transmission to the Bell or Bond Treasury divisions in Australia.
   1333 Against that background it seems to me to be difficult to conclude that the view that something could be collected from ITC was untenable. There was uncertainty surrounding the payment, both as to its amount and its timing. The uncertainties cannot simply be dismissed. In accordance with what I said in Sect 9.2.5.2, it is appropriate to look at events occurring after 26 January 1990 to test that preliminary conclusion. Certain things happened during this period.
7. In late January or early February the Australian arm of the group contemplated inclusion of the ITC contract payment and it was included in its full amount for receipt in June 1990 in the Garven cash flow.
8. Pepper began to take a hand in both the negotiations with Inland Revenue and the discussions with Campania.
9. Early in March 1990 Brown decided (and I doubt he did it without consultation with Pepper or someone else within the Bell structure) to engage in the ‘high‑risk strategy’ of discussing with Inland Revenue a negotiated settlement.
10. Breese then included the amount in the BGUK cash flow materials delivered to Australia.
11. Negotiations were entered into with Campania.
12. Senior counsel’s opinion supported the view that the merits of the construction argument lay with TBGIL rather than with Campania.
13. By the end of June 1990, a satisfactory result had been achieved with Inland Revenue, appropriate assessments were issued and a settlement reached with Campania.
14. By early July settlement proceeds amounting to about £4.7 million had been received.
    1334 Brown’s view that the ITC tax liability could be reduced and that TBGIL might have to accept from Campania something less than the full amount in a negotiated settlement turned out to be correct. None of that is surprising. It is common experience. But it cannot be overlooked that the eventual settlement came about after Brown embarked on what he described as a ‘high‑risk strategy’. Fortunately for BGUK, the strategy bore fruit.
    1335 Honey took the view that the directors and management of the Bell group would, as part of their normal functions, have monitored recovery of the ITC contract payment to formulate appropriate responses in managing the implications of the ultimate realisation for the cash flow. This is a recurring theme in the banks’ cash flow case; namely, that a cash flow is not a static document and it is part of the management function to adapt to changing circumstances. While I agree with that as a general statement, money cannot be conjured up where it does not exist. The ITC contract payment is a good example.
    1336 The item was included in its full amount for receipt in June. No doubt, in accordance with their management responsibilities, the directors would have monitored progress of the several aspects that had to be finalised in order to achieve the desired result. What would have happened if Brown’s ‘high‑risk strategy’ caused Inland Revenue to open or reopen other lines of enquiry into the tax affairs of the BGUK group? According to Brown, the investigations could have taken a number of years. What would have happened had Campania stood on its digs and refused to pay? Presumably, litigation would have ensued. In that event, management would have been forced to adapt to changing circumstances by excluding the receipt altogether from cash flows or adjusting the amount and (or) timing of the receipt. But there is no evidence that in the circumstances confronting the Bell group in 1990, management could have compensated for an adverse turn of events in relation to the ITC item by replacing it with an alternative source of funds in the same or a similar amount. The ability to adapt to changing circumstances has to be understood in that light.
    1337 I am not satisfied that the directors or senior management of TBGL knew about the ITC contract payment before 26 January 1990. In my view, the circumstances as they prevailed at 26 January 1990 and looked at in their entirety, militate against inclusion of a potential receipt from the ITC contract payment in the cash flows. There were uncertainties both as to amount and timing of the potential receipt. Those uncertainties remained for some time after January 1990. The BGUK group was in wind down and the prospect of negotiated settlements (both with Inland Revenue, particularly in order to effect a receipt by June 1990) were apparent, but not certain. It is common experience that negotiating a settlement of a dispute can result in receipt of the full amount, part of the amount claimed, or nothing at all. In this instance, only part of the disputed sum was recovered.
    1338 For all of these reasons, I believe that in the assessment of objective solvency a receipt from the ITC contract payment should not be included in the predictive cash flows.
    9.8. The sale of Q‑Net
    9.8.1. The relevant sale and purchase agreements
    9.8.1.1. The initial purchase of Q‑Net
    1339 In May 1985, the State of Queensland established a telecommunications service using the AUSSAT satellite. It was known as Q‑Net. By deed dated 17 June 1988 (the initial Q‑Net sale agreement), Stilton Pty Ltd (a wholly owned subsidiary of BML that was subsequently named Q‑Net Pty Ltd (Q‑Net)) acquired from the State of Queensland certain equipment and the business name Q‑Net. Allied to the initial Q‑Net sale agreement was a service agreement entered into between the State and Stilton, by which Stilton was to supply certain services to the State for reward. The initial term for the provision for services was three years, after which Q‑Net had (in effect) a right of first refusal to continue providing those services and to provide new services (as defined) should the State so require.
    1340 The purchase price of $11.1 million was payable in instalments: $1 million on completion, $3 million on each of 30 June 1989 and 30  June 1990 and $4.1 million on 30 June 1991. One of the conditions of the initial Q‑Net sale agreement was the provision by BML of a guarantee of the obligations of Q‑Net, including the payment of the outstanding instalments. Another condition required Q‑Net to execute a negative pledge by which Q‑Net would agree not without the prior written consent of the State (which consent was not to be unreasonably withheld) to give any security over its assets unless the State specified in writing that the security was an exempt one. No executed copy of the negative pledge was adduced in evidence and there is no evidence as to what would constitute an ‘exempt security’.
    1341 The initial Q‑Net share sale agreement also included a right of first refusal in favour of the State to repurchase the assets if Q‑Net were to be sold or if control of the company were to change hands other than to a related company.
    9.8.1.2. Intra-group sale of Q‑Net
    1342 On 17 October 1989 Belcap Nominees Pty Ltd (Belcap Nominees), a wholly owned subsidiary of TBGL, entered into a share acquisition agreement with BML by which Belcap Nominees agreed to purchase all of BML’s shares in Q‑Net, Bond Communications (Australia) Ltd (BCA) and Bond‑Net Pty Ltd (Bondnet). BCA owned 70 per cent of the shares in Eastel Pty Ltd, a joint venture vehicle with British Telecom. Bondnet was a telecommunications company that operated a transmission tower in the central business district of Perth and resold space to people to use for two‑way radios and other communications devices. I will call the 17 October 1989 share sale agreement between Belcap Nominees and BML ‘the 17 October sale agreement’.
    1343 Prior to the creation of the 17 October sale agreement Albany Broadcasters Ltd (Albany Broadcasters), a subsidiary of TBGL, had entered into an assets sale agreement with Belcap Investments Pty Ltd (Belcap Investments), a subsidiary of Albany Broadcasters (and thus another subsidiary of TBGL), by which Albany Broadcasters sold to Belcap Investments the licence granted pursuant to the Broadcasting Act 1942 (Cth) in respect of commercial radio station 6VA Albany (the 6VA licence). A back‑to‑back agreement was entered into between Albany Broadcasters and BML, by which Albany Broadcasters sold all its shares in Belcap Investments to BML. The effect of this transaction was the transfer of effective control of the 6VA licence to BML. The purpose of the transfer of the shares in Belcap Investments to BML was to put BML in a position where it could sell radio station 6VA and other broadcasting assets to an unrelated third party.
    1344 The asset sale agreement between Albany Broadcasters and Belcap Investments in relation to the 6VA licence, and the share sale agreement between Albany Broadcasters and BML in respect of the shares in Belcap Investments, were subject to a condition precedent, namely, the consent in writing by the Australian Broadcasting Tribunal (the tribunal) to the transfer of the 6VA licence from Albany Broadcasters to Belcap Investments. The asset sale agreement was also subject to the fixing of the purchase price. The share sale agreement was subject to the completion of the assets sale agreement. Under s 89A of the Broadcasting Act, the tribunal could refuse consent to the transfer of a licence if it appeared to the tribunal that it was advisable in the public interest to refuse a transfer on the ground that the transferee was not a fit and proper person to hold a licence. The condition precedent in the asset sale agreement between Albany Broadcasters and Belcap Investments in relation to the fixing of the purchase price was fulfilled on 27 November 1989 when the parties formally agreed on the purchase price that had been left open.
    1345 The 17 October sale agreement provided for a completion date of 31 August 1989 or such other date as agreed between the parties; the completion date was extended several times by arrangement between the parties. The purchase price was $1,350,002, apportioned as to $1 million for Q‑Net, $2 for BCA and $350,000 for Bondnet. From 31 October 1989 TBGL, through Belcap Nominees, took control of Q‑Net, Bondnet and BCA. On 31 October 1989 Aspinall, Mitchell and Simpson were appointed directors of Q‑Net. The Q‑Net share sale agreement was also subject to 11 conditions subsequent to be completed by 31 December 1989, failing which either party could rescind the agreement.
    1346 One of the conditions subsequent was the completion of the sale of the issued share capital in the licensee of radio station 6VA. Another condition required TBGL to grant a guarantee in favour of the State in respect of the obligations of Q‑Net. The State refused to release BML from its earlier guarantee but accepted a guarantee from TBGL. TBGL also executed a deed of indemnity in favour of BML.
    1347 On 13 February 1990 an agreement amending the initial Q‑Net sale agreement was executed by the State and Q‑Net under which the State consented to the sale of Q‑Net from BML to Belcap Nominees but preserved the operation of the right of first refusal if Belcap Nominees wished to sell Q‑Net to a third party.
    1348 The managing directors’ report in the 1989 TBGL Annual Report (issued in November 1989) noted, under the heading ‘Communications’, that:
    [S]ince year end the Group has acquired Bond Communications [whose] principal activity is the operation of Australia’s only privatised satellite communications network, Q‑Net … A number of proposals and initiatives are being examined with a view to developing the company into a major force in the national and international telecommunications markets.
    1349 It appears that the arrangements in the 6VA sale agreements and the 17 October sale agreement had been in contemplation for some time. On 8 June 1989 BML had advised the tribunal of the proposed sale of the 6VA licence and the on‑sale to the independent third party. This probably explains why the 17 October sale agreement specifies a completion date of 31 August 1989.
    9.8.2. Cash flow implications of the Q‑Net sale
    1350 On the banks’ pleaded case, Q‑Net would have generated sale proceeds of $7.5 million in or about April 1990 and Q‑Net and BCA would, between January and April 1990, have generated trading income of about $2.57 million. But that trading income would have been offset by acquisition costs, capital expenditure and operating expenses in the same period (including for the whole of January) in excess of $5 million. The banks contend that the sale proceeds of Q‑Net would have been available to meet the Bell group’s cash flow deficiency. The plaintiffs’ position is that nothing should be brought to account because there were too many impediments to permit a sale of the assets in time to counter the cash flow deficiency and, in any event, the realisable value was nil. The January and February Bell group cash flows indicate net trading cash outflows for the period.
    1351 The cash flows adduced in evidence up to and including the 1 December cash flow have no entries for the trading of Q‑Net, but all cash flows thereafter do reflect cash flow from the operations of that entity. The net cash outflows from Q‑Net trading disclosed in the period ending 31 December 1990 in the 19 January, 26 January and Garven cash flows are as set out in Table 13.
    Table 13
    Q‑NET: NET CASH OUTFLOWS
    CASH FLOW DOCUMENT PERIOD COVERED NET CASH OUTFLOW
    19 January 19 Jan – 31 Dec 1990 ($2.320 million)
    26 January 26 Jan – 31 Dec 1990 ($2.283 million
    Garven 19 Feb – 31 Dec 1990 ($1.993 million)

1352 While the spreadsheet for the Garven cash flow made no provision for the sale of Q‑Net, the accompanying summary included a receipt of $7.5 million from Q‑Net as one of the additional sources of cash to cover the deficiency. The summary does not indicate the anticipated date of that receipt.
1353 Consistent with the plaintiffs’ submissions, Cash Flows 1, 2, A and B make no provision for either the proceeds of sale of Q‑Net or of ongoing trading results. In relation to the latter, Woodings said he did not consider it appropriate to include any cash flow from operations of Q‑Net in Cash Flow 1 or Cash Flow 2 because Q‑Net was not, as at 26 January 1990, a member of the Bell group and that, in any event, its exclusion improved the cash flow from TBGL’s perspective. The Honey cash flow makes provision for the receipt of $7.5 million in April 1990 (being the sale proceeds) but also allows for a net cash outflow from operations in the period from 1 January 1990 to 30 April 1990 of $227,000.
1354 I will have more to say about the treatment of the Q‑Net position by the experts and the inclusion or exclusion of that item in Love’s cash flows and the Honey cash flow in a later section. But what I have said in this section is sufficient to give a flavour to the significance of the item in the objective solvency case.
9.8.3. Impediments to the sale of Q‑Net
1355 It does seem strange that despite the fact that the conditions in the 17 October sale agreement had not been satisfied, the directors seem to have proceeded on the basis that Q‑Net was a Bell group asset. But that is what they did. As early as 26 September 1989, Walkemeyer (the accountant at Bell Corporate) was communicating with a director of Q‑Net concerning the weekly cash flows. Bell group management reports show that Q‑Net was accounted for in the Bell group profit and loss statements for the six months to December 1989. In November 1990 cash remittances were made by Q‑Net to TBGL and salaries and expenses were paid on Q‑Net’s behalf. The results were ultimately recorded in a loan account between Q‑Net and BGF.
1356 In his evidence, Aspinall said that in January 1990 he expected the 17 October sale agreement to be completed and that from that time he had been attempting to sell Q‑Net to various parties. But treating a commercial operation as an asset for accounting purposes and a question about where legal title actually resides (and the consequences, if any, of the resolution of that question) are, of course, different things.
1357 The completion date for the 17 October sale agreement was extended by arrangement from time to time. As at 26 January 1990 completion was scheduled for 28 February 1990. It was further extended on several occasions until 3 September 1990 when TBGL finally rescinded the agreement. In other words, Belcap Nominees never obtained legal title to the assets and it was never able to sell those assets. The TBGL annual report for the 15 months to 5 October 1990 contains the bland statement that the sale reported as a post‑balance date event in the 1989 Annual Report did not eventuate as the conditions were not fulfilled and the company rescinded the agreement. Reference to the TBGL weekly cash flow reports for periods in April 1990 and following indicate a dramatic decline in cash flows from operations compared to the projections in the Garven spreadsheets.
1358 It is an important facet of the plaintiffs’ case on this issue that, as at 26 January 1990, there were material impediments to a sale of Q‑Net, making it unlikely that it could be sold by April. It is to those impediments that I now turn.
9.8.3.1. The Australian Broadcasting Tribunal
1359 It must be remembered that, as at 26 January 1990, the acquisition by Belcap Nominees of Q‑Net was conditional upon the sale of radio station 6VA to BML and that this was conditional upon Tribunal approval. The relationship between the Bond interests and the tribunal was, not to put too fine a point on it, uneasy.
1360 Companies holding certain television and radio licences were subsidiaries of BML, which was a subsidiary of BCHL, the majority shareholder of which was Dallhold, which was controlled by Alan Bond. An incident or series of incidents occurred in which Alan Bond was involved that caused the tribunal to launch an inquiry as to the fitness and propriety of companies controlled by him to hold licences. In June 1989 the tribunal found that Alan Bond was not a fit and proper person to hold a licence and thus the licensee companies that he controlled were not fit and proper. This put the licences in jeopardy of revocation.
1361 On 12 September 1989 the Full Court of the Federal Court set aside the decision of the tribunal that Alan Bond and the licensees were not fit and proper. It is not necessary to explain the reasons for those conclusions. Special leave to appeal to the High Court was granted to the tribunal on 13 October 1989. This was the position as at 26 January 1990. The hearing of the appeal by the High Court occurred at the end of February 1990 and judgment was delivered on 26 July 1990. The High Court found that it was open to the tribunal to make the findings that it had made; the orders of the Full Court of the Federal Court were set aside.
1362 In June 1989, the solicitors acting for Belcap Investments sent a letter to the tribunal attaching an application for approval of the transfer of the radio licence for 6VA from Albany Broadcasters to Belcap Investments and referring to the proposal to transfer Belcap Investments from Albany Broadcasters to Bond Media. On 12 July 1989 the solicitors advised the tribunal that, on 30 June 1989, Bond Media had entered into an agreement with Albany Broadcasters to acquire the whole of the issued capital of Belcap Investments.
1363 An inquiry into the transfer of the 6VA licence was commenced on 21 August 1989. But the decision of the tribunal to approve the licence transfer was not handed down until August 1990. The transfer application was impeded by the inquiry into the fitness and propriety of persons associated with Alan Bond to hold a media licence. In approving the transfer, the tribunal noted that Belcap Investments was a subsidiary of Albany Broadcasters and that the transfer of the licence to it was an essential element in the process by which the licence would be transferred to a third party unrelated to Alan Bond.
1364 The plaintiffs contend that, as at 26 January 1990, Belcap Nominees did not then have title to the Q‑Net assets, it could not reasonably be anticipated that it would obtain title and it was not therefore in a position to sell those assets. This is because the sale to Belcap Nominees was conditional on the tribunal approving the transfer of the 6VA radio licence. The plaintiffs say that it was highly unlikely the tribunal would have approved anything involving BML until the proceedings as to whether or not Alan Bond was a fit and proper person to hold a broadcasting licence were concluded. The banks’ retort is that this overlooks the fact that the parties to the 17 October sale agreement were part of the same group and were ‘friendly parties’ and that there was no evidence to support the contention that the tribunal would await finalisation of the fitness and propriety litigation.
1365 It was put to Aspinall that he understood at the time that unless the tribunal approved the transfer of the 6VA licence, the condition precedent in the agreement between Albany Broadcasters and BML would not be satisfied and, accordingly, the condition subsequent in the 17 October sale agreement would not be satisfied. It would follow that Belcap Nominees would not be in a position to give good title to the Q‑Net assets to a purchaser. Aspinall agreed but said that it was something that could be rectified.
1366 I wonder if it is as simple as that. No detail was given of the means by which the problem could be rectified. One obvious answer is that BML and Belcap Investments could reach some accommodation, such as waiver of the condition. But no attention was given to the effect (if any) of such a waiver on other companies, including the independent third party that was eventually to take control of the 6VA licence. Radio station 6VA had been an asset in the TBGL stable for many years. There is no obvious connection between it and the Q‑Net assets that were being purchased. It can be assumed that those who negotiated the several agreements had a reason for including as a condition in the 17 October sale agreement the completion of the 6VA asset sale. Delving back into the distant past, I recall a time when the conveyancing scale for solicitors’ costs made allowance for drafting and engrossing documents according to the number of folios. But I doubt that this explains the inclusion of the condition. I am not prepared to speculate on the reason why the agreements were tied together. But nor am I prepared to accept (on the evidence as it is) that the condition could easily have been waived.
1367 I also accept the plaintiffs’ submission that it was unlikely the tribunal would have approved the transfer of the 6VA licence until the conclusion of the litigation. In its report of 21 August 1990 explaining the decision to approve the transfer application, the tribunal set out the history, including the process of the litigation through the Federal Court and the High Court. The application had been lodged on 8 June 1989 and the inquiry had commenced on 21 August 1989. In par 9 of the report the tribunal indicates that one of the reasons that the inquiry did not proceed was because ‘by that stage the tribunal was awaiting the decision of the Federal Court’. It is clear from reading the report, in particular par 7, par 8, par 12, par 13 and par 14, that the tribunal was concerned about the issue relating to fitness and propriety. The decision to approve the transfer of the 6VA licence was conditional on the provision of unequivocal evidence, such as executed contracts, that the on‑sale to the independent third party was extant.
1368 As at 26 January 1990 leave to appeal to the High Court had been granted. It can be assumed that the parties would then have been aware that hearing dates of 27 February to 1 March 1990 had been set. The decision is reported: Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321. Mason CJ, at 365, described the issues canvassed in the appeal as ‘important questions affecting the Federal Court’s jurisdiction … as well as concerning the limits and grounds of review … under the [Administrative Decisions (Judicial Review) Act]’. The reasons for decision extend over 72 pages of the Commonwealth Law Reports. Given that background and looking at the matter in January 1990, it could not reasonably have been thought that the High Court would have pronounced judgment in any lesser time than was actually taken.
1369 In my view, the fact that Belcap Nominees did not have title and could not reasonably have expected to obtain title for some time was an impediment to the prospects of an early sale of the Q‑Net assets.
9.8.3.2. Negative pledge, right of first refusal and guarantee
1370 I do not accept the plaintiffs’ submission that the negative pledge agreement (assuming one was signed) was a serious impediment to a sale of the Q‑Net assets. I say this because of cl 5 of the form of negative pledge in the schedule to the initial Q‑Net sale agreement, which reads as follows:
The Company undertakes that it will not sell, convey, transfer otherwise dispose of, or create any interest in, all or any part of its assets or any interest therein (either in a single transaction or in a series of transactions whether related or not) for less than full consideration in money or moneys worth on an arm’s length basis.
1371 There was no evidence that Aspinall contemplated selling the Q‑Net assets other than for full consideration on an arm’s length basis. The plaintiffs also contend that the other aspect of the negative pledge, namely restrictions on charging assets, would introduce an impediment to a sale because a purchaser would not be able to borrow against the assets it was buying. There are, I think, at least two answers to this proposition. First, the negative pledge was drafted so as not to apply to security certified by the State to be an ‘exempt security’. Although there is nothing in the documents to indicate what would amount to an ‘exempt security’, the arrangements expressly contemplated exceptions to the prohibitions against creating securities. Secondly, it would depend on the identity and financial credentials of the purchaser concerned. Not all acquisitions of businesses are done on the basis of borrowings against the assets being purchased.
1372 Clause 11A of the initial Q‑Net sale agreement provided that if at any time prior to the third anniversary of the completion date (that is, some time after 17 June 1991) Q‑Net wished to dispose of the assets to a purchaser other than a related corporation, then it was required to give the State a 30 day right of first refusal. Clause 11E.1 provided that if Q‑Net were to be subject to a change of control from BML to another company, then Q‑Net was obliged immediately to offer its assets for sale back to the State at 75 per cent of fair market value (to be determined in accordance with procedures set out in the agreement). The offer was to remain open for 60 days from the date that fair market value was determined.
1373 In the circumstances contemplated as at 26 January 1990, it is the right of first refusal contemplated in cl 11A (rather than the more onerous provisions of cl 11E) with which we are concerned. I do not believe that the existence of the right of first refusal was a serious impediment to a sale. It would be triggered by the formation by Q‑Net of an intention to dispose of the assets, in which case they would be offered to the State at a nominated price and on nominated conditions. The offer had to remain open for 30 days. That, in itself, does not create much of a problem. The State would either accept or reject the offer. If the latter, Q‑Net would be free to sell to an unrelated third party on the same terms and conditions. Either way, a sale could be effected. The 30‑day offer period would cause some delay but it would not be significant.
1374 The plaintiffs submit that in the event of a proposed sale, it was unlikely that the State would release TBGL from its guarantee of the obligations under the initial Q‑Net sale agreement. This would be an impediment to a sale because it would mean that TBGL would have to carry the liability under the guarantee in its balance sheet. I do not accept this submission. It is pure speculation that the State would have refused to release TBGL from the guarantee. It can be assumed that the State would have taken into account the identity and financial credentials of the purchaser. Even if the State did not release it, TBGL might also have been able to extract an indemnity, remembering that this is what TBGL did in favour of BML in the 13 February 1990 amending agreement. Finally, even had TBGL been obliged to continue with its guarantee, the exposure would have been reflected as a contingent liability in its balance sheet. It would not have affected the cash flow from the purchaser.
9.8.3.3. Impediments: conclusion
1375 I regard the fact that Belcap Nominees did not have title to the assets as a serious impediment to a quick sale and one that, on the evidence, was not capable of simple and expeditious resolution. I regard the existence of the right of first refusal in favour of the State as an impediment (because there could be a 30‑day delay) but not a serious one. The same can be said for the negative pledge: if the purchaser wished to charge the assets to secure borrowings, it would be necessary to approach the State for consent. I do not regard the other matters advanced by the plaintiffs as being impediments to an expeditious sale.
9.8.4. Proposals to sell Q‑Net
1376 Aspinall’s evidence was that, as at January 1990, he had no reason to believe other than that the 17 October sale agreement would not be completed and he was working on that basis. He said that he believed Q‑Net’s prospects for the future were extremely good because he believed that the communications industry was soon to be deregulated by the Commonwealth Government. From January 1990 TBGL was attempting to sell the Q‑Net assets to various parties.
1377 By 12 January 1990 there had been discussions between Aspinall and Judy Stack, a director of Q‑Net and employee of BML, about the proposed sale. Stack was the person primarily involved in assembling information preparatory to offering the assets for sale. On 12 January 1990, Stack wrote to Aspinall identifying 14 organisations (including ANZ Bank, OTC Ltd, Hutchison and British Telecom) with a potential interest in acquiring the Q‑Net assets. Stack said that the list of organisations was not complete ‘but a significant number of additions is unlikely’. She suggested approaching the organisations deemed most likely to be interested on the basis that the assets were ‘not officially on the market but could be winkled out with fast footwork because Bell group will survive liquidation, does want to keep assets but in our view cannot develop assets sufficiently in the long term’. She concluded the note by saying: ‘Clearly, the opportunity exists to sell these assets either in whole or in part’.
1378 It seems from the 12 January 1990 communication that there was a sense of urgency about the proposed sale of Q‑Net. Stack indicated to Aspinall that an information memorandum would be compiled by 19 January 1990 and that she would approach likely purchasers because a ‘fast response’ was necessary.
1379 It seems that in January 1990 discussions were held with OTC Ltd because an information memorandum dated 30 January 1990 bears the notation ‘prepared for OTC Ltd’. The information memorandum assumed that a sale would be completed by 1 April 1990 and included this statement:
[TBGL] values the assets and goodwill in [BCA and Q‑Net] at $14,000,000. This valuation reflects a tangible asset backing ratio of 0.83 and a price earnings multiple based on 1990/91 budgeted after tax earnings of 11.26.
The cash purchase price on settlement will reflect adjustments to the Balance Sheet and Profit and Loss Statement on that date and take into account debtors, creditors, intercompany loans and deduct the present value of the $3 million payment due to the Queensland Government on 30 June 1990. Based on the 31 December 1989 Balance Sheet an indication of the cash payment required is $8,194,330.
1380 The executive summary to the information memorandum contained background information about the history and ambitions associated with the venture. The history and reasons for sale were explained in these terms:
[Q‑Net] was purchased by the Bond Group as part of its international communications strategy to provide a low risk entry into the marketplace. The Group developed [Q‑Net] and its other telecommunications interests with the firm intention of achieving a major role in the Australian communications industry.
The business is now well positioned to take advantage of deregulation … Due to recent problems however it is clear that the Group will be unable to develop the business to its full potential.
1381 The sense of urgency to which I referred when discussing the 12 January 1990 communications and the last sentence of the quote set out above lead me to conclude that the sale of Q‑Net was, in reality, a forced sale. I think the directors must have been aware of this. They must also have been aware that it was necessary to dispose of the businesses to cover apprehended cash flow deficiencies.
1382 The estimated purchase price of $8.19 million was calculated on the basis that the purchaser would receive a credit for the net present value of the $3 million instalment due to the State on 30 June 1990, but would assume the liability for the final instalment of $4.08 million due 30 June 1991.
1383 A figure of $7.5 million was attributed to the sale of Q‑Net in the summary to the Garven cash flow (without a projected date for the receipt) but nothing was included in the spreadsheets. Aspinall said that he could not recall when and how the sum of $7.5 million was settled on, but in cross‑examination said it would have been a net receipt. The two remaining instalments due to the State (totalling $7.08 million) would have been factored in to the negotiations with the purchaser.
1384 At the meeting with representatives of the banks on 22 and 23 February 1990, Aspinall is reported as having told those present that Q‑Net, as a non‑core asset, would be sold and that there were two bidders, OTC and Hutchison Group. The expected proceeds would be $7.5 million (with the cash flow effect being slightly better) and the sale was projected to be completed in two to six weeks.
1385 A report in relation to the sale of Q‑Net prepared in March 1990, and which formed part of the board pack for the 1 May 1990 TBGL directors’ meeting, said: ‘we have now been actively marketing Q‑Net for about two months, however, progress has been fairly slow’. It indicated that OTC was unlikely to make an offer (if at all) before June and that Hutchison was no longer interested. The author went on to say that, although Q‑Net was showing a profit of $1.3 million for the year, the main problem with selling the asset was the fact that the federal government had not sorted out its attitude to deregulation of the public switched network.
1386 So far as I can see Mitchell gave little, if any, material evidence about Q‑Net. In his witness statement he mentioned Q‑Net as one of the assets available to reduce debt or assist in future cash flow requirements. But in cross‑examination he conceded that he was unable to say anything about the value of those assets and he had no knowledge of Q‑Net’s financial affairs.
1387 As I have already said, the 17 October sale agreement was never completed and title to the Q‑Net assets never passed to the Bell group. The agreement was rescinded in September 1990. The Bell group was not able to complete a sale of those assets or to receive any sale proceeds.
9.8.5. The valuation of Q‑Net
1388 The plaintiffs adduced evidence from Jeffrey Hall that, on the basis of a ‘rationally foreseeable value’ or range of values, TBGL’s investment in Q‑Net and BCA (assuming that realisation was to occur at the end of February 1990 or alternatively by mid‑May 1990) was nil. The banks contended that Hall’s evidence was biased, uninformed, lacking in coherent reasoning and advanced in an area in which he had no expertise. These were among the milder attacks made on Hall’s evidence. While I thought that some of these submissions were unnecessarily vituperative, others had some force.
9.8.5.1. Hall’s valuation experience
1389 Hall’s qualifications and experience are set out in an annexure to his expert report dated 4 April 2003. He holds degrees in accounting (1978) and finance (1986). He is a chartered financial analyst and a chartered accountant. He is a director of Sumner Hall Associates Pty Ltd, a specialist corporate advisory firm that he founded in January 2002. He describes the firm’s principal activities as the preparation of corporate business valuations and the provision of independent advice and expert reports in connection with mergers and acquisitions, takeovers, schemes of arrangement, divestments, capital raisings, corporate reconstructions and financial matters generally. He has been a lecturer in mergers and acquisitions (including valuations) at the Macquarie Applied Finance Centre since 1995 and is the author of articles on valuations that have been published in reputable journals.
1390 Before establishing Sumner Hall, he was a principal in the Corporate Advisory Services division of Ernst & Young and then a director and shareholder of Grant Samuel & Associates Pty Ltd, an investment banking firm. While with those firms he was involved in a large number of valuations and reports and handled similar assignments. He has also given expert evidence in a number of court cases that are also listed in the annexure.
1391 I accept Hall’s qualifications to give expert evidence of a valuation nature. But that is not an end to the bank’s challenge to Hall’s expertise. The banks contend that the businesses in which Q‑Net, BCA and Bondnet were involved were ‘of an idiosyncratic nature and, to some extent, in an evolutionary stage of development’ and that Hall had no expertise in or experience of the relevant industries.
1392 Hall did not claim in any of his reports that he had particular expertise in technical or operational matters relating to the operation of Q‑Net’s business as it was in 1990, or as management intended to develop it, or of the prevailing or foreseeable market conditions for the Q‑Net business in 1990. But this exchange occurred during Hall’s evidence in chief:
Mr Hall, would you look at annexure A to your report on Q‑Net? I want to ask you, firstly, the matters you have been involved in valuations of businesses and shares in the telecommunications industry, knowing that I have referred his Honour to your work in regard to Aussat and Bond Media, are there any other matters?—Yes. I think the only other matter is preparation of an independent report on the takeover of AAPT by Telecom New Zealand a couple of years ago which is listed on the first page of my CV and then on numerous occasions looking at not telecommunications specifically but start‑up companies in technologies like fibre optics or security monitoring et cetera.
All right. To your knowledge is there any special expertise required for valuing a telecommunications industry on a basis of consideration of cash flows?—I consider it appropriate for someone with valuation expertise and reasonable business judgment and knowledge to be able to look a set of management’s projections and form judgments about the likelihood of those projections being achieved, the risks involved and I suppose ultimately the way a potential purchaser of those assets would evaluate the cash flow projections, without specialist telecommunications knowledge.
1393 I accept that evidence as a general approach to valuations. There will, of course, be instances where a field of endeavour is so specialised or unique (or in the banks’ language, idiosyncratic) that only a person with an intimate knowledge of that endeavour could appreciate the nuances. But I am not convinced that the businesses operated by Q‑Net in 1990 fall into that category.
9.8.5.2. The instructions to Hall
1394 The formal instructions to Hall are contained in a letter from Blake Dawson Waldron dated 3 April 2003. The instructions are set out under a number of headings: privatisation of the telecommunications network Q‑Net; anticipated future deregulation of the Australian telecommunications industry; acquisition of Q‑Net by TBGL; conditions subsequent to the share acquisition agreement (transfer of 6VA); the tribunal litigation; extensions of time for completion; and formulation of the intention to sell Q‑Net and the information memorandum.
1395 I do not believe that there is anything in the content of the instructions which is particularly contentious. The plaintiffs’ closing submissions set out details of the instructions and give references pointing to the supporting material. When I say the instructions are not contentious, I am referring to the factual basis rather than to what (if anything) can or should be drawn from them or whether the instructions are complete or adequate.
9.8.5.3. Hall’s methodology and conclusion
1396 Hall explained that he assessed the value of TBGL’s investment in Q‑Net and BCA as at 26 January 1990 by estimating the net realisable value of the underlying assets and then deducting associated liabilities to arrive at the underlying net asset value.
1397 Having outlined various available methodologies, he said that he had opted for the discounting of projected cash flows approach. I will call the discounted cash flow methodology ‘the DCF’. He did so because of his view that it had a strong theoretical basis and was the most commonly used method for valuation of mining companies and start‑up projects. Discounted cash flow models were often used for industrial companies that are in a high growth phase of their business or where there are not relatively stable and predictable cash flows. Discounted cash flow valuations involve calculating the net present value of projected cash flows. The cash flows are discounted using a discount rate that reflects the risks and uncertainties associated with the cash flow streams. He acknowledged that considerable judgment was required in estimating future cash flows and that the valuer often places great reliance on projections prepared by management.
1398 Because of the nature of Q‑Net and BCA as ‘an early stage telecommunications and technology business’, Hall considered three different future cash flow scenarios and subjected each to a probability weighting. In the first scenario, he assumed that the business did not develop as hoped and that it would be wound up after completion of the contracts with the State. The probability weighting applied to this scenario was 20 per cent. In the second scenario, he assumed that the business would develop successfully and that management’s revenue and cost forecast would be achieved, with the forecast extended from five to 20 years. A 50 per cent probability weighting was applied. The final scenario assumed that the business would develop at 80 per cent of the rate projected by management. He used a 30 per cent probability weighting for this scenario.
1399 The projected cash flows from each scenario were discounted to a net present value using a weighted average cost of capital that differed for each scenario, assuming a constant 7.5 per cent increase in revenues beyond the first five‑year period and allowing for capital expenditure in line with depreciation.
1400 The result, according to Hall, was a weighted average net present value of $8.8 million as the gross value of Q‑Net and BCA. He opined that a purchaser would not have attributed any significant value to Bondnet, describing it as ‘highly speculative blue sky’. Hall then deducted from the gross value the present value of the two outstanding instalments to the State ($6.3 million) and the net inter‑company liabilities ($2.6 million) to arrive at a net value of negative $100,000.
1401 In his instructions Hall’s attention had been drawn to the information memorandum and he was asked to explain the reasons for any difference there might be between his values and those set out in the company’s document. He was also asked to assume that the assets had a value of $14 million and to opine (on that assumption) on the cash component that a purchaser would have been required to pay at settlement.
1402 In relation to the first aspect, Hall was critical of the way net tangible assets had been represented, the calculation of goodwill, the price earnings multiple that had been adopted and the base earnings figure to which the multiple had been applied.
1403 So far as concerns the cash component of the purchase price, the main difference between Hall and the author of the information memorandum lies in the treatment of the instalment due to the State on 30 June 1991. Hall said that the information memorandum omitted that payment and that it should have been deducted from the cash component of the purchase price, payable at settlement. It is not entirely clear but it may also be that Hall thought the face value (rather than the net present value) of both instalments should have been accounted for, although it is not reflected that way in the table he prepared. Hall also expressed doubts about the treatment of a working capital deficiency but, again, he followed the information memorandum in preparing his table.
1404 Hall’s opinion in relation to the cash component is reflected in Table 14, which appears at the end of this section. Hall calculated the net present value of the 1991 instalment as $3.4 million. Taking that into account, he assessed the cash component of the purchase price as $4.7 million, rather than $8.1 million.
1405 Based on this work Hall expressed the conclusion that as at 26 January 1990, the realisable value of TBGL’s investment in Q‑Net and BCA was nil, assuming that realisation occurred either by the end of February 1990 or in mid‑May 1990. Although the paragraphs in his report that contain the conclusions are long, it will be convenient to set them out in full.

8. In my opinion, the realisable value of TBGL’s investment in Q‑Net and BCA as at 26 January 1990 was nil assuming that realisation was to occur by the end of February 1990. Potential purchasers were not likely to have had sufficient time to complete all of the steps necessary to make such an acquisition including review of the Information Memorandum, submission of an initial indicative offer, performance of detailed legal and financial due diligence on the assets involved, negotiation of a final binding offer and negotiation of an appropriate purchase and sale contract. Even then, it would have to be assumed that potential purchasers would conclude that Q‑Net and BCA were of substantial value and that satisfactory responses would have been received in respect of due diligence. This may not have been the case. In particular, it does not appear that TBGL had good title to Q‑Net and BCA as at 26 January 1990 because the agreement to purchase these entities from [BML] in October 1989 was subject to a condition subsequent regarding the transfer of a commercial radio licence from TBGL to [BML]. That transfer had not yet been approved by the Tribunal. Hearings into questions regarding whether Mr Alan Bond and companies controlled by Mr Bond were fit and proper persons to hold commercial broadcasting licences were ongoing as at 26 January 1990.
9. In my opinion, the realisable value of TBGL’s investment in Q‑Net and BCA as at 26 January 1990 was also nil assuming that realisation was to occur by mid‑May 1990. Potential purchasers would be likely to have had sufficient time to conduct their enquiries by that date. However, I have estimated that TBGL’s investment in Q‑Net and BCA had a nil value as at 26 January 1990. This value has been determined by estimating the net present value of the business operations of Q‑Net and BCA and then deducting the liabilities associated with those assets. Apart from the remaining period on a contract to provide services to the [State], the business operations of Q‑Net and BCA were essentially in the startup phase. I have adopted a risk weighted discounted cash flow valuation methodology as the appropriate method for assessing the value of these businesses on the basis that I believe that this is the approach that potential purchasers would have adopted. The resultant gross value of the businesses is $8.8 million but there were liabilities of $8.9 million associated with Q‑Net and BCA leaving a nil value for TBGL’s investment. Even if there was a potential purchaser that would have taken a much more optimistic view on the value of these assets, which I regard as extremely unlikely, realisation of any such value would have remained dependent on the satisfactory outcome of any legal and financial due diligence undertaken by that potential purchaser. In particular, the sale could not have been completed until such time as TBGL had good title to the assets. Potential purchasers may have regarded this as possible, but by no means certain, to be achievable by mid‑May 1990. Any acquisition of TBGL’s investment in Q‑Net and BCA would have had to be conditional on this item at a minimum.
   Table 14
   HALL CALCULATION OF Q‑NET CASH COMPONENT
   DESCRIPTION INFORMATION MEMORANDUM
   [$ MILLIONS] HALL’S APPROACH
   [$ MILLIONS]
   Assumed gross value of assets $14.000 $14.000
   Present value of 1990 instalment ($2.869) ($2.869)
   Present value of 1991 instalment Nil ($3.428)
   Net inter‑company liabilities ($2.635) ($2.635)
   Working capital adjustment ($0.302) ($0.302)
   Total deductions from gross assets ($5.806) ($9.214)
   Cash component of purchase price $8.194 $4.786

9.8.5.4. Criticisms of Hall’s approach
1406 I have already dealt with the banks’ submissions concerning Hall’s lack of expertise in the valuation of a telecommunications business. But there was also a large number of other challenges to the validity and reliability of Hall’s methodology and conclusions.
1407 One contention was that Hall had an incorrect understanding, whether by way of instruction or assumption, about the ability of the 6VA licence to be transferred. This inevitably distorted his view of completion of that transfer and, thus, the value of Q‑Net. In particular, he mistakenly coupled issues of Alan Bond’s difficulties with the tribunal with the ability to complete the Q‑Net acquisition by Belcap Nominees. This linkage (which did not exist) was said to create an uncertainty that would affect purchasers of the Q‑Net business from the Bell group. Hall had not read all of the relevant material given to him by the plaintiffs’ solicitors and, in particular, had not considered the tribunal’s report of August 1990, even though, as it happened, it threw light on events at the time of his valuation.
1408 It will be apparent from what I have said in Sect 9.8.3.1 that I do not accept this criticism. In my view, there was a link between Alan Bond’s problems with the tribunal and the satisfaction of one of the conditions in the 17 October sale agreement. There was, in my view, a serious impediment to a quick sale of Q‑Net because the vendor would first have to obtain title before it could pass title on. So far as I am aware, the legal proposition summed up in a Latin phrase that we are no longer permitted to utter, still applies.
1409 The banks also submitted that there were many areas in which Hall’s use and application of the DCF was flawed. Importantly, his nil value was the result of the allocation of subjective and unjustified probabilities to a very limited number of scenarios in circumstances where he did not have the relevant industry expertise or knowledge, or knowledge of the business itself. He had made no enquiries about management’s views, only his extrapolation of management’s figures. An allied complaint was that it would have been appropriate to include, as one of the cash flow scenarios, figures that were better than management’s predictions.
1410 Counsel for the banks made much of the cross‑examination in which Hall agreed that he had made no enquiries of management (or of the plaintiffs’ solicitors to ascertain what information might have been available) about management’s views as to the likely performance of the business in the future. But this cross‑examination was largely in two areas. The first was in relation to the projections used for scenario 2 in the DCF. Hall said he had taken management’s projections in the information memorandum (which only went for five years) and extended them out to 20 years. He referred to the debate in valuation circles about whether projections going beyond 10 years have much (if any) meaning. He said that it was his practice to use the longer period because to do otherwise tended to place too much emphasis on the choice of multiple for the terminal value. I have no reason not to accept that opinion.
1411 The second area in which this question arose was whether Hall had paid any attention to the ongoing effects of government deregulation in the telecommunications sector. I have to accept the criticism of Hall in this respect. In his report, Hall referred generally to ‘uncertainty in the industry’ but it is apparent from the cross‑examination that he had made no detailed study of the available documentation from the time and had no particular views on the trend of deregulation. On the other hand, the DCF is based on management’s projections for five years. It is, it seems to me, unlikely that management would have formulated projections over that period purely on a ‘base case’ without taking into account their views on the favourable aspects of deregulation. To say, therefore, that the DCF is devoid of any attribution of the beneficial effects of ongoing deregulation overstates the case. But, as I will explain shortly, this does not mean it is ‘best case’.
1412 Another criticism made of Hall’s methodology is that in choosing scenarios he should have included one (or some) that included figures better than those being predicted by management. When asked whether it was normal practice so to do, Hall responded that it would depend on the type of business. Looking at a mature business, the normal approach would be to take management’s projections as a base case and then apply a sensitivity analysis which would be both above and below the base case. This is because the base case is ‘what everyone is comfortable with, that’s probably going to be the valuation result but we want to understand the sensitivity of things turning out better or worse’. But Hall said this exercise was quite different. This was a start‑up (not literally, as it had a contract). But in terms of the long‑term projections he viewed it as a start‑up business so management’s projections, rather than being a base case, would generally be regarded as a best case. It was not axiomatic that they would be best case but ‘in the normal situation with this type of a business management tends to have best case type projections’.
1413 Q‑Net was an asset which, in January 1990, TBGL wanted to sell. Aspinall spoke in his witness statement about various means of realising assets and proffered the view that a sale by directors in the ordinary course is the alternative that would obtain the ‘best price’ for the asset. In my view, it can be assumed that in January 1990 Aspinall was determined to extract the best price from the market for the sale of Q‑Net. It is unlikely, in those circumstances, that the projections in the information memorandum would have been formulated simply on a base case. It is more likely that management would have looked at something more favourable than a base case scenario.
1414 Counsel for the banks also complained that Hall had double counted risk factors; that is, he had selected a discount rate reflecting uncertainty and then discounted achievement of the better scenarios resulting in a lower valuation. In his evidence Hall denied that he had double counted the risk. He was asked about it in re‑examination and, in an answer that I accept, he said:
I was careful in that I was well aware that the way I was approaching the valuation with this discounted cash flow model and scenarios and then a probability weighting that I was going to be looking at the risks and uncertainties in the cash flows and also a buyer’s views on what the likelihood of each scenario occurring was, and that those were two different – they’re really two different types of uncertainty, risk or probability that could probably be dealt with best as two explicit decisions rather than trying to somehow just combine them into one or the other method, which to me would have been less transparent, and so – because this was my framework and obviously if you just sort of charged ahead without thinking about that, then I guess there would be a risk of double counting so I was keen to ensure that I didn’t do that.
1415 Criticisms were made of many factors used by Hall in his valuation methodology. For instance, his choice of a ‘beta’ factor of one when the fact that much of the revenue stream was coming from a (relatively) assured source, namely a State government, would have justified a figure less than one which would, in turn, have led to a higher value. While he said he would not argue with a figure less than one, he thought one was ‘a reasonable number to use’. It was also said that he had chosen a gearing rate without any sensitivity analysis. But, as he explained, the gearing rate was a matter of judgment consistent with the beta factor. I am satisfied with Hall’s explanations in those respects.
1416 It will be apparent from what I have said that, generally speaking, I accept Hall’s valuation expertise and methodology. But I have difficulty in accepting his conclusion that the gross value of the business was $8.8 million rather than $14 million. The main reason is that I am not sure that he gave sufficient (if any) weight to the favourable aspects of the moves to deregulation in the telecommunications industry. He did not profess to have carried out an in‑depth analysis of the contemporaneous reports and documentation about the state of the industry and government proposals for it or having formed views on it. While I have concluded that the five‑year forecasts in the information memorandum prepared by management were likely to have been more than base case projections, it does not follow that they were best case. It is a leap of faith to move from saying that management would not have relied on a base case to saying that this necessarily means they have adopted best case projections. There is a range of options in between, none of which was canvassed in the evidence.
1417 It is trite to say that in a DCF exercise, anything that has a material effect on the cash flows will have a consequent effect on the value attributed to the underlying assets. The potential for growth in revenue is a factor that could have that sort of effect. Hall accepted in cross‑examination that he did not know whether the projections in the information memorandum were done in real or nominal dollars. The difference between ‘real’ and ‘nominal’ is that one reflects inflation while the other does not. Hall said that his projections were in nominal dollars. He agreed that it would be important to know the basis of the directors’ projections. If they had used real cash flow forecasts, he would have to adjust them for his DCF to make them nominal; that is, to incorporate the effect of inflation. The problem this causes is that it is not clear how many of the future increases are due to inflation and how many to real growth. Hall accepted that when projections are extended over a period as long as 20 years, real growth can have a dramatic effect on a calculation of net present value.
1418 Hall was also criticised on the basis of a Grant Samuel report (of which he was one of the authors) prepared in 2000 in relation to a takeover of AAPT Ltd, a telecommunications company. He agreed that he would not have been party to the report being released had he disagreed with its content, although in taking responsibility for it he would have relied on the contribution of others for some aspects. He also said that he would have discussed with his co‑authors major factors affecting the telecommunications industry. While I accept that not too much should be read into a report prepared in 2000 when considering the situation as it applied in 1990, I would have expected views expressed in the 2000 report which are (at least at face value) at odds with views expressed in a report prepared in 2003 to have been explained. So far as I can see, they were not explained. The differences that I have in mind are those that are favourable (in the 2000 report) compared with the bland reference to ‘uncertainties’ in the 2003 report.
1419 The AAPT report related that: ‘Over the past 10 years [that is, back to 1990] telecommunications growth has been at levels well above growth in all other major industries’. In cross‑examination Hall said that he remembered that that was his view. Hall agreed that it was also his view that telecommunications services growth was forecast to continue in the manner he then set out in the AAPT report, encompassing bandwidth services and the like. The report also stated that ‘telecommunications companies have been experiencing growth in data traffic of 80 to 100 per cent per annum in volume and 20 to 30 per cent per annum in revenue’ and that data traffic had exploded over the last five years. Hall agreed that that statement was correct and that ‘the last five years’ meant the five years immediately after the end of the cash flow forecasts made by Q‑Net management in the information memorandum.
1420 The AAPT report also recorded a rise in the telecommunications industry contribution to gross domestic product from 2.6 per cent to 5.5 per cent and that the sector was growing at a compound rate of 12 per cent. It also stated that the fastest growing segment in data was the managed network services area, an area in which Q‑Net was involved in 1990.
1421 In the result then I am not able to conclude, on the basis of Hall’s evidence, that the realisable value of the business of Q‑Net and BCA was nil because the staring point was a gross asset value of $8.8 million. This assumes (contrary to the banks’ submissions) that Bondnet was of no value at the time.
1422 There is one final aspect of Hall’s evidence on which I must comment. In answer to a question posed to him in his instructions, Hall assessed the cash component that a purchaser would have paid (assuming a gross asset value of $14 million) as $4.79 million, rather than $8.19 million as expressed in the information memorandum. The difference lies in the treatment of the $4.08 million instalment payable to the State in June 1991. The information memorandum assumed that a purchaser of Q‑Net would finance that $4.08 million rather than pay it as a lump sum to the State. Hall had, of course, included the net present value of that instalment to $3.43 million as an amount for which the purchaser would receive a credit against the purchase price.
1423 In cross‑examination, Hall was asked if, on acquisition, the purchaser had to finance the instalment (and pay interest or amortise it over a number of years), the result would be reflected in the net present value payment column. Hall stated that it would be, because it was the present value of an external debt associated with the value of the assets. He went on to say that whether it was paid off on the due date, or refinanced to be paid off in the future, it would have a present value and that this was the amount he was using. I accept Hall’s evidence that the proper approach in a valuation is to bring the net present value of the instalment to account by reducing the cash component of the purchase price. It follows that I accept that, even assuming a gross asset value of $14 million, the cash received on completion would be $4.79 million rather than $8.19 million.
9.8.6. Other evidence
9.8.6.1. The plaintiffs
1424 Love did not opine on the Q‑Net asset and has not included it in Cash Flows A and B. Woodings commented on the cash flows from operations but otherwise seems to have excluded the Q‑Net sale proceeds receipt from Cash Flows 1 and 2. So far as expert evidence is concerned, the plaintiffs rely on Hall’s evidence.
9.8.6.2. The banks
1425 The banks rely on the evidence of Aspinall and the documentary evidence (such as the 12 January 1990 memorandum, the information memorandum, the Garven cash flow, the notes of the February 1990 meetings with bank representatives and the March 1990 board report) in support of the proposition that the sale proceeds should be included. I have already dealt with this evidence.
1426 Honey included in his predictive cash flow some elements of cash flow from operations and the April 1990 sale proceeds receipt of $7.5 million. He included the amount based largely on the company’s documents, showing that Q‑Net had been accounted for as part of the Bell group since at least November 1989 and that it would trade until 1 April 1990 and then be sold. He also used the documents referred to in the previous paragraph. He felt that as at 26 January 1990 it could not be precluded that Q‑Net and BCA would be sold. That would result in a cash inflow of $7.5 million during April 1990 and, accordingly, operating cash flow could be expected from Q‑Net and BCA until April 1990 (but not afterwards).
1427 Honey acknowledged that as at January 1990 there were a number of uncertainties that had a potential impact on the cash flows from this asset (especially the non‑completion of the 17 October sale agreement and the fact that no firm arrangements were in place for an on‑sale). But he felt the exclusion of those amounts was not justified, given his views on the dynamic nature of cash flow management and the role of the directors and management of TBGL in managing cash flow.
1428 Honey professed no valuation expertise. While I have no doubt about his expertise in accounting (including cash flow) matters, I take a different view to that espoused by Honey on the inferences and conclusions to be drawn from the underlying documents.
9.8.7. Conclusion on Q‑Net
1429 In my view, for the objective solvency case, no cash receipt should be recognised for the Q‑Net asset. The main reason I say this is that it could not realistically have been anticipated that the lack of title could have been cured in short order so as to enable TBGL to effect a sale. While I have not been persuaded that it was a valueless asset, I believe that even on the gross asset figure of $14 million, the cash component of the purchase price would not have exceeded $4.79 million. This casts further doubt on the forecast receipt in the Honey cash flow of $7.5 million in April 1990.
9.9. JNTH matters
9.9.1. Relationship between TBGL and JNTH
1430 From August 1988 Alan Bond, Beckwith, Mitchell and Oates were the directors of JNTH. JNTH was a listed public company engaged in industrial pursuits such as the woollen mills. It also held an investment share portfolio. It came under the control of TBGL well before 1985. The TBGL annual reports show JNTH as an associated company with ownership levels (ordinary shares) as specified in Table 15, which appears at the end of this section. The holding was at its height on 30 June 1986 (45.8 per cent). It remained steady at 27.9 per cent on and after 30 June 1988. The registered owners of the ordinary shares were TBGL subsidiaries Wanstead, Wanstead Securities, WAON and Industrial Securities.
1431 The 30 June 1989 annual report for JNTH notes that in November 1988, a BCHL subsidiary had announced a takeover offer for the shares in JNTH and that ‘BCHL and its subsidiaries are presently entitled to 99.4 per cent of the ordinary issued capital of [JNTH] and 68.1 per cent of the issued preference capital’. It also indicates that BCHL intended ‘to acquire the minority interests of [JNTH] not presently held’ and that it was ‘not intended to seek new businesses or investment opportunities for [JNTH] at this time’. In October 1989 BCHL made an offer to acquire the remaining ordinary and preference shares but in late December 1989 it withdrew the offer.
1432 In addition to the ordinary shares, TBGL held listed cumulative convertible non‑redeemable preference shares in the capital of JNTH. The preference shareholders were entitled to a preferred cumulative dividend of 9.5 per cent per annum on the issue price of $6.70 payable half‑yearly on 31 March and 30 September. Prior to 1 December 1989 TBGL held about 46 per cent of the preference shares on issue, mainly through a subsidiary called Academy Investments No 2 Pty Ltd (Academy). In December 1990, the shares held by Academy were sold in an interesting event called the Academy transaction. As at 26 January 1990 TBGL (through Industrial Securities) held 316,000 preference shares in JNTH. Ambassador Nominees was the registered owner of 278,200 of these preference shares but it held them on trust for Industrial Securities.
1433 Historically, management fees were charged by TBGL to JNTH. Services pertaining to management, accounting, taxation, insurance, personnel selection, finance, treasury and secretarial services were provided by direct and indirect subsidiaries of TBGL. According to Aspinall (and I do not believe this is contentious), the management fee arrangement between TBGL, BCHL and JNTH had its genesis in an arrangement by which (prior to the BCHL takeover of the Bell group) TBGL had charged JNTH management fees of 0.5 per cent of the average gross assets. After BCHL took over the Bell group, BCHL, through its central Treasury (Oates) and corporate development department (Mitchell), provided management services to TBGL and JNTH. In the year to 30 June 1989, TBGL continued to charge JNTH the historic management fee ($100,000 per month). But this was effectively passed through to BCHL, which charged TBGL a fee in the same amount. A similar arrangement was in place between TBGL and BRL. The management fee arrangement ceased in early January 1990, when the Bell group assumed control over its financial management from the BCHL Treasury.
1434 It is common ground that, as at 26 January 1990, JNTH was indebted to BGF in the sum of $15.25 million (the JNTH receivable). The principal components of this debt were loans of $6.2 million and $4.2 million. The loans carried interest. In addition, TBGL’s ledger recorded a receivable from JNTH of $1.8 million being accrued management fees for the period 1 July 1988 to 31 December 1989 (the accrued management fees). This amount did not carry interest.
Table 15
TBGL’S SHAREHOLDING IN JNTH
YEAR PERCENTAGE OWNERSHIP LEVEL
30 June 1985 42.8
30 June 1986 45.8
30 June 1987 36.7
30 June 1988 27.9
30 June 1999 27.9
15 October 1990 27.9

9.9.2. JNTH matters and the Bell group cash flows
1435 The September cash flow (for the year from July 1989 to June 1990) forecasts management fee receipts from JNTH of $300,000 in each of October 1989 and January and April 1990, together with $1.2 million in July 1989. I understand that this latter amount represented accrued but unpaid management fees. The September cash flow also showed dividend receipts of $4.27 million in each of October 1989 and April 1990.
1436 None of the January cash flows or the Garven cash flows included any receipts from management fees. This is consistent with the ‘de‑Bonding’ process referred to towards the end of Sect 9.9.1. The 4 January cash flow carries through the September cash flow receipt of $4.27 million in April 1990 but with the notation ‘preference only’. But in the other January cash flows and in the Garven cash flow, this has been reduced to $100,000 in each of April and September 1990. It is common ground that this refers to dividends on the preference shares only and that there was no expectation of dividends arising from the ordinary shares.
1437 It is a little difficult to see how the various January cash flows treat the JNTH receivable or the accrued management fees because they contain only a single entry, ‘Bond inter‑company’, for $2.8 million in March 1990.
9.9.3. The parties’ contentions: JNTH matters
1438 None of the Love cash flows or the Liquidator’s cash flows or the Honey cash flow make any provision for receipts from management fees or preference share dividends from JNTH in the period following 26 January 1990. It is not part of either side’s case that dividends could be expected from the ordinary shares. Therefore, the argument (with one caveat) revolves around the prospects of recovery from the JNTH receivable and the accrued management fees.
1439 The caveat is that the banks’ pleaded solvency case includes receipts of amounts of $100,000 from the JNTH preference dividends in each of April and September 1990. They say that Honey did not include them for reason of materiality rather than any conviction that they could not be paid. The argument about the preference dividends is also tied up with the Academy transaction. I will return to the preference dividend in the discussion about the Academy transaction.
1440 The plaintiffs allege that JNTH was unable to repay the JNTH receivable or the accrued management fees on demand, in whole or in part, because JNTH’s assets comprised receivables from and investments in BCHL and related and associated companies. Also, the financial position of BCHL was such that it could not have met demands made on it by JNTH. The plaintiffs also allege that, as at 26 January 1990, BGF had no prospect of obtaining cash immediately (or within a relatively short space of time) by mortgaging or selling the JNTH receivable, the accrued management fees or the JNTH shares in order to repay BGF’s debts as and when they fell due. They contend that the JNTH shares had no realisable value.
1441 The plaintiffs also allege that no moneys would have become available from this source in February or May 1990, or through the period of the refinancing to 31 May 1991. Not surprisingly, none of Cash Flows 1, 2, A or B includes any receipts from the JNTH receivable.
1442 The banks put most of this in issue. They accept that the financial position of JNTH was substantially dependent upon the financial position of the BCHL group of companies and Dallhold Investments Pty Limited, as a consequence of its assets predominantly comprising advances to those companies. But they say that there were assets within JNTH capable of raising cash to pay the receivables owed the Bell group companies. They also say there were significant commercial incentives for BCHL to facilitate the payment of the receivables due from JNTH, namely:
(a) that TBGL represented a major investment of BCHL and if repayment of the loan was necessary to maintain the Bell group of companies, and ultimately benefit BCHL in terms of the value of its investment, then it would have been likely that BCHL would have endeavoured to make the funds available; and
(b) that the Bell group was in a position to exert commercial pressure on BCHL through the issuing of formal demands.
1443 The banks deny the nil value placed on the JNTH shares by the plaintiffs and say that they do not, in any event, rely on the companies’ ability to sell or mortgage the JNTH shares in relation to the plaintiffs’ insolvency case.
1444 The Honey cash flow includes amounts of $3 million in each month from February to June 1990 (inclusive) in reduction of the JNTH receivable and the accrued management fees.
9.9.4. The financial position of JNTH
1445 The plaintiffs’ central thesis is that JNTH was itself in financial straits during 1989 and through January 1990, so was unlikely to be in a position to repay the JNTH receivable or the accrued management fees at any time during the refinance period. An analysis of the BGF–JNTH loan account carried out by the plaintiffs reveals that between March 1989 and 26 January 1990 there were transfers from BGF to JNTH totalling $15,242,516.18. Transfers back from JNTH to BGF however totalled $241,656.83, of which $198,788 only was in cash. The plaintiffs contend that the steady flow of funds from BGF to JNTH over the period March 1989 to January 1990 indicates that JNTH was cash‑poor throughout the period and they invite me to conclude that JNTH was unlikely to be in a position to repay the moneys it owed to Bell group companies.
9.9.4.1. Cash flow considerations
1446 Some JNTH cash flow forecasts were adduced in evidence. It seems that JNTH had control of a boat, Schooner XXX (the Schooner), which it hired out for reward. A cash flow for the period March 1989 to March 1990 shows cash inflows of $5.5 million and outflows of $23 million, as set out in Table 16 which appears at the end of this section.
1447 Part of the preference dividends (due at the end of each of March and September 1989) were payable to Industrial Securities. The ordinary dividend was payable in December 1989. The management fees were, of course, those payable to TBGL. By October 1989 Bond Brewing management (the hirer of the Schooner) had issued instructions that no further charter fees were to be paid to JNTH. Comparative figures taken from the cash flow for the week ending 6 October 1989 (again for a 12 month period) are inflows of $1.9 million and outflows of $23.6 million, as set out in Table 17.
1448 The cash flows show that the GFH dividend was expected in June and December 1989 and April 1990. But the cash flows prepared for the Bell group in December 1989 and January 1990 had omitted receipts from that source. The evidence also establishes that BGF loaned significant sums to JNTH in April 1989 and October 1989 to enable it to pay the half‑yearly preference dividends. I accept, therefore, that beyond October 1989 JNTH had no anticipated sources of income, as reflected in its cash flow forecasts, and still had expenditures it had to meet. In terms of assessing solvency, further loans from BGF were not an option. The only way it could meet its obligations to pay the preference dividends in the future, and to repay the JNTH receivable and the accrued management fees, would be for it to realise its assets, that is, to call in moneys owed to it by other BCHL companies or Dallhold. I will deal with that prospect in a later section.
Table 16
JNTH CASH FLOW: MARCH 1989 TO MARCH 1990
ITEM AMOUNT
Schooner charter fees $3.208 million
GFH dividend $1.974 million
BRL dividend $0.337 million
Schooner expenses ($1.241 million)
Ordinary dividends ($1.828 million)
Preference dividends ($18.136 million)
Management fees ($1.8 million)

Table 17
JNTH CASH FLOW: OCTOBER 1989 TO OCTOBER 1990
ITEM AMOUNT
Schooner charter fees Nil
GFH dividend $1.920 million
BRL dividend Nil
Schooner expenses ($0.990 million)
Ordinary dividends Nil
Preference dividends ($20.038 million)
Management fees ($2.4 million)

9.9.4.2. Balance sheet considerations
1449 The annual report for JNTH for the year ending 30 June 1989 (issued in mid‑November 1989) reveals the following (on a group basis):
(a) by that time JNTH did not carry on any operating business activities and only held investments;
(b) the assets (leaving to one side receivables) were cash of $287,000, shares in BRL (carried at $12.8 million) and GFH ($6 million) and the Schooner ($6.8 million);
(c) the liabilities were creditors of $9.7 million (including a debt to BGF of $9.4 million ) and provisions of $9.1 million (including $1.2 million due to TBGL); and
(d) at book values total assets were $240.1 million and the total net assets were $221.3 million.
1450 JNTH’s current assets totalling $214.1 million included receivables of $137.1 million from BCF, $75.1 million from Dallhold and $1.9 million from other BCHL companies. This represents approximately 97 per cent of the net assets. By way of contrast, as at 30 June 1988 (before the BCHL takeover), JNTH had cash and other current assets of $205.3 million.
1451 This analysis of the balance sheet supports the plaintiffs’ contention that JNTH’s financial position was dependent on receivables owed by Dallhold and BCF and the realisable value of its shares in BRL and GFH.
1452 The loans to BCF carried interest at commercial rates. In correspondence with the ASX in June 1989, JNTH advised that the loans came about as a result of a revolving credit facility that it had provided to BCF. It was repayable on demand and due, in any event, no later than 15 December 1989. The letter also said that the loans were unsecured but that the lender could call for satisfactory security to be provided.
1453 The loan to Dallhold was made by a wholly owned subsidiary, J N Taylor Finance Pty Ltd (JNTF), as part of a composite loan made by it and other BCHL companies. This loan, too, carried interest at commercial rates and it was unsecured and repayable on demand.
1454 The audit certificate in the 30 June 1989 annual report for JNTH contains a qualification in relation to the BCF loan:
At 30 June 1989, the Group has a loan of $137.1 million to Bond Corporation Holdings Limited group (BCH). The audit report of BCH for the year ended 30 June, 1989 indicates that there is some doubt that BCH will be able to continue as a going concern and that because of significant uncertainties, the auditors are unable to state with certainty whether the accounts present a true and fair view of the state of affairs and the loss. In these circumstances, the recovery of the debt of $137.1 million from BCH is subject to uncertainty.
1455 The audit certificate in the 30 June 1989 annual report for BCHL also expressed uncertainty about the ability of BCHL to continue as a going concern. The qualifications extended to nine significant assets (or their carrying value) in the BCHL group accounts. The auditors described the uncertainties as significant and said that they could affect the overall truth and fairness of the matters dealt with in the accounts or their carrying value.
1456 The value of the shares in BRL and GFH will be the subject of consideration in other sections. It is sufficient to note that the auditors included a qualification that the carrying value of shares in BRL and GFH was uncertain. In my view, it was unlikely that as at 26 January 1990 the book value of either holding could have been realised in short order.
1457 By October 1989, JNTH had disposed of the Schooner although there is little, if any, evidence about the terms of the sale. The disposal is noted as a post‑balance date event in the 30 June 1989 accounts. As at 26 January 1990, the Schooner was not an asset from which funds (either through trading or by sale) could be generated.
9.9.4.3. Late 1989 and early 1990
1458 In December 1989, JNTH reported to the ASX that JNTF had granted an $80 million facility to Dallhold that would mature on 4 April 1990 and that principal and interest outstanding at the time was $81.5 million. On 3 January 1990, in response to a query from the ASX after the appointment of the receiver to BBHL, JNTH advised that the Dallhold facility stood at $82.97 million, that its maturity date had been extended to 31 December 1990 and that Dallhold had agreed to provide security for the loans. It would appear from this that interest had not been paid and was accruing. Under the revised arrangements, Dallhold was not obliged to pay interest until 31 March 1990.
1459 Dallhold lodged an annual return for 30 June 1988, but by 26 January 1990 it had not filed the return for 30 June 1989. According to the 1988 return, Dallhold then had a working capital deficiency of $146 million. On 7 December 1989, Dallhold had been served with a statutory demand under s 364 of the Companies Code for payment of US$35.05 million issued by SCBAL in relation to a December 1986 facility. The 30 June 1989 accounts for Dallhold were not signed until 22 June 1990; they disclose a working capital deficiency of $445.96 million.
1460 In my view, to describe Dallhold’s financial position in late 1989 and early 1990 as anything other than parlous would be a gross understatement.
9.9.5. Likelihood of recovery of the JNTH receivable
1461 Love was asked to opine on the likelihood of recovery from the JNTH receivable. He remarked on most of the matters that I have referred to in the preceding sections and then addressed some specific considerations. First, JNTH’s financial position and its ability to pay its debts were virtually entirely dependent on the financial position of BCHL and Dallhold. Their position, as at January 1990, was quite uncertain. BCHL had made large losses, had a working capital deficiency and was subject to an audit qualification doubting its capacity to continue as a going concern. BBHL had been placed in receivership and this could have led to the majority of the Bond group’s loans becoming immediately due and payable.
1462 Secondly, there had been no material reductions in the amounts owing by JNTH to BGF or to TBGL. It is to be remembered that BGF had made significant loans to JNTH for the purpose of JNTH paying dividends to the preference shareholders.
1463 Thirdly, BGF and TBGL faced a considerable predicament in using legal remedies to attempt to obtain repayment of the receivables from JNTH. Obtaining a judgment against JNTH would not contribute to its ability to pay, which depended on JNTH collecting the BCHL and Dallhold receivables owed to it. To wind up JNTH would take considerable time and would adversely affect the Bell group’s own investment in JNTH. It could also precipitate the winding up of BCHL companies and thereby adversely affect the Bell group’s investment in BRL and GFH and its receivables from GFH and BCF. I also agree with those comments.
1464 Love then enunciated his conclusion (and the reasons why he omitted the JNTH receivable from Cash Flows A and B) as follows:
As a result, there was no short term means of obtaining repayment from JNTH and, in the medium or longer term, it was impossible to predict the outcome of the many uncertainties surrounding the financial position of the Bond Group and Dallhold. What can be said, in my opinion, is that a group with a working capital deficiency of more than $1.3 billion at 30 June 1989, and with losses approaching $1 billion at 30 June 1989 which continued to increase thereafter to an extent that its auditors could not assess, represented an extreme credit risk. In my opinion, the repayment of the receivables from JNTH could not reasonably have been expected by the end of January, or February 1990 or in the months thereafter.
In my opinion, any prudent prospective purchaser of the debts would have assessed the risk of non payment of the debts as very high, indeed too high to warrant a purchase, even at a very steep discount. In my opinion, the publicly known financial position of JNTH and the Bond Group was such that no prudent prospective investor could have made a reasoned financial judgment that JNTH would be likely to repay its debts. The position of the Bond Group and Dallhold was too uncertain to enable such a judgment to be made. A prudent prospective purchaser, in my opinion, would not have regarded legal action for recovery of the debts as being likely to achieve that result. Because the debts were not saleable, in my view, no prudent prospective financier would have regarded them as acceptable security for an advance.
1465 Woodings omitted the JNTH receivable from Cash Flows 1 and 2 for the reasons advanced by Love, with which he agreed. As I indicated in Sect 8.9, I do not attach significant weight to the views separately expressed by Woodings in this respect.
1466 Honey also expressed the view that the financial position of JNTH was substantially dependent on the financial position of the BCHL group and Dallhold because the assets were predominantly advances to the latter companies. Honey disagreed with Love’s decision to exclude the amounts from consideration; he included recoveries of $3 million in each month from February to June (inclusive).
1467 Honey examined the auditor’s report in the 30 June 1989 annual report for JNTH. He noted that, while the auditors indicated that the recovery of $137.1 million from BCF was subject to uncertainty and the carrying value of $18.8 million in respect of investments in related corporations was uncertain, they did not state that the assets were valueless. Honey gave further evidence that on a consolidated group basis JNTH assets totalled $240.1 million and liabilities totalled only $18.8 million. These liabilities would have been covered even if the assets had realised only 8 per cent of their value.
1468 Honey noted that there were two significant reasons to anticipate that BGF could recover, if not all, then a substantial part of the inter‑company loan owing by JNTH, namely:
(a) the fact that TBGL represented a major investment of BCHL and was important to BCHL. If repayment of the loan was necessary to maintain the Bell group, and ultimately benefit BCHL in terms of the value of its investment, then it would have been likely that BCHL would have endeavoured to make the funds available; and
(b) the Bell group was in a position to exert commercial pressure on BCHL through the issuing of formal demands, if necessary, and even winding up BCHL.
1469 In Honey’s view, the uncertainties concerning the capacity of JNTH to make payments would have been known to management and would have required close monitoring and consideration. In his opinion, the uncertainties were not such as to cause the removal of the JNTH receivable or the accrued management fees from Bell group’s available resources as at 26 January 1990 and thus from his cash flow.
1470 In their submissions, the banks referred to these matters as ‘two significant commercial incentives [that] existed as at 26 January 1990 for BCHL to facilitate the payment of the receivables due from JNTH’. This line is also reflected in the evidence of the directors.
1471 Aspinall testified as to his belief (in January 1990) that the loans would be repaid and that if he pressed JNTH for the money it would cause BCHL and Dallhold to pay money to JNTH in order to repay TBGL rather than risk winding up proceedings by TBGL. He also said that he had made no enquiries about the financial standing of JNTH although he had spoken to Oates about its ability to repay the loan. Mitchell gave evidence of his view, in early 1990, that BCHL would continue as a going concern. He thought that a liquidation of TBGL would have been likely to lead to a collapse of the Bond group and the termination of the brewery deal. This would have been to the consequent disadvantage of TBGL. He also said that ‘moneys owed by Bond companies would be paid when necessary’. But Mitchell conceded that in 1989 and 1990 he had no idea of the financial position of Dallhold and as he was not involved in treasury functions he had no knowledge of the cash resources of BCHL or BCF.
1472 In my view, looked at objectively as at 26 January 1990, there could be very little prospect of recovery of the JNTH receivable if JNTH had to rely solely on its own resources to fund repayments. The ‘8 per cent argument’, advanced by Honey, works as a matter of pure mathematics. But of the total assets, $6.8 million represented the value of the Schooner that, as at 26 January 1990, was no longer available as a source of cash. The balance represented debts or shares, the value of which was inextricably linked to the fortunes of BCHL and its related and associated entities. It is in that area that attention must be focussed. There are two significant aspects here: the audit qualifications and the difficulties associated with formal recovery processes.
1473 While it is true that the auditors did not say that either the BCF or Dallhold loans, or the BRL or GFH shares, were valueless, the audit qualifications went to those very matters and thus to the heart of the availability of the JNTH receivable as a source of cash. In the JNTH annual report the auditors noted the uncertainties concerning recovery of the BCF loan, and the carrying value of the BRL shares and GFH shares based on audit qualifications attached to the accounts of BCHL, BRL and GFH. In relation to BCHL, the qualification was as to the capacity of the company to continue as a going concern.
1474 It can, I think, be assumed that the auditors deliberated conscientiously before determining that a qualification was appropriate; an audit qualification in the accounts of a listed public company is no mere trifle. But it does not mean that the reservation expressed will necessarily come to pass. It is a cautionary note and one to which outsiders dealing with or observing the affairs of the corporation would be likely to give careful consideration. In my view, the approach contended by the banks attributes too little weight to the audit qualification.
1475 I agree generally with what Love has said about the difficulties associated with formal recovery processes. I accept the evidence of Aspinall that he was concerned to ‘de‑Bond’ the Bell group insofar as it related to control of financial administration. But the complex and complicated debt and equity interrelationships meant that disentangling the fortunes of the Bell group from those of the BCHL group would be a tortuous process. Aspinall and Mitchell may well have believed that the ‘two significant commercial incentives’ to which reference has been made would aid their cause in obtaining recovery of the debts. But what they may have believed and what was objectively the case are not necessarily the same thing. If and when ‘push came to shove’ there were substantial impediments to TBGL instituting a formal recovery action, perhaps by way of a statutory demand or a writ, because of the potential adverse effect on other assets and interests of the Bell group. The arguments about the commercial incentives are, in my view, a two‑edged sword.
1476 That having been said, the ‘two commercial incentives’ proposition is not frivolous or spurious. JNTH was, not to put too fine a point on it, a financial basket case. Its fortunes were inextricably linked to those of BCHL and it had virtually no prospects independent of BCHL. In this respect, TBGL was in a slightly different position because it at least had an operating business that was cash flow positive: the newspaper and publishing operation. If JNTH was to honour its financial obligations to TBGL, it could only do so if BCHL put it in sufficient funds. BCHL had, according to the 30 June 1989 annual report, negative working capital and it had made a loss for the financial year of $980 million. BCHL had to restructure if it was to have a long‑term future. It had to survive for whatever length of time it would take to put such restructure in place. BCHL had some sources of income and it would inevitably have to pick and choose where it placed those funds during the restructure period. This just adds to the uncertainties that caused the auditors to append the qualification to the accounts. In my view, it does not necessarily follow that if TBGL served a demand on JNTH, BCHL would place JNTH in funds to meet the commitment. Nor does it necessarily follow that, even if BCHL were prepared to place JNTH in funds, it would do so to the full extent of the claim made by TBGL, or at the time or times desired by TBGL.
1477 If I am to accept the banks’ arguments about recovery of the JNTH receivable in answer to the plaintiffs’ insolvency case, I have to rely on Honey’s opinion, not only about the likelihood of the commercial incentives ruling the day but also about the timing of the receipts. Why is it likely (using that term as earlier discussed) that BCHL would have seen fit to place JNTH in funds to the extent of $3 million each month from February to June? It certainly had not done so during 1989, as the cash payments by JNTH to BGF were minimal, and it was BGF (not BCF or BCHL) that had provided the wherewithal for JNTH to meet the preference dividend that it had paid late in 1989.
1478 There are other uncertainties. JNTH was (in January 1990) a company with no operating businesses and very few outside shareholders. It would have been open to the directors of BCHL, when considering the fortunes of the group overall and its best chances of survival, to have taken a different view of JNTH (structured as it was) than, for example, the Bell group (which had an operating business) and BRL (whose fortunes were inextricably linked to the breweries). It could, therefore, have appeared to the directors of BCHL that, had it been necessary, it would have been easier to cut JNTH adrift than some other companies in the wider Bond group. I am not saying what the directors would or may have thought about this question in January 1990. I raise it as no more than one of the uncertainties with which the financial position of JNTH was beset at the time and therefore as part of the factual matrix relevant to an assessment of solvency.
1479 This is an area in which it is, I think, legitimate to look at what actually happened after 26 January 1990 to test the competing theses as they are advanced as at that date. At the 7 February 1990 directors’ meeting, it was decided that TBGL should request from JNTH ‘an assurance that it will meet its obligation to repay the sum of $15 million to this company when required to do so’. On 7 March 1990, Aspinall wrote to JNTH seeking the provision of security for the loans but there was no mention of repayment. On 11 June 1990, Aspinall sent a follow‑up letter indicating that the banks were pressing for some positive action to obtain security or to recover the debt and sought proposals in that respect. There was a further letter written on 31 August 1990 in which Aspinall requested the courtesy of a reply and asked for details, by 7 September 1990, ‘as to your intentions to repay the outstanding moneys’, warning that the matter could be taken out of TBGL’s hands. A response by JNTH came on 5 September 1990:
This Company has no ability to reduce the debt due to yourselves until such time as it has received the corresponding reduction in the loan which it has made to [BCF]. I confirm we have requested [BCF] to repay its debt to this company and will immediately advise you of progress in this matter.
1480 Aspinall regarded the response as unsatisfactory and referred it to a directors’ meeting on 24 September 1990, at which Mitchell was allocated the task of drawing up a position paper on the ‘current situation regarding JNTH’. On 7 November 1990 Aspinall again wrote to JNTH requesting the provision of security. On 8 November 1990, JNTH responded saying that as BCHL had (by then) lodged a scheme of arrangement with the court, JNTH ‘had not had any success in recovering the loan due … by BCF’. It also noted that the arrangements with Dallhold (which did not require repayment until 31 December 1990) meant that that was not a source of funds and that they had ‘been advised by Dallhold that at this time it could not pay in any event’. This letter was tabled at a TBGL directors’ meeting held on 16 November 1990 without any resolution being reached about its contents.
1481 JNTH was placed in provisional liquidation on 10 December 1990. That order was stayed pending appeal. The appeal was dismissed and the appointment of the provisional liquidator took effect on 3 January 1991. A winding up order was made on 26 March 1991: see Re JN Taylor Holdings Ltd (In Liq), JN Taylor Finance Pty Ltd (1991) 57 SASR 21.
1482 So far as the evidence is concerned, this seems to have been the end of the saga. There is no evidence that the JNTH receivable was ever repaid, at least during the relevant period. The Report as to Affairs for BGF, signed by Aspinall, recorded the debt owed by JNTH as at 18 April 1991 to be $19.19 million. Nor is there evidence that any formal recovery action was ever implemented. This, to my mind, supports the primary reasoning that formal recovery action, while obviously available to TBGL, was not a simple choice.
9.9.6. The accrued management fees
1483 In my view the same reasoning applies to the accrued management fees and the same conclusion ensues. The Report as to Affairs for TBGL records a debt of $1.8 million owed by JNTH as at 18 April 1991.
1484 Honey differentiated between the JNTH receivable and the accrued management fees in his working of the predictive cash flow in that he included the latter in a lump sum in July 1990. It is apparent that Honey applied the same reasoning to payment of the accrued management fees as he did to the JNTH receivable. But he did acknowledge that there were uncertainties as to the quantum and timing of receipts ‘which would have been a product of ongoing negotiations between Bond group and Bell group’. As I have indicated in Sect 9.9.5, that is what happened.
1485 In their submissions, the plaintiffs treat separately the impact of recovery of this debt on the pre‑ and post‑Transactions insolvency case. I am not sure that I have fully understood why, because the former requires some prognostication into the future to assess whether recovery was likely in the period to which the assessment of solvency is addressed. In my view, similar considerations apply.
9.9.7. The preference dividends
9.9.7.1. The dividends generally
1486 In my view, given the financial situation of JNTH (as set out in the preceding sections), the chances of payment of preference dividends (even at the reduced rates allowed for in the banks’ pleaded case) were somewhere between nought and nil. Whatever force the ‘two commercial incentives’ argument might have in relation to the receivable, it is difficult for me to accept that it would apply to a payment (such as a preference dividend) that could, albeit with some pain, be deferred. In Sect 9.10.3 I have developed that argument by reference to the evidence of Henson and Hill concerning BRL. Similar considerations apply here.
1487 It is a trite statement that dividends can only be paid out of profits actually earned in the relevant accounting period or from retained earnings in the balance sheet. The Articles of association (so far as they concern dividends) are in a relatively standard form for companies of that era. They confirm that dividends can only be paid out of profits and that the declaration of a dividend by directors is conclusive in the sense that no larger dividend can be declared. The Articles also provide that a final decision as to the dividend lies with the shareholders who ‘may’ declare that a dividend be paid to members according to their rights and interests in the profits. The 30 June 1989 accounts for JNTH reveal that the group had cash holdings of $287,000 but the holding company had no cash. The holding company had retained profits, although the group did not. Accordingly, although there was no legal impediment to the declaration of dividends from the holding company’s retained earnings, the cash to meet the commitment could only (realistically) have come from other BCHL companies. This, in my view, was unlikely.
9.9.7.2. The Academy transaction
1488 In Sect 9.9.1, I introduced the event called the Academy transaction. I need to say something more about it here because it generated much controversy during the hearing. It was one of those unusual transactions for which the late 1980s became famous.
1489 The banks objected to any evidence being led about this event on the grounds of relevance and because they saw it as a ‘back door’ attempt by the plaintiffs to allege conscious wrongdoing by the TBGL directors. I restricted the use to which evidence of the Academy transaction could be put; I said that I would not investigate the propriety or legality of the transaction because to do so could open up allegations of conscious wrongdoing by the directors, and that was outside the plaintiffs’ pleaded case. I saw the primary relevance of the Academy transaction as going to the search by TBGL for cash to meet commitments such as the bondholder interest due in December 1989. The banks now complain that the plaintiffs are using the transaction as part of their insolvency case and that this is outside the ruling. I do not agree. The availability and use of cash in December 1989 is part of the factual matrix on which solvency falls to be determined. The prohibition on the use of the evidence goes to the propriety of the transaction, not to its use in the insolvency case.
1490 Prior to 1 December 1989, Academy owned 13,053,600 preference shares in JNTH. On about 1 December 1989 TBGL sold all of the shares it held in Academy to a BRL subsidiary for $100,401. As part of this transaction, Academy obtained a loan from BRF of $26.1 million. In turn, Academy applied these moneys towards repaying a loan owed to TBGL. At the same time there was a similar transaction involving the transfer of control over JNTH ordinary shares through the sale by BCHL of one of its subsidiaries, Actraint No 85 Pty Ltd, to a BRL subsidiary.
1491 In early January Henson, a newly appointed director of BRL, told Oates that BRL wanted the Academy and Actraint transactions reversed. On 2 January 1990 a proposal was put forward to achieve this result. On 8 January 1990, BRL rejected the proposal and requested immediate repayment of $26.1 million by TBGL in relation to the Academy transaction. Oates told Henson that repayment of the sums involved (which would enable the reversal of the Academy transaction) would be difficult. The dispute concerning the repayment of the sums for the purchase of the shares in Academy and Actraint was ultimately resolved by a deed of inter‑company indebtedness entered into between BRL and BCHL on 21 May 1990 by which BCHL assumed liability for the debt owed by TBGL in relation to the Academy transaction.
1492 The Academy transaction had not been avoided at 26 January 1990. It follows that, as at 26 January 1990, the 13,053,600 JNTH preference shares owned by Academy were not a legitimate source from which TBGL could expect to obtain a preference dividend, nor were they available for sale, mortgage or pledge by TBGL unless and until such time the dispute over the repayment of the $26.1 million and the reversal of the Academy transaction had been resolved. The timing of such resolution was uncertain.
1493 Interest was due on 10 December 1989 in the sum of around $6.6 million on the bonds of the first BGNV bond issue, and in the sum of $8.25 million on the TBGL bond issue. An analysis conducted by Woodings showed that the Bell group had total funds available in its bank accounts of $2.025 million or less in the period from 8 to 11 December 1989. There was, therefore, insufficient cash to meet bondholder interest payments that totalled $14.1 million.
1494 On 8 December 1989, the interest payment of $6.6 million on the first BGNV bond issue was made through funds obtained from BCF, which in turn obtained the funds from BRF, as part of the Actraint transaction. On 11 December 1989, the interest payment of $8.25 million was made to SGIC utilising funds obtained through the Academy transaction.
1495 It follows therefore, and I find, that the bondholder interest was met from the proceeds of the Academy transaction, rather than from more usual recurrent forms of revenue.
9.9.8. Ability to sell or mortgage the JNTH shares
1496 The plaintiffs contend that there was no capacity to sell or mortgage the JNTH shares so as to provide cash at any time during the period relevant for the insolvency assessment. The banks do not plead that any particular sum could be found from such sources and Honey did not include any such receipts in his predictive cash flow. But the banks do put in issue the plaintiffs’ contention that the shares had no realisable value as at 26 January 1990.
1497 Love opined that it was very unlikely that the ordinary or preference shares in JNTH could have been sold at the end of January 1990, during February 1990, or indeed, for many months thereafter, if at all. He also proffered the view that the same considerations rendered the shares in JNTH worthless as a security for a loan and that cash could not have been raised by borrowing against those shares. Honey was of a similar view. He opined that the value of shares in JNTH was dependent upon the financial position of BCHL and BRL. He said that it was unlikely that the shares in JNTH would have been readily realisable until the likely outcome of BCHL’s realisation and restructuring strategies and the BRL brewery transaction became clearer. In preparing his hypothetical cash flow, Honey said he assumed that the realisation of the shareholding in JNTH would not be achieved in the relevant period. Honey also said:
I do not dispute [Love’s] conclusions to the extent that it was unlikely that the shares in [JNTH] could have been realised in the short term and, accordingly, the hypothetical cash flow statement does not reflect any proceeds from the sale of the shares.
1498 I accept this evidence. There was unlikely to have been much of a market for the shares because BCHL owned 99.4 per cent of the ordinary shares and 68 per cent of the preference shares. The evidence is that there were no on‑market sales of ordinary shares between 16 December 1989 and 27 January 1990, or of preference shares after 25 November 1989. The lack of an easily accessible open market would also have reduced the likelihood of a third party lender accepting the shares as security for loans.
1499 It follows that for the objective insolvency case, the argument centres on the recoverability of the JNTH receivable, the accrued management fees and the preference dividend rather than on the prospects of a sale or mortgage of the shares.
1500 There remains a difference of opinion between the experts. Love, Hall and Woodings say that, as at 26 January 1990, the shares had no realisable value. Honey took a different view. But the argument seems to relate more to the valuation SNAs than to the cash flows. To my mind, the preponderance of evidence about the financial predicament of JNTH, its dependence on the fortunes of BCHL and the uncertainties referred to in the audit qualifications of both JNTH and BCHL lead me to conclude that, as at 26 January 1990, the shares had no realisable value then or in the following months.
9.9.9. Conclusion on the JNTH matters
1501 In my view, the plaintiffs were correct in omitting the JNTH receivable from the Love cash flows and the Liquidator’s cash flows for the purpose of assessing objective solvency. I take the same view about the likelihood of receipt of preference dividends from JNTH and (or) of cash being generated from a sale or mortgage of the shares.
1502 In my view, the strongest argument in favour of the banks’ contentions is the commercial imperative for BCHL to keep the Bell group alive. But in relation to the receivables, JNTH is in a different position to TBGL (and, for that matter, BCF or any other wholly owned subsidiary of BCHL). I need say no more about that than is contained in Sect 9.9.5. Insofar as concerns the dividends and a possible sale or mortgage of the shares, the commercial imperative argument has little, if any, weight. It is one thing to say that BCHL was likely to repay a receivable (that is, a debt then due and owing) in order to keep TBGL alive. It is quite another thing to say that BCHL would have caused the directors of JNTH (albeit that they were also BCHL officers) to declare a preference dividend and then to put JNTH in a position where it could meet the entitlements of the preference shareholders. The availability of cash from a mortgage or sale of the shares would, in any event, depend not so much on the commercial imperatives as perceived by the directors, but rather on the perception that a third party purchaser or lender held of JNTH’s overall financial position. I believe that an outside party, looking at JNTH in January 1990 for these purposes, would have regarded JNTH’s predicament as poor.
1503 These comments (and the basic reasoning behind them) should be borne in mind when considering similar arguments raised in relation to the position of BRL, GFH and BCF.
9.10. The BRL preference dividends (a first look)
1504 At this stage I can do no more than introduce this topic because it is heavily dependent on the fate of the brewery transaction.
9.10.1. Relationship between TBGL and BRL
1505 For many years (certainly prior to 1985), TBGL had been a substantial shareholder in BRL. As at 26 January 1990, TBGL (through the BRL shareholders) held 39 per cent of the ordinary shares and 23.14 million preference shares, representing 43.6 per cent of the preference shares on issue in the capital of BRL. TBGL also held a small parcel of partly paid ‘C’ class shares but they can be ignored for present purposes. BCHL had (through other subsidiaries) other shareholdings in BRL: it held about 18 per cent of the ordinary shares and 12 per cent of the preference shares otherwise than through TBGL.
1506 The convertible preference shares had been issued at $4.75 per share. They carried a 10.5 per cent cumulative preference dividend payable on 30 April and 31 October in each year.
9.10.2. Dividends, cash flows and financial statements
1507 In the September cash flow, provision had been made for the receipt of ordinary and preference dividends from BRL totalling $32 million for the year to June 1990. BRL did not declare an ordinary dividend for the period ending 30 June 1989. In the cash flows prepared in January 1990 and in the Garven cash flow, there is no provision for the receipt of ordinary dividends but there is an allowance for preference dividends of $5.1 million in each of May (April in the Garven cash flow) and October 1990.
1508 In the annual report for 30 June 1989 (issued in November 1989), the directors reported that ordinary and preference dividends had been paid in May 1989 but that they did not recommend the payment of an ordinary dividend ‘at this time’. There is no indication in the annual report of their intentions concerning preference dividends. It seems (from the half‑yearly results to 31 December 1989 and Note 5 to the accounts to 30 June 1990) that the preference dividend due 31 October 1989 was paid. I do not know when it was paid but I assume it was before mid‑December 1989.
1509 In mid‑December 1989 the board of BRL changed and from that time it was no longer controlled by associates of BCHL. On 27 February 1990, in a release to the ASX accompanying the half‑yearly results to 31 December 1989, the directors of BRL reported that they had not declared dividends on the ordinary shares or on the preference shares. They went on to say: ‘The directors intend that the payment of dividends to shareholders will be resumed when the company returns to profitability’. The 31 December 1989 balance sheet for BRL revealed that the company had $48.9 million cash on hand, other current assets (including the brewery deposit and advances to related companies) of $624.7 million and current liabilities of $106.2 million.
1510 Aspinall said in his evidence that in January 1990 he was aware that TBGL was unlikely to receive ordinary dividends. But he also said that it was not until 28 February 1990 that he became aware that there would be no preference dividends paid by BRL. In a memorandum to Beckwith and Oates on 2 March 1990, Aspinall referred to the ASX announcement and said that it meant the TBGL cash flow would be depleted by a further $5.2 million. I note that in the weekly cash flow forecast for 6 March 1990, the BRL preference dividend is shown as nil. So far as I can see from the evidence, it was not reintroduced into the cash flows during the remainder of 1990.
1511 Although it is not controversial, I want to say something about management fees. The general nature of the arrangements between BRL and TBGL (later BCHL) for the charging of management fees by TBGL to BRL is the same as set out in Sect 9.9.1 for JNTH. In the September cash flow, provision was made for receipt of management fees from BRL totalling $25.2 million in the year to 30 June 1990 and a further $14.4 million in the following financial year. The Garven cash flow made no provision for management fees from BRL. On the contrary, the covering summary listed the removal of BRL management fees of $39.6 million as one of the major factors contributing to the ‘severe impact on the Bell group cash flows’. Aspinall testified that he was aware that from mid‑December 1989 BRL would operate independently from the Bell group and that that he did not think that management fees would be paid by BRL to TBGL.
9.10.3. The evidence of Henson and Hill (to January 1990)
1512 Colin Henson and Geoffrey Hill were two of the independent directors appointed to the board of BRL in December 1989. I mentioned these changes in Sect 4.5.1 and I need here to explain in a little more detail the events that precipitated the changes.
1513 The first of the agreements for the sale of the breweries was entered into in May 1989. Because it involved arrangements between related companies, the ASX had taken the view that shareholder approval was necessary. Adsteam held 19 per cent of the shares in BRL. This meant that Adsteam was involved in the negotiations to implement the brewery transaction and BCHL had to ‘deal’ with Adsteam. For some time Adsteam and its chairman, John Spalvins, had been concerned at the way BCHL was handling the affairs of BRL and, in particular, the $1.2 billion brewery deposit, which led to suggestions that BRL’s assets were at risk. Adsteam commenced proceedings towards the end of November 1989 seeking the appointment of receivers and managers by the court over the assets and undertakings of BRL. The proceedings were settled in the middle of December on the basis that BCHL would surrender control of the board and that there would be an independent chairman (Hill), two directors nominated by BCHL (Alan Bond and Mitchell) and two nominated by Adsteam (Henson and Michael Kent). The NCSC approved the settlement. Two other directors (Alan Batley and Michael O’Neill) were appointed in February 1990.
1514 Late in November 1989, Colin Henson was requested by Spalvins to accept appointment as an independent director of BRL and to take an executive position being responsible for the day-to-day management of BRL. He was appointed to the board of BRL on 21 December 1989 and remained in an executive position with BRL during the remainder of 1990. Geoffrey Hill was appointed as the independent chairman on 11 December 1989. The impression I gained from seeing and hearing Henson and from contemporaneous documents is that Henson was not well disposed towards the BCHL interests and was unlikely to have done BCHL many favours. That is not intended as a criticism of him.
1515 Shortly after taking up his role, Henson set about a number of tasks, including establishing an independent office for BRL, ascertaining BRL’s potential claims against BCHL companies, making demands for recovery of moneys, perfecting the securities that had been given for the brewery deposit and generally assessing BRL’s financial position. He was also trying generally to deal with the brewery transaction.
1516 One of the early events with which Henson had to deal was a request by Mitchell that BRL lend to BCHL the remaining $50 million in cash held by BRL. Henson said that he refused the request ‘in emphatic terms’. As early as 22 December 1989, Henson put Oates on notice that the Academy transaction would have to be reversed. During January 1990, in addition to the problems concerning the brewery deposit and the securities for it, Henson identified potential claims against BCHL companies, including 10 claims that involved a total amount of $418 million. One of these claims was for about $800,000 against TBGL in respect of employee loans that had been written off. A notice of demand in respect of that claim was served on TBGL on 11 January 1990.
1517 I do not need to go into detail about the disputes. The substance and merits of the disputes are not relevant for the purposes of this litigation. What is relevant is the fact that the disputes were on foot and that their existence had been communicated to TBGL prior to 26 January 1990.
1518 The directors of BRL met on 25 January 1990. Henson attended the meeting, and so too did Alan Bond and Mitchell. Henson presented a management report to the meeting, which report included details of the potential claims against BCHL. There is another aspect of the management report that is relevant. Appendix A was a cash flow forecast for BRL for the 1990 calendar year. It had been prepared by employees of BRL but under Henson’s instructions. The copy that is in evidence bears some handwritten notations that Henson identified as his.
1519 Appendix A shows an excess of cash outflows over cash inflows over the year of about $29 million. This is not a negative cash balance because the opening cash balance was $49.7 million. The cash flow provides for preference dividends of $13.4 million in each of April and October 1990, a total of $26.8 million. It then contains a notation ‘Less inter‑group preference invested Bond [and] Bell group; Note: subject to board approval’. The figures attached to that item are $1.3 million (Bond) and $5.2 million (Bell) for each of April and October. This is a total of $13 million. Henson explained that the $26.8 million was the total dividends payable on all of the preference shares. The figure of $13 million was a reference to that portion of the total dividend pool that would have been payable to the BRL shareholders (in the base of the Bell group) and other BCHL companies that held preference shares. The difference between the two sums (rounded out) was $14 million. In his examination in chief, Henson gave this explanation of the note that I have described:
Now, at that time it was considered that payment of a preference dividend to the Bond group companies would be withheld in view of the circumstances if the dividend was to be paid at all.
You said they would be withheld in view of the circumstances. Could you tell his Honour what circumstances they were?—The uncertainties at the time with the relationship between the company and Bond Corporation group, the amounts owed to Bell Resources were such that it wasn’t considered appropriate for amounts to be paid at that time.
1520 Henson also testified that it would have been his decision to have the cash flow report structured in the way that it was to show a non‑payment of the ‘inter‑group’ dividends. He explained that cash flow reports are based on management assumptions and he would have made that particular assumption. It was subject to board approval and later on the board could have rejected it, but that was his recommendation as to how the matter should be dealt with at the time.
1521 Henson’s handwritten note was a suggestion as to how the $29 million cash shortfall could be covered. One of the items was described in these terms: ‘Possible non payment of pref dividend $14.0 (net)’. Henson explained that this entry flagged the possibility that no dividend would be paid to any of the preference shareholders (whether or not they were associated with BCHL or TBGL).
1522 The minutes of the directors meeting of 25 January 1990 do not record a discussion in relation to the issue of the payment of the preference dividends. In cross‑examination, Henson said that he had no recollection of any discussion at the meeting about the payment of the preference dividends. Traditionally, a discussion of that nature would have occurred at the time that the accounts came to be approved. He noted that a reference in the minutes led him to believe that the cash flow was discussed and it included reference to the preference dividend. He said: ‘it would have been referred to and it usually is referred to, but I can’t say that it was’.
1523 Hill was asked questions about the Henson management report presented to the 25 January 1990 directors’ meeting. He said that he would have regarded the payment of the preference dividend as an obligation to pay into the future. It would not affect the cash position of BRL at that point but it would ultimately be an outgoing or a potential outgoing. He said that as at 26 January 1990 he was concerned to know BRL’s financial position and also to have some idea of what its cash flows would be in the future. The payment of a preference dividend, while an obligation, was not a requirement (as repayment of a debt would be). These exchanges occurred:
Did you have any views on whether the option should be pursued one way or the other?—It really depended on the cash balances. If I could avoid paying it and I needed the money to keep the company alive, I wouldn’t have paid it.
…
Now, leaving aside your knowledge or otherwise of Mr Henson’s views, are you able to say from discussions with other board directors of BRL at this time what their views were on the payment of the preference dividend [at the time of the 25 January 1990 board meeting]?—It’s a long time ago. My recollection is that the Bond directors were adamant that the preference dividend should be paid and the Adsteam directors, including Mr Henson, were adamant that if it was paid, nothing would be paid to Bond, and me sitting in the middle, I wasn’t prepared to commit either way at that point in time because it depended on the financial capacity of the company. That’s my recollection.
1524 This approach is in accord with what I understand to be the law and practice in relation to dividends. The law, as it stood in 1990 (and as it still stands), is that a dividend can only be paid out of profit: Companies Code s 565. Generally speaking, preference shareholders only participate in the overall dividend pool at the rate prescribed in the terms of issue. The balance of the pool is then distributed to ordinary shareholders. A right to a cumulative dividend does not mean that the shareholder can insist on the declaration of a dividend of the requisite (or any) amount. But, subject to anything in the terms of issue, it does mean that if the company does not pay the full prescribed dividend in a particular year, the entitlement accumulates and the shareholder has a right to have the deficiency made up in succeeding years before any amount is distributed to ordinary shareholders. As with JNTH, the rights attaching to the preference shares, as enshrined in the Articles of association, were in relatively standard form and nothing in the Articles or the terms of issue derogates from these general statements.
1525 In my view, it is likely that the possible non‑payment of preference dividends was discussed at the meeting but no decision had then been taken not to pay the dividend. But neither had a decision been taken to pay the dividend. The contemporaneous documents available at the time, at least to Mitchell, would have indicated that payment was far from a foregone conclusion. I am not able to conclude that Mitchell passed this information on to Aspinall. Within a month of the directors’ meeting, the decision not to pay any preference dividends had been made.
9.10.4. The expert evidence
1526 It is virtually impossible to divorce the reasoning in the evidence adduced from experts concerning BRL from the fate of the brewery transaction. In this section, I will relate only the conclusions reached by the experts insofar as they impact on the preference dividend question. No provision is made in Cash Flows 1, 2, A or B for receipts of BRL preference dividends. The Honey cash flow included receipts of $5.16 million in each of May and November 1990.
1527 Love’s opinion was to the effect that BRL could only be returned to profitability if it obtained value from the brewery deposit and, realistically, the only way that could happen would be for the brewery transaction to be completed. His view was that, as at 26 January 1990, there was no foundation for forming any reasoned conclusion as to the prospects of the agreement then in contemplation proceeding to completion. That matter was entirely speculative, depending on the actions of several third parties and the outcome of litigation concerning the receivership of BBHL. Love thought that the benefits that BRL might have obtained under the agreement were uncertain and did not enable quantification of the benefits, if any, which might accrue to BRL.
1528 Love concluded that, although BRL had retained profits and nearly $50 million in cash, BRL’s capacity to declare and pay a dividend during the year to 30 June 1990 depended on it obtaining value from the brewery deposit. It was completely uncertain whether and, if so, when any value might be recovered from the deposit, and the uncertainty would have continued for several months. In his view, as at January 1990, the likelihood of BRL directors declaring dividends, even on preference shares, or obtaining cash with which to pay dividends, was extremely slim, if not non‑existent in the ensuing six to 12 months because:
(a) BRL would have required substantial amounts of cash in order to complete the brewing transaction;
(b) it was vulnerable to having its retained profits, from which dividends could be paid (if cash was available), extinguished by a loss suffered by failure to recover the full value of the deposit or by providing for a diminution in its value;
(c) even if BRL ultimately acquired an interest in the brewing assets, there would have needed to have been a further period of consolidation for the BRL group and a return to group profitability before any available cash could be diverted to the payment of dividends; and
(d) BRL continued to have recurrent interest obligations to its bondholders.
1529 In relation to the last point, I should mention that in the cash flow prepared for BRL in January 1990 (Appendix A to Henson’s January management report), the interest commitment on these bonds for the 1990 calendar year was shown as $23 million.
1530 Honey pointed out that, although the 30 June 1989 accounts revealed an operating loss for the BRL group, BRL (as an entity) had a profit of $61.1 million after tax and had retained profits of $230 million. On that basis, and bearing in mind the cash in hand of $50 million as at 31 December 1990, and assuming that no substantial losses were anticipated after 30 June 1989, there would have been no legal impediment to payment of preference dividends.
1531 Honey acknowledged that, as at 26 January 1990, there was uncertainty as to whether the preference dividends would be paid and that there might have been some uncertainty as to the capacity to pay the dividends. But he concluded that the uncertainty was not sufficient to preclude the dividends being included in the Bell group’s cash flow as at 26 January 1990. The dividends were an available source of cash from which to pay debts as and when they fell due; however, close monitoring by management was required. It was not until the ASX announcement of 27 February 1990 that it became public that BRL was not declaring the dividend.
9.10.5. BRL preference dividend: preliminary conclusion
1532 Honey is correct when he said there was no legal impediment to the payment of a preference dividend; but in January 1990, things were not looking good. Neither BCHL nor TBGL had control of the BRL board. At least some members of the BRL board were investigating legal actions against TBGL and other companies associated with BCHL. And the directors of BRL were predicting a negative cash flow (albeit with a positive cash balance) for the year to 31 December 1990.
1533 Honey is also correct when he points out that BRL had $50 million in cash from which the dividend could be paid. But it was also predicting a negative cash flow for the calendar year and, as Hill said, the preference dividend was an obligation that could be deferred, unlike, for example, the interest due to bondholders. If BRL were to default in the interest commitment to bondholders the consequences could have been serious. In those circumstances, I think it is reasonable to infer that the directors would not lightly have taken a decision to expend $26.8 million in payment of an obligation that could be deferred.
1534 In my view, the preponderance of the evidence that I have outlined suggests that the BRL preference dividend should be excluded from the assessment of objective solvency. But I will come back to it after I have considered the brewery transaction in more detail, see: Sect 9.16.6.
9.11. The GFH matters
9.11.1. Relationship between TBGL and GFH
1535 GFH was a private company and, accordingly, its shares were not listed on the ASX. It had commenced life as Heytesbury Securities Pty Ltd and it held the bonds issued in the two domestic bond issues until those bonds were transferred to SGIC in 1988.
1536 GFH had on issue 300,000 ordinary shares, which were held (in January 1990) by companies in the BCHL group so that it was an indirect wholly owned subsidiary of BCHL. It also had on issue 2969 preference shares that carried a right to receive, from the profits of the company, a cumulative preference dividend at such rates as the directors might from time to time determine. TBGL held 1564, or 53 per cent, of the preference shares.
9.11.2. GFH preference shares; BRF subordinated loan
1537 Before proceeding to discuss the GFH receivable and dividends, I need to describe an episode that occurred in mid‑1989 and which affected BGF, GFH and BRL.
1538 In the first half of 1989, around $228 million in cash was transferred from BGF to BCF. This was reflected in TBGL’s consolidated profit and loss account and balance sheet as at 31 May 1989 and it came to the notice of at least one of the banks (SocGen). On 2 June 1989, SocGen wrote to BGF saying that this appeared to be a direct contravention of the undertakings given by the company in the letter dated 16 September 1988. It will be remembered that, in that letter, TBGL had agreed, not without the consent of the banks, to lend moneys or grant financial accommodation to related companies outside the NP group in the aggregate exceeding $25 million. Although TBGL wrote to SocGen denying any breach of the negative pledge covenant, there was a breach and various officers within the company knew it. They also knew that they could not afford to report the breach. Some high‑level internal dialogue occurred between management and the accounts department about this problem. The ‘back room boys’ (and perhaps girls) slipped into overdrive to find a solution.
1539 The genesis of this little escapade goes back to 1987, when Heytesbury Holdings Ltd made a subordinated loan of $100 million to BGF, guaranteed by TBGL and repayable no later than August 1992. In April 1988 the Heytesbury facility was repaid and replaced with a similar facility from BRF. In December 1987 GFH had issued preference shares to various companies in the wider RHaC group, including BRF and BGF at $1 plus a premium of $49,999. In a letter to the ASX on 18 May 1989, BRL reported that the $100 million loan was still in place. The device arrived at to resolve the breach of the September 1988 undertakings involved the subordinated loan and the GFH preference shares.
1540 In an internal memorandum of 20 June 1989, the author acknowledged that intra‑group transfers had given rise to breaches of the financial covenants applicable to the TBGL lenders. He said: ‘In order to circumvent any breaches of those covenants it is required to re-route the funds back to BCHL via two tranches’. One of the tranches was the repayment of the existing $100 million subordinated loan to BRF, which would then on‑lend those funds to BCHL. But there was a problem. Each of the monthly closing balances of the loan account between BGF and BCF from February to May 1989 had to be brought under $25 million. In addition, whatever was done had to be in accord with the advice given to the ASX on 18 May 1989 that the loan remained outstanding as at that date.
1541 The contrivance was refined in a further internal memorandum dated 27 June 1989. BGF would conditionally repay the $100 million subordinated loan to BRF in monthly instalments commencing in February 1989. As a repayment is not a ‘loan’, no breach of the negative pledge would have occurred. BRF would acknowledge the conditional repayment from BGF under the subordinated loan agreement but would not apply the funds until the repayment became unconditional. This would overcome the problems associated with BRL’s advice to the ASX that the subordinated loan was still current. The $100 million would eventually find its way from BRF to BCF (through an intermediary) as part of the brewery deposit.
1542 The refinements proposed in the 27 June 1989 memorandum involved an additional aspect. Repayment of the $100 million subordinated loan was not sufficient to bring the accounts into order. It seems that on 4 April 1989, BGF had transferred $26 million to BCF. It was therefore suggested that BRF sell to BGF preference shares in GFH to the value of $26 million ‘as at 4 April 1989’; the price would be $50,000 per share. A later (undated) memorandum suggested that the actual value of the shares was closer to $30,000 than to $50,000 and a sale at true value would probably cause the auditors to require the remaining holdings to be written down in the books of BRL and TBGL. The last thing that those concerned wanted was a further hit to the balance sheets of BRL and TBGL.
1543 The 27 June 1989 memorandum concludes with these words: ‘The above re-routing of loan accounts needs to be perfected as soon as possible and in any event pre-30 June 1989. Please advise at your earliest whether the above transactions are acceptable’. This is compelling evidence that the transactions had not been effected by 27 June 1989.
1544 A minute of a directors’ meeting of BGF, purportedly held on 4 April 1989, was prepared authorising the acquisition of 520 preference shares in GFH at $50,000 each. These shares were part of the 1564 preference shares that BGF held in GFH. BGF had originally subscribed for 795 preference shares. Allowing for the 520 shares acquired in this transaction, the company must (at some stage) have acquired a further 249 shares. If the cost was $50,000 per share, it would explain the figure of $38.4 million referred to in Sect 4.4.4.
1545 I am in no doubt that the transactions were not effected until late June 1989 at the earliest. They were backdated. Had I been dealing with allegations of improper conduct by officers or employees of Bell group companies I would have had a lot more to say about these transactions. But I’m not and I won’t. I mention them here because they are part of the narrative about financial dealings between BGF and BCF and they explain the background to TBGL’s holdings of shares in GFH, both of which form part of the plaintiffs’ insolvency case. In addition, they are relevant to some dealings between SocGen and the Bell group in mid‑1989.
9.11.3. Cash flows, receivables and dividends
1546 It is common ground that, as at 26 January 1990, GFH owed BGF $6.9 million and it owed TBGL $9.45 million. The plaintiffs have not included any cash inflows, either from the GFH receivables or from the sale or mortgaging of the GFH preference shares, in any of Cash Flows 1, 2, A and B. The banks do not rely on the availability of moneys from GFH receivables or from the sale or mortgaging of the GFH preference shares in either their pleaded defence to the plaintiffs’ insolvency case or in the Honey cash flow. But the plaintiffs’ contention that neither the receivables nor the shares had any realisable value is nonetheless in issue.
9.11.4. The GFH receivables
1547 GFH owed $6.9 million to BGF for preference dividends that had been declared in the second half of 1989 but had not been paid. The sum was due and payable as at 26 January 1990.
1548 The other receivables stemmed from arrangements entered into in 1982 by which RHaC acquired 2.9 million partly paid shares in TBGL. The shares were converted to fully paid in January 1988, with the balance of the subscription price being taken up by TBGL as a receivable payable in five annual instalments commencing on 1 July 1988. RHaC transferred the shares (and the liability) to GFH. The instalments for 1988 and 1989 were not paid in cash: they were put through as book entries in loan accounts between BGF and BCF. The receivable was not, as at 26 January 1990, a debt due and payable. The next instalment of principal and interest was not due until 1 July 1990. I accept the plaintiffs’ submission that, even if GFH had the financial capacity to repay the receivable, no amount was due until July 1990 and then nothing further could be expected until July 1991. It was not an available source of cash.
1549 Love concluded that GFH’s financial position was almost entirely dependent on it collecting its receivables from BCHL companies and realising its investment in the Bond group. The position of the Bond group was precarious. It had reported negative working capital as at 30 June 1989 of more than $1.3 billion, it had substantial losses to 30 June 1989 ($980 million) and it was continuing to suffer losses. He noted that there had been no cash reduction in the receivables prior to 26 January 1990 and no payment on account of the debt owed by GFH to TBGL was due until 1 July 1990.
1550 Love considered that, as with the JNTH receivables, there was no short‑term means of obtaining repayment from GFH and in the medium or longer term, it was impossible to predict the outcome of the many uncertainties surrounding the financial position of the Bond group, which represented an extreme credit risk. He concluded:
Having regard to all of the matters above, in my opinion, the repayment of the receivables from [GFH] could not reasonably have been expected by the end of January, in February 1990 or in the months thereafter.
Further, for essentially the same reasons as those given in relation to the receivables from [JNTH] (other than matters relating to Dallhold), in my opinion the receivables could not have been sold or used as security to raise a loan in the times mentioned above.
1551 Although Honey did not include any amount from the GFH receivables in his hypothetical cash flow, he said:
I have not included loan repayments from [GFH] in the hypothetical cash flow. However, for similar commercial reasons to those outlined in [relation to JNTH] there was the possibility that the [GFH] receivables could have been used as a means by which [the BCHL] group could have provided cash flow support to the Bell group as part of the cash flow merge management issues and negotiations.
1552 This harks back to the ‘two significant commercial incentives’ for BCHL to prop up the Bell group, as discussed in Sect 9.9.5 in relation to JNTH. For much the same reasons as expressed there, I prefer the approach of Love to that of Honey in this respect.
9.11.5. GFH preference dividends
1553 The GFH preference dividend due to BGF had not been paid in the second half of 1989. BRL also held preference shares in GFH and it had not received payment of its dividend. On 12 January 1990, BRL issued a demand for payment. The demand had not been satisfied by 26 January 1990. None of the Bell group cash flows prepared after 11 October 1989 included the dividend.
1554 Honey did not address the prospect of dividend income from GFH preference shares. I accept the plaintiffs’ submissions concerning the lack of sources from which GFH could have obtained the funds to pay the preference dividends. Those submissions are to the following effect:
(a) in order to be in a position to pay preference dividends, GFH would need to receive dividends upon the ordinary shares it held in BRL, JNTH and TBGL, which apart from its receivables, were its major assets;
(b) neither TBGL nor JNTH had declared a dividend on ordinary shares for the year ended 30 June 1989 and the September cash flow had been premised on that situation continuing to 1991;
(c) BRL did not declare an ordinary dividend for the year ending 30 June 1989;
(d) the only other means by which these investments could be a source of dividend income for GFH was by sale or mortgage of its ordinary shares in TBGL, JNTH and BRL, and this was unlikely;
(e) the recoverability of GFH’s investments in TBGL, BRL and JNTH was unlikely in circumstances where the BCHL group 1989 annual report revealed that GFH’s audited accounts as at 30 June 1989 had been qualified because of the uncertainty of the recovery of these investments;
(f) the audit qualification in the BCHL group 1989 annual report applied to the accounts of BCHL subsidiaries, of which GFH was one, where their assets included loans to other BCHL subsidiaries; and
(g) for similar reasons, there was no realistic prospect of GFH obtaining moneys from its shareholder, Actraint No 71, which was its major debtor ($112.5 million).
1555 For the sake of completeness, I should add that the unpaid dividends were accrued in the accounts until December 1989 but the accruals were reversed as at 30 June 1990.
9.11.6. The unpaid calls
1556 Similar reasoning applies to the $9.45 million owed to TBGL for unpaid calls. Again for the sake of completeness, I should mention that a non-cash entry for $3.21 million as at 1 July 1990 was made, thereby reducing the GFH receivable. In effect, the reduction in the GFH receivable was charged to the BCF loan account through BGF.
9.11.7. Ability to sell or mortgage the GFH preference shares
1557 Love’s view was that, for essentially the same reasons to those given in relation to the shares in JNTH (except for reasons concerning share trading), Love concluded that the shares in GFH could not have realised cash at the end of January, in February 1990 or in the months thereafter. For the same reasons, no lender would have regarded them as acceptable security for a borrowing.
1558 Hall was instructed to assess the rationally foreseeable value or range of values for BGF’s holding of preference shares in GFH (among others). He did so on two bases: one looking only at publicly available information and the other reviewing additional material that could reasonably be expected to have been made available on request to a potential purchaser. His conclusion was that the underlying value of the net assets attributable to preference shareholders was in the range of $13.4 million to $22.1 million, giving a value per share in the range of nil to $7476. But this left no value for ordinary shareholders.
1559 According to Hall, the most important assumption on which the valuation proceeded was the extent to which inter‑company receivables, particularly from Dallhold and BCF, might be recoverable and the timing of such a recovery. Other assumptions included the recovery of securities for the brewery deposit (which he assumed to be in the range of $194 million to $443.2 million). These assumptions had a direct impact on GFH due to its investments in TBGL and BRL. Hall reached this conclusion:
It was quite possible, given the lower end of this range, that the value of the shareholdings is nil and that these shareholdings will remain unsaleable by mid‑May 1990. Ultimately, the realisable value of these shareholdings would be dependent upon not only the underlying value range but also on the relative leverage that TBGL and potential purchasers had in any negotiations and the relevant risk any potential purchasers might be willing to accept.
…
No amount of information would have been likely to have interested a potential purchaser in TBGL’s shareholdings in JNTH or GFH. The assets of both those companies consisted primarily of amounts owed to them by BCH and related parties or investments in BCH and related parties. Both of those companies would have remained firmly under the control of BCH even if TBGL’s shareholdings were sold to a third party. It is extremely unlikely that there would have been any purchaser of either of these shareholdings, apart from BCH itself, for anything other than a nominal or negligible amount even by mid‑May 1990.
1560 Honey did not agree that the shares in GFH were valueless as at 26 January 1990. He did not dispute Love’s conclusions to the extent that it was unlikely that the shares in GFH could have been realised in the short term and, accordingly, the hypothetical cash flow statement did not reflect any proceeds from the sale of the shares. But he acknowledged that the financial position of GFH and the value of its shares were dependent upon the outcome of the rationalisation and restructuring strategies being pursued by BCHL.
1561 A third party contemplating a purchase of the GFH preference shares or of accepting them as security for a loan would have been confronted by a further adverse circumstance. One of the major assets of GFH was its holding of ordinary shares in TBGL, BRL and JNTH. But those shares were then pledged to Midland Bank plc as part of the security package for the moneys advanced to Actraint No 72 at the time of the Bell group takeover. The share mortgage was still in place in January 1990. It is reasonable to assume that this would have reduced the security value of the assets of GFH and would not have made the company more attractive to a prospective purchaser of the preference shares.
1562 Again, for the reasons expressed in relation to JNTH, I prefer the reasoning of Love and Hall to that of Honey.
9.11.8. GFH matters: conclusion
1563 In my view, the exclusion of any amounts for recovery of the GFH receivables or from the sale or mortgage of the GFH preference shares in the assessment of objective insolvency is justified.
9.12. The BCF receivables
9.12.1. History of the BCF receivable
1564 BCF was the treasury company for the BCHL group. In Sect 4.4.3 and Sect 4.4.4 I outlined, in broad detail, the transactions between BCF and BGF. Woodings’ analysis of the general ledgers (which I accept) indicates that the bulk of the value passing from BGF to BCF was in cash but the majority of the transactions flowing the other way were in value other than cash. In the period from 1 January 1989 to 26 January 1990, after allowing for reversals and other adjustments, total transactions flowing from BGF to BCF were $387.92 million and transactions flowing from BCF to BGF were $376.14 million. Of those transactions, the liquidators found sufficient material to permit classification of about 90 per cent of the between cash and non‑cash. Table 18 illustrates the point.
Table 18
BGF/BCF LOAN ACCOUNT – SUMMARY
1 Jan 1989 to 30 June 1989 1 July 1989 to 26 Jan 1990
TRANSACTION SOURCE CASH
[$MILLION] NON-CASH
[$MILLION] CASH
[$MILLION] NON-CASH
[$MILLION]
BGF to BCF $269.98 $4.16 $60.93 $2.98
BCF to BGF $63.43 $215.28 $39.25 $2.5

1565 The distinction between cash and non‑cash transactions cannot be taken too far. It would be wrong to assume that all non‑cash transactions are necessarily valueless but some can, at the very least, be contrived or opportunistic. Nonetheless, the history of the account is one factor that can be taken into consideration when a question arises, as it does here, of the likelihood of significant cash payments being made against the general trend.
1566 In seven out of the 12 months to 31 December 1989 the closing cash balance was in favour of BCF. But this is explained by the number and size of the non‑cash transactions, at least one of which (repayments on the BRF subordinated loan) I regard as suspect. The monthly closing balances of the account that were in favour of BCF ranged between $63.32 million (28 February 1989) and $1.178 million (31 October 1989). The monthly closing balances on and after 30 June 1989 for months in which the balance favoured BGF are as set out in Table 19:
Table 19
BGF/BCF LOAN ACCOUNT – MONTHLY CLOSING BALANCES
MONTH AMOUNT
30 June 1989 $11.15 million
30 November 1989 $5.77 million
31 December 1989 $13.47 million
26 January 1990 $11.74 million

1567 The analysis set out in Table 19 also indicates that in the months of November and December 1989 the amount owing by BCF to BGF increased but during January it decreased by about $1.73 million. In December 1989:
(a) BCF lent $6.6 million (part of the proceeds of the Actraint transaction) to BGF to enable BGF to meet its interest commitment to bondholders; and
(b) BGF transferred $14.4 million (part of the $26.11 million received from a BRL subsidiary in the Academy transaction) to BCF.
1568 In December 1989 SCBAL served a demand on BGF for repayment of its facility. The plaintiffs made much of the fact that in December 1989 BGF did not make a demand for repayment of the moneys owed to it by BCF to enable it to meet the SCBAL demand. The plaintiffs invite me to infer from the lack of a demand on BCF that the directors thought there was no point in doing so. I will go into more detail about the SCBAL demand in a later section. It is sufficient to say here that I do not think there is much force in the plaintiffs’ submission on this point. After the collapse of the club facility proposal in July 1989, Aspinall and Simpson had been working on an overall accommodation with all of the banks. To repay SCBAL at that time would, in all probability, have precipitated recovery action by other banks, spelling doom for the Bell group.
9.12.2. BCHL: a troubled entity
1569 In Sect 9.9, in relation to JNTH, and Sect 9.11, concerning GFH, (among other sections of these reasons) I have commented on the troubles confronting the Alan Bond empire, including Dallhold and BCHL. I do not intend to repeat what I said in those passages. From at least the time when the first Lonrho report was issued (November 1988), BCHL was on the back foot and in crisis management. Things did not improve in 1989.
1570 Graeme Baker was assistant company secretary of most of the BCHL group companies from 1981. In January 1989 he became the secretary of TBGL and in December 1989 he assumed that role for BCHL and about 160 of its subsidiaries. In his witness statement, Baker spoke of the pressure that the group was under, especially following the publication of its 1989 accounts. The pressure was exacerbated by the fact that a number of senior people left around or shortly after that time and there was an increase in the number of problems and disputes (in addition to pressure from banks) with which the remaining members of senior management had to deal. The problems and disputes which came to his mind included:
(a) queries and requests for information from groups of convertible bondholders of BCHL, BBHL, the Bell group and BRL, including proceedings brought by the BBHL bondholders for repayment;
(b) the aftermath of queries sent by BCHL’s auditors in connection with the 1989 audit, including events of default under the NAB syndicate facility, some land in Rome, and the Stockton loans;
(c) agitation from Adsteam about the position of BRL, which led to an application to appoint a receiver to BRL and ultimately to the appointment of an independent board in December 1989;
(d) complications in putting a brewery sale from BCHL to BRL in place, including worries about the value of the deal, the level of debt and the way in which any residual Manchar debt was to be dealt with between BRL and BCHL;
(e) claims made against BCHL group companies by BRL in early 1990 and instigated by the new director Henson;
(f) the NCSC enquiry which had been announced to the public prior to the publication of the accounts; and
(g) a claim brought by JNTH minority preference shareholders about the price at which their shares should be bought out.
1571 Late in 1989 and early in 1990, three separate petitions were lodged to wind up BCHL. It will be remembered that on 29 December 1989, a receiver was appointed over the assets of BBHL at the behest of the NAB syndicate members. On the same day, SGIC made an application to this Court to wind up BCHL on the grounds that it was insolvent. On 3 January 1990, BCHL applied to have the petition dismissed or stayed. The dispute involved an indemnity agreement entered into by SGIC and BCHL in connection with the late and unlamented Rothwells Ltd. On 18 January 1990, Ipp J dismissed the petition: In the Matter of Bond Corporation Holdings Ltd (1989‑1990) 1 WAR 465. In late January or early February 1990, two petitions were lodged by subsidiaries of BRL to wind up BCHL, following the service of notices under Companies (Western Australia) Code s 364. BCHL challenged the petitions on the ground that the s 364 notices were defective. The challenge by BCHL failed but the matter was eventually settled without a substantive hearing: see Sect 9.16.3.2.
1572 It is an interesting historical fact that in each of the NAB receivership application, the SGIC petition and the BRL petitions, BCHL was able to keep its attackers at bay without the directors having to swear an affidavit attesting to the solvency of the company concerned.
9.12.3. The realisable value of the BCF receivable
1573 I do not think it is in dispute that BCF was a treasury company for BCHL and the only way BCF could repay BGF was if BCHL placed BCF in funds to do so. As I said at the start of the preceding section, I have already canvassed the travails of BCHL and I do not intend to do more than summarise the main arguments put by the respective parties.
1574 The plaintiffs contend that, as at 26  January 1990, there were no grounds for expecting repayment of the whole or any part of the BCF receivable in the ensuing months, nor could the receivable be sold or used as security for borrowings. They relied on the evidence of Love and Woodings in this respect.
1575 Love opined that BGF faced a similar predicament in using legal remedies to obtain payment of the receivable from BCF to that outlined in relation to the receivables from JNTH. Obtaining a judgment would not have contributed to the debtor’s ability to pay, as that depended upon it collecting receivables from other BCHL group Companies. To wind up the BCHL group companies would have taken considerable time and would have had an adverse effect on the Bell group’s own investment in the debtor or creditors of the debtor. It could have precipitated the winding up of the BCHL group, which might, again, have had an adverse effect on the Bell group’s investments in BRL. The winding up of BCHL group companies would have been complex and could have taken several years before creditors would know if they were to receive any, and if so what, dividends on their debts.
1576 Love incorporated these opinions in forming the view that no amount should be included as a cash inflow for the BCF receivable in Cash Flows 1, 2, A or B.
1577 Honey included a recovery from the BCF receivable of $13.5 million, being a $2.5 million loan and $11 million deposit. The plaintiffs contend, I think correctly, that this is an error. The balance of the loan account stood at $13.5 million on 31 December 1989 but by 26 January 1990 it had been reduced to $11.4 million. Leaving that to one side, Honey’s opinion that the BCF receivable ought to be included in the predictive cash flow was based largely on the ‘two commercial incentives’ argument. I have already dealt with that proposition, particularly in Sect 9.9.5, and it is not looking much better to me now than it did then. That having been said, if BGF made demand on BCF and threatened to wind BCF up, it would have been more difficult for BCHL to deal with the situation.
1578 There is one other significant aspect that causes me to hesitate before ruling against the banks on this issue. With hindsight, it is possible to say that by January 1990 it was effectively all over for BCHL – it was just a matter of time. Nonetheless, between 31 December 1989 and 26 January 1990, the Bell group was able to wheedle $2.1 million from BCF in reduction of the loan. The TBGL weekly cash flow report for 23 February 1990 indicates that, by that date, it had been reduced to $9.9 million. By May 1990, it had been paid in full. Thus, by 26 January 1990, there was a track record of repayments and that experience was proximate to the critical date. On that basis (and bearing in mind that the onus of proof lies on the plaintiffs), I lean slightly in favour of the inclusion of the receivable in the predictive cash flow, although not necessarily for the reason advanced by the banks.
9.12.4. The BCF receivable: conclusion
1579 With very little enthusiasm, I find that, in assessing objective solvency, an amount of $11.4 million, representing recovery of the BCF receivable, should be included. Honey included the recovery by equal instalments in each of February, March and April 1990. He did so because that was the way the projected receipts were dealt with in the undated January cash flow. As the plaintiffs point out, this does not put the timing question on particularly firm ground as it was not repeated in other Bell group cash flows produced in January 1990. But as there is not much else to go on, in reconstructing the cash flows I will do the same.
1580 I should say that this conclusion does not cause me to resile in any way from what I said in relation to the GFH receivable or the JNTH receivable. In those instances, there was no proximate track record of meaningful recoveries. Additionally, the relationship between BCHL, the debtor and BGF was not as direct as was the connection between BCHL, BCF and BGF.
9.13. The plaintiffs’ insolvency case: continuing losses
9.13.1. The issue described
1581 One of the particulars advanced by the plaintiffs in support of the allegation of insolvency is that the Bell group on a consolidated basis and each of the Bell group companies that are plaintiffs (other than BPG and Belcap Enterprises) made losses in the seven months to 26 January 1990. In the submissions another of the plaintiff companies, Ambassador Nominees, has been removed from the list of entities said to have made losses in the relevant period.
9.13.2. Losses and insolvency
1582 The plaintiffs submit that a key indicium of insolvency is the existence of continuing losses. In this respect, they cite Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124, [386] where ‘continuing losses’ was one of a number of matters in a ‘checklist’ that an expert witness agreed ‘brought to mind very common features in insolvency situations’. In Plymin, the subject company had a large number of debts that were wholly or partly unpaid. At [384], Mandie J said:
Of course, that a company was not in fact paying many of its debts as and when they fell due does not necessarily mean that it was unable to do so, but, in the case of [the company], certain of the debts were very large, and the delay in their payment or, more particularly, their permanent non‑payment is such as to justify the inference, even in the absence of other known circumstances, that [the company] was indeed at all relevant times unable to pay them. However, there are other known circumstances … [The company] was incurring large and continuing trading losses throughout 1999, and these losses were being financed by non‑payment of certain large and many smaller creditors. Other sources of finance could not be located and none were obtained. (emphasis in original)
1583 This is, in my view, an apt description both of the general principle and of the context in which it arose in Plymin. The primary question in any insolvency analysis is whether the company is unable to pay its debts as they fall due. A company can make losses on its revenue account and yet still be in a position to pay its debts. It may do so by a variety of means, including drawing on capital or reserves or by borrowing. It is not at all uncommon, for example, for an entity to make losses during the start‑up phase of a business. Nor is it unusual for a company to record a loss if, for example, it is necessary to make a substantial write down in the value of an asset or an increase in a provision that reflects in the profit and loss account. So it is not the mere fact that the company has made or is making operating losses that is of concern. The critical question is whether and to what extent the losses have an impact on the ability of the company to pay its debts. It is essentially a question of the sources of funds that are available for that purpose. This is the significance of the last two sentences in the passage set out above.
1584 I can explain what I mean by giving a hypothetical example. The example will be simplistic and not in accord with accounting practice because it treats free cash flow and profit as if they were the same thing. To understand the example it is necessary to make four assumptions. First, a company has an operating business and it is also classified as a share trader (and thus would have write downs in the share portfolio as at the balance date reflected in the profit and loss account). Secondly, the company makes a $10 million profit from its operating business and the whole of that amount is available as free cash flow. Thirdly, the company has other expenses of $5 million to be met from the free cash flow. Finally, the valuation of the share portfolio as at the balance date requires a write down of $15 million. In this simplistic example, the company would make a loss of $5 million but it would have sufficient cash to pay its debts (that is, the expenses) as and when they fell due.
9.13.3. The losses of the Bell group: to January 1990
1585 It seems to me that the situation facing the Bell group in late 1989 and early 1990 was different from that in Plymin. In relation to the Bell group companies, there is no evidence of material failures to pay debts in the period from 1 January 1989 to 26 January 1990. In saying that, I am leaving to one side the failure to meet the demands or requests of the Australian banks for repayment (in whole or in part) of the principal amounts of the various facilities advanced by them. It is common ground that by 31 July 1989 the terms of the finance arrangements for the various Australian banks had expired and that (from the date of expiry of each arrangement) the principal amounts were payable on demand. During the second half of 1989 the refinancing of those principal amounts was under negotiation. This is at the heart of the litigation. The dealings between the banks and the Bell group during that period are important for other reasons but they can be left to one side in relation to the present argument.
1586 It is common ground that the companies paid the monthly interest due to the Australian banks and to the Lloyds syndicate banks during 1989 and in January 1990; problems first surfaced in that respect in February 1990. It is also common ground that the interest payments due to the bondholders in May, July and December 1989 were also met, albeit in the last‑mentioned case facilitated through unusual means by the Actraint and Academy transactions: see Sect 9.9.7. The companies conducting the publishing and communicating businesses were operating profitably and had overdraft facilities available to cover cash flow shortfalls. There is no evidence that other creditors went unpaid or suffered significant delays in payment in the period to 26 January 1990.
1587 In PP 20A(u), the plaintiffs provided a table setting out the losses made by the plaintiff Bell companies in the seven months to 26 January 1990 both before and after adjustments. The banks attack the calculations on the basis that they do not reflect actual losses to 26 January 1990 but are notional or theoretical losses derived from the plaintiffs’ own assertions in their valuation SNAs. It appears that the losses (before adjustments) were based on the figure included in the six‑monthly financial statements to 31 December 1990. The write downs of the value of BRL and JNTH shares that were made by the directors in March 1990 when they came to finalise the results to 31 December 1989 were then applied to the base figures. The calculation of losses after adjustments was done on a similar basis, except that the write downs were done on the basis of the plaintiffs’ own valuation of assets (not limited to the BRL and JNTH shares) as reflected in the SNAs.
1588 The calculations are complex and it would take considerable time to explain them. In my view, it would not be fruitful to enter into a detailed analysis of the calculations. To be meaningful, they would have to be done for each of the companies individually. In any event, I do not think the continuing losses argument contributes much to the debate on the solvency (or otherwise) of the relevant companies.
1589 There is no doubt that, on a consolidated basis, the Bell group was making losses, and the losses were significant. In the year ended 30 June 1989 the consolidated loss was $159.2 million. The profit and loss summaries in the management accounts disclose the following. In the three months to 30 September 1989 the consolidated loss was $9.7 million. The result for October 1989 was a small profit ($494,000) but in each month thereafter there was a loss. By 31 December 1989, the year to date loss on a consolidated basis (before the write downs made in March 1990) was $99 million. But, in a situation where there is no evidence of a failure to meet ongoing commitments, I am not sure where that takes the argument. This is not to say that incurring losses is an irrelevant consideration. I will explain why a little later.
1590 In my view, the argument can be stated in much more simple terms that do not require complex accounting calculations of losses, properly so‑called. As at 26 January 1990 (leaving to one side consideration of the BRL preference dividends), the only source of recurrent income was the publishing and communications businesses. In the year ending 30 June 1989, the operating profit from those businesses was $32.2 million. In the management accounts as at 31 December 1989, the year to date figure from that source was $9.6 million. Those accounts also reflect external interest income of $19.8 million. If that is taken into account, the recurrent income was $29.4 million. But the same set of accounts also recognised a year to date external interest expense of $49 million. Therein lies the problem: interest outgoings exceed recurrent income. The question then is whether there are additional sources of funds to cover the shortfall and to meet other expenses as and when they might arise. That, to me, is the critical question; not whether, in accordance with the accounting standards and generally accepted accounting principles, the companies were making continuing losses.
1591 I said a little earlier that it would be wrong to regard continuing losses as an irrelevant consideration. The issue was touched on by Love in his report where he said:
The write down in asset values as against book values in the SNAs should be brought to account in the profit and loss account of the relevant companies. No real advantage is served by doing so in this case, however, as the losses which would thereby be revealed would give no additional perspective to the financial condition of the relevant companies. I note, however, that [some] plaintiff companies had losses, as at 26 January 1990, even without such write downs. Such losses contributed to the inability of those companies to raise cash quickly.
1592 As a matter of logic, I think the last sentence must be right. If recurrent income is insufficient to service debt, then other sources of funds have to be found. If those sources depend on the ability to sell, mortgage or charge assets, the existence of continuing losses would, as a matter of commercial logic, be an impediment to a quick realisation or other means of raising cash from the assets. They might, for example, influence a lender assessing the security value to be attributed to the assets. They might also influence the negotiating position (in relation to price and conditions of sale) that a prospective purchaser would take. Continuing losses are, therefore, part of the factual matrix against which the ability of the companies to achieve this end falls to be determined.
9.14. Necessity to gain access to asset sale proceeds
9.14.1. The cl 17.12 issue described
1593 Looking into the future from 26 January 1990, the expenses of the Bell group exceeded the available recurrent income. On an annual basis, the interest payable to the banks on the facilities was running at approximately $3.6 million per month or $43.1 million per year. In the Garven cash flow, the prediction of cash receipts from BPG (adjusted on a pro rata basis from 15.4 months back to 12 months) was about $22.2 million. On the banks’ case (as reflected in the Honey cash flow) the adjusted predicted receipt would be about $31.4 million. On the plaintiffs’ case (Cash Flow 2), the figure was $32.1 million. Accordingly, there was a shortfall even before taking into account the annual interest commitment of approximately $48 million to the bondholders. This was made clear in an exchange with Aspinall in his cross‑examination:
[I]t was abundantly clear to you that the cash flow from the Bell Publishing Group was not sufficient to meet the total interest bill?—Abundantly clear, but I had a lot of other tools to use to meet my interest payments.
It was not even sufficient to meet the bank interest?—The Bell Publishing Group surplus cash would not meet the bank interest, that is the Australian facility and the Lloyds facility, without using the other tools that I had.
1594 Aspinall also agreed that in January he was of the view that if the Bell group was to survive on the income generated from BPG, it would have to reduce the level of debt. He thought that the value of the group’s assets could be used to raise equity for the group if necessary and that the potential for cash flow improvement could be managed. This would allow the group to sustain a level of debt and enable it to put in place long‑term bank financing to secure its future. In the meantime (and this is one of the ‘other tools’ that he had in mind) the companies would require access to asset sale proceeds in order to survive.
1595 This raises the cl 17.12 issue (which I introduced in Sect 7.2.5). Briefly stated, the issue arises from the terms cl 17.12 of ABFA and RLFA No 2. Clause 17.12 provides that the proceeds from the sale of assets (subject to exceptions) were 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 say that by executing documents containing that term the companies effected a transfer of control to the banks and that the companies were thereafter at the whim of the banks. As senior counsel for the plaintiffs put it in opening:
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.
1596 In their opening, the banks said that as at 26 January 1990, the ‘overwhelming probabilities’ were that if the Bell group required the release of asset sale proceeds to service its current liabilities, the relevant consent would have been forthcoming. So understood, the banks say, 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. According to the banks, those proceeds are, therefore, properly to be taken into account in assessing solvency.
9.14.2. The provisions in the refinancing documents
9.14.2.1. The provisions in the refinancing documents
1597 The provisions that go to make up the cl 17.12 regime are described in detail in Bell (No 6). Nonetheless, because of the importance of the issue (and to make it easier for a reader to appreciate the context) I will repeat some of that material.
1598 The relevant provisions are drafted in the same way in ABFA and in RLFA No 2. Westpac is a party to ABFA and RLFA No 2 in its capacity as (among other things) the Security Agent. Clause 17.12 uses the phrase Recovered Money Distribution Date, which I have earlier defined as RMDD. I will commence with cl 17.12:
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 the Security Agent promptly upon receipt thereof and the Security Agent shall deposit such net proceeds into an interest bearing suspense account or accounts as nominated by the Security Agent to be held in the name of the Security Agent or its nominee and to be applied together with any accrued interest thereon on the next RMDD as a prepayment of the [facilities].
1599 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 the Security Agent is to be calculated. Clause 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.
1600 There are provisions in the transaction documents that restrict both the ability of the companies to realise assets as well as the access the companies would otherwise have had to the proceeds from permitted asset sales.
1601 The principal restriction on asset disposals is to be found in cl 17.8(a). In it the companies covenant 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 or money received and disposed of in the ordinary course of the business, intra-group indebtedness transferred as permitted under cl 17.9(a)(iii) and any moneys paid by TBGL, or received by any member of the BGUK Group, under a comfort letter.
1602 Under cl 17.9(a)(A)(aa), the companies can dispose of assets to any person with the prior written consent of the Security Agent, but consent is not to be withheld if the Security Agent is satisfied that 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’.
1603 In relation to permitted asset sales, there are two broad categories of restrictions, each having a sub‑category. The first category is ‘specific disposals, including the Bell Press proceeds and other nominated specific disposals. The second broad category is ‘non‑specific disposals’. The two sub‑categories encompassed within it are the publishing assets (other than Bell Press) and the remainder of the group assets.
1604 In the discussion that follows, I am going to leave to one side an argument as raised by the banks that at least some of the assets that I am about to mention are not subject to the cl 17.12 regime in any event. I will return to this argument later.
9.14.2.2. Specific disposals
1605 There are three assets that were the subject of specific mention in the Transaction documents: namely, Bell Press, the BRL and JNTH shares and Bryanston. I will deal with each in turn.
1606 The documents envisage that the Bell Press assets could be sold for not less than $25 million without any further consent, or for less than $25 million with the consent of the banks. The Security Agent would then discharge the mortgage debenture over the assets and receive the proceeds of the sale. The net proceeds were to be applied in reduction of the indebtedness to the banks: cl 17.10(a)(i)(A) and cl 17.12(a)(ii).
1607 The shares in BRL and JNTH could be sold in whole or in part or (provided the facilities agents agreed there was no diminution in market value) converted into other marketable securities. The Security Agent would then release any security over the shares and the net proceeds of the sale would go to the Security Agent 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: cl 17.10(a)(i)(B), cl 17.10(c) and cl 17.12(a)(ii).
1608 The sale agreement for Bryanston, executed in December 1989, provided for an up-front payment of £5 million. This up-front payment was to be paid to the Security Agent to be held by it 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: cl 17.10(a)(ii) and cl 17.10(e). By way of an aside, 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 £3.7 million. The schedule of ‘Anticipated Liabilities’ showed nominated expenses of £3.7 million.
9.14.2.3. Non-specific disposals
1609 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 sub‑groups: first, the publishing assets other than Bell Press and, secondly, the remainder of the Bell group assets. In this latter category were the shares in GFH, the Q‑Net assets, the New York apartment and the ITC contract payment. It may also include assets such as the Wigmores receivables, receipts from W&J and the radio stations. None of these are in the disputed category.
1610 The regime for the two sub‑groups is the same. The reason a differentiation is drawn is that in cl 17.9(a) the power to dispose of assets (subject to the conditions set out in the agreement) is conferred separately on BPG (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).
1611 To dispose of these assets the companies had to obtain the approval of the Security Agent. The Security Agent had to be satisfied that the disposal was at arm’s length and at market value. The Security Agent 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 Security Agent to be applied in reduction of the indebtedness to the banks.
1612 These arrangements were subject to two minor exceptions. One was ‘small disposals’ (cl 17.11). TBGL or any of its subsidiaries could dispose of assets at arm’s 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.
1613 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 the Security Agent and, if so dealt with, would not be subject to the application of the disposal proceeds conditions in cl 17.12: see cl 17.9(a)(iii)(B) and cl 17.10(a)(iii) and (f).
1614 Some of the other agreements in the refinancing package had an impact on the application of the proceeds of asset sales by the companies. I refer, in particular, to the ICA and the STD. In each case, the parties were the Lloyds syndicate banks, the Australian banks, Lloyds Bank (as the Lloyds syndicate agent) and Westpac (as the Security Agent and as the Australian banks’ agent).
1615 There is another relevant provision of ABFA and RLFA No 2 that I should mention, namely, cl 7. Clauses 5 and 6 of ABFA deal with repayments and pre‑payments. Clause 6.4 provides that moneys repaid or pre‑paid cannot then be re‑drawn. The effect of cl 7(a) is that repayments, pre‑payments and ‘all other payments made or to be made to the Security Agent hereunder’ (which would include proceeds of asset sales under cl 17) were, on receipt by the Security Agent, to be distributed among the banks in accordance with cl 6 of the ICA. The effect of cl 7(b) is to deem any moneys received by a bank through a distribution by the Security Agent under cl 7(a) as a repayment or a pre‑payment, thus reducing the amount owing to that bank by the amount received.
1616 Clause 6 of the ICA was designed to operate in the following way:
(a) save for moneys recovered under legal action (regulated by cl 7.2), all moneys received by the Security Agent under a financing document and available for distribution to the banks were to be distributed by the Security Agent on an RMDD: cl 6(a);
(b) except when there was an ‘Enforcement Event’, an RMDD was the last business day in each month: cl 6(c)(i);
(c) 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 cent in value of the banks) or (if there had been no such determination) a date set by the Security Agent in consultation with the facilities agents: cl 6(c)(ii);
(d) unless the Instructing Banks otherwise agree, the Security Agent 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:
(i) costs, charges and expenses of a receivership (if any);
(ii) costs, charges and expenses of the Security Agent and the facilities agents incurred in exercising powers or remedies;
(iii) outstanding interest due to any bank under the financing documents;
(iv) pro rata reductions of the principal owing to the banks;
(v) any other amounts secured by security documents;
(vi) the surplus, if any, to a borrower or other person entitled.
1617 In relation to Westpac, the ICA contained some special provisions to cater for the additional exposure of Westpac to the group because of the overdraft of $5 million advanced to WAN: see cl 6(d)(vi)(B). Where the Security Agent distributed moneys to Westpac, it could elect to treat the repayment or pre‑payment as going either to the bill facility or to the overdraft. If it went to the bill facility it could not be re‑drawn, but if it went to the overdraft it could: see also ABFA cl 6.4 and cl 9.
1618 The effect of the STD was to create a trust fund held by the Security Agent for the banks. Clause 5 provided that any moneys received by the Security Agent pursuant to any security covered by the trust fund were to be applied in accordance with cl 6 of the ICA. The trust fund was defined to include any other assets or security which the Security Agent 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.
1619 There was a specific nomination by the Security Agent that it was holding as trustee under the STD the various mortgage debentures; for example, those granted by Bell Press and by BGF. But (again as an example) the share mortgage granted by Dolfinne Securities has no such nomination.
9.14.2.4. Application of proceeds of asset sales
1620 The effect of cl 17.12 was that unless the banks otherwise agreed (this meant all banks, not the 67 per cent by value), TBGL was required (promptly on receipt) to procure the payment to the Security Agent 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) the excess of the net proceeds over $1 million (in respect of each transaction) for other assets disposed of by the BPG sub‑group (for each transaction) but the retention by the group was not to exceed $5 million in total for a series of transactions over a six month period: cl 17.12(a)(i);
(c) the excess of the net proceeds over $1 million (in respect of each transaction) for other assets disposed of by TBGL or its subsidiaries (other than the BPG sub‑group) but not to exceed $5 million in total for a series of transactions over a six month period: cl 17.12(a)(i).
1621 Clause 17.12(a) required the Security Agent to deposit the net proceeds in an interest bearing suspense account or accounts as nominated by the Security Agent to be applied together with accrued interest on the next RMDD as a pre‑payment of the bank loans.
1622 Clause 6.2 provided that the moneys TBGL was obliged to cause to be paid to the Security Agent were to be applied in accordance with cl 7. Clause 7 of ABFA (and cl 13.5 of RLFA No 2) provided that the Security Agent was to distribute amounts received by it among the banks in accordance with cl 6 of the ICA. Clause 6 of the ICA relevantly provided that the Security Agent would distribute money received by it on the next RMDD in accordance with cl 6(d). Clause 6(d) of the ICA provided that, unless the Instructing Banks (that is, 67 per cent in value) otherwise agreed, the moneys were to be distributed by the Security Agent as soon as practicable on or after the next RMDD to the banks on a pro rata basis.
1623 In what I am about to say I am leaving to one side questions about waivers and consents. I am also leaving to one side the question whether all of these assets were caught by the cl 17.12 regime. The effect of these provisions (on their face) was that the proceeds of sale from Bell Press, the BRL shares or the JNTH shares were to go to the banks. 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 Q‑Net, 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 the Security Agent to be applied in reduction of the debts due to the banks.
9.14.3. Is there a construction question?
1624 At the time when I delivered the reasons in Bell (No 6), I thought the banks were raising a question of the proper construction of the contractual provisions in the cl 17.12 regime.
1625 By a ‘construction question’ I mean the classic contract law principles that govern the interpretation of contractual documents where there is uncertainty in the language used by the parties. Those principles are well known. The paramount canon of construction is that the court must ascertain the intention of the parties as embodied in the words that they have used. The court will not re‑write the contract for the parties. In other words, the court stays within the four corners of the document except to the limited extent to which resort can be had to extrinsic evidence in resolving ambiguities. In that respect, extrinsic evidence is largely that of the surrounding circumstances in which the contract came into being.
1626 I doubt that in judgments delivered in Australia since 1982 in cases with any contractual element, however slight, there have been many that have failed to mention Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. In relation to extrinsic evidence, the time‑honoured dictum of Mason J in Codelfa, 352, is apposite:
The true rule is that evidence of surrounding circumstances is admissible in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although … if the facts are notorious, knowledge of them will be presumed.
1627 As Mason J pointed out, at 353, that 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.
1628 Much of the early part of the plaintiffs’ written closing submissions on this issue is devoted to the proposition that there is no such question. It now appears that the banks accept this is so. In their responsive submission, the banks say that they do not rely on a construction issue ‘per se’; that is, they do not assert that there is any ambiguity in cl 17.12.
1629 I accept that there is no ‘construction question’ of the classic type. There is no ambiguity in the wording of cl 17.12. The plain meaning of the clause is that on disposal of an asset by a group company, TBGL was obliged, unless all banks agreed otherwise at the request of TBGL, to cause an amount equal to the consideration received for the disposal after deducting reasonable costs and expenses incurred in the disposition to be paid promptly to Westpac. That is the plain meaning of the words. The plaintiffs accept that it was possible for the Bell group to gain access to the proceeds of disposal of any asset if it made a request under cl 17.12 in respect of the proceeds of disposal of that asset and if all of the banks consented to that request. Again, that is the plain meaning of the words.
1630 That having been said, it is not the case, for example, that there was any condition precedent to the operation of cl 17.12. TBGL was obliged to pay an amount equal to the consideration received for the disposal of an asset. It could only be relieved of that obligation if it made a request to the banks and all the banks consented to the request. The form of the clause is not that the Bell group could retain the proceeds of an asset disposal unless the banks directed otherwise. The clause requires the proceeds or an equivalent sum to be paid across to Westpac. The possibility that TBGL could make a request to be relieved of that obligation and the banks might consent to that request did not make the obligation conditional nor did it qualify the obligation in any sense that is relevant to its proper construction. I accept the plaintiffs’ contention that the obligation was strict unless TBGL made a request to which all the banks gave their consent.
1631 But this does not mean that the commercial purpose of the clause and the way in which the parties intended it to operate is irrelevant. This is yet another area where state of mind (both of the banks and the directors) intrudes and so too does the concept of ‘commercial realities’. The banks advance the argument that the cl 17.12 regime is a ‘mechanism’ by which the Bell group companies could gain access to the proceeds of asset sales as and when necessary.
1632 The plaintiffs take issue with the characterisation of the regime as a ‘mechanism’. I will return to that issue shortly. But accepting for the moment that such a phrase is appropriate, the ‘mechanism’ is relevant when considering whether the directors could reasonably expect the proceeds to be available (if needed). It is also relevant to the question whether the banks were entitled to believe that the directors held that expectation. And it is relevant also to the commercial realities that are part of the decision‑making process on insolvency. To understand the way in which issues of that nature are relevant, it is necessary to look at the pleadings.
9.14.4. The pleaded case on cl 17.12
9.14.4.1. Clause 17.12 in the insolvency pleadings
1633 At the risk of tedious repetition, a nidus of the plaintiffs’ case is that, as at 26 January 1990, the relevant companies were insolvent or nearly so. In 8ASC par 16C, the plaintiffs plead the effect of cl 17.12 (without identifying it by number) as part of their insolvency case: see, for example, 8ASC par 33C(f) (which incorporates par 16C) and PP par 33C (V) and PP par 20A(j). In particular, the latter provides that BGF’s insolvency by 26 January 1990 may be inferred from numerous matters, including that by 21 December 1989 all banks were insisting that the Transactions contain provisions that required the net proceeds of significant asset sales to be paid to Westpac as Security Agent. The particular goes on to say that ‘such proceeds [were] to be deposited into an escrow account in Westpac’s name and applied by Westpac as a pre‑payment of the existing facilities under the proposed Transactions on a pro rata basis agreed between the banks’.
1634 The banks deny that the companies were insolvent. In DP par 20A to par 33B the banks say that as at 26 January 1990 BGF, BGUK, BGNV and TBGL did have a reasonable prospect of paying their liabilities as they fell due. In other words, the companies were not insolvent. One of the reasons advanced in support of this assertion is that as at 26 January 1990 there was a reasonable prospect that, between then and 31 May 1991, there would be net trading cash flows of $125 million, sufficient to cover interest outgoings. The particularisation of the net trading cash flows includes at least some of the assets (for example, the Bell Press proceeds) that were subject to the cl 17.12 regime. Those particulars also call in aid the particulars to ADC par 33C(d). In the latter particulars the banks raise the prospect of (among other things) the directors realising assets. DP par 33C(d)(1)(i) is in these terms:
[T]he 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.
1635 The import of cl 17.12 is particularised in a series of provisions appearing under the heading ‘Particulars relating to the use of proceeds of sale and clause 17.12’. I think they are part of the particulars to ADC par 20A to par 33B, and therefore relevant to the insolvency question. Not all of these matters are directly relevant to the subject matter of this part of the reasons but I will need to refer to them eventually and so will set them out here:
(1) Further, or in the alternative, so far as the proceeds of asset sales made by Bell group companies in 1990 were affected by the provisions of [cl 17.12], the banks say that as at 26 January 1990, it was likely that, in so far as Bell group companies required access to the proceeds of the sale of assets owned by those companies to meet their outgoings, the consent of all of the banks to the companies having that access for that purpose would have been forthcoming.
(2) The banks rely upon the following facts, matters and circumstances in support of the contention in paragraph (1) above:
(a) as at 26 January 1990, the banks recognised that asset sale proceeds might be required to supplement the cash flow of the Bell group;
(b) [cl 17.12] provided the banks with a means of preventing asset sale proceeds from being transferred, by way of loan, investment, asset purchase or otherwise, to the Bond group. Clause 17.12 also provided a mechanism by which the Bell group could obtain access to asset sale proceeds for legitimate corporate purposes, including the payment of debts. Clause 17.12 did not prevent the Bell group from obtaining access to asset sale proceeds which it required to meet legitimate corporate debts;
(c) as at 26 January 1990, the banks were concerned to establish prudential control over the Bell group’s assets including the proceeds of asset sales. Clause 17.12 was a means by which that prudential control was achieved;
(d) the banks entered into the refinancing rather than take steps that would increase the possibility of the Bell group going into liquidation. The banks preferred to support the Bell group and preferred the control which came with valid security. The banks supported the Bell group in placing it in a position in which it could achieve a restructuring which, if successful, would increase the prospects of obtaining repayment from a going concern. The banks preferred to obtain repayment from a going concern;
(e) as at 26 January 1990, the banks had spent significant time and effort in structuring a refinancing transaction that would afford the banks protection in relation to the validity of the security and the continuing status of Bell group companies as going concerns. One of the banks’ commercial aims was to obtain perfected security. The banks were aware from legal advice that if the security providers were wound up within six months of the date of the grant of security, that security was more likely to be set aside than if the security providers were not wound up within such period;
…
(h) the banks regarded the assets pledged under the Transactions to the banks as of sufficient value to enable the proceeds of sale of assets affected by the provisions of [cl 17.12] to be released to the Bell group companies;
(i) the Bell group did, in 1990, have access to the proceeds of sale of [Bell Press] to meet its debts in February and May 1990. This fact is also relied upon generally in answer to the plaintiffs’ allegation of insolvency and inevitable insolvency in paragraphs 20A to 33B …
1636 These particulars highlight a major difficulty in this area. They raise matters that go to the state of mind of the banks and thus to subjective intention. Evidence of those things is not admissible to establish the proper interpretation of the contractual provisions. That much is clear. But evidence of those matters is admissible when the question is what the directors believed or were entitled to expect and what the banks believed that the directors expected. That much is equally clear. The difficulty comes when the trier of fact has to assess insolvency in, what I have called the objective sense and in a way in which value judgments are necessary. This brings into play the notion of ‘commercial reality’. In my view, ‘commercial reality’ is not a theoretical notion that can be judged by fixed criteria. Something that might be realistic in one commercial transaction might be unrealistic in another. What might tip the balance between the two is the context in which the arrangement came into being. And the commercial purpose of the arrangement could well be relevant to those questions.
1637 Disentangling the probative force of evidence that is admissible for one purpose but not for another is often difficult. But it is not a novel exercise in the juridical process. It often occurs, for example, when a court is called upon to construe a contract and then (in the light of the construction so arrived at) entertain an application for rectification. I am going to some pains to explain the process of reasoning on which I intend to embark because it could easily be misunderstood. I do intend to use, in the objective insolvency case, evidence that is primarily relevant in relation to state of mind. But I will do so only to the extent that I think is necessary to determine the commercial realities in the course of assessing whether or not the companies could pay their debts as and when the debts fell due. It should not be thought that I have misunderstood the nature of the task that I am called upon to undertake. In particular, it should not be thought that I am proceeding to determine the proper construction of a contract, the language of which is ambiguous.
1638 The banks contend that cl 17.12(a) did not confer an unfettered discretion on each bank to refuse any request by TBGL. The law implied an obligation of good faith on the banks in dealing with the Bell group in relation to the operation of cl 17.12(a), relying on cases such as Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, 255. That there can be an implied term as to good faith or an implied obligation of reasonableness is not in doubt. But the problem for the banks lies in the concession that they were not saying such a term is implied by fact or as the presumed intention of the parties, but rather it arose as a legal incident of the contracts. In other words, it raises the distinction referred to by Priestley JA in Renard Constructions (260 and following) between an ad hoc implication and one that is implied by law in contracts of a class into which the contract in question falls. While I accept that it is unnecessary to plead a question of law, the indicia compelling the implication of the obligation, as a matter of law, would have to be raised squarely on the pleading. In my view it is not enough to say, as the banks do (but only in closing submissions), that the implied term of good faith was implied as a legal incident of the commercial contract between the Bell group of companies and the banks because of the nature of the power in the banks to apply the proceeds of asset sales or release them to the Bell group. There is no sufficient pleading on which such an argument could be based.
9.14.4.2. Clause 17.12 and state of mind
1639 I do not wish, at this stage, to go too deeply into the pleadings of ‘knowledge, belief and suspicion’ insofar as they affect the cl 17.12 issue. But there is one thing that I need to canvass here. ADC par 48A contains several relevant assertions in relation to a number of beliefs held by the directors at the time they caused the companies to enter into the transactions:
(a) the group had assets of real and substantial value, especially the publishing assets and the BRL shares: par 48A(c)(a);
(b) the assets of the group should not then be sold: par 48A(c)(c)(2);
(c) assets should only be realised if they were not essential to the core activities of the group or only as and when required for the purposes of liquidity: par 48A(c)(c)(3);
(d) income derived by group companies, other than from asset sales, was not sufficient to discharge the group’s current liabilities when accruing: par 48A(c)(d);
(e) the directors expected 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 Bell group: par 48A(c)(l)(6).
1640 I am not sure how the pleas summarised in (b) and (c) above fit together, unless (b) is referring primarily to the publishing assets and the BRL shares or is referring only to the time of any proposed sales. In DP, under the heading ‘Particulars relating to the Use of Proceeds of Sale and Clause 17.12’, the following details are provided:
(201) In 1989 and into 1990, [Aspinall, Mitchell, Oates and Simpson] expected that, if necessary, the banks would agree to the release of proceeds from the sale of Bell group companies’ assets to the Bell group to meet the outgoings of such companies as they fell due
(202) It was therefore likely, as at 26 January 1990 that [Aspinall, Mitchell, Oates and Simpson] would seek such consent as and when needed in 1990, after the refinancing occurred and would advance such arguments as could properly be advanced in support thereof
1641 There are two things to be taken from this. First, there is a clear admission on the pleadings that without access to asset sale proceeds the companies could not (on a group basis) meet recurrent liabilities. As will appear shortly, the evidence, particularly that of Aspinall, confirms that situation. Assuming for the moment that this situation applied to asset sales that were subject to the cl 17.12 regime, unless the banks (at the request of the companies) agreed to release sale proceeds that had come into the hands of the Security Agent, the group would be in financial trouble.
1642 Secondly, the state of mind of the directors is, relevantly, an ‘expectation’. The general particulars provided in par (1) to par (3) of the banks’ cl 17.12 particulars (most of which I have set out above) and the particulars pleaded in par (201) and par (202) do not allege any express or implied agreement (or indeed, any arrangement or understanding) made between TBGL (or any other Bell Participant) and the banks (or any of them) prior to 26 January 1990. Neither do the banks plead or particularise an implied term, collateral contract, estoppel or prior course of dealing as the basis for the allegations made in those paragraphs.
9.14.5. The assets subject to the cl 17.12 regime
1643 As a general statement, the cl 17.12 regime (on its face) was to have prospective effect; that is, subject to some express exceptions, it was to apply to future transactions. I say this because cl 17.8, in its plain meaning, has prospective operation. It says that the companies ‘will not … without the prior written consent of all of the banks … sell, convey, transfer or otherwise dispose of … assets except as provided in accordance with [cl 17.9, cl 17.10 and cl 17.11]’. As a matter of logic, it is not possible to obtain ‘prior written consent’ to a transaction that has already occurred. In my view, there is no warrant to read the words ‘sell, convey, transfer or otherwise dispose of’ as applying only to the finalisation (in the sense of settlement or completion) of a contract that has already been executed.
1644 It will be convenient to go back to the list of disputed cash flow items and examine them against the drafting of the cl 17.12 provisions.
1645 The Bryanston payment is one of the express exceptions and is obviously subject to the cl 17.12 regime. As at 26 January 1990, there could never have been a reasonable expectation that any material amounts would be available to the banks as a pre‑payment, let alone to the companies by way of a release back to cover liquidity needs. By 23 January 1990, Breese had finalised a list of the amounts owed by TBGIL to external creditors and to other group companies. The total amounts were approximately £3.5 million and £1.3 million respectively.
1646 There can be no real dispute that the Bell Press proceeds are also to be regarded as covered by the regime, although they were not earmarked for creditors in the same way as the Bryanston payment. Looked at as at 26 January 1990, it was a future transaction. Even though it was then in contemplation, the evidence is that contracts were not executed until mid‑February 1990.
1647 It seems to me that the ITC contract payment is not covered by the cl 17.12 regime. The contracts had been executed in November 1988 and although the taxation issues had not been settled, the only question was whether, and if so to what extent, any balance of the agreed consideration remained due to the BGUK group.
1648 For the objective solvency case it probably does not matter a great deal whether or not the Q‑Net transaction is regarded as falling within the cl 17.12 regime because I have ascribed to it a nil value: see Sect 9.8.7. I think the better view is that it is caught, because (as at 26 January 1990) Belcap Nominees did not have title to the assets that it had purported to sell. Accordingly, the 17 October sale agreement was so preliminary or conditional that a later sale (or a confirmation of that arrangement) would be a future transaction.
1649 The other disputed cash flow items can be dealt with together under two general descriptions: dividends and the Bond receivables. The language of cl 17.8 does not apply to receipt of a dividend to be declared in the future. Nor does the language used in the other parts of cl 17 seem to apply.
1650 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 the Security Agent unless they came under one of the nominated exceptions. This is because it would be a ‘disposal’ by way of conversion into cash.
1651 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. It appears that, as at 26 January 1990, BCF owed BGF $11.4 million. By 1 May 1990, this had been reduced to $4.8 million, through a series of transactions, and by 23 May 1990 the debt had been satisfied in full. 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 $5.9 million which was used to pay the interest due to SGIC on the private bond issue. By 1 June 1990 BGF owed BCF $980,000. The loan balance fluctuated thereafter and by 30 April 1991 BCF owed BGF $5.9 million.
1652 During the meetings in Perth in February 1990, the directors and the banks discussed the use of part of the Bell Press proceeds to meet the May bondholder interest. In a memorandum to the other banks of 26 February 1990, Weir (Westpac) referred to a ‘Bond Corp debt repayment of $7.6 [million] which we would require being repaid prior to 23/3/90’. These funds were to be used as part of the interest commitments due by Bell group companies. But there is no suggestion that the repayment would be received by the Security Agent under the cl 17.12 regime.
1653 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 the 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.
1654 The last asset that I wish to mention is the New York apartment. While it was part of the arrangements with Campania over the ITC Entertainment assets it was (at that stage) merely an option. The evidence does not disclose when the option was exercised but the plaintiffs’ case seems to proceed on the basis that any receipt arising from the exercise of the option would be available to TBGIL. I take this from the inclusion in each of the Liquidator’s cash flows and the Love cash flows of a receipt of $1.3 million in March 1990 referable to the New York apartment. It follows that it is not part of the plaintiffs’ case that the proceeds from the sale of the New York apartment were subject to the cl 17.12 regime.
9.14.6. The cl 17.12 regime as a ‘mechanism’
1655 From the outset of the negotiations, after the club facility proposal became moribund, the Bell group was attempting to persuade the banks to accept a limited range of securities and to preserve to itself flexibility to deal with its other assets as it saw fit. For example, on 22 August 1989, TBGL wrote to Lloyds Bank saying:
With respect to the non publishing assets … it is our intention to use the proceeds … in an amortisation of the domestic lenders’ position and to use any remaining monies for working capital purposes and payment of the subordinated debt.
1656 The banks were unimpressed with these approaches. The proposal exemplified in the 22 August 1989 letter got short shrift. The banks say that they were determined to impose a regime that would give them what is described in the pleadings as ‘prudential supervision’ over the affairs of the Bell group. They say that their motivation in this regard was to eliminate the risk of Bell group assets being siphoned off for use by the wider BCHL group.
1657 I have no doubt that the banks did want an enhanced degree of prudential regulation. Many of them did not want to deal with the BCHL group at all. They had little regard or trust for at least some of the officers of the BCHL or Bell group with whom they had dealt. Equally, I have no doubt that the cl 17.12 regime was a carefully thought out structure that developed over the period of negotiations for the refinancing. The question, though, is whether the cl 17.12 regime was the mechanism, or an essential component of the mechanism, by which the banks sought to establish prudential control. The banks say it was. The plaintiffs say it was not.
1658 I will not go through the entire history of the development of the terms sheets, although there is a fair degree of detail on that subject in Sect 30.9. In this section I will confine discussion to the developments that are directly relevant to the cl 17.12 issue. Without underestimating the importance of the early versions, it will be convenient to start with the terms sheet distributed by Westpac following the meetings of the Australian banks on 4 October 1990.
1659 In this terms sheet, the banks proposed taking security over (among other things) the shares in JNTH and BRL. They also proposed a prohibition of TBGL or other Bell group companies undertaking further borrowings in excess of $30 million without the banks’ consent. They also proposed a condition that no Bell group company could provide loans or financial accommodation to any BCHL subsidiary or associate in excess of $25 million. This, of course, mirrored the unilateral undertaking given in August and September 1988. The banks also included this condition:
The borrower and the security providers shall not dispose of assets in excess of $5 million without the prior written consent of all of the Lenders in which case all cash proceeds are to be used either to repay the lenders pro rata or are to be placed on deposit in an escrow account charged for the benefit of the Lenders.
1660 On 23 October 1989, Simpson wrote to Westpac commenting on the draft terms sheet. He rejected the proposal to take security over the JNTH and BRL shares. He said: ‘We have constantly advised you that it is the intention of the Bell group to look at opportunities which may arise to improve its business’. He also rejected the prohibition on further borrowings, repeating the comment about wishing to look at opportunities and saying that it was ‘an unnecessary restraint on the commercial activities of the Bell group’. In relation to the condition concerning asset sales, he said that, as then worded, it was unacceptable:
We believe the Bell group must have some flexibility and given [the banks’ requirement that the Bryanston proceeds be used to reduce the facilities] any further monies obtained by the disposal of assets should be available for the group’s corporate purposes.
1661 Simpson’s response was not well received by the banks. I will not go through all of the evidence but will give some examples. Armstrong (Lloyds Bank) expressed surprise at the tenor of the letter. He said that Simpson’s demand for ‘flexibility’ was not in the banks’ interest, although he added that Lloyds Bank was willing ‘to be flexible on waivers when justified’. Edward (SocGen) placed a handwritten notation ‘No!’ against the paragraph of the letter that I have set out above. The copy of this terms sheet discovered by SBCAL has the words relating to the escrow account alternative scoured out. An internal memorandum of NAB contains this comment:
We consider that proceeds of asset sales should always be placed in permanent reduction of the debt, and see no benefit in an escrow account option. This should be deleted.
1662 The consensus reached at the meeting of the Australian banks on 27 October 1989 was in line with the NAB comment set out above. The drafting of the condition changed and developed in the several drafts of the terms sheet delivered in November and December 1989. However, all versions included a restriction on asset sales and a requirement that, without the consent of the banks, sale proceeds were to be used to retire bank debt.
1663 Accordingly, the directors lost the argument that the Bell group companies should have a general right to retain and use asset sale proceeds for ‘the group’s corporate purposes’ or to enable them to ‘look at opportunities’. Certainly, there was no repeat of the request in the 22 August 1989 letter for approval to use asset sale proceeds to pay subordinated debt. Attention then turned to whether access to the funds would require the consent of all banks or a majority of them. On 6 November 1989, Aspinall, Simpson and Edwards met Armstrong and Latham (Lloyds Bank). The banks allege that Armstrong gave an assurance that in relation to the use by the Bell group of proceeds of asset sales, the banks would not be unreasonable in providing consent for such use and that the Lloyds syndicate banks would try to act quickly in relation to a request for such consent. A file note taken by Latham contains these cryptic entries:
JA
BPG. Debt shortfall. Clear shortfall. Banks will not be unreasonable.
DA: history shows difficulty of getting agreement.
JA: Syndicate tries to act quickly.
1664 I presume ‘JA’ is Armstrong and ‘DA’ is Aspinall. It is noteworthy that in his witness statement, Armstrong made no reference to the 6 November 1989 meeting or to any assurance given by him then, or on any other occasion, that the banks would ‘not be unreasonable’ in dealing with a request for access to asset sales proceeds. Indeed, in a file note he made of his visit to Australia in early October 1989, Armstrong recognised that there would be a cash flow shortfall for the first one or two years. He said that the banks would have to rely on the TBGL guarantee and the shortfall would have to be made up from collection of management fees and dividends from shareholdings.
1665 Simpson wrote to Latham on 13 November 1989, referring to the 6 November 1989 meeting and to the discussion about the requirement to obtain the consent of all banks. Simpson said:
This is a provision we could live with in a small syndicate and where we were aware that all banks were prepared to be reasonable. As you have experienced, there are a small number of banks in this particular lending syndicate who have demonstrated a willingness to be less than helpful.
1666 Simpson went on to request that the drafting of the provision ‘spell out’ the situations where the banks’ consent would be given automatically. Despite those protestations, the ‘all banks’ stipulation remained a feature of the terms sheets and is reflected in cl 17.12. I accept that the clause, as finally drafted, includes some exceptions to the regime but the fact remains that the Bell group required the consent of all banks to the arrangements. The directors lost that argument, and the tenor of Simpson’s letter (to which Aspinall refers in his witness statement) suggests that they (the directors) knew that this was the case and proceeded with the refinancing negotiations on that basis.
1667 The banks argument that the cl 17.12 regime was not an impediment to the commercial solvency of the Bell group companies hinges around two related factors. First, the commercial purpose of the regime was to ring‑fence (a phrase recognised in the Oxford Dictionary) the proceeds to prevent leakage to other BCHL group companies. Secondly, it provided a mechanism for access to the proceeds in situations that were consistent with the commercial purpose.
1668 The argument that purpose of cl 17.12 was to prevent ‘upstreaming’ of funds to the BCHL group but not to prevent the Bell group from obtaining access to asset sale proceeds for ‘legitimate corporate purposes’, including the payment of debt, is not without difficulty. It does not accord strictly with the provisions of cl 6 and cl 7 of ABFA and cl 13.5 of RLFA No 2. Westpac was obliged to distribute moneys received from TBGL under cl 17.12 and there was, at the end of the month in which the funds were received, a deemed repayment of the banks’ facilities and loans and an express prohibition on those moneys being re-borrowed. As the plaintiffs pointed out, once money was paid by TBGL to Westpac under cl 17.12, the Bell group could only gain ‘access’ to an equivalent amount by all banks consenting to a further and fresh advance.
1669 I accept the arguments mounted by the plaintiffs in this respect. It is true that once paid over to Westpac, the sale proceeds could not leaked to the BCHL group. However, to contend that was the purpose of the clause is to ignore the substance of the provision and its intent as revealed by the words used. Clause 17.12 did not ensure that the Bell group got the proceeds and the BCHL group did not; it ensured that the banks got the money and nobody else. The following are examples of other provisions of ABFA and RLFA No 2 that were aimed at preventing funds flowing from the Bell group to the BCHL group:
(a) cl 16.7(a), which prevented TBGL or any member of the Bell group from declaring or paying any dividend without the prior written consent of the Bell group;
(b) cl 17.13, containing restrictions on incurring, providing or extending any financial indebtedness or financial accommodation;
(c) the restrictions in cl 17.15 on TBGL and the other members of the Bell group from acquiring any asset or entering into any arrangement with any company that had a substantial shareholding in TBGL or any member of the Bell group or any of BCHL, BRL, Dallhold, JNTH or any of their subsidiaries.
1670 In reality, these are the provisions that ring-fenced TBGL’s cash and other assets from being leaked to the BCHL group. The asset disposal and proceeds clauses did not add to the restrictions that were intended to prevent cash ‘leakage’ (or more accurately, prevent the cash and other assets of the Bell group from being appropriated for the benefit of the BCHL group rather than being used for the ‘legitimate corporate purposes’ of the Bell group).
1671 Save for one possible caveat, I also accept the plaintiffs’ submissions that the cl 17.12 regime is not a ‘mechanism’, in the relevant sense, by which the Bell group could gain access to asset sale proceeds for purposes such as coverage of cash flow shortfalls. In this context, the expression ‘mechanism’ suggests a procedure that had been considered and agreed by the parties prior to entering into the refinancing documents, and which was expressly intended to regulate, with some certainty, the means by which the Bell group could gain access to the proceeds of asset sales. It is to be remembered that the banks knew that the group would, in all likelihood, require access to asset sales proceeds to pay its debts as they fell due after 26 January 1990.
1672 The caveat mentioned in the preceding paragraph is this. ABFA cl 17.12(a)(i)(A) and (B) had the effect mentioned in Sect 9.14.2.3. It meant that from the sale of certain assets, the companies could retain up to $1 million from an individual transaction, but no more than $5 million in total in any six‑month period. On one view of it, this might be seen as a ‘mechanism’ by which the companies could retain money for ‘legitimate corporate purposes’. If so, it detracts from the proposition that there was a ‘mechanism’ by which the companies might have access to proceeds from other sales and (or) in amounts that exceeded those specified in the clause. The Bell Press proceeds, for example, were outside the ambit of this clause.
1673 It seems to me that the ‘mechanism’ in cl 17.12 consisted of no more than an acknowledgement that TBGL could make a request. It was within the discretion of each bank either to accept or reject the request, and if one bank held out, the request could not be implemented. That aspect of cl 17.12 did not confer on TBGL or any other Bell Participant a contractual entitlement to the proceeds of asset disposals if the proceeds were required to meet their debts as they fell due. Nor did it contain any promise by the banks to that effect. It also could not provide the basis for any expectation on the part of TBGL or any other Bell Participant that they would gain access to the proceeds of an asset disposal if those proceeds were required. The ‘mechanism’ does not specify any criteria by which the banks were required to consider any request by TBGL, and nor does it have anything to say about the meaning of ‘legitimate commercial purposes’.
9.14.7. The likelihood of access to asset sale proceeds
1674 I accept, generally, the reasoning process advanced by the plaintiffs in support of the argument that I should not accept the following contention, which appears at the outset of the banks’ cl 17.12 particulars:
Further, or in the alternative, so far as the proceeds of asset sales made by the Bell group companies in 1990 were affected by the provisions of cl 17.12 of ABFA and RLFA No 2, the banks say that as at 26 January 1990 it was likely that, insofar as Bell group companies required access to the proceeds of the sale of assets owned by those companies to meet their outgoings, the consent of all of the banks to companies having that access for that purpose would have been forthcoming.
1675 I intend to do little more than summarise five of the six propositions advanced by the plaintiffs and to repeat that I accept them.

1. The ‘expectation’ of the directors was no more than a mere ‘hope’ that the banks would, if requested, release the proceeds of asset sales to the Bell group. As at 26 January 1990, the directors knew that there would be a cash flow shortfall and that the companies could not pay their debts as they fell due without access to asset sales proceeds. The only contractual entitlement of the Bell group was to make a request and to have it considered. The ‘hope’ related to the result of such consideration.
2. I do not accept the argument that it was likely that the banks would release the funds because the commercial purpose of the cl 17.12 regime was to ensure prudential control over the assets. I have no doubt that the banks were keen to establish prudential control over the assets. But there were other provisions within the agreements that were more directly concerned with that issue. The effect of the cl 17.12 regime went further than to prevent leakage to the BCHL group. Its real effect was to reserve the assets for the banks, subject to release on unanimous consent.
3. Save for the BGUK group and the Bryanston proceeds, there is no evidence that, prior to 26 January 1990:
   (a) the banks, as between themselves, reached any agreement or understanding or had any discussion about releasing the proceeds of asset sales to the Bell group if required after 26 January 1990 to enable the group to pay its debts;
   (b) after the discussions with Lloyds Bank early in November 1989, which did not bear fruit, the directors approached the banks or had any discussion with them concerning the possibility of the proceeds of asset sales being released after 26 January 1990 if required to enable debts to be paid as they fell due despite the proposed asset disposal and proceeds provisions.
4. The circumstances in which the waivers were granted by the banks in 1990 in relation to the Bell Press proceeds do not establish that it was likely that the banks would grant access to the proceeds of asset sales. Rather, the absence of any agreement, understanding or common expectation among the banks that they would grant the Bell group use of the proceeds of asset sales is demonstrated by what occurred when the issue arose. In particular:
   (a) there was opposition from many of the banks and serious opposition from four of them;
   (b) the Lloyds syndicate took further legal advice about the consequences if they did not release the proceeds. The taking of that advice is not consistent with a view formed prior to 26 January 1990 about allowing the Bell group to use the proceeds of asset sales to pay its debts as they fell due if required;
   (c) it was never put to the banks that they should waive the obligation on Westpac from February 1990 onwards because of an agreement or understanding reached prior to 26 January 1990;
   (d) when the question of whether the proceeds from the sale of Bell Press should be distributed was first raised, none of the banks responded in a way that suggested they ought to agree to the proposed waiver because the Bell group intended to use the money held by Westpac for a ‘legitimate corporate purpose’ and not to transfer the money to BCHL.
5. The absence of any intention held by all banks that they would relieve TBGL of its obligation under cl 17.12 if required or make fresh advances to the Bell group is also demonstrated by the course of the negotiations for the refinancing.
   1676 In relation to the third of the propositions set out above, prior to 26 January 1990 there had been no meeting of minds on this question. In the early stages, Aspinall and Simpson had negotiated for flexibility in the use of asset sale proceeds for business expansion, not to pay recurrent expenditure. The cash flows provided to the banks were out-of-date and were, by January 1990, inaccurate. The directors knew this. The reaction of those banks that had not actually reviewed the financial position of the Bell group before proceeding could not in those circumstances be predicted. I would add that (as set out in Simpson’s letter to Lloyds Bank of 13 November 1989) the directors, certainly Aspinall, regarded some of the banks as ‘less than helpful’.
   1677 The position of individual banks on this question is exemplified in a report Pettit (Gulf Bank) made to the London office after a Lloyds syndicate banks meeting on 1 November 1989. He said this:
   What is clear to me is that any deal we reach now is likely to have to stand the very threat of other creditor challenges and other circumstances largely outside our control during its remaining life and again at maturity, given that Bell will not be able to repay principal without recourse to refinancing, capital raising or asset/business sales.
   1678 There is no suggestion there of any thought having been given to the prospect of asset or business sales being used, during the life of the facilities, to meet debt‑servicing commitments.
   1679 The waivers and consents referred to in the fourth proposition are described in several sections, especially Sect 4.6.7, Sect 30.10 and Sect 30.11. Latham’s note of the 22 February 1990 meetings in Perth is instructive. On the waiver issue he said:
   It was viewed as important not to give a hint now that we might be willing to contemplate stepping into the company’s shoes in paying the interest due to subordinated bondholders in May from residual proceeds of the asset sales. All banks present were in favour of waiver mechanism which would provide time for the banks to reflect on what the company was seeking, whilst ensuring that the company felt that the banks did not wish to give them any significant latitude.
   1680 There is no hint there of any discussion along these lines: ‘It is bad news that the companies want access to funds that we thought would be used to reduce principal. But they have a point; we did contemplate releasing funds to allow them to meet recurrent commitments and this looks like a request of that nature. We will tough it out for a while so as not to give them too much comfort’.
   1681 As to the fifth proposition, details concerning the course of the refinancing negotiations are contained in many sections of these reasons, especially Sect 30.9 and following. In essence, the evidence is that cl 17.12 represented a regime to which all banks would agree. That agreement came after the question of ring‑fencing asset sales had been extensively canvassed among the banks in the course of settling the terms sheet. The position adopted by the banks in this regard is illustrated by the evidence of Walsh (SCBAL). In his witness statement, he said:
   I expect that if I had been asked in 1990, I would have said that if TBGL needed the proceeds of asset sales in order to pay interest to the bondholders, then the only sensible course would have been to release the asset sales proceeds for that purpose. I understood the banks to be taking a medium term view and giving the operating business time to develop sufficiently to allow a full restructure of the business at an appropriate time. Refusing to release proceeds of the asset sales would, if those proceeds were needed to pay bondholders’ interest, be taking a very short term view
   1682 When cross‑examined, Walsh agreed that the provisions relating to access to asset sales proceeds had been part of the ongoing discussions and he was aware that they had been included in the facilities agreements. He conceded that, so far as he could recall, prior to the execution of the facilities agreements he had not been asked about waiving such a provision. Nor had he discussed with, or received an instruction from, any officer of SCBAL about the possibility of such a waiver. In any event, he would not have been authorised to indicate agreement. I think the passage in the witness statement amounts to reconstruction rather than recollection.
   9.14.8. Access to asset sales proceeds: conclusion
   1683 At the outset of this Sect 9.14, I mentioned the plaintiffs’ contention that by executing documents containing cl 17.12 and its associated provision, the companies effected a transfer of control to the banks and that the companies were thereafter at the whim of the banks. As senior counsel for the plaintiffs put it in oral opening:
   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.
   1684 I also mentioned that in their opening, the banks said 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. The crux of that submission becomes apparent from reading the banks’ cl 17.12 particulars, especially par (242):
   [T]he banks rely upon the same facts as supporting the contention that it was likely, as at 2  January 1990, that the banks would, in 1990, release the proceeds of asset sales to Bell group companies in order for them to meet their outgoings and thereby avoid or mitigate the risk of TBGL, BGF or BGUK being wound up, within six months of about February 1990, and extend the time elapsing after the Transactions were entered into in order to assist the banks to resist any challenge to the validity of the Transactions.
   1685 It must be remembered that the topic under consideration here is cash flow insolvency, that is, the inability of a company to meet its debts as those debts fall due. We can, therefore, leave to one side the intrinsic value of the main assets, particularly the publishing assets, except to the extent that they could generate recurrent income or could be used as collateral to raise funds for working capital purposes.
   1686 I will try to encapsulate contextual matters that are not contentious or, if they are, they ought not to be. The directors knew that in the immediate future, the level of recurrent income (mainly from the publishing assets) would not be sufficient to meet interest commitments to the banks and to the bondholders. The free cash flow from the publishing assets would not, in the foreseeable future, be sufficient to meet the interest commitments unless the overall level of debt was reduced. This meant restructuring of the Bell group finances. The other alternative was to restructure the group entirely. Those alternatives, or either of them, would take time to implement. Pending the restructure, the Bell group companies would need access to asset sales proceeds to meet ongoing commitments. The banks also knew all of this.
   1687 I prefer the plaintiffs’ arguments. The wording of the cl 17.12 provisions in the documentation is clear. It is not easy to understand, but it is clear. It means what it says. The directors fought for a better deal in this respect but, by November 1989, that battle had been lost. There was no contract, arrangement or understanding between the banks on the one hand and the Bell group companies on the other, as to how a request for release of proceeds would be handled. Nor was there a contract, arrangement or understanding between the banks in this respect. It was simply stood over for consideration if and when the problem arose. It did (the problem, I mean), almost immediately. The companies were at the mercy of the banks and, as experience showed, gaining the necessary waivers was a close run thing.
   1688 I accept that the banks had legal advice that their security position would strengthen with the passing of time. There are two things to be said about this. First, they had also been told that they would be no worse off than they were at the commencement of the refinancing if the securities were to be challenged and set aside. Secondly, it ought not to be thought, as the particulars might be read as suggesting, that all would be well if liquidation could be staved off for six months. The banks had been advised in the joint A&O and MSJL memorandum (mid‑October 1989) that if there was no corporate benefit to a security provider from that company granting a security, the vulnerability continued indefinitely. In other words, there was no time limit applying to a challenge based on those grounds. Taken to its logical, albeit impractical, conclusion, the banks would have to prop up the Bell group for a very long time in order to ‘obtain perfected securities’, as it is put in par 2(e) of the particulars.
   1689 I therefore conclude that for the objective insolvency case, regard should not be had to the proceeds from the sale of assets that were subject to the cl 17.12 regime.
   9.15. Ability to raise funds from the two main assets: introduction
   1690 By the second half of 1989 the Bell group had two main assets: the publishing assets and the BRL shares. I should add that the banks assert that the Bell group had a third major asset, namely, the shares in JNTH and GFH. It will be apparent from Sect 9.9.8 and Sect 9.11.7 that I do not share the banks’ enthusiasm for that argument.
   1691 In relation to the plaintiffs’ cash flow insolvency case, the question is whether, looked at immediately prior to 26 January 1990, the companies could raise funds by the sale, mortgage or pledge of those assets to meet recurrent liabilities as they fell due. This depends, at least in part, on the value to be ascribed to those assets in January 1990. That is a very large topic in itself.
   1692 The plaintiffs’ cash flow insolvency case hinges on the cash flow position concerning BGF. In that regard, PP par 20A(r) alleges that
   as of 26 January 1990, BGF had no prospect of obtaining cash immediately or within a relatively short space of time, by mortgaging [intra‑group receivables and investments] or by procuring the Harlesden Group or the [BRL shareholders] to mortgage their assets in order to repay BGF’s debts as and when they fell due, including the debts owed to the Australian Banks.
   1693 The allegations in PP par 20A(r) assume that refinancing of the Bell group’s bank debt as at 26 January 1990, did not take place. It is alleged that, if a lender or lenders, other than the banks, had been willing to advance BGF sufficient moneys as at 26 January 1990, they would only have done so upon the same, or substantially the same, terms as the Transactions.
   1694 The position taken by the banks is best summed up in DP par 33C(d)(1)(g) and (j). Admittedly, these particulars appear in a different context but it remains a reasonable summary of what the banks say on these issues. The paragraphs are long and I will not set them out. It is sufficient to say that they are to the effect that there was ample scope to enhance the value of both assets.
   1695 In the next two sections I will deal individually with the value of the BRL shares and of the publishing assets.
   9.16. Value of the BRL shares: the brewery transaction
   9.16.1. Some introductory comments
   1696 During the 1980s, the BCHL group established an enormous presence in the brewing industry in Australia and the United States. Whether the move into breweries was precipitated by someone discerning from the Gospels that Christ’s first miracle involved alcohol, and hence regarded that as good omen, I cannot tell. Perhaps it was because someone heard of the received wisdom that selling alcohol is a cash-flow-rich enterprise and that it is even more so if you make the product as well as sell it. The latter is a statement belied by the tax losses claimed by so many lawyers turned vignerons. The responsible officers within the BCHL group appear to have overlooked another matter of received wisdom, namely, that in times of high interest rates, borrowing huge dollops of money to buy breweries is not conducive to retention of the otherwise attractive cash flows.
   1697 No analysis of the financial position of the Bell group as at 26 January 1990 would be complete without considering whether, and if so to what extent, the BRL shares had realisable worth. The value of BRL shares was, in turn, fixed on the loans it had made to BCHL or its subsidiaries. This, in turn, depended on the fate of the arrangements for BRL to acquire the breweries and to set off the loans against the purchase price. Looked at in January 1990, what were the prospects of the successful culmination of such a deal? That is the 1.2 billion dollar question.
   1698 It is not possible to answer that question without understanding how the brewery transaction originated and how negotiations proceeded through 1989 and 1990. That is where I will start. I will then turn to more proximate issues concerned with ‘likelihoods and probabilities’ in January 1990.
   1699 I must repeat one of the warnings I have already delivered. The way in which the $1.2 billion in cash was removed from BRL and transferred to the coffers of various BCHL companies is notorious. It has seen some of the people involved, including Mitchell and Oates, spend time in prison. But this case is not about the way the money was transferred out of BRL. The fact that BRL once had, and then did not have when it needed it most, ready access to those funds, is one of the reasons (perhaps even the major reason) why we are here at all. But it is a question of ‘effect’ rather than ’cause’. This case is not about attributing blame for the so-called ‘BRL strip’.
   9.16.2. The brewery transactions: origins
   9.16.2.1. Background
   1700 TBGL held about 39 per cent of the ordinary shares in BRL. By early 1988, BRL had liquid and cash assets of about $2 billion. On 29 April 1988, BCHL and ICWA announced they had each acquired 19.9 per cent of issued shares in TBGL. The NCSC launched an inquiry to determine whether BCHL and ICWA had been acting in concert; the inquiry was discontinued when BCHL agreed to launch a full takeover offer for TBGL. By 26 August 1988, BCHL had acquired about 68 per cent of the shares in TBGL. BCHL held, in its own right, about 14 per cent of the shares in BRL. By these means it controlled both TBGL and BRL. After October 1988 the board of TBGL was comprised solely of persons associated with BCHL; associates of BCHL also controlled the board of BRL.
   1701 In 1988 and 1989, BCHL had liquidity problems. It was the subject of adverse press comment and was having difficulty in attracting funds from conventional lending sources. Hence the attraction of the ‘cash rich’ BRL.
   1702 As early as May 1988, it had been contemplated that BRL would (within a merged BCHL group) acquire and operate BCHL’s brewing interests. The paper presented by Mitchell to the Hawaii meeting of BCHL executives in September or October 1988 included, as one aspect, that BRL would control the brewing assets and pursue a brewery business.
   1703 The first brewery agreement was announced in May 1989. It was amended and varied many times. A deal was eventually consummated in October 1990.
   9.16.2.2. The Markland House loans and the Freefold facility
   1704 To understand the way negotiations for the brewery transactions developed, it is necessary to appreciate the history of financial dealings between BRL and the wider BCHL group that led to the latter being indebted to the former in amounts totalling about $1.2 billion.
   1705 From 29 August 1988, a series of transactions occurred which resulted in funds being transferred from BRL to various companies within the BCHL group. These are the events that have become known, in common parlance as ‘the BRL strip’. The transfers were conducted by back-to-back loans using intermediary companies in a group called Markland House, in which Alan Bond had an interest, but which he did not control. No securities were given to BRL for these loans. Without the moneys advanced to it by BRL, Markland House did not have funds with which it could, independently, provide the loan funds that the BCHL companies were seeking. By 3 November 1988 a total of $502.2 million of BRL’s liquid assets had been transferred to Markland House, and then on‑loaned by Markland House to BCHL group companies.
   1706 On 3 November 1988 the NCSC queried BRL and BCHL about the loans. On the same day, BRF (a BRL subsidiary) received $536 million from Freefold Pty Ltd (Freefold) representing the proceeds from the sale by Freefold of BHP shares. Freefold was a subsidiary of Weeks Petroleum Ltd, a listed public company. About 94 per cent of the shares in Weeks Petroleum were owned by BRL. BCHL and Freefold entered into an agreement by which Freefold would lend $700 million to BCHL at commercial interest rates but on an unsecured basis; the Freefold loan was to be repaid on 21 March 1989.
   1707 By a series of journal entries the back-to-back loans through Markland House were collapsed and replaced by the Freefold facility. Freefold received $512 million from BRF as part payment of the $536 million advance. Freefold then passed these funds through to BCHL. In mid-November 1988 Freefold borrowed a further $188 million from BRF and on‑lent it to BCHL. This brought the total indebtedness to the amount mentioned in the BCHL–Freefold agreement, namely $700 million.
   1708 On 13 December 1988, a total of $170.2 million was removed from BRF and passed over to BCHL by way of 10 further back-to-back loans using the Markland House companies as intermediaries. This brought the total indebtedness under the arrangements to $870.2 million.
   1709 In March 1989 the financial position of BCHL was such that the Freefold facility could not be repaid and the time for repayment was extended to 21 September 1989. It is difficult to avoid the conclusion that around this time (the first quarter of 1989), the difficulty of reporting these loans began to occur to BCHL executives. This seems to have been the genesis of the idea that if the idea of selling BCHL’s brewing assets to BRL were to be pursued, it might be possible to extinguish the loans by setting them off against the purchase price.
   1710 In the course of considering this proposal it was discovered that the indebtedness had risen to $994 million. It was decided to consolidate all of the indebtedness into the Freefold facility, the principal amount of which was extended from $700 million to $1 billion. In April 1989, further transactions were recorded in which $294 million in loans made by Bell group companies to BCHL were re‑routed through Freefold.
   1711 As part of these arrangements securities were provided. In broad summary, the securities were:
   (a) an executed third mortgage over the shares in BBHL held by BCHL;
   (b) an executed third mortgage over shares in certain BCHL related companies;
   (c) the right to receive repayment of advances made by certain BCHL subsidiaries to other BCHL subsidiaries; and
   (d) the right to a receivable owing to a BCHL subsidiary with provision for security to be substituted from time to time.
   1712 The most significant of the securities were mortgages over promissory notes from BCHL group companies. The ability of those companies to pay was dependent on the ownership of assets that were already the subject of securities given to other lenders. It was difficult to place a value on the securities.
   1713 On 18 May 1989 BCHL announced that BRL would acquire all of BCHL’s brewing assets (that is, the operations in Australia and those in the United States) for $3.5 billion. Of the purchase price, $1.2 billion was to be paid as a deposit which would permit the extinguishment of the Freefold facility. The deposit was to be secured by essentially the same security package as had been provided to Freefold.
   1714 By the end of May 1989 the amount due under the Freefold facility was said to have been $836.6 million. On 29 May 1989, a series of directors’ meetings were held which authorised agreements to effect the arrangement foreshadowed in the 18 May 1989 announcement. It was agreed that Manchar Holdings Pty Ltd (Manchar), a subsidiary of BRL, would purchase the brewing assets. Manchar issued a series of promissory notes to satisfy the payment of the $1.2 billion deposit. They were:
   (a) $836.6 million payable to Freefold (to satisfy the debt due by BCHL to Freefold under the Freefold facility);
   (b) $6.7 million and $0.1 million payable to BCHL and endorsed to BRF to satisfy other loans; and
   (c) $356.6 million (uncalled) payable to BCHL.
   1715 Freefold released the security package on receipt of the promissory note from Manchar.
   9.16.2.3. Further borrowings
   1716 Further re‑arrangements to the loan structures occurred on 29 May 1989. A loan from TBGL to BCHL for $131.9 million was re‑routed through BRL and another $20.7 million in cash was drawn from BRL by BCHL. To account for these transactions, at some time between June and August 1989 the $356.6 million uncalled promissory note was cancelled and replaced by two notes totalling $204 million from Manchar to BCHL. From all of this, it can be discerned that the $1.2 billion deposit was provided for as follows:
   (a) the $204 million uncalled promissory notes;
   (b) the 29 May note to Freefold for $836.6 million;
   (c) the 29 May notes endorsed to BRF for $6.8 million; and
   (d) the 29 May transactions (TBGL or BRL) totalling $152.6 million.
   1717 It appears the $204 million promissory notes were never called. The BRL interim report to shareholders and results for the six months ended 31 December 1989 contains the following reference concerning the fate of the uncalled promissory notes:
   The brewing deposit of [$1.2 billion] has been paid as to $996 million by [Manchar] leaving an amount of $204 million unpaid. The Company has received legal advice which indicates that the remaining liability of $204 million of Manchar to [BCHL] can be legally offset against the gross amount of the deposit of [$1.2 billion]. The net amount owing to Manchar is, therefore, $996 million.
   1718 These were audited half‑year results for BRL and were released after the composition of the BRL board had changed. I think it is safe to assume that the promissory notes totalling $204 million remained uncalled and were in fact offset against the balance of the brewing deposit.
   9.16.2.4. The first brewery transaction (May 1989)
   1719 I wish now to step back from the $1.2 billion loans and look more closely at the brewery sale agreements themselves.
   1720 The original brewery sale agreement between BCHL and BRL was entered into on 29 May 1989, following the ASX announcement that had been made on 18 May 1989. Manchar agreed to acquire the worldwide brewing assets of BCHL, including the US brewing operation. This was to be effected through Manchar purchasing all of the shares in BBHL and in another company through which the overseas operations were held; the purchase price was $3.5 billion. Of the purchase price, $1.2 billion was to be paid as a deposit. The balance was to be satisfied by the assumption of debt attaching to the brewing assets. The agreement was subject to a number of conditions precedent and would be terminated if the conditions were not satisfied by 31 October 1989. The conditions related primarily to shareholder and lender approvals and consents. It was agreed that if the arrangement were terminated, the deposit was to be repaid with accrued interest.
   1721 The ASX told BRL and BCHL that it considered the payment of a deposit of $1.2 billion in respect of an acquisition of the brewing assets might be in breach of the listing rules relating to third party transactions. During June 1989, there was a great deal of correspondence between the companies and their solicitors and between the companies and the ASX on those questions. In addition, the ASX made it clear that, in its view, the market was not properly informed; the proposed deal would require shareholder approval; it would be necessary for BRL and BCHL to commission and present to the meeting an independent accountant’s report on the fairness of transaction; and BCHL could not vote at the meeting.
   1722 The requirement to obtain shareholder approval raised an immediate problem; Adsteam held almost 20 per cent of the shares in BRL. As BCHL could not vote (it was a related party), the deal was effectively dependent on the consent of Adsteam. Discussions took place between executives of Adsteam and BCHL from time to time after May 1989 but Adsteam’s approval to the transaction was never obtained. I will return to Adsteam’s contribution to this saga a little later.
   1723 Three things occurred in June 1990. On 21 June 1990, the ASX informed BCHL that, in its view, the market was still not informed of all of the matters relating to the proposed disposal of the brewing interests, despite requests from the ASX to have the information released. At around this time, BCHL requested Hambros Australia Ltd to prepare an independent accountant’s report as to the fairness of the transaction to the shareholders of BRL. On 26 June 1990, due to the tardiness of the BRL officers in responding to ASX queries, a trading suspension was placed on BRL shares. I think the trading halt only lasted for a day or so.
   1724 So far as I am aware, there was no independent accountant’s report issued in 1989 or before 26 January 1990. This is not all that surprising, as the final structure of the transaction had not been settled by that date. I note also that by September 1989 the identity of the party preparing the independent accountant’s report had changed to Arthur Andersen.
   1725 During the remainder of 1989, the brewery sale proposal went through a number of changes but had not reached the stage where it could be put to shareholders. I think it is fair to say that, by about August 1989, it had become apparent to the executives involved in the negotiations that the chances of implementing the deal in the form envisaged in the 29 May 1989 agreement were slim. Alternative means of effecting a sale were explored.
   9.16.2.5. The second brewery transaction (September 1989)
   1726 On 19 September 1989 further agreements were entered into. They involved BRL, BCHL and Lion Nathan Ltd (Lion Nathan), a New Zealand brewery company. The agreements provided for the sale of BCHL’s Australian brewing interests for $2.5 billion to a BRL subsidiary and the acquisition by Lion Nathan of a 50 per cent interest in that subsidiary by way of joint venture. Lion Nathan’s acquisition was conditional upon the BRL subsidiary acquiring the Australian brewing interest. The agreements were subject to various conditions precedent, to be completed by 31 January 1990 or such later date as the parties might agree, including:
   (a) a BRL subsidiary acquiring certain BBHL subordinated debentures and outstanding US dollar and Swiss franc denominated convertible bonds by 31 January 1990 (the proposed acquisition to be funded, conditionally, by Lion Nathan);
   (b) BCHL making a takeover offer for all the shares in BRL (other than those held by BCHL and TBGL) by 31 January 1990 (the proposed acquisition to be funded, conditionally, by Lion Nathan); and
   (c) the obtaining of various regulatory, lender and other creditor approvals.
   1727 The debentures referred to in (a) above had a face value of about US$510 million. It was anticipated that the repurchase offer would be at a price not exceeding 45 per cent of face value.
   1728 In fact, the September arrangements were more complicated than I have outlined. The contract for BRL to buy the US brewing operations was to remain on foot but BRL would have the right to terminate the contract unilaterally at a future date. The September contract also provided that the deposit of $1.2 billion would be apportioned as to $850 million for the purchase price of the Australian breweries by Lion Nathan joint venture company, with the balance ($350 million) to be suspended for allocation to the purchase of the US brewing interests in the future.
   1729 On 8 December 1989, BCHL and Lion Nathan each announced to the ASX that the conditions precedent to the September 1989 agreement could not be fulfilled. On 28 December 1989, BRL announced to the ASX that on 22 December 1989 it had given notice of its intention to terminate the September 1989 agreement at the expiration of 14 days from 22 December 1989. On 28 December 1989 the BCHL announced that Lion Nathan was still claiming rights in relation to the Australian brewing assets, which BCHL disputed.
   9.16.2.6. The third brewery transaction (December 1989)
   1730 On 8 December 1989 Adsteam initiated court action to wrest control of BRL from BCHL. By 12 December 1989, a settlement had been reached by which the constitution of the board had changed such that a majority of members were independent of BCHL. Hill was appointed as independent chairman. Adsteam nominated two members of the board, one of whom was Henson. Alan Bond and Mitchell remained on the board as nominees of BCHL. The new board of BRL (or certainly those other than Alan Bond and Mitchell) immediately entered into negotiations with BCHL concerning the breweries.
   1731 On 21 December 1989 Hill gave his chairman’s address to the BRL annual general meeting. In relation to the $1.2 billion deposit and the brewery transaction, Hill told the shareholders he felt there were five options. One was to do nothing, which he immediately rejected. Another was to recover the $1.2 billion deposit, which could mean relying, in part, on the securities. Another was to rescind the brewery sale agreements and take legal action to recover the moneys. This, Hill said, would be long, costly and complex. He expressed the remaining two options as follows:
   A second option which flows from the first is to complete the purchase of the [BBHL] agreement. This agreement is very complex and has changed and varied many times. It also has a number of key problems:
   • The purchase price at the current time including the US assets is $3.5 billion;
   • The value of [BBHL] appears to have deteriorated since the agreement was originally entered into;
   • In addition, the banks to [BBHL] must support and approve any sale; and
   • It will take time, something that which perhaps [BBHL] does not have.
   The third option and the one that I personally favour at the present time, is to join with Lion Nathan or other interested parties with brewing expertise together with [BBHL’s] bankers to achieve an orderly and realistic commercial solution to [BBHL’s] current problems. I believe [BRL] could do this under the agreements it currently has with [BBHL], or as a secured creditor over [BBHL’s] capital, or as a joint venture partner, or as an owner, or as a potential purchaser.
   1732 Both Hill and Henson gave evidence to this effect. I have no doubt that this was the view held by them at the time and it accurately reflects the complexity of the task then confronting BRL in bringing a deal to fruition. Hill also said in his chairman’s address:
   I do not wish to give you false hope. The current financial position needs to be established. The new board’s success in turning [BRL] around will rest, amongst other things, on the ability of the Board of [BRL] to determine its rights and obligations in respect of existing agreements and arrangements. Crucial to this is the [BBHL] purchase, the security underlying the secured deposit to [BCHL] and [BRL’s] ability to recover other monies. With shareholders’ funds of $1.2 billion, you do not have to be Einstein to work out the effect of a total loss of the $1.2 billion deposit held by [BCHL] on [BRL]. It would be devastating. I am not in a position to say whether this is a possibility or not.
   1733 On 28 December 1989 BCHL and BRL announced to the ASX that they had agreed to proceed with the sale of the Australian brewing assets for $2 billion. The announced terms included these:
   (a) BRL would assume existing senior bank debt of $740 million as part payment;
   (b) BCHL would purchase public debt of BBHL and another subsidiary at a significant discount and BRL would finance that purchase;
   (c) the existing deposit would be applied against the purchase price and to the extent, if any, that the deposit exceeded that price, it would be covered by securities already held by BRL; and
   (d) the purchase of the assets was subject to independent valuation and due diligence investigation to satisfy stock exchange requirements.
   1734 Again, the arrangements were much more complicated than appears from this summary. The purchase price of $2 billion, of which $740,000 represented the assumption of bank debt, would have provided full value for the $1.2 billion deposit. But the value of the Australian brewing assets was to be assessed according to a complicated formula, as was the amount due to the senior debt lenders and the amount for which the debentures could be repurchased. Accordingly, BRL may also have been required to ‘purchase’ a 50 per cent stake in Bond University for $160 million and a receivable from the Sydney Hilton hotel of $120 million, to adjust the consideration. Bond University and the Sydney Hilton hotel were assets of other BCHL group companies.
   1735 In BCHL’s announcement the belief was expressed that the transaction could be completed by 1 March 1990. The BRL announcement referred to that stated belief and observed that successful completion in such a period would depend upon the cooperation of BBHL’s bankers and creditors.
   1736 On 26 January 1990, BRL announced that it would not accept the amendments proposed on 28 December 1989 to an agreement for purchase of the Australian brewing assets of BCHL. Rather, BRL announced that it would purchase the Australian brewing assets based on an agreement made on 29 May 1989 (as amended, but not including the 28 December 1989 agreement). According to BRL, the ‘principal interest in taking this decision was to ensure that its security position was best protected’.
   9.16.3. Events in December 1989 and January 1990
   9.16.3.1. The receivership of BBHL
   1737 In late December 1989 a syndicate of banks that had facilities with the brewing companies moved against them. On 29 December 1989, NAB (as syndicate manager) issued a stop payment notice that had the effect of preventing BBHL from making an interest payment in January 1990 to the trustee of the debentures it had issued in the United States. The banks also issued formal notices of demand alleging that BBHL was in default under the loan agreements and calling up the principal amount of the debts. On the same day, the banks were successful (on an ex parte application) in having Beach J of the Supreme Court of Victoria appoint a receiver and manager over companies that controlled the brewing assets.
   1738 On the same day (29 December 1989) BBHL applied to this Court for an injunction restraining the receivers from exercising their powers under the ex parte order on the basis that an injustice had been done by denying BBHL a hearing before Beach J. This Court declined the application saying that for reasons of judicial comity, except in exceptional circumstances, it was not desirable for a court to interfere with an order of a court of another State: Bond Brewing Holdings Ltd v Crawford (1989) 1 WAR 517.
   1739 On 2 January 1990, BCHL commenced action in the court to have the ex parte order for the appointment of the receiver set aside. There were several attempts to settle the proceedings but they did not bear fruit. The hearing continued throughout January 1990 and had not been completed by 26 January 1990. A decision was handed down on 9 February 1990 in which the appointment of the receivers was confirmed: National Australia Bank Ltd v Bond Brewing Holdings Ltd.
   1740 However, the BCHL group appealed against the decision. On 28 February 1990, the Court of Appeal allowed the appeal and set aside the orders appointing the receiver: National Australia Bank Ltd v Bond Brewing Holdings Ltd. A full analysis of the reasoning of either the trial judge or the Court of Appeal is unnecessary for present purposes. It is sufficient to recite that, as a matter of fact, the application was made, the order was made and the appeal was successful. But it is interesting that these proceedings concluded without the directors of BBHL (or of any other BCHL group company) swearing an affidavit attesting to the solvency of the companies concerned.
   9.16.3.2. Other events in December 1989 and January 1990
   1741 On 4 December 1989, the trustee of the subordinated debentures issued by BBHL in the United States delivered a notice of failure to pay US$32 million interest. Subsequently, the trustee demanded payment of principal and interest by way of acceleration notice. On 15 January 1990 the trustee initiated winding up proceedings against BBHL. The Victorian Supreme Court was advised on 17 January 1990 by solicitors acting for BBHL bondholders that the bondholders would not agree to a sale of the brewing assets until repayment was received for the debentures and interest.
   1742 On 15 December 1989 BBHL failed to pay US$13.5 million interest on other debentures in the United States; on 18 January 1990, the trustee issued notice of default and demanded payment of principal and interest. The trustee was prevented by way of injunction (granted on 23 January 1990 by this Court) from winding up BBHL. The trustee then agreed not to seek to lift the injunction in return for certain undertakings from BBHL that had been given in the receivership proceedings in the Supreme Court of Victoria.
   1743 From the time of his appointment to the board of BRL, Henson took an active role in its affairs. Henson immediately identified three major issues facing BRL. First, there were many impediments to the completion of the brewery transaction. Secondly, there were doubts about the value of the securities provided by BCHL to Manchar for the brewery deposit to cover the shortfall between the net value of brewery assets and the $1.2 billion deposit. Thirdly, there was a substantial level of unsecured debt owed by BCHL group companies to BRL group companies, in addition to the $1.2 billion brewery deposit. Henson set about investigating the history of dealings between BRL and BCHL with particular emphasis on those matters.
   1744 The Academy transaction was one of the first matters to attract Henson’s attention: see Sect 9.9.7. In December 1989 he told Oates that he wanted the transaction reversed. Discussions continued through January 1990 on that matter. By 23 January 1990, Henson had identified potential claims against BCHL group companies (in addition to the $1.2 billion brewery deposit) including 10 transactions that involved amounts totalling approximately $418 million. In relation to the claims identified against BCHL group companies, Henson served (during January 1990) five formal notices of demand. One was for £10 million against Stockton Holdings (UK) Ltd. Another was against TBGL for about $800,000. Yet another was a claim for $3.7 million against BCHL for aircraft charter fees. The remaining two were against other Australian subsidiaries for amounts totalling about $5.8 million. A notice of demand was also served by BRF against BCHL for claims totalling $24.1 million.
   1745 I should say something about the Stockton debt. In November 1988 TBGIL had advanced £10 million to Stockton, a BCHL company, repayable in November 1989. It carried interest at 2 per cent above the Lloyds Bank base rate. It seems likely that the £10 million was advanced to Stockton by TBGIL from the consideration received under the ITC contract: see Sect 4.4.2.3. This is an example of BCHL getting access to cash holdings of a Bell group company. In December 1988 TBGIL assigned its rights under the Stockton loan agreement to BRF. This was an example of an arrangement by which BCHL used cash holdings of BRL for its own benefit. Stockton did not repay the loan when it fell due in November 1989. Hence the demand issued by Henson in January 1990.
   1746 On 25 January 1990 BRL received a report it had commissioned from Grant Samuel as to the value of the brewing assets, which gave a valuation range of $1.46 million to $1.64 million. BRL also received reports from Freehills, BDW and Deloittes on various aspects of the brewery transaction and dealings between BRL and BCHL group companies.
   1747 During the hearing, I issued what I called a draft ruling on the evidentiary use to which the material in the reports could be put. I mention these things here not because the evidence goes to the truth of the matters the subject of the various demands, but to demonstrate that there were disputes between BRL and BCHL (affecting BRL and TBGL). They were serious disputes and they involved significant sums.
   1748 Henson’s evidence left me in no doubt that the discussions he held with officers of BCHL and the auditors concerning the Academy transaction were forthright. It is clear that the relationship, at least so far as Henson was concerned, was strained. He was not amused by what he had come to learn about the dealings between BCHL and BRL. In fact, on 8 January 1990, Henson went so far as to serve a s 364 notice (a demand that, if not satisfied, would ground a winding up application) on BCHL. This is one factor that must be borne in mind when assessing the path that negotiations for the brewery deal would have to follow.
   1749 The $3.7 million and $24.1 million claims mentioned above also resulted in the service on BCHL of s 364 notices. In fact, winding up petitions were lodged against BCHL in respect of those notices. Early in February 1990, BCHL made an application to this Court to stave of the effect of the petitions: In the Matter of Bond Corporation Holdings Ltd (1990) 2 WAR 41. I assume that the petitions were disposed of (without orders being made) as part of the arrangements detailed in the 21 May 1990 deed: see Sect 9.16.3.3.
   9.16.3.3. The brewery transaction: February 1990 on
   1750 What follows is taken largely from the evidence of Henson, which I accept. Most of it was subject to relevance objections. It is relevant for two reasons. First, to identify problems that existed in January 1990 and that had to be overcome in order for the deal to proceed to finalisation. Secondly, it completes the factual matrix relevant to the value of the BRL shares later in 1990.
   1751 On 28 February 1990 the half‑yearly accounts were sent to shareholders. In the chairman’s report, Hill said that the value of the deposit had been written down to about $0.5 billion. The company had $50 million in cash and control of a 94 per cent interest in Weeks Petroleum, which in turn held a significant interest in the Bass Strait royalty. BRL was owed more than $1.4 billion by BCHL group companies. This included the deposit. Hill also said: ‘The receiver appointed to [BBHL] has been removed and [BRL] may still seek to proceed with the acquisition of the brewing interests under the agreement of 29 May 1989 (as amended). The conditions precedent to the agreement are to be satisfied by 20 March 1990. In the event that [BRL] elects not to proceed with the acquisition, the deposit will be repayable on or before 30 May 1990’. In other words, it was still not certain, at that stage, whether BRL would proceed with the brewery transaction.
   1752 The brewery transaction as amended by the 28 December 1989 agreement involved a sale to Manchar of the Australian brewing assets. Those assets comprised the assets underlying BBHL, namely, the issued share capital of the three breweries as well as a number of other assets. When the BRL board decided on 25 January 1990 not to proceed with the amended form of the brewery sale agreement, it sought to revert to the May 1989 agreement (subject to further negotiations). This was an agreement that involved the sale of 15 million ordinary shares and 1.2 billion preference shares in the capital of BBHL. The agreement also provided for the sale of shares in the BBHL subsidiary that owned the brewing assets in the United States; these assets had been excluded by the December 1989 amendments.
   1753 On 28 February 1990 a fifth version of the brewery sale amendment agreement was executed. This document was confined to the sale of BBHL shares only and excluded the shares through which the US brewing assets were held. The purchase price of the Australian brewing assets was reduced to $2 billion, down from the $2.12 billion attributed to those assets in the May 1989 agreement.
   1754 In order to complete an agreement for the sale of BBHL shares, it was necessary to obtain the discharge of a mortgage over BBHL’s shares that BCHL had granted to HSBC (Wardley) in late 1989. In order to obtain a discharge of the mortgage so that the shares could be sold, it was necessary for BRL to resolve a dispute with HSBC (Wardley) and BCHL. The dispute arose because BRL claimed an equitable lien over the shares based on the May 1989 brewery sale agreement. The HSBC (Wardley) mortgage was subsequent in time to the lien claimed by BRL and was taken with notice of the BRL interest, according to BRL. On 21 March 1990 BRL and related group companies entered into a deed of settlement with HSBC (Wardley) and BCHL. In broad terms, BRL agreed not to proceed with the winding up petition it had issued against BCHL and separate proceedings it had launched against BSBC (Wardley). In return, BSBC (Wardley) agreed to discharge its mortgage over the BBHL shares and to provide BRL with a facility to enable it to acquire related debts.
   1755 From late February 1990 onwards, after the BRL accounts to 31 December 1989 had been published, more information came to light about the various assets that underlay the promissory notes mortgaged as part of the Manchar security package. Henson said he was aware from discussions with BCHL staff in the course of preparing the BRL accounts that most or all of these assets were up for sale as part of BCHL’s asset sale programme. Some of the information which emerged (set out below) shed light on the amount that BRL might gain on a realisation of the asset; and some of the information shed light on the ease with which the asset might be realised. Information also emerged about other assets that were provided by BCHL as additional consideration to reduce the brewery deposit.
   1756 One of those assets was the Chifley Square development in Sydney. Manchar had a first mortgage over a promissory note with the face value $110 million from the registered proprietor. Hill said that he had discovered the previous day that BCHL had, on 11 January 1990, given Indosuez (who had a second mortgage over the Chifley Square development and who were then funding construction) an option. Upon any sale of the development, this option resulted in profit being shared 70 per cent by BCHL and 30 per cent by Indosuez. Henson felt that BRL would probably get nothing out of the security if the option were exercised.
   1757 On 2 March 1990, BRL agreed to BCHL accepting an offer to purchase the Chifley Square development for $405 million on condition that BRL’s rights were preserved. Henson believed that the sale would net $25 million, compared with a promissory note with a face value of $110 million that the asset underlay. Mitchell requested that BRL credit the $25 million against the amount claimed in BRL’s winding up petition. Henson told Mitchell this was not acceptable and not negotiable.
   1758 On 8 March 1990 BRL responded to a query from the ASX and declined to give details of its estimated realisable values for the assets underlying the Manchar securities because it might affect the negotiating position should BRL wish to enforce its rights under the securities.
   1759 At the BRL board meeting on 16 March 1990, Henson presented a management report in which he said there were a number of uncertainties in relation to the overall value of the security package. Henson said that any variation on previously estimated values would be given on a monthly basis, but formal adjustments to the carrying values in the accounts would not take place until 30 June 1990.
   1760 Prior to the 16 March 1990 board meeting Grant Samuel provided an updated report to BRL, ascribing to the breweries a valuation in the range of $1.55 million to $1.72 million. The reason for the change was that more recent figures had shown a decrease in marketing and administration costs and an increase in earnings for two of the breweries. The 16 March 1990 board meeting approved continuation of the negotiations towards a brewery sale agreement.
   1761 On 20 March 1990, Hill announced that BRL and BCHL had agreed an extension of time for completion of negotiations for the brewery purchase based on an agreed asset value of $1.85 billion and on the main steps necessary to complete that transaction. In the same announcement, Hill said that BRL had agreed to purchase from BCHL 212.8 million shares in BML for 40 cents per share. The purchase price was to be satisfied from the repayment to BRL of outstanding sums owed by BCHL group companies. The purchases were subject to approval by shareholders of both BRL and BCHL.
   1762 On 12 and 13 May 1990 Henson held meetings with Willis (NAB) and Crawford and Fear (KPMG) concerning the brewery transaction. The following note, being an extract of Henson’s report to the BRL board, is a succinct summary of the position that had been reached and evidences a degree of strain in the dealings between BRL and the banks:
   [Willis] said that at a minimum the NAB syndicate requires the execution by Monday, May 14 of an unconditional contract committing BRL to purchase the breweries. On behalf of BRL I said that the commitment would not be provided. There are a number of outstanding issues but we would provide an assurance that we would use our best endeavours to complete. I advised the meeting:
   BRL will not proceed unless it is satisfied that the project is financially viable. It will not be financially viable if BBHL is unsuccessful with the defeasance of the US debentures … In addition:
   (a) BRL has not finished the due diligence although it is at an advanced stage …
   (b) The NAB has not provided me with terms of the defeasance facility arrangements …
   (c) Various documents have been delivered to BCHL for the regularising of the inter‑company debt and other matters. Prior to our agreement to proceed with the BBHL acquisition BCH must execute these documents …
   In response to this, Willis said that it will be unlikely that the syndicate will agree to withdraw its proceedings against BCH in circumstances where BRL has not given a commitment to proceed with the BBH purchase. At this stage, I was ready to terminate discussions as there did not seem to be any point in reviewing the various documents if the fundamental issue could not be agreed. However, Willis suggested that we leave the commitment question in abeyance and review the documents, to which I agreed.
   1763 By 18 May 1990, when the BRL board next met, the due diligence investigations were still continuing. The board resolved to receive written reports concerning the financial estimates. The reports would also cover ‘appropriate methods to restructure the acquisition of [BBHL] having in mind the various practical difficulties in relation to the current structure which were discussed at the meeting’. In other words, by mid‑May 1990:
   (a) a final decision whether or not to proceed with the acquisition had not been made;
   (b) the final structure of the transaction (including the precise identity of the assets being acquired and the purchase price) had not been agreed;
   (c) the condition relating to the acquisition by (or funding by) BCHL of the subordinated debentures had not been completed;
   (d) the shareholders had not been approached for the necessary approvals; and
   (e) the BBHL banking syndicate (led by NAB) had not committed to support the transaction.
   1764 On 21 May 1990 BRL, BCHL and related companies entered into a deed of inter‑company indebtedness and compromise agreement concerning disputed indebtedness between the various companies. The amount of the BCHL group inter‑company indebtedness to BRL (including claims previously in dispute) was agreed at approximately $320 million. The debt was repayable before 31 January 1991 and carried interest at commercial rates. BCHL provided securities for the outstanding indebtedness. BRL released TBGL from some of the debts that the latter owed to it. However, not all of the claims of BRL against BCHL were released under this arrangement; for example, claims in relation to the management fees and the share futures trading accounts were not included.
   1765 The compromise agreement also provided for a ‘de-Bonding’ of BRL. Under this arrangement, the voting power of BCHL and BRL was to be limited to 25 per cent and BCHL and TBGL agreed to sell down their shareholdings from 53.8 per cent to 30 per cent by 31 December 1990, and then down to 25 per cent by 31 March 1991.
   1766 On 1 June 1990, the board of BRL resolved to extend the date for satisfaction of the conditions precedent to the brewery transaction from 23 May 1990 to 30 June 1990. The meeting received a report on the due diligence investigations. It revealed that complex issues were still being addressed to arrive at ‘the most suitable acquisition structure’. It is to be noted that by this time the agreement was in its eighth revision. The directors reviewed a first draft of the independent expert’s report and agreed that a shareholders meeting would be convened for 26 July 1990.
   1767 On 10 July 1990, Hill wrote to NAB requesting that the banks agree to a further extension of the date for completion of the transaction from 31 July 1990 to 17 August 1990. NAB declined to give the extension and asked for further information before a decision could be reached. The banks said that it would be necessary for BRL to commit itself unconditionally to the transaction before 31 July 1990. At around this time, NAB advised BRL that it was not prepared to extend the BBHL facility beyond 30 September 1990 other than on terms that, according to Hill, were too onerous for BRL to meet. NAB and HKBA also withdrew the finance facilities for the repurchase of the US debentures.
   1768 The board met again on 20 July 1990. The date for satisfaction of conditions was extended from 30 June 1990 to 31 July 1990. The date for the shareholders’ meeting was delayed until 15 August 1990. Drafts of the reports to shareholders were discussed. However, the directors noted that because of the impact of the level of debenture repurchase on the liabilities of the group, they were not in a position to make a final recommendation to shareholders in regard to the brewing acquisition. It was agreed to recommend the brewery acquisition to shareholders subject to repurchase of debentures reaching at least 51 per cent. Because NAB and HKBA had withdrawn the facilities previously available for this purpose, BRL arranged alternative funding sufficient to satisfy the 51 per cent condition.
   1769 It seems, then, that of the points outstanding in mid‑May 1990, only the identity of the assets and the purchase price had been resolved. The other items remained outstanding.
   1770 Running parallel with the negotiations between BRL and BCHL were other dealings between BRL and Lion Nathan for a joint venture. In fact, Lion Nathan was the course of alternative financing for the repurchase of the US debentures. On 13 August 1990 BRL executed a joint venture arrangement with Lion Nathan to have an equal interest in the Australian breweries. On 15 August 1990, the shareholders of BRL approved the acquisition of BBHL and the deeds of compromise concerning the indebtedness of BCHL group companies.
   1771 On 2 October 1990, the purchase of the BBHL brewery assets by BRL from BCHL and the joint venture between BRL and Lion Nathan were completed. In its final form, the transaction included these terms:
   (a) BBHL changed its name to National Brewing Holdings Ltd;
   (b) BRL, through Manchar, acquired all of the preference shares and 50 per cent of the ordinary shares in National Brewing and Lion Nathan acquired the remaining 50 per cent;
   (c) about 88 per cent of the US debentures were repurchased at a discount of 42 per cent (the majority of the funds having been provided by Lion Nathan);
   (d) Alan Bond resigned as a director of National Brewing but Mitchell, Hill and Henson remained on the board;
   (e) for the purposes of the transaction with BCHL, the agreed value of the Australian brewing assets was $1.8 billion, with other assets increasing the total to $2 billion; and
   (f) the sale of the 50 per cent interest to Lion Nathan was based on an agreed asset value of $1.53 billion.
   1772 The effect of the brewery transaction on the fortunes of BRL can be seen from its annual report for the year ending 30 June 1990. A number of statements are made concerning the value of the company. First, in relation to assets, the directors reported that BRL held a 30 per cent interest in Nine Network Australia Ltd (formerly BML). It was a passive investment with a book value of $147 million. Secondly, the brewery transaction and joint venture with Lion Nathan had been finalised. Thirdly, BRL retained its 96 per cent interest in the Bass Strait royalties, through Weeks Petroleum. The directors also reported an operating loss for the group for the year ending 30 June 1990 of $880 million.
   1773 The directors had estimated that as at 31 March 1990 the net assets of BRL, without the brewery transaction, were $56 million. The completion of the transaction enabled the reported results as at 30 June 1990 to show a net asset value of $326 million or 51 cents per ordinary share. The difference in the agreed value of the brewing assets, as between BRL and BCHL and as between BRL and Lion Nathan, meant that there was still a provision of $712 million for non‑recoverability of the deposit and other BCHL group receivables. However, the provision would have been $1.03 billion had the brewery transaction not been completed.
   1774 This short description of events from February 1990 to October 1990 indicates just how complex the transaction was. It was difficult in May 1989; it had not become any simpler in September 1989, or in December 1989. In that respect, little changed in 1990.
   9.16.4. Share trading in BRL and other indicia of value
   1775 The plaintiffs produced a schedule giving details of trading in BRL shares in the period from 4 January 1988 to 29 December 1989, remembering that the shares were suspended from trading on the latter date and remained in that state until 26 March 1990. I have no reason to doubt the accuracy of the information in the schedule. Table 20 (which appears at the end of this section) is a summary of the information. The last column is a rough guide (deduced from my reading of the schedule) to the most common price at which the shares traded in the relevant period. In the first quarter of 1988 the shares were trading in the $1.30s. The best performance was in the second and third quarters of 1988 ($1.60s) and the worst, not surprisingly, was towards the end of 1989 ($0.40s).
   1776 At the close of trading on 1 December 1989 the shares were trading at 57 cents. On 27, 28 and 29 December 1989 the closing values were 32 cents, 33 cents and 36 cents respectively. The volume of shares traded was relatively low on each occasion. The preference shares last traded at 33 cents per share.
   1777 The share trading halt was lifted on 26 March 1990. Despite the change in control of BRL by that time, the shares did not immediately return to market values enjoyed in earlier times. The plaintiffs tendered a report that Ord Minnett had given to the board of TBGL on 31 October 1990 concerning the investment in BRL. The report contained information as to the trading history of BRL shares, which I have summarised in Table 21, which appears at the end of this section. The share price never recovered to the levels achieved before news of the loans to BCHL became public.
   1778 Ord Minnett reported that BRL shares had traded in the range of 41 cents to 14 cents since reinstatement. Turnover had been low, at approximately 4.7 per cent of fully diluted capital, and 14.6 per cent of ‘free’ fully diluted capital. The weighted average price during the period was 28 cents per share. In the week preceding the announcement of the conclusion of the brewery transaction, BRL shares traded in the range 28 cents to 24 cents. After the announcement, the range was 29 cents to 22 cents.
   1779 Ord Minnett assessed the net asset value for BRL as 48 cents per share but concluded the market value would be the trading average of 25 cents per share. This equates to a figure of $60 million for TBGL’s holding in the company. However, Ord Minnett reported that the realisation of the value of the BRL shares was unlikely to be achieved. Until BRL could establish a performance record in both relative and absolute terms, Ord Minnett reported that the level of institutional investor support for BRL shares would remain low.
   1780 In assessing the net assets, it seems that Ord Minnett may have focussed their attention on the brewery assets alone and not taken into account the holdings in the Nine Network. As indicated in Sect 9.16.3.3, in the annual report for 30 June 1990, the directors assessed the net asset backing of BRL shares at 51 cents.
   Table 20
   BRL SHARE TRADING: JANUARY 1988 TO DECEMBER 1989
   PERIOD HIGH LOW MOST COMMON
   First quarter, 1988 $1.65 $1.01 $1.30s
   Second quarter, 1988 $1.90 $1.47 $1.60s
   Third quarter, 1988 $1.77 $1.54 $1.60s
   Fourth quarter, 1988 $1.63 $1.31 $1.40s
   First quarter, 1989 $1.47 $1.20 $1.30s
   Second quarter, 1989 $1.25 $0.78 $0.90s
   July 1989 $0.85 $0.54 $0.70s
   August 1989 $1.10 $0.68 $0.90s
   September 1989 $1.30 $0.80 $1.10s
   October 1989 $1.05 $0.60 $1.00s
   November 1989 $1.15 $0.65 $0.90s
   December 1989 $0.65 $0.30 $0.40s

Table 21
BRL SHARE TRADING: FROM MARCH 1990
PERIOD HIGH LOW
March 1990 $0.41 $0.14
April 1990 $0.39 $0.22
May 1990 $0.41 $0.22
June 1990 $0.40 $0.17
July 1990 $0.28 $0.17
August 1990 $0.35 $0.14
September 1990 $0.29 $0.20
October 1990 $0.29 $0.22

9.16.5. The BRL shares: the expert evidence of Love and Honey
1781 The banks assert both as a matter of fact and directors’ belief that the Transactions gave the directors time to defer the realisation of the BRL shares. This would allow the directors of BRL and BCHL the opportunity to pursue steps to complete an agreement for the sale of the brewery assets of BCHL on terms that could result in the market price of the BRL shares reaching a value substantially in excess of the market price of those shares without a control premium in December 1989.
1782 The banks say that the price of BRL shares without a control premium in December 1989 was 36 cents for ordinary shares and 26 cents for preference shares. The banks assert that the value of the BRL shares could have increased substantially as a consequence of the sale of the brewery assets. This is without taking into account any further increase in the price at which those shares might be sold as a consequence of a purchaser wishing to pay a premium for control. The banks contend that the subject matter of the negotiation for sale (namely, the Australian brewing interests of BCHL) gave rise to the possibility, depending on the price and terms determined, of placing a value greater than 36 cents on each share of BRL.
1783 While the banks plead, as a matter of directors’ belief, values for the BRL shares prior to entering the Transactions of either $1.73 or $1.90, they do not plead as a matter of fact either a realisable or an underlying value for the BRL shares prior to entry into the Transactions. That having been said, they do plead $1.73 as the net asset value of the BRL shares following completion of the brewery sale.
1784 Love commented on the difficulty of realising on the BRL asset and on likely values. He said that, generally speaking, an assessment of the realisable value of shares listed for trading on a stock exchange would commence with an examination of the traded prices for the shares at the relevant time, with allowance being made for factors that affect the comparability of past transactions, with the transaction under consideration. He also mentioned factors such as:
(a) whether there were regulatory restrictions (such as the takeovers legislation or limitations on foreign investment) that affected the market for shares in the subject company;
(b) whether the parcel might command a premium for some reason, such as that the parcel might confer control of the subject company;
(c) particular factors affecting recent trading in the shares in question; and
(d) factors affecting trading on the stock market generally at the material time.
1785 Love examined the trading history of BRL shares, but opined that the market price was not a reliable guide to as to the price that could be obtained for a parcel of shares representing almost 40 per cent of BRL’s issued capital, or indeed any other sizeable parcel of BRL shares. He advanced a number of reasons for this conclusion. First, the volumes of BRL shares traded were very low when compared with the Bell group’s very substantial holding. Secondly, the BRL share price declined following the release of the BCHL group accounts on 13 November 1989. This reflected both increased uncertainty of a brewing transaction being completed and the unlikelihood of BRL recovering the $1.2 billion deposit if it had to rely on the security that it held from the BCHL group. Thirdly, the new and significant uncertainties in the financial position of BRL, introduced by the appointment of receivers to BBHL: this had the potential to prevent implementation of the December 1989 brewery acquisition agreement.
1786 Honey expressed the view that BRL’s financial position was primarily dependent on the financial position of the BCHL group and that, without the brewery transaction, the BRL group did not have a core cash‑generating business activity. With no core cash‑generating business and with the brewing deposit as BRL’s main asset, it would have been very difficult to realise TBGL’s controlling 39.4 per cent shareholding in BRL. In order for the BRL shares to be realised in such a situation, it would likely have been necessary to realise BRL’s assets and pay out creditor claims, through a liquidation or otherwise, and distribute any remaining surplus to shareholders.
1787 Honey accepted that there was major uncertainty concerning the values of BRL’s assets. This included, in particular, the securities provided by the BCHL group for the deposit and the amount that might be recovered by BRL from unsecured claims against BCHL. In light of this, there was a real prospect that little or no value might be achieved for the BRL shares if the brewery transaction did not proceed and BRL sought to realise the deposit and its other assets. Completion of the brewery transaction in some form, as contemplated as at 26 January 1990, would improve the asset backing of the BRL shares and the realisable value of those shares. Therefore, TBGL, as a major shareholder in BRL, stood to benefit from completion of the brewery transaction.
1788 In his report, Honey conducted an exhaustive analysis of the brewery transaction and its effect. He concluded that, had the 28 December 1989 version of the deal proceeded to finalisation, BRL would potentially have had a net tangible asset backing per share of between 68 cents and $1.23. This could potentially have been higher if the provisions made in the 31 December 1989 accounts in respect of advances to and investments in BCHL related companies and other receivables, totalling $472.7 million, proved to be overly conservative. Honey noted that the range of net tangible asset value of 68 cents to $1.23 compared favourably with the base position, assuming no brewery transaction, which indicated a range of between no value and 40 cents per share. On the other hand, Honey expressed the view that BRL would have been highly geared following completion of the brewery transaction and this may have precluded TBGL from realising a value for BRL’s shares as high as the net tangible asset backing. Nonetheless, Honey felt that BRL would not have suffered financially, and would more than likely have benefited financially, by the brewery transaction proceeding.
1789 I need to deal with the last point made by Honey. I do not think there is much doubt that the interests of BRL were best served by proceeding with the brewery transaction. That was an inevitable result of the position the new board of BRL found itself in when they took control in mid‑December 1989. I think it is fair to say that this was the view of Hill and Henson, albeit with some concerns about the way that the company had been placed in that position. The real question, in January 1990, was not whether it was in BRL’s interests to continue with the deal. Rather, it was whether, and if so when, a transaction could be finalised.
1790 In this respect, Honey seems to have been of the view that the signs were promising. He said that, despite the BBHL receivership, in December 1989 and January 1990 steps were taken and negotiations were continuing to progress the brewery transaction in some form or another. This is evidenced by:
(a) the request for Grant Samuel to provide an interim report on the 28 December 1989 brewery proposal, which was provided on 25 January 1990;
(b) the letters received from Lion Nathan on 24 January 1990 regarding a proposed joint venture arrangement and the reference in that letter to recent discussions with BRL; and
(c) a letter dated 26 January 1990 from BRL to the ASX, indicating that BRL intended to proceed with the 29 May 1989 brewery agreement (as amended up to but not including the 28 December 1989 agreement) and amended to reflect a purchase price of $2 billion for the Australian brewing assets only.
1791 That may well be so. But it reflects more on the position in which BRL found itself rather than the ‘if and when’ of the transaction. As I indicated in the preceding section, when the half‑yearly results were despatched to shareholders on 28 February 1990, the directors were still saying they ‘may’ proceed with the brewery acquisition on the basis of the May 1989 agreement.
1792 On this issue, I prefer Love’s evidence to that of Honey. It is consistent with what I believe to have been the innate complexity of the brewery transaction and the significant hurdles that, as at 26 January 1990, had to be overcome before the deal could be finalised. Honey recognised this when he said that his analysis needed to be considered in the context of a number of uncertainties and aspects of the proposal that had not been finalised prior to 26 January 1990. These uncertainties had been outlined in Grant Samuel’s interim report of 25 January 1990.
1793 To my mind, some of the most significant (but not the only) hurdles were that:
• BCHL had lost control of the board of BRL;
• BCHL was being pursued by the new board on multiple fronts for recovery of debts;
• the deal required shareholder approval;
• BCHL was locked in legal proceedings over the receivership;
• BCHL shares were suspended from trading; and
• BCHL required the support of the banking syndicate, something that was, at the time, far from a foregone conclusion.
9.16.6. The BRL shares: conclusion
1794 At the risk of repeating myself, the single most important aspect here is the innate complexity of the BBHL transaction as it stood in December 1989 and January 1990. As Hill said in his chairman’s address on 21 December 1989, successful completion depended on the bankers approving the sale. Hill swore an affidavit in the receivership proceedings. He and Henson made several approaches to NAB to sort things out. Hill expressed frustration in his letter dated 18 January 1991 to Frank Cicutto about NAB’s attitude. NAB continued on with the receivership proceedings to the bitter end. This must detract from any confidence they might have had about the expeditious culmination of a BRL‑led brewery deal.
1795 In addition, in the annual report for 30 June 1990, the directors recommended that no dividend be paid on ordinary shares and that the dividend on preference shares due 30 April and 31 October 1990 not be paid. This stands to reason. Even with the completion of the brewery transaction, the company was not suddenly going to be returned to profitability with cash surpluses from which to pay dividends.
1796 I am not suggesting that the BRL shares had no value. They obviously did. But the directors’ stated view (expressed in the TBGL accounts as at 31 December 1989) that the BRL shares had a carrying value of $1.80 was never realised and, in my view, it was unrealistic at the time. The brewery transaction was ultimately completed some 17 months after it was first announced on 29 May 1989. According to the independent directors of BRL, the culmination of the deal contributed significantly to restoring value to the shares. It provided a net asset backing of 51 cents per share. But this did not reflect in the share price on the market. Although the brewery transaction was completed early in October 1990, the highest trading price for the shares during that month was 29 cents.
1797 In May 1992 the BRL shares were realised for $59.8 million or 25 cents per share. Not much can be read into that fact because a realisation in an insolvency administration adds a further level of complexity to the task of achieving maximum value. But I do note, in passing, that it is similar to the opinion expressed by Ord Minnett to TBGL on 31 October 1990 about the value of the parcel. Similarly, the bid for the BRL shares, which was eventually accepted by Westpac, was launched on 6 March 1992 (that is, before the commencement of the insolvency administrations) at a price of 23 cents per share. Be that as it may, attention needs to be focussed on the BRL shareholding as it stood in January 1990. The difficulty for TBGL, as at January 1990, would have been the sheer mechanics of realising a parcel representing almost 40 per cent of the ordinary shares in BRL in a way that would maximise the value.
1798 I can summarise my conclusions in relation to the position TBGL found itself in as at 26 January 1990 in relation to the BRL shares as follows.

1. The fate of BRL was dependent on realising value from the loans it had made to BCHL. This, in turn, depended on the financial state of BCHL.
2. The single most important factor was the brewery transaction. The only realistic way for BRL to return to financial stability was to proceed with the brewery transaction.
3. Significant uncertainties surrounded the value of securities given by BCHL to secure repayment of the deposit. There could be no confidence that, had BRL realised on those securities, it would have recovered the loans in full (or anywhere near it).
4. The brewery transaction was innately complex, its terms had not been finalised and there could be no confidence it would be completed in the short to medium term.
5. Because of the uncertainties surrounding the brewery transaction and the relationship with BCHL, the ability of TBGL to realise funds in the short term by mortgaging or selling the BRL shares was negligible.
6. Due to the change in control of the board and management of BRL, there was no possibility of a resumption of management fees as a source of income for TBGL.
7. Even if the brewery transaction had been brought to fruition quickly, it would have taken some time to return BRL to operating profitability. Hence, there was no realistic prospect of the resumption of dividend flows from, or any material appreciation in capital value of, the BRL shares in the short to medium term.
   What I have said in item 7 confirms the preliminary conclusion I mentioned in Sect 9.10.5; namely, that the receipt of preference dividends from BRL should be excluded from the assessment of objective insolvency.
   1799 In my view, the conclusions mentioned in the last three points above support the position of the plaintiffs rather than that of the banks in relation to the cash flow insolvency case. I repeat that I am not saying that the BRL shares were worthless. The directors were entitled to have regard to those shares as an asset that could be dealt with in any proposed restructure. But in my view, they would have had little short‑term benefit as a source of funds from which cash flow shortfalls could be covered. There was no realistic prospect of the BRL shares being a source of funds sufficient to cover cash flow shortfalls that were going to arise before and in May 1990.
   9.17. The value of the publishing assets
   1800 In this section I am concerned with the value of the publishing assets as at 26 January 1990 and the length of time it would have taken for TBGL to realise any value from those assets to cover the known cash flow shortfalls that the group companies were then facing. I will also look at the evidence concerning the cash return to TBGL on the assumption that the publishing assets were sold during the course of 1990.
   1801 There is a significant difference between the publishing assets and the BRL shares. The publishing assets, built around the newspapers, were the foundation of a solid operating entity. They had not suffered the same depredations as BRL at the hands of BCHL. There is no doubt in my mind that they had considerable value, and the value was realisable. The question is, how much and when?
   9.17.1. The assets and their book value in 1989
   1802 The publishing assets are those owned and operated by companies in the sub‑group of which BPG is at the apex: see Annexure ‘N’ in Schedule 38.24. BPG had five direct subsidiaries. One of them was Harlesden Investments. In turn, Harlesden Investments owned Western Mail Operations which, in turn, owned WAN. WAN held the mastheads and assets of The West Australian. WAN also owned four subsidiaries which published regional and community newspapers. BPG also had three non‑operating subsidiaries.
   1803 The operating subsidiaries and associated companies of BPG (with the exception of WA Broadcasters) carried on business as printers and publishers of various newspapers and magazines. The principal publication was The West Australian newspaper. It was published by WAN. It was the only local metropolitan newspaper published Monday to Saturday in Western Australia. WAN also published the Countryman, a paid circulation weekly newspaper produced at Victoria Park. WAN was by far the most significant contributor to the BPG group’s earnings and The West Australian was the source of almost all of that contribution.
   1804 Also within the BPG group were seven wholly owned paid circulation regional newspapers, four wholly owned regional free circulation newspapers and a 49.9 per cent interest in 10 suburban free circulation newspapers and an afternoon paper called The Daily News. Bell Press carried on a heatset commercial printing business from premises in Canning Vale. It also had a printing business in Victoria Park at which some of the newspaper products (other than The West Australian) were printed. WA Broadcasters operated a travel agency.
   1805 The audited financial statements of the BPG group show that net assets increased from $23.4 million as at 30 June 1988 and $360.3 million as at 30 June 1989. The difference is explained by the increase in book value of property, plant and equipment and of the mastheads. The latter needs some explanation. In December 1988, the directors of TBGL commissioned Whitlam Turnbull to prepare a valuation of the BPG newspapers. On 17 March 1989, Whitlam Turnbull delivered their valuation as at 31 December 1989. The report ascribed a value of $626 million to the newspaper assets of BPG based upon estimated EBIT in the order of $41.3 million and a rate of capitalisation giving in effect an EBIT multiple of approximately 15 times. The valuation ascribed a value of $387.3 million to the mastheads of the BPG. I will explain the term ‘EBIT’ in the next section.
   1806 The directors acted in accordance with the Whitlam Turnbull valuation and included the mastheads in the 30 June 1989 accounts at $387.3 million. In the audited financial statements for TBGL, the auditors qualified the carrying value of the BPG assets, based on the masthead figure. They said that it might be over‑valued to the extent of $125 million.
   9.17.2. The valuation evidence
   1807 The plaintiffs adduced expert valuation evidence from Anthony Norman and the banks from Ian Cameron‑Smith. I do not think there was any serious challenge to the notion that the valuation of the BPG assets was a proper subject for expert evidence. Nor was the basic qualification (as an expert) of either individual attacked. That having been said, in the closing submissions the banks did characterise Norman’s evidence as ‘rigid, inflexible and unreliable’ and said it was ‘not that of a valuer but that of an accountant taking an inflexible view based on numbers alone rather than relevant and necessary experience in valuing publishing assets’. The plaintiffs also took Cameron‑Smith to task on occasions for double counting and being ‘overly optimistic’. My approach is to focus on methodology rather than personality. I usually find that this is more likely to assist. It was in this case.
   1808 The parties approached the questions arising from the value of the publishing assets from different perspectives. The instructions given to Norman asked him to deliberate on two questions. First, whether, viewed from 26 January 1990, the publishing assets could have yielded cash by the end of January, or in February 1990, or in a few months thereafter and, if so, the amount of cash that could have been obtained. Secondly, the amount of cash which the publishing businesses could have yielded, and in what time, in the event of a forced sale, had the sale process commenced on 26 January 1990. As Norman pointed out, the starting point of any such analysis required him to establish the value of the publishing assets.
   1809 Norman’s conclusions were that, as at 26 January 1990, the business had a value in the range $328 million to $360 million, with a mid‑point of $344 million. It would take seven to nine months to effect a forced sale. The realisable value on a forced sale would be gross $275 million and net $244 million.
   1810 Love did not provide valuation evidence. Rather, he took Norman’s conclusions as to the level of cash proceeds from a forced sale and then proffered the opinion that such a sale would not have permitted the companies to meet their debts as they fell due.
   1811 Cameron‑Smith was requested to provide a valuation of the publishing assets as at 27 January 1990 on the basis that the business continued as going concern. He was not concerned with a forced sale scenario. In his view, the valuation range was $459 million to $503 million. This would give a mid‑point of $481 million.
   1812 Honey did not provide a valuation opinion. However, he looked at much of the financial information on which the experts provided their valuations. He opined that someone of his experience looking at that information could understand it to mean that the publishing assets could have been dealt with at a value up to that contained in the Whitlam Turnbull report, assuming the companies were not wound up. He also proffered views on two other issues. First, liquidation generally has a negative impact on the value of assets such as the publishing assets. Secondly, the performance of the business after it was sold and listed on the ASX in 1992 confirmed the view that there was potential for growth in the value of the publishing assets as at January 1990.
   1813 It is necessary for me to outline what I understand some terms or phrases that are commonly used in the valuation industry to mean. These phrases are referred to in the valuation reports prepared for this litigation. I do not understand there to be much controversy about the meaning of the terms used.
8. ‘EBIT’: earnings before interest and taxes.
9. ‘EBITD’: earnings before interest, taxes and depreciation.
10. ‘EBITDA’: earnings before interest, taxes, depreciation and amortisation.
11. ‘Future maintainable earnings’ (FME): the profit that a business earns, and what it expects to earn in the future. As the FME seeks to identify sustainable earnings into the future, the reported profit figures are often adjusted to reflect things such as a commercial wage for the proprietor, interest paid or received and any items of an abnormal or non‑recurring nature.
12. ‘Capitalisation of future maintainable earnings’: a valuation method by which the earnings that a business can reasonably be expected to generate in the future (FME) are capitalised at a multiple reflecting the risks of the business, the rate of return on investment that a purchaser will accept and the unique circumstances of the enterprise (capitalisation multiple). Multiples can be applied to a range of different measures of earnings, including net profit after tax, EBIT, EBITD or EBITDA.
13. ‘Control premium’: an amount paid over and above the market value of a business in order to gain enough ownership to set policies, direct operations, and make decisions for a business.
14. ‘Going concern’: a currently operating business that is expected to continue to function as such and remain viable in the foreseeable future.
15. ‘Going concern value’: the value of a business as an operating, normally functioning entity to a buyer. This value is almost always more than the sum of the liquidation or break up value of the assets.
16. ‘Orderly sale’: generally refers to an open market sale of assets without the pressure to sell them in the shortest possible (instead of reasonable) time or at whatever (instead of reasonable) price offered. It assumes the sale of a going concern. It is the opposite of a forced sale.
17. ‘Forced sale’: a sale where the vendor is either in a position where it is forced to sell the asset, due to, for example, liquidation or regulatory changes or is perceived by the market to be in a forced sale position, due to, for example adverse publicity. Due to the resultant (or perceived) inequality in bargaining power, the amount realised for an asset in a forced sale scenario will be less than in a going concern scenario.
    1814 Both Norman and Cameron‑Smith used the capitalisation of FME as the means of valuating the publishing assets. Another common valuation technique is the discounted cash flow method (DCF). A DCF analysis takes the projected future cash flows of the business and applies against them a discount factor to bring them back to a present day value. The experts considered, but rejected, DCF as the appropriate mechanism in this situation. They were also in agreement on the selection of EBIT as the predictor of FME. They were not far apart on the calculation of the maintainable EBIT. However, they differed markedly on the base and final capitalisation multiple and whether (and if so, to what extent) the valuation should include a control premium.
    1815 As is common in valuations, the experts arrived at a range within which the true value could fall. The use of a range allows an observer to identify a mid‑point. This is what I have done. In the discussion that follows, I propose to ignore the range of values and to settle on the mid‑point.
    1816 Norman calculated the maintainable EBIT and the capitalisation multiple separately for WAN and for the regional publications. In relation to EBIT, Norman relied primarily upon the 1989/90 budget and the TBGL profit and loss summary for the six months ended 31 December 1989. He came up with a maintainable EBIT for WAN of $30 million and for the regional publications of $3.5 million, a total of $33.5 million. Norman then applied a capitalisation multiple in the range 10 to 11 (WAN) and 8 to 8.5 (regional publications) to arrive at a mid‑point value of the assets of $344 million. He then applied a 20 per cent discount for a forced sale, reducing the value to $275 million. Finally, Norman made two adjustments:
    (a) the addition of $13 million for the value of the stake in the community newspapers; and
    (b) the deduction of $44 million being the outstanding lease finance costs for the printing presses at the Herdsman facility.
    1817 According to Norman, as at 26 January 1990, the publishing assets had a value of $344 million and would produce cash proceeds of $244 million on a forced sale, effected within seven to nine months.
    1818 In assessing maintainable EBIT, Cameron‑Smith had regard primarily to the five‑year forecast results for 1989/90 to 1993/94, prepared in September 1989, because they were the most recent forecasts that would have been available as at 26 January 1990. He determined a maintainable EBIT for WAN of $29.4 million and for the regional publications of $4.7 million, a total of $34.1 million. His range of capitalisation multiples was 10.5 to 11.5 both for WAN and the regional publications. This gave a mid‑point value of the publishing assets of $375 million. Because he was valuing the publishing assets on a going concern basis and was not concerned with the forced sale scenario, Cameron‑Smith:
    (a) applied a 30 per cent control premium factor; and
    (b) made no adjustments for lease liabilities or the stake in the community newspapers.
    1819 The resultant value of the publishing assets, according to Cameron‑Smith, was $488 million.
    1820 I will move now to consider the contentious factors that explain the differences between the two valuation figures.
    9.17.3. Going concern versus forced sale
    1821 I wish to start with a couple of general comments. I accept the fundamental premise that The West Australian was a strong operating business. The same can be said for the other facets of the publishing assets. The 49 per cent stake in the community newspapers and the Daily News was not contributing much (if anything) to EBIT. But it still had some value. The Bell Press heatset printing operation at Canning Vale was performing poorly but it, too, had some value. The remaining part of the Bell Press operation (the printing works in Victoria Park) also had some value. As will appear in a later section, dealing with adjustments, I do not believe that the Bell Press sale proceeds (for the Canning Vale operation) should be included in an assessment of value of the publishing assets. This is because, as at 26 January 1990, they were already ear-marked for sale and the disposition of the proceeds was provided for in ABSA and RLFA No 2, the terms of which had been finalised by that date.
    1822 The operating results for the publishing assets immediately prior to 26 January 1990 gave cause for optimism. For example, the BPG group’s weekly management report for the week ended 20 January 1990 indicated that the trading profits for The West Australian were $3.5 million over budget and the profits for the BPG group exceeded budget by $1.3 million. Aspinall, in particular, had great confidence in the future of the publishing assets: see Sect 24.1.4. I accept the genuineness of the beliefs professed by Aspinall in this respect and I think that, generally speaking, they were based on a sound foundation.
    1823 The exact nature of the exercise with which I am here confronted needs to be borne in mind. I am looking at the objective insolvency case. The question I have to answer is whether, as at 26 January 1990, the Bell group companies could pay their debts as those debts fell due. The position we have arrived at thus far is that it was known, by 26 January 1990, that there was going to be a cash flow deficiency. The known recurrent income was insufficient to meet known recurrent outgoings as and when those commitments were due to be met. How was the shortfall to be covered? The answer is: by selling or mortgaging the remaining assets to provide enough money to pay the debts.
    1824 How are the publishing assets to be viewed in this regard? In accordance with the findings made in preceding sections, the publishing assets were the only real source of recurrent income. They were to be mortgaged to the banks as the primary security for the banks’ agreement to extend the existing facilities. That being so, the capacity to mortgage the publishing assets so as to bring in additional cash funds was severely restricted. The refinancing documents contained a restriction on creating further securities. There is no evidence that this was ever discussed with the banks or regarded as a serious possibility. This, then, leaves a sale (in whole or in part) as the only realistic means by which the publishing assets could be the source of additional funds over and above free cash flow from operations.
    1825 Of course, consideration of the sale of the publishing assets presents a dilemma. If they were sold in their entirety, there would be no recurrent income. If they were sold in part, for example by way of an equity injection by a joint venture partner, the free cash flow available to the group would be diminished. The net effect would depend on the extent to which capital funds reduced borrowings.
    1826 The objective solvency case is not the only contentious issue in which the value of the publishing assets is relevant. For example, in the balance sheet insolvency case, it remains important to know the true value of the assets as a starting point for testing the various hypotheses reflected in the SNAs. It is also relevant in the banks’ case that the refinancing gave time for the directors to restructure the finances of the Bell group. Leaving to one side the necessity to reach some accommodation with the bondholders, I do not think it is contentious that the major component of the restructure plans was the injection of funds into the group by the sale of an equity stake in BPG or, failing that, the sale of The West Australian, with or without the remaining publishing assets.
    1827 Against that background, I turn to the question I have to decide, namely, the value of the publishing assets as at 26 January 1990. It seems to me that the true value should be assessed on a going concern basis. I say this because, at the time, the publishing assets were just that a going concern. There is no evidence that, for example, the most likely form of realisation of the assets was by sale to a corporate predator (shades of the motion pictures Wall Street and Pretty Woman) interested only in breaking up the whole and selling its component parts. At the heart of the publishing assets was The West Australian, an established daily newspaper that enjoyed a virtual monopoly in the State. The attraction to a purchaser would, most likely, have been its potential as a going concern. For this reason, it seems to me that the starting point of the valuation exercise ought to be the going concern value.
    1828 That, however, is not an end to the matter. I return to what I said about the exact nature of the questions I have to answer. The going concern value is one that the directors are entitled to use for balance sheet purposes. But the reality is that, as at 26 January 1990, the Bell group companies were in financial distress. Had the refinancing not proceeded it is likely that one of the Australian banks would have made a demand for repayment. The other Australian banks would likely have followed suit and the Lloyds syndicate banks would have taken similar action. BGF and BGUK could not have met the demands. There would have been a call on TBGL under its guarantee. The companies would have been placed in liquidation and then fate that befell the publishing assets after April 1991 would have happened a year earlier.
    1829 This is the situation in which the objective insolvency case falls to be determined. Looked at as at 26 January 1990, the directors were faced with a forced sale scenario in order to bring in sufficient cash to cover the shortfall in the cash flows. It seems to me that Cameron‑Smith is right when he says that the value ought to be assessed on a going concern basis. But this is the start, not the end, of the process. I think that Norman is right in saying that in the circumstances confronting the Bell group in January 1990, it is necessary to arrive at a forced sale value in order to assess the likely cash input that the publishing assets could generate.
    1830 I accept Norman’s reasoning process, particularly as disclosed in par 16.1 to par 16.5 of his first report and par 18 of his second report as to why it is appropriate to value the publishing assets on a forced sale scenario. I note that in par 16.5, Norman said this:
    In my opinion, if the publishing businesses had been sold by a vendor who was obliged to sell them, the going concern value of them would not have been achieved. In my view, the price realised would have been between 15% and 25% less than the amount of the going concern value.
    1831 Norman then adopted the mid‑point of the going concern value range and then discounted it by 20 per cent to bring it back to a forced sale value. I accept Norman’s evidence that 20 per cent is the appropriate discount factor in a forced sale scenario.
    1832 This, then, brings me back to the assessment of the going concern value. As I mentioned in the preceding section, both experts calculated a maintainable EBIT and applied a capitalisation multiple. Norman assessed the raw value as $344 million, while Cameron‑Smith’s calculation led him to a figure of $375 million. I will discuss the reasons for the difference in the next section. The next question is whether the raw value represents the going concern value or whether it is appropriate to apply a control premium in order to convert the raw value to a going concern value. Norman took the former approach while Cameron‑Smith adopted the latter.
    1833 Norman did not apply a control premium at all as part of his valuation exercise. In his second report, he says:
18. A control premium will only be paid if the bidder finds it necessary to achieve acceptance of his offer. If the position of the business or its existing shareholders is weak, then control can be achieved without paying for it in the form of a control premium. In my view, BPG and its shareholders were in a weak bargaining position, and would not have been able to negotiate successfully for a control premium to be paid.
19. I, on the other hand, apply a discount adjustment of 20% to derive the adjusted value of the publishing businesses, on the basis that they were in a forced sale scenario … In my view, my scenario is the more relevant and appropriate, because the Bell group was in fact in financial distress, and not in a ‘business as usual’ situation in January 1990.
    1834 This process may be open to the criticism that it involves an element of double counting of the negative factors. It suggests that the reason a control premium is not applied is because the vendor is in financial distress. But this, too, is the reason for preferring the forced sale scenario to the going concern method. The forced sale scenario results in the application of a 20 per cent discount. However, in accordance with what he said in par 16.5 of Norman’s first report, it is a discount that is applied to the going concern value. It seems, therefore, that the appropriate course is to arrive first at the going concern value and then apply the forced sale discount to take into account the distressed state of the vendor. But how should the going concern value be assessed in these circumstances?
    1835 This brings me back to Cameron‑Smith. He opined that in assessing a going concern value for assets like the publishing assets, it was appropriate to apply a control premium. In his view, the appropriate premium was 30 per cent. The plaintiffs attacked the selection of this figure on two main grounds.
    1836 First, in striking the control premium, Cameron‑Smith should have limited himself to information that was available as at 26 January 1990. He did not do so. In par 6.4.7(c) of his first report, he said that in determining the appropriate control premium, he looked at a number of things. Included among them was a review of the fortunes of WANH, and he noted that after 1992 the earnings of The West Australian had increased dramatically. However, in cross‑examination, Cameron-Smith denied that his consideration of the WANH share price would affect the level of control premium.
    1837 Secondly, one of the reasons advanced by Cameron‑Smith for the selection of 30 per cent was ‘the huge barriers to entry to compete with The West Australian’. In par 6.3.7(e) of his first report, Cameron‑Smith included the barriers to entry as a factor to which he had paid regard in determining the capitalisation multiple. In cross‑examination he denied that this factor had been taken into account twice. However, he also said: ‘I believe the final multiple, which [indistinct] presented by the control premium, does not put as much store on that as it did in doing the trading multiples to get to a valuation before the control premium’.
    1838 I note, in passing, that in February 1991 Cameron-Smith prepared a valuation of the publishing assets on behalf of Hambros Australia Ltd. Both Cameron-Smith’s first report and the Hambros report valued the same assets and used the same methodology. In the Hambros report, the control premium is set at 17 per cent. In cross‑examination, Cameron‑Smith put this difference down to two factors. First, between January 1990 and February 1991, the Western Australian economy went into recession and worsened considerably. Secondly, the Hambros report was prepared when ‘the whole economic climate, business climate, was depressed, and we were extremely cautious as a bank’.
    1839 I found these exchanges quite confusing. On balance, I think I should accept Cameron‑Smith’s denials that he double counted the barrier to entry factor or that he took into account future matters in assessing the level of the control premium. Had I come to the view that a control premium was appropriate, I would have been inclined to accept the 30 per cent figure.
    1840 Norman explained his methodology for not including a control premium in the going concern valuation. In the exchanges on this matter in cross‑examination, there was a concentration on share acquisitions, especially in the context of a takeover. Norman felt there were no comparable takeovers or share trading that would assist him. Instead, he looked to a mathematical calculation based upon the rate of return required by an investor, using a risk free rate of return as his starting point. He then modified the risk free rate by reference to a number of factors, including industry risk premiums and the strength of the publishing assets.
    1841 In his first report, Norman set out the relationship between required rate of return and the implied earnings multiple. To apply a control premium to a methodology based on required rate of return would have the effect of increasing the implied earnings multiple and reducing the required rate of return. I think this is a legitimate approach to establishing a going concern value as the starting point for a forced sale scenario.
    1842 It makes sense that if the starting point is share trading it will usually relate to small parcels of shares. However, when attention turns to the whole enterprise, an adjustment might have to be made. In that situation, the additional value that goes with control, short of total ownership, would be of prime concern. The same considerations could apply to a minority shareholder at the time a takeover is launched. The bidder does not then have control but is seeking to gain a level of dominance. In some circumstances, this can result in the bidder achieving a position where it can compulsorily acquire the shares of minorities.
    1843 I think this is the way that par 40 to par 45 of Norman’s second report is to be understood. In circumstances where a vendor is selling all of its assets to a purchaser, the concept of a premium for control does not have the same force. If the vendor is not in a distressed state, it can bargain and achieve the price it wants, perhaps a higher price than the market would otherwise suggest from a capitalisation of FME. The buyer either does, or does not, come to the table depending on what it sees as the required rate of return and a host of other factors. But where the vendor is distressed and is therefore required to sell, control is not really a factor. The purchaser does not need to include the control premium to achieve acceptance of its offer. In this sense, I do not think there is any necessary double counting in the impact of negative factors by excluding the control premium from the initial calculation of going concern value.
    1844 Insofar as the matters included in this section are relevant to the objective insolvency case, I can summarise my findings as follows.
20. The relevant question is whether, to what extent and when the publishing assets could generate cash proceeds by sale to cover known cash flow deficiencies.
21. It is appropriate to look at the disposal of the publishing assets in a forced sale scenario.
22. To do so, it is necessary to value the publishing assets on a going concern basis. I accept that the most appropriate way of determining this value is by capitalising the FME. In the circumstances facing the Bell group in January 1990, it is not appropriate to take the raw value so determined and increase it by the application of a control premium.
23. The going concern value must then be reduced by a discount factor of 20 per cent to arrive at the forced value.
    1845 Because of peculiarities with some of the publishing assets, particularly leasehold plant and equipment and the stake in the community newspapers, it is necessary to make some further adjustments to arrive at the level of cash proceeds available to the vendor from sale. I will deal with the adjustments separately.
    9.17.4. FME and EBIT
    1846 Norman arrived at a slightly higher EBIT for WAN than did Norman, while the roles were reversed with respect to the regional publications. Norman assessed the overall maintainable EBIT for the publishing assets at $33.5 million, while Cameron‑Smith put the figure at $34.1 million. The difference is not material. I am prepared to work from the higher figure.
    9.17.5. The capitalisation multiple
    1847 An enormous amount of factual material and expert analysis was adduced in support of, and submissions and argument directed to, the competing theses about the appropriate capitalisation multiple. In this instance, I am going to say little more than that I have considered carefully the arguments advanced by the plaintiffs and by the banks in their respective written closing submissions. In general terms, I prefer the approach taken by Cameron‑Smith. In my view an EBIT multiple of 11 is not unreasonable. The negative factors that the plaintiffs advance for depressing the capitalisation multiple are ones that would have occurred to a prospective purchaser looking at the publishing assets as at 26 January 1990. In my view, they reflect in the forced sale discount and are adequately accommodated within the 20 per cent discount factor.
    1848 I refer, once again, to Aspinall’s beliefs set out in Sect 24.1.4. The West Australian, and the publishing assets generally, had plenty going for them. As I have already said, immediately prior to 26 January 1990, they were trading ahead of budget. There were plans for expansion and further improvements. Cameron‑Smith pointed to the following factors:
    (a) the leading position of The West Australian in its market place as a source of news;
    (b) the leading position of The West Australian in the State’s newspaper advertising market;
    (c) the high‑level of loyalty amongst readers and advertisers;
    (d) that quality metropolitan newspapers, properly run, have the ability to generate large earnings for their owners;
    (e) the significant barriers to entry to the market;
    (f) the Herdsman plant;
    (g) the stability of historical earnings; and
    (h) the part ownership of The Daily News and ownership of the regional publications.
    1849 As another of my gratuitous asides, I recall that the locals only bought the Daily News for the back page, which featured cartoons by Rigby and a column by Bernard Kirwan Ward. After Rigby left and Kirwan Ward died, the publication was doomed. However, that is comment borne of nostalgia and has nothing to do with the value of the publishing assets. I should get back to the task at hand.
    1850 Cameron‑Smith also referred to a number of other transactions involving newspapers in which it was possible to ascertain EBIT figures. They included:
    (a) the News Corporation acquisition of the Adelaide Advertiser at 19.1 times EBIT;
    (b) an article by Hambros in October 1989 setting out multiples applied in recent media transactions of 15 times EBIT for metropolitan publishers and 11 times EBIT for suburban and regional publishers;
    (c) Haswell Pty Ltd’s acquisition of provincial newspapers in Queensland in August 1988 for 12.6 times EBIT; and
    (d) Resolis Pty Ltd’s acquisition of The Canberra Times in June 1989 for 12.6 times EBIT.
    1851 A lot of evidence was led, and there was a lot of argument, as to the economic climate in Western Australia in 1989 and 1990. The plaintiffs say that Cameron‑Smith’s evidence is infected by an undue optimism for the economic climate at the time and by a failure to appreciate that the State was already in recession by January 1990 and that things got worse thereafter. I am not sure that I can make definitive findings on these matters and probably cannot do much better than Cameron‑Smith’s comment that the economy was ‘sending out mixed signals’.
    1852 However, as I have mentioned a couple of times before, in January 1990 the publishing assets were trading ahead of budget and ahead of results for the year ended 30 June 1989. No business is ‘recession proof’. However, a virtual monopoly in a position such as The West Australian should be able to withstand economic reverses as well, if not better, than most. Certainly, that was the experience of the newspaper in the past. In the end, I have not given much weight to the evidence of the impact of economic conditions and the vulnerability of the publishing assets to the economic outlook.
    1853 I am prepared to accept Cameron‑Smith’s evidence that the appropriate capitalisation multiple was 11 times EBIT. In my view, the problems with the publishing assets were not related to the assets themselves. The main problem was one of guilt by association. By January 1990, the Bell group was in trouble, and potential purchasers would have been aware of that fact. But those problems reflect in the forced sale scenario and the attendant discount factor. I do not think it is necessary to bring them to account again in a going concern valuation.
    9.17.6. A timetable for a sale
    1854 At the moment, I feel as if I am having ‘two bob each way’. Having just completed a section in which I accepted the evidence tendered on behalf of the banks, I now turn to a topic on which I found the plaintiffs’ case compelling, namely, the time it would take to effect a sale. This is not particularly surprising because it follows on from my acceptance of the forced sale scenario. The plaintiffs’ submissions in this respect can be summarised as follows.
    1855 In his first report, Norman was asked to give an opinion ‘whether, viewed from 26 January 1990, the publishing businesses could have yielded cash by the end of January, or in February 1990, or in a few months thereafter and, if so, the amount of cash that could have been obtained’. He proffered the opinion that it was virtually impossible to sell the publishing businesses (in the sense of a completed sale with the full purchase price having been paid) within a matter of days, or even by the end of February 1990. Further, it was extremely unlikely that the publishing businesses could have been sold by the end of May 1990 or thereabouts. He also thought that an attempt by a vendor to complete a sale of the publishing businesses, in less than about six months, if successful, would have resulted in an even lower price than his gross valuation forced sale figure of $275 million being realised.
    1856 In a statement of qualifications an experience, Norman included details of large assets or businesses where he had been involved in the sale. They included the following sales:
    (a) a controlling interest in Foster’s Brewing for $1.8 billion;
    (b) a chain of hotels for $40 million;
    (c) the Triple M radio network for $93 million; and
    (d) Australia’s largest jewellery chain, with 200 stores.
    1857 As was pointed out in Norman’s cross‑examination, his experience did not include the sale of a newspaper. Nonetheless, his experience in selling large enterprises experience is considerable. It supports the view, to which I had come in any event, that I should accept his evidence on these matters. This was not a corner delicatessen. It was a substantial operating enterprise in a relatively specialised field. Norman made the point, which I again accept, that as at January 1990, the publishing businesses represented major assets ordinarily worth in excess of $300 million. On my findings, a figure of $375 million was justified. A sale process designed to maximise the prospects of obtaining a high price would have involved considerable time and disclosure to potential purchasers of a substantial body of information about the businesses. Generally speaking, purchasers do not pay what others regard as a full market price for assets of this kind without a thorough investigation of the assets.
    1858 Norman said that public sales of assets of this kind usually involve a number of well‑recognised steps. These steps represent the measures reasonably necessary to enhance the prospect of obtaining the best price. Even in the circumstances of a forced sale, the same steps would be necessary. He thought that a reasonable time to conclude each of the necessary steps (not necessarily in the sequence specified) would be seven to nine months, made up as follows:
    (a) preparation and dissemination of information memorandum: two months;
    (b) receipt of responses or indicative offers: one month;
    (c) due diligence and negotiations of price and major terms: two months;
    (d) contract negotiation and documentation: one to two months
    (e) final settlement: one to two months.
    1859 I accept this evidence. I also accept Norman’s view that it is unlikely that a sale could have been completed in less than about six months. Any acceleration of the indicative timetable would have resulted in a reduction of the sale price that could otherwise have been achieved.
    1860 I should mention here the second of the questions posed to, and answered by, Honey. He was asked whether, assuming the companies were placed in liquidation, it was reasonably foreseeable that there would be factors having a negative impact on the realisable value of the assets? Yes, said Honey. I agree. In fact, it is a truism. However, that is not the question I have to answer in the objective solvency case.
    1861 I have accepted that the forced sale scenario is appropriate and that a reasonable sale programme would have taken seven to nine months to put in place. I have also accepted that a sale in anything less than six months was likely to have achieved a lower price than returned value. In the light of those findings, it seems to me that the other question posed to Honey also falls away. Honey was asked whether the available information could have been understood by someone of his experience to mean, on the basis that the companies were not to be wound up, that the publishing assets could have been dealt with on the basis of a value of up to the amount opined in the Whitlam Turnbull report.
    1862 It has to be borne in mind that Whitlam Turnbull ascribed a value of $626 million to the newspaper assets of BPG, based on an EBIT of $41.3 million and an EBIT multiple of 15 times. That is a long way from the evidence that I have accepted for any of those measures as they applied to the publishing assets in January 1990. It would not be fruitful to enter into a long analysis of the reasons why Honey answered that question in the affirmative.
    9.17.7. Taking into account prior expressions of interest
    1863 An issue that I do not regard as terribly significant but that I should mention anyway is the extent to which, in valuing the publishing assets as at 26 January 1990, it is legitimate to take into account known information about expressions of interest concerning the assets.
    1864 In his first report, Honey identified three such expressions of interest. In July 1989, there was an offer for the BPG group from Australian Capital Equity Pty Ltd for an initial purchase price in the range of $300 million to $325 million. HKBA responded, indicating that the offer was not attractive. At around the same time, there was an offer from News Corporation Ltd of an estimated $425 million to purchase The West Australian and its associated publishing interests.
    1865 In August 1989, the directors received an initial offer, brokered through Hambros, in the range of 10 to 12 times the historic pre tax cash flow for WAN. The precise basis of the calculation of price under the Hambros‑brokered offer is not clear. C&L estimated the offer to indicate a value for the publishing assets in the range of $360 million to $480 million, based upon a future maintainable cash flow in the range of $36 to $40 million.
    1866 I have little doubt that all of this is part of the factual matrix which a valuer could legitimately take into account in determining value. But they do not take the matter very far. They are not offers in the contractual sense. Indeed, although Honey refers to them as offers, the HKBA response to Australian Capital Equity referred to ‘the possibility of you making an offer’. The only evidence of the News Corporation approach seems to be a newspaper article with a headline ‘Murdoch makes informal bid for Bell group assets’. The Hambros letter indicated that the client ‘wished to acquire’ the newspaper and wanted to register its expression of interest. And there is not a great deal of information about the basis on which the expressions of interest were structured. Obviously, there is no indication as to how the interested parties would have reacted to a maintainable EBIT figure of $34.1 million.
    1867 The expressions of interest do little harm to Cameron‑Smith’s assessment of the going concern value. But equally, they have little, if anything, to say about the legitimacy of the forced sale scenario or the orderly sale timetable advanced by Norman.
    9.17.8. Adjustments to arrive at cash proceeds
    1868 Having arrived at a forced sale value, it is necessary to make some final adjustments before calculating the cash proceeds available to the vendor from the sale.
    1869 Cameron‑Smith carried out his going concern valuation on an un‑geared basis; that is, excluding borrowings and lease liabilities, and therefore with no reference to interest costs and finance lease charges. This is a legitimate approach. In his first report, Norman said that the financing costs of the Herdsman machinery were incurred by way of lease finance agreements. He said that, consistent with the principles underlying an EBIT assessment of value, it was necessary to deduct from the valuation based on earnings an amount of $44 million to reflect the outstanding lease liability.
    1870 In cross‑examination, Norman clarified this approach. He acknowledged that this deduction was only relevant to a forced sale scenario and not to a going concern valuation. He said this:
    I was instructed to determine the cash proceeds that could be realised from a forced sale and my interpretation of that is that I was to calculate the amount of cash that would be available to retire interest bearing bank debt of various kinds and my experience in transactions where businesses are sold and so on tells me that it’s quite normal for a lessor of equipment to require a payout of the then lease liability and indeed the purchaser quite often wants the same thing because he wants clear title to the asset, and so that’s the reason that I deducted that sum whereas of course Mr Cameron-Smith had a different instruction and didn’t need to deal with that.
    1871 He conceded that it is not always the case that a purchaser pays out the lease financing. It might, for example, depend on the purchaser’s own credit credentials. However, he did not accept that he should not have made the lease payout adjustment in this instance. I agree with this approach. The plant leases were approximately $44 million; a not insignificant figure. As a matter of commercial logic, if a purchaser is taking over a lease finance commitment of that magnitude, rather than requiring the vendor to pay it out and deliver unencumbered title, it is likely that the purchaser will factor the liability into its calculation of price. In other words, the price that the purchaser is prepared to pay is likely to be less so as to compensate for the ongoing commitment. I acknowledge that this proposition was not put to the expert witnesses in that way but it seems to me to stand to reason.
    1872 Neither Cameron‑Smith nor Norman included the stake in the community newspapers in their valuations. I think this is to be explained by the fact that those entities were not making a material contribution to FME. However, in determining likely cash proceeds from sale, it is appropriate to include this stake at its book value of $13 million.
    1873 In his workings, Norman did not include either the $6 million value of the Bell Press operation at Victoria Park or the $25 million for the Canning Vale assets. In looking at his evidence, it is necessary to make an adjustment for the former. Cameron‑Smith included the former but not the latter. Because Cameron‑Smith took the $6 million into account, it is already a component part of the $375 million going concern valuation. As I have used the figure of $375 million as my starting point, there is no need to make an adjustment adding back the $6 million.
    1874 In their closing submissions, the banks contended that the $25 million for the Bell Press operations at Canning Vale should also be included in the valuation. I do not propose to do so for present purposes. This is because, by January 1990, a firm decision had been taken to sell those assets separately. Specific arrangements had been made in the draft refinancing documents about the disposition of the sale proceeds. They would not have been available as part of the cash proceeds coming in to the Bell group from the sale of the publishing assets.
    9.17.9. The value of the publishing assets: conclusion
    1875 My conclusions as to the value of the publishing assets are represented in Table 22 below. On these findings, looked at as at 26 January 1990, if the directors wished to realise the publishing assets to cover cash flow shortfalls, they could have done so within seven to nine months and the sale would have generated $269 million. I am leaving to one side the question whether they could have implemented a restructure, such as an equity injection by sale of a part interest to a joint venture, because I do not believe they could have done so in any shorter time frame.
    1876 In Sect 9.2.6.2, I said that, for an assessment of the solvency of the Bell group companies, the period over which the assessment should extend was 12 months. The projected receipt of $269 million within seven months fits in this period. However, in my view, the prospect of funds coming in from the sale of the publishing assets does not alleviate the cash flow insolvency of the group companies because the critical time is May 1990 when the bondholder interest fell due. Under the sale timetable that I believe to be appropriate, there was no prospect of funds being available from the sale of the publishing assets in time to enable BGF to meet those commitments. I will have more to say in Sect 9.20 about the impact of the publishing assets on the insolvency question.
    Table 22
    PUBLISHING ASSETS: AVAILABLE SALE PROCEEDS
    INTEGER VALUE
    WAN
    • Maintainable EBIT
    • Cap multiple
    • Value
    $29.4 million
    11
    $323 million
    Regional publications
    • Maintainable EBIT
    • Cap multiple
    • Value
    $4.7 million
    11
    $52 million
    Publishing assets – raw value $375 million
    Control premium nil
    Publishing assets – going concern value $375 million
    Forced sale discount factor 20 per cent
    Publishing assets – forced sale value $300 million
    Adjustments
    • Herdsmen lease liability
    • Community News (book value)
    • Bell Press (Victoria Park)
    ($44 million)
    $13 million
    Nil
    Cash proceeds from sale $269 million

9.18. Debt and equity structure of the Bell group: cascading demands
9.18.1. The issue described
1877 The Bell group was characterised by the large number of interlocking debt and equity relationships amongst TBGL and its subsidiaries. The concept of ‘cascading demands’ refers to the domino effect that would result from demands made by Bell group companies to their intra‑group debtors. In order to realise its assets, a Bell group company that was a creditor of another company in the group would need to make demands for and collect its debts. The debtor company may, in turn, need to make demand on other own intra‑group debtors. On the plaintiffs’ case, unless debtors could meet demands made on them (as well as their other debts), it would follow that they were insolvent and should be wound up. Bell group companies’ shares in solvent companies might also need to be realised, either by sale or, provided shareholdings were sufficient, by a members’ voluntary liquidation and distribution of surplus assets.
1878 The cascading demands issue is relevant in a number of areas, particularly in the insolvency case, the basis for the monetary claims and in relation to relief generally. It is not possible to appreciate the full import of the issue without understanding the significance of the SNAs. I will describe the SNAs in greater detail when discussing the balance sheet insolvency case: see Sect 10. Briefly, they are work sheets that identify, among other things:
(a) debts owed to and by Bell group companies to other Bell group companies;
(b) shareholding investments by Bell group companies in other Bell group companies; and
(c) other assets and other liabilities of each company.
1879 I have included as Schedule 38.8 a table that identifies the SNAs for each of the 25 plaintiff Bell companies. Generally speaking, the banks accept the accuracy of the book value SNAs. I will deal with the points of difference later. The banks object to the valuation SNAs and the distribution calculations in their entirety. I have also included as an Annexure (see Schedule 38.24 ‘O’), the SNA for TBGL as an example of the form and content of these documents.
1880 I accept the integrity and general accuracy of the material contained in the SNAs. In Sect 10 I will indicate my reasons for coming to that conclusion. All that I am concerned with here is the broad effect of the cascading demands problem on the question whether the Bell group companies were solvent immediately prior to the execution of the refinancing documents on 26 January 1990. The question whether the value of assets would have flowed through to BGF and TBGL on a liquidation of the Bell Participants can be left over for later discussion.
9.18.2. Cascading demands: the pleadings.
1881 It is common ground that the directors believed that unless the Transactions were entered into one or more of the Australian banks would cause one or other or both of TBGL and BGF to be wound up. Further, if either TBGL or BGF were wound up, each other company in the Bell group would be or might have been wound up. This is the effect of PP par 20A(s), PP par 26A(b)(ix), ADC par 48A(c)(d) and (e) and PR par 122(b).
1882 The plaintiffs’ case that the winding up of one company would have had a flow‑on effect, propelling other group companies to a similar fate, is pleaded in 8ASC par 7A, par 7B and par 8A. Many of the Bell Participants either owed debts to, or were owed debts by, other Bell group companies, including other Bell Participants. Each debt was unsecured and repayable on demand. Immediately before the Transactions were executed, for TBGL and BGF to realise their assets:
(a) they would have had to make demand for repayment of their loans to other companies and take steps to realise the value of their shares in other companies by sale or winding up;
(b) this would have led to the liquidation of Bell Participants; and
(c) the value of those assets would have flowed (or in the case of Western Interstate, may have flowed) through to TBGL and BGF.
1883 The debts owed to and by Bell Participants are detailed in the book value SNAs. There is not much dispute about those details. The banks deny that the inter‑company debts were unsecured and on demand. I am satisfied that the debts were unsecured and had no fixed terms of repayment: see the reference to the notes to the BGF annual accounts in Sect 12.13.2. In those circumstances, I think the general run of inter‑company loans were repayable on demand. In ADC, the banks deny the matters in (a), (b) and (c) above. However, I think that, in reality, it is only (c) that is hotly contested.
9.18.3. Debtor−creditor relationships within the Bell group
9.18.3.1. Some introductory comments
1884 I have reached the following conclusions based on the evidence of Woodings and Love, their analyses of the books and records of various Bell group companies, and the way those analyses are reflected in the SNAs. The reader should bear these basic conclusions in mind as the discussion in the succeeding sections unfolds. First, all relevant inter‑company debts within the Bell group were unsecured and repayable on demand. Later in this section I will deal with entries in relation to some of the companies apparently restricting the right to make demands. In addition, there is an argument as to whether the BGNV on‑loans were subordinated but that is a different question: see Sect 13. The relevant inter‑company debts are as set out in the SNAs.
1885 Secondly, the publishing assets and the BRL shares were the principal assets or investments of Bell Participants other than loans to, or shares in, other Bell group companies or in other subsidiaries of BCHL. With the exception of companies closely connected to the publishing of newspapers, few of the Bell group companies had any cash holdings.
1886 The third of the basic conclusions is, in essence, an acceptance of the case pleaded in the early parts of 8ASC, culminating in par 8A. It can be summarised as follows:
(a) for BGF and TBGL to realise the worth or value of all their assets immediately before the Transactions they would have had to make demand for intra‑group debts and realise intra‑group shareholdings by sale or winding up;
(b) this would have led to the liquidation of Bell Participants; and
(c) the worth or value of the assets in whole or in part would have flowed (and in the case of Western Interstate may have flowed) through to TBGL and BGF.
1887 I need to say something more about the conclusion that the relevant inter‑company debts were unsecured and repayable on demand. I acknowledge that, in many instances, in the accounts the loans were described as ‘non‑current’, indicating that they would not fall due for repayment within 12 months after the snapshot date. I also acknowledge that certain Bell group company accounts for the year ended 30 June 1989 contain notes to the effect that the Bell Group creditor had undertaken not to call for repayment of the loan account until the debtor company was able to pay. But Woodings testified that he had not found any other record of such undertakings.
1888 In my view, assuming such undertakings were in fact given and received, they would not have been enforceable in the event of a liquidation of the creditor. In addition, the proposition that the directors regarded the inter‑company loans as other than repayable on demand is inconsistent with the drafting of recitals in ABSA and the Principal Subordination Deed. In this respect, I accept the analysis advanced by the plaintiffs in their written closing submissions. In particular, I accept that undertakings of that type would be illusory and void for uncertainty because the agreed time for repayment operates in a subjective way by leaving it to the debtor to decide for itself when, if ever, it will repay: Bailes v Modern Amusements Pty Ltd [1964] VR 436, 441; Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (Receiver & Manager appointed) & Anor (1993) 11 ACSR 1, 4.
1889 In addition I note the evidence of Winstanley and Walkemeyer (accounting officers of the Bell group) that the inter‑company loans were on demand.
1890 Accordingly, I think it was appropriate to construct the SNAs on the basis that the loans were repayable on demand, as Woodings did. The fact that the loans are included in the non‑current sections of the SNAs has to be understood accordingly.
1891 I accept the force of the analysis and reasoning process advanced by the plaintiffs in support of the cascading demands thesis in their written closing submissions. This is an important issue because, as I have already acknowledged, there is no such thing as ‘group insolvency’. The financial position of each entity in the group has to be picked apart to ascertain whether or not, as at the snapshot date, it could pay its debts as those debts fell due. Hence the significance of the SNAs. Despite the importance of the issue, I am not going to describe all facets of it in full detail. I will content myself with a general description of the reasoning process that I have applied.
9.18.3.2. Debtor−creditor relationships: the BPG sub‑group
1892 I can illustrate the practical effect of the cascading demands thesis by looking at how a demand on BGF would filter through one of the sub‑groups. The best place in which to carry out such an exercise is the group in which the most valuable assets were held: the BPG sub‑group.
1893 Table 23 below lists the debtor−creditor relationships between BGF and companies within the BPG sub‑group as at 26 January 1990. This material has been extracted from the SNAs. The second column lists debts to or by BGF by or to individual publishing group companies as reflected in the books of the companies and without taking into account any other debtor−creditor relationships. The third column shows the net position after tracking various obligations through the group. The last two columns indicate the assets and liabilities of the companies. Figures in brackets represent amounts owing by BGF to the companies concerned.
Table 23
BGF AND THE BPG GROUP: ASSETS AND LIABILITIES
COMPANY BOOK DEBTS TO OR (BY) BGF NET BOOK DEBTS TO OR (BY) BGF ASSETS LIABILITIES
Albany Advertiser ($1.66 million) ($1.66 million) $16.99 million $1.49 million
Bell Press $127.85 million $80.28 million $83.14 million $135.05 million
BPG ($3.27 million) ($2.63 million) $3.66 million $0.77 million
Colorpress Nil Nil $6 million $8.88 million
Harlesden Investments $158.79 million $58 19 million $102.65 million $158 79 million
Hocking Nil Nil $15.71 million $0.18 million
South West Printing Nil Nil $27.25 million $1.46 million
Western Mail $78.93 million $73.04 million $27.37 million $73.75 million
Western Mail Operations Nil $100.6 million $100.6 million $100.6 million
Western Mail Developments $0.19 million $0.41 million $0.15 million $0.28 million
WAN ($79.47 million) ($28.25 million) $980.35 million $144.79 million
WA Broadcasters Nil Nil $1.61 million $0.88 million

1894 I need now to explain how the figures in the second column are arrived at in the cascading demands scenario. If demand is made on BGF, it will initially call on its loans to Bell Press ($127.9 million), Western Mail ($78.9 million) and Harlesden Investments ($158.8 million).
1895 Bell Press will in turn call its loans to WAN ($25.5 million), Western Mail ($20.3 million), Western Mail Developments ($0.18 million), Albany Advertiser ($0.005 million), BPG ($2) and South West Printing ($0.003 million). This leaves Bell Press with a shortfall of around $81 million owing to BGF, not to mention liabilities to other Bell group companies. Bell Press has current assets of around $13.4 million; a future tax benefit of around $2.6 million; and property, plants and equipment worth around $21.5 million. Thus, it appears Bell Press (if not already insolvent) will become insolvent if a demand is made by BGF.
1896 Western Mail will receive a demand of around $20.3 million from Bell Press in addition to its $78.9 million demand from BGF. It will also receive a demand from Western Mail Developments ($0.015 million). Western Mail can in turn call on its loans to BPG ($0.63 million), WAN ($25.74 million) and two minor sums owed to it by Harlesden Investments and Western Mail Operations. Western Mail is in effect left with $73.04 million owing to BGF. It has no other realisable assets, making it insolvent if demand is made on BGF (if it is not already in that state).
1897 Harlesden Investments will receive demands for $158.8 million from BGF and a minor sum from Western Mail. Harlesden Investments will call on its loan to Western Mail Operations of $100.6 million. This leaves a shortfall of $58 million owing to BGF. Aside from a projected income tax benefit of around $2 million, Harlesden Investments has no other realisable assets, making it insolvent if demand is made by BGF, again assuming that is not already the case.
1898 Western Mail Operations will receive a demand from Harlesden Investments ($100.6 million) and a small demand from Western Mail, leaving it to pay $100.6 million. Its only asset is its investment in WAN, worth almost the same amount ($100.6 million). If demand is made on BGF, Western Mail Operations will be required to pay, indirectly, a sum to BGF that will marginally exceed its assets, rendering it insolvent.
1899 WAN has substantial assets. It has a long list of borrowings from and loans to Bell group companies, but overall the moneys owing to WAN exceed the moneys owed by it by a considerable amount. WAN’s two main liabilities are the loans of around $25 million from Western Mail and Bell Press. It can be assumed that Western Mail and Bell Press will demand repayment if a call is made on them by BGF. But WAN has over $79 million owing to it from BGF, which is more than enough to cover its liabilities. This is, in effect, a cancellation of mutual debts, leaving around $29 million owing to WAN from BGF. So WAN would not need to call on any of its other assets, for example its $8.9 million receivable from Colorpress.
1900 Albany Advertiser will receive a small demand from Bell Press through the process of cascading demands. It also has debts to other companies both within the publishing group (for example, Colorpress) and outside the group, the biggest being $0.66 million owed to TBGL Enterprises. But it has $1.6 million owing to it from BGF. Again, this is more than enough to cover any demands made on it by creditor companies.
1901 BPG will receive demands of $0.64 million from Western Mail and $2 from Bell Press. It also has a liability of $0.1 million to WAN but, as I have already indicated there will be no need for WAN to call on its other receivables. BPG has a sum of around $3.3 million owing to it from BGF, which exceeds the amount it will be required to pay under the demands made on it. It therefore remains a creditor of BGF in the amount of $2.63 million. BPG also has $0.09 million owing to it by Western Mail Developments, but there is no reason that this would need to be called upon.
1902 Western Mail Developments will receive demand from Bell Press ($0.19 million). As mentioned, it also owes $0.09 million to BPG but this will not be called upon in the event of cascading demands. It can make demand on Western Mail for $0.15 million, leaving a shortfall of $0.04 million owing to BGF. Its receivable from Western Mail is its only asset, meaning it will become insolvent (if it is not already so) if the banks make demand on BGF.
1903 South West Printing will receive a small demand from Bell Press. It also owes $0.61 million to Colorpress (which will not be part of the cascading demands). But South West Printing has around $1.5 million owing to it from WAN, more than enough to cover its liabilities. As mentioned, WAN can pay any or all of these debts in the event they are demanded.
1904 WA Broadcasters had no debts to other Bell companies. It was a creditor of WAN in the amount of $107 million.
1905 Hocking had both lent to, and borrowed money from, WAN. But overall it was a creditor of WAN in an amount of around $0.9 million. It was not involved in any other inter‑company borrowings.
1906 Colorpress was indebted to WAN in the order of $8.9 million, which, for reasons I have mentioned, would not be part of the cascading demands. It had money owing to it from BPG ($3.3 million), Albany Advertiser ($0.35 million) and South West Printing ($0.61 million), which it would not need to call on. It did, however, have a substantial excess of liabilities over assets, which may need to be considered when looking at its solvency, but its solvency was not affected by any demand on BGF.
1907 In summary, then, BGF was, overall, a net creditor of the publishing group. The loans were made to three companies (Western Mail, Harlesden Investments and Bell Press). When the complex chain of on‑lending and inter‑group borrowings is resolved, it emerges that Western Mail Operations and Western Mail Developments were also indirect debtors of BGF. The funds from BGF would not flow any further than these five companies: Western Mail, Harlesden Investments, Bell Press, Western Mail Operations and Western Mail Developments. If the banks made demand on BGF there would inevitably be a call by BGF for repayment of the debts owed by the five companies.
1908 BGF had little prospect of recovering its loans fully from these companies. Indeed, a rough calculation shows that BGF would have been owed around $210 million by these companies even after they had called on any receivables and passed such moneys back to BGF. Other assets available to these companies had book values of about $37 million. This would leave BGF with a deficit of around $173 million that it would be unable to recover.
9.18.3.3. Debtor−creditor relationships: the broader Bell group
1909 I am satisfied that most of the intra‑group borrowing and lending in the group was accounted for through BGF. About 95 per cent of BGF’s assets and 88 per cent of its liabilities arose from intra‑group loans. If it became necessary for BGF to realise the worth of its assets on 26 January 1990 before the Transactions took effect, it would have to call up its intra‑group loans. Unless a debtor to BGF had sufficient assets to repay BGF without calling up its own intra‑group loans, then a demand from BGF would inevitably lead to demands down the line in a cascading fashion. Bell Group Companies that could not meet the demands, in the ordinary course upon the application of the unpaid creditor company, would be wound up.
1910 In reaching the conclusions that I have mentioned, I have had regard to a number of charts, the integrity and basic accuracy of which I accept.
1911 I am also satisfied that the same scenario applies to TBGL’s intra‑group debtors, although there are only two of them, namely Dolfinne and Maranoa Transport. These inter‑company loans represented assets of $408.1 million out of total assets of $695.6 million. Neither Dolfinne nor Maranoa Transport had inter‑company loan assets upon which to call. Their assets were BRL shares. Both debtors had net asset deficiencies at book value. Furthermore, their total assets in each case at book value were insufficient to meet their debts to TBGL.
1912 In his First (Further Amended) Report, Love outlined the assets and liabilities of the plaintiff Bell companies and the intra‑group debt and shareholding relationships within the Bell group as at 26 January 1990, prior to the Transactions. Love’s evidence was based on the documents with which he was instructed, including the SNAs and the documents in the SNA folders. Love further explained and illustrated by the use of charts the routes by which the funds from Bell group assets would have flowed, in the ordinary course, to external creditors of Bell group companies (including through TBGL and BGF) had realisations been made as at 26 January 1990 before the Transactions took effect. In doing so, Love addressed the respective positions of BGF, BG(UK), BGNV, TBGL, BPG, the BRL shareholders and the other Bell plaintiff companies that were not BRL shareholders.
1913 Love expanded on the flow of funds in his analysis of the cash flow position of the Bell group prior to the Transactions (Cash Flow 1 and Cash Flow A). He discussed the cash requirements of BGF, TBGL, BGNV, BG(UK), the BRL shareholders and the other Bell plaintiff companies and their entitlements and access to cash through their links to asset‑owning companies. I will not repeat the detail of this exercise. It follows much the same format as I have described in Sect 9.18.3.2 in relation to the flow of demands through the BPG sub‑group. It is sufficient to say that when the demands had cascaded through the group and back to BGF there would have been a net deficiency in funds available to BGF to satisfy the claims.
1914 I am satisfied that the position described by Love in his First (Further Amended) Report par 11.1 to par 11.14 and par 11.16 to par 11.24 is an accurate reflection of the position in which each of the plaintiff Bell companies found itself immediately prior to the completion of the Transactions on 26 January 1990.
1915 In relation to the problem created by cascading demands, I do not believe that the completion of the Transactions on 26 January 1990 made any difference. Suppose, for example, that the demands were precipitated by a claim made by the DCT against Bell Bros in relation to the $30 million income tax assessment. Bell Bros would have made demand on BGF to recover its loans. This would have set the cascading demands in motion. In any event, as will be apparent from the earlier discussion, in my view even after the Transactions, the companies remained insolvent because they could not meet known commitments, especially the May bondholder interest instalment.
1916 There are four exceptions to the statement that the plaintiff Bell companies were insolvent.

1. Ambassador Nominees: it had no liabilities and no assets that it owned beneficially.
2. Belcap Enterprises: it had no liabilities and so would not have been the subject of a demand from another Bell group company or, for that matter, an external creditor. It was a creditor of BGF ($0.43 million).
3. Maradolf: it had no liabilities and was therefore in a similar position to Belcap Enterprises. It was a creditor of TBGL ($12.5 million), Dolfinne ($5.99 million) and Maranoa Transport ($1.56 million).
4. W&J Investments: it had no debts owing to other Bell group companies and so would not have been subject to a demand. However, the SNA discloses that it had $0.12 million in accrued expenses and other creditors and $0.93 million in deferred income tax. It was a creditor of BGF ($6.99 million). It may or may not have been insolvent, depending on the nature of the accrued expenses, other creditors and deferred income tax.
   9.19. Specific liabilities
   9.19.1. Introduction
   1917 There is little dispute in the cash flows produced by the liquidators and Love (on the one hand) and Honey (on the other) in relation to bank interest and bondholder interest obligations of the Bell group companies, and other cash outflows, in the period to May 1991. Apart from bank and bondholder interest obligations, the other cash outflows concerned Canadian tax, corporate overheads (mainly rent), administrative expenditure related to the wind down of BGUK, refinancing costs and trade creditors of BPG.
   9.19.2. Bank and bondholder interest
   1918 Cash Flow 2 records total bank interest payable on the facilities in the period 27 January 1990 to 31 May 1991 in the amount of $61.4 million, being $33.1 million in relation to the Australian banks’ interest and $28.3 million in relation to the Lloyds syndicate banks’ interest. I understand that the banks are content to accept those figures.
   1919 Total bondholder interest recorded in Cash Flow 2 as being payable in the period 27 January 1990 to 31 May 1991 is $73.1 million, whereas the Honey cash flow records the amount as $72.3 million. The difference of around $700,000 is due to the approach taken by the authors to the calculation of the interest payment to the BGNV bondholders in July 1990. In that respect, Cash Flow 2 records the obligation as amounting to $8.2 million, whereas the Honey cash flow records the obligation as amounting to $7.5 million. In Table 4 I have used the pounds sterling figure without attempting a currency conversion; the difference is immaterial.
   9.19.3. Other miscellaneous creditors
   1920 In relation to Canadian tax, Cash Flow 2 records the amount as $960,000, whereas the Honey cash flow records the amount as $860,000. The difference of $100,000 is explained in Woodings 1 at par 228 and results from an assumption made for the purposes of Cash Flow 2 in relation to a $100,000 entry under the heading ‘Corporate Overheads’ in the Garven cash flow. The difference is immaterial to the issues that I have to decide.
   1921 In relation to corporate overheads and BGUK’s wind down expenditure, Cash Flow 2 records the total amounts as $4.5 million and $320,000, respectively. As I understand it, there is no dispute between the parties about either of those figures.
   1922 In relation to the operations of BPG, the creditors were trade creditors, creditors relating to the cost of newsprint, and lease payment expenses. The figures contained in Cash Flow 2 and the Honey cash flow for those items are slightly different. There is no allegation that BPG did not pay its trade creditors, its newsprint costs, or its lease payments in the period for which I am concerned in the assessment of the insolvency allegations. Accordingly, the difference is immaterial to the determination of the issues.
   9.19.4. Refinancing costs
   1923 In relation to the refinancing costs, Cash Flow 2 records an amount of $9.363 million which has been adopted from the 26 January 1990 cash flow. The Honey cash flow records the amount as $5.444 million being the figure in the undated January 1990 cash flow. The banks submitted that the actual costs relating to the refinancing amounted to $7.603 million; this is calculated from the figures contained in Woodings’ statements recording the payment by the Bell group companies of bank fees, legal fees and stamp duty in relation to the transaction. I accept that analysis.
   1924 One thing is certain. The refinancing was going to ‘cost’. There could have been no reasonable expectation that the revenue authorities would waive stamp duty. Nor, given the length of the negotiations and the background, was it likely that the banks would forgo the fees that usually attach to refinancing arrangements. The Christmas season had passed and, with the greatest of respect to the profession of which I was once a member, the lawyers were unlikely to forgo the right to deliver accounts for the services they had rendered. In other words, these were known liabilities. The only question was the amount and timing of the liability.
   1925 The refinancing Transactions were complex and it is apparent from the evidence that considerable intellectual and emotional energy was expended on them. While the stamp duty (and perhaps the bank fees) could be calculated with a reasonable degree of precision, it may have been more difficult to make an accurate prediction in relation to legal fees. It can safely be inferred that the charges (when levied), while being within the confines of professional decency, would in all likelihood be charges in full measure. The estimates of total costs ranged from $5.4 million in the undated January cash flow to $9.3 million in the 26 January cash flow. The actual charges were $7.6 million.
   1926 I repeat what I said earlier (Sect 9.2.5.2) about the use of hindsight in determining objective solvency. A court can take into account facts available in hindsight (that is, after the determinative date of solvency) if they help determine which version of conflicting accounts as to the state of affairs is the more likely. The fact that an event actually took place might weigh in favour of the alleged expectation as being a commercial reality. But that fact alone is not determinative. It is one only of a host of matters that may intrude into the decision‑making process.
   1927 Taking all factors into account, and applying appropriate caution, it is, in my view, reasonable to fix the known liability for refinancing costs in an amount of $7.6 million.
   9.19.5. Conclusion
   1928 While there are minor differences in the amounts included in Cash Flow 2 and the Honey cash flow with respect to bank and bondholder interest, and in relation to the other creditors referred to above, the differences are immaterial to the real issues to be determined on the plaintiffs’ allegations of insolvency. The one exception is the figure in Cash Flow 2 for refinancing costs.
   1929 In making findings as to solvency as at 26 January 1990, I propose to adopt the following figures:
   (a) $43.6 million for bank interest and $48.1 million for bondholder interest (on an annual basis);
   (b) the amounts set out in Cash Flow 2 for the items mentioned in Sect 9.19.3; and
   (c) $7.6 million for the refinancing costs.
   9.20. The plaintiffs’ cash flow insolvency case: conclusion
   1930 Standing back for a moment, the fact that if the Australian banks called for repayment of their facilities the companies could not meet the demands (something conceded on the pleadings, at least as a matter of belief) testifies to the delicate financial position of the group. The banks say it was a no more than a period of tight liquidity. I think it was much more than that.
   1931 The cash management situation within the Bell group companies in 1989 and into January 1990 was, to say the least, difficult. Linda Christie, who was a bookkeeper for TBGL from October 1988 to May 1991 but who gives her present occupation as ‘a full time mother’ – a noble and demanding calling – gave evidence about the situation at the relevant time. One of her tasks was to prepare lists of creditors with notes ‘on the level of urgency’ and, on occasion, notes ‘about the creditors’ attempts to press for payment’. She gave evidence about numerous instances where she had to hold creditors at bay. Decisions on who did and did not get paid were made by BCHL Treasury in Sydney, not by TBGL. She testified to the policy of managing creditors according to the old adage ‘the squeakiest door gets oiled’. I am in no doubt what that means. On many occasions she was given authority to pay part only of a debt and told: ‘we will see where this takes us’.
   1932 The December 1989 interest payment due to the bondholders was made possible only by a one-off transaction in which funds were removed from BRL by the Academy transaction.
   1933 Neither the manipulation of creditors nor the use of one-off transactions to generate funds to pay recurrent debts are, of themselves, a definite indicator of insolvency. But they raise questions as to the financial stability of the organisation and are factors that may be taken into account in determining the issue.
   1934 What was the financial position of the Bell group companies on 26 January 1990, immediately prior to execution of the Transaction documents? As at that date, the Bell group companies’ ability to pay their debts as and when they fell due was dependent on the publishing assets in terms of their ability to contribute to cash flow from ongoing business operations. Based on Cash Flow 1, the publishing assets were forecast to produce cash inflow to the Bell group of approximately $43.2 million, which, on a pro rata basis, is an annual figure of $32.4 million. The group had known recurring annual cash outflows of $94 million, made up of $91.7 million for interest and $2.3 million for corporate overheads, such as rent.
   1935 Accordingly, as at 26 January 1990, the Bell group companies faced a recurring annual deficiency of cash inflows from its only ongoing business operations, from which to meet their forecast recurrent annual cash outflows. The deficit was approximately $61.6 million.
   1936 In his witness statement, Aspinall included some material under the heading: ‘Negotiations with the banks and the management of the Bell group February 1990 to April 1991’. He said:
   As a consequence of the continuing analysis of the Bell group’s cash forecasting referred to above, it was apparent to me that, in the absence of the proceeds from the sale of assets and the recovery of monies from [BCHL, JNTH] and BRF, the Bell group would not have sufficient cash flow to survive indefinitely.
   The most immediate cash flow requirement was for the sum of $25 million, required in February 1990, to pay fees and stamp duty, and in May 1990 to pay convertible bond interest.
   1937 Save for the elasticity in the word ‘indefinitely’, I think this is an accurate summary of the position. The debt from BRF was only about $200,000 and is not material. I have indicated my views on the recovery of the other receivables. There was no understanding or arrangement with the banks concerning the asset sales proceeds. In that respect, the companies had ceded control to the banks and were at the mercy of their lenders. Between February and May 1990, the companies had to meet, in addition to their normal operating expenditures, the following known commitments:
   (a) refinancing costs: $7.6 million;
   (b) bank interest (four months): $14.3 million;
   (c) bondholder interest: $25 million.
   1938 The group, therefore, had to find $46.9 million during that period. Using the figures in Cash Flow 2, $3.03 million was to come from asset sales that escaped the cl 17.12 net. The free cash flow from the publishing assets was predicted to be $10 million. Assuming full receipt of the $11.4 million BCF receivable, the group was still confronted with a shortfall of $22.5 million. In reality, the shortfall would have been higher because some of the available cash would have to be allocated to cover previous months’ deficits. The biggest single problem was the May 1990 bondholder interest. Based on a file note made by Weir (Westpac) on 2 February 1990, this was exercising the minds of the directors (and the banks) from that time. Meeting the bondholder interest was not a simple matter. It could not have come from recurrent cash flow and recent history was not encouraging. The interest commitment due in December 1989 had only been covered because of a peculiar one‑off event (the Academy transaction: see Sect 9.9.7.2).
   1939 I have a vague recollection of counsel for the banks submitting that it would be inappropriate for me to approach the objective insolvency question by reconstructing the cash flows according to my findings on the disputed items. If that submission were made, it is not one which I accept. I have done exactly that. I have re-worked Cash Flow 1 and Cash Flow 2 and included them as Schedule 38.9 and Schedule 38.10, respectively. The re‑worked schedules are developed on a group basis, as are Cash Flow 1 and Cash Flow 2.
   1940 Schedule 38.9 relates to the pre‑Transactions insolvency case. It differs from Cash Flow 1 in that I have removed the repayments of principal to the Australian banks in January 1990, and to the Lloyds syndicate banks and the bondholders in February 1990. I have made this change because, on 26 January 1990, no demand had been made. This is not to say that I think Cash Flow 1 is wrongly constructed. It is common ground that had the refinancing not proceeded, demands would have been made by the Australian banks and this would have precipitated demands by the Lloyds syndicate banks and the bondholders. The only other difference between Schedule 38.9 and Cash Flow 1 is the inclusion of the $11.4 million BCF receivable (after line 15; and see Sect 9.12.3).
   1941 As shown in Schedule 38.9, the closing cash balance in January 1990 is negative $4.8 million. The balances at the end of each of February, March and April 1990 are positive. But at the end of May 1990, the closing cash balance is a deficit of $5.2 million. The deficit figure increases in each month thereafter (with one immaterial exception) and by December 1990 it is $36.1 million. Not surprisingly, the cumulative cash flows are also in negative territory during those months.
   1942 Schedule 38.10 relates to the post‑Transactions insolvency case. It differs from Cash Flow 2 in that the BCF receivable has been added and the refinancing costs (line 42) have been changed to reflect what I said in Sect 9.19.4. I have made one further change from Cash Flow 2. As I pointed out in Sect 9.5.3.2, Cash Flow 2 assumes (but does not say) that the Bell Press proceeds would have been paid to the banks in reduction of principal. In Schedule 38.10 I have shown the inflow and outflow of those proceeds. They cancel one another out and do not affect the monthly closing balances. I have not altered the monthly interest commitment to the banks.
   1943 The closing cash balances shown in Schedule 38.10 are all negative, ranging from $6.9 million in January, to $35.9 million in May and to $62.3 million in December 1990. Once again, the cumulative cash flows are also in negative territory throughout the period.
   1944 I note in passing that even if the WAN overdraft (with a $5 million limit and drawn down to $2 million on 26 January 1990) could have been applied against group deficits, rather than to the day‑to‑day needs of the publishing operations, the problems would not have been cured.
   1945 There is one asset that was viable and which could have realised cash within the 12‑month insolvency inquiry period that I have previously mentioned. I am referring, of course to the publishing assets. In Sect 9.17.9 I announced a conclusion that the publishing assets could have been sold within seven months at a price that would generate cash proceeds of $269 million. But I added that I did not believe that this alleviated the cash flow insolvency position of the Bell group companies. With the assistance of Schedule 38.9, I can explain why. I will not burden the reader with yet another Excel spreadsheet.
   1946 The negative closing cash balances and negative cumulative cash flows in May 1990 and in each month thereafter, as disclosed in Schedule 38.9, are indicative of insolvency. Suppose, in accordance with the findings in Sect 9.17.9, there was a notional settlement of the sale of the publishing assets on 1 September 1990 and on that date the Australian banks facilities ($131.5 million) and the Lloyds syndicate banks facility ($131 million) had been repaid. If Schedule 38.9 were to be re‑cast to reflect the settlement and the retirement of the banks facilities, with the consequent deletion in September 1990 and following of bank interest and the cash inflows from BPG, it would still reflect an insolvent position. Table 24 below, which sets out the closing cash balances and cumulative cash flows for September to December 1990, illustrates what I mean.
   Table 24
   CLOSING CASH BALANCES – NOTIONAL RETIREMENT OF BANK DEBT
   MONTH CLOSING CASH BALANCE CUMULATIVE CASH FLOW
   September 1990 ($12 million) ($11 million)
   October 1990 ($12.3 million) ($11.3 million)
   November 1990 ($12.3 million ($11.3 million)
   December 1990 ($27.3 million) ($26.3 million)

1947 Of course, this exercise demonstrates another problem. If the publishing assets were sold in September 1990 the main source of funds to meet the bondholder interest due in December 1990 and following would no longer have been available. As things turned out, even with the publishing assets producing revenue, the December interest was not met. But that is another matter.
1948 An examination of the consolidated group cash flows is the start, not the end, of the exercise. For the reasons set out in Sect 9.18 relating to cascading demands, the position disclosed on a group basis flowed through to individual group companies. In this respect, I accept Love’s analysis of the position of individual companies.
1949 In my view, the financial position of the Bell group companies as at 26 January 1990 was one of insurmountable endemic illiquidity. As at that date, and assuming that the Transactions had not been completed, by May 1990 the companies would be in a position where they could not have met their debts as and when those debts fell due. The position did not improve in the period between May and December 1990. For example, as early as 6 April 1990, Aspinall had remarked in an internal memorandum that ‘there are no assets left to sell’ and that ‘any funds generated from the sale of … assets would flow to the banks in any case’. The management report to the board meeting on 24 September 1990 revealed that the trading position and profitability of the publishing assets had worsened and that interest due to the banks at the end of September could not be met. If it was not already ‘all over’, it certainly was by that time.
1950 The cash flow insolvency case generally, and the finding that the situation did not improve after May 1990 is supported by evidence of, among other things:
(a) the forecast continuing cash flow deficiencies;
(b) the substantial disconformity between recurrent cash inflows and recurrent liabilities;
(c) the disconformity between the profits from its only operating business and its overall interest expense;
(e) the pattern of overall losses incurred on a continuing basis through 1989 and 1990 (although this is subject to the caveat in Sect 9.13.3); and
(f) the absence of assets which could be realised, sold or mortgaged in time to cover the deficits.
1951 I also take the view that the refinancing which occurred in January 1990 and following did not alter the Bell group’s position. The companies were still unable to meet the known recurrent commitments when those debts fell due.
1952 The plea in 8ASC par 29B that BPG, Wanstead and Western Interstate, if not already insolvent, became insolvent or would inevitably become insolvent on entry into the Transactions has also been made out. In accordance with the findings I have made, BGF and BGUK would, certainly by May 1990, have defaulted in meeting interest commitments due to the banks and bondholders. This would have had consequences for BPG, Wanstead and Western Interstate.
1953 BPG, pursuant to the guarantees in the Transactions, would become liable to pay on demand the debts owed to the banks, demand would be made and by reason of the nature of its assets BPG would default. Wanstead had, and Western Interstate may have had, an excess of assets over liabilities. For example, Wanstead was a creditor of BGF ($2.3 million) and Industrial Securities ($0.001 million). It held parcels of shares in Option Securities (which had value) and in JNTH (which did not). But by reason of the guarantees that Wanstead and Western Interstate signed, those companies became liable for the debts of BGF and BGUK to the banks and they would not have had assets sufficient to satisfy any demands made on them.
1954 The plaintiffs have satisfied me that, with certain exceptions, the relevant Bell group companies were insolvent in accordance with both the pre‑Transactions and post‑Transactions insolvency cases. As explained in Sect 9.18.3.3, the exceptions are Ambassador Nominees, Belcap Enterprises, Maradolf and (possibly) W&J Investments. None of the latter three companies gave a guarantee as part of the Transactions and thus are excluded from the post‑Transactions insolvency case.

10. The plaintiffs’ balance sheet insolvency case
    10.1. Introduction
    1955 In Sect 9.2.1 I drew a distinction between an assessment of insolvency based on cash flow considerations and on the balance sheet. I noted that the former is generally the primary indicator of insolvency. Nonetheless, the strength of the balance sheet of a company is not irrelevant to the exercise. It is relevant, for example, in identifying company assets that are capable of ready realisation, in assessing credit resources that are available to the company and in establishing the likelihood of support from the company’s financiers.
    1956 In the context of this litigation, balance sheet considerations are relevant in a number of areas, including:
    (a) ascertaining the assets and liabilities of the various Bell group companies, including intra‑group shareholdings and loans;
    (b) ascertaining whether or not the assets were readily realisable so as to be a source of funds from which debts could be met; and
    (c) identifying external creditors who might be prejudiced by the Transactions.
    1957 Insofar as the insolvency allegations are concerned, the plaintiffs’ case is enunciated in PP par 20A(t) in relation to BGF and incorporated by reference into the case concerning other Bell group companies. The particular alleges that on 26 January 1990, immediately prior to entering into the agreement:
    (a) as to each of BGF, BGUK, BGNV and TBGL, its liabilities exceeded its assets and each had a deficiency of working capital;
    (b) as to each of the BRL shareholders, its liabilities exceeded its assets;
    (c) as to each of Great Western Transport, Harlesden Finance, Western Transport, TBGLE and WAON, its liabilities exceeded its assets; and
    (d) as to the Bell group on a consolidated basis, its liabilities exceeded its assets and it had a deficiency of working capital.
    1958 Working capital is a valuation metric that is calculated as current assets minus current liabilities. The working capital ratio, which measures the ability to repay creditors, is calculated as current assets divided by current liabilities. A working capital deficiency, where it exists, is sometimes used as an element in assessing whether a company is insolvent. If current assets do not exceed current liabilities, the company may run into trouble repaying creditors that want their money quickly. It must be recognised, however, that a working capital deficiency is not, of itself, indicative of insolvency. But because it is a pointer to liquidity it is a relevant consideration in the assessment.
    1959 The plaintiffs rely on the SNAs as evidence of the assets and liabilities on which this aspect of their case is based. The banks contend that the plaintiffs’ SNAs are not balance sheets of the type that would provide any assistance to an assessment of solvency. The banks say that the balance sheet matters relied on by the plaintiffs are dependent on the valuation SNAs. These, the banks contend, are an inappropriate basis for the plaintiffs’ allegations of insolvency and they cannot be relied upon as an indicator of the balance sheet position of any of the relevant companies.
    1960 In Sect 6.2.8 and Sect 9.18.1 I introduced the SNAs, described briefly what they are and, by reference to Schedule 38.8, identified the SNAs for each of the 25 plaintiff Bell companies. I need now to give some detail as to how they were prepared and why (as I indicated in Sect 9.18.1) I accept them as an accurate reflection of the financial state of the companies concerned.
    1961 It will be remembered that the SNAs are Excel spreadsheets prepared by the liquidators setting out the estimated assets and liabilities of each Bell group company (and the consolidated group) as at 26 January 1990, immediately prior to the Bell Participants entering the Transactions. They contain:
    (a) the value of the assets and liabilities as derived from the books and records of the companies (the book value SNAs);
    (b) the liquidators’ valuations of assets and liabilities, which in some cases differ from the book values (the valuation SNAs); and
    (c) the notional distribution from total assets at valuation in respect of each liability listed.
    1962 In their written closing submissions the plaintiffs provide the following summary of the impact of the SNAs. I accept the general force of this summary, subject to individual findings that I have made contrary to the case advanced by the plaintiffs.
11. The book value SNAs are accurate statements of the assets and liabilities of the Bell group companies either recorded in or, alternatively, derived from the companies’ books and records as at 26 January 1990.
12. The valuation SNAs reflect the values ascribed to assets and liabilities by the liquidator based on his own and other expert opinion and, in the case of intra‑group dealings, derived from the operation of the financial model.
13. The TBGL consolidated SNA is an accurate statement of the consolidated assets and liabilities of the Bell group at book value, and reflects the values ascribed in the valuation SNAs, excluding the effect of intra‑group dealings.
14. The principles and assumptions contained in the SNA basis of preparation documents are appropriate and reasonable bases for the preparation of the SNAs.
15. The financial model is an effective Excel computer model, appropriate to the task of performing the calculations contained in the SNAs and the correct methodology has been applied by the plaintiffs.
16. The financial model has accurately and reliably produced the following calculations within the SNAs:
    (a) net assets or net asset deficiency at book value and at valuation;
    (b) notional distribution of assets to creditors and to shareholders, as applicable, at valuation;
    (c) working capital, at valuation;
    (d) dividend to creditors expressed as a number of cents in the dollar, at valuation;
    (e) return of capital to shareholders, at valuation;
    (f) adjusted profit or loss after tax, at valuation.
    1963 I am also satisfied that Bell Table P2209 is an accurate summary of the book value SNAs. The same applies to Bell Table P2210 in relation to the valuation SNAs.
    1964 A little phrase that gained some currency during the hearing is ‘back of the envelope’. I think the reader will understand what that means. Based on the findings in Sect 9, a back of the envelope calculation on a consolidated basis reveals that as at 26 January 1990 liabilities exceeded assets by a significant amount. Of course, this is a straight calculation of assets and liabilities. It does not transport into the primary assessment of cash flow insolvency.
    10.2. The SNAs and supporting documents
    10.2.1. Provenance, development and purpose
    1965 Based on Woodings’ evidence, the following emerges as a history of the provenance of the SNAs. There are four sets, or types, of documents that are part of the SNA process. The first is the financial model. It is an Excel computer programme, initially produced by Totterdell and his staff at Price Waterhouse in 1996. The second set is the SNAs themselves: see Schedule 38.8. They are the Excel spreadsheets that have been extracted from the financial model. Each spreadsheet has underlying worksheets that record the liquidator’s workings that were fed into the model. The third set is the basis of preparation documents. These provide detail of the assumptions on which the model and the spreadsheets are based. Finally, there are several Bell Tables that were prepared by the liquidators and which support, explain or summarise the contents of the SNAs.
    1966 Price Waterhouse prepared an SNA for the consolidated TBGL group and SNAs for 41 nominated companies; Woodings’ firm prepared SNAs for 36 other companies. The SNAs prepared by Price Waterhouse were placed onto the computer system in Woodings’ accounting firm and were checked and retained in their original form. No changes were made. Solicitors from BDW were also involved in the process of preparing the SNAs. It was, as Woodings acknowledged in cross‑examination, a long and expensive process. I am not sure whether the banks were inviting me to draw adverse inferences from this chain of events. If they were, and in any event, I decline to do so. On the totality of the evidence I am satisfied as to the integrity of the SNAs.
    1967 The bulk of the work on the SNAs was done between 1996 and 1998. Each of the SNAs was prepared after what Woodings described as a detailed review and analysis by his professional staff of the available books and records of each of the companies undertaken by his professional staff and supervised by Ian Francis and Woodings himself. Woodings also said (on information and belief) that a similar process occurred at Price Waterhouse. I am prepared to accept this evidence.
    1968 The first version of the SNAs was served on 16 October 1997. Amendments were made as more information came to light during the liquidators’ investigation into the Bell group companies’ financial affairs, including from the books and records and from documents produced by third parties in the course of this litigation. In respect of the valuation SNAs, amendments were also made having regard to the expert opinions received from Love, Norman and Hall. Amended versions of the SNAs were served in December 1997, March 1998 and June 2003. Further amendments were made to the June 2003 SNAs, largely to deconsolidate the BGUK sub‑group companies and to correct what the liquidators regarded as an error, namely, the incorrect inclusion of the Lloyds syndicate banks as a creditor of BGF. Other minor errors were detected and corrected. The further amended SNAs were served on 25 September 2003.
    1969 The basis of preparation documents were also amended from time to time. It seems that as Love’s work progressed, there were some changes made to these documents to reflect the instructions given to Love, the assumptions he was asked to make and some aspects of the results of his analysis. The last version of the basis of preparation document was served on 27 April 2004, immediately before Woodings’ oral evidence was to commence.
    10.2.2. The integrity of the financial model
    1970 From the outset of the trial the banks challenged the integrity of the financial model, claiming it was flawed. I think the challenge was based on matters raised by Honey in his expert report. He said that there were weaknesses in the plaintiffs’ model that arose as a consequence of circular references. According to Honey, these weaknesses could cause different outcomes for the same combination of assumptions, depending on whether the combination of assumptions was built up cumulatively (with each new assumption being included separately and in addition to earlier revisions of assumptions) or on a base case scenario method of calculation derived from the December 1997 SNAs.
    1971 The plaintiffs adduced expert evidence from Terrence Ord, a computer analyst from Lightspeed Technology (Aust) Pty Ltd. Ord was asked by the plaintiffs to report on two matters: whether the financial model gave effect to the SNA basis of preparation document; and in light of the matters raised by Honey, whether there was a weakness in the model and, if so, what effect this had on the output of the model.
    1972 The conclusions contained in Ord’s report support the integrity of the financial model. In his opinion, the model gave effect to the SNA basis of preparation document and carried out the calculations consistently with that document. He said that when used in accordance with its methodology and purpose there was no discernible weakness in the model.
    1973 Ord was called to give evidence. He presented and verified his report but was not cross‑examined. Save for Honey’s report, the banks did not call any evidence questioning the formulation or operation of the financial model. The plaintiffs submit that I should have complete confidence in the integrity of the financial model and in the SNAs produced using the model. I accept that submission insofar as it relates to the model. To the extent that it encompasses the SNAs, I accept it subject to matters that are contrary to individual findings that I have made.
    10.3. The book value SNAs
    10.3.1. Matters of agreement
    1974 The book value SNAs were derived largely from six‑monthly financial statements for each Bell group company, the TBGL consolidated balance and the trial balance, all as at 31 December 1989. The authors also had regard to the general ledgers from 30 June 1989 to 30 June 1991 to identify movements in account balances between 31 December 1989 and 26 January 1990.
    1975 In the main, the banks accept the accuracy of the book value SNAs. They object to four of the individual inter‑company loans reflected in the documents. I will deal with those disputes shortly. The banks also object to the following entries:
    (a) provisions for income tax, where the book value of the liability is recorded as nil;
    (b) the ownership of Q-Net;
    (c) the liability to Godine included in current liabilities at book value in the sum of $0.4 million;
    (d) the treatment of the surplus in Western Interstate;
    (e) TBGL’s liability as guarantor of the three BGNV bond issues and the BGF bond issue; and
    (f) the comment in the BGNV SNA that the annual accounts make no reference to the terms of the advances to TBGL and to BGF.
    1976 All of these objections, save for item (c), are to SNA notes. The plaintiffs submit that, leaving to one side item (f), the banks’ objections in respect of those matters are attempts to maintain consistency in their case and to avoid making any admissions touching on substantive matters in issue, rather than as criticisms of the book value SNAs. I think that is correct. The substance of the entries stands or falls on other findings I have made.
    1977 In one of his witness statements, Woodings accepted the criticism in item (f) and said the SNA notes should be amended to reflect an entry in the annual accounts that the advances were unsecured, interest bearing and with no fixed term of repayment.
    10.3.2. Objections to specific inter‑company debts
    1978 The banks objected to the inclusion in the book value SNAs of entries relating to four inter‑company debts. The first I can deal with quickly. In their written closing submissions, the plaintiffs concede that the inclusion of an amount of £7,024 shown as owing by TBGIL to a company called Cinema Realisations Ltd was an error. The plaintiffs submit that the removal of this amount would not affect the net financial position of TBGIL and that therefore an amendment to the SNAs would be immaterial. I agree with this contention.
    1979 There is another entry with which I can deal quickly. In their written closing submissions the banks say that they no longer dispute the advance recorded in the SNA of Bell Resources Finance plc of £0.12 million to BGUK and the corresponding entry in the BGUK SNA of a debt in the same amount.
    1980 The SNAs include a debt of £1.95 million ($4.26 million) owing by BGUK to BGF. The reconciliation of the loan account occupies about 40 pages in the third witness statement of Breese. In their written closing submissions the plaintiffs ducked the task of summarising the evidence. I propose to follow the same course.
    1981 The banks say (and I think Woodings accepts this) that the BGUK books (general ledgers and trial balance) do not disclose this debt. The banks also point out that in January 1990 a great deal of work was done to identify the creditors of the BGUK group for the purposes of the refinancing. Breese, assisted by C&L, had responsibility for identifying all creditors and liabilities of BGUK. The directors were not informed of the existence of a debt owed by BGUK to BGF.
    1982 There was, however, an account between the BGUK group and BGF marked as ‘intern’l HK/I bear’ in the general ledger of BGF. This may have reflected transactions between BGF and TBGIL. However, the thrust of Breese’s evidence was that the account was treated as a BGUK account by the UK arm of the Bell group. Specific entries within that account that related to TBGIL and BIIL were ‘recharged’ as between BGUK and those companies by way of inter‑company loan accounts. On balance (and notwithstanding the list of creditors given to the UK directors in January 1990) I am satisfied with Breese’s explanation and reconciliation. The receivable of $4.26 million was properly included in the book value SNAs.
    1983 The last of the disputed debts is an advance from Bell Bros Holdings to BGUK of $1.09 million. There is a note in the Bell Bros Holdings’ SNA that explains the process by which the entry came to be made. It is also relevant to note that the entry was in accord with a procedure included in the BGUK basis of preparation document, namely, that the books and records of the Australian Bell group companies should be taken as correct unless otherwise stated.
    1984 Again, the banks point out that this debt did not appear in the books and records of BGUK nor was it included in the list of creditors of BGUK presented to the directors in January 1990. The plaintiffs submit that the problems arise because of confusion in the naming of accounts. The substance of their submissions is as follows. On the United Kingdom side, the entities variously described as ‘Bell Brothers’, ‘Bell Bros Pty’, ‘Bell Bros’, ‘Bell Bros (Aust)’ and ‘Bell Bros’ Holdings’ were undifferentiated in the accounts. On the Australian side, the term ‘BG International’ was used interchangeably with ‘BG(UK)’.
    1985 Winstanley described detailed reconciliations he had made of the Bell Bros and Bell Bros Holdings’ accounts and the entry in the general ledger reconciliation for the month of December 1989 under a heading ‘sundry debtors’. This recorded the receivable due to Bell Bros Holdings from ‘BG International’ as confirmed in the SNAs ($1.09 million) and the adjustment of that amount following an insurance refund received in February 1990. The adjustment was sourced from the electronic general ledger of Bell Bros Holdings. Winstanley confirmed that these entries referred to BGUK and not to TBGIL. He had checked the loan account in the audited accounts of Bell Bros Holdings at 30 June 1989.
    1986 Winstanley also gave evidence about a fax he sent to the London office dated 20 August 1990 in which he stated, ‘Bell Bros Holdings Ltd have a balance of [$0.8 million] (previously [$1.09 million] which was reduced by [a] refund of UK insurance [in February 1990])’. Winstanley testified that the information for his comment on the fax was taken from the Bell Bros Holdings’ ledgers.
    1987 In his evidence Breese said that as at 30 June 1989 there was only one account relating to ‘Bell Brothers’ recorded in the BGUK ledger. He understood that all transactions, both debits and credits, relating to ‘Bell Brothers’ were recorded in this one ledger account. This combined transactions between BGUK and Bell Bros, and BGUK and Bell Bros Holdings. Breese agreed that it was appropriate to account for these separately, namely, the BGUK/Bell Bros receivables and the BGUK/ Bell Bros Holdings receivables.
    1988 I accept the plaintiffs’ submission that the evidence of Winstanley and Breese (in the latter case notwithstanding the events of January 1990) supports and justifies the inclusion of the sum of $1,085,759 as an advance from Bell Bros Holdings to BGUK in Bell Bros Holdings’ book value SNA and the corresponding liability in the book value SNA of BGUK.
    1989 It follows, then, that the receivable as between Cinema Realisations Ltd and TBGIL should be excluded from the SNAs but that the other three entries emerge unscathed from this skirmish.
    10.3.3. Admissibility and probative value
    1990 The banks objected to the admissibility of the SNAs generally. So far as the book value SNAs are concerned, I think they are admissible under a combination of the principles governing the collation and presentation of strictly factual materials and the expressions of opinion about them.
    1991 In relation to the former, the schedules are admissible under Evidence Act s 27A and the principles enunciated in R v Caratti (Unreported, SCWA, Library No 980460, 14 August 1998) (6 ‑ 8) (Murray J) and in Caratti v The Queen [2000] WASCA 279; (2000) 22 WAR 527, [132] – [134]. They are also admissible as documents derived from business records under Evidence Act s 79C(2)(a).
    1992 I am aware that the book value SNAs are only as good as the underlying facts on which they are based. For the most part, the information extracted from the books and records is not disputed. To the extent that it is, I am satisfied on the evidence of Breese, Winstanley and Woodings that the underlying facts have been established. In my view this constitutes a sufficient basis of underlying fact from which matters of opinion can be transported into the valuation SNAs. The question of Woodings’ expertise in relation to the SNAs is covered in the draft ruling on the admissibility of expert evidence.
    1993 In one of his witness statements, Woodings testified to his experience as a liquidator, insolvency practitioner and chartered accountant. He also described his review of the Bell group records in his possession and the applicable accounting standards. Against that background, he said:
    I am of the view that the assumptions made in the basis of preparation document in relation to the book value SNAs were fair and reasonable and appropriate assumptions to make so as to enable the book value SNAs to be prepared and record those Bell group companies’ assets and liabilities at book value as at 26 January 1990.
    I am of the view that:
    (a) the book value SNAs were prepared and derived from books of Bell group companies in accordance with the basis of preparation document so as to record the assets and liabilities and the values thereof recorded in their books as at 26 January 1990;
    (b) the book value SNAs accurately identify the assets and liabilities of those Bell group companies as at 26 January 1990 and record the book value of those assets and liabilities at that date.
    1994 Aided by that evidence and based on my own close examination of the financial model, the basis of preparation documents and the evidence of the other witnesses called by the plaintiffs, I have reached the same conclusion.
    10.4. The valuation SNAs
    1995 Woodings testified that the purpose of the valuation SNAs was to provide an estimate of value at which assets needed to be sold, mortgaged or pledged in the short term, having regard to the anticipated cash deficiencies identified in Cash Flow 1 and Cash Flow 2. He cautioned that the valuation SNAs did not represent an estimate of the value of the assets on a going concern basis or on the basis that they would be retained (not sold) in a scheme of arrangement. Nor did they represent values that could be realised over an extended period of time in an orderly liquidation of the companies.
    1996 He said that in preparing the valuation SNAs he had the benefit of the expert opinions of Love, Norman and Hall in assessing the estimated realisable values of the assets on which each of them were asked to opine. It will be apparent from what I have said in Sect 8.9 that I am aware I have to make decisions on disputed items and that I cannot accept something simply because it is said by a so‑called expert. Nonetheless, it will also be apparent from the findings I have made, particularly those in Sect 9.11.8, Sect 9.16.6 and Sect 9.17.9, that I am generally satisfied that the basic reasoning process applied by the witnesses represents the true position as reflected in the valuation SNAs.
    1997 This is not to say that I have accepted the opinions proffered by the witnesses in all respects. For example, on my assessment of the evidence I have come to the view that the publishing assets should be accorded a slightly higher value than that attributed to them by Norman. But I do not believe that the difference has a material impact on the valuation SNAs overall. Nonetheless, they do have to be adjusted for the effect of the difference.
    1998 I am aware that the valuation SNAs are only as good as the underlying facts on which they are based. I have accepted the book value SNAs and have made findings, especially in Sect 9, on the disputed cash flow items and on the matters of judgment concerning the potential for other assets to provide sources of cash to cover cash flow deficiencies. In my view this constitutes a sufficient basis of underlying fact from which matters of opinion can be transported into the valuation SNAs. The question of Woodings’ expertise in relation to the SNAs is covered in the draft ruling on the admissibility of expert evidence.
    1999 I am also aware that the valuation SNAs are sensitive to the assumptions from which they have been developed. This is demonstrated by the alternative scenarios (I think they were 31 in number) prepared by Honey using the financial model that the plaintiffs had served in December 1997. The alternative approaches gave widely differing results. This is not at all surprising. The question for me is whether I accept as reasonable and appropriate the principles and assumptions reflected in the basis of preparation documents and on which the valuation SNAs were based. I am comfortable with those assumptions; the fact that the extraction of data based on different assumptions would produce a different result is not of any moment.
    2000 It should also be noted that Honey’s alternative scenarios were developed from the December 1997 version of the financial model, not the one served in June 2003. I am not sure whether this would have made any difference to the result. I note also the criticisms made by Honey about the model. I am not sure whether, and if so to what extent, his perception of the inadequacy of the model influenced his choice of different assumptions or the way in which the model was employed.
    2001 I am satisfied that the basis on which the valuation SNAs were prepared is proper and efficacious. In my view, it assists in the determination of the questions of solvency which arise in these proceedings. In relation to the consolidated SNA for the Bell group, there is a demonstrated insufficiency of realisable value in its assets to meet its liabilities. I make no finding as to the exact amount of the deficiency because it would require a recasting of the SNAs, and that is something I am not prepared to do. However, I am in no doubt that after the revision, there will still be a deficiency. The statement about a deficiency in the consolidated SNA must be read subject to the warning about the group insolvency heresy.
    10.5. Profit and loss calculations: distribution columns
    2002 I want to deal briefly with two other aspects of the SNAs: the profit and loss calculations; and the assessment of the distribution of funds from and to the various companies.
    2003 The financial model permits an estimate to be made of the profit and loss after tax for the period 1 July 1989 to 26 January 1990. The assessment incorporates valuation adjustments. The way the model operates and the basis on which the profit and loss estimates were arrived at is described in Woodings 1. The plaintiffs have provided a convenient summary in their written closing submissions. I have no difficulty in accepting the approach reflected in those materials or the results at which the authors have arrived. However, it will be apparent from Sect 9.13 that I have not placed great store on the operating losses in the assessment of solvency.
    2004 As explained in the basis of preparation document, the SNAs also include a column headed ‘Distributions to Creditors and Shareholders’, which records a calculation of a notional distribution to creditors and (where a company has net assets) shareholders of each company as at 26 January 1990.
    2005 In his expert report, Ord said that the financial model was designed to convert book value balance sheets into realisable value balance sheets by considering inter‑company assets and liabilities, and creditors claims. By this process, the model was able to show the resultant realisable values of assets and liabilities and hence the distribution likely to be made to creditors. Ord said that it was not a general realisation model and that, given its structure, its use was limited. In this respect, Ord expressed his conclusion as follows:
    Having examined the two key files [underlying the models] I am of the opinion that not only has the correct methodology been applied well, but that given the complex nature of the relationships between the companies, no other computer based approach would provide a better solution.
    2006 I accept this analysis and am satisfied as to the appropriateness of the methodology used to develop, and (subject to individual findings made elsewhere) the integrity of the results in, the distribution columns of the SNAs.
    2007 The results are extraordinarily complex because of the web of interlocking shareholdings and debtor–creditor relationships. I have neither the capacity (not having access to the model) nor the will (my energy levels are diminishing rapidly) to recalculate the results to fit with findings made elsewhere and which are, or may be, at odds with the results reflected in the SNAs. Nonetheless, as a matter of methodology, I am satisfied that the plaintiffs’ approach, as reflected in the distribution columns, is appropriate. Without intending this to be an exhaustive list, examples of areas where the distribution columns may need to be re‑cast include:
    (a) the BCF receivable: Sect 9.12.4;
    (b) the valuation of the publishing assets: Sect 9.17.9;
    (c) the Godine Developments debt and miscellaneous creditors: Sect 10.6.2 and 10.6.3, respectively; and
    (d) the treatment of the BGNV on‑loans as subordinated.
    10.6. Identification of external creditors
    2008 I wish now to turn to a different aspect of the balance sheet insolvency case; namely, the identification of external creditors of Bell group companies other than the bondholders. There are two relatively significant such creditors and a few of lesser materiality.
    10.6.1. Income tax liabilities
    10.6.1.1. Notice of assessment, objections and appeals
    2009 By May 1987 the DCT had issued income tax assessments under the Income Tax Assessment Act 1936 (Cth) (the ITAA) against three of the Bell group companies. As at 26 January 1990 all of the assessments had been objected to, were under appeal and remained unpaid. By that date, with penalties and accrued interest, the amounts outstanding under the assessments were:
    (a) Bell Bros ($29.99 million)
    (b) Bell Bros Holdings ($2.94 million) and
    (c) Maranoa Transport ($1.34 million).
    2010 The assessments all arose from share transactions (some would say audacious takeover forays) conducted by the Bell group while under RHaC’s tutelage. The Bell Bros assessments arose from share transactions in relation to three companies: Boral Ltd, Ansett Transport Industries Ltd and Elders Ltd. The assessments directed to Bell Bros Holdings arose from sales of shares in numerous companies (including my old favourite, Albany Woollen Mills Ltd). Maranoa Transport was assessed on profits allegedly made on the sale of shares and options in BRL, which it had acquired when BRL took over Weeks Petroleum Ltd.
    2011 I am not concerned with the substance of the disputes between the DCT and the relevant Bell group companies as to whether or not the assessments were correct, or as to whether the transactions gave rise to assessable income (or the availability of losses to offset income). The plaintiffs have not pleaded material facts that would support a finding that Bell Bros, Maranoa Transport or Bell Bros Holdings had a substantive liability to pay tax. They say that they do not need to do so. The plaintiffs say that the liability arose by force of the statute, and that once the assessments were issued, it remained as a liability notwithstanding the existence of the objections and appeals. The DCT was, therefore, a ‘creditor’ whose interests the directors were obliged to take into account when deciding whether or not to enter into the Transactions.
    2012 In essence, the banks contend that under the objection process there was a possibility or probability of the assessments being reduced or extinguished and, until that process was complete (and it was not complete as at 26 January 1990) there was no obligation to pay the amounts in question. The banks say that the directors believed, and were entitled to act on the basis, that the tax claims made by the DCT would be resisted successfully. The banks also say that the plaintiffs’ contention about the amounts arising as a liability by force of the statute immediately on the issue of the assessments is not correct.
    2013 The juridical task that I have to perform is capable of reasonably clear exposition, although carrying it out is more difficult. I have to decide whether, once the assessments were issued, a liability existed and that the liability existed throughout the period to January 1990. In dealing with the defence, I do not have to determine the objections to the assessments. But I do have to decide what the directors knew, or ought to have known, or would have known (had they made enquiries) about the likelihood of the liabilities being reduced or extinguished.
    2014 The banks raise an alternative argument; namely, that the evidence establishes the existence of bona fide disputes, on substantial grounds, about the existence of the tax debts. The effect of the evidence is that the plaintiffs have not established as a fact that the amount (or any other amount) of the alleged tax debts would have been payable, and needed to be met. I am prepared to accept that there were bona fide disputes concerning the assessments. But it is beyond my remit to determine the issues and, notwithstanding that the plaintiffs’ primary contentions have been made out, I do not propose to deal with the banks’ alternative argument.
    2015 Because I am not obliged to determine whether there was a substantive liability to pay tax, I will not be giving any further background information about the share transactions that gave rise to the assessments. I will concentrate on the course of the assessment, objection and appeal process, but I need to make a few other introductory comments.
    2016 First, during the course of their insolvency administrations, the liquidators have admitted proofs of debt lodged by the DCT for the substantive tax liabilities that are the subject of the assessments. I make no comment whether this was or was not an appropriate course for the liquidators to follow. It is irrelevant to the exercise I have to perform. So too is the fact that in December 1991 (after the commencement of the liquidations) the Federal Court dismissed appeals against the Bell Bros assessments for want of prosecution.
    2017 Secondly, on the evidence that was led (or not led) I have come to the view that none of the Australian directors had any direct personal knowledge of the substantive disputes the subject of the assessments. The objections and appeals were being handled by Graeme Pepper and he was not called to give evidence: see Sect 24.1.7.5, Sect 24.2.8.2 and Sect 24.3.
    2018 Thirdly, Nola Rice, an Administrative Services Officer employed by the DCT gave evidence and explained:
    (a) how the amounts outstanding under the various assessments as at 26 January 1990 were calculated;
    (b) the processes of objection and appeal taken by the taxpayer in relation to these assessments; and
    (c) how additional tax for late payment (also called general interest charges) in respect of each of the assessments was levied on the taxpayer, calculated from the date each assessment was due for payment and how the statement of account was calculated.
    2019 I need to say something more about the general processes. I do not think any of this is contentious. A notice of assessment will fix a date by which the tax is to be paid. The taxpayer bears the onus of proving that the assessment is wrong. Once an objection is filed, the DCT can (and did in relation to the Bell group assessments) grant an extension of time to pay, either to a fixed date or until the objection process has been completed. The deferral of payment is also covered by a general policy ruling issued by the DCT. Normally (and it occurred here) the general interest charges continue to accrue until the tax is paid or the assessments are overturned. If the DCT dismisses the objections, the taxpayer can appeal to the Federal Court or the Administrative Appeals Tribunal. The initiation of the appeal is done by the DCT referring the matter to the Federal Court or the tribunal.
    2020 In cross‑examination there was no material challenge to the efficacy of Rice’s calculations or to her description of the processes that apply in relation to assessments and appeals. I accept her evidence. From it, I have been able to compile Table 25 that gives relevant details of the various assessments.
    Table 25
    INCOME TAX ASSESSMENTS AND OBJECTIONS
    COMPANY TAX YEAR ASSESSMENT DATE PAYMENT DUE DATE DATE OF OBJECTION
    Bell Bros 30 June 1980 10 September 1982 13 October 1982 12 November 1982
    30 June 1981 10 September 1982 13 October 1982 12 November 1982
    30 June 1984 4 October 1985 5 November 1985 3 December 1985
    30 June 1985 2 May 1986 3 June 1986 2 July 1986
    30 June 1986 19 May 1987 22 June 1987 17 July 1987
    Bell Bros Holdings 30 June 1977 22 September 1982 25 October 1982 19 November 1982
    30 June 1979 22 September 1982 25 October 1982 19 November 1982
    30 June 1980 22 September 1982 25 October 1982 19 November 1982
    30 June 1981 22 September 1982 25 October 1982 19 November 1982
    30 June 1982 8 August 1983 9 September 1983 6 October 1983
    30 June 1983 18 May 1984 20 June 1984 8 June 1984
    Maranoa Transport 30 June 1980 6 March 1986 7 April 1986 21 April 1986

2021 The objections to the Bell Bros’ 1980, 1981 and 1984 assessments were disallowed. Bell Bros was advised of this by letter dated 17 April 1986 in relation to the 1984 assessment, and by letters dated 18 February 1988 in relation to the 1980 and 1981 assessments. Rice said that she could not locate notices of the DCT’s decisions on the objections in relation to the 1985 and 1986 assessment. It seems to me that the question whether or not the assessed tax was payable does not depend on whether or not decisions had been made on the objections.
2022 On 16 June 1986 Bell Bros requested that the disputed 1984 assessment be referred to the Federal Court. The DCT responded to this request on 20 August 1986, stating that Bell Bros would be advised about its request in due course. On 6 April 1988 TBGL requested that Bell Bros’ disputed 1980 and 1981 assessments also be referred to the Federal Court. There is no evidence of the date on which Bell Bros requested referral of the 1982 assessment.
2023 The DCT subsequently referred the disputes about the 1980, 1981 and 1984 assessments to the Federal Court, by notices of referral dated 26 August 1988.
2024 It seems that the objection process in relation to the disputed Bell Bros Holdings assessments was not advanced, probably because of the similar nature of the claims to those the subject of the Bell Bros assessments which were in the appeal process.
2025 In relation to Maranoa Transport, the DCT disallowed the objection, and notified the company by letter on 19 February 1988. TBGL subsequently wrote to the DCT in April 1988, requesting that the disallowance of the objection be referred to the tribunal, which was done on 24 June 1988. A preliminary conference between the parties took place at the tribunal on 23 August 1989. The parties agreed to defer the matter pending the outcome of the Bell Bros appeal in the Federal Court.
10.6.1.2. The status of the DCT as a creditor
2026 There is a fundamental disagreement about the force and effect of assessments under the income tax legislation. In essence, the plaintiffs say that the tax assessed by the DCT as payable by Bell Bros, Bell Bros Holdings and Maranoa Transport was at all material times a debt or liability owed to the DCT. This is the effect of a combination of statutory provisions relating to the assessment and collection of tax. Accordingly, the DCT was a creditor of those companies at the time they entered into and gave effect to the Transactions and the Scheme.
2027 The banks contend that the relevant provisions of the ITAA, including those provisions that accord a special evidential status to assessments, have application in relation to proceedings between the DCT and a taxpayer (or a third party) for the collection or recovery of tax or a challenge by the taxpayer as to his true tax liability under the ITAA. These are not such proceedings. The relevant sections of the ITAA have no operation in proceedings such as these; that is, where there is no challenge to the assessment as such, which do not involve the DCT seeking to collect or recover tax and which do not amount to a collateral challenge to the assessment binding on the DCT.
2028 The argument can be summarised as follows. Under the legislation, the income tax specified in the notices of assessment issued to the companies was due and payable by those companies on the due date specified in each notice, and the companies were liable for additional tax for late payment from those due dates until the tax was paid: ITTAA s 204(1) and s 207(1).
2029 The income tax due and payable by those companies (including additional tax for late payment) was a debt due to the Commonwealth: ITAA s 208(1). The DCT is able to take action in a competent court to recover any unpaid tax (including additional tax): ITAA s 209(1). The ITAA provides that liability to pay tax under an assessment is not suspended pending the outcome of a review by a tribunal or appeal to a court: ITAA s 201. The dissociation between the enforceability of the debt due under a tax assessment and any objection or appeal procedure instigated by the taxpayer is further reinforced by the provision for the refund of any tax paid under an assessment together with interest upon the successful objection or appeal by the taxpayer: Taxation (Interest on Overpayments and Early Payments) Act 1983 (Cth) s 9 to s 12.
2030 Throughout the process of objections and appeals undertaken by each of Bell Bros, Bell Bros Holdings and Maranoa Transport, the onus was on those companies to prove that the assessments were excessive and to displace the liability under the assessments. Until they each succeeded in this regard, the tax assessed and additional tax for late payment continued to be due and payable, and additional tax continued to accrue daily: ITAA s 190(b).
2031 The legal liability to pay income tax is imposed by statute, not assessment. The liability imposed by statute creates a debt which is due and owing, but not payable until assessment: Re Mendonca (a debtor); Ex parte Commissioner of Taxation (1969) 15 FLR 256, 259. The assessment amounts to a demand for payment that crystallises the taxpayer’s liability under the ITAA, makes the tax assessed due and payable at a certain date, and enlivens the objection, review and appeal procedures prescribed by s 175A: The Commissioner of Stamps (Western Australia) v Western Australian Trustee Executor and Agency Co Ltd (1925) 36 CLR 98, 105.
2032 There is little controversy in what I have said to date. But the parties differ markedly on the substantive effect of the notices of assessment and, in particular, the proper interpretation of ITAA s 177. Section 177 provides that the production of a notice of assessment is conclusive evidence of the due making of the assessment and, except in an objection or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct. The plaintiffs say they can rely on the probative force of the assessment and need to go no further to prove the liability. As I have already indicated, the banks contend that that the evidential status accorded to the notices of assessment under s 177 applies only in proceedings between the taxpayer and the DCT. The assessments are not, therefore, sufficient as evidence in these proceedings of a substantive liability on the part of Bell Bros, Bell Bros Holdings or Maranoa Transport to pay tax under the general provisions of the ITAA.
2033 In Sunrise Auto Ltd v Deputy Commissioner of Taxation (No 2) (1995) 61 FCR 446 the DCT had issued a notice of assessment to the taxpayer. The applicant was a debtor of the taxpayer. The DCT also issued a notice under the ITAA s 218 requiring the applicant to pay the amount it owed to the taxpayer to the DCT in part satisfaction of the taxpayer’s liability under the notice of assessment. The applicant accepted that the operation of s 177 precluded the taxpayer from challenging the assessments (other than on grounds that are not relevant here), save in appeal proceedings. However, the applicant argued that it was open to it to challenge the assessments because it was not bound by s 177.
2034 The Full Court held that in practical terms the substantive issue of the correctness of the notice of assessment (in terms of the amount of tax and its particulars) is upon its tender substantively, if not adjectivally, foreclosed (except on restricted grounds that are not relevant here). The Full Court said at 472:
We would add that, as already noted, although s 177(1) is facultative, it may, in our view, be availed of in any proceedings (other than, of course, a review or appeal under Part IVC) in which the amount of the tax or its particulars is an issue, including but not limited to, proceedings in which the taxpayer is a party Thus, in this context, [the applicant] is, in our view, in no different a position than that of [the taxpayer]. (emphasis added)
2035 The banks argue (in a long and detailed submission) that the purpose of the ITAA is the raising of revenue. The Act has nothing to do with the adjustment of private rights amongst citizens of the Commonwealth. The relevant part of the legislation does not affect the conduct of litigation between private parties, but it is a mechanism to secure the effective collection of revenue by the Commonwealth in accordance with the taxing legislation. The mechanism ensures that tax is paid despite any disputes that may arise between the taxpayer and the DCT about whether or not any taxable income was earned during the year of assessment or the extent thereof. Sunrise has to be seen in this light and the dicta cited has nothing to say about the facts of this case.
2036 In my view, the answer depends on the use for which the ‘conclusive effect’ of the assessment is advanced. I do not need to determine the full reach and interpretation of s 177 and what I am about to say should be understood accordingly. Here, the question is whether, as at 26 January 1990, a liability existed by which the Bell group companies had an obligation to pay tax. I think that question has to be answered in the affirmative. An assessment had been issued; review and objection proceedings had been commenced (though had not been finalised); and an arrangement was in place by which payment of the assessed amount was deferred pending finalisation of the review process.
2037 I need to say a little more about the proposition that payment of the tax was deferred pending resolution of the objections and appeals. At the time, the DCT had a general policy that in cases of genuine dispute the taxpayer could pay 50 per cent of the disputed amount and defer payment of the remainder. In that situation (and even where 50 per cent was not paid) legal action for recovery would not, subject to exceptions, be taken while an objection remained undetermined. The policy ruling set out, in par 38, what it described as ‘an important exception’ relating to a debt in excess of $5000:
[W]here … it is considered that the revenue is seriously at risk, e.g. information is obtained which indicates that the taxpayer is … taking action to arrange his or her affairs within Australia so that legal control of the funds/assets is no longer vested in the taxpayer. In such a case, recovery action may … commence … notwithstanding the existence of factors which would otherwise preclude legal recovery action.
2038 The plaintiffs submit that the proposed grant of security over the entire assets of the Bell Bros, Maranoa Transport and Bell Bros Holdings was an arrangement of affairs so that legal control over the assets was no longer vested with the taxpayer. Accordingly, no‑one considering this matter at the time could rely on the policy of non-recovery pending the outcome of an objection. I will return to this submission in the context of the prejudicial effect of the Scheme and the Transactions.
2039 There were some approaches by the Bell group to the DCT for a formal extension of time for payment and confirmation that recovery proceedings would not be instituted. For example, in relation to the 1985 assessment against Bell Bros, TBGL wrote to the DCT on 8 July 1986 stating that it believed that the assessed tax of $188,333.24 was not payable, and asking for confirmation that no legal recovery action would be commenced and that additional tax would not accrue. The DCT responded on 31 July 1986, stating that the assessed amount remained outstanding. The DCT advised that the balance would remain in abeyance pending the outcome of the company’s objection, while noting that additional tax was continuing to accrue from the due date.
2040 In my view, neither the general policy ruling, nor the approaches by the Bell group to the DCT for confirmation that recovery action would not be taken, affect the underlying character of the assessed tax as a ‘liability’ or of the DCT as a creditor. In the circumstances, the force of the notice of assessment cannot be put to one side. The purport and intent of the legislation is that the obligation to pay the tax arises by force of the substantive provisions of the statute. That obligation is then confirmed and supported by the facultative effect of s 177.
2041 There must, in my view, be a liability. Otherwise, how, for example, could the general interest charges arise or be calculated? It is a different question (and one that may change with the context) whether, for all purposes and in every type of situation or legal proceedings, the exact nature and amount of the liability is fixed conclusively by the notice of assessment alone. I am concerned here with whether the notice of assessment is evidence of the existence of a liability, not necessarily conclusive evidence for all purposes. I think it is.
2042 In a post‑hearing communication the parties drew my attention to Commissioner of Taxation v Futuris Corporation Limited [2008] HCA 32 [62] ‑ [70], in which comments are made about the ‘conclusive evidence’ aspects of s 177. In my view, there is nothing in that dicta which renders inapposite the reasoning disclosed in the preceding paragraphs.
2043 The plaintiffs do not advance the tax debts as an element of their cash flow insolvency case. The plaintiffs do allege (in their balance sheet insolvency case) that the notices of assessment provide conclusive evidence of a debt that was due and payable to the DCT. I am uncomfortable with that language because, by reason of the general policy (and perhaps the specific arrangements) to defer payment until completion of the recovery proceedings, the debt was not then ‘due and payable’. Strictly speaking, it may have been ‘due’ (because the assessment remained extant) but it was not payable. There is no allegation, for example, that the review process would have been completed, or the DCT would have withdrawn the deferral agreement, before the insolvency assessment period ended. Had this been the case, the disputed tax liabilities may have been included in the cash flow insolvency case. But that is not how the plaintiffs put the argument.
2044 In the circumstances with which we are confronted here, I believe that the tax debts, as reflected in the notices of assessment, were ‘liabilities’. They were disputed liabilities but the notices of assessment gave them a status that would not attach to, for example, a claim by a supplier of newsprint that WAN had rejected as being faulty and substandard. The tax debts were a liability and the DCT was a creditor. The directors were thus obliged to deal with the claims of the DCT as a creditor. The reason why they were so obliged and how this impinges on directors’ duties will be discussed in Sect 20.3.3.
10.6.1.3. Progress in the review process
2045 In the preceding sections I have given a brief resume of how the assessments arose and when various formal steps in the review process were taken. I now need to fill in a little of the detail of the way in which the Bell group officers and their lawyers were handling the tax disputes. This is a necessary facet in determining what the directors knew, or ought to have known, or would have known (had they made enquiries) about the likelihood of the tax liabilities being reduced or extinguished.
2046 I will start with the treatment of the tax liabilities in the accounts of the relevant Bell group companies. I accept that for all relevant years, no provision was made in relation to income tax assessments issued against the companies. However, a note appeared to the effect that no provision had been made for the assessments. For example, in TBGL’s accounts for 30 June 1983 the note said that no provision had been made for the assessments or interest accruing on them, ‘as they will be subject to objection and the directors are confident that the objection will be successful’. The auditors did not qualify any of those companies’ accounts in relation to the absence of such a provision. Similar notes were included in the 1988 and 1989 accounts, for which the Australian directors, rather than the RHaC‑appointed officers, were responsible. Throughout the period, the auditors’ report in the negative pledge reports contained a note to similar effect.
2047 I accept this as evidence that, in the context of preparing and finalising the annual accounts, some consideration was given to the tax disputes. But coming forward to January 1990 and the proposal to enter into the Transactions, the question is: what consideration was given to the taxation issues and by whom?
2048 Gary Dean was the solicitor primarily responsible for pursuing the review process in connection with the income tax assessments. He was, from time to time, an employed solicitor and then a partner of the firms Keall Brinsden, Bennett & Co and Gary Dean & Associates. Those firms were successively instructed by the Bell group companies to carry out those tasks. I am comfortable with the evidence Dean gave. It is largely set out in his witness statement and was, in my opinion, materially intact at the conclusion of his cross‑examination. What flows is a summary of the evidence that I accept. In the paragraphs that follow I will refer to the three Bell group companies to whom assessments had been issued as ‘the taxpayers’ unless it is necessary to distinguish between them.
2049 From mid‑1989 Dean became the person principally responsible for the conduct of the review. He was supervised by a principal, although the latter’s involvement only comprised attending significant meetings and providing input into documents that Dean had drafted. Instructions for the proceedings came through Graeme Pepper, whom Dean knew to be employed by BCHL as an in‑house tax accountant and adviser. Pepper was assisted by Prafula Fernandez, another in‑house tax accountant at BCHL. Dean dealt with Fernandez over more administrative matters, such as locating documents relevant to the litigation. He had no contact with any other BCHL personnel or with any of the then TBGL directors.
2050 By July 1989 the taxpayers had filed particulars of the grounds of the objections (including further and better particulars) and the DCT had provided responses and particulars of responses in answer to the grounds. In September 1989, the Federal Court set down a programme for the provision of affidavits by 24 November 1989, and the directions hearing was adjourned to 18 December 1989.
2051 At the risk of oversimplification, the point of contention between the taxpayer and the DCT was whether the shares (which were eventually sold for a profit on which the DCT sought to levy tax) were purchased as an investment or for resale at a profit. This is essentially a question of corporate intention at the time of acquisition.
2052 Dean’s evidence is that in February 1989, his firm briefed Brian Shaw QC in relation to the appeals and requested that he settle the grounds of objection. In the brief, Shaw QC was told that the major witnesses in each action would be former directors and major shareholders of Bell Bros. However, ‘the relationship of these people with the current board and major shareholder of the Bell group is delicate. Their preparedness to assist us is, therefore, something which is at present indeterminable’. Dean also said it was his view that it was important to obtain evidence from the former directors in order to succeed in the appeal.
2053 Dean also testified that prior to the publication of the TBGL and Bell Bros annual accounts in November 1989, his firm was not asked to provide advice as to the prospects of success of the Federal Court appeals by either the directors or auditors of TBGL or Bell Bros.
2054 Dean’s view was that the primary evidence would have to come from RHaC. From his review of the materials he was aware that Alan Newman had been involved in the transactions but if he were to be called it would be to corroborate evidence given by RHaC. Newman had indicated to Dean that he was reluctant to give evidence unless RHaC did. Apart from Roger Hussey (who he believed to be a former director of TBGL) Dean did not think any other officers of TBGL could be of much assistance.
2055 Early in November 1989 Dean prepared a draft affidavit for RHaC based on documents in his possession (including evidence given to a formal inquiry) and without having proofed the proposed witness. The draft affidavit and relevant documentation were sent to RHaC, who was overseas. There is no evidence that RHaC saw the materials. As Dean said, eventually ‘the boxes were returned to [his firm] unopened and without comment from [RHaC]’.
2056 By mid‑November 1989, Dean was without affidavits from RHaC or Hussey and had no information as to when (or if) they might make themselves available. He applied, successfully, to the Federal Court for an extension of time within which to file the affidavits to 18 December 1989. This was later extended to 19 January 1990. In his witness statement, Dean said that at all times he kept Pepper informed of progress and of the need for evidence to be obtained from RHaC. As to his then state of mind, he said:
I had formed a limited view of the case, based on my reading of RHaC’s evidence to the [formal inquiry], which was positive provided that the necessary evidence could be obtained. If no evidence as to corporate intention was obtained, Bell Bros would lose. Similarly, if evidence from the key witnesses did not establish the requisite corporate intention, Bell Bros would lose. I communicated these views to Pepper on a number of occasions
2057 In cross‑examination Dean gave further evidence about his state of mind. He said that he could not assess accurately the prospects of success without RHaC’s evidence. He then said: ‘It would be correct to say that if the evidence on intention supported the applicant’s case, then there would be some reasonable prospects of success’.
2058 Early in December 1989 Shaw QC gave some preliminary advice (orally) based on the draft affidavit. According to Dean, Shaw QC advised that aspects of the affidavit were either fatal to, or did not assist, the taxpayer’s case. An arrangement was made for Shaw QC to come to Perth in mid‑December 1989 to confer with RHaC. That meeting did not take place, nor did any other conference involving RHaC. Dean and Pepper went to Melbourne and had a conference with Shaw QC, from which they formed the view that Shaw QC was giving ‘off the cuff’ advice and ‘had not engaged with the facts’. A decision was made to brief other counsel and Allan Myers QC was chosen.
2059 By this time, Dean had information that the relationship between RHaC and TBGL, perhaps more correctly BCHL, had soured. Alan Bond had apparently commenced proceedings in London against RHaC. In his brief to counsel, Dean told Myers QC of his view that it was highly unlikely that any affidavit would be obtained from RHaC. He also advised Myers QC that each of Bert Reuter, Hussey and Peter Edward (by then with SocGen) had declined to provide an affidavit and that Newman would do so only if RHaC did.
2060 This was the state of play as at 26 January 1990. To complete the narrative, I will describe briefly what happened after that date.

1. On 14 February 1990 Dean conferred with Myers QC. Dean’s note of the conference includes the following views attributed to Myers QC:
   (a) ‘the applicant does not have a strong case at the moment’;
   (b) ‘the intention of the company is primarily the intention of the board [or of the dominant director]’;
   (c) ‘the transactions probably were trading operations. There is a need for [RHaC] to give evidence that the profit was the consequence of the failure of a capital transaction and not of some other purpose’; and
   (d) ‘counsel’s view is the applicant should try and make a documentary case. Only call the director if the applicant can’t make a complete documentary case [and] it is necessary to avoid an adverse inference’.
2. In March 1990, each of Hussey, Reuter and Edward confirmed they would not provide an affidavit.
3. Thereafter, the focus of preparation for the Federal Court appeals changed to discovery and inspection of documents, rather than affidavits from participants in the transactions.
4. RHaC died on 2 September 1990.
5. By December 1990 Dean regarded the appeals as effectively dormant ‘but likely to be rekindled [by the DCT’s lawyers] at any time’, especially in view of RHaC’s death. Pepper had informed Dean that ‘Bell has no funds and our instructions were to incur as few costs as possible as whether or not Bell continued with the appeals was dependent upon the success or otherwise of a proposed restructuring of the group’.
6. In around August 1991, Dean approached Pepper for payment of his firm’s fees. When funds were not forthcoming, he arranged for his firm to be removed from the record as solicitors.
7. The appeals were never brought to hearing and in December 1991 they were dismissed for want of prosecution.
   10.6.1.4. The income tax liabilities: conclusion
   2061 In relation to a disputed income tax assessment, it is one thing for a taxpayer to hold a view that it has right on its side: but it is another thing to prove it. In a taxation dispute the onus lies on the taxpayer to establish its case. The assessments against Bell Bros and Bell Bros Holdings (I am not entirely sure whether this applies equally to Maranoa Transport) arose from profits made on the sale of shares. The fundamental point was whether the shares were initially purchased as an investment or whether they were in the nature of trading stock, acquired for resale at a profit. This is a question of corporate intention and it was for the taxpayer to prove the intention of the board (or its dominant member) in relation to the acquisition.
   2062 The strongest point in the banks’ favour on this issue is the note in the accounts (indicating the director’s view that the DCT would eventually be put to the sword) and the absence of any qualification in the audit report in relation to that note. In fairness, it probably goes a little further than the absence of a qualification. It may be that in the period immediately following the issue of the notices of assessment, C&L gave advice confirming the strength of the taxpayers’ position. If that is the case, that view was not shared by counsel originally briefed in the matter.
   2063 On 16 November 1982, C&L reported to Alan Newman on the results of a conference with Murray Gleeson QC and Graeme Hill. The author said: ‘I think you should be aware that both counsel are not at all confident that the objections and appeals will succeed and indeed were both surprised that it had taken the [DCT] so long to issue the assessments’. Even at that stage the importance of conferring with RHaC ‘to discuss the full facts and background of the transactions’ was recognised. The evidence does not contain any indication that this aspect of counsel’s advice was implemented, although RHaC was later to give evidence to a formal inquiry.
   2064 Whatever may have been the position in the early years, on Dean’s evidence things started to happen in relation to the Federal Court appeals from February 1989 and they gathered pace in November and December 1989. It was at this time (late 1989) that the view of those running the case that it would be necessary to obtain affidavit evidence from RHaC crystallised. It also became evident that there was no certainty that RHaC (or the other former officers of TBGL) would cooperate. Indeed, the information available to Dean at the time (and relayed to Pepper) suggested that those officers would not assist. Dean’s view at the time was that with RHaC’s evidence (if it followed the lines of what he had told the formal inquiry) there were reasonable prospects of success. Without RHaC’s evidence, proving the case was problematic. It was not until February 1990 that the alternative way of proceeding (namely, by way of documents rather than affidavits) emerged and even then it was not the preferred option.
   2065 Dean said (and I accept) that he kept Pepper apprised of progress. But there is no evidence of what, if anything, Pepper told the directors about Dean’s views or those of counsel. In Sect 24.1.7.5 I deal with the evidence of Aspinall and of Mitchell about their knowledge of the tax claims. It has to be borne in mind that the question this raises is what, if any, consideration the directors gave to the position of external creditors in the context of the proposal to grant to the banks securities over assets that would otherwise be available to satisfy the claims of all creditors of equal ranking.
   2066 The evidence that Dean kept Pepper informed of developments does not provide me with any comfort about what Pepper told to the directors. Nor can I derive comfort about whether the directors made any real enquiries as to the state of the taxation appeals in the context of the proposal to secure assets in favour of the banks. They did not speak to Dean. Nor can I glean any indication that the situation was reviewed by Pepper, or the directors or the auditors, in the light of the apparent souring of the relationship between RHaC and BCHL and the effect that the absence of evidence from RHaC might have had on the likelihood of success.
   2067 It is true that in February 1991 C&L wrote to BRL (then under independent control) saying that they concurred with the treatment of the potential tax liability in the 5 October 1990 accounts of TBGL. They said they continued to hold the view that there were technical arguments supporting the view that the dispute would ultimately be resolved in favour of the taxpayers.
   2068 There are two things to be said about the C&L letter. First, there is no evidence that before it was written the author made any enquiries of Dean, as the solicitor having the carriage of the appeal proceedings, about the then position of the case or the likelihood of success. Secondly, there is no indication that C&L had given consideration (around November 1990 or thereafter) to how the ‘technical arguments’ would be turned into proof of the facts.
   2069 I note in passing that the letter was written after the death of RHaC. To that extent, the chances of success might have improved as the absence of evidence from RHaC would not have to be explained. But it would still have been incumbent on the taxpayer to persuade some other officer, perhaps Newman, to give evidence in place of RHaC.
   2070 In this aspect of the case it is the banks who are asserting a positive, namely, that the directors were entitled to act on the view that the tax liabilities could effectively be ignored because the assessments were without substance. The question this raises is what, if any, information the directors had, in January 1990, about the tax disputes. Pepper was the man with the knowledge and he was the person on whom Aspinall said he relied. Pepper was not called to give evidence and I think the banks’ case on this aspect suffers because of that failure.
   2071 When Brown gave evidence he said that he reported to Pepper. He said he regarded Pepper as an expert in taxation matters and when he communicated with Pepper, he found it unnecessary to spell out every detail. Brown also gave evidence that it was his understanding that Pepper reported to Oates. He formed this view because, in his occasional conversations with Pepper, it was Oates that Pepper would say that he would then contact.
   2072 I have no reason to doubt that Oates was Pepper’s main point of contact. Brown gave no evidence about Australian tax affairs. As neither Oates nor Pepper were called, there is no evidence about information that Pepper may have passed on to Oates concerning the tax disputes.
   2073 In my view, as at 26 January 1990, there were liabilities to the DCT as set out in the notices of assessment (affected by accruing interest charges). I do not need to decide whether, in relation to substance and amount, the notices of assessment are ‘conclusive evidence’ of their contents. They were liabilities that the directors were obliged to consider in accordance with the principles set out in Sect 20.3.3. As at 26 January 1990, there was no certainty that the taxpayer could marshal the evidence necessary to satisfy the onus on them to prove the assessments were wrong. There is insufficient evidence to satisfy me that the directors gave consideration to these matters at the relevant time.
   10.6.2. Godine Developments Pty Ltd
   2074 In 8ASC par 12(a) the plaintiffs plead that three external creditors arose out of trading in Share Price Index futures (SPIs) during 1987. I do not need to describe share price index futures trading other than to say that it is a thinly‑disguised form of gambling. The plea in par 12(a) can hardly be called a model of precision. It was amended several times (both as to the amount and the identity of the creditor) and, as finally presented, alleges that:
   (a) $21,926,352 was owed to Godine Developments Pty Ltd (Godine Developments) or BRL or BRF: par 12(a)(i)(A);
   (b) $626,479 million was owed to BRL or BRF: par 12(a)(i)(B); and
   (c) $408,206 was owed to BRL or BRF: par 12(a)(i)(C).
   2075 The reason that I have quoted full amounts (rather than rounded figures) will become apparent shortly. I should mention that Godine Developments is a subsidiary of BRL. Two companies with similar names are Bell Participants, namely, Godine Enterprises Pty Ltd and Godine Finance Pty Ltd. They ought not to be confused with Godine Developments. The background to these claims is as follows.
   2076 Prior to 1987, TBGL opened a trading account with International Commodity Clearing House Ltd (ICCH). This account was held in TBGL’s name and designated by ICCH by the number 4340 (Account 4340). The account was utilised to trade SPIs during the period from October 1987 through to December 1987.
   2077 On 27 March 1987 BRF opened a trading account with ICCH. This account was held in BRF’s name and designated by ICCH by the number 0690 (Account 0690). This account was also utilised to trade SPIs during the period of September 1987 through to December 1987.
   2078 By 30 December 1987, all SPIs traded on Account 4340 and on Account 0690 had been closed out, with losses on the trading totalling $21,926,352 (4340) and $21,725,127 (0690). TBGL paid to ICCH a total of $45.5 million to cover the losses on both accounts. This involved an overpayment of $580,742 on Account 0690. On 30 December 1987 BRL paid to BGF the sum of $45.5 million to reimburse TBGL for the moneys it had paid to ICCH in closing out the contracts.
   2079 Woodings carried out an analysis of TBGL’s books and records concerning the SPIs trading accounts and the $45.5 million payment. I am satisfied that the investigations disclose the state of affairs as represented in the company’s records. Woodings was unable to locate much detail about the trading situation. The accounts for Godine Developments for the year ending 30 June 1989 do not record any inter‑company balance between it and TBGL. However, a draft briefing note was prepared by Bell group officers shortly after December 1987. It contained (among others) the following comments:
   According to the accountants of both BRF and TBGL, TBGL was reimbursing BRF for the [$45.5 million] payments on the understanding that the contracts appearing on ICCH’s statements of account in respect of BRF were beneficially held by TBGL.
   Also, TBGL accountants made payment in respect of the contracts appearing on ICCH’s statements of account for TBGL on the understanding that TBGL was the beneficial owner of these contracts.
   However, no written instructions are available to substantiate the understandings referred to … above.
   Tony Davies and Steve Johnston have recently stated that all of the contracts apparently are beneficially held by BRF.
   2080 There is some other contemporaneous documentation supporting the contention expressed in the last paragraph of that note. For example, a draft resolution was prepared in January 1988 for both TBGL and BRL. It stated that there had been an ‘inadvertent misallocation’ of SPIs trading to TBGL rather than to Godine Developments. There is no evidence that the draft was considered by either board or that it was formalised. But I am not prepared to infer, from this inaction, that the draft was other than in accord with the intention at the time.
   2081 In the course of their audit work, C&L recognised the confusion over the identity of the entity on whose behalf the trading was conducted. An audit working paper contains a note that in November 1987 ‘the client’ tried to have all trading transferred to BRF but that ICCH refused to do so. This leaves open the possibility that the lack of any formal resolution confirming the intention expressed in the drafting note was due to the position adopted by the broker (ICCH) rather than the companies. Another working paper refers to discussion with TBGL accounting staff and states: ‘Client is firmly of the opinion that all the trading was intended to be done by [BRL]’.
   2082 Looking at the evidence overall I am not persuaded, on the balance of probabilities, that the SPIs were traded by TBGL on Account 4340 for its own benefit rather than for the benefit of another entity. In my view, the trading was for the benefit of BRL or one of its subsidiaries. I am not able to say, definitely, that trading was on the account of BRL or a subsidiary and, if so, which one. But the plaintiffs have not persuaded me that trading was by TBGL on its own account.
   2083 Woodings’ analysis of the financial entries in the books showed that the payment of $45.5 million by BRL to TBGL brought to account the losses incurred on both Account 4340 and Account 0690, interest due by BRL to TBGL on the losses on both accounts (set off against interest due on other accounts by TBGL to BRL) and the overpayment by TBGL to ICCH of the losses on Account 0690. This left a balance owed by BRL to TBGL of $45,091,794.
   2084 Three items of significance emerge from this financial analysis:
8. The losses on Account 4340 were $21,292,352, which corresponds with the figure pleaded in 8ASC par 12(a)(i)(A).
9. The interest charged to BRL by TBGL on account of the losses on Account 4340 was $626,479, which corresponds with the figure pleaded in 8ASC par 12(a)(i)(B).
10. After taking into account the amounts owed to TBGL following the payments to ICCH (on both accounts) and the balance of interest entitlements after the set off, the payment of $45.5 million by BRL to BGF on 30 December 1987 resulted in an overpayment of $408,206. This corresponds to the figure pleaded in 8ASC par 12(a)(i)(C).
    2085 After the $45.5 million payment by BRL, the general ledger of TBGL showed an overpayment by BRL of $408,206. This corresponded to a balance in the suspense account of $408,206, representing a liability to BRL for the overpayment. In turn, the overpayment by BRL of $408,206 was brought to account as a receivable from TBGL in BRF’s general ledger.
    2086 It seems, therefore, that the accounting treatment is in accord with the draft briefing note: that trading on both Account 4340 and 0690 was for the benefit of BRF or BRL. The plea advanced in 8ASC seems to assume the contrary: that TBGL operated Account 4340 on its own account, that it should have borne the trading losses (par 12(a)(i)(A)) and that it was not entitled to charge interest to BRL on those losses (Par 12(a)(i)(B)). I assume that Godine Developments enters the picture because it was the subsidiary of BRL which carried on or had the benefit (a slightly ironic turn of phrase in the light of the result) of the SPIs trading.
    2087 The matter is complicated by the fact that BRL lodged a proof of debt in the liquidations of both BGF and TBGL for about $22.5 million, which (I am assuming) is the effect of the trading losses and the interest charges on Account 4340. This suggests that, at least in the minds of the directors of BRL, trading was carried on for the benefit of TBGL, not BRL or one its subsidiaries, such as Godine Developments. I think the liquidator may have admitted the proof of debt. I say this because the valuation SNA for TBGL shows a debt to Godine Developments of $22.5 million.
    2088 The evidence led on these questions is not in a particularly satisfactory state. But on the basis of what has been adduced I am satisfied that, as at 26 January 1990, one or other of BRL, BRF or Godine Developments (and for these purposes it does not matter which) was a creditor of TBGL in the amount of $408,206 as reflected in the books and records of both companies. However, the plaintiffs have not satisfied me to the requisite standard that, as at the same date, one or other of BRL, BRF or Godine Developments was a creditor of TBGL for $21.9 million or $0.63 million as alleged.
    2089 According to Woodings’ investigations, the general ledger of TBGL disclosed the overpayment of $408,206 by BRL and recorded it in a suspense account representing a liability to BRL in that amount. BRF’s general ledger brought the same sum to account as a receivable from TBGL. That is what the books and records of the companies disclosed. It is not a trifling amount and cannot be disregarded on grounds that it lacks materiality. The directors either were or should have been aware of it.
    10.6.3. Miscellaneous creditors
    2090 The plaintiffs allege that there were other miscellaneous creditors of Bell group companies as at 26 January 1990 who were prejudiced by the Scheme:
    (a) unpaid rent of $168,500 due to SGIC;
    (b) declared but unclaimed dividends due by TBGL to shareholders amounting to $56,000;
    (c) entitlements of employees of BPG amounting to $56,000;
    (d) a $17,500 overdraft owed by Western Mail to an unknown bank;
    (e) trade creditors and employee entitlements of Albany Broadcasters; and
    (f) trade creditors of Bell Bros Holdings of $56,000.
    2091 I am satisfied that the unpaid rent was a liability of TBGL as at 26 January 1990. But it was paid on 13 February 1990. The rent was due for the premises occupied by the head office of TBGL and (I think) the administration of WAN. While I accept that the directors would have known of the existence of the liability, I also accept that they would reasonably have held an expectation that it would be paid. The plaintiffs have not made out this aspect of the claim.
    2092 The declared but unpaid dividends were the subject of a provision in TBGL’s accounts. I am satisfied that this is a liability to which the directors needed to have regard.
    2093 BPG was an operating concern. As at 26 January 1990, the directors had every reason to think the publishing businesses would continue as a going concern. Employees accrued entitlements on an ongoing basis and it is a common experience that on the sale of a business liability for accrued employee entitlements is effectively transferred to the purchaser, subject to an adjustment of the purchase price. In this respect, I think the plaintiffs’ claim is without merit.
    2094 It is common ground that the Western Mail overdraft was a liability as at 31 December 1990. But the audited accounts of Western Mail as at 5 October 1990 disclose no such liability, leaving open the inference that at some time between January and October 1990 it was paid out. It might have paid out at some time in January but before 26 January 1990. In any event, I wonder about the materiality of this debt.
    2095 In my view, the plaintiffs have established the existence of trade creditors of Albany Broadcasters and Bell Bros Holdings as alleged. The Albany Broadcasters amount includes employee entitlements. I think Albany Broadcasters is in a different position to BPG because it was no longer involved in an operating business. As I understand it, the Bell Bros Holdings trade creditors represent the balance due after adjustments relating to the unpaid rent due to SGIC.
    10.6.4. External creditors: conclusion
    2096 In my view, the Bell group companies had external creditors (other than the bondholders) that, in light of the principles discussed in Sect 20.3.3, the directors were obliged to consider. I repeat that the existence of these creditors is not an element of the cash flow insolvency case. The creditors concerned are:
    (a) Bell Bros to DCT: $29.99 million (under objection);
    (b) Bell Bros Holdings to DCT: $2.94 million (under objection);
    (c) Maranoa Transport to DCT: $1.34 million (under objection);
    (d) BRL (or a subsidiary): $408,206;
    (e) TBGL to shareholders (dividends): $56,000
    (f) Albany Broadcasters to trade creditors and employees: $64,000; and
    (g) Bell Bros Holdings to trade creditors: $56,000.
    10.7. Flow of funds in Western Interstate
    10.7.1. The problem described
    2097 Western Interstate was an Australian Bell group company and a subsidiary of Bell Bros, which held 95,000 ordinary fully paid shares of $2. In December 1988 (after the BCHL takeover), the memorandum and articles of association of Western Interstate were amended to increase the nominal capital and to create a class of redeemable preference shares. In several separate transactions during December 1988, a total of 43,405 redeemable preference shares in Western Interstate were issued to BGUK at the par value of $2, together with a premium of $9,998 per share. The minutes of the BGUK directors meeting approving the first allotment indicates that the subscription moneys would be ‘upstreamed’ to the Bell group.
    2098 The redeemable preference share issues included the following relevant terms and conditions:
    (a) the right to attend and vote at general meetings, but only where the business of the meeting covered certain specified topics;
    (b) in circumstances where the preference shareholders could attend meetings, the ordinary shares and the preference shares carried voting rights according to their respective proportions of paid up capital;
    (c) the preference shareholders had no preferential rights to dividends, if and when the directors declared dividends; and
    (d) on a winding up of Western Interstate, the redeemable preference shareholders were entitled to a return of their contribution of the share capital of $2 per share in preference to the ordinary shareholders, but were not entitled to participate in surplus assets or profit, or to repayment of the premium.
    2099 It is common ground that the preference shareholders were entitled to vote on a motion to wind up the company. In that instance, Bell Bros (as the holder of the ordinary shares) could have cast 69 per cent of the votes and BGUK (as the preference shareholder) the remaining 31 per cent. As the plaintiffs point out, a resolution to wind up the company required a special resolution, with at least 75 per cent of the votes cast being in favour of the motion. In other words, both Bell Bros and BGUK would have to agree in order for a winding up resolution to pass.
    2100 Western Interstate passed the subscription moneys through to BGF. According to the book value SNAs (which the banks do not dispute), as at 26 January 1990 Western Interstate was a creditor of BGF in the amount of $537.4 million and Western Interstate’s only creditor was BGUK in the amount of $854. The only external creditor of BGUK alleged by the plaintiffs in 8ASC was the Lloyds syndicate banks. Leaving BGNV to one side, Western Interstate was by far the largest inter‑group debt owed by BGF.
    2101 In 8ASC par 8A the plaintiffs plead that the worth or value of Western Interstate’s assets may have flowed through to TBGL and BGF as a direct or indirect creditor, shareholder or ultimate shareholder of those Bell Participants wound up as a result of TBGL and (or) BGF taking steps to realise their intra‑group investments. The plaintiffs say that this arises because Bell Bros, being the only ordinary shareholder in Western Interstate, had an asset of real and substantial value and that asset could benefit TBGL by reason of it being the ultimate shareholder of Bell Bros.
    2102 The banks deny that any interest of Bell Bros in Western Interstate, as the ordinary shareholder, would not have been made available to Bell Bros or TBGL. Rather, the banks say, BGUK could have been entitled to a measurably significant potential benefit from the holdings in Western Interstate. As the plaintiffs point out, the crucial issue is the respective interests of the ordinary shareholder, Bell Bros (and hence, ultimately, TBGL) and the preference shareholder, BGUK. They point out that TBGL was also the ultimate shareholder of BGUK, but in this regard it would stand behind the Lloyds syndicate banks as creditors of BGUK.
    2103 I need to add a further comment explaining how the pleaded allegation concerning Western Interstate came about. The plaintiffs’ case was always structured on a basis like that now set out in 8ASC par 8A; namely, that BGF and TBGL would have received a benefit from surplus funds of the Bell Participants as those funds filtered through the interlocking debt and shareholding relationships within the group. In the seventh version of the statement of claim, Bell Bros and Western Interstate were treated separately from the other Bell Participants. In relation to those two companies, it was pleaded that surplus assets ‘could’ have enured to the benefit of TBGL. That distinction fell away in the early versions of 8ASC.
    2104 In February 2004, the plaintiffs applied to amend 8ASC par 8A partially to restore the distinction by pleading that surplus assets ‘would have or in the alternative may have flowed through to TBGL and BGF as a direct or indirect creditor or shareholder of the company’. Counsel for the plaintiffs explained the amendment as an effort to return to the formulation of the seventh version of the statement of claim. I saw a problem with ‘would’ in relation to Western Interstate because it opened up an argument that the preference share issue to BGUK was invalid. I was concerned that this had the potential to prejudice the banks because it would have required a whole new line of enquiry. I therefore permitted the plaintiffs to amend, but only on the basis of an allegation that, insofar Western Interstate was concerned, surplus assets ‘may’ (not ‘would’) have flowed through to TBGL and BGF.
    2105 As I understand it, the validity of the Western Interstate preference share issue may still be a live issue between the parties. But it will not be decided in these proceedings.
    2106 It seems that the share issue was another example of BCHL engineering a mechanism to siphon funds out of one part of the group (in this instance BGUK) to another (here, the Australian Bell group). I was not able to identify the source of the funds that came under the control of BGUK but it may have been the sale of the Dewey Warren insurance business. Although the funds were, according to the BGUK directors’ minute, to be ‘upstreamed’ to the Australian Bell group, that was not their ultimate fate. Once in the Antipodes, the funds (or at least some of them) quickly left the Bell group and found a home in BCF. It seems that the extraction of these funds caused one of the problems that, in turn, led to the extraordinary masking transactions referred to in Sect 9.11.2.
    10.7.2. Flow of funds analysis
    2107 The issue relating to the flow of surplus funds of Western Interstate is not related to the cash flow insolvency argument. The banks do not argue, for example, that the availability of surplus funds (if that be the case) would render the shares in Western Interstate (and for that matter Bell Bros) saleable in the short term. In other words, the problem being discussed here is not one that has an impact on the ability of relevant Bell group companies to pay their debts as those debts fell due.
    2108 The plaintiffs’ case is set out in their written closing submissions and I accept those submissions. They can be summarised as follows:
11. The manner in which any surplus in Western Interstate would enure to the ordinary or redeemable preference shareholders depends on either:
    (a) whether, and the manner in which, the directors of Western Interstate caused it to continue to carry on business, including to pay dividends, or to redeem the preference shares, which would have entailed repayment of the premium of $9,998 per share rather than their par value of $2 per share; or
    (b) the devolution of Western Interstate’s assets in the event that its shareholders resolved to wind it up and in what circumstances this could occur.
12. Because neither the ordinary shareholder (Bell Bros) nor the preference shareholder (BGUK) could command 75 per cent of the voting power, there would be a deadlock in relation to any attempt to wind up Western Interstate.
13. As the preference shareholder could recover the paid up capital contribution ($2) in priority to the ordinary shareholders but could not participate in surplus assets or profit or recover payment of the premium, it would not be in BGUK’s interests to vote to wind up Western Interstate. Conversely, it would be in Bell Bros interests to do so.
14. Bell Bros, but not BGUK, could vote on resolutions to appoint directors and it was thus in a superior position to BGUK to influence the course of events within Western Interstate in matters that might have been to the benefit of BGUK, rather than Bell Bros, including the power to:
    (a) declare dividends;
    (b) redeem the preference shares (and thus return to BGUK the premium as well as the paid up capital); and
    (c) issue further shares.
15. The banks argue that the directors could legitimately have taken the view that they could distribute surplus assets in proportion to funds actually contributed on subscription for the shares. On this basis, the directors could transfer 99.95 per cent of the surplus assets to BGUK by some of the preference shares, leaving only 0.05 per cent of the surplus for Bell Bros.
16. However, the plaintiffs say that in a winding up the liquidator of Bell Bros, as the ordinary shareholder, could with equal legitimacy take exception to such an action. It would be a supererogatory disposition of the company’s assets in a de facto winding up, which was less advantageous to Bell Bros than a winding up would be.
17. Just as it is reasonable to assume that BGUK would have acted to prevent a winding up of the group, it is reasonable to suppose that the ordinary shareholder would have taken steps to prevent the directors acting in this manner. Further, it is a reasonable assumption that the persons appointed by the ordinary shareholder would in the normal course of events not be persons who would choose to take a view adverse to the ordinary shareholder unless they were obliged to take that view.
18. The surplus assets shown in the valuation SNA for Western Interstate would not be sufficient to enable it to put the respective shareholders in a position to effect the purpose specified in item 5.
19. On the banks’ own hypothesis, it would be essential for BGUK to agree to the winding up of Western Interstate in order to obtain any part of the surplus. If the agreement were with Bell Bros as the other shareholder, the situation is in substance no different to a deadlock between the shareholders: Bell Bros would have the capacity to seek payment in a significant amount for its agreement. If the agreement were with the directors, the liquidator of Bell Bros would still be in a position to seek payment in a significant amount for not preventing the directors from acting in this manner.
    2109 This is a chain of reasoning that I accept. It is not alleged that, as at 26 January 1990, Western Interstate was insolvent. It is one of three companies alleged (in 8ASC par 29B) to have become insolvent upon entry into or as a consequence of the Transactions and the Scheme.
    2110 There are two separate, yet connected, issues here. One is whether, on a winding up, Bell Bros had a substantial interest in the surplus assets of Western Interstate, which interest may have enured to the benefit of TBGL. The other is whether, Western Interstate not having been insolvent before the Transactions were entered into, there was a breach of fiduciary duty by its directors in agreeing that it should participate in the refinancing. I am concerned here with the first of those questions and will return to the second in the discussion about the prejudicial and detrimental effects of the Scheme.
    2111 Neither party argues that the hypothesis for which they contend is what would have happened. As the banks point out, they do not need to show that the Western Interstate surplus would have been used to redeem the redeemable preference shares of BGUK, causing a flow of those funds to BGUK. It is sufficient for them to say that it would have been a legitimate exercise of power by the directors. But equally, the course of conduct that the plaintiffs say was open to the directors and open also in a liquidation was a reasonable anticipation of what may have happened.
    2112 I do not have to decide (and I am not deciding) whether the surplus funds in Western Interstate would have enured for the benefit of TBGL or of BGUK. Neither am I required to say whether or not the redeemable preference share issue was valid. What I can say, and what I find, is that, looked at immediately before 26 January 1990, Bell Bros had a substantial interest in Western Interstate as the holder of all of the ordinary shares. Further, it is a plausible and reasonable hypothesis that, on a winding up, that interest (when reflected in surplus funds) may have enured to the benefit of TBGL. I do not believe that, for present purposes, it is necessary for the plaintiffs to take the additional step of establishing that the surplus would have passed to TBGL.
    10.7.3. The valuation SNAs: effect of non‑distribution
    2113 The SNAs have been built on the hypothesis that I have just mentioned and in accordance with the plea in 8ASC par 8A; namely, that the surplus assets of Western Interstate may (not would) have enured for the benefit of TBGL. For that reason, the surplus of $107.4 million is retained and not distributed in the distribution column of the SNAs. Woodings accepted that it is not possible to calculate any notional distribution to the rest of the Bell group companies without knowing what the correct position is in relation to the relative claims of BGUK and Bell Bros to the surplus.
    2114 The banks submit that this renders the valuation SNAs and the calculation of distributions to creditors under the plaintiffs’ SNA model inaccurate and unreliable as they simply ignore over $100 million otherwise available for distribution. I do not accept this argument. As explained in the preceding section, the Western Interstate surplus asset has not been distributed in the financial model because it is the subject of competing claims. It is not as if the funds are not accounted for. They are there in the SNAs but have not been allocated through the chain to the ultimate recipient. While distribution of an additional $107.4 million would affect the notional return to individual companies, it would not affect the overall deficiency disclosed in the consolidated SNA. In other words, on a balance sheet basis there would still be a shortfall of assets available for distribution to meet all claims.
    2115 In my view, the integrity of the financial model and the overall effect of the valuation SNAs and the distribution column are not affected by the flow of funds arising from any surplus in Western Interstate.
    10.8. BGF as a borrower under the 1986 Loan Agreement
    10.8.1. The issue described
    2116 I wish to turn now to another relatively discrete issue that fits logically in the balance sheet area but is primarily relevant to the prejudicial and detrimental effect of the Transactions and the Scheme. It is whether, immediately before 26 January 1990, BGF had a liability to the Lloyds syndicate banks in respect of their facility.
    2117 The SNAs have been constructed on the basis that no such liability rested with BGF. The SNA for BGF shows a current liability to the Australian banks for $131.5 million but no liability to the Lloyds syndicate banks. The BGUK SNA discloses a current liability to the Lloyds syndicate banks of £60 million.
    2118 BGUK and BGF are both parties to the 1986 Loan Agreement and are called ‘the Borrowers’. But only BGUK actually borrowed; that is, only BGUK drew moneys down from the facility. BGF was entitled to draw funds down but it did not do so. The question then is whether BGF had a liability under the facility at the time that the January 1990 refinancing was effected.
    2119 It is an issue raised on the pleadings. For example, in 8ASC par 10 the plaintiffs plead that pursuant to RLFA No 1 BGUK was indebted to the Lloyds syndicate banks in the sum of £60 million. But there is no plea of any indebtedness by BGF to the Lloyds syndicate banks. In ADC par 10 the banks admit that allegation but say that BGF was also liable to the Lloyds syndicate banks. In PR par 4 the plaintiffs respond to the effect that BGF did not borrow any part of the principal of the Lloyds syndicate banks’ facility and on a proper construction of the 1986 Loan Agreement, LSA No 1 and RFLA No 1, it was not liable in respect of the borrowings.
    2120 This issue also arises in the more subjective elements of the case. For example, the banks plead that even if BGF was not a borrower, the directors were entitled to believe that it was and the banks were entitled to believe that the directors were entitled to believe that it was: see ADC par 48A, par 48AA and par 65KA.
    2121 It is not difficult to discern the importance of this issue. When it comes to the 26 January 1990 Transactions, the obligations on BGF would have been different if it already had a liability to the Lloyds syndicate banks. The enquiries (or lack of enquiries) that the plaintiffs contend are at the heart of the breaches of duty alleged against the directors might well differ. It would depend on whether BGF, by entering into the Transactions, assumed a liability to the Lloyds syndicate banks that it did not previously have or which was of a different character to the pre‑existing obligation.
    2122 The essence of the plaintiffs’ case in this respect is that the commercial purpose of the facility was to permit BGUK to repay existing debt: that is why it was a ‘borrower’. There was an additional object, namely, ‘for corporate working capital purposes’. The amount of the facility, namely £60 million, had to be drawn down within 45 days of the commencement date. Any money not drawn down by that date could not thereafter be called. Thus, for example, if by the expiry of the 45 day period only £50 million had been drawn down, the borrower would have no access to the remaining £10 million. It would then have been a £50 million facility repayable in 1991.
    2123 However, there was an option to convert the facility to a revolving credit line. If the option were exercised, any part of the principal sum could be pre‑paid and then re‑drawn. In that way, there was potential for BGF to draw down funds so it would then be a ‘borrower’ as a matter of commercial fact. The plaintiffs’ case is that the references to ‘borrower’ and ‘borrowers’ in the facility agreement are to be construed in that way. The plaintiffs say that:
    (a) BGF was not, as a matter of commercial fact, the (or a) borrower;
    (b) as a matter of the proper construction of the documents, BGF was only a ‘borrower’ if it actually borrowed, that is if it, as a matter of commercial fact, drew down moneys under the facility; and
    (c) although BGF is denoted in the agreements as a ‘borrower’, there is sufficient ambiguity in the use of the terms ‘borrower’ and ‘borrowers’ to permit extrinsic evidence as an aid to construction.
    2124 The banks’ case can be stated quite simply: BGF and BGUK are joint borrowers of the Lloyds syndicate banks’ facility. The terms of the relevant agreements are clear and unambiguous. They oblige the ‘borrowers’ to repay the loans in full on the repayment date and to indemnify the banks against loss incurred as a consequence of default. ‘Borrowers’ are defined to encompass both BGF and BGUK. I should give effect to the plain meaning of the agreement. There is no need for me to go beyond the four walls of the written agreement. But if a latent ambiguity is found, I can only have recourse to limited extrinsic material and even then for a limited purpose. The banks contend that the material to which I can properly have recourse supports their case.
    2125 This question occupied a lot of time during the plaintiffs’ opening addresses and it is the subject of lengthy written submissions. Notwithstanding the welter of material thrown at the issue, I think I can resolve it in relatively short order.
    10.8.2. The draw downs
    2126 I think it is common ground that the whole of the £60 million was drawn down by BGUK. None of it was repaid. The option to convert it to a revolving facility was not exercised. In other words, as a matter of commercial fact BGF was not a ‘borrower’. It did not elect to receive, and did not receive from the Lloyds syndicate banks, the moneys which those banks agreed to make available under cl 2.1 of the 1986 Loan Agreement.
    2127 To complete the narrative on this aspect, there were, in fact, two separate occasions on which the moneys were drawn down. BGUK drew down all of the moneys under the 1986 arrangement. Then, on 28 September 1987, BGUK received £60 million from BIIL. It passed those moneys over to LMBL in satisfaction of the existing facility and immediately drew down the same sum (£60 million) under LSA No1 and RLFA No 1.
    2128 I accept, therefore, that BGF did not incur any liability by reason of it having received funds under the facility arrangements. I am not in a position to say whether any part of the £60 million advance found its way to BGF through inter‑company loans. That would not, in any event, alter this situation because the relationship of debtor and creditor would then have arisen between BGF and BGUK, not between BGF and the banks.
    10.8.3. The construction question
    2129 The 1986 Loan Agreement and RLFA No 1 (incorporating LSA No 1) show BGF and BGUK as parties, denoted as ‘the Borrowers’. They contain the following definition:
    ‘Borrower’ means either [BGF] or [BGUK] and ‘Borrowers’ means [BGF] and [BGUK].
    2130 Under cl 6 the borrowers undertook to repay the loans on the repayment date. Under cl 11.2 the borrowers were obliged to pay interest at the end of each interest period. By cl 19.3 the borrowers agreed to indemnify each bank against loss. Clause 2.3 provided that the obligations of the borrowers towards the agent and the banks under the loan agreement were separate and independent rights. The definition clause contained the usual provision that, subject to context, words importing the singular include the plural and vice versa.
    2131 Thus far, things look clear: the borrowers (plural) have contractual obligations that sound in money (a liability) and the borrowers (plural) include BGF. I have looked closely at the plaintiffs’ arguments about the existence of ambiguity in the wording of the 1986 Loan Agreement, LSA No 1 and RLFA No 1. At the risk of oversimplification, they seem to encompass the following matters.
20. It is the draw down of funds that creates an indebtedness. The obligation in cl 6 to ‘repay’ must relate to an indebtedness. In accordance with its ordinary meaning, ‘repay’ means to pay back, refund, restore or return something. For an obligation to repay to arise there must be an existing indebtedness to which the obligation to repay (pay back or refund) the money attaches. Therefore, cl 6 does not create the indebtedness (and thus the liability). It is the draw down that has that effect. ‘Borrowers’ in cl 6 thus refers to a party with an actual indebtedness.
    2 If there is any obligation on BGF it is a joint liability. Clause 6 can only operate to create a joint obligation if there is an existing joint indebtedness to which a joint liability to repay attaches.
21. The agreements are littered with references to ‘borrowers’ (plural) and ‘borrower’ singular in a way that suggests a clear distinction between the two. This forms the context in which the construction of the word borrowers in cl 6 falls to be determined. This context suggests a concentration on the party with the existing indebtedness.
22. The obligation to indemnify in cl 19.3 applies only to consequential loss. An indemnity that covers the obligation to repay principal (cl 6) or interest (cl 11.2) would be otiose. Thus, cl 19.3 does not impose on BGF, as a borrower, an obligation to repay principal or interest.
    2132 I can see that these matters raise issues concerning the reach and application of the 1986 Loan Agreement, as affected by LSA No 1 and RLFA No 1. I am not sure, however, whether they go so far as exhibiting ambiguity of the type that would permit the introduction of extrinsic evidence under the principles in Codelfa Constructions. But I do not think I need to go that far. The principle canon of construction in relation to agreements is to ascertain the intention of the parties from the language they have used.
    2133 The governing law for the 1986 Loan Agreement, LSA No 1 and RLFA No 1 is English law. I do not see any material differences between English and Australian law that are relevant to the construction of these documents. The Law of Property Act 1925 (UK) s 58 provides:
    Any instrument (whether executed before or after this Act) expressed to be supplemental to a previous instrument, shall, as far as may be, be read and have effect as if the supplemental instrument contained a full recital of the previous instrument, but this section does not operate to give any right to an abstract or production of any such previous instrument, and a purchaser may accept the same evidence that the previous instrument does not affect the title as if it had merely been mentioned in the supplemental instrument. (emphasis added)
    2134 I should say in passing that Property Law Act 1989 (WA) s 16 is in similar terms. This provision permits the use of documents that are supplemental to the original agreements as an aid to construing the latter so as to ascertain the intention of the parties from the language they have used: Plumrose Ltd v Real and Leasehold Estates Investment Society Ltd [1970] 1 WLR 52, 55; PW & Co v Milton Gate Investments Ltd [2004] Ch 142, 179. It also avoids the problems that are encountered when an attempt is made to use post‑contractual conduct as an aid to construction: see Sect 12.5.2.
    2135 It is to be remembered that LSA No 2 (one of the Transactions executed in January 1990) contained, as an appendix, the document called RLFA No 2. The purpose of the latter was to restate RLFA No 1. LSA No 2 is called a ‘supplemental agreement’ and it expressly provides that it is supplemental to RLFA No 1. LSA No 2 also provides that RLFA No 1 was to be ‘amended and restated … in the form of’ RLFA No 2; and ‘shall be and be deemed to be amended and restated in the form of the Appendix [RLFA No 2]’.
    2136 In other parts, LSA No 2:
    (a) provides that, subject to the provisions of LSA No 2, RLFA No 1 was to remain in full force and that RLFA No 1 and LSA No 2 ‘shall be read and construed as one document’;
    (b) indicates that references in LSA No 2 were to be taken as a reference to RLFA No 1 as amended by LSA No 2; and
    (c) defines the ‘Lloyds Facility Agreement’ as: ‘[RLFA No 1] and, after the operative date, [RLFA No 2] relating to [the facility] as appended to [LSA No 2] together with the UK Debentures as executed by the UK Borrower’.
    2137 I will return to the UK debentures and to the phrase ‘UK Borrower’ in a moment. Leaving them to one side, I believe that LSA No 2 and RLFA No 2 are ‘supplemental’ in the relevant sense. They are therefore available as an aid to construction, both of their own force (by their wording they are incorporated into the original agreements) and under s 58.
    2138 LSA No 2 contains a number of relevant definitions, recitals, and provisions which support the construction that BGF did not have a liability under the 1986 Loan Agreement. In each instance the emphasis is mine.
23. ‘Lloyds Syndicate Loan’: ‘the principal amount of £60,000,000 lent to the UK Borrower under the Lloyds Syndicate Facility as evidenced by the UK Debentures’.
24. ‘UK Borrower’: ‘BGUK in its capacity as the borrower of the Lloyds Syndicate Loan’.
25. ‘Lloyds Syndicate Facility’: ‘the term loan in respect of the Lloyds Syndicate Loan provided by the Lloyds syndicate banks to the UK Borrower … in accordance with the Lloyds Facility Agreement’.
26. Recital C: ‘the UK Borrower borrowed the Lloyds Syndicate Loan in accordance with the terms of the Original Lloyds Facility Agreement’.
27. ‘Original UK Borrowers’: noted as BGF and BGUK.
28. Clause 3.2(a)(i): ‘… and the Original UK Borrowers shall no longer be deemed to derive any rights from or be subject to any obligations or liabilities in respect of such breach under the terms of RLFA No 1’.
    2139 A distinction is drawn between the UK borrower (BGUK) and the original UK borrower (BGF and BGUK). The first four items (together with the definition of Lloyds Facility Agreement referred to earlier, and which incorporates RLFA No 1) all point inexorably to BGUK being the ‘borrower’ under the original arrangements. Certainly, BGF is a party to LSA No 2 and, by virtue of its provisions, is released from obligations and liabilities under the earlier agreements. But as I have indicated, this could apply to consequential loss under the indemnity, not to a liability to pay principal and interest. This, it seems to me, is the intention of the parties gleaned from the composite set of documents that form the contractual arrangements.
    2140 In reaching these conclusions I have not had regard to the UK debentures because, although they are connected with LSA No 2 (and therefore with the earlier documents), I doubt they can properly be described as ‘supplemental’ to them. For the same reason, I have not had regard to the definition of ‘Original UK Borrowers’ in cl 1.1 of ABSA.
    2141 Similarly, I have given no weight to the plaintiffs’ argument that it would have been beyond the scope of BGF’s corporate authority to become a borrower. That argument is simply not tenable given the clear role of BGF as the treasury company for the group. But this does not mean that BGF did, in fact, become a borrower under the Lloyds syndicate facility.
    10.8.4. Subjective issues
    2142 I am satisfied that the books and records of BGF do not show a liability before 26 January 1990 to the Lloyds syndicate banks for either the principal or interest on the Lloyds syndicate facility. I hasten to add that this conclusion is part of the factual matrix concerning the beliefs of the directors. It does not relate to the construction question. Woodings’ investigations, which I accept, revealed the following.
29. BGF’s general ledger, journal vouchers and payment vouchers for the period 27 August 1987 to 8 January 1990 disclose that BGF was involved in three interest payments made in respect of the Lloyds syndicate facility: 30 December 1988, 31 March 1989 and 8 January 1990. In each case BGF treated the payment of interest as a loan to TBGIL.
30. Neither BGF’s general ledger as at 31 December 1989 nor the December 1989 financial statements for BGF record a liability for the facility.
31. The financial statements of BGF for the financial year ended 30 June 1988 contain:
    (a) a record, in Note 15, that as at 30 June 1987 BGF had contingent liabilities of $658.2 million pursuant to an indemnity to certain financial institutions that was withdrawn during the year of those financial statements; and
    (b) that no contingent liabilities were recorded as existing as at 30 June 1988.
32. The financial statements of BGF for the financial year ended 30 June 1989 do not record any contingent liabilities.
33. The financial statements of BGF for the period 1 July 1989 to 5 October 1990 include a record in Note 19 of contingent liabilities pursuant to a guarantee of $140.3 million for bank loans.
    2143 I am not aware of any other contemporaneous documentary evidence within the books and records of the Bell group which show that, as at 26 January 1990, BGF recognised a liability for principal and interest in respect of the Lloyds syndicate facility.
    10.8.5. Conclusion
    2144 In my view, this issue falls to be resolved in the way contended for by the plaintiffs. Immediately before 26 January 1990, BGF had no relevant liability to the Lloyds syndicate banks in respect of the £60 million facility.
34. The banks: decision‑making structures and relevant personnel
    11.1. The purpose of this section
    2145 I am about to embark on a detailed examination of the on‑loan subordination issue, which is a central feature of the banks’ defence, and then of the various causes of action advanced by the plaintiffs. Before I do so, I think I should tell the reader a little about the defendant banks.
    2146 It will be apparent from the summary of the pleaded case set out in Sect 6 that so many aspects of the litigation depend on, or involve, the state of mind of the banks or decisions made by the banks. There are many things that the banks are said to have known, believed or suspected. The alleged insolvency of the companies is an example. Issues concerning the banks’ knowledge are not confined to the plaintiffs’ case. There are things that the banks say they (or the directors) knew or believed or were entitled so to do. The pleas in ADC par 65KA are an example. The banks also allege that they made decisions to treat the bonds as equity in reliance on representations made to them by officers of TBGL.
    2147 In Sect 7.5.1 I referred to the almost orphic notion of the state of mind of a corporation. As a broad, general statement, to say that a corporate entity ‘knows’ something is to say that some one or more persons are so closely connected to the management of the entity that what they ‘know’ can be said to represent the state of mind of the company. Again, to say that a company ‘decided’ to do something is to say that a person or persons with the requisite authority committed the company to that course of action. And to say that a company ‘relied’ on something is, again, to say that a person with requisite authority relied on that thing.
    2148 In order to understand these issues it is necessary to appreciate the reporting and decision‑making structures of each of the banks and level of authority attaching to the position held by the relevant officers. This is one aspect of these reasons where repetition is a particular problem because the same question arises in relation to the period when the convertible bond issues were made, and thus is of primary relevance to the subordination issue (1985 to 1987), and also arises in relation to the period in which the refinancing was being negotiated (1988 to 1990).
    2149 To limit (although, unfortunately, not to eliminate) repetition, I will outline that material in relation to each bank and identify those bank officers most closely connected with the Bell group facility and the decisions taken in relation to it. In large measure, the decision‑making structure of the banks did not change between those two periods, although some of the personnel involved did change. In relation to each bank, it will be necessary to read the material covering both periods in order to obtain a complete picture of the way it was organised.
    2150 Before I begin that task, I must warn anyone who has an aversion to bureaucracy or has trouble remembering strings of job titles, for example, Senior Deputy Assistant Vice President of the Lending Sub‑Committee, (although that one is a little exaggerated) that they may have trouble following the sections below, and should never consider employment in a bank.
    2151 During the oral opening statements, counsel for the banks handed up a diagrammatic representation of the reporting structure of each bank (other than Lloyds Bank) at the relevant time or times. These documents were reproduced in the written closing submissions. Although they were not formally tendered as evidence, the diagrams are a convenient summary of the reporting structure. I have identified them in Schedule 38.11 to these reasons.
    2152 The diagrams must be read subject to the textual material concerning each bank. The Schedule includes references to the closing submissions from which the textual material has been taken. Those references are listed for both the subordination question and the later refinancing. I have treated it in this way to avoid having to identify in the text the primary evidence on which I have relied.
    2153 I have also included, as Schedule 38.5, a list of all bank officers who gave evidence (including those who were not required to attend for cross‑examination). The list has been organised according to the bank by which they were employed.
    2154 The material in this section is of general importance but it has particular significance in the discussion of two areas:
    (a) reliance and detriment in the banks’ estoppel claim concerning the subordination of the on‑loans (Sect 17.4 and following); and
    (b) what the individual banks knew or suspected about the state of solvency of the Bell group companies at the time of the refinancing in January 1990 (Sect 30.21.2 and following).
    11.2. Westpac
    2155 Westpac began life in 1817 as the Bank of New South Wales. In 1982, the Bank of New South Wales acquired the Commercial Bank of Australia and changed its name to Westpac Banking Corporation. Westpac’s head office is in Sydney.
    The convertible bond issue period
    2156 The Bell facility was managed by the Corporate Banking WA section of the bank, which was located in Perth. The Manager, Corporate Banking WA was responsible for the initial review of credit applications. A proposal would be drafted and provided to the State Manager, Corporate Banking WA. If the proposal was supported at this stage, and the request was beyond the delegated authority limit of the State Corporate Banking division, the application was sent to the head office Corporate Banking division in Sydney. I think the authority limit of the State Corporate Banking division was $5 million. If Corporate Banking WA did not support an application, a briefing paper outlining the reasons for this decision would be sent to Westpac’s head office in Sydney. Bill Cutler was the Manager, Corporate Banking and Robert Stutchbury was the State Manager, Corporate Banking at the time.
    2157 The Chief Manager, Credit Control (later known as Head of Credit Policy and Control) received all credit applications concerning advances over $25 million and had authority to approve advances and changes to facilities involving amounts less than $50 million. This position also had the authority to refuse any credit application. Applications that exceeded this authority had to be reviewed by the General Manager, Credit Policy and Control, who had an approval limit of up to $100 million. Applications exceeding this amount were forwarded to the Head Office Credit Committee (head office CC) and, if required, the Board Credit Committee (board CC) for consideration.
    2158 Applications were presented to the head office CC by the relevant State Manager, who would answer any questions raised by members of the committee. The head office CC made its decision by a process of discussion, consultation and consensus rather than a vote on proposals. This committee had the authority to approve or decline applications where the borrower or group had a total debt not exceeding $100 million dollars.
    2159 Where an application exceeded that amount or involved significant issues or controversial aspects, the head office CC provided a recommendation and submitted the proposal to the board CC. The board CC was established in about May 1987 to oversee large loans and credit relationships generally. The committee had the full authority of the board. The board CC considered written information (including current proposals before the head office CC and the minutes of that committee’s meeting in which these proposals were discussed) and oral submissions (usually from Geoff McCorkell or Frank Ward) in their deliberations. McCorkell and Ward were members of the head office CC.
    2160 Warren Hogan and Robert White (the bank’s managing director) were both members of the board CC. According to Hogan, the board CC relied on the head office CC to scrutinize the proposal properly and provide relevant and accurate analysis and information to assist the board CC with their decision‑making process. Hogan testified that the board CC undertook ‘very careful analysis and review of all the matters that had been put forward’ and did not merely ‘rubber stamp from head office CC recommendations’. But McCorkell could not recall any occasion on which board CC did not follow those recommendations.
    2161 Numerous credit applications concerning the Bell group reached the board CC for consideration. Hogan gave evidence that by January 1990, the level of exposure from the Bell facility had remained within authority limit of the head office CC.
    2162 The role and functions of the bank’s ‘Executive Committee’ are somewhat unclear. While it appears that this committee’s position in the bank’s decision‑making structure was immediately below the board, there is no clear evidence that elucidates its authority or explains its deliberative processes.
    2163 When giving oral evidence, McCorkell and Deer recalled that the Executive Committee was comprised of the bank’s most senior staff, including the Managing Director, the Chief General Manager Corporate and International, the Chief General Manager Retail Financial Services and the Chief General Manager Management Services. The committee met to ‘consider major issues’ and ‘help smooth decision‑making of projects which embraced more than one part of the bank’. According to McCorkell, the Executive Committee was at the very top of the bank’s decision‑making chain. That view emerges from this exchange in his cross‑examination:
    You were one of the most senior credit people in the bank. Isn’t that correct?—Of some seniority yes I wasn’t on the executive committee.
    2164 The Executive Committee is mentioned in various memoranda and minutes of meetings but there is little evidence about its decision‑making processes or the precise circumstances in which it may have been called to deliberate. There is little evidence, for example, of what documents were considered and who, if anyone, appeared before it.
    2165 The minutes of a head office CC meeting where the 8 May 1986 credit application was considered contained the following qualification:
    Proposal considered on credit aspects only and not other issues being considered by the Executive Committee and Board.
    2166 Cutler was asked about the role of the Executive Committee in the context of the 8 May 1986 credit application and, although he could not recall who sat on the committee, he accepted, based upon the passage reproduced above, that it was a body whose authority lay between the head office CC and the bank’s board. He could not recall whether or not the committee performed a credit role or whether it had the authority to reject a credit application.
    2167 Minutes of a head office CC meeting dated 6 February 1986 note that the proposal to provide a $500 million facility to BCHL was ‘supported for Executive Committee support and board approval’. McCorkell was asked about the function the Executive Committee would perform in receiving a proposal such as this but was unable to provide an answer. He had no recollection of proposals going from the head office CC to the Executive Committee and went on to say that sending proposals to the Executive Committee seemed strange to him. McCorkell, who is noted in the minutes as being present at the 6 February 1986 meeting, was unable to recall why the considered proposal was sent to the Executive Committee.
    2168 The plaintiffs submit that the absence of evidence of an important link in the decision‑making chain leaves a gap in the series of decisions the defendants’ must prove in order to establish how Westpac may have conducted itself in changed circumstances. The plaintiffs ask the court to infer three things in relation to the Executive Committee as a result of the evidence adduced before me.
    2169 First, I am asked to infer that the role of the Executive Committee was to make decisions at the highest level of the bank’s authority, which embraced considerations far broader than the strictly ‘credit’ aspects about which the bank witnesses gave evidence. Secondly, I am asked to infer that strategic decisions, such as a decision that may have affected the financial survival of TBGL, would fall into the category of broader considerations. Thirdly, the plaintiffs ask me to infer that there were decision‑making processes at the bank in relation to the Bell group that took account of issues over and above the ‘credit aspects’ to which the witnesses’ evidence was restricted.
    2170 I have little doubt that issues over and above ‘credit aspects’, strictly so‑called, would have been taken into account from time to time. But I do not regard this (or the ‘gap’ to which the plaintiffs referred) as being particularly material. I think there is enough evidence for me to reach findings on the relevant matters.
    2171 Hogan, White, McCorkell, Cutler and Stutchbury were the Westpac officers who gave evidence.
    The refinancing
    2172 The day‑to‑day management of the facilities provided by Westpac to the Bell group were the responsibility of the Corporate Banking division in Perth. Robert Weir was the manager of the Corporate Banking division in Perth from December 1988 to June 1990 and was the officer of Westpac most closely involved with events, in terms of his knowledge and dealings with the Bell group.
    2173 He kept the BGF file with him and had access to all correspondence from all levels of decision‑makers in Westpac. His predecessor was John Salamonsen and, before that, Cutler. Weir reported to Stutchbury, who was the State Manager of Corporate Banking for Western Australia from late 1988 to April 1991.
    2174 Weir was assisted by a credit analyst, John Youens. From time to time Youens would draft documents (including correspondence and credit submissions) for Weir’s signature. He also assumed responsibility for TBGL−related matters while Weir was away on annual leave for six weeks beginning 20 April 1990.
    2175 During the course of the refinancing, these Westpac officers were advised by Dianne Browning, who was the Manager, Legal in the Corporate Banking division of Western Australia and worked closely with Weir during the negotiations. Her knowledge is important in relation to Westpac’s awareness of some of the legal issues arising from the Transactions. Browning reviewed all the draft security documents and she received most, if not all, all correspondence emanating from P&P. She would also have received the advices that were circulated by A&O and MSJL. She said that she provided legal advice to the whole department and, as such, anything in the department that required legal input was generally referred to her. In those circumstances, her advice would be reflected in the decisions made, although there may not be any written opinion or note of her advice.
    2176 Stutchbury was responsible for all matters relating to the profitability of the division, including the performance of the corporate accounts and the quality of the portfolio managed by Westpac. He oversaw all corporate accounts in Western Australia, including those for TBGL and its subsidiaries. He was responsible for reviewing credit applications originating in Corporate Banking WA.
    2177 The applications were sent to Hugh Spring (Chief Manager, Credit, Corporate Banking from mid-1989) in Sydney. His predecessor was Bruce Daglish. Stutchbury reported to the General Manager, Corporate Banking in Sydney (initially Philip Deer and later, Iain Thompson). Stutchbury had a new lending authority of up to $5 million and authority for write-offs or provisions of a very nominal amount ($500 or $1,000). All facilities had to be reviewed at least annually by head office in Sydney.
    2178 The important credit proposals in relation to the Bell group therefore originated with Corporate Banking WA (primarily Weir for the purposes of this aspect of the case) and were usually signed off by the State Manager (Stutchbury). They then moved up to the Chief Manager of Credit, Corporate Banking (primarily Spring at the relevant times) and then to the head office CC, which included, among others, the General Manager of Corporate Banking (Deer or Thompson) and various other senior managers including, at various times, McCorkell, Howard Dudgeon and Ward. Ray Chadwick, who was Chief Manager of Corporate Banking in New South Wales, was also on the head office CC. The defendants did not serve witness statements for Chadwick, Spring or Youens and they were not called to give evidence.
    2179 From the head office CC, the credit applications were sent to the board CC. This committee included Hogan and White, both of whom gave evidence, although primarily on the subordination issue. Numerous credit applications that related to the Bell group reached the board CC for consideration, although by January 1990, according to Hogan’s evidence, the level of exposure at that stage left it below the level of the head office CC. The decision‑making power lay with the Western Australian Corporate Banking division, which was headed by Stutchbury. However, Hogan said that the board CC could have intervened had they wished to do so.
    2180 In addition to the officers mentioned at the conclusion of the preceding section, Deer, Salamonsen, Weir and Browning gave evidence on behalf of Westpac.
    11.3. CBA
    2181 CBA was founded in 1911 under legislation enacted by the federal parliament. Initially it was both a central bank and a trading and savings bank but legislative changes in 1959 led to the Reserve Bank of Australia assuming control of all central banking activities. The remaining functions, namely, the trading and savings bank activities, together with the newly constituted Commonwealth Development Bank came under the auspices of the renamed Commonwealth Banking Corporation.
    2182 In mid−to late 1984, the Commonwealth Trading Bank of Australia changed its name to the Commonwealth Bank of Australia. The bank became a public company on 17 April 1991 and on that date it ceased to be a statutory authority.
    The convertible bond issue period
    2183 CBA’s lending office for the Bell group account was located within the Loans Department of the bank’s Western Australian State Administrative Office in Perth (the Perth Loans Department). This office was responsible for the day‑to‑day administration of the Bell group’s facilities with CBA. The Perth Loans Department maintained direct contact with the relevant officers of the Bell group companies and reviewed any documentation (financial or otherwise) provided by the companies, including negative pledge reports.
    2184 Due to the size of the Bell facility, the Perth Loans Department had to report to the bank’s Corporate and International Division (CID), which was located in Sydney. The Perth Loans Department provided CID with annual reviews and additional information in relation to any particular decision that had to be made regarding the facility. Any review or proposal sent from the Perth Loans Department to CID was reviewed by a senior assistant manager or a senior manager within CID.
    2185 When a request for credit or to extend terms was received by the Perth Loans Department, the Manager Loans or Assistant Manager Loans WA would prepare an application, summarise the financial position of the company and make a recommendation. The application was submitted to the Deputy Chief State Manager and then to the Chief State Manager, who would despatch it to CID in Sydney.
    2186 A Senior Manager, Manager or Senior Assistant Manager at CID would consider the application and then provide his comments to an Assistant General Manager. The Assistant General Manager would then either make a decision or, if the request was beyond his authority, instruct the Senior Manager, Manager or Senior Assistant Manager to prepare an application for submission to the credit committee of the board (credit committee) for consideration and decision.
    2187 Mark Sample, Tim Dennis and John Sim were account officers or mangers within CID and had an involvement in the processes concerning TBGL’s request for equity treatment of the bond issues. Dennis gave evidence but neither Sample nor Sim were called.
    2188 In December 1985, the Assistant General Manager of CID was Patrick O’Halloran. He died before being able to give evidence. The officer holding that position from September 1986 was Gordon Latimer. He was involved in the processes concerning the second bond issue and the collapsing of the NP agreement and its replacement by the NP guarantee. Latimer gave evidence.
    2189 An application submitted to the credit committee was generally in a standard format and would include:
    (a) a description of credit already advanced to the applicant company (and associated entities);
    (b) a description of the further lending requested or the variation of terms sought and information on the purpose of the loan or variation;
    (c) proposed reduction arrangements;
    (d) proposed security arrangements;
    (e) a description of the usage of the facilities already on foot;
    (f) the financial figures for the consolidated group (of which the applicant company was a member) under the headings Capital, Balance Sheets and Profitability;
    (g) the names of the directors of the group’s parent company;
    (h) general comments; and
    (i) a recommendation.
    2190 The Assistant General Manager responsible for the account would attend the meeting of the credit committee in order to answer questions arising from the application. If the final decision were based on any consideration that was not covered in the credit application, a note of that fact would be made in the record of the Committee’s decision. The notice of the decision would be forwarded to CID, who informed the branch of the decision made and any conditions imposed. The decision was generally conveyed in writing, although on occasion it would be conveyed in a telephone call followed by written confirmation.
    The refinancing
    2191 CBA’s lending Perth branch remained the first point of contact between the bank and the Bell group, but the real decision‑making authority and the key witnesses in this case were based in CID in Sydney. The Assistant General Manager of this division was Latimer, the supervisor of the Bell group facility and the person most closely involved in the refinancing negotiations. After the BCHL takeover of the Bell group, Latimer reported to Barry Poulter, Chief General Manager of CID, in relation to the bank’s facility to BGF.
    2192 The amount owing under the facility in the latter part of 1989 was within Latimer’s limit of authority. However, Poulter made the critical decision to withdraw the demands issued by CBA in September 1989 and to proceed with the proposed refinancing. Latimer did not have a great deal of involvement with the Bell facility once CBA had made the decision, on 20 September 1989, to proceed with the refinancing. Both Latimer and Poulter gave evidence.
    2193 Latimer delegated responsibilities to other Managers and Senior Managers. Tim Dennis and Ian Smith were the main Senior Managers to whom duties in relation to the Bell facility were delegated. Dennis filled this role from 18 October 1989 up until 20 December 1989 when he went on leave. His predecessor, Graham Boyd, was not called to give evidence. Smith assumed the responsibility after Dennis went on leave and continued in this position until March 1991.
    2194 Michael Hade was a manager in a more junior position. He prepared some financial analyses on aspects of the Bell group in the relevant period. The last of the main CBA witness was Ian Payne, who was the Deputy Managing Director and Chief Operating Officer during the critical period.
    11.4. HKBA
    2195 HKBA is a member of the HSBC group, a worldwide banking conglomerate. The genesis of the HSBC group can be traced back to The Hongkong and Shanghai Banking Corporation Limited, which was formed simultaneously in Hong Kong and Shanghai in 1865 to finance the growing trade between China and Europe.
    2196 In 1986 HKBA was incorporated in Australia and granted a banking licence. Prior to that time, corporate lending in Australia was conducted by the HSBC group through, among other entities, the merchant bank Wardley Australia Ltd (later renamed Hong Kong Finance Ltd).
    The convertible bond issue period
    2197 Relationships with customers at HKBA were developed and maintained by each relevant State branch office. Geoff Farr, Credit Manager WA, was the relationship executive for the Bell group. Relationship managers were required to prepare any necessary documentation for draw downs, reviewing correspondence from the Bell group and preparing credit submissions and reviews as required. Farr reported to David Baker, State Manager WA.
    2198 Reviews and credit proposals originated at the State office level. If credit applications exceeded the delegated authority limit of the State office, they were forwarded to HKBA head office in Melbourne. Even at its initial level of $15 million, the Bell group’s facilities with HKBA exceeded the State office’s authority limit. Any applications regarding the grant of the facility, to increase the facility or to change any arrangements had to be forwarded to the Melbourne office and from there to the Group Head Office, International Division of HSBC in Hong Kong (GHO).
    2199 Once sent to Melbourne, credit proposals were initially reviewed by a credit controller (Margaret Leung), who was responsible for highlighting any issues in the proposal that required particular consideration. Recommendations regarding proposals and reviews were sent to the Managing Director HKBA (James Rankin). Authority to approve proposals and reviews of certain facilities, including those concerning the Bell group, ultimately lay with the General Manager International GHO in Hong Kong (Anthony Townsend and John French).
    2200 Credit reviews of all facilities were conducted at least annually. Reviews would be more frequent for facilities considered more risky, if there was a request to increase the facility or change its terms, or if there was a material change in events.
    2201 Both the Credit Manager WA and the Managing Director had the authority to decline any proposal without forwarding it to a higher authority. Farr, Leung and Rankin were the HKBA officers who gave evidence.
    The refinancing
    2202 I discussed in Sect 4.2.3 the relationship between HKBA, Wardley and HSBC. Essentially, from about December 1988, Wardley Australia began to integrate with HBKA, at first becoming a wholly owned subsidiary and finally merging with HKBA in April 1990. HSBC, the parent company, set general policy and approved annual operating and strategic plans for HKBA.
    2203 At the relevant times, the Bell facility was managed by HKBA officers. HKBA had a director appointed by HSBC, namely Townsend. Townsend was usually the officer usually responsible for making decisions about the Bell group facility. HKBA had a hierarchical reporting system: the higher up the chain, the greater the limit an officer had to approve the granting of credit. In relation to the Bell facility, this usually meant Townsend was the appropriate person, because he had an approval limit of US$15 million. If an proposal exceeded Townsend’s authority, it would be forwarded with his recommendation to the executive director or the chairman of HSBC.
    2204 Initially, HKBA’s Perth branch had the responsibility for the management of the Bell facility. However, in June 1989 responsibility was taken over by the Specialised Lending Department in Sydney (which was also responsible for the Dallhold and BCHL facilities). Stuart Davis was a Director of the Specialised Lending Department of HKBA during the relevant period. This placed Davis at the centre of events with which we are concerned in this case. The other Director of Specialised Lending was Bruce Strang. Davis had primary responsibility for the Bell and Bond group facilities but Strang would step in if Davis were absent.
    2205 James Yonge was the Chief Executive Officer of HKBA from the start of 1989. Kerry Roxburgh and John Dickinson were joint managing directors who reported to Yonge. Those in the Specialised Lending Department reported to the joint managing directors but most often Dickinson was the relevant person.
    2206 Below Davis and Strang in the Specialised Lending Department were a number of officers responsible for the day‑to‑day management of the Bell facility, primarily Karen McGregor and Richard Inglis. Communications from those in the Specialised Lending Department would usually be addressed to Townsend and copied to Dickinson and Richard Hale. The latter was involved in the HSBC’s Singapore branch. HSBC Singapore had given an indemnity over part of HKBA’s Bell group debt, to achieve some degree of sharing of the risk. Townsend’s role seems to have been filled by French or Richard Orgill from time to time.
    2207 Davis testified that the Bell facility did not occupy a significant amount of his time but he retained ‘macro-level’ responsibility and was aware of the group’s major assets and liabilities. It is significant that the officers who had most exposure to the Bell group facility were also heavily involved in the BBHL syndicate (particularly Townsend, Yonge, Davis and Inglis) and as such were privy to a reasonable amount of information that was also relevant to the Bell facility. Farr was a credit manager in the Corporate Banking division in the Perth office who gave evidence primarily on the on‑loan subordination issue.
    2208 HKBA was also involved in the BBHL banking syndicate led by NAB. A number of HKBA officers are mentioned in the documentation concerning the BBHL syndicate and the events that culminated in the receivership application of December 1989. Prominent among them are Davis and Yonge.
    2209 In addition to the officers mentioned at the end of the preceding section, Davis gave evidence on behalf of HKBA.
    11.5. NAB
    2210 NAB is a trading bank incorporated in Australia, which provides, among other things, corporate banking services in Australia and the United Kingdom. It started life in 1858 as the National Bank of Australasia Limited. The bank underwent a merger with the Commercial Banking Company of Sydney Limited in or around January 1983. In October 1984, NAB changed its name from National Commercial Banking Corporation Limited to National Australia Bank Limited.
    The convertible bond issue period
    2211 The reporting hierarchy at NAB between 1985 and 1989 centred on NAB’s State branches. The State Corporate Banking division was responsible for managing the bank’s relationships with local companies. Client accounts would be managed by a corporate finance manager or senior corporate finance manager, an assistant corporate finance manager and an analyst. These officers would report to the manager of Corporate Banking in their state.
    2212 A credit request would usually be prepared by an assistant corporate finance manager before it was signed by the corporate finance manager and the State corporate finance manager. TGBL’s facility with NAB exceeded the authority of the Western Australian Corporate Banking division and so any applications relating that account had to be forwarded to the Credit Bureau along with any recommendations or analysis.
    2213 The Credit Bureau assessed applications forwarded by relationship groups. Officers in the Credit Bureau included the General Manager, Chief Managers, Senior Managers and Managers. These roles had varying degrees of authority, from purely analytical (managers) to delegated authority to certain limits (senior managers).
    2214 Any credit applications that exceeded the approval authority limit of the Credit Bureau were considered by a committee of the board known as the Lending Committee or the Board Lending Committee, which had ultimate decision‑making authority.
    2215 The officers within the State Corporate Banking division most closely involved with these events were Peter Wallace, Trevor Hunt and Linton Byfield. Greg Willcock, Stephen Mickenbecker, Phillip Dowse and Kevin Weir had varying roles within Credit Bureau. Lloyd Smith was a member of the Board Lending Committee. Each of those officers gave evidence.
    The refinancing
    2216 In April 1989 there was a relevant change in the structure of NAB. Responsibility for client contact with large customers, including the Bell group and the BCHL group, was moved from the State offices and centralised in a new division, called Institutional Banking, located in Melbourne. Tony Keane was Relationship Manager at Institutional Banking from July 1989 to mid‑1991 and was responsible for the day-to-day management of the Bell facility. These responsibilities included keeping up-to-date on TGBL’s financial position. Graeme Willis, Group Relationship Executive, was Keane’s immediate supervisor from April 1989 to November 1990.
    2217 The Credit Bureau assessed applications forwarded by relationship groups (including Institutional Banking). Various officers took responsibility for matters relating to the Bell group in the period from 1989 to 1991. Alan Diplock was General Manager of the Credit Bureau until October 1989, when Frank Cicutto was appointed to the position. Other Credit Bureau officers who are recorded as having made decisions or prepared analyses and recommendations on the Bell group refinancing are Cliff Gorrie, Rex, Waller, Donhardt and Wearne.
    2218 There was no relevant change in the way in which applications that exceeded the approval authority limit of the Credit Bureau, including the Bell group refinancing, were considered by Lending Committee (or the board Committee). The meeting of the board Committee that approved the Bell group refinancing was held on 30 August 1989.
    2219 NAB was the lead banker for the BBHL banking syndicate. Willis, Trevor Meares (Manager, Corporate Leasing and Agency Administration Division), Les Ryan (General Manager, Corporate Banking) and Don Argus (Managing Director) were involved from time to time in questions concerning the BBHL syndicate.
    2220 Keane was the only person mentioned in this section who gave evidence on behalf of NAB.
    11.6. SocGen
    2221 SocGen was incorporated in Australia in 1981. It is a wholly owned subsidiary of the French based Société Générale group. The group traces its origins to 1864, when it was founded by a group of industrialists and financiers. SocGen provides merchant banking services in Australia and New Zealand. It has offices in Sydney (head office), Melbourne and Brisbane.
    2222 In January 1999 SGAL changed its name from Société Générale Australia Ltd to SG Australia Ltd.
    The convertible bond issue period
    2223 SocGen was incorporated in Australia in 1981 and, during the period in question, had offices, relevantly, in Sydney and Melbourne. SocGen’s parent entity was Société Générale, which had its head office in Paris (SG Paris).
    2224 SocGen’s Bell account was managed out of the Melbourne office. The day-to-day administration of the file and consideration of draft terms sheets were the responsibility of account officers and corporate finance managers. These officers reported to the Associate Director/Director of Corporate Lending and the General Manager Melbourne/National Director of Corporate Finance. Peter Edward held those positions at the relevant time.
    2225 The SocGen credit committee was situated in Sydney. It was at the pinnacle of the bank’s Australian decision‑making structure. The credit committee had an authority limit of $10 million; applications exceeding that limit (and which were supported by the credit committee) required approval of the Asia Section (‘Secteur Asie’) within the International Department (‘Direction des Affaires Internationales’) in SG Paris. Alain Joyet was a director of SocGen and a member of the credit committee. Edward was also a member.
    2226 Where an application concerned a lending of more than A$35 million, it had to be reviewed by the ‘Controle des Engagements’ and ‘Controle Centrale des Risques’ departments in Paris.
    2227 Phillippe Auxenfants was the Deputy Head of Secteur Asie at the relevant times. He was responsible for the supervision of Société Générale’s subsidiaries and branches throughout Australasia, including SocGen.
    The refinancing
    2228 As one of the Australian banks, SocGen received financial information concerning the Bell group through Westpac, through attendance at Australian syndicate bank meetings and directly from TBGL.
    2229 Christopher Weeks and Roger Johnson handled the day-to-day administration of the file as well as considering draft terms sheets and liaising with more senior officers. Weeks and Johnson prepared the credit proposals in relation to the Bell facility in 1989. Another person in the Melbourne office, Francois Buaud, also had a reasonable amount to do with the TBGL file in that period.
    2230 Edward was involved in the refinancing of the TBGL facility but also had prior experience with SocGen’s TGBL relationship. He was employed by TBGL from 1975 to 1983 as Group Financial Controller, Principal Accounting Officer and then as Group Corporate Planner. Edward had been employed by SocGen since 1983. He commenced in the Sydney office as a Manager, Corporate Lending with responsibility for administering accounts of, among other things, Western Australian based clients such as TBGL. In June 1987, he became the General Manager of the bank’s Melbourne office and was, from that time, a member of the credit committee for Australia. In 1989, he moved to Sydney to continue as National Director of Corporate Finance until 1992, when he became the Director of Credit.
    2231 At relevant times, Edward was the most senior officer of SocGen who was directly responsible for the TBGL facility. He considered credit applications in relation to TBGL as a member of the credit committee in Sydney, and referred proposals to the Paris office where necessary. Other members of the credit committee included Bernard Denis, Roger Johnson and Jean Ponsard.
    2232 Auxenfants remained as the Deputy Head of Secteur Asie within the Direction des Affaires Internationales during this period and was responsible for the supervision of SocGen. Until 1988, the officer within Secteur Asie who dealt with Bell group matters was Yves Garnier, and from 1988 it was Frederique Bogusz. Garnier and Bogusz reported to Auxenfants and neither of them had decision‑making authority
    2233 Auxenfants’ evidence was concerned primarily with the banks’ on‑loans case. However, he said that SG Paris had 700 – 800 files at the time from different subsidiaries or branches in Asia. His evidence suggested that the Bell facility was not one that was considered high‑risk at the time, and not one that occupied a substantial amount of time in 1989 and 1990. He said that at the time, the Paris office had to focus on the most serious risk, and that they had more serious risks than the Bell facility, including in Australia.
    2234 SocGen was also involved in the BBHL banking syndicate led by NAB. A number of SocGen officers are mentioned in the documentation concerning the BBHL syndicate and the events that culminated in the receivership application of December 1989. Prominent among them are Weeks, Johnson and Edward.
    11.7. SCBAL
    2235 Standard Chartered Bank is a large international bank with headquarters in London. In 1985 and 1986, two wholly owned subsidiaries of Standard Chartered Bank operated in Australia: Standard Chartered Australia Ltd (SCAL), which operated as a merchant bank, and Standard Chartered Finance Ltd (SCF). In early 1986, SCF obtained a full commercial banking licence and purchased SCAL’s assets and liabilities. SCF then changed its name to Standard Chartered Bank Australia Limited (SCBAL).
    2236 On 1 October 2001 SCBAL made a voluntary transfer of business to Standard Chartered Bank. By reason of the transfer, all the assets and liabilities of SCBAL became the assets and liabilities of Standard Chartered Bank. Thereafter the duties, obligations, rights and privileges applying to SCBAL applied to Standard Chartered Bank.
    The convertible bond issue period
    2237 It is necessary to say a little bit more about the relationship between SCB and SCBAL. At the relevant time, SCB was the majority shareholder of SCBAL. SCB set application limits so that if an application for a facility exceeded certain levels, the application, with a recommendation, was required to be forwarded to SCB in London. If approved by SCB, it was tabled with the SCBAL board for final approval. In that sense, SCB maintained some managerial control over the lending practices of SCBAL. SCBAL kept SCB advised about developments that were taking place with their facility.
    2238 SCBAL had its head office in Adelaide. John Patten was National Manager, Advances and Credits. John Dodd was General Manager, Administration and Peter Cameron was Managing Director. These three officers sat on the Australian Credit Committee (ACC). Cameron was authorised to decline proposals as well as approve those within a certain limit.
    2239 The Bell group’s facility with SCBAL was opened and managed out of the bank’s Sydney office. In 1985 and 1986 John Stone was a Senior Associate Director of the bank, responsible for all corporate lending by SCAL and then SCBAL in Australia. Roger Desmarcheliar was the line manager responsible for the Bell group’s facility and he dealt with the account on a day-to-day basis. The Sydney branch prepared applications for limits for the Bell facility but did not have any decision‑making authority in relation to the facility. Desmarcheliar reported to the Senior Manager, New South Wales, who in turn reported to the Associate Director/State Manager.
    2240 An application beyond Cameron’s authority limit had to be forwarded to SCB London for approval. SCBAL had did not have the authority to agree to major changes to the terms of Bell group’s facility and reported on all developments to SCB in London. All policy decisions regarding the facility were made in London and SCBAL sought approval from SCB for any significant communication with TBGL or BGF.
    2241 Applications received by SCB London were reviewed by analysts in the Group Advances division before being considered by the Senior Credit Controller in that division (Tony Goddard). Bill McPherson was head of the Group Advances division from May 1983 to June 1989. According to Goddard, Group Advances at SCB was responsible for analysing and processing for approval or rejection those credit applications that came from SCB banking offices where the facilities or connected lending exceeded certain limits. Thus, while SCBAL was a subsidiary of, and separate company to, SCB, credit proposals and reviews of a certain size had to be forwarded to the bank. The facility provided by SCBAL to BGF required approval from London, particularly in 1988 and 1989 when the SCB group also had other related exposure to BCHL and related companies.
    2242 After review by Group Advances, the application and a recommendation would be forwarded to a credit committee comprised of three senior or general managers of SCB. The members of the credit committee dealt with the application on an individual basis and did not meet as a group to discuss the application. A review, with no changes to the facility, could be approved by one general manager. Once approved by SCB in London, the decision would be returned to the SCBAL board in Adelaide for approval.
    2243 Stone, Cameron and Goddard were the only officers mentioned in this section who gave evidence. The plaintiffs did not require Stone or Goddard to attend for cross‑examination.
    The refinancing
    2244 I have mentioned the relationship between SCB and SCBAL and the degree to which the two entities interacted and the influence that SCB exercised over accounts conducted by SCBAL.
    2245 These practices are evident from, for example, the correspondence that occurred following the demands made by SCBAL on TBGL and BGF in December 1989. In most cases, the views of the officers of SCB and SCBAL build on and reflect one another. Although I am determining the knowledge of SCBAL, I would, in most cases, regard the views of SCB officers as reflecting or representing the views of SCBAL. That is because the views of SCB were relevant to the decisions of SCBAL. On the other hand, where a divergence appears between the views of SCB and those of SCBAL, it is those of SCBAL that are relevant for the present case. For example, SCB appeared less tolerant of the Bell and Bond groups than SCBAL. SCB appeared to have stronger views than SCBAL in making the demand on the Bell group and was more resistant to the idea of participating in the refinancing.
    2246 SCB was also a lender to BBHL within the NAB syndicate. But this situation is somewhat different: while the management of SCBAL’s facilities often required the approval of SCB London, there was no corresponding obligation the other way. In other words, it appears SCB managed its facility with BBHL independently of SCBAL. The officers involved with SCB’s facility had little (if anything) to do with the officers involved with SCBAL’s facility with the Bell group. There is little evidence that knowledge acquired by SCB in its role within the syndicate was ever communicated to SCBAL. In the absence of such evidence, there is no basis to attribute SCB’s knowledge to SCBAL.
    2247 The Bell group’s facility with SCBAL was opened and managed out of the bank’s Sydney office. Due to proximity, the Perth office was the first point of contact. Peter Owen was State Manager for Western Australia. But all applications and reviews were handled in Sydney. Ray Walsh was State Manager for New South Wales from 1988 to 1999. He was the line manager responsible for the Bell group’s facility and he dealt with it on a day-to-day basis. Walsh prepared applications for limits for the Bell facility with assistance from other officers in the Sydney branch (David Brookman, Max Carling, Desmarcheliar and Mark Devadason) but the branch did not have any decision‑making authority in relation to the facility.
    2248 Applications were forwarded to the General Manager, Credit Control (Dodd) and the National Manager, Advances and Credits (Patten) at the SCBAL head office in Adelaide. Patten would review these applications before they were discussed by the members of the bank’s Australian Credit Committee (ACC). The ACC consisted of the Group Managing Director (Peter Cameron from 1987 to 1989 and Eirvin Knox from 1989 to 1990), and two managers (including Dodd, Patten, Lee Woollam or Doug Dallimore).
    2249 After review by the ACC, an application had to be forwarded to SCB London for approval. As previously mentioned, SCBAL had did not have the authority to agree to major changes to the terms of Bell group’s facility and reported on all developments to SCB in London. All policy decisions regarding the facility were made in London and SCBAL sought approval from SCB for any significant communication with TBGL or BGF. For example, Walsh explained that the extensions granted from August 1988 to mid‑1989 were referred from Adelaide to London for consideration by SCB and that decisions such as those were not within his level of authority.
    2250 The head of the Credit Department (CD) at SCB London was Rod Altringham. That division consisted of Loans Surveillance and Credit Policy (LSCP) and the Group Advances Department (GAD). Nick Minogue (Head, LSCP) and Bill McPherson (Head, GAD) reported to Altringham. When Altringham received applications from ACC in Adelaide, they were forwarded to the credit committee, then the Loan Review Committee and finally the Executive Committee. Other officers at SCB London who were responsible for the Bell facility included:
    (a) Michael Ferrier, Divisional Manager Credit Control in the Eurocurrency Division, who was the line manager for the TGBL account;
    (b) Peter Gwilliam, head of the Eurocurrency Division, where the Bond accounts were held, who had overall responsibility for credit;
    (c) Alan Orsich, head of the International Banking Department (also on the credit committee); and
    (d) Peter McSloy, Senior General Manager, Asia Pacific Region (member of the board Committee; London Director of SCBAL).
    2251 Ferrier reported to Gwilliam, who in turn reported to Orsich. Gwilliam also held the position as head of the International Banking Department. Orsich, Gwilliam and McSloy reported to William Brown, Managing Director, SCB.
    2252 There is some controversy regarding the authority of SCBAL in regards to the Australian officers’ practice of deferring to London for approval of material decisions and even communications to TGBL. I will deal with this issue later.
    2253 Devadason and Walsh both gave evidence on behalf of SCBAL.
    11.8. Lloyds Bank
    2254 The origins of Lloyds Bank plc extend back to 1765 when John Taylor and Sampson Lloyd established a private banking business in Birmingham, England. That business later became absorbed by the Lloyds Banking Company. In 1996, Lloyds Bank plc and Trustee Savings Bank plc merged, although they continued to trade as separate entities until legislative changes were effected in 1999. In 1999 the business of TSB Bank plc was transferred to Lloyds Bank plc, and the latter changed its name to Lloyds TSB Bank plc registered in England. Lloyds TSB Bank plc operates from London and provides, among other things, banking services.
    The convertible bond issue period
    2255 In Sect 4.2.8.3, I described how the Lloyds banking group’s involvement in the Bell syndicated facility was originally conducted through LMBL and how, on 21 May 1986, LMBL’s participation was transferred by novation to Lloyds Bank. When LMBL was wound up in early 1988 and merged into Lloyds Bank the Capital Markets Group, which had managed the Bell syndicated facility from within LMBL, was transferred to the Corporate Banking and Treasury division of Lloyds Bank.
    2256 The evidence about the exact reporting structure within each of LMBL and Lloyds Bank is not at all clear. The banks were unable to prepare a diagrammatic representation of the hierarchy. The following outline of the relevant reporting and decision‑making structure is the best I can do in the circumstances.
    2257 When the facility was entered into, Robert Medlam was head of the Corporate Banking division of Lloyds Bank. Sidney Shore was Assistant General Manager of the division. Luthert was Senior General Manager of the Risk Management division of Lloyds Bank.
    2258 Robert Owen was the chairman and Chief Executive of LMBL. John Eggleshaw was a director of LMBL who reported directly to John Mitchell, the head of Investment Banking at LMBL with responsibility for the syndication function. Chris Shawyer was head of Loans Syndications at LMBL. Martin Cruttenden, a managing director of LMBL, was involved in reviewing the application for the TBGL loan.
    2259 Eggleshaw and a Mrs Shaw, an officer in the Loans Administration Department of LMBL, were involved dealing with syndicate participants for the 15 April 1987 request. Eggleshaw continued to deal with TGBL in 1987 in the lead-up to the NP guarantees. Cushing was manager of the Risk Control department. Leslie Tinsley was head of the Documentation and Transaction Management section at LMBL and was responsible for dealing with correspondence for LMBL’s role as syndicate agent. Keith Evans was an officer dealing with documentation and transaction management. Evans was responsible for day-to-day liaison with other banks in the syndicate and ‘referred all but the most routine and mundane correspondence’ to Tinsley. Williams had a similar role as an officer in the Documentation and Advisory Unit of Lloyds Bank.
    2260 Tinsley prepared some documentation concerning exposure following the 1987 stock market crash, which was copied to Dinger of the Capital Markets Group at LMBL, Stiven (Assistant Director, Risk Control Department, LMBL), McCrea Steele (Manager, Corporate Banking Division, Lloyds Bank), Baker (Credit Services, Lloyds Bank) and Draper of Lloyds International in Perth.
    2261 Shore and Ken Farquhar, Senior Lending Banker in the Corporate Banking Division of Lloyds Bank, were also involved with the TGBL facility at this stage.
    2262 Of the officers mentioned in this section, only Eggleshaw, Tinsley and Owen gave evidence.
    The refinancing
    2263 John Latham was Assistant Director of the Capital Markets Group in the Corporate Banking and Treasury division in 1989 and 1990. Latham first became involved in the Bell facility around July or August 1989 and subsequently became the person dealing most closely with the day‑to‑day occurrences in relation to the refinancing negotiations. Latham reported to Johny Armstrong, who was director of the Capital Markets Group and oversaw the negotiations.
    2264 The Capital Markets Group was the division within Lloyds Bank that was primarily for the participation in the Bell group facility. Lloyds Banks’ functions as agent were conducted separately through the Documentation and Transaction Management department. Tinsley was Assistant Director of the Capital Markets Group and was Head of the Documentation and Transaction Management department. He was responsible for Lloyds Banks’ duties as syndicate agent. However, by the time Latham acquired responsibility for the facility, the distinction between the two aspects of Lloyds’ practice became blurred and Tinsley’s role fell away. Evans was a manager who reported to Tinsley and had administrative responsibilities in relation to Lloyds’ agency role. Once Latham assumed day‑to‑day control of the facility, Evans continued to assist Latham. Evans was not called as a witness.
    2265 Aside from Latham, Armstrong and Tinsley, the other witnesses called by Lloyds included Robert Owen (chairman and Chief Executive of LMBL and director of Investment Banking for Lloyds Bank Group) and John Eggleshaw (a director of LMBL), both of whom had left Lloyds by the end of 1987 and gave evidence primarily on the Information Memorandum, the arrangements to put in place the Lloyds syndicate facility and the on‑loan subordination issue. The final witness called was Christopher Stiven, who was involved in risk management for LMBL and later Lloyds.
    2266 The Capital Markets Group was headed by Martin Cruttenden (as General Manager), who therefore had ultimate responsibility for the facility. Prior to the merger between Lloyds Bank and LMBL, Cruttenden was Managing Director of LMBL. He gave a witness statement but was not called. Below Cruttenden was Matthew Olex, a director and head of the Capital Markets Group. Armstrong, and then Latham, came in beneath Olex. David Brackenridge was an assistant manager in the Capital Markets Group. Neither Olex nor Brackenridge gave witness statements.
    2267 Cruttenden was the only member of the Capital Markets Group with the power to approve credit and, consequently, the credit applications prepared in the Capital Markets Group were sent to him for approval.
    2268 Paul Hanley, Ken Farquhar and Andrew Ling also appear in the correspondence from time to time. Hanley was an officer at LBNZA in Sydney and passed on certain material in the local press to his colleagues in London. Farquhar was a senior manager based in the Credit Management Unit of the Corporate Banking division. His duties included dealing with customers who were experiencing financial difficulty. Andrew Ling was an accountant who undertook a review of the Bell group facility in January 1990.
    2269 Stiven, Latham and Armstrong all called gave evidence on behalf of Lloyds Bank.
    11.9. Banco Espírito
    2270 Banco Espírito was founded as a banking and foreign exchange business by Jose Maria de Espírito Santo e Silva in Portugal in 1869. It became a state owned bank in 1975 but returned to private ownership in 1992. At that time it changed its name from Banco Espírito Santo e Commercial de Lisboa to Banco Espírito Santo SA. The bank offers a range of financial services, including wholesale, retail and investment banking.
    The convertible bond issue period
    2271 The Portuguese bank, then called Banco Espírito Santo e Comercial de Lisboa, was an original participant in the Lloyds syndicated facility. The head office of the bank (BE head office) was located in Lisbon, but the bank’s participation in the Bell facility was managed through its London branch (BE London).
    2272 The Loans Administration section in the bank’s London branch was responsible for all documentation, booking, recording and administration of loans. Hugh Stewart, a manager in Loans Administration, was responsible for non-Portuguese accounts and handled the Bell facility. Stewart reported to Luis Martins, Deputy General Manager, and the joint general managers of BE London, Ian Brodie and Pedro de Almeida.
    2273 Credit Analysts seconded from BE head office assisted in analysing financial information and reported to Stewart as well as directly to the London Credit Committee (LCC). The LCC was constituted by Brodie, de Almeida, Stewart and a Portuguese officer seconded to London.
    2274 A general manager of BE London was authorised to decline participation in a facility without requiring the approval of the Executive Credit Committee (ECC) in Lisbon. The LCC meet weekly to consider outstanding risks or new proposals. Responsibilities for particular loans were assigned to members of the committee. In 1986, the LCC was authorised to approve credit proposals up to £250,000. The LCC also had the authority to decline participation in facilities.
    2275 Applications above the LCC’s authority limit were referred to the International Division at BE head office. It was usual practice for the London branch to discuss a proposal informally with the International Division, advising of the reasons it was interested in the credit, before a formal proposal to participate in a credit was forwarded to head office.
    2276 Proposals that arrived in the International Division were assessed by analysts and reviewed the head and deputy head of the department (Joao Rodrigues and Antόnio Neto, respectively). Proposals would be discussed by those officers before applications were presented to the ECC for approval.
    2277 The ECC consisted of all of the executive directors of Banco Espírito; the general managers of the Commercial Division presented proposals but had no voting authority. The ECC reviewed weekly correspondence and was authorised to approve facilities over £5 million. A decision to approve an application had to be unanimous. According to Neto, the ECC followed the recommendations of the International Division in almost all international lending cases. He thought this would have been the process adopted in dealing with a credit application such as that for the Bell facility.
    2278 Brodie and Neto were the only officers of Banco Espírito who were called to give evidence in relation to the events in the convertible bond issue period or the refinancing period.
    The refinancing
    2279 The Loans Administration section in the bank’s London branch was responsible for all documentation, booking, recording and administration of loans. Margaret Wright, Assistant Manager during 1989, was responsible for administration of facilities within the branch. She was secretary for the London Credit Committee (LCC) and attended Lloyds syndicate meetings. While she took notes and reported back to the bank, Wright did not have any decision‑making authority.
    2280 Wright reported to Stewart, the manager responsible for non‑Portuguese accounts. He was present at LCC meetings in September through December 1989, including those where legal aspects of the Bell refinancing were discussed.
    2281 Credit analysts Duarte Rocha and Arlindo Costa, who were seconded from BE head office, assisted in analysing financial information and reported to Stewart as well as directly to the LCC. Brodie had primary responsibility for operation and administrative aspects in the London branch but also took on de Almeida’s responsibilities in relation to all loan portfolios established though BE London. He was a member of the LCC but was absent from the London office in September 1989.
    2282 The LCC met weekly to consider outstanding risks or new proposals. Responsibilities for particular loans were assigned to members of the committee. Brodie, de Almeida Stewart, Martins, Antonio Saude, Antonio Mendia and Costa sat on the committee in 1989. The LCC had an authority limit of £250,000. While the Executive Credit Committee at BE head office made the decision to participate in the Lloyds syndicate for £5 million, the decision to agree to participate in the refinancing was made by the LCC. This matter was not referred to BE head office, but as a matter of practice minutes from LCC meetings were copied to that office.
    11.10. BoS
    2283 The Governor and Company of the Bank of Scotland was established by an Act of the Parliament of Scotland on 17 July 1695. It is the only bank ever to be founded by such an Act and was (until recently) the only commercial institution created by the Scots Parliament still in existence.
    2284 On 10 September 2001, the Bank of Scotland and Halifax Group plc agreed to merge to create HBOS. HBOS plc is a company incorporated in the United Kingdom and with its head office and corporate headquarters in Edinburgh. It is the holding company of the HBOS group, the subsidiaries of which included Halifax Group plc and The Governor and Company of the Bank of Scotland.
    2285 On 17 September 2007 The Governor and Company of the Bank of Scotland was incorporated as a public company and changed its name to Bank of Scotland plc. It operates as the principal banking subsidiary of the HBOS group.
    The convertible bond issue period
    2286 BoS was based in Edinburgh but had a branch in London. The key departments or decision‑making bodies of the bank during the relevant period were the London Chief Office (LCO), the International Division, Edinburgh (IDE), the Treasury and the Management Board.
    2287 During 1986 and 1987, the LCO was primarily responsible for facilities offered or provided by the bank in pounds sterling. This primary responsibility meant that by convention within the bank, the LCO was ordinarily given the first opportunity to participate in facilities denominated in pounds sterling. However, other divisions within the bank could lend in pounds if the LCO declined to take up a proposed facility.
    2288 The Treasury department and Business Development division were amongst the various departments within the LCO. Certain officers within these two departments operated as relationship managers and were involved in creating and developing relationships with customers or prospective customers in order to create lending opportunities for the bank. These prospective facilities would then be referred to the appropriate division within the bank.
    2289 Originally there was an overseas department within the LCO, but this department was eventually made part of the IDE and operated as a subordinate London‑based office for the IDE. The responsibilities of the IDE included the administration of the bank’s participation in the Bell facility. The Credit and Administration Department (CAD) within the IDE dealt with all international credit proposals and was the decision‑making authority in relation to international credit proposals or applications for amendments to existing international facilities.
    2290 Financial information and general correspondence was considered and reviewed by a Manager’s Assistant; this information was then summarised and included in reports to the relevant Manager in the CAD. Assistant Managers’ responsibilities included credit analysis as well as reviewing draft documentation prepared by the Manager’s Assistants. Reports and reviews would be considered by the Manager in the CAD and passed on for further review by the relevant Senior Manager where appropriate.
    2291 The role of Manager entailed monitoring the credit risk of existing and new facilities, as well as reporting information (especially any deterioration of assets) to the bank’s executives. This position did not have authority to approve or reject changes to facilities and only made recommendations on applications.
    2292 A Senior Manager’s role in the credit application process involved reviewing applications, approving changes to existing facilities and reviewing loans within the authority limit delegated to that position. The Bell facility was beyond the Senior Manager’s authority limit. Senior Managers reported to the Divisional General Manager, who in turn reported to the General Manager of the International Division.
    2293 The Treasury division at the bank was managed by a Senior Manager, who reported to the General Manager of the division. The General Manager of the Treasury division reported to the Treasurer. The Treasurer could approve the recommendations of the General Manager of IDE where the decision in question exceeded the personal authority of the General Manager, but essentially, the General Managers of the International Division and the Treasury division at the bank were responsible for all credit decisions.
    2294 The configuration of the Management Board could change depending on the purpose for which it was meeting. Accordingly, it could comprise different numbers of executive and non-executive members at any given time. The board could also configure itself as a credit committee for the purpose of considering high‑level proposals. The board could also approve the recommendations of the General Manager of IDE where the decision in question exceeded the personal authority of the General Manager.
    2295 Peter Burt was the joint General Manager and Head of International Division, Edinburgh, and from May 1988 was Treasurer and Chief General Manager. Adam Ion was a Manager within IDE. John Duthie was the Senior Manager of CAD. At the relevant time, John Dykes and James Boags were joint Managers of CAD and John Wilson was an Assistant Manager in that department. Each of them was involved in the decisions to participate in the Bell facility and in relation to the requests to treat the bond issues as equity. All of them (except Ion) gave evidence.
    2296 The position with respect to the authority levels at the relevant time may be summarised as follows:
    (a) each proposal for the provision of a new facility or the amendment of the arrangements for an existing facility was dealt with at different levels, such that if the proposal was approved at a lower level it moved to the next level for consideration;
    (b) each of Dykes and Burt had the authority to decline any proposal without forwarding it to a higher authority;
    (c) if the proposal exceeded the delegated authority limit of any level, it was forwarded to the next level if approval was recommended; and
    (d) the approval decisions in respect of the Lloyds syndicated facility exceeded the authority of Dykes and Burt. The latter had a monetary approval limit of £5 million.
    The refinancing
    2297 The International Division at the bank’s head office was responsible for administration of the bank’s participation in the Bell facility. The operation of the CAD continued in much the same manner as described in the preceding section. Diane Meikle and Jim Halley were Assistant Managers within CAD.
    2298 Andrew Moorehouse, Manager CAD, recalled that in many instances only summaries of financial information (rather than source material) were passed up the line to him and to higher authority. Gordon Smith, a Senior Manager, also recalled that he usually received spreadsheets and comments prepared on documentation received by the bank rather than the source documents. However, Smith said that in late 1989 he received and reviewed more (but not all) information in relation to the Bell facility, including letters and reports from Lloyds Bank. Smith reported to Ian Logie, Divisional General Manager, who in turn reported to Gordon McQueen, General Manager of the International Division.
    2299 Moorehouse’s role as Manager entailed monitoring the credit risk of existing and new facilities, as well as reporting information (especially any deterioration of assets) to the bank’s executives. He had no authority to approve or reject changes to facilities and only made recommendations on applications. Stewart Livingston was the Manager’s Assistant who prepared the credit application in relation to the refinancing of the Lloyds syndicate facility. The application was submitted to Moorehouse for checking and additional comments before it was sent to the Senior Manager, Smith.
    2300 The Senior Manager’s role in the credit application process involved reviewing applications, approving changes to existing facilities and reviewing loans within the authority limit delegated to that position. It was usual practice for Smith to record any disagreements with a Manager’s recommendation on the application or in a separate memorandum. The Bell facility was beyond Smith’s authority limit and his role in relation to the application to refinance the facility was limited to reviewing and making recommendations. Smith supported the application to refinance the Bell facility. Smith gave evidence.
    2301 Ultimately, McQueen made the decision to proceed with the refinancing of the Bell facility on 14 November 1989. As General Manager of the International Division and the Treasury division at the bank, McQueen was responsible for all credit decisions. He was not called as a witness.
    11.11. Indosuez
    2302 Banque Indosuez’s origins date back to the Banque l’Indochine (founded in 1875 as the issuing bank for the French territories in Asia) and Banque de Suez (established in 1959 following the nationalisation of the Suez Canal). These two banks merged in 1975 to form Banque Indosuez.
    2303 In 1996, Banque Indosuez was acquired by Crédit Agricole, but remained a distinct and separate legal entity. It changed its name to Crédit Agricole Indosuez in May 1997. In May 2004, Crédit Agricole Indosuez and Crédit Lyonnais’ corporate and investment banking division were merged to form Calyon.
    2304 The fact that Indosuez, Crédit Agricole and Crédit Lyonnais are now associated is not relevant to the discussion of events prior to 1996.
    The convertible bond issue period
    2305 The Indosuez head office was located in Paris, but the bank’s participation in the Bell facility was managed from its London branch office.
    2306 Indosuez London comprised a number of departments including, relevantly, a Corporate Banking Department and a Credit Department. The Corporate Banking Department operated with a simple two tiered structure: account managers would report to the head of the Corporate Banking Department, who was also described as the Manager of Multinational Corporate Banking.
    2307 Account managers were responsible for marketing the bank and, accordingly, were also responsible for reviewing information provided by potential borrowers and preparing and presenting credit proposals regarding those potential borrowers. Such officers also managed specific accounts and would review all key information received by the bank relating to those accounts.
    2308 The Manager of Multinational Corporate Banking would report to the Deputy General Manager of Indosuez London, who would report in turn to the General Manager of the London office. Sitting at the apex of the structure of Indosuez London was the London Credit Committee (LCC). The heads of the Credit and Corporate Banking departments, as well as the Deputy General Manager and General Manager of the London office, sat on the LCC.
    2309 Credit proposals or applications would be prepared by the relevant account manager and then submitted to the Credit Department for analysis of the credit risk. If the head of the Credit Department signed off on the proposal, it would be sent back to the account manager. The account manager would seek the approval of the Manager of Multinational Corporate Banking and the proposal would then be submitted to the LCC for consideration. If the LCC recommended the proposal, it would then be sent to the Paris head office for final approval. The recommendation of the LCC would be attached to the proposal.
    2310 Andrew Trypanis was, from April 1984 until May 1987, head of the London Credit Department and also a member of the LCC. From May 1987 until September 1989, he was head of the bank’s Private Banking Department in London, before resuming as Head of Credit, London.
    2311 The banks opened their case on the basis that the LCC did not conduct any detailed critical analysis of applications. Its role was merely to check that there were no features likely to prevent the credit being recommended for approval by Indosuez Paris. Ralph Haman, who was an account manager for the Corporate Banking Marketing Department with Indosuez London, gave evidence that this was the case. He also said that in considering any facilities to be extended to an Australian company, the London Credit Committee would rely on the Paris head office and the bank’s Australian subsidiary, Indosuez Australia Limited (ISAL), to conduct any detailed critical analysis.
    2312 The bank’s head office in Paris held the ultimate decision‑making authority for any proposals or applications originating from its various branches. The International Department and the Paris Credit Committee were the departments responsible for dealing with those decisions.
    2313 The International Department was split up into a number of divisions, each of which dealt with a specific geographic region. According to the bank’s policy, the various branch and subsidiary offices would report to the relevant division of the International Department when they were considering entering into a facility with a customer based in a specific geographic location.
    2314 Credit proposals received from foreign branches were assessed by the Vice President of the relevant regional division. The Vice President in charge of a regional division was responsible for coordinating all of Indosuez’s lending in that area. That officer would assess the credit risks of a proposed facility and had a personal authority limit within which they could approve the participation of a subsidiary or branch office in a facility. The Vice President of a division also had a consultative role, and would be updated and informed of significant changes to certain facilities.
    2315 Chantal Gautier was the Vice President of the Australasia division at the International Department at the relevant time. She reported to the First Vice President in charge of the Pacific region (Andre‑Luc Boussagol). A decision could be made by the Vice President and First Vice President acting in concert. The combined decision‑making authority of the Vice President (Australasian division) and First Vice President (Pacific region) between 1986 and 1988 was US$10 million. Where a decision concerned an amount exceeding the combined authority of those officers, the matter would be referred to the Paris Credit Committee.
    2316 Indosuez had a 50 per cent interest in Indosuez Australia Ltd (ISAL). Although Indosuez was involved in ISAL’s credit process, following approval by Paris, credit applications were still required to be submitted to ISAL’s own banking committee and board.
    2317 The bank’s position with respect to the authority levels at the relevant time may be summarised as follows:
    (a) Each proposal for the provision of a new facility was dealt with at different levels, such that if the proposal was approved at a lower level it then moved to the next level for consideration.
    (b) In 1986, if Indosuez London was dealing with an Australian risk, the London Credit Department would review the financial information and provide their view about the risk. This review was then forwarded to the LCC.
    (c) The LCC comprised senior management from the Corporate Banking area of Indosuez, London. A proposal was only recommended for submission and decision to Indosuez Paris if the LCC was in favour of the risk. The LCC did not conduct any detailed critical analysis of the proposal. Its role was merely to check that there was nothing wrong with the credit to prevent it from being recommended for decision to Indosuez Paris.
    (d) In 1986, the International Department’s Pacific/Australasia Division had authority to approve any application to participate in facilities up to US$10 million. Proposals for Australian risks went to Gautier. If she supported an application, she conveyed it to the Vice President in charge of the whole Pacific Region. If she did not support an application, she could decline it without further action.
    (e) If the amount of the proposed credit exceeded the authority limit of US$10 million, the proposal was forwarded to the Paris Credit Committee for approval.
    2318 Haman and Gautier were the only officers of Indosuez who gave evidence in relation to the events of either of the periods.
    The refinancing
    2319 The officers of Indosuez London were responsible for day-to-day management of the file, evaluating credit risks and making evaluations regarding loan applications. The London branch consisted of several departments including the Loans Administration Department, Corporate Banking and Marketing Department, Credit Department, London Credit Committee, Private Banking Department and Legal Department.
    2320 Account Managers Haman and Moxon and Glyn Graham (an analyst) were the officers in the Corporate Banking and Marketing Department who were involved in preparing the application for refinancing the Lloyds syndicated loan. Haman’s role included marketing and relationship management for 30 to 40 companies at any one time. He had no credit authority and reported to Robert Wilson (then subsequently to François de Pelleport and Peter Pegrum), Manager of Multinational Corporate Banking and Head of the Corporate Banking and Marketing Department.
    2321 Roger Poole was Head of Loan Administration. His role involved handling day-to-day administration in the Loans Department, including overseeing the processing of loan facility documentation. On occasion, Poole attended Lloyds syndicate meetings and reported back to Haman.
    2322 Haman recalled that whenever new facilities were considered, such as the Bell facility, analysts in the Credit Department reviewed the financial information to determine whether it was a suitable company for the bank to lend to. In 1986, when the bank was dealing with an Australian risk, the London branch’s Credit Department would review the financial information and provide their view as to the risk. They would then forward it to the LCC.
    2323 Trypanis was Head of the Credit Department in BI London. His role involved signing‑off on credit proposals that had been analysed by officers in the department. Trypanis’ predecessor, Buckman-Drage, authorised the application to refinance the Bell facility to be forwarded to the LCC. Tony Dawson, an Account Officer and Senior Analyst, was Trypanis’ deputy. He was involved in all restructuring proposals.
    2324 The LCC was comprised of senior managers at Indosuez London, including the General Manager (Adrian Phares), the Deputy General Manager (Jean-Louis Compain), the Head of the Credit Department (Trypanis) and the Head of Corporate Banking and Marketing Department (Wilson). Harman and Indosuez London’s in‑house counsel (Margaret Garner) provided information to the LCC but did not vote. The LCC had the highest level of authority in BI London. Harman could not remember the amount of the London office’s credit limit but stated that it was ‘very low’. All applications for which the support of the LCC were forwarded to Indosuez head office.
    2325 Indosuez head office held the ultimate decision‑making authority of the bank. Credit proposals received from foreign branches were assessed by the vice president of the relevant regional division and submitted to the First Vice President in charge of the appropriate global region. Relevant officers included Bernard Esnault (Vice President UK), Rabut (Senior Vice President Europe), Gautier and Marie France Besnard (Vice Presidents Australasia), Boussagol (First Vice President Pacific) and Thierry Da and Bertrand Hutchings (Senior Vice Presidents Pacific).
    2326 Esnault was Haman’s main contact in Paris. Besnard and Hutchings co‑authored a fax sent to Harman regarding the terms of the Bell facility restructuring. Proposals requiring approval for amounts exceeding a regional division’s authority limit were submitted to the Paris Lending Committee. The International Department and the Paris Lending Committee were answerable to the board of the bank, which was chaired by Jeancourt‑Galignani.
    2327 ISAL arranged and participated in a number of facilities for Bell and Bond group companies: see Sect 4.2.8.7. ISAL reported to the Indosuez head office regarding the Bell and Bond groups from time to time in 1989 and 1991. Given its location, ISAL was the closest point of contact between the Bell group and the Indosuez head office and Indosuez London. David Blair, an account officer at ISAL in Sydney, provided assistance to BI London with queries of a general nature regarding TBGL. The Paris office received information provided by ISAL before approving the refinancing proposal of 15 September 1989 and proceeding with the Transactions on 26 January 1990.
    11.12. BfG
    2328 Bank für Gemeinwirtschaft AG was a company incorporated in Germany and carrying on the business of banking. It had subsidiaries in Germany, Luxembourg, Switzerland, Israel and the United States. In 1992 Bank für Gemeinwirtschaft AG changed its name to BfG Bank AG (BfG).
    2329 In January 2000, BfG was taken over by Skandinaviska Enskilda Banken AB and it changed its name to SEB AG in April 2001. There was no change to the legal entity itself.
    The convertible bond issue period
    2330 The head office of the German bank, BfG, was located in Frankfurt. It had a London branch (BfG London), through which its participation in the Bell facility was handled. The key departments or decision‑making bodies of BfG during the relevant period were:
    (a) Loans Department: London.
    (b) Management: London.
    (c) Syndicated Loans Department (SLD): Frankfurt.
    (d) Legal Department: Frankfurt.
    (e) Foreign Department: Frankfurt.
    (f) Credit Risk Department (Filialbüro): Frankfurt.
    (g) Board of management: Frankfurt.
    2331 Account Officers in the Loans Department were at the lowest level of the hierarchy in BfG London. They had the responsibility of handling the day‑to‑day administration of loans. The Account Officers’ role was to prepare or evaluate loan applications and conduct credit reviews to assess the financial status of prospective borrowers. The officers would then make recommendations in relation to those applications.
    2332 Senior Account Officers were responsible for monitoring the specific accounts allocated to them. They also assisted Account Officers in fulfilling their duties when necessary. When a credit application was received, a report would be complied by the Senior Account Officer and an Account Officer in the Loans Department. This report would be forwarded to the Loans Manager. At the relevant time, Jens Hagemann was a Senior Account Officer and Jürgen Herche was the Loans Manager. They were assisted by Braeuer, a Legal Officer.
    2333 The Loans Manager was responsible for ensuring that credit applications were properly researched and prepared. Where credit applications were supported by the Loans Manager, the application and the recommendation would be submitted to the joint General Managers for consideration
    2334 The joint General Managers had the highest level of authority in the London branch. They were responsible for overseeing all lending and administration within BfG London and supervised the Loans Manager and Account Officers. The joint General Managers had authority to approve credit applications up to DM3 million in respect of bilateral loans but had no authority regarding bilateral loan applications beyond the DM3 million limit or any syndicated loan applications. These applications had to be forwarded to head office. If the joint General Managers did not support the application they had a discretion not to submit it to head office for consideration. The application would not proceed in those circumstances. At the relevant time, the London joint General Managers were Werner Dressel and Ulrich Mauersberg.
    2335 Within the bank’s head office, the SLD, the Foreign Department, the Credit Risk Department (‘Filialbüro’) and the Legal Department reported to the board of management who were in turn responsible to the board of directors.
    2336 The SLD (also referred to as the Euro Syndicated Loans Section) was responsible for syndicated loan applications. The credit officers in the SLD reviewed the syndicate loan proposals submitted to head office by the foreign branches and subsidiaries. An officer in the SLD would review the application to assess the risks for the bank. The SLD did not have the authority unilaterally to turn down a proposal and was required to submit the proposal to the board of management regardless of whether the proposal was supported by the SLD or not. However, the SLD usually took into account the views of the branch in its own assessment. Kristina Laubrecht and Friedhelm Scholl were analysts within SLD, whose head was Wolfgang Reischel. Günter Kremer and Horst Willemse were credit officers within SLD.
    2337 After assessing the proposal, the SLD would prepare a recommendation that, along with the original credit application, would be sent to the Filialbüro. A second assessment and recommendation would be made by the Filialbüro. The Filialbüro would also assess the risk of the transaction. Any loan proposal or amendment to an existing loan had to be reviewed by the Filialbüro before it was forwarded to the board. It was the responsibility of this department to make a risk recommendation and it would do so in a note on the credit application or in a separate memorandum.
    2338 If the proposed borrower was a company domiciled in a foreign country, the Foreign Department was also required to make a recommendation. Ulrike Hocke and Reiner Hochstrate were, respectively, an Account Officer and the Head of the Foreign Department.
    2339 A package of information consisting of the credit application and recommendations of the SLD, Filialbüro and Foreign Department (if applicable) would be submitted to the board. The board of management usually only received the original loan submission and the recommendations of SLD, the Foreign Department and Filialbüro when making a decision in relation to a proposed facility. The board would consider the proposal based on these documents and would not normally see the original documentation from the client or customer. Ralf Krüger and Matthias Hoffman‑Werther were members of the board of management. Krüger was also the board member responsible for London.
    2340 Hagemann, Herche, Hoffman‑Werther, Laubrecht, and Mauersberg all gave evidence on behalf of BfG.
    The refinancing
    2341 The officers of BfG London were responsible for the day-to-day management of the facility file, analysing credit risks and making recommendations regarding loan applications. The London branch’s operational structure included, among other things, the Loans Department and the Legal Department. Both fell within the authority of the joint General Managers of BfG London, Dressel and Mauersberg. Mauersberg’s role was to oversee administration and lending in the London office. Dressel had responsibility for the treasury and dealing activities of the London branch.
    2342 Paul Wright was the Deputy Manager in the Loans Department of BfG London. Wright dealt with the Bell facility on a day-to-day basis. Willemse was a Loans Manager. His role involved ensuring that all loan applications were properly researched and prepared. Willemse is reported to have worked closely with the joint General Managers and to have had daily discussions with Mauersberg regarding the bank’s activities.
    2343 Once receiving the support of the joint General Managers, all loan applications involving exposure over the DM3 million delegated authority level of the BfG London had to be submitted to BfG head office.
    2344 The bank’s head office was divided into four departments: the Syndicated Loan Department, the Foreign Department, the Credit Risk Department (Filialbüro) and the Legal Department. These departments reported to the board of management, which in turn reported to the board of directors.
    2345 Serge Kamarowsky was the legal adviser in BfG head office. He advised the Syndicated Loans Department in respect of loan applications and did so in relation to the risks facing the bank in entering into the refinancing Transactions. Kamarowsky communicated directly with the Account Manager (Wright) at BfG London when necessary. He provided Laubrecht, the Credit Officer in the SLD, with an analysis of the legal risks attendant on the Transactions.
    2346 Laubrecht was one of a number of officers who reviewed syndicate loan proposals forwarded by foreign branches or BfG subsidiaries. Her role required regular discussions with the relevant branches. Laubrecht reported to Scholl, who was Head of the SLD. Scholl’s role involved approving or rejecting proposals supported by the Credit Officers in the SLD. It was his usual practice to approve proposals supported by Credit Officers, including Laubrecht.
    2347 Krüger was a member of BfG’s board of Management and had responsibility for the SLD as well as the London branch. Hans‑Joachim Knieps was Deputy Chairman of the board of management. He was Krüger’s deputy in relation to overseeing BfG London. Scholl and Krüger provided witness statements but were not called to give evidence.
    2348 In addition to those mentioned at the end of the preceding section, Wright gave evidence.
    11.13. Crédit Agricole
    2349 Crédit Agricole SA’s origins date back to 1894 when it was created to serve France’s farming and agricultural community. Specific legislation allowed Crédit Agricole to bring together some existing local banks and set up new banks. In August 1920 a public-sector central body was introduced to monitor and coordinate the financial activities of the institution as a whole. In 1926, this was renamed Caisse Nationale de Crédit Agricole. In 1988, Crédit Agricole became a public limited company following its mutualisation.
    2350 In 1996, Crédit Agricole acquired Banque Indosuez. It also acquired a 10 per cent equity interest in Crédit Lyonnais in 1999. In May 2003, Crédit Agricole effected a friendly takeover bid for Crédit Lyonnais. Crédit Agricole went public in December 2001 and again changed its name to Crédit Agricole SA. In May 2004, the name of the Crédit Agricole group’s financing and investment banking businesses was changed to Calyon.
    The convertible bond issue period
    2351 The head office of Crédit Agricole was located in Paris but its participation in the Bell facility was underwritten out of the London branch (CA London). The bank’s International Division in Paris was also involved in decisions concerning the facility. The bank was not one of the original participants to the Lloyds facility but entered into the syndicate through CA London in February 1987.
    2352 CA London was divided into departments. By May 1988 there were four departments: Corporate Banking and Finance Division (CBFD), Asset and Acquisition Finance, Property and Project Finance, and Commodity and Trade Finance. The Bell facility was managed through the CBFD, which dealt with non‑specialised lending activities.
    2353 In early 1987, the CBFD was split into two parts, Corporate Banking and Corporate Finance, each of which had a head of department/manager who reported to the Senior Manager and Head of CBFD. The heads of departments/managers were analysts as well as relationship managers in charge of developing the client base, bringing in deal opportunities and analysing them. The head of Corporate Banking was supported by an Assistant Manager whose role was primarily relationship banking and seeking new business.
    2354 The most junior officers within the CA London structure were the account managers in CBFD. They acted as analysts and as account managers. Sarah de Rohan (then Margerrison) was the account manager responsible for the Bell facility. These officers reported to the Senior Manager of Corporate Banking (Bill Vickers and Paul Rex), who in turn reported to the Head of CBFD (Marc Brugière-Garde). The next level of administration were the Deputy General Managers and General Manager of the CA London (Alain de Truchis).
    2355 All credit applications were considered by the London Credit Committee (LCC) whose members included the Senior Manager and Head of CBFD, the General Manager and other heads of department within CA London. The General Manager had authority to make recommendations or decisions but otherwise, the LCC required a quorum of three to make a recommendation or decision. De Truchis and Brugière-Garde were members of LCC.
    2356 According to de Rohan, there were very few separate credit analysts so the assistant managers initially did both the credit analysis and the marketing work. She said that, as an account officer, she was required to read and analyse all information and correspondence received by the bank in relation to the Lloyds syndicated facility.
    2357 The heads of the four departments reported to the Senior Manager and Head of CBFD, who was by then also Assistant General Manager. The head of Corporate Banking was supported by a Manager and an Assistant Manager who were required to discuss with the head any important issues relating to particular accounts or to raise any questions that required a decision to be made regarding the facility.
    2358 Credit proposals were prepared by each of the four departments within CBFD and presented to the LCC by the department head. Following the split of CBFD, the membership of the LCC remained the same with the Senior Manager and Head of CBFD, the General Manager and other heads of department (which had the following slightly different names: property mortgage/finance, treasury and administration) meeting on a weekly basis to deliberate on applications or proposals. The LCC was chaired by the General Manager, who still had sole decision‑making power and a delegated authority level of £2 million or US$3 million.
    2359 All credit proposals were considered by the LCC. An analyst would present the proposal to the LCC. The Senior Manager and Head of CBFD was required to answer questions from the LCC and take ultimate responsibility for the proposal.
    2360 Credit applications in excess of the LCC’s delegation had to be sent to the International Division of the bank’s Paris head office for approval. Given the bank’s £5 million participation, all major decisions regarding the Lloyds syndicated facility had to be approved by head office. Credit applications forwarded to Paris were accompanied by the same documentation as had been put before the LCC.
    2361 The London office was not privy to the decision‑making process in Paris. CA Paris could ask questions or request more information, but the decision would be theirs alone. If the London branch did not wish to enter into a proposed facility, it had the authority to decline a proposal without requiring the consent of CA Paris.
    2362 The two departments in the International Division in Paris that were responsible for approving international credit applications were the International Credit Evaluation Department (IEN) and the relevant geographical zone. The zones were responsible for developing the business of the bank’s overseas branches, monitoring risk and analysing proposed lending within their geographical areas.
    2363 While the IEN and the zones had a parallel relationship and would assess proposals separately, it was the IEN that had the ultimate authority to approve or refuse a proposal. Christian de Sayve was the chairman of the IEN Internal Credit Committee. No officer had the authority to approve a credit proposal without his involvement. De Sayve noted that in situations where a zone had refused a proposal but the London branch was still pursuing it, the IEN would place considerable weight on the views of the zone.
    2364 The reporting line was not strictly hierarchical because the zones and the IEN had a parallel role. The zones were primarily responsible for developing the business of the bank’s overseas branches and for monitoring the bank’s exposure and risks in the various geographical areas in which the bank had a presence. The zones would analyse proposed lending within their geographical areas in order to see whether they fitted in with the bank’s general banking strategy. The IEN’s role was very narrow in comparison. It would analyse proposals from a credit risk point of view, then refuse or authorise the credit.
    2365 By the time a proposal came to the IEN it would have been the subject of a number of reviews from various levels of the bank’s decision‑making hierarchy. According to De Sayve, the IEN relied on the accuracy of documents prepared by fellow officers and on the beliefs and recommendations expressed by those officers being genuine. However, he said the IEN maintained the right to ask for further information.
    2366 It was necessary to obtain approval from the Northern European zone in relation to any loans with UK associations since that department was expected to maintain an information database on all UK borrowers.
    2367 In relation to the Bell facility, it was also necessary to obtain approval from the Asia Pacific zone, which was the zone responsible for maintaining an information data base on all Asian facilities, including those in Australia. The head of the Asia Pacific zone was responsible for the global RHaC group relationship but did not consider facilities from a credit perspective. The head would provide input to the IEN by way of additional information.
    2368 Brugière-Garde gave evidence that, in practice, obtaining approval was easy because the zones were ultimately responsible for the development success of CA London. Brugière-Garde said that, in general, the zones comprised a number of marketing people. They were responsible for strategy and development but not for the risk. They did not focus on the credit risk itself in the same depth as the IEN.
    2369 Another level in the hierarchy was the overall Head of the Zones Department. The head of each zone reported to the Head of the Zones Department, who in turn reported to the Head of the International Division. However, there was some degree of direct reporting by the head of each zone to the Head of the International Division.
    2370 The delegated authority limit of the IEN was US$50 million. Approval for proposals over this limit could only be given by the International Commitments Committee.
    2371 In summary, an application sent from London to Paris would have to be approved by the Northern European zone, the Asia Pacific zone, IEN and finally the Head of the International Division. The result of the head office decision would be communicated back to London for implementation.
    2372 From 1986, Michel Arnaud was the manager of the South Asia and Pacific zone. Jacques de la Rochefoucauld was the Zone Manager in the Northern European zone (which included the UK).
    2373 During the trial, I heard evidence from Brugière-Garde, de Rohan, de Sayve and Rex on behalf of Crédit Agricole.
    The refinancing
    2374 The Bell facility remained under management by the CBFD, which dealt with non‑specialised lending activities. Rex was the Deputy Manager and later Assistant General Manager in CBFD and was responsible for day-to-day conduct of the Bell facility. He reported to Brugière-Garde, Division Head, and later to David Barrows. From September 1989, Rex was effectively the most experienced member of the London branch’s senior management involved in approving transactions. He was a member of the LCC, attended Lloyds syndicate meetings and prepared the credit application in respect of the restructuring of the loan.
    2375 De Rohan was an account officer in CBFD, and the primary Account Officer on the Bell facility, until September 1989. Her main role was in relationship banking (finding new business for the bank) but she was also responsible for analysing the on going credit risk of existing clients.
    2376 Alain de Truchis, General Manager of CA London during 1989 and 1990, chaired the LCC until September 1989. As General Manager, he had sole decision‑making power after applications were considered by the LCC. Brugière-Garde reported to de Truchis until Barrows assumed the position of General Manager in mid-1989.
    2377 The London branch had a delegated authority limit of £2 million and, as the amount of the Bell facility exceeded that amount, all proposals regarding that account had to be submitted to the International Division at CA head office in Paris.
    2378 During this period, the South Asia and Pacific zone remained responsible for the Bell group loan. Michel Arnaud was the manager of the zone and Fransois Ackerman was the Deputy Manager. Arnaud reported to Francoise Jouven, a co‑head of the International Division at CA head office. Jacques de la Rochefoucauld was the manager of the Northern European zone and CA London reported to him. His role included monitoring the London branch but did not involve any credit functions.
    2379 François Jouven and Giles Guitton were co‑heads of the International Division of the bank. Martial Stambouli was Director of the International Division in 1990.
    11.14. Crédit Lyonnais
    2380 Crédit Lyonnais’ origins date back to Lyon, France in 1863. In 1872 it became a joint stock company and began to expand internationally. In 1882, the Paris branch became Crédit Lyonnais’ head office. Following World War II and the introduction of new statutes, Crédit Lyonnais was nationalised. It was privatised in 1999.
    2381 In May 2003 Crédit Lyonnais became a subsidiary of Crédit Agricole, following Crédit Agricole’s friendly takeover bid. In May 2004, Crédit Agricole merged Crédit Lyonnais’ corporate and investment banking division with Crédit Agricole Indosuez to form Calyon, a corporate and investment bank.
    The convertible bond issue period
    2382 The head office of Crédit Lyonnais (CL head office) was located in Paris but the bank’s participation in the Bell facility was managed from its London Office (CL London). Officers in London were responsible for the day‑to‑day running of the facility file, evaluating credit risks and making recommendations regarding loan applications.
    2383 CL London had departments that dealt with corporate finance, project finance, private banking and real estate finance. Each department was made up of teams (‘filièrès’) of account managers for each particular loan facility. These groups were responsible for receiving all external communications (such as annual reports and other documents) and then reviewing those documents and recommending any appropriate action. Account managers who worked on the Bell facility included Jean McKey and Patrick McGahan.
    2384 Account Managers reported to the ‘Chef de Filièrè’, the head of the group. This position amounted to a senior account manager role. The Chef de Filièrè complied credit proposals, financial reviews and general corporate information and reported to the Head of Corporate Banking and Assistant General Manager. McGahan occupied the role of Chef de Filièrè from 1987 to 1989 and he reported to Ian Menage. The in-house legal counsel at CL London (Jennifer Goodwin) was responsible for advising on legal matters received by the bank’s London office.
    2385 The Deputy General Manager was responsible for reviewing internal applications and reviews. The Deputy General Manager reported to the General Manager at CL London. Jean‑Claude Goubet and Christian Ramanoel were Deputy General Mangers and Christian Ménard and Goubet were General Managers during the period.
    2386 A credit application submitted to the Head of Corporate Banking at CL London would be examined from its commercial perspective. The application would then be assessed by the Credit Department, which reviewed all credit applications and advised on risk. Mangers of the Credit Department would then submit applications to the credit committee for review and checking. The credit committee would then make a recommendation to forward to CL head office.
    2387 CL London had the authority to approve corporate banking facilities up to £1.5 million. All loan applications that exceeded that authority, including the Bell facility, had to be submitted to CL head office for approval. The members of the credit committee included the Chair, General Manager, Credit Manager, Deputy General Manager and Assistant General Manager.
    2388 The International Department in the Paris office was split between Direction des Affaires Internationales (DCAI), which was organised into geographic zones of operation, and Directions des Engagement (DDE), the credit risk section. DCAI was the commercial and decision‑making section of the International Department and was concerned with all facility participations outside France. Responsibility for the Bell facility fell to officers in the Europe section and the Asia/Pacific section.
    2389 DDE officers analysed risk and provided comments and recommendations to the relevant officers in DCAI. The DDE would primarily undertake the first review of any application received from CL London. This review would assess the risk elements of the proposal by considering the balance sheet, relationship between assets and liabilities, profit and loss accounts, cash flow and non‑financial elements.
    2390 Following a recommendation from the DDE, the head of the relevant zone at DCAI could make a decision within the delegated limit. Where a matter exceeded the delegated authority level of the DCAI head, the application would be submitted to a DCAI Committee.
    2391 Other offices of the bank were also involved in its participation in the syndicated facility. Crédit Lyonnais Singapore was initially allocated as the branch with overall responsibility for monitoring the Bell group (‘agence pilote’). As Ménard explained it, the agence pilote was a classical, traditional way of giving to a branch or to a subsidiary the key role in assessing the follow‑up on the risk on the group. The office was copied in on some information about the borrower and provided information or advice.
    2392 Crédit Lyonnais Australia in Sydney reported to CL head office and gave advice and recommendations to branches investing within its area. At some point, the Sydney office took over as agence pilote from Crédit Lyonnais Singapore. But, as Goubet said, the agence pilote system was not clearly defined. He, for example, thought that the London branch was the agence pilote for the Bell facility.
    2393 Goubet, Ménard, Ramanoel each gave evidence on behalf of Crédit Lyonnais.
    The refinancing
    2394 Account managers who worked on the Bell facility in relation to the refinancing included McGahan (from 1986), Peter Goodall (1987 ‑ 1990) and Michael Hebb (1989 ‑ 1990). Hebb’s role on the Bell facility file was to monitor the loan on a day-to-day basis. He reported Goodall, Senior Account Manager (and later Chef de Filièrè) and McGahan, Manager of the International Companies Filièrè. Hebb also attended Lloyds syndicate meetings and prepared the credit application in respect of the restructuring of the Bell facility.
    2395 McGahan, Account Manager in Corporate Banking, worked in the International Companies Filièrè in CL London. In January 1988 he became the Chef de Filièrè. McGahan was responsible both for developing existing and new businesses, as well as managing a team of three Account Managers and support staff. He left CL London in June 1989.
    2396 Goodall became a Senior Account Manager from mid‑1988 and then Chef de Filièrè in May 1989 (replacing McGahan). At the time he succeeded McGahan, he had previous knowledge of, and experience with, the Bell group companies, including the other facilities the bank provided to the Bell group. Goodall supervised Hebb and reviewed the Crédit Lyonnais file. He worked closely with and reported to the Head of Corporate Banking and Assistant General Manager (Ian Menage) and the Credit Department in CL London. Goodall was involved in the preparation of documents such as credit proposals, financial reviews and general corporate information.
    2397 Menage was Head of the Corporate Banking Division and a member of the CL London Credit Committee. He was directly responsible to the Deputy General Manager (Goubet 1986 to 1987 and Ramanoel 1987 to 1990) and (or) the General Manager (Goubet 1987 to 1992) for the marketing work of the Managers and Account Managers. His role was to develop business relationships and prepare initial credit proposals. Menage reviewed recommendations of Managers and Account Managers, then amended or forwarded them to the Credit Department of the branch prior to the proposals being submitted to the credit committee. In August 1990, he became Assistant General Manager of the Corporate Banking and Syndications Division. Menage was not called to give evidence.
    2398 Barthélemy was Head of the Credit Department in 1989 and 1990 and member of the CL London Credit Committee. The Credit Department was responsible for reviewing all information (especially financial information) received in respect of credit proposals and supporting the proposal if the risks were acceptable. Barthélemy was not called by the defendants to give evidence.
    2399 As Deputy General Manager, Ramanoel assisted in managing the Commercial Department of CL London. In assessing credit applications, he would seek further information on any matters from the relevant Filièrè. As general practice, he did not review supporting documentation referred to in an application. Goubet’s role as General Manager gave him the authority to act in situations where the bank was considering taking action against a company that had breached covenants. However, he was required to inform CL head office and any other branches that had a relationship with the group involved.
    2400 At the relevant time, Goubet, Menange, Ramanoel and Barthélemy were members of the credit committee of CL London. They reviewed and checked applications submitted by mangers of the Credit Department before making a recommendation to CL head office. There were no relevant changes in the operations of DCAI and DDE.
    2401 Henri Laumet was the head of the Asia Pacific zone at DCAI and was responsible for the bank’s Australian office as well as facilities that had Australian companies as borrowers. Yves Lajous was head of the European zone (Western Europe) in the DCAI. He was assisted by Nicolas D’Avout, who was responsible for dealing with the day‑to‑day matters concerning CL London and other branches within the Western Europe zone. He would generally review all proposals before discussing them with Lajous. Lajous was responsible for CL London and credit proposals in respect of the Bell facility were sent to him. Lajous would have discussed the proposals with Laumet and DDE prior to a decision being made.
    2402 Subject to what I have already said about the nature of the role, CL Singapore and then CL Australia acted as agence pilote for the Bell facility. Bernard Vibert, Joel Bernard, Jean‑Pierre de Bellecombe, Peter Hocking and Gerry Shuijers were involved with the Bell facility through CL Australia. Hocking (Chief General Manager) and Bernard (Bank Officer) reported to Vibert, Managing Director. Vibert was responsible for communicating information regarding the Bell companies to CL London and CL head office. Those offices in turn kept him informed of the relationship between the bank and the Bell group.
    2403 Laumet, Goodall and Hebb gave evidence on this aspect the litigation. Goubet, Ramanoel and McGahan also testified.
    11.15. Creditanstalt
    2404 Creditanstalt’s origins date back to 1855, when Bank Austria AG was first founded. In 1934 it merged into another organisation that, in 1939, was renamed Creditanstalt Bankverein. Creditanstalt Bankverein was nationalised in 1946.
    2405 On 31 December 1997 Creditanstalt Bankverein changed its name to Creditanstalt AG. Bank Austria AG owned nearly 95 per cent of the shares in Creditanstalt. In September 1998, Creditanstalt AG merged with Bank Austria AG under an Austrian legal principle by which Bank Austria AG assumed all of the rights and obligations of Creditanstalt. Consequently, Creditanstalt Bankverein ceased to exist.
    2406 In 2000 Bank Austria Creditanstalt merged with a German bank. Within the new group, Bank Austria Creditanstalt is responsible for business development in Austria and in Central and Eastern Europe.
    2407 In July 2001 orders were made substituting Bank Austria AG as the sixth-named third defendant in place of Creditanstalt Bankverein in this action. In August 2002 Bank Austria changed its name to Bank Austria Creditanstalt AG. On 27 September 2008 Bank Austria Creditanstalt AG changed its name to UniCredit Bank Austria AG. I will refer to the entity as Creditanstalt.
    The convertible bond issue period
    2408 Creditanstalt was an original participant in the Lloyds syndicated facility. The Bell account was managed by the Asia and Australasia group in Creditanstalt’s London office.
    2409 The loan and account officers in the London office’s regional groups were responsible for the day-to-day management of individual facilities. Their tasks included booking facilities and preparing applications. The Account Officer in the Asian and Australasia group, who had primary responsibility for the Bell account, reported to the Deputy Manager and Senior Manager (Head) of the Asia and Australasia group. Lloyd O’Harte was the original Account Officer on the Bell facility. From September 1987, Darryl Gayler had day‑to‑day responsibility for the Bell account.
    2410 The Senior Manager and Head of the Asia and Australasia group (John Crocker) was responsible for all of the London office’s Australian and Asian business. O’Harte and, later, Gayler, reported to Crocker. The Senior Manager dealt with strategy, marketing, business development and credit analysis. Applications for new facilities required the recommendation and endorsement of the Senior Manager. The Head of the Asia and Australasia group was formally required to report to the Senior Manager and Head of Corporate Banking (Paul Serfaty). Crocker was later to fill an Assistant Director position, reporting to the Deputy General Manager and Head of the Credit Policy Division, who in turn reported to the General Manager of the London branch (Nigel Hudson).
    2411 In the London office, credit applications had to be accompanied by an executive summary and signed by the relevant division head. Applications were reviewed by the Credit Risk and Evaluation department (CARE), which was responsible for ensuring technical compliance, completeness and accuracy. The application would then be considered by the London Credit Committee (LCC).
    2412 In 1986, the LCC was comprised of approximately eight individual officers from various departments, including Hudson and Serfaty. The committee did not necessarily meet together but each member was required to review the application.
    2413 The Deputy General Manager (Wolfgang Lafite) and General Manager (Hudson) of Creditanstalt London had a delegated credit authority for applications up to £2 million. The bank’s £5 million participation in the Lloyds syndicated facility exceeded this limit and thus required the approval of the Creditanstalt’s head office.
    2414 General practice in the London office was that the amount of information submitted to members of the LCC was to be minimised, therefore applications contained summaries of the main information and any relevant legal advice. The documents in the application that was submitted to the LCC was forwarded on to head office in Vienna. Original documents were not received by head office unless they were specifically requested.
    2415 The Creditanstalt head office was composed of the following relevant divisions or decision‑making bodies:
    (a) the International Division, which managed the bank’s international exposures (the London branch reported to this division);
    (b) the Filialbüro, a subset of the International Division, which was also known as the International Credit Department or Credit Control Department, and was responsible for credit analysis; and
    (c) the managing board, which exercised the ultimate decision‑making authority of the bank.
    2416 The Head of the International Division (Alarich Fenyves) reported to the Deputy Chairman of the managing board. This position was occupied by Guido Schmidt‑Chiari from 1986 to 1989. He became Director and Executive Chairman in 1989.
    2417 Applications received from the London office were reviewed by the Filialbüro, which prepared their own recommendation, a ‘Stellungnahme’, on the basis of the summarised information contained in the forwarded application. In 1986, credit applications under a certain threshold limit could be approved by the Head of the International Division and one member of the managing board (the Deputy Chairman). However, by 1989, this abbreviated approval process had been abandoned and credit applications were dealt with according to the authority limits set out in the bank’s credit procedures and guidelines.
    2418 The Creditanstalt Managing Board ultimately made decisions on new facilities and significant changes to accounts in excess of £5 million, it made the decision to participate in the Lloyds syndicated facility.
    2419 Crocker and James Cunningham were the only officers of Creditanstalt who gave evidence.
    The refinancing
    2420 The loan and account officers in the London office’s regional groups were responsible for the day-to-day management of individual facilities. Their tasks included booking facilities and preparing applications. From September 1987, Gayler had day-to-day responsibility for the Bell account. Gayler reported to Deputy Manager Vincent Dolan and Crocker, the Senior Manager and Head of the Asia and Australasia group.
    2421 I have already described Crocker’s role and responsibilities. The Head of the Asia and Australasia group was formally required to report to the Senior Manager and Head of Corporate Banking (Paul Serfaty). However, by 1989 Crocker had also been appointed to an assistant director position and he reported directly to Cunningham, the Deputy General Manager and head of the Credit Policy Division.
    2422 Crocker worked closely with Gayler in monitoring the Bell account and was actively involved in the facility from 1986 to 1991. He ‘tended to see almost every piece of paper involved’ with the account, and from 1 July 1987 was involved with ‘any important decision related to the Bell facility’. Before making any recommendation on applications or proposals, Crocker would often discuss matters with Cunningham and Alois Steinbichler. The latter was in charge of the Credit Control department in the International Division of the bank’s head office in Vienna in 1989. He subsequently became Deputy General Manager of the London office in 1990.
    2423 I have also described the role and practices of the CARE department within the London Office. Malcolm Evans was the head of CARE in 1989.
    2424 By 1989 the LCC had been restructured, and was made up of the Deputy General Manager and Head of Credit, the General Manager and an officer from CARE. The LCC comprised Cunningham, an officer from CARE and the General Manager of the London office (Hudson, until 1989 and David Stewart from 1989). As I have already said, the committee did not necessarily meet together but each member reviewed the application.
    2425 Decisions on new facilities or those concerning significant changes to existing facilities that exceeded the delegated authority limit of the London office required the approval of Creditanstalt head office in Vienna. The London office’s delegated authority limit of £5 million and the general description of the role and practices of the London office, and the LCC in particular, did not change greatly.
    2426 Once an application had been referred to the head office in Vienna, it was reviewed by the International Credit Division. This body prepared its own Stellungnahme on the basis of the summarised information. The Creditanstalt Managing Board ultimately made decisions on new facilities and significant changes to accounts in excess of £5 million. The managing board made the decision to participate in the Lloyds syndicated facility and the decision to agree to the refinancing. It seems that the managing board relied on summaries prepared by bank officers and did not usually see original documents.
    11.16. DG Bank
    2427 DG Bank Deutsche Genossenschaftsbank was incorporated in Germany. In 2001, as a result of a merger, the name of the bank was changed to Deutsche Zentral-Genossenschaftsbank, DZ Bank AG. DZ Bank is the central bank for Germany’s numerous bank cooperatives, providing them with banking services such as money transfers, export finance and access to international finance markets.
    The convertible bond issue period
    2428 The head office of DG Bank (DG head office) was located in Frankfurt. The bank had offices in Singapore (DG Singapore) and London (DG London). The bank’s participation in the Lloyds syndicated facility was managed from its Singapore office.
    2429 Officers from DG London attended Lloyds syndicate meetings and received information from Lloyds Bank. Michael Hall (Credit Manager) attended syndicate meetings and reported to DG Singapore.
    2430 In DG Singapore, account managers were responsible for monitoring interest payments, reviewing documents and circulating correspondence. Credit analysts prepared annual credit reviews and further examinations of facilities, responded to queries from DG head office and made recommendations. The account managers and analysts involved with the Bell facility included Chew Chung Huang, Grace Chow and Marianne Nai. The legal department in the Singapore office was responsible for liaising with external lawyers and reviewing documentation (such as terms sheets).
    2431 These officers reported to the Manager and Head of Credit and Marketing in the Singapore office, who was responsible for the branch’s marketing work as well as managing banking relationships and supervising credit and administration. From 1986 until 1988, that position was occupied by Hans‑Otto Jesgarek. In 1988 he was replaced by Klaus Borig. At the top of the reporting hierarchy of the Singapore office was the General Manager (Stefan Ziffzer, until 1987 and Björn Jonker thereafter). The General Manager had the authority to approve non-material amendments to facilities and could decide not to pursue new transactions.
    2432 When the Singapore branch received an invitation to participate in a facility, the general practice was for an account manager to perform a credit analysis. The account officers were responsible for analysing and summarising detailed financial information of potential borrowers in credit applications and reviews. The report was then given to the Manager and Head of Credit and Marketing, who would consider the risk and margin.
    2433 The General Manager and the Manager jointly had the authority to approve transactions of DM5 million with a four‑year maturity date. Applications exceeding the authority limit of the Singapore office had to be forwarded to DG head office for approval. The General Manager and Manager in Singapore made recommendations based on a review of the proposals.
    2434 DG Singapore reported to the International Division’s Asia section (A2) in Frankfurt. Credit proposals from Singapore were considered by the General Manager of A2 (Klaus Reiter) or someone else within the department.
    2435 Credit proposals from foreign branches were also submitted to the Credit Analysis Department, ‘Kreditanalyse’ (KAN), a department within the Credit Co-ordination Division or ‘Konsortial Kredite’ (KK). There were three sub‑departments within KAN, and the sub-department known as KAN III was responsible for considering proposals received from the Singapore branch.
    2436 The Head of KAN III (Hans‑Jörg Bannmann) was responsible for analysing proposals received from the Singapore branch and for making independent recommendations in respect of the credit risk of such proposals to the Head of KAN and the General Manager of KK. If Bannmann had concerns or queries about a proposal, he would seek clarification from the branch submitting the proposal. Bannmann had no decision‑making authority and would report to the Head of KAN, who in turn reported to the General Manager of KK (Gert Schemmann). The General Manager of KK reported to the board.
    2437 Following analysis and review from A2 and KAN, proposals would be submitted by the General Manager of KK to the board. Günter Schmidt-Weyland was the board member responsible for international business originating from the Asia region. He reviewed all credit applications from Asian branches and discussed facilities with the general managers from the credit and international departments. Reiter and Schmidt‑Weyland jointly had the authority to give approval for proposals within a certain limit. The Bell facility was within their joint authority level.
    2438 Bannmann, Borig, Jonker and Ziffzer all gave evidence on behalf of DG Bank.
    The refinancing
    2439 In DG Singapore, account managers (Chew Chung Huang and Chan Geok Chye) were responsible for monitoring interest payments, reviewing documents and circulating correspondence. Credit analysts prepared annual credit reviews and further examinations of facilities, responded to queries from DG head office and made recommendations. Yeo Li Ming was Head Analyst from 1986.
    2440 The legal department of DG Singapore was responsible for liaising with external lawyers and reviewing documentation (such as terms sheets). Marianne Nai worked in the legal department from 1988 to 1990.
    2441 Jesgarek and Borig held the position of Manager and Head of Credit and Marketing in the Singapore office from 1986 to 1988 and 1988 to 1991 respectively. Jesgarek and Borig were responsible for the branch’s marketing work as well as managing banking relationships.
    2442 The General Manager of DG Singapore had the authority to approve non‑material amendments to facilities and could decide to not pursue new transactions. The General Manager position was occupied by Ziffzer, Jonker and Michael Schattka.
    2443 Applications exceeding the authority limit of DG Singapore had to be forwarded to DG head office for approval. The General Manager and Manager in Singapore made recommendations based on a review of the proposals. Such credit proposals went to A2 and to KAN III in Frankfurt. Reiter remained General Manager of A2. Bannmann, as head of KAN III, was responsible for analysing proposals received from DG Singapore and for making independent recommendations in respect of the credit risk of such proposals to the Head of KAN and the General Manager of KK (Schemmann). The Head of KAN III had no decision‑making authority. The General Manager of KK reported to the board.
    2444 Günter Schmidt‑Weyland was the board member responsible for international business originating from the Asia region. He reviewed all credit applications received by DG head office and discussed facilities with the general managers from the credit and international departments. Reiter and Schmidt‑Weyland jointly had the authority to give approval for proposals within a certain limit. The Bell facility was within their joint authority level.
    11.17. Dresdner
    2445 In November 1872, Dresdner Bank AG was founded in Dresden (Germany), through the conversion of a financial institution that had been established in 1771. In 1884 the head office was moved to Berlin, but the jurisdiction of the bank remained in Dresden. The head office operations were later transferred to Frankfurt. On 23 July 2001, Dresdner was taken over by Allianz AG and is a wholly owned subsidiary of the Allianz Group.
    The convertible bond issue period
    2446 Dresdner was a German bank with its head office in Frankfurt. It was one of the original participants in the Bell syndicated facility and the bank’s £5 million participation was booked from its London branch. The officers of the London branch were responsible for the day-to-day running of the file, corresponding with the relevant Bell group companies and preparing loan applications.
    2447 The key departments and decision‑making bodies of the bank during the relevant period were the Business Promotions Department (later renamed Corporate Banking Department) and the Credit Department in London; and the Credit Risk Management Department, International Credit Risk Division, credit committee and the board of directors in Frankfurt.
    2448 All new business credit proposals were sourced and received by the Business Promotions Department in London. The department made a decision about whether or not, in principle, the proposal was of interest to the bank. If the decision was positive, a memorandum would be forwarded to the London Credit Department. Credit analysts researched borrowers, reviewed pledge reports and prepared annual presentations of loan applications. Eberhard Grauer and Colin Bell were account managers for the Bell account and Steven Bubb, David Bedwell and Stephen Jessett were the analysts most closely involved. The analysts reported to the Assistant Manager (Sue Winton, then Jessett, 1988 to 1990), who reported to the Manager and Head of the Credit Department (Gunter Ulbrich, 1986 to 1987, and Klaus Isenbech, 1988).
    2449 The principal business of Dresdner’s London branch was lending to corporate clients. Stefan Duderstadt and Günter Steffens were joint General Managers of the branch. They made recommendations on applications that were forwarded to the bank’s head office. Duderstadt had particular responsibilities for credit.
    2450 Before 1990, when the bank’s London office was restructured, the London Credit Department would prepare the initial credit application for participation in a facility. The credit application consisted of a spreadsheet, a brief analysis of the figures and an ‘in principle’ recommendation. The application was submitted to the Credit Risk Management Department in the head office, Frankfurt.
    2451 When a loan application was received by head office, it would be assessed by the relevant zone in the International Credit Division of the Credit Risk Management Department. The Bell account was managed within the International Credit Risk Division (Europe/Asia), known as ‘Kredite Ausland’. Peter Mick was Division Head from 1986 to 1990. The division was authorised to approve applications and proposals up to £5 million.
    2452 Heiko Wegener was the head of the Far East and Australia section of Kredite Ausland. Behrends was the head of the United Kingdom/Ireland/Scandinavia section. Analysts in the sections would carry out their own risk assessment of the loan, based on the information provided by the submitting branch, and prepare a memorandum. Wegener would submit the memorandum as well as the original credit applications to the Kredite Ausland Division Head for approval.
    2453 The Kredite Ausland division reported to the Credit Risk Management Department, which reviewed and summarised applications before the proposals were considered by the credit committee. Schülser was head of the department. The credit committee consisted of Hugo Chill, Werner Hundt and Bernhard Walter.
    2454 The credit committee reported to the Executive Board of Managing Directors. Christoph Von Der Decken was the board member responsible for the Far East and Australia region. The Executive Board, Domestic Division, International Division, Special Equity Department and the Corporate Department reported to the ultimate authority of the full supervisory board.
    2455 Bell, Jessett, Walter and Mick were the officers who gave evidence on behalf of Dresdner.
    The refinancing
    2456 All new business credit proposals were sourced and received by the Business Promotions Department (later renamed Corporate Banking Department) in London. The department made a decision about whether or not, in principle, the bank was interested in the proposal. If the decision was positive, a memorandum would be forwarded to the London Credit Department. In 1989 and 1990, Grauer was the Manager of Corporate Banking and Jessett was the Assistant Manager, reporting to Grauer. Duderstadt and Steffens were joint General Managers of the branch. They made recommendations on applications that were forwarded to the bank’s head office. Duderstadt had particular responsibilities for credit.
    2457 Before 1990, the London Credit Department would prepare the initial credit application for participation in a facility. The credit application consisted of a spreadsheet, a brief analysis of the figures and an in principle recommendation. The application was submitted to the Credit Risk Management Department in head office, Frankfurt.
    2458 The London Credit Department was abolished in 1990. All former Credit Department analysts were allocated to the newly created Corporate Banking Department, where they prepared credit applications and proposals for submissions to head office in Frankfurt. Grauer was the Account Manager for the Lloyds syndicated loan at this time and was responsible for reporting developments in relation to the facility to head office.
    2459 At the bank’s head office, the Bell account was managed within Kredite Ausland, of which Mick was Division Head. Wegener continued as the head of the Far East and Australia section of Kredite Ausland. Analysts would carry out their own risk assessment of the loan based on the information provided by the submitting branch and prepare a Stellungnahme, which Wegener would submit (together with the original credit application) to Mick for his approval.
    2460 The Credit Risk Management Department reviewed and summarised applications sent by Kredite Ausland before the proposals were considered by the credit committee. Chill, Hundt and Walter were on the credit committee.
    2461 The Executive Board of Managing Directors was higher than the credit committee. Christoph Von Der Decken was the board member responsible for the Far East and Australia region. The Executive Board, Domestic Division, International Division, Special Equity Department and the Corporate Department reported to the ultimate authority of the full supervisory board.
    2462 In giving evidence, Mick was unable to recall the limit of his authority to approve participation in facilities but believed that the bank’s participation in the Lloyds syndicated loan was within his authority. However, in 1986 it had been necessary to obtain credit committee approval for the loan as the bank had a prior exposure to another member of the Bell Group, TBGIL.
    2463 Mick also testified that in 1989, decisions concerning the bank’s participation in the Lloyds syndicated loan were referred to the board. In particular, a recommendation made by Mick dated 28 November 1989 regarding a restructuring of the Lloyds syndicated loan was submitted to the board. According to Mick, the board was involved in the decision because the loan had become a problem loan and he was obliged to involve the board in considering the restructuring. The next recommendation was signed as having been approved by Von Der Decken.
    11.18. Gulf Bank
    2464 The Gulf Bank KSC was duly incorporated in Kuwait by legislative decree in November 1960 and commenced the business of banking on 5 October 1961. Gulf Bank has its head office in Kuwait. At the relevant time it also had branches in Singapore and New York and a European representative office in London.
    The convertible bond issue period
    2465 Gulf Bank participated to the amount of £3 million in the Lloyds syndicated facility through its Singapore branch. It was not an original participant and joined the syndicate in September 1986.
    2466 Credit applications from companies in the Asia region were managed and drafted by the Singapore office. Account and marketing officers reviewed the original material, then acted on instructions from senior management. The Assistant Credit Manager had a power of veto on applications. The Credit and Marketing Manager supervised facilities, received key information and made recommendations to the bank’s head office in Kuwait.
    2467 Credit applications were assessed by the credit committee in Singapore. The account officer assigned to the proposed facility as well as either the General Manager or Assistant General Manager sat on the credit committee. The committee was, however, more of a discussion body and only the General Manager had authority to approve proposals within the Singapore office’s delegated credit limit. Where a proposal exceeded this limit, a recommendation was forwarded to the bank’s head office in Kuwait. Persons occupying these positions at the relevant time included:
    (a) Account and marketing officers, Assistant Credit Manager: Melvyn Mak, Jeffrey Song, Norman Tan and Abdul Rahman;
    (b) Credit and Marketing Manager: Leong Wai Kong and Mustaza Kassim; and
    (c) General Manager: Hugh Brown (1986 to 1987), Georges Gillet (1987 to 1989) and Kassim (1990 and 1991).
    2468 The London branch was a representative office. It had no decision‑making authority. Its role was to advise and make recommendations on risk, transactions and structures. The London office was small; it had a staff of only four people. It acted primarily as a ‘mailbox’ for other Gulf Bank offices. Detailed transaction information, legal documentation and related correspondence would generally be sent to Singapore or the head office without having been reviewed and considered by the London branch, unless there was a specific request that they should do so. From 1984 until 1991, the General Manager of the London office was Graham Pettit.
    2469 Departments in Gulf Bank’s head office in Kuwait included the Institutional Banking Group (Inst BG), the International Banking Group, the Credit Policy and Review Department, the International Loan Committee (ILC) and the board of directors.
    2470 Responsibility for international business development was divided internally on a geographical basis, with the Singapore office responsible for all business in the Far East. International credit proposals that exceeded local branch limits were referred to the Head of the Inst BG and the Head of Credit Policy and Review at head office. Credit applications included any relevant financial analysis.
    2471 When a credit application arrived at head office, the proposal was reviewed by the Head of Credit Policy and Review (Ted Fenner). Fenner often called for a credit assessment by an analyst in the Inst BG. Each analyst was responsible for a particular geographical region. The analyst would provide the Head of the Inst BG with comments on the application. The General Manager of the Inst BG was Robert Wilcox (1983 to 1988) and Alan Beauregard (1988 to 1990).
    2472 If the Head of the Inst BG decided to proceed with the application, it was submitted to the ILC along with an opinion from the Head of Credit Policy and Review. If the Head of the Inst BG opposed the proposal, it would not be submitted to the ILC and would go no further. The Head of the Inst BG generally attended the ILC meetings to answer any questions in regard to the application.
    2473 The ILC comprised four or five board members who were non-executive directors of the bank. The committee generally relied on the branch’s credit application and analysis, the review by the Inst BG and the opinion from the Head of Credit Policy and Review. If the ILC approved a proposal it would inform the proposing branch.
    2474 Wilcox’s role as General Manager of Inst BG included the review of applications submitted to head office by the bank’s foreign branches and, if appropriate, to recommend such proposals to the ILC. He left the bank in mid‑1988. Pettit and Wilcox both gave evidence.
    2475 The position with respect to the authority levels at the relevant time may be summarised as follows:
    (a) Each proposal for the provision of a new facility or the amendment of the arrangements for an existing facility was dealt with at different levels, such that if the proposal was approved at a lower level it moved to the next level for consideration.
    (b) Gulf Bank Singapore would draft a proposal and send it to Singapore’s internal credit committee, which could approve the transaction if it was within its own delegated credit limit. If the proposal exceeded its limit, Gulf Bank Singapore would refer the matter to the General Manager of the Inst BG (which included the International Division) and the Head of Credit in Gulf Bank Kuwait for their approval.
    (c) The proposal would then be received and reviewed by the Head of Credit Policy and Review in Kuwait, who would often call for a credit assessment by analysts in the International Group (although the bulk of the analysis for any credit application was conducted at branch level).
    (d) The Head of the Inst BG then presented the transaction to the ILC, along with an opinion and input from the Head of Credit Policy and Review. The ILC members then made their collective decision. However, if the Head of the Inst BG decided not to proceed with a credit proposal, then it would not be submitted to the ILC and it would go no further.
    The refinancing
    2476 Credit applications from companies in Asia were managed and drafted by the Singapore office. Account and marketing officers (Tan, Rahman and Leong) reviewed original material then acted on instructions from senior management. The Assistant Credit Manager (Mak, Song, and later, Rahman and Tan) had a power of veto on applications. The Credit and Marketing Manager (Kong and then Kassim) supervised facilities, received key information and made recommendations to the bank’s head office in Kuwait.
    2477 The role and practices of the credit committee in Singapore did not change greatly. The General Manager continued to have authority to approve proposals within the Singapore office’s delegated credit limit. If the proposal exceeded this limit, a recommendation was forwarded to head office in Kuwait. In 1989 Kassim became the General Manager of Gulf Bank’s Singapore branch.
    2478 There were no relevant changes in the London representative office throughout the period. It had no decision‑making authority. Its role was to advise and make recommendations on risk, transactions and structures. Pettit continued as the senior officer in the London office. Gulf Bank London primarily acted as a ‘mailbox’ for other Gulf Bank offices. Detailed transaction information, legal documentation and related correspondence would generally be sent un-read to Singapore or head office, unless Pettit or his colleagues had been requested by those offices to review and comment. Pettit made extensive comments in relation to the proposed restructuring of the Lloyds syndicated loan in 1989.
    2479 Departments in Gulf Bank’s head office in Kuwait included the Inst BG, the International Banking Group, the Credit Policy and Review Department, the ILC and the board of directors. There were no relevant changes from the earlier period, save that the ILC was renamed the Bank Credit Committee.
    2480 There was a further decision‑making body known as the Management International Credit Committee. There is no evidence about where this body stood in relation to the ILC but the evidence is that it was the relevant body that approved the credit application of 20 November 1989.
    2481 The only officers from Gulf Bank who gave evidence were Pettit and Wilcox.
    11.19. Kredietbank
    2482 Kredietbank’s origins date back to 1889 when its forerunner was established as a cooperative society in Belgium. It was converted to a limited company after World War I and, after a series of mergers, became Kredietbank NV in 1935.
    2483 On 4 June 1998 Kredietbank NV merged its worldwide operations with CERA Bank to form KB CERA Nieuw NV, which was renamed KBC Bank NV. Kredietbank NV, renamed KBC Bank Verzekerings Holding NV, continues to exist as the holding company for KBC Bank NV.
    The convertible bond issue period
    2484 Kredietbank was a Belgian bank with a head office and Executive Committee located in Brussels and branch offices in London and Melbourne. During the relevant period, the reporting hierarchy within Kredietbank comprised officers in the following departments and committees:
    (a) Corporate Banking Department (London);
    (b) London Credit Committee (LCC) (London);
    (c) Centrale Afdeling Buitenlandse Kredietberlening (CABUK later called CAIK) or Foreign Credit Department, (FCD) (Brussels);
    (d) Foreign Credit Committee (FCC) (Brussels); and
    (e) Extended Credit Committee Professional and International Banking (ECCPIB) (Brussels).
    2485 The Corporate Banking Department was based in London. This department was responsible for managing facilities granted to corporate customers through the London office. An account officer from Corporate Banking was assigned to each corporate customer and was responsible for handling the day-to-day affairs of that customer. The relevant account officer would receive and respond to correspondence from a customer or syndicate manager.
    2486 Credit analysts reported to the Deputy Manager of Corporate Banking, who reported to the Corporate Banking Manager. The Senior Manager of the Corporate Banking division was next up in the hierarchy, the General Manager higher still. Relevantly, Nihal de Silva was the credit analyst responsible for the Bell facility. From 1986 he was the Deputy Corporate Banking Manager. David Monahan and (from 1988) Michael Broom were Corporate Banking Managers. Marc Bernaert and (from 1988) Monahan were the Senior Managers in that department. Eugeen Cleemput and (from 1988) Bernaert occupied the position of General Manager.
    2487 The Corporate Banking Department and the LCC dealt with credit applications submitted for new facilities or to alter existing facilities. Credit applications were usually prepared by an account officer and reviewed by a senior officer before it was considered by the LCC.
    2488 The LCC considered all credit applications prepared in the London branch. The LCC was comprised of three members, the General Manager, Senior Manager and Manager. In the absence of the Manager, the Secretary of the LCC would sit on the committee. The account officer attended the LCC meeting to provide additional clarification or detail regarding the application if required, but they were not able to vote. At least three members were required to deliberate on an application and decisions had to be reached unanimously. Cleemput, Keith Benson (the bank Treasurer) and de Silva were members of the LCC between 1986 and 1988. Monahan and Broom joined in 1988.
    2489 As usual practice, the LCC would only receive the credit application without any of the primary information (for example, information memoranda, annual reports, other financial reports received from the customer) or legal advice that the credit application was based on.
    2490 The LCC was authorised to approve transactions up to £1.5 million and had a general power of veto. If the LCC declined a credit application, head office in Brussels was informed to ensure that the overall relationship with global clients was satisfactorily maintained. If there was a client relationship issue, Brussels could require London to take on a credit application it had declined to participate in. If the LCC approved the credit application and it was beyond its authority limit, or if the committee’s approval was not unanimous, the application and any primary information would be forwarded to the bank’s head office in Brussels.
    2491 At head office, an application would be analysed by an in-house credit analyst in CABUK who prepared an independent advice, known as a CABUK advice, for the FCC. The credit analyst would discuss the CABUK advice with the Manager of CABUK. The CABUK advice was attached to the London credit application and both documents were put before the FCC for a final decision. The Manager of CABUK would attend the FCC meeting and was expected to be familiar with the details of the file, so as to answer any questions that the FCC members might have. The CABUK advice was influential, but not determinative, of the FCC’s decision. The name of the Foreign Credit Department changed from CABUK to CAIK at some time before July 1988. Karel Vermeulen and Jean Souvereyns were credit analysts within FCD.
    2492 The FCC was composed of three members and their decisions on proposals had to be unanimous. If a unanimous decision was not reached, the credit application was referred to the ECCPIB. The ECCPIB comprised members of the FCC and at least two managing directors. This committee considered credit applications where the applications exceeded the authority of the FCC, when the decision of the FCC was not unanimous or for facilities where a provision had been raised. Anton Grupping, Pieter Heering and Hieronymus Van Hoeck were members of the FCC.
    2493 Bernaert, Broom, Cleemput, Heering and Monahan gave evidence on behalf of Kredietbank.
    The refinancing
    2494 The Corporate Banking Department (London) was responsible for managing facilities granted to corporate customers. An account officer from the department was assigned to each corporate customer and was responsible for handling the day-to-day affairs. The Corporate Banking Department and the LCC dealt with credit applications submitted for new facilities or to alter existing facilities. The procedure in the London branch was that a credit application was prepared by the account officer and reviewed by a senior officer before it was considered by the LCC. Broom, Corporate Banking Manager (London), was responsible for the Bell facility in 1989 and 1990.
    2495 The LCC comprised the General Manager, Senior Manager and Manager and, in the absence of the Manager, the Secretary. It considered all credit applications prepared in the London branch. The LCC had the authority to approve transactions up to £1.5 million and had a general power of veto. At least three members were required to deliberate on an application and decisions had to be reached unanimously. The LCC’s practice described in the preceding section continued in this later period.
    2496 A number of bank officers employed at Kredietbank’s London branch were involved with the restructuring of the bank’s participation in the Lloyds syndicated loan. De Silva was the Deputy Manager of the Corporate Banking Division and Secretary of the LCC. His role was to analyse credit applications and attend LCC meetings where he would make recommendations to the LCC. In early 1989, de Silva reported to Broom when the latter took over the handling of the day-to-day responsibilities for the Lloyds syndicated loan.
    2497 Broom was the Manager of the Corporate Banking Department. In early 1989, he was assigned to the position of account officer responsible for the Bell facility and was therefore responsible for the day-to-day handling of the facility. He attended Lloyds syndicate meetings, correspondence from Lloyds was addressed to him and he read all legal advice received in relation to the account. Broom prepared the proposal for the restructuring of the Bell facility and was a member of the LCC when it approved the proposal to be forwarded to head office, Brussels. He reported to Monahan, Senior Manager of the Corporate Banking Department.
    2498 Monahan was a member of the LCC and sat on the committee that approved the proposed restructuring of the Lloyds syndicated loan, which was then forwarded to head office, Brussels. Broom forwarded all relevant information in relation to the Lloyds syndicated facility to Monahan. He reviewed all credit applications prepared by Broom and de Silva prior to the applications being presented to the LCC. He reported to Bernaert, General Manager of the bank’s London branch.
    2499 Bernaert was head of the Corporate Finance department in 1985 and became the General Manager of the London branch of Kredietbank in 1988. He was responsible for the entire London branch and was a member of the LCC. His involvement with the Lloyds syndicated loan was limited to assessing credit applications as a member of the LCC and he only reviewed documents in that capacity.
    2500 The London branch had lending authority limited to £1.5 million. All loan applications that exceeded the authority of the branch (which included the refinancing of the Bell facility) were required to be submitted to the FCC at head office, Brussels for approval. The CAIK assessed credit applications that were approved and forwarded to head office by the LCC. The credit application would be analysed, along with any primary information, by a credit analyst who prepared an independent advice. The application and independent advice would then be forwarded to the FCC for its consideration.
    2501 In practice, the head of the Corporate Division and Credit Analysis of section of the CAIK and (or) the credit analyst who prepared the independent advice would discuss the application in detail with the Divisional Manager of CAIK before it was presented to the FCC. The advice was influential but not determinative of the FCC’s decision. In relation to the proposed refinancing of the Bell facility, the independent advice was drafted by Jan Haers and Vermeulen. The FCC practices were much as described in the earlier section.
    2502 It was Kredietbank’s policy that where a provision had been raised, the ECCPIB was required to approve a credit application. CAIK raised a provision in relation to the Bell facility. ECCPIB approved the proposal to refinance the Bell facility on 17 November 1989.
    2503 Haers was the legal adviser in the CAIK; he assisted the CAIK Divisional Manager to prepare supplements to credit applications. Vermeulen was the Head of the Corporate Division of CAIK and in charge of the Credit Analysis section. He reported to Heering, the CAIK Divisional Manager. Vermeulen would prepare (or instruct credit analysts reporting to him to prepare) independent advice on the credit applications received from the LCC and would discuss the advice with Heering before the application was presented to the FCC.
    2504 Heering was a member of the FCC and it was his responsibility to present credit applications to the FCC, and then answer any queries from other members of the committee. Heering was not involved in the decision to approve the proposal to refinance the Lloyds syndicated loan because he was away on leave during that time. Van Hoeck was Assistant General Manager in 1986 and in 1988 became General Manager of CAIK and the Senior Credit Officer at head office, Brussels. He was also President of the FCC and a member of the ECCPIB. Van Hoeck was not called to give evidence.
    2505 The officers of Kredietbank who gave evidence were Bernaert, Broom, Cleemput and Heering.
    11.20. Gentra
    2506 The Royal Trust Company of Canada was a company incorporated in England as a subsidiary of a Canadian bank located in Toronto. It carried on the business of banking and had recognised bank status. The bank underwent two relevant name changes:
    (a) in November 1986 to Royal Trust Bank of London; and
    (b) in September 1993 to Gentra Limited.
    The convertible bond issue period
    2507 Gentra was not an original participant in the Lloyds syndicated facility. It acquired its interest (£3 million) on 26 August 1986. While there is no direct evidence from the bank’s witnesses on this issue, an examination of the documents in Gentra’s file indicates that the participation in the Bell facility was controlled by the London branch without recourse to Gentra’s head office in Canada.
    2508 The Commercial Credit Division (or department) (CCD) in the London branch operated on a vertical hierarchy with officers at each level reporting to the next available rung of authority within the branch. By May 1987, CCD had come to be known as Commercial Lending or the Commercial Lending Department (CLD). The reporting hierarchy included:
    (a) Assistant Managers and Managers (Jonathon Stocker, Martin Davies, Guy Harris and Steven Cooke);
    (b) Senior Manager and Divisional Director CCD (Robert Sullivan and Mike Townsley);
    (c) Banking Director (Peter Roberts);
    (d) Managing Director (John Lovesey, 1986 and 1987, and Jan‑Arne Farstad, 1988 to 1991); and
    (e) the Banking Committee (including Lovesey, Roberts, Farstad and David Pellett).
    2509 The role of Assistant Managers and Managers within CCD varied from officer to officer but generally involved credit analysis, relationship management and other duties. Two Assistant Managers, or Managers, were required to prepare credit applications and annual reviews, which included documents such as an application for limit, a credit summary, account officers’ comments and (usually) a balance sheet summary. For the purpose of such applications or reviews, the two Assistant Managers or Managers were referred to as ‘Account Officer’ and ‘Alternative Account Officer’. The position was also referred to from time to time as ‘Credit Analyst’.
    2510 Managers reported to the Senior Manager and Divisional Director of CCD, whose recommendation was required for the approval of credit applications and annual reviews. The Senior Manager also had the capacity to approve certain matters without endorsement from higher authority, such as the September 1987 request by TBGL to nominate an additional borrower for the purposes of convertible bonds.
    2511 The Senior Manager and Divisional Director of CCD originally reported to the Banking Director. But by 1986, the holder of this position reported directly to the Managing Director. By September 1987, the Banking Director had resumed an intervening role.
    2512 The Managing Director had the authority to approve loan facilities within a certain credit limit. For instance, the bank’s entry to the facility was within the Managing Director’s delegated authority, subject to two signatories. Where a facility involved an amount within the upper limit of the Managing Director’s authority, it was usual practice to inform the Banking Committee by way of notification and to provide some background on the facility. If the facility exceeded the Managing Director’s authority, it was forwarded to the Banking Committee for approval.
    2513 The Banking Committee was also sometimes referred to as the Credit Committee or Executive Committee. It was comprised of executive and non‑executive members. The Banking Director and Managing Director sat on the committee in their respective capacities. The committee had its own authorisation limit (within which the Bell facility fell) and decisions that exceeded that limit were to be referred to the bank’s head office in Canada.
    2514 A review of the bank’s file indicates that documents noted or approved by the Banking Committee were stamped to indicate the Banking Committee’s ‘notation’ or ‘approval’. Documents on the bank’s file also indicate that the highest‑ranking officer in the London branch was the Deputy Chairman, who was also chairman of the Banking Committee.
    2515 Farstad, Harris, Jenkins, Sullivan and Lovesey gave evidence on behalf of Gentra.
    The refinancing
    2516 Credit proposals were prepared by an Account Manager and were analysed and approved by Pellet, Divisional Director of the Credit Department. Once the credit application had been signed off by Pellet it was directed to Roberts, Banking Director, and Farstad.
    2517 The Managing Director (Farstad) had the authority to approve loan facilities within a certain credit limit. If a facility exceeded the Managing Director’s credit limit it was forwarded to the bank’s London’s Banking Committee (LBC) for approval.
    2518 The LBC made final decisions on credit applications and consisted of Farstad, Roberts, Maurice Davenport and Cyril Gamble. The LBC had its own authorisation limit (within which the Bell facility fell) and decisions which exceeded that limit were referred to Gentra’s head office in Canada.
    2519 Farstad was the Managing Director of Gentra London from 1988 until January 1991. He took over this position from John Lovesey. The Managing Director was also a member of the LBC. Farstad oversaw the work of Les Clarke (Senior Manager Commercial Lending), Townsley (Commercial Lending) and Roberts. Farstad was closely involved with the Bell facility from 1988 until mid‑1990 by virtue of his position on the LBC.
    2520 Townsley was the Divisional Director in the Commercial Lending Division of Gentra London during 1988. In this role, Townsley was responsible for expanding the bank’s lending book. He became involved with the Bell facility when he started in this role. Clarke, as Senior Manager of the division, reported to Townsley, and Townsley reported to Roberts (Banking Director). Townsley also reported to the LBC and made presentations to this committee on credit applications.
    2521 Stocker was Manager of the Corporate Banking division of Gentra London from 1987. This role involved both marketing and credit functions. Stocker’s responsibilities were to deal with clients on a day-to-day basis and maintain a close a relationship with those clients. Stocker was the relationship manager for the Bell facility until mid 1989. He held that in March 1989, when the bank was advised of the proposal to restructure the Bell facility.
    2522 Harris was a Commercial Lending manager at the London branch from 1989. Harris was employed to develop the bank’s commercial book and in this role, he handled accounts on a day-to-day basis. Harris reported to Clarke. Harris took over the Bell facility during Stocker’s absence in July 1989. During this time the bank’s senior management requested that Harris prepare a full report on TBGL in light of the bank’s exposure to BCHL and in light of the Lonrho report (see Sect 30.4). Responsibility for the Bell facility was handed back to Stocker upon his return.
    2523 Jenkins started in the London branch as a Senior Manager in Commercial Lending in August 1989. From May 1990, he was Director, Special Accounts. As Senior Manager, Jenkins was responsible for developing and maintaining a portfolio of corporate accounts, including the Bell facility. He remained involved with the Bell facility from 1989 to 1991.
    2524 Tony Davies was the Senior Manager of Corporate Recoveries in the London branch during 1989. Davies reported to Pellett, Divisional Director in the Credit Division during 1989. Pellet was also the Secretary of the LCC. His responsibilities included analysing and approving credit proposals prepared by relevant account managers. Once Pellett gave his approval to credit proposals, they were sent to Roberts and Farstad for LCC approval.
    2525 Brian Barr, Vice President of Risk Management for Royal Trust International (London), became increasingly involved in the Bell facility in 1990. Barr was the Risk Assessment Manager in the Toronto head office during 1989 and was responsible for overseeing the bank’s international branches. Barr was sent to the London branch to handle the bank’s exposure to the property sector in London and the wider United Kingdom and to handle risk assessment. Barr dealt with the issue of whether the bank should approve a request from TBGL to use the proceeds from its asset sales to pay the bondholder interest.
    11.21. Skopbank
    2526 Skopbank was incorporated in Finland as an entity owned by over 250 savings banks. It carried on a commercial banking business. On 19 September 1991, the Bank of Finland took over Skopbank and closed its international investment business. Skopbank is in voluntary liquidation.
    2527 As the bank did not take up its position until July 1988, I do not have to distinguish between the two periods. Skopbank’s head office was situated in Helsinki. The International Finance Department was responsible for the bank’s participation in the Lloyds syndicated loan.
    2528 The day-to-day management of the Bell facility was the responsibility of the Finance Manager in the International Finance Department. The Finance Manager reported to Chief Manager of the department, who had a credit approval limit of approximately £100,000. Applications for finance exceeding this amount required approval from the credit committee or the board. Proposals drafted by the Finance Manager would be submitted to the Chief Manager for endorsement. Once endorsed by the Chief Manager, the Finance Manager would present the proposal to the credit committee or the board.
    2529 Skopbank’s participation in the Lloyds syndicated loan was for £3.5 million. This required the approval of the bank’s board or the International Loan Committee.
    2530 The Finance Manager made verbal presentations to the board approximately twice a year, informing the board of the current position in relation to loans under his supervision. The Finance Manager and members of the board and credit committee would discuss any proposals made in relation to the loan. The number of board members present during these discussions varied, depending on the nature of the decision.
    2531 There were approximately 10 to 12 people working in the International Finance Department. The role of the Finance Manager included marketing responsibilities and he would actively seek participation in Euro loans or loans to international companies. Once an individual in the bank brought in business, it was the usual practice for this same person to be responsible for the loan.
    2532 Caroline Lynam was Assistant Manager, UK International Department at FennoScandia Bank Ltd, a Skopbank subsidiary based in London. During 1989 Lynam attended a Lloyds syndicate bank meeting on behalf of Skopbank.
    2533 Sakari Simonen was Finance Manager in the International Finance Department at head office from 1988 to March 1990. He reported directly to the Chief Manager, Fred Sundwall, who was head of the department. Simonen was responsible for the day-to-day management of the Bell facility with assistance from the administration and legal departments. He would see all incoming information from Lloyds Bank to Skopbank and it was his responsibility to review and analyse that information. Simonen prepared credit applications and, after the proposals were endorsed by the Chief Manager, Simonen would make a verbal presentation to the board or a board member who had authority to approve the proposal.
    2534 Alpo Akujärvi was Credit Manager, International Finance Department, at head office from about May 1989. In about March 1990, he took over the management of the Bell facility from Simonen, and during 1990 he was responsible for the day‑to‑day management of the account.
    2535 Fred Sundwall was the Chief Manager of the International Finance Department. He directly supervised Simonen and was required to review credit proposals and provide his endorsement before they were presented to the board and International Loan Committee. Sundwall had a credit authority limit of approximately £100,000. Simonen informed Sundwall of much of what Simonen knew about the bank’s involvement in the Lloyds syndicated loan during this period because they had regular meeting regarding Simonen’s accounts. Sundwall was not called as a witness by the banks.
    2536 Heikki Koponen was a lawyer in the International Division and filled the roles of Assistant Credit Manager and later Credit Manager of legal matters. He received all legal advice related to accounts and would inform the account manager and the board. He assisted on the Bell facility throughout this period but was given responsibility for the file from early March 1991. He attended the 13 October 1989 Lloyds syndicate meeting on behalf of Skopbank. Koponen was not called by the banks as a witness.
    2537 Anne Neimi was a lawyer and Credit Manager in the International Division. She received and analysed legal advice that was sent to the bank account managers and the board. She worked particularly closely with Akujärvi on the Bell facility during 1990. Along with Akujärvi, she signed the May 1990 waiver on behalf of Skopbank. Neimi was not called as a witness by the banks.
    2538 Kaarlo Eljas Sukselainen was a board member and member of the International Loan Committee. He held this position until he was replaced by Juhani Riikonen in September 1989.
    2539 Yrjo Riikonen was a board member. In September 1989 he replaced Sukselainen as the board member responsible for the International Division and the bank’s international loan portfolio, including the Bell facility. Riikonen established the International Loans Committee and was chairman of the committee from January 1990.
    2540 The decision to enter the Transactions did not require full board or credit committee approval because it did not involve new money being lent, or a significant extension of the term of the facility. A single board member was able to approve the proposal. The board member responsible for the International Division and the international loan portfolio, Riikonen, delegated his authority to fellow board member Veijo Laakso because Riikonen was in New York at the time of the proposal presentation.
    2541 Akujärvi, Simonen and Sukselainen were the officers from Skopbank who gave evidence.
35. The convertible bond issues, the on‑loans and subordination
    12.1. Introduction
    12.1.1. The structure of these sections of the reasons
    2542 In this section and in the succeeding sections, Sect 13 to Sect 18, I propose to deal with the ‘spider’s web’ issue, namely, whether the on‑loans of the funds arising from three of the convertible bond issues were subordinated. In Sect 12, I will introduce the on‑loan and subordination questions. In order to do this, I will have to spend a little time explaining what convertible bonds are and how the market operates. I will also need to deal with the concept of subordination of debt: first as a general theory and then as it appears from the documentation for the Bell group bond issues. In relation to the concept of subordination and its application to this case, it will be necessary for me to describe how the convertible bond issues came into being and how the on‑loans came to be made.
    2543 In the succeeding sections I will move to more detailed consideration of the banks’ case that there were contracts or contractual terms, either between the relevant Bell group companies or between those companies and the banks, that the on‑loans would be (and were) made on a subordinated basis and would remain subordinated. In these later sections I will also deal with the estoppel and other defences said to affect the on‑loans.
    2544 I will commence these sections with a warning. The story of the on‑loans will unfold in an excruciatingly tortoise‑like fashion. For some readers, the process by which that occurs may bring to the mind the opening words of Cicero’s First Oration against Catiline:
    How long, O Catiline, will you abuse our patience? How long is that madness of yours still to mock us? When is there to be an end of that unbridled audacity of yours?
    2545 I confess to a touch of madness: nothing else could explain why I have remained in judicial office for as long as I have and why, immediately after completing a long administrative inquiry, I agreed to hear this matter. But I plead innocent to the charge of audacity. It was not my choice to go down this long and winding road. I have been forced into a detailed examination of the subordination question by the way the case was pleaded.
    12.1.2. The on‑loan question described
    2546 In Sect 4.3.2 I described the five bond issues entered into by Bell group companies and in Sect 7.3 I introduced the subordination issue and outlined its importance in the case.
    2547 Briefly, TBGL and BGF each received $75 million from Heytesbury Securities as the consideration for their respective bond issues. Heytesbury Securities has since been replaced by SGIC as the registered holder of those bonds. Making an approximate currency calculation for the pound sterling issue, BGNV received a total of $435 million from individual bondholders in the three BGNV bond issues. BGNV loaned those funds to TBGL (the first issue) or to BGF (the second and third issues). These are the ‘on‑loans’ that are at the heart of this dispute.
    2548 The claims of the bondholders against BGNV (and against TBGL as guarantor) are, on the face of the bonds and of the trust deeds that support them, subordinated to the rights of other unsecured creditors. The same can be said for the claims of the bondholder (SGIC) against TBGL and BGF under the domestic bond issues. But the question is whether, regardless of the position of BGNV vis a vis the bondholders, the subordination flows through to, and applies to, the on‑loans made by BGNV to TBGL and (or ) BGF. Put another way, regardless of the position of BGNV vis a vis the bondholders, did BGNV lend the bond issue proceeds to TBGL and (or) BGF on a subordinated or an unsubordinated basis?
    2549 I should explain briefly how I arrived at the figure of $435 million referred to in the first substantive paragraph of this section. It is not easy to give an exact Australian dollar equivalent to the amounts raised in the bond issues due to the pound sterling denomination of the third BGNV bond issue and because of the conversion of some of the bonds from the first BGNV bond issue.
    2550 In a credit application dated 19 December 1988, Edward (SocGen) reported that the total face value of the five bond issues was $585 million. I think it is fair to assume that this information was communicated to Edward by someone from within the Accounts department of BCHL or TBGL. Using that as the starting point, and deducting from it the amounts of $150 million (for the combined effect of the TBGL bond issue and the BGF bond issue) and $250 million (for the first and second BGNV bond issues), the Australian dollar equivalent of the pound sterling denominated face value of the third BGNV bond issue is $185 million. This accords (roughly) with the Australian dollar figure shown in the 1989 TBGL Annual Report, although it is somewhat less than that shown in the 1988 TBGL Annual Report. The difference may be due to changes in the exchange rate between the two balance dates.
    2551 The difference between the total face value of the five bond issues ($585 million) and the face value of the domestic bond issues ($150 million) is $435 million. This, then, represents the Australian dollar equivalent of the three BGNV bond issues and is the aggregate amount of the on‑loans.
    12.1.3. The respective cases on the status of the on‑loans: a summary
    2552 The plaintiffs’ case is that whilst the obligations of BGNV as issuer and TBGL as guarantor of the BGNV bond issues were subordinated, the on‑loans of the proceeds of those issues from BGNV to TBGL and BGF were unsubordinated. The effect of this is that at the time of the Transactions the BGNV bondholders, through the mechanism of the on‑loans, effectively ranked equally with the banks. The plaintiffs point to the fact that there is no written agreement in respect of the on‑loans and there is no record in the primary accounting records (journals, ledgers and vouchers) or in the audited accounts of the on‑loans being subordinated. It is probably more accurate to say that the primary records contain no express entries about the status of the loans, one way (subordinated) or the other (unsubordinated).
    2553 The plaintiffs contend that the evidence adduced by the banks is not sufficient to support a finding that the on‑loan contracts contained (expressly or by implication) a term to the effect that they were relevantly subordinated. According to the plaintiffs, the evidence points to the opposite conclusion.
    2554 The banks submit that it was a term of the on‑loan contracts between BGNV, TBGL and BGF that the on‑loans were subordinated. Further, they argue, there were contracts with the banks (other than for the third BGNV issue) to the effect that the on‑loans were subordinated. The banks also contend that if the on‑loans were not, as a matter of contract, subordinated then TBGL, BGF and BGNV were (and are) estopped from denying that the on‑loans were (and continue to be) subordinated.
    2555 The banks put forward an alternative case; namely, that if, contrary to their primary submissions, the on‑loans were not contractually subordinated, they are entitled to relief under the Trade Practices Act. This is because in 1985, 1987 and following, the companies made representations to the effect that, and otherwise conducted their banking relationships with the banks on the basis that, the on‑loans were subordinated. If that turns out not to have been the case, the plaintiff Bell companies engaged in conduct that was misleading and deceptive. The banks point to evidence led from former officers of Bell group companies and from bank officers and to contemporaneous documents that they say establish these contentions.
    12.1.4. The significance of the subordination issue
    2556 In Sect 7.3.2 I outlined the significance of the subordination issue in the litigation. It is, as counsel for the plaintiffs remarked, like a spider’s web permeating almost every aspect of the case. It is necessary to unravel the web and subject each of its threads to close examination.
    2557 In this summary I wish to mention only one of the significant features of the subordination issue. It relates to the prejudicial effects of the Scheme. If the on‑loans, from their inception, ranked behind the banks’ debt and if, as a result, the bondholders did not suffer any altered priority in relation to the proceeds from the choses in action represented by the on‑loans, a question arises whether the Transactions had any prejudicial effect on the bondholders. On the other hand, if the on‑loans were unsubordinated then the bondholders were prejudiced by the Transactions. The plaintiffs contend that the directors knew of the prejudicial effect the Transactions would have on creditors and in those circumstances causing the companies to enter into the Transactions was not in the best interests of the companies, nor was it for a proper purpose. The plaintiffs also contend that the banks knew that the on‑loans were unsubordinated. This has obvious ramifications for the cases raised under Barnes v Addy and equitable fraud.
    2558 The banks place even greater reliance on the subordination issue. They raise it as a defence to the plaintiffs’ central allegations about the effect of the Transactions and the Scheme (which in turn are incorporated into other allegations such as bank knowledge and directors’ knowledge). It is also a defence in the sense that the banks contend that the plaintiffs’ conduct disentitles the plaintiffs to equitable relief, or alternatively that they (the banks) are entitled to a set-off. And they also seek to enforce the subordination in any liquidation of TBGL and BGF.
    12.2. Subordinated convertible bonds: the general context
    2559 To place the subordination argument in context I need to say something of a general nature about processes and concepts relevant to the way funds were raised by the Bell group (from sources other than the banks) in the mid‑1980s. The three BGNV bond issues took place in the Eurobond market and it is necessary to understand (in broad outline) how the market operated. All five issues were of subordinated bonds. It is necessary to say something of a general nature about subordination and how it operated in bond issues of this type.
    12.2.1. The Eurobond market: an introduction
    2560 The period from the late 1990s to the early 2000s saw the emergence of new and sophisticated (at least that is how they are described by those who peddle them) ‘financial products’, such as trading in indices futures, ‘stock lending’ and ‘contracts for difference’. The sales persons’ puff attaching to these products usually contains the word ‘innovative’ (or jargon of similar meaning), which should, of itself, be enough to put the prospective punter on notice. But we should not think that the industry devoted to devising ‘innovative’ products is a phenomenon of the 2000s. It has been alive and well for 50 years or so. Unlike the present (where most of the products are thinly disguised wagers), most of the products on offer in previous decades at least had the virtue of being directed to the primary function of the markets; namely, to raise capital for productive enterprises. The Eurobonds fall into the latter category.
    2561 During the 1960s and 1970s, new methods of financing corporate and commercial activity began to appear in the financial markets. One such development was the emergence from the early 1970s of the Eurobond market. It was, in essence, a largely self‑regulated market for the handling of transactions involving less conventional financing structures where the funds were provided, in the main, by private rather than institutional investors. The Luxembourg Stock Exchange was the most active centre on which the paper representing these products was listed and traded.
    2562 Eurobonds can take many forms. The form that is relevant for this case is an issue of convertible subordinated bonds. Typically, the bonds were debt instruments for a fixed period of years. They carried interest payable by regular instalments and with an option for the bondholder to convert the debt into shares in a company prior to maturity. The conversion price was usually calculated according to a pre‑set formula, often based on share market performance. Sometimes the issuer had a right to require the bondholder to convert the debt to shares or to redeem the bonds prior to maturity.
    2563 I am now going to describe what I understand to have been a typical process in the mid‑1980s relating to an issue of bonds in the Eurobond market. In doing so I have relied largely on the evidence of Anthony Stranger‑Jones. There were no hard and fast procedural dictates and the process could vary. A company (‘the issuer’) approached a finance house to act as manager of the issue. The manager formed a syndicate by inviting potential syndicate members to participate. The lead manager sent around an ‘invitation telex’ that contained indicative terms for the issue such as interest rate, issue price and conversion price. The invitation telex generally fixed a date by which the syndicate members were required to confirm their participation.
    2564 The next step was the completion of an offering circular (sometimes called an ‘Extel card’) that contained the final terms of the issue. The offering circular was distributed to the syndicate members under an ‘offering telex’. The next document was a ‘subscription agreement’ by which the syndicate members agreed with the issuer to subscribe for, or procure investors to subscribe for, the bonds on offer. The subscription agreement nominated a closing date as the time at which the subscription moneys were to be paid to the issuer and the issuer was to issue the bonds.
    2565 A peculiar feature of the Eurobond market (peculiar, at least, to those who have difficulty understanding how something can be sold before it exists and for whom the concept of short selling in financial markets is, at best, bemusing) is that the bonds could be traded before they were issued and before the terms on which they were to be issued had been finalised. In the period after the invitation telex had been sent and before the offering circular and offering telex had been finalised, and then through to the closing date, the syndicate members and other investors could trade in the bonds in what was called a ‘grey market’. The bonds were not listed on the relevant stock exchange until after the closing date.
    2566 One purpose of the grey market was to enable potential syndicate members or managers to ascertain whether they were likely to be able to sell their proposed allotments. As well as the grey market, there was a primary market (essentially the sale of the initial allotment of bonds from the managers or syndicate members to investors) and a secondary market (being the subsequent trading of bonds after listing and on the open market.
    2567 ‘Junk bonds’ were another form of financial product used in the 1970s and 1980s. As I understand the terminology, junk bonds were a high‑risk, non‑investment‑grade paper with a low credit rating and very little security. As a consequence, they usually had a high yield. I think it is correct to say that the three BGNV bond issues made in the Eurobond market (and the domestic bond issues) were not regarded as junk bonds. On the other hand, some of the contemporaneous documentation refers to the debentures issued by BBHL into the United States market as junk bonds.
    12.2.2. The meaning of subordination in relation to debt
    2568 Not all fundraisings in the Eurobond market created subordinated obligations. But because of its significance in the case I will say something about subordinated debt generally. By its very nature, subordination involves two (or more) sets of obligations incurred by a debtor. The claims of the holders of one set (the subordinated creditors) are postponed or deferred to the claims of the holders of other sets. It is common to refer to the subordinated creditors as ‘junior creditors’ and to the holders of the other set or sets of obligations as ‘senior creditors’. The terms ‘junior debt’ and ‘senior debt’ have a corresponding meaning.
    2569 Subordinated debt has been widely used in a variety of contexts. The predominant feature of the subordinated debt of a corporation is that it that will rank behind other debts, but before equity. On occasions, shareholders may prefer to capitalise a company by the use of subordinated debt rather than equity. Some of the reasons why an entity or an individual may have a preference for subordinated debt over equity include:
    (a) from the debtor’s perspective, the ability to deduct interest payable from gross profits in calculating net profits on which tax is payable;
    (b) from the creditor’s perspective, the liability to pay interest is mandatory, whilst payment of dividends is usually dependent upon profits;
    (c) a corporate debtor can repay debt whilst a return of capital is subject to legal restrictions;
    (d) institutional restrictions on investment in shares (particularly private equity) may not apply to debt investments;
    (e) debt can be secured but equity cannot; and
    (f) the debtor’s shareholders may wish to exclude debt investors from capital growth or may not wish to dilute their shareholding, although a similar result could be achieved through a structured issue of preference shares.
    2570 Subordinated debt has, in the past, formed a fixed capital component of banks and other institutions that are subject to statutory capital adequacy regimes. In the past it was not uncommon to see subordinated debt used in highly leveraged takeovers and management buy-outs in order to increase the finance available. In Wood P, The Law of Subordinated Debt, the author (an English lawyer and academic) described subordination as ‘undoubtedly quirky and idiosyncratic from a legal point of view’. He also said that subordination does not fit easily into conventional legal concepts and suggested that some ‘twisting and wrenching’ is required to make it work.
    2571 In the same work, Professor Wood provides the following definition of subordination:
    Subordination is a transaction whereby one creditor (the subordinated or junior creditor) agrees not to be paid by a borrower or other debtor until another creditor of the common debtor (the senior creditor) has been paid.
    Like security, subordination is relevant only if the debtor is insolvent because until then both junior and senior creditors can be paid in full. Hence the fundamental object of a subordination is that it should be successful on insolvency.
    A subordination on insolvency may be achieved by:
    • a turnover agreement by the junior creditor to hold dividends and distributions receivable by him on trust for the senior creditor for application towards the senior debt, or (less commonly) an agreement by him to pay to the senior creditor an amount equal to recoveries on the junior debt; or

• an agreement between the debtor and the junior debtor, with or without the senior creditor, that the junior debt is entitled to be paid only after the senior debt has been paid in full.
  2572 In his treatise, Professor Wood identifies two types of subordination: one is called ‘complete’ and the other ‘springing’ or ‘inchoate’. In relation to these species of subordination, the author says:
  Under a complete subordination, the junior debt is postponed from the time of the subordination contract and may not be paid so long as the senior debt is outstanding.
  Under a springing (or inchoate) subordination, the junior debt may be paid until a specified event happens, such as the insolvency of the debtor, the occurrence of an event of default under the senior credit agreement, or the breach by the debtor of a financial ratio. So long as all is well with the debtor, the subordination lies asleep. But when an event occurs indicating that the senior debt may be at risk, the subordination at once leaps up, pounces on the junior debt and holds it down. One disadvantage is that, unless the alarm rings early enough the pounce may come too late when the junior debt has escaped.
  When these payment blockages should occur depends on the circumstances [reference omitted].
  In any event, all subordinations spring into effect on liquidation or insolvency proceedings because it is then that the subordination is essential so far as the senior creditor is concerned.
  The timing of the spring may differentiate between categories of debt included in the junior debt. Thus the principal of the junior debt may be locked up from the beginning but payment of interest, fees and costs to the junior creditor may be allowed until some springing event such as an event of default under the senior credit agreement.
  2573 Professor Wood also alluded to the problem that falls for determination in this case, namely, whether the on‑loans were subordinated. Under the heading, ‘Identity of debtor’, the author says:
  In principle the subordination should apply to all debtors who may be liable for the junior debt, directly or by way of guarantee or otherwise. Thus if the junior creditor makes a loan to a subsidiary under the guarantee of the parent and the guarantee is subordinated, the loan itself should also be subordinated. Otherwise the liquidator of the subsidiary might be able to claim from the parent-guarantor any on‑lending of the loan by the subsidiary to the parent, and pay dividends out of the proceeds to the junior creditor as a creditor of the subsidiary who thereby side-steps the subordinated guarantee.
  2574 In a subsequent treatise by the same author there is no mention of the on‑lending problem. There is a recent Australian monograph on bondholders’ rights: Taylor J, Bondholders’ Rights, Federation Press 2005. Again, so far as I can see, the author makes no mention of on‑lending and of the potential problems it may cause.
  2575 There are limited forms of statutory subordination. For example, the Trustee Companies Act 1964 (NSW) s 29 imposes a requirement of subordination of any loan by a trustee under that Act. The definition of a subordinated loan within that Act is as follows:
  ‘Subordinated loan’ means a loan which is unsecured and the terms of which are evidenced by an instrument in writing which expressly provides that the rights of the lender are subordinated to all other creditors of the borrower.
  2576 The subordination of debt carries with it the difficulty that it alters the statutory order of distribution of a company’s estate. For some time a view prevailed that any attempt to alter the order of distribution was contrary to public policy. An opposing view was that the statutory order was a matter of private right to equal treatment that could be waived or varied by agreement. But it has also been recognised that a limited group of creditors cannot, by contract, vary the effect of the statutory provisions on themselves in a way that will harm other creditors outside of the group. For example, a clearing house arrangement between airline operators (a limited mini-liquidation) that could harm other creditors was held invalid by the House of Lords in British Eagle International Air Lines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758.
  2577 The effectiveness of subordination in law is now recognised: In Re British and Commonwealth Holdings plc (No 3) (1992) 1 WLR 672; In Re Maxwell Communications Corporation plc (1993) 1 WLR 1402; Re 1046 Corporation Ltd (in Liq) (1993) 33 NSWLR 344; United States Trust Co of New York and Others v Australia and New Zealand Banking Group Ltd and others (1995) 37 NSWLR 131.
  2578 Since amendments to the corporations legislation in 1992, debt subordinations have had legislative sanction. Under s 563C, nothing in Pt 5.6 Div 6 (dealing with proof and ranking of claims) renders a debt subordination unlawful except insofar as it would prejudice a creditor not a party to it. The origins of s 563C can be traced back to the 1988 General Insolvency Inquiry, known as the Harmer Report.
  2579 The relevant paragraph of the Harmer Report became the basis for paragraph 963 of The Explanatory Memorandum for the Corporate Law Reform Act 1992 (Cth). The two‑part provision of s 563C of the Corporations Law describes where subordination is enforceable as well as providing a definition of ‘debt subordination’. Section 563C of the Corporations Law was inserted by s 102 of the Corporate Law Reform Act 1992 (Cth). The definition of ‘subordination’ in s 563C(2) is expressed in wide terms to mean:
  [A]n agreement or declaration by a creditor of a company, however expressed, to the effect that, in specified circumstances:
  (a) a specified debt that the company owes the creditor; or
  (b) a specified part of such debt;
  will not be repaid until other specified debts that the company owes are repaid to a specified extent.
  2580 Section 563C was intended to clarify the earlier law rather than alter it. In Re NIAA Corporation Ltd (351) the court considered a term concerning subordination as follows: ‘The loans are to be subordinated to the claims of all creditors of the Company i.e. on winding up, they will rank for repayment after creditors have been fully paid’. One of the issues before the court was whether it could be said that no binding contract came into existence as a consequence of the uncertainty of that term. Santow JA said, at 356:
  It is also true that the subordination terms are brief, with none of the customary language of trust subordination, or assignment. But it does not follow that the words are not adequately clear … Hence I would not accept that there was no binding contract, by reason of any uncertainty of its terms, even if the parties may have intended to give greater particularity to the terms by a note certificate or trust deed.
  2581 In the PR the plaintiffs plead that any term as to subordination as alleged by the banks is vague and uncertain. I will return to this argument later in these reasons. But it should be noted that one of the plaintiffs’ arguments is that the term ‘subordination’ denotes a concept and that it refers to an agreement rather than its actual content. The plaintiffs say that nothing can be implied about the terms of any agreement merely from the use of the word ‘subordination’. Nonetheless, an understanding of some of the key concepts of subordination assists the process of identifying the content of the subordination that is alleged in this case.
  12.2.3. Classification and mechanism of subordinated debt
  2582 Subordination agreements may provide for a complete or a springing or inchoate subordination. In a complete subordination, junior debt is postponed from the time of the making of the subordination contract and may not be paid as long as senior debt is outstanding. Under a springing (or inchoate) subordination, the junior debt may be paid until a specified event happens, such as the insolvency of the debtor, the occurrence of an event of default under the senior credit agreement or the breach by the debtor of a financial ratio.
  2583 There may, of course, be variations on these two principal themes. For example, partial subordinations may occur where the junior creditor is permitted to receive limited payments on the junior debt pending the occurrence of a specified event of default, such as the borrower’s insolvency, bankruptcy or default in payment of the senior debt. Upon the occurrence of such an event, the subordination becomes complete and no payment is permitted on the junior debt until the default is remedied or the senior debt is fully paid.
  2584 In their closing submissions the plaintiffs comment on the significance of the subordination terms alleged in ADC par 11EE(2) to par 11EE(4). There, the banks contend for a springing subordination when, according to the plaintiffs, the form of subordination provided for in the BGNV Subordination Deed is a complete subordination, as was the subordination in the Principal Subordination Deed, the BIIL Subordination Deed and the deed made between TVW(UK) and TBGIL.
  2585 Subordination may be achieved in various ways including a turnover agreement by the junior creditor to hold dividends and distributions receivable by it on trust for the senior creditor for application towards the senior debt, or an agreement by it to pay to the senior creditor an amount equal to recoveries on the junior debt. Another method of achieving subordination is by an agreement between the debtor and the junior creditor, with or without the senior creditor, that the junior debt is entitled to be paid only after the senior debt has been paid in full. The former is often referred to as a ‘turnover trust’ and the latter as ‘contractual postponement’.
  2586 Professor Wood has also referred to another form of contractual subordination in his treatise, which is achieved by a mechanism called a contingent debt subordination. This form of subordination is often used where there is concern that an ordinary contractual subordination may conflict with a mandatory insolvency rule that unsecured debts are to be paid pari passu. A contingent debt subordination provides that if the debtor goes into liquidation or becomes subject to any other insolvency proceeding, the junior debt becomes contingent or conditional on the debtor being able to pay the senior debt in full. The junior creditor, in effect, renounces its junior debt in the event of the debtor being unable to pay the senior debt in full due to insolvency. If the debtor would be solvent if the junior debt was reduced but not wholly eliminated, then the junior debt is diminished accordingly. If the debtor would still be insolvent, even if the junior debt was completely eliminated, the junior debt would be cancelled. The utility of the contingent debt contractual subordination is for the potential ability to restore solvency when insolvency is alleged to have occurred.
  2587 The form of subordination can also affect recovery of senior debt, junior debt and other unsecured debt. There are two main reasons for this. First, other unsecured debt will benefit from a contractual subordination even if it was not intended to rank as senior debt in relation to the junior debt. Secondly, in a turnover subordination the senior debt benefits from the turnover of dividends on the junior debt and so receives a ‘double dividend’ or a dividend based upon the junior debt dividend being turned over to the senior creditor.
  12.3. Subordination in the documentation of the bond issues
  2588 So far as concerns subordination, there are no relevant differences between the form of the bonds or the drafting of the trust deeds for the three BGNV bond issues. In the discussion that follows, I will use material from the documentation of the third BGNV bond issue.
  12.3.1. The conditions in the offering circular and the bonds
  2589 Clause 1A of the offering circular and Condition 1A of the bonds contain almost identical provisions describing the status of the bonds and the fact of subordination:
  The Bonds and the Coupons constitute direct, unconditional, unsecured and subordinated obligations of [BGNV as issuer] and rank pari passu without any preference among themselves and equally with all other present and future unsecured and subordinated obligations of [BGNV].
  The rights of the Bondholders and the Couponholders are subordinated in right of payment to the claims of all other unsubordinated creditors of [BGNV] in the manner provided in the Trust Deed.
  2590 Similar provisions apply in both documents to the guarantee given by TBGL to support the obligations of BGNV.
  2591 The conditions attached to the bonds issued by TBGL and by BGF to Heytesbury Securities contain an identical provision to Condition 1A set out in the previous paragraph. It has to be borne in mind that trust deeds covering the domestic bond issues were not executed until 25 July 1988. But cl 5 of the respective trust deeds, as eventually executed, contains subordination provisions to much the same effect. It follows that, on the face of the documentation, the claims of the holder of the domestic bonds (in this instance SGIC) against TBGL and BGF (and against TBGL as guarantor of the obligations of BGF) are similarly subordinated.
  2592 Clause 3 of the offering circular for the first BGNV bond issue and Conditions 3A and 3B of the bonds set out another provision that is material to the subordination question:
  [BGNV as issuer] undertakes that it will not create or have outstanding and [TBGL as guarantor] undertakes not to create or have outstanding or guarantee any other indebtedness for borrowed money convertible into the equity of [TBGL] unless such indebtedness shall be subordinated and rank equally in all respects with or junior to the Bonds or the guarantee thereof by [TBGL] (as the case may be).
  2593 The effect of this provision is that, in relation to the second and third BGNV bond issues, BGNV and TBGL had a pre‑existing contractual obligation to ensure that the subsequent bond issues were subordinated. There is an argument about the force and effect of this provision and its interrelationship with the rights of, and mechanisms for, conversion. I will deal later with these arguments and the way they impact on the status of the on‑loans: see Sect 12.13.7, Sect 12.14.1 and Sect 13.2.5, among others.
  12.3.2. The terms of the trust deeds
  2594 Each of the trust deeds for the three BGNV bond issues contains a provision stipulating that, on a winding up of BGNV, the claims of bondholders and coupon holders (or of LDTC as trustee) against BGNV would be subordinated to the claims of all other creditors of BGNV who were not subordinated. In each of the trust deeds for the TBGL bond issue and the BGF bond issue there is a similar provision.
  2595 The starting point is cl 2B of the trust deed, which provides that the bonds ‘will constitute direct, unconditional, unsecured and subordinated obligations of the Issuer and will rank pari passu without preference among themselves and equally with all other present and future unsecured and subordinated obligations of the Issuer’. There is an identical provision relating to the conversion bonds, except that the word ‘Issuer’ is replaced by the word ‘Guarantor’.
  2596 There are some relevant definitions in various sub‑parts of cl 5(A)(1). I have to set them out in Schedule 38.12 but their general effect is as follows.

1. ‘Subordinated Indebtedness’: the indebtedness of the issuer under the bonds and all other indebtedness of the issuer which is, in its terms, subordinated to the claims of unsecured creditors.
2. ‘Relevant Claims’: the claims of all creditors of the issuer (other than Subordinated Indebtedness) at the commencement of a winding up.
3. ‘Ordinary Creditors Shortfall’: the deficit of Relevant Claims after distributions by the liquidator to those creditors.
4. ‘Appropriate Amount’: the amount paid by the liquidator to the trustee for the bondholders in respect of the bonds or, if less, the whole or so much of that amount as is necessary to meet the Ordinary Creditors Shortfall after taking into account amounts paid by the liquidator in respect of Subordinated Indebtedness other than the bonds.
   2597 The remainder of cl 5 contains the substantive provisions concerning subordination. The critical provision is cl 5(A)(2), which, once again, I have set out in Schedule 38.12. Its effect is as follows.
5. In a winding up of the issuer, the bondholders claims are postponed to Relevant Claims and no amount is to be paid by the trustee to bondholders until the Appropriate Amount has been established and distributed.
6. Any amount distributed by the liquidator to the trustee for the bondholders in the winding up is to be held by the trustee on trust to be applied:
   (a) first, towards the trustee’s costs of executing the trusts;
   (b) secondly, to the holders of unsatisfied Relevant Claims up to the Appropriate Amount; and
   (c) thirdly, to the bondholders rateably.
7. The trustee can satisfy the trust in favour of the holders of Relevant Claims by repaying the amount to the liquidator so that the liquidator can then distribute the funds to the creditors so entitled.
   2598 Clause 5(A)(3) empowers the trustee to obtain certificates from the liquidator as to the ‘relevant claims’ and the amounts of other ‘subordinated indebtedness’. Clause 5(A)(4) says that the trustee is entitled (to the exclusion of the bondholders) to take proceedings to wind up the issuer but no other remedy shall be available to the trustee or the bondholders except in certain nominated circumstances. Clause 5(B) has a separate but similar regime covering the subordination of the guarantee by TBGL and the liabilities arising under the conversion bonds.
   2599 Different views were advanced during the hearing as to the proper construction of clauses bringing into effect the subordination regime. I will return to the different constructions in a later section (Sect 13.2.8.3). At this point all I need say is that the banks argued that the clear postponement of the bondholders’ claims results in the contractual subordination of the trustee’s claim. This entitles the liquidator not to pay the trustee in respect of that claim until after all unsubordinated creditors are paid in full. Any other construction of the subordination clauses denies operation of the express ‘postponement’ of claims.
   2600 The better view, in my opinion, is that advanced by the plaintiffs. The subordination mechanism envisages that the trustee will prove in the liquidation of the issuer for the full amount of the bonds. The liquidator is to treat the proof of debt of the trustee just like any other proof of debt. The regime appears to contemplate that the liquidator will not attempt to differentiate between subordinated and non‑subordinated claims but rather to treat them as if they ranked pari passu. The liquidator will create a fund in the liquidation by the realisation of assets and then deal with it in accordance with the scheme of priorities set out in the legislation. If there is a balance of funds to be distributed to unsecured creditors then, as between the subordinated and non‑subordinated creditors, it will be apportioned between them on a pari passu basis. But the regime prescribed by cl 5(A) will then come into effect.
   2601 The amount received by the trustee representing the share of the bondholders will be dealt with by the trustee as follows. First, in payment of the trustee’s costs relating to the execution of the trusts. Secondly, if the holders of ‘relevant claims’ have not been paid in full, all or part of the balance will be paid in satisfaction of those ‘relevant claims’. Thirdly, the balance (if any) is to be distributed pari passu to the bondholders.
   2602 Under the preamble to cl 5(A)(2), any moneys distributed by the liquidator to the trustee are to be held by the trustee on trust to be dealt with according to, and in the order prescribed in, the priorities in the three listed categories. The last paragraph of cl 5(A)(2) provides that the trustee can discharge its liability under the trust by repaying the moneys to the liquidator ‘on terms that the liquidator shall distribute and pay the same accordingly’. In other words, if all or any of the moneys initially distributed by the liquidator to the trustee are needed to satisfy creditors who have ‘relevant claims’, the trustee can repay those funds to the liquidator and it would then be for the liquidator to re-distribute them among creditors having ‘relevant claims’.
   2603 It should be noted that this subordination regime operates only in a liquidation of the issuer. If there is an event of default the trustee can declare the bonds to be immediately due and payable (cl 3(C) and Condition 10 of the conditions attaching to the bonds). By virtue of cl 9 of the trust deeds for the first and second BGNV bond issues and Condition 11, the trustee, to the exclusion of the bondholders, has the right to institute ‘such proceedings as it may think fit to enforce repayment of the securities’. It is only if the trustee, having been directed to do so by a specified number of bondholders, neglects to take action or to prove in the winding up that the bondholders are at liberty to do so. But if moneys are received by the trustee or the bondholders consequent on the taking of such action they will not be subject to the subordination regime in cl 5(A). Condition 11 of the conditions attaching to the bonds is as follows:
   Only the Trustee may pursue the remedies available under the general law or under the Trust Deed to enforce the rights of the Bondholders and Couponholders and no such holder will be entitled to proceed against the Issuer or the Guarantor unless the Trustee, having become bound to do so in accordance with the terms of the Trust Deed, fails to do so.
   2604 In relation to the right to take action under cl 9 of the trust deeds for the TBGL bond issue, the BGF bond issue and the third BGNV bond issue are in slightly different form. They provide, in cl 9(C), that if the bondholders commence action or prove in the winding up, any moneys they receive are held on trust for the trustee. In a winding up this would result in those moneys being impressed with the trust arising under cl 5(A)(2).
   2605 Using the categorisation of types of subordination discussed in the preceding section, this seems to be an inchoate subordination that, once triggered, brings about a turnover trust.
   12.3.3. Subordination in the Transaction documents
   2606 Although in this section of the reasons I am primarily concerned with the status of the on‑loans at and from the time they were made, that status cannot be divorced entirely from the events of 1990, due largely to the plaintiffs’ ‘deeper subordination’ arguments. I need, therefore, to refer to the relevant Transaction documents that dealt with subordination: they are the Principal Subordination Deed, the BIIL Subordination Deed and the BGNV Subordination Deed. The relevant provisions in the several deeds are much the same and I will use the BGNV Subordination Deed as an example.
   2607 ‘Senior Liabilities’ are defined to encompass the obligations of TBGL and BGF to the banks. The term ‘Subordinated Liabilities’ means the debts owed by TBGL and BGF to the ‘Subordinated Creditor’, namely BGNV. The term ‘Event’ covers, as well as a liquidation of TBGL or BGF, an official management, a provisional liquidation or a scheme of arrangement in relation to those companies. I have set out the terms of Clause 2 in Schedule 38.13 but its general effect is as follows.
8. BGNV’s claims under the Subordinated Liabilities are subordinated to the claims of the banks for the Senior Liabilities.
9. No part of the Subordinated Liabilities is due for repayment until the Senior Liabilities have been repaid in full or unless an Event occurs.
10. If an Event occurs the Subordinated Liabilities are repayable immediately.
11. If an Event occurs, Westpac, as Security Agent, can direct BGNV to prove in the winding up.
12. Other than at the direction of Westpac, BGNV is not to prove in a winding up in competition with the banks.
13. All moneys received by BGNV in respect of Subordinated Liabilities are to be held on trust for Westpac in accordance with cl 3(a) of the deed.
    2608 Under cl 3(a), until the Senior Liabilities are repaid in full, BGNV is required to deliver to Westpac in ‘precisely the form received’ and without the need for demand, any payment or distribution received by it in respect of any of the Subordinated Liabilities. Any money or property received by BGNV in respect of any of the Subordinated Liabilities is to be held by it on trust for Westpac as Security Agent pending delivery to Westpac.
    2609 Identifying the conceptual species of subordination represented by these provisions is a little more difficult. The effect of the opening words of cl 2(a) is to create a ‘complete’ subordination in the nature of a contractual postponement. On the other hand, there is an inchoate element to the arrangements brought about by cl 2(a)(ii) and 2(b) on the occurrence of an Event. Once an Event occurs, the debts due by TBGL and BGF to BGNV become payable and either:
    (a) Westpac directs BGNV to prove in the liquidation, in which case there is a turnover trust of any moneys received from the liquidators: cl 2(d) and cl 3(a); or
    (b) BGNV is prevented from taking any action towards recovery of the debt: cl 2(d).
    12.4. The on‑loan contracts: the pleadings
    12.4.1. Some introductory comments
    2610 It seems to be common ground that the on‑lending of the net proceeds of the BGNV bond issues involved ‘contracts’ (using that word at its most basic meaning) between BGNV and TBGL or BGF. However, it is not possible to find a piece of paper that is, or a series of pieces of paper that are, a contract setting out neatly the terms of the on‑loans.
    2611 But this is not unusual: contracts are often informal, with little actual negotiation and exhaustive expression of terms and conditions. This applies, for example, when a passenger engages the services of a taxi driver to take her to a nominated destination. The passenger and the driver seldom embark on detailed negotiations about the fare or the manner in which the fare is to be calculated and nor is there an express promise by the passenger to pay the fare. It can apply just as much in the setting of a group of associated companies when they are organising intra‑group dealings: see Electrical Enterprises Retail Pty Ltd v Rodgers [1988] 15 NSWLR 473 at 497.
    2612 This, then, is the nature of the on‑loan contracts. They are not constituted by neatly drawn and carefully drafted written agreements; they are informal. The question is whether, notwithstanding the informality of the arrangements, legally binding promises and obligations were undertaken by the parties between themselves. In this instance, BGNV agreed to advance moneys to TBGL (or BGF) and TBGL (or BGF) agreed to repay them and to pay interest along the way. These were (and were intended to be) legally binding obligations capable of independent enforcement, but on what precise terms and conditions? Was any thought (precise or otherwise) given to the terms on which the on‑loans were to be made?
    12.4.2. The on‑loans and the pleadings
    2613 The on‑loan subordination issue has been alive on the pleadings since the commencement of the litigation. The plaintiffs have always asserted that TBGL and BGF were indebted to BGNV and that the indebtedness arose from the on‑lending of the proceeds of the bond issues. In the first version of the defence (filed on 19 May 1997), the banks did not admit the indebtedness but went on to say that if there was any indebtedness it was subordinated.
    2614 The pleadings gradually developed, with the banks’ defence being expanded into a comprehensive set of allegations known as the ‘par 13A argument’. These are now to be found in ADC par 11EA to par 11ER. It was not until PR was filed (February 2005) that there appears an allegation of material fact in the plaintiffs’ pleadings to the effect that the on‑loans were unsubordinated. There are some references to the unsubordinated nature of the on‑loans in PP (for example, PP par 59D) but I think they are advanced by way of response to the banks’ case.
    12.4.2.1. The on‑loans generally
    2615 PP par 7C contains a schedule setting out the debts owed by and to Bell Participants as at 26 January 1990. The schedule indicates that BGNV was a creditor of BGF in an amount of $363.5 million, and of TBGL as to $61.2 million. In 8ASC par 12 the plaintiffs include the bondholders in the list of creditors of TBGL and BGF as at the commencement of the Scheme Period. The bondholders are said to be creditors in respect of the liabilities arising under the TBGL bond issue and the BGF bond issue. In par 11E and par 11F the plaintiffs plead that the moneys raised under the three BGNV bond issues were on‑lent to TBGL or BGF and that the loans carried interest. There is no mention of the status (subordinated or unsubordinated) of the on‑loans. In par 11K the plaintiffs say that, as at the commencement of the Scheme Period, TBGL and BGF had principal liabilities of $60.4 million and $338.8 million respectively in respect of the BGNV on‑loans.
    2616 The difference between the recitation of the indebtedness of TBGL of $61.2 million in PP par 7C and $60.4 million in 8ASC par 11K must, I think, represent accrued interest on the bonds. The face value of the first BGNV bond issue was $75 million, but there were some conversions in the early years thus reducing the outstanding total to $60.4 million. In relation to BGF, the difference between the figures of $338.8 million and $363.5 million in those paragraphs might represent a change in the rate of exchange for the third BGNV bond issue, which had been effected in pounds sterling.
    2617 In ADC par 11E and par 11F the banks admit the allegations that the moneys raised under the three BGNV bond issues were on‑lent to TBGL or BGF and that the loans carried interest. But they submit that the borrowings of TBGL and of BGF ‘were, at all material times, non‑current, subordinated liabilities of TBGL and BGF respectively and otherwise rely upon par 11EA to par 11ER below’. I will come back to those paragraphs shortly but, in summary, they set out the banks’ arguments that there were contracts between the relevant Bell group companies, and contracts between those companies and the banks, containing terms that the on‑loans would be subordinated. The banks also argue the existence of estoppels preventing the plaintiffs from now asserting the contrary.
    2618 In PR the plaintiffs say that the BGNV on‑loans ‘were ordinary unsecured unsubordinated liabilities of TBGL and BGF to BGNV’. They also deny the existence of contractual terms or estoppels as contended by the banks in ADC par 11EA to par 11ER.
    2619 The banks’ pleadings concerning the terms of the on‑loan contracts, and the conduct giving rise to the estoppels that they now say prevent the plaintiffs from asserting that the on‑loans were unsubordinated, are long and complex. ADC par 11EA is in these terms:
    11EA In further answer to the allegation in paragraph 11E of the statement of claim that BGNV on‑lent the moneys raised under the Three BGNV Issues to TBGL and BGF, the Defendants say that:
    (a) for the reasons, and to the extent set out, in paragraphs 11EB to 11ER below the said loans were, or should be treated as having been, at all material times, subordinated to the debts of all other creditors of TBGL and BGF for one or more of the following reasons:
    (1) there were contracts or contractual terms between TBGL and BGNV, and BGF and BGNV to the effect that the loans were subordinated to the extent pleaded below;
    (2) if there were no such contracts or contractual terms there was an estoppel between TBGL, BGF and BGNV to the same effect;
    (3) there were contracts for the first two of such loans, between TBGL, BGNV and the then members of the Negative Pledge Group respectively, on the one hand, and various of the Banks, on the other hand, to the effect that the liabilities of TBGL and BGF respectively to BGNV pursuant to those loans would, on a liquidation of TBGL and BGF, be subordinated to the same effect;
    (4) in any event, in respect of all three loans, the plaintiffs are estopped as against the Banks from denying that the said loans were subordinated to the same effect;
    (b) for the reasons set out in paragraph 11EH below, BGNV is obliged to make restitution in the manner pleaded; and
    (c) for the reasons pleaded in paragraph 11EI below, BGNV will hold any funds that it receives in a winding up of TBGL or BGF on the trusts or equitable obligations therein pleaded.
    2620 As I mentioned in Sect 6.5, the plea in ADC par 11EI was abandoned during closing submissions and par 11EA(c) is only reproduced here for the sake of completeness. The pleading in ADC par 11EA(a)(1) contains the basis for the assertion that there were contracts inter se in respect of each of the three on‑loans. Paragraph 11EA(a)(3) does the same work for the argument that there were contracts between the relevant Bell companies and the banks for the first two on‑loans (contracts inter partes). Paragraphs 11EA(a)(2) and (4) contain the framework for the assertions of estoppels as between BGNV on the one hand and TBGL and BGF on the other (the estoppels inter se) and of estoppels between the plaintiffs generally and the banks (the estoppels inter partes).
    2621 In using the phrases inter se and inter partes I will no doubt incur the wrath of those who (with justification) decry the use of Latin in reasons for decision. But I think it is different from, for example, using a Latin maxim which few readers would understand, such as nemo dat quod non habet to describe a principle of law that is just as easily explained in plain English. My excuse for using inter se and inter partes is twofold. First, they are reasonably well understood in modern parlance. Secondly, I will be using them with reasonable frequency and they are much shorter than any English phrase that would be an appropriate description of the relative complexity of the on‑loan arrangements.
    2622 In the discussion that follows I will concentrate on the pleadings necessary for the establishment of contracts relating to the subordination of the on‑loans. Matters such as mistake or unfairness (which are relevant in the main to the estoppel and restitutionary arguments) will be dealt with separately.
    12.4.2.2. The contracts inter se
    2623 ADC par 11ED contains 86 subparagraphs reciting the history of the banking relationships under the NP agreements and later the NP guarantees, the raising of funds through the five convertible bond issues, the agreement by the banks to treat the bonds as equity, and the beliefs and conduct of the Bell group companies and of the banks. The allegations in ADC par 11ED are supported by over 200 pages of particulars. It is not possible to deal with each assertion, but I will attempt to summarise what I see as the main features of par 11ED, using the first BGNV bond issue as an example.
    2624 First, it is said that in its dealings with the banks prior to the bond issue being effected, TBGL represented to the banks that it believed (and that it was the fact) that:
    (a) the BGNV bond issue and the TBGL bond issue would be on identical terms (with some exceptions, although the nature or extent of subordination was not one of the exceptions); and
    (b) the bondholder debt and the liabilities of TBGL arising from the raising and deployment of funds from the bond issue would be subordinated and would rank behind bank borrowings of the NP group companies.
    2625 Secondly, it is pleaded that TBGL considered that the bond issues should be regarded as equity when considering the balance sheet ratios because the bonds were subordinated, they would not mature for a long period (10 years), and there was strong likelihood of conversion. TBGL requested the banks to agree to such treatment, which agreement the banks gave.
    2626 Thirdly, TBGL, BGF, the NP group companies and BGNV had a common belief or assumption that all debt of the NP group brought about by the fundraising arrangements involving the issue of all convertible bonds in 1985 and 1987 (including that raised in the Eurobond market in respect of which BGNV was the issuer) was subordinated and ranked behind existing and future bank borrowings of the NP group. Further, each of the companies conducted itself on that basis with each other, and with third parties, in matters of commercial importance and seriousness.
    2627 Fourthly, by 20 December 1985 TBGL had decided that the purpose of issuing the bonds was to inject subordinated funds into TBGL or the NP group, that the proceeds of the bond issue would be so provided and that they would be provided to TBGL or the NP group on a subordinated basis. Further, by 20 December 1985, BGNV was aware of those things and understood and accepted that its role and participation in the issue of the bonds was for the effectuation of those matters.
    2628 Fifthly, each of the banks conducted its banking relationship with TBGL and the NP group companies in the same beliefs and on the same assumptions as set out in the preceding paragraph.
    2629 In ADC par 11EE(1) the banks assert that TBGL had actual or implied authority to decide the terms of the on‑loans from BGNV in accordance with the business purpose of those fundraising arrangements. DP par 11EE(1) describes the business purpose of the deployment of the proceeds of the five convertible bond issues as follows:
    [T]o complete that part of the fund raising arrangements by providing the funds raised for TBGL and the Bell group to TBGL (in respect of the 1985 fund raising arrangement) and to BGF (in respect of the 1987 fund raising arrangements) on a subordinated basis so as to enable those funds to be excluded from the calculation of Total Liabilities of the [NP group companies] under the [NP agreements].
    2630 ADC par 11EE(2) and par 11EF and par 11EG contain matters that are critical to the assertion of contracts inter se (again using the first BGNV on‑loan as an example):
    11EE(2) The effect of the matters referred to in and under subparagraphs 11ED(1) to (22) above was that by 20 December 1985 TBGL had decided that [the first BGNV on‑loan] would be subordinated to the claims of other creditors of TBGL substantially on terms that in the event of the winding up of TBGL:
    (i) the claims of BGNV against TBGL in respect of [the first BGNV on‑loan] would be postponed to claims of unsubordinated creditors of TBGL; and/or
    (ii) if any amount was paid to BGNV in the liquidation of TBGL in respect of [the first BGNV on‑loan] such money would be held on trust by BGNV for satisfaction of the claims of unsubordinated creditors of TBGL until those claims had been satisfied in full, and accordingly such were terms of [the first BGNV on‑loan].
    11EF Further or in the alternative the conduct, intention and beliefs of TBGL, BGF and BGNV pleaded … above demonstrated a tacit understanding or agreement or manifested a mutual assent from which it can be inferred or alternatively implied that it was a term of the on‑loans between BGNV and TBGL and between BGNV and BGF that the liabilities of each of TBGL and BGF to BGNV pursuant to the on‑loans were subordinated to the claims of all other unsubordinated creditors of those companies on terms set out in subparagraphs 11EE(2) … .
    11EG In the further alternative, by reason of the matters … pleaded [above] it was an implied term of … [the first BGNV on‑loan] that the rights of BGNV as a creditor of TBGL and BGF, respectively, were subordinated to the claims of other creditors of TBGL and BGF, as the case may be, on terms set out in subparagraphs 11EE(2). (emphasis added in each sub‑paragraph)
    2631 In DP par 11EE(2) it is said that the ‘decision’ that the loans would be subordinated was made by persons within the chairman’s office of TBGL or the board of TBGL and ‘is evidenced by or may be inferred from the matters referred to in’ specified paragraphs of ADC par 11ED.
    2632 There are also particulars to support the allegation in ADC par 11EG that there was an implied term as to subordination. First, each of TBGL, BGF and BGNV was aware that the on‑loans were an integral part of the arrangements to raise funds in Europe and provide those funds to TBGL and BGF. Secondly, TBGL, BGF and BGNV did not, apparently for reasons associated with the lawful avoidance of stamp duty, attempt to spell out and document the full terms of the contracts of on‑loan. Thirdly, the business purpose of the arrangements, and of the on‑loans as part of the arrangements, was to provide the funds raised by BGNV to TBGL and BGF on a subordinated basis so as to enable those funds to be excluded from the calculation of liabilities for balance sheet ratio purposes.
    2633 Accordingly, a term that the on‑loans were subordinated should be implied because:
    (a) it is reasonable and equitable;
    (b) it is necessary to give business efficacy to the contract;
    (c) it is so obvious that such a term went without saying;
    (d) it is capable of clear expression; and
    (e) it does not contradict any express term of the contract; or
    (f) alternatively to (a) to (c) above, it is necessary for the reasonable and effective operation of the contract in all the circumstances of the case.
    2634 In PR par 98 and par 99 the plaintiffs deny that TBGL had authority to decide the terms of the on‑loans and that TBGL’s decision to include a term to the effect pleaded would have been inconsistent with the ‘use of proceeds’ clause in the bond issue documentation (which did not specify that the loans would be subordinated). They also deny that there were terms as to subordination alleged in ADC par 11EE(2) in the on‑loan contracts, or if there were terms to that effect:
    (a) any such terms were illusory, too vague and uncertain to be enforceable;
    (b) the banks lacked standing to enforce such a term as they were not parties to the BGNV on‑loans; and
    (c) the alleged agreements as to subordination were terminated and discharged by the BGNV Subordination Deed.
    2635 As to the assertions of a ‘tacit understanding or agreement’ (ADC par 11EF) and of an implied term (ADC par 11EG) relating to subordination, the plaintiffs say in PR par 100 that the allegations cannot be made out because those terms are:
    (a) not necessary for the reasonable and effective operation of the BGNV on‑loans (either as a contract of debt or to achieve the stated income tax benefits);
    (b) not reasonable and equitable in the circumstances;
    (c) inconsistent with the obligations of BGNV to bondholders to meet, on an unsubordinated basis, payment of interest and redemption of bonds;
    (d) not capable of clear expression, and are illusory, too vague and uncertain because they do not identify the nature and extent of the alleged subordination nor the mechanism by which the alleged subordination was to take effect;
    (e) not so obvious that they go without saying; and
    (f) contrary to the express terms of the BGNV on‑loans.
    2636 The plaintiffs also repeat the argument that if such terms can be implied, the banks lack standing to enforce them and, in any event, they were discharged by the BGNV Subordination Deed.
    12.4.2.3. The contracts inter partes
    2637 The contracts between the banks and the various NP group companies are pleaded in ADC par 11EK and following. They, too, rely on the factual premises alleged in ADC par 11ED. There are two things to note about these pleadings. First, they relate only to the first two BGNV on‑loans and not to the lending of the proceeds from the third BGNV bond issue. Secondly, it is not alleged that there was any such contract between HKBA and the NP group companies. The effect of ADC par 11EK, par 11EL and par 11EM is that the Australian banks (other than HKBA) and the Lloyds syndicate banks agreed with either TBGL, or with TBGL and BGNV or with TBGL and the NP group companies or with TBGL, BGNV and the NP group companies, that:
    (1) in consideration of the promise in (2) below each of the [banks] would treat the liabilities of TBGL, as a member of [the NP group], arising from the raising and deployment of funds in and about [the first BGNV bond issue] as equity when considering balance sheet ratios for the purposes of banking covenants;
    (2) the liabilities of TBGL, as a member of [the NP group], arising from the raising and deployment of funds in and about [the first BGNV bond issue] would in the event of liquidation of TBGL be subordinated to the liabilities of TBGL to the bank lenders.
    2638 In their reply, the plaintiffs deny the existence of any such agreements. They say further that BGNV was not a party, that the alleged agreements lacked consideration and were uncertain, and that in any event there was no intention to create binding legal relations. The plaintiffs argue that if any agreement was made as alleged, the term was that any subordination of TBGL’s liabilities under the on‑loans would be subject to the terms of the trust deeds and of the bonds.
    12.4.2.4. Identifying the ‘on‑loan contracts’ from the pleadings
    2639 The pleadings do not spell out the precise nature or characterisation of the on‑loan contracts, nor do they purport to set out the terms of the contracts (other than the bland statement that the on‑loans were subordinated). Even though there is no issue as to the existence of ‘contracts’ (at least for the contracts inter se), in order to decide whether there were terms relating to subordination it is necessary to identify the underlying nature of the contracts that are said to contain the relevant provisions. I will deal with these questions in detail in Sect 13 but it might be useful if I look at this stage at some issues arising from the way in which the contracts are described in the pleadings.
    2640 During oral closing submissions I asked the banks to try to identify the ‘contracts’ by utilising a form of request for further and better particulars with which a pleader, circa 1960s, confronted with an allegation of an informal agreement, might have been familiar:
    (1) Was the agreement referred to in par X:
    (a) oral;
    (b) written;
    (c) partly oral and partly written; or
    (d) to be inferred.
    (2) If written or partly written, identify the document or documents.
    (3) If oral or partly oral, state the substance of the conversation and who spoke them, when and where.
    (4) If to be inferred, set out each act, fact, matter or thing giving rise to the inference.
    2641 It may have been a little unfair to expect counsel to reduce what is innately a complex issue to such simple terms and I think that counsel for the banks who dealt with it struggled to do so. Nonetheless, I think the exercise was useful because it is possible to identify from the discussion a number of alternative scenarios on which the banks’ case rests.
    2642 First, in pleading the contracts inter se in ADC par 11EA(a)(1), the banks refer to ‘contracts or contractual terms’. I think this means that there are alternative characterisations of the arrangement, either as a contract of subordination or as a contract in respect of the relevant on‑loan, one term of which dealt with subordination. Whichever it is, in relation to the existence, manner or scope of subordination I do not think there is any relevant distinction between the characterisations. It will become apparent that I believe there were on‑loan contracts and that either they did or did not have subordination as a component. On the evidence, I can see little room for the characterisation of a separate contract of subordination standing side by side with a more general contractual arrangement covering other aspects of the on‑loans.
    2643 Secondly, I think the way in which the banks advance the on‑loans permits of a number of different possibilities:
    (a) express contracts, probably oral (ADC par 11EA(a)(1) and par 11EE), with an express term (ADC par 1EE(2) to (4)) concerning subordination;
    (b) express contracts, probably oral (ADC par 11EA(a)(1) and par 11EE), with an implied term (ADC par11EG) concerning subordination;
    (c) express contracts, probably oral (ADC par 11EA(a)(1) and par 11EE), with an inferred term (arising from a tacit understanding or agreement or from a manifested mutual assent) concerning subordination that is to the same effect (ADC par 11EF); or
    (d) inferred contracts (arising from a tacit understanding or agreement or from a manifested mutual assent) with a term concerning subordination that is to the same effect (ADC par 11EF).
    2644 When, in relation to the facts of this case, I describe a contract as ‘oral’, I am using the term in contradistinction to a written contract. In other words, oral in this context means ‘not written’. The statement that the express contract for which the banks contend is ‘probably oral’ requires explanation. There are at least two things to be said about it. First, a search for a conversation or a series of conversations between nominated individuals from which the oral contract emerges is far too simplistic a notion for the circumstances of this case.
    2645 Secondly, in Sect 12.4.2.2 I have set out or summarised ADC par 11ED(19A) and (19B) and par 11EE(2) from which it can be seen that the express contract for which the banks contend is built on the ‘decision’ of TBGL that the on‑lending would be on a subordinated basis. The particulars relevant to that decision call in aid other paragraphs of ADC par 11ED. And those other paragraphs include references to documents. But the banks do not contend that those documents themselves have contractual effect so as to render the proper characterisation of the arrangement as ‘partly oral and partly in writing’. Nor is it said that the source accounting documents of the companies (about which I will have more to say later) that record the on‑loans have contractual effect. The documents referred to in the nominated subparagraphs of DP 11ED are said to be part of the factual matrix that constitute evidence from which the relevant decision can be inferred.
    2646 This is not to say that the source accounting documents are irrelevant. Although they are not relied on by the banks, the plaintiffs point to the absence within them of any comment on the status (subordinated or unsubordinated) of the on‑loans of the proceeds from the bond issues.
    2647 Another problem that emerges from this analysis of the pleaded case relates to the ‘inferred contract’ in ADC par 11EF. Read strictly, ADC par 11EF refers to a term (concerning subordination) to be inferred into a contract, rather than to an inferred contract (a term of which concerns subordination). In other words, strictly read, the paragraph supports what I have said in (c), above but not necessarily the proposition in (d). But on the way the trial was conducted, I do not think it does any mischief to read ADC par 11EF as encompassing both (c) and (d) above. For example, in their closing submissions the plaintiffs dealt with inferences both in relation to the existence of a contract and to the terms of such a contract.
    2648 While on ADC par 11EF, I should say that I do not find the alternative proposition − that the tacit understanding might give rise to an implied term − particularly attractive. The conceptual difference between ‘inferred’ and ‘implied’ terms is subtle and not always easy to identify or apply in practice. As a broad general proposition the difference is this. An inferred term is one in respect of which the court is satisfied the parties must have intended to include in the contract but which was not enunciated. In other words, the search is for the actual intention of the parties, or something very close to actual intention. An implied term is one on which the parties did not reach actual agreement but which is a necessary part of the overall arrangement. In that instance the task is to ascertain the presumed or imputed intention of the parties. If a contract owes its existence to inference, the proposition that it could contain implied terms is one that I find conceptually unattractive. In any event, in closing submissions counsel for the banks agreed that the inclusion of the word ‘implied’ in ADC par 11EF was inelegant and that the implied term argument arises squarely under ADC par 11EG.
    12.5. Informal contracts: some general legal principles
    2649 An agreement will not constitute a binding contract unless it is one that can reasonably be regarded as having been made in contemplation of legal consequences. In other words, the parties must have intended to create legal relations. Generally speaking, the test of an intention to effect legal relations is an objective one, namely, would a reasonable person believe the parties were assenting to bind themselves to legal consequences?
    2650 An agreement may also be inferred from conduct. The intention of the parties may be gleaned as a matter of inference from the way they acted and reacted with one another in their dealings concerning the subject matter of the arrangements.
    2651 The law requires the parties to make their own contract. It will not construct a contract for them out of terms that are vague, indefinite or unsettled. Nonetheless, there may be terms that, while not expressed in the agreement, are to be inferred or implied because the actual or imputed intention of the parties requires that they be seen as part of the arrangements. Again, the ascertainment of intention is largely objective.
    2652 These are some of the broad statements of general principle in contract law that have arisen in this case. I will develop some of them as a precursor to an examination of the factual matrix.
    12.5.1. Formation of contract
    2653 Classic contract theory requires the identification of an offer and an acceptance of that offer before a legally binding contract comes into existence. But this theory has a number of difficulties in dealing with the complexities of modern life and commercial practice and cannot be pressed too far. In Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153, Heydon JA rejected a contention that the offer and acceptance analysis must invariably be employed in reaching decisions about the formation of contracts. His Honour commented that the analysis was neither sufficient nor necessary to explain all cases and that it did not work well in certain circumstances. He concluded that regard could be had to the conduct of the parties to ascertain whether a contract could be found to exist.
    2654 This principle extends beyond the search for an answer to the question whether or not there has been a concluded bargain. The conduct of parties to a purported contract can be a basis for inferring not merely the existence of a contract but also its terms: Australian Energy Ltd v Lennard Oil NL [1986] 2 Qd R 216, 237.
    2655 I accept what was put to me by the plaintiffs in their closing submissions on the general approach to this question, insofar as it relates to an informal contract of the type that the on‑loans represent. Looking at the parties’ conduct as a basis for inferring a contract is an exercise in the first stage of the two‑stage process identified in Hawkins v Clayton (1988) 164 CLR 539, 570 by Deane J:
    It is necessary to identify two distinct stages in the ascertainment of relevant terms. Those stages may well overlap and it will often be unnecessary to distinguish between them in practice. The first stage is essentially one of inference of actual intention: what, if any, are the terms which can properly be inferred from all the circumstances as having been included in the contract as a matter of actual intention of the parties? The second stage is one of imputation: what, if any, are the terms which are, in all the circumstances, implied in the contract as a matter of presumed or imputed intention?
    2656 I am here concerned primarily with inference, rather than imputation or implication (a subject with which I will deal separately). In a similar vein, in Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 422, Brennan CJ, Dawson and Toohey JJ said:
    [W]here there is no formal contract … the actual terms of the contract must first be inferred before any question of implication arises. That is to say, it is necessary to arrive at some conclusion as to the actual intention of the parties before considering any presumed or imputed intention.
    2657 The first stage with an informal contract is to look for the ‘actual intention’ of the parties. Consistently with the objective theory of contract, that is not a search for the subjective state of mind of each party, even if shared but not communicated. Rather it is a search for the ‘objective intention’ of each party to be inferred from what is manifested by its communications and other conduct.
    2658 In Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117 ‑ 11,118, McHugh JA (Hope JA and Mahoney JA concurring) noted that there were particular difficulties in reconciling strictly conceptual legal analysis with commercial arrangements. Commercial discussions are often too unrefined to fit easily into the neat conceptual categories. His Honour also noted that in an ongoing relationship (which is likely to be dynamic), it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions that might be too uncertain or too illusory to enforce at a particular time in the relationship may, by reason of the parties’ subsequent conduct, become sufficiently specific to give rise to legal rights and duties.
    2659 The phrases ‘tacit understanding or agreement’ and ‘manifested mutual assent’ are taken from the authorities. For example, in Integrated Computer Services McHugh J said, at 11,117:
    a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words. The question in this class of case is whether the conduct of the parties, viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract.
    2660 And in Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 Ormiston J said (81): ‘agreement and thus a contract can be extracted from circumstances where no acceptance of an offer can be established or inferred and where the most that can be said is that a manifestation of mutual assent must be implied from the circumstances’.
    2661 The dicta in these cases were referred to with approval in Brambles Holdings v Bathurst City Council [74] ‑ 77 and in Pegrum v Fatharly (1996) 14 WAR 92, 92 ‑ 94 (Ipp J). The authorities are clear that inferring a contract (or a term) from conduct will not be done lightly. In Pegrum (95), for example, Ipp J adopted what had been said in Australian Energy Ltd: that it is only in cases where the evidence is clear that such inferences will be drawn.
    2662 The relevant principles were succinctly put in Branir v Owston Nominees Pty Ltd (No 2) [2001] FCA 1833, (2001) 117 FCR 424. In the context of a commercial contract that was found to have arisen from the prior conduct and communications of the parties, Allsop J (Drummond and Mansfield JJ agreeing) said at [369]:
    [Contracts] can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting i’s and crossing t’s or where they think they have done so. Here, the i’s were not dotted and the t’s were not crossed … Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances … if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: ‘and we hereby agree to be bound’ in this or that respect. The essential question in such cases is whether the parties’ conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract.
    2663 This, it seems to me, sums up the task I have to perform. I have to decide whether, looking at the entire body of conduct of the parties, I can infer a real intention to be bound by a term that the on‑loans were to be made on a subordinated basis.
    12.5.2. Post-contractual conduct
    2664 The on‑loan contracts were informal and this is a case in which it is not easy to identify with much precision the date on which the contracts were formed. This is a problem that I will discuss in more detail later: see Sect 13.1. Taking the first BGNV on‑loan as an example, it is known that the funds arrived in the coffers of TBGL on 23 December 1985. Taking that as the latest date on which a contract could have been formed, is it permissible to look at conduct occurring after that date as an aid to determining whether the contracts included a term as to subordination? The banks say the answer is yes, while the plaintiffs say it is no.
    2665 It is important to draw a distinction between two exercises: on the one hand, deciding whether a contract exists at all (and if it does, what are its terms) and on the other hand, construing or interpreting the terms of a contract known or admitted to be in existence.
    2666 The question is relatively easy to answer in relation to the construction or interpretation of the terms of a contract. Certainly in the case of a written contract there are severe limits on the admissibility of evidence that is not contained within the four corners of the contractual instrument. This is an application of the Codelfa doctrine: parol evidence of what parties did, or how they have interpreted or applied their contract is inadmissible to subtract from, add to, vary or contradict the language of the written instrument.
    2667 While it is not easy to reconcile all of the relevant authorities, I think the better view is that post‑contractual conduct is not admissible as an aid to the construction of the terms of a contract: FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, 350; Posgold (Big Bell) Pty Ltd v Placer (Western Australia) Pty Ltd [1999] WASCA 217, (1999) 21 WAR 350, [50].
    2668 But what of the other exercise to which I have referred, namely, the task of deciding whether or not a contract with a particular term or terms came into existence at all? There is authority supporting the view that post‑contractual conduct can be taken into account in such an exercise. In Mears v Safecar Security Ltd [1983] QB 54, 77, Stephenson LJ said:
    I have already expressed my view that this agreement was oral, but even if it was partly in writing, we are concerned with the search for a term that was not written down, and there is nothing in those authorities which prevents the courts from looking at the way the parties acted for the purpose of ascertaining what that term was. Common sense suggests that their subsequent conduct is the best evidence of what they had agreed orally but not reduced to writing, though it is not evidence of what any written terms mean.
    2669 A similar question was dealt with by Young J in Peddie v Stein (unreported, SCNSW, BC8701481, 26 March 1987). Having said that evidence of subsequent acts or conversations is not admissible for the purpose of construing a contract, his Honour expressed the view that subsequent communications between the parties may legitimately be referred to and be taken into consideration to determine whether a contract has been made. Young J continued, at 20:
    However not only is it legitimate to look at subsequent conduct for the purpose of determining whether a contract is made, it is also legitimate to refer to such evidence to work out what were the terms of the contract which was partly oral and partly written.
    2670 His Honour cited the dicta of Stephenson LJ in Mears in support of that proposition. He also referred to Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 where McLelland J collected the authorities on this question. In Film Bars, a case concerning an informal contract, McClelland J said, at 9255:
    Where a question arises whether communications between the parties have given rise to a binding contract at a particular time, subsequent communications may be legitimately referred to and taken into consideration … However … the probative value of such communications must be found in the light they throw on the proper interpretation of the earlier communications alleged to constitute the contract.
    2671 I have found one authority that appears to take the opposite view. In Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd [2006] VSC 42; (2006) Aust Contract R 90 – 238, [185], Dodds‑Streeton J said: ‘Post‑contractual conduct and communications are not admissible in order to establish the existence of a contract’. Her Honour did not cite or discuss authority for that proposition. Earlier in the reasons there was discussion of (and adoption of) the principles discussed in FAI Traders Insurance, which relate to construction of contractual terms rather than whether or not a contract has been formed. It was not a necessary part of the reasoning process because her Honour went on to say that in any event the evidence of post‑contractual conduct lacked the precision, level of detail and certainty requisite for a contract. And later in the reasons, (at [191] in the course of discussing Vroon BV), her Honour said that ‘the evidence of the parties’ [post‑contractual] conduct and communications … does not establish that they were acting on the basis that a contract existed’.
    2672 I think I should adopt the approach taken in Mears, Peddie and Film Bars. It seems to me, therefore, that the law does permit access to extrinsic evidence of the conduct of the parties for the limited purpose of ascertaining whether a contract, with the terms contended for, existed.
    12.5.3. Implied terms
    2673 I have already mentioned the distinction between inferred and implied contracts or terms. I have also indicated that there were no formal contracts relating to the on‑loans. The next question is this: what are the rules governing the implication of terms into informal agreements such as the on‑loan contracts?
    2674 The starting point for this discussion must be BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283. There, the Privy Council said that a term will only be implied in fact in a formal contract if five criteria are present. The term must:
    (a) be reasonable and equitable;
    (b) be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
    (c) be so obvious that ‘it goes without saying’;
    (d) be capable of clear expression; and
    (e) not contradict any express term of the contract.
    2675 But these criteria are not applied rigidly in the case of an informal contract: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 121 (Deane J) and Hawkins v Clayton (571) (Deane J). In the case of a contract that has not been reduced to complete written form, a term will be implied (apart from in circumstances of established mercantile usage or professional practice or past course of dealing) if, but only if, the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. This was the way Deane J put it in Hawkins v Clayton (573). And this formulation has been adopted in numerous other cases: see, for example, Byrne (422) (expressly) and (442) (implicitly); Breen v Williams [1995] HCA 63; (1996) 186 CLR 71, 91; and Moneywood Pty Ltd v Salamon Nominees Pty Ltd (2001) HCA 2, (2001) 202 CLR 351, [80].
    2676 In their written closing statements, the plaintiffs argue that, while the BP Refinery criteria do not constitute rigid doctrine, they present an authoritative guide that courts are obliged to follow. They submit that:
    (a) it will not suffice for the implication of a term in an informal contract that the term is ‘reasonable’ or that the contract would operate more reasonably with that term than without it;
    (b) while the criteria in BP Refinery are not to be applied rigidly to an informal contract, each remains highly relevant;
    (c) in the final analysis, there is no great difference between the criteria required by Deane J’s formulation in Hawkins v Clayton and the criteria stated in BP Refinery. The criteria mentioned in BP Refinery were a synthesis of the prior case law, and the Privy Council did not indicate an intention to create a novel basis for term implication. The difference lies in the application of the criteria;
    (d) although Deane J’s formulation made no express reference to obviousness, nevertheless that criterion must be satisfied. It still is necessary to show that the term in question would have been accepted by the contracting parties as a matter so obvious that it would go without saying; and
    (e) in any event, in an informal contract it is unlikely that a term which fails to meet the obviousness criterion would be one which is necessary for the reasonable or effective operation of the contract.
    2677 The proposition contained in (c) above is an adaptation of comments contained in an article by Tolhurst GJ and Carter JW, ‘The New Law on Implied Terms’ (1996) 11 JCL 1, 12. The submission in (d) finds support in dicta in Hospital Products (121) (Deane J) and Byrne (446) (McHugh and Gummow JJ). The point made in (e) emerges from Yau’s Entertainment Pty Ltd v Asia Television Ltd [2002] FCA 338, (2002) 54 IPR 1, [35]. I accept those submissions as an accurate summation of relevant aspects of the current law. The question whether a term as to subordination is to be implied into the on‑loan contracts will ultimately depend on whether it is necessary for the reasonable or efficient operation of the contracts assessed against the background of, but without rigidly applying, the BP Refinery criteria.
    12.6. The onus of proof on the subordination question
    12.6.1. Onus of proof: the parties’ contentions
    2678 Subordination of the on‑loans is accepted by all parties as a central issue to the resolution of this litigation. There is an anterior issue to the subordination case: who bears the onus or burden, in their case, of proving that the on‑loans were unsubordinated (on the plaintiffs’ case) or subordinated (on the banks’ case)? And what would be the effect on each of the plaintiffs’ causes of action or the banks’ defences, if any, of a failure to discharge that onus?
    2679 I have no idea who started this particular scrap. From a strict pleading perspective, it was the banks. It was not mentioned in the first version of the statement of claim or in that version of the particulars. It emerges first in the original version of the defence and counterclaim with a bland statement that if (which was not admitted) there was any indebtedness, it was subordinated.
    2680 But it is not hard to imagine that before the application was filed in the Federal Court there had been some contact between the parties. It is likely that during this contact there would have been some disclosure of likely avenues of attack and defence. This may explain why, as early as 29 April 1996, when the litigation was still in its infancy, the status of the on‑loans was the subject of submissions during an interlocutory dispute. Counsel who was then leading for the plaintiffs referred to BGNV and the bond issues and said this:
    Those bondholders … held their bonds on a subordinated basis. But the interesting feature of Bell Group is that it had lent the money to [BGF] on an unsubordinated basis and [BGNV’s] other debts were relatively small … So the practical or commercial position … of the bondholders to whom [BGNV] had issued bonds, was that against [BGNV] they were subordinated, they were in reality unsubordinated creditors of [BGF].
    2681 The critical nature of the subordination debate emerged slowly as the defence developed through what was originally par 13A and then through the provisions of par 11EA to par 11ER. Save for some minor references in PP par 59D, it was not raised in the plaintiffs’ pleadings until the filing of the PR in February 2005. That is not to say, of course, that there was ever any doubt about the plaintiffs’ case on the subordination question. They opened on the basis that the unsubordinated status of the on‑loans is significant to the relief they are seeking. As counsel put in oral opening:
    [T]he plaintiffs’ case is that those loans from BGNV to TBGL and BGF were just ordinary loans. They are unsubordinated loans … Obviously if the BGNV loans as at 26 January were subordinated or there was a significant dispute about that, that has a real impact upon the conduct of Equity Trust as a director of BGNV and the directors of TBGL and BGF and of the Banks.
    2682 This position was confirmed when counsel made the spider’s web analogy, something that certainly attracted my attention. In an earlier section of the reasons I have made some comments on the analogy and I doubt I will be able to resist the temptation of mentioning it again.
    2683 The plaintiffs describe the par 11EA issues as a classic example of a question on which a defendant bears the onus. The banks raise these issues as an essential part of their defence. They seek to establish them as matters that entitle them to avoid the plaintiffs’ claim. The legal onus of establishing the existence of the contracts, breaches or anticipated breaches of the contracts, representations and estoppels and other issues (such as reliance) said to ground the par 11EA defences (and the issues in the counterclaim) rests on the banks.
    2684 The plaintiffs point out that the pleadings on the par 11EA issues are voluminous and complex. They assert and rely on the existence and breach of a number of implied terms or implied contracts. They also rely on alleged representations said to have been relied on by the banks to their detriment. These are classic affirmative defences by way of confession and avoidance as to prejudice and as to directors’ and banks’ states of mind, culminating in a claim for relief by way of declaration and injunctions in the counterclaim. The plaintiffs also contend that the banks bear the onus of proving specific states of mind of the directors and the banks, which are pleaded by way of confession and avoidance about the subordination issue.
    2685 The banks have never shied away from the proposition that subordination is a critical issue. During the oral opening, counsel for the banks asserted that subordination was central to all of the main causes of action pleaded by the plaintiffs. Counsel went on to say that dealing with subordination provided a complete answer to the majority of the plaintiffs’ claims.
    2686 The banks say that, on the pleadings, the plaintiffs have assumed the onus of proving that the BGNV on‑loans were unsubordinated. They say that the onus was assumed by the pleading of the prejudicial effect of the Scheme and Transactions on the assets of BGNV (namely, the on‑loans), and the intention of the banks and directors of implementing a Scheme with such an effect. As I have already said, it is not contentious that there is no express allegation about the BGNV on‑loans not being subordinated in the 8ASC. The express allegations about the BGNV on‑loans appear in various paragraphs of the PR. The banks contend that the plaintiffs’ allegations in the reply inform the plaintiffs’ allegations in the 8ASC, particularly those relating to the prejudicial effect of the Scheme and the Transactions.
    12.6.2. The onus of proof: general legal principles
    12.6.2.1. Onus or burden defined
    2687 The two principal burdens of proof are the legal burden of proof and the evidential burden. The legal burden of proof has been defined by the authors of Cross on Evidence (7th Aust ed, 2004) as the obligation of a party to meet the requirement of a rule of law that a fact in issue must be proved or disproved. The evidential burden has been defined as the obligation to show, if called upon to do so, that there is sufficient evidence to raise an issue as to the existence or non‑existence of a fact in issue. In Purkess v Crittenden (1965) 114 CLR 164, 167 ‑ 168, the majority endorsed the comments of the authors of the 10th edition of Phipson on Evidence:
    The expression ‘burden’ or ‘onus’ of proof, as applied to judicial proceedings … has two distinct and frequently confused meanings: (1) the burden of proof as a matter of law and pleading – the burden, as it has been called, of establishing a case, whether by preponderance of evidence, or beyond a reasonable doubt; and (2) the burden of proof in the sense of introducing evidence.
    2688 The practice of speaking of the shifting of the burden of proof can be meaningless if it is used inappropriately with either of the two definitions referred to above. The authors of Cross on Evidence have described three situations in which it is possible for the burden of proof to shift. The description of each situation in which the burden of proof can shift also clarifies the practical effect of the shift. The first is a situation where the evidential burden on a particular issue is said to shift. The second is a situation where the legal burden on an issue may be said to shift and the third situation is one where the burdens on the different issues in a given case are variously distributed between the parties.
    12.6.2.2. Shifting of the burden and distribution of issues
    2689 Take, for example, a civil case where the plaintiff has established that he or she has suffered injury as a result of the defendant’s negligence. The evidential burden passes to the defendant to, for example, adduce evidence that the plaintiff contributed to his or her own injury.
    2690 Using the same hypothetical claim for negligence, if the plaintiff has discharged the evidential burden upon him to lead some evidence of his injuries, provided the plaintiff’s witnesses are believed, the legal burden is said to have shifted from the plaintiff to the defendant. This means that the defendant must adduce some evidence at that point on the issue or lose the argument. Those who contend that the legal burden on a particular issue never shifts in the course of a case are more likely to favour a view involving the distribution of issues.
    2691 Of course, issues can be distributed throughout a case in a way that affects the onus of proof. The authors of Phipson on Evidence (16th ed, 2005) espouse the view that the burden of proof ‘lies upon the party who substantially asserts the affirmative of the issue’. But this is clarified in the following extract from the same text:
    The true meaning of the rule is that where a given allegation, whether affirmative or negative, forms an essential part of a party’s case, the proof of such allegation rests on him. An alternative test, in this connection, is to strike out the record of the particular allegation in question, the onus lying upon the party who would fail if such a course were pursued.
    In all but the simplest cases, the burden of the issues is divided, each party having one or more onus cast upon him. [6-06]
    2692 The authors, at [6-07], also suggest that the burden of proof is only of importance when the court is unable to determine where the truth lies and the evidence is so finely balanced regarding who bears the legal burden of proof that either version of events satisfies the balance of probabilities. In such a case, the burden of proof may determine which party succeeds.
    2693 For the reasons that will follow, I have come to the view that the subordination question is not an exceptional case. I have not found it impossible to decide whether the BGNV on‑loans were subordinated or not. Accordingly, the decision of who bears the burden of proof (while still important) is not quite as central as the parties (judged from the anxiety only barely concealed in their submissions) apparently thought.
    12.6.3. The onus of proof: analysis
    2694 The banks rely heavily on the proposition that a finding that prior to the execution of the BGNV Subordination Deed the on‑loans were unsubordinated is so central to the causes of action advanced by the plaintiffs that they must bear the onus of proof. The banks point to a number of areas in which they say this is so.
    2695 First and foremost, it is a necessary element of the pleading of the ‘effect of Scheme and Transactions’. The plaintiffs allege in 8ASC par 33C(j)(iii) that in any subsequent winding up, the creditors of BGNV would participate in the winding up on the basis that their claims ranked behind the banks and would be satisfied only after the whole of the indebtedness to the banks had been discharged. The corollary of these subparagraphs is the general allegation in the last sentence in par 33C that a ‘corresponding advantage was conferred upon the banks’. It is necessary, for the plaintiffs’ allegations to operate, that the position be that prior to the BGNV Subordination Deed, the bondholders’ claims did not rank behind the banks. It could only be by altering the ranking through the mechanism of subordination that a ‘corresponding advantage’ could be conferred upon the banks.
    2696 A second area relates to aspects of the banks’ knowledge and conduct. The plea in 8ASC par 59B(b) is that, from early to mid-December 1989, the banks knew that if there was a demand by one or more of the Australian banks it could not have been met and TBGL, BGF and BGUK would have been wound up within a short time unless they could enter into a ‘valid and effective restructuring’. It is also alleged in par 59C that from mid‑December 1989, and during and after the Scheme Period, the banks knew that if interest was not paid to the BGNV bondholders, LDTC would wind up TBGL or BGNV. Paragraph 59D pleads that the banks ‘believed or suspected’ that the on‑loans might not be subordinated and that BGNV would or might compete with the banks as an unsecured creditor. It is also pleaded in par 59I that, for the same period, the banks believed or suspected that TBGL, BGF, BGUK and other Bell Participants might be wound up within six months of entry into the Transactions.
    2697 It is then pleaded in par 59J that the banks ‘knew’ that, in relation to BGNV, as a result of the BGNV Subordination Deed all ‘significant and worthwhile assets’ of BGNV (namely, the on‑loans) would be made available to the banks ‘in priority to the claims of all other creditors’ of BGNV.
    2698 The equitable fraud allegations are a third area in which, according to the banks, the plaintiffs assert (in their case in chief) the lack of subordination of the on‑loans. The particulars to 8ASC par 65MA summarise the elements of the Scheme said to have constituted an inequitable and unconscientious bargain. One of these elements is that the pari passu principle would apply having regard to class rights or other matters in relevant legislation or otherwise applying to companies. It is intrinsic to those allegations that, but for the Transactions and the Scheme (which for BGNV can only mean the BGNV Subordination Deed and its general participation in the Scheme) the BGNV on‑loans would have fallen within the pari passu principle alleged, that is, they would have competed equally with the banks.
    2699 Finally, I will mention the statutory claims. In 8ASC par 87(g)(i), the plaintiffs allege that the BGNV Subordination Deed constituted or effected a disposition of property within the meaning of s 121 of the Bankruptcy Act. In the particulars to support this plea, the plaintiffs say that the deed constituted or effected a disposition and alienation of property in that BGNV ‘disposed of and alienated its right to collect the receivables the subject of the subordination … [or] alternatively to participate equally with other creditors in the collection of such receivables’. Again, it is necessarily inherent in such an allegation that, in the context of the winding up of BGNV and save for the effect of the deeds, the on‑loans would not be subordinated. In that event (one of the events contemplated and pleaded by the plaintiffs in 8ASC) the effect of the deed would be neutral on the pre‑existing position.
    2700 I have not covered all of the parts of the statement of claim relied on by the banks. But what I have set out is sufficient for the analysis that I have to undertake as to the distribution of issues.
    2701 In my view the plaintiffs are correct in asserting that it is the banks that bear the onus of proof. There are two ways of looking at this. First, the distribution of issues favours the position advanced by the plaintiffs. I do not doubt the importance to the plaintiffs’ case overall of a finding that the on‑loans were unsubordinated; but it does not follow that the onus necessarily rests on the plaintiffs. The banks contend not just that the loans were subordinated, but that there were contracts that contained specific terms concerning subordination. And they were contracts of two differing species: one between companies within the Bell group, and the other between Bell group companies and the banks. The banks raised the issue in that way in ADC par 11EA and following. They say that the same underlying factual matrix, if it does not establish the existence of contracts, underpins the estoppel claims. It is a vital part of the counterclaim that the on‑loans were made on a subordinated basis and that the plaintiffs now seek to resile from that position.
    2702 Secondly, the plaintiffs place heavy emphasis on the fact that, on the face of the annual accounts, the on‑loans appear to be ordinary unsecured lending and the banks seek to establish a contrary position. I say that this is the position as it appears on the face of the accounts because most of the intra‑group lending was done on an unsecured and unsubordinated basis. The evidence disclosed only three instances of subordinated lending and in each of them there was either a written agreement or a notation in the primary accounting documents.
    2703 The plaintiffs also point out that, as part of the refinancing package, the banks required the on‑loans to be subordinated. The wording of cl 17.6(d) of ABFA and RLFA is that TBGL should ‘use its reasonable endeavours to procure that BGNV convert [the on‑loans] into subordinated debt’. The language is ‘convert’, which indicates change, not to confirm an existing state of affairs. This led to the signing of the BGNV Subordination Deed on 31 July 1990. The recitals to the BGNV Subordination Deed make no reference to any pre‑existing subordination. I raise this matter here only in relation to the onus of proof. On the substantive merits, I have come to the conclusion that not too much should be read into the wording: see Sect 30.18.7.
    2704 In terms of the onus of proof, and assuming that this is a situation where the evidential burden − legal burden dichotomy applies, I think the plaintiffs have adduced sufficient evidence on the point for the legal burden to shift to the banks to establish the positive propositions contended for in the par 11EA defence.
    12.7. The first bond issues (December 1985)
    12.7.1. Some introductory comments
    2705 It is not possible to come to grips with the arguments about the on‑loans without first understanding how the bonds (which were the source of the funds for the on‑loans) came to be issued and how they were treated for accounting purposes. It is to those questions that I now turn.
    2706 It is common ground that the banks agreed that the bonds in the first and second BGNV bond issues could be treated as equity rather than as debt in calculating the NP ratios, which required total liabilities to be kept at less than 65 per cent of total tangible assets. Significant issues in the case include why the directors and other relevant officers of the Bell group companies thought the banks ought to permit this treatment and why the banks agreed to do so. The banks say that the primary reason (in the thinking both of the company officers and of the banks) was that the debts were subordinated and that the banks would not have given consent without the element of subordination. The plaintiffs say that this is not so and that, while subordination was a factor, it was not a necessary element in the decision.
    2707 I think it is common ground that had the proceeds from the bond issues been treated as debt rather than as equity there would have been, at various times, a breach of the ratio and that such a breach would have been an event of default under the NP agreements or the NP guarantees. Had there been an event of default, the banks would have been at liberty to demand immediate repayment from the principal debtor and any guarantor and indemnifier.
    2708 There is one other general matter that I need to canvass. It is, as I have already said, common ground that the banks agreed to a request by TBGL that they treat the bonds as equity rather than debt in calculating the balance sheet ratios. Phrases such as ‘quasi-equity’, ‘deferred equity’ and ‘hybrid equity’ were bandied about from time to time to describe the bonds. Put at its most basic, ‘equity’ is something (usually, but not limited to shares) that you would expect to see reflected in the ‘shareholders’ funds’ section of the balance sheet, while ‘debt’ is an obligation that will appear as a component of current liabilities (if repayable within 12 months) or long‑term liabilities (if repayable in more than 12 months).
    2709 In modern corporate financing there are myriad instruments that contain elements of both debt and equity. Preference shares are an example. They are part of the issued share capital but are sometimes regarded as a form of debt funding.
    2710 Bonds of the type issued by the Bell group companies in the five convertible bond issues are not equity: they are debt. The fact that they might eventually become equity (through the exercise of the conversion right and consequent issue of shares) does not alter the situation. It is true that the bonds were included in the shareholders’ funds section of the balance sheets of TBGL for 1986 and 1987, although as separate line items from share capital and reserves. But in the 1988 balance sheet they are to be seen under non‑current liabilities. I will explain a little later why this change was made. At present, it is sufficient to say that, whatever may have been the balance sheet treatment in 1986 and 1987, the bonds were debts: they were not equity. This, of course, does not mean that there is anything wrong with an arrangement between private parties by which they agree to a different treatment within the regulation of their own relationship.
    12.7.2. The genesis of the convertible bond issues
    2711 In the 1970s and 1980s the Bell group was a rapidly expanding industrial and investment conglomerate. It was frequently in need of funds to finance its acquisitions and growth. Up until the early 1980s most of the necessary funds came from conventional banking sources. The 20 defendant banks were by no means the only ones with which the Bell group companies had banking relationships.
    2712 There were two separate banking groups within the Bell group. One was the NP group comprised of the Australian companies within the Bell group and BGUK. The other was the UK group comprised of TBGIL and its subsidiaries. The dual banking group structure resulted from TBGL’s takeover of ACC. ACC had its own banking relationships and became in effect, the TBGIL group. The TBGIL group continued to be subject to its own bank covenants. TBGL also had subsidiaries that were not members of either the NP group or the TBGIL group.
    2713 The relationship between the NP group and its banks was governed by the NP agreements and later the NP guarantees, which required the NP group to maintain a ratio of total liabilities to total tangible assets of 65 per cent. Accordingly, the extent to which the Bell group could raise funds to finance its acquisitions was limited by the imposition of the 65 per cent ratio on the NP group companies.
    2714 The office of the chairman within the Bell group comprised of a number of executives who performed all treasury, financial planning and administrative, legal and secretarial services, research and investment and group services on behalf of companies in the Bell group. In 1984 and 1985 the Bell group was approached by various European financial institutions with a proposal that it raise funds by issuing convertible bonds into the Eurobond market. I have described (Sect 12.2.1) the development and general practices of the Eurobond market. One of the features offered with some of those proposals was the subordination of the bonds.
    2715 As I have already said, a significant issue in the case is the treatment of the bonds, for balance sheet purposes, as equity rather than as debt. The responsible personnel within the office of the chairman of the Bell group recognised that unless the bankers to the NP group companies agreed to treat the bonds as equity rather than debt there was a risk that the 65 per cent ratio would be breached. Accordingly, they would have to obtain the consent of the bankers before entering into a bond issue. The status of the bonds as subordinated was one of the factors mentioned by the officers of the Bell group in letters sent to the banks asking that ‘the issues should be regarded as equity when considering balance sheet ratios for the purposes of the banking covenants’: see Sect 12.12.1 and Sect 12.12.4.
    2716 During 1984 and 1985 Bell group officers were in contact with a number of institutions, including SBCIL, Soditic SA (Soditic) and Citibank NA (Citibank), in relation to the Eurobond market. David Griffiths and John Cahill, respectively the Group Treasurer and the Assistant Treasurer of the Bell group at the relevant time, (among others) were involved in the negotiations for the five convertible bond issues. So too were Oliver Graham and Derek Williams, two officers within the Group Treasury (UK). Katherine Burghard, group legal counsel for the United States, was another who played a part in the negotiations. John Studdy was a director of TBGL during the relevant period. He is the only member of the board from those days who was able to give evidence.
    2717 The earliest document containing a reference to a convertible bond issue in the Eurobond market is a telex dated 26 September 1984 from SBCIL to TBGL that referred to a meeting that had taken place and summarised the conversation to the effect that it would be preferable for a US dollar convertible issue to be made by TBGL rather than BRL. The telex said that it was SBCIL’s view that TBGL could issue a US dollar convertible note under the indicative terms and conditions set out in the telex.
    2718 The relevant indicative terms and conditions indicated that the issuer would be ‘Bell Group NV or [a] suitable offshore vehicle’ with the issue to be guaranteed by TBGL for an amount issued of US$60 million convertible bonds at a maturity of 10 years. The proposed status of the bonds was ‘unsecured obligations of the issuer which would rank pari passu in all respects with all other present or future unsecured and unsubordinated obligations of the issuer and guarantor’. The indicative terms also recited that payments had to be made ‘free and clear of all withholding taxes’.
    2719 There are three points to note from this early communication. First, it does not envisage the issue of subordinated debt instruments. Secondly, it mentions the need for the payments to bondholders to be free of withholding tax. Thirdly, it contemplates the use of an offshore vehicle (in fact, a Netherlands Antilles registered company) to act as issuer.
    2720 It seems that by May 1985, consideration of the consequences of participation in the Eurobond market had advanced to include questions such as balance sheet treatment. An internal memorandum dated 27 May 1985 commented on the balance sheet treatment relating to convertible notes. The memorandum attached examples of the treatment of convertible notes in the accounts by Elders IXL and NAB (which showed the note as shareholders’ equity) and Bridge Oil Limited (which included them as liabilities). The memorandum stated that for statutory purposes, convertible bonds were not treated as shareholders’ equity and that a review of the above companies indicated that the uniqueness of the convertible bonds allowed scope to treat them as ‘shareholders’ funds and convertible notes’ or as ‘total liabilities’.
    2721 In cross‑examination, Griffiths agreed that the preference of the Bell group was for the bonds to be part of shareholders’ funds. He also agreed that the commercial objectives of the fundraising included limiting the exchange rate risk (by an Australian dollar offering) and, through convertibility, gaining a broader investor base in equity as well as the investors’ commitment to the bonds.
    2722 On 5 June 1985 the directors of TBGL considered a Treasury report that Griffiths said he would have prepared or, if he did not, he would at least have been aware of its general content. The minutes indicate that the board ‘noted a report given on a capital raising facility through the Swiss market. Bonds totalling $100 – 150 million with a 10 to 15 year term could be issued, which would be convertible into ordinary shares at around 15 per cent above market or redeemed. Bonds were placed by banks in the form of subordinated borrowings’.
    2723 On 10 June 1985 Griffiths sent a memorandum to RHaC setting out the parameters of a possible foreign convertible bond issue by the Bell group, including that the issue be for an amount equivalent to $100 million to $150 million and that it be unsecured and subordinated. Griffiths also gave evidence that at this time RHaC was confident about the financial performance of the Bell group into the future and that he was optimistic about the prospects of an expansion of the equity base through conversion of the bonds into shares.
    2724 On 11 June 1985 Griffiths spoke to William Cutler of Westpac about various matters concerning TBGL’s facilities. Cutler made a file note: ‘Subordinated debt – must be truly subordinated, both in nature and in term. The concept must be there in case [TBGL] want to use it. David Griffiths mentioned a term of say 7 years, but I am not sure of the significance of this, although request is apparently similar to that negotiated for BRL’. Other evidence suggests that there were or had been negotiations with BRL concerning the items that would come within the term ‘liability’ for some banking covenants.
    2725 Griffiths was exploring how preference shares or similar securities might be used for negative pledge purposes and for a redefinition of what would constitute ‘liabilities’. He wanted to have the ratio extended to 70 per cent and to have some intangible assets included as part of total assets for ratio purposes. I accept the submission made by the banks that it is likely that the reference to subordinated debt in the discussion between Griffiths and Cutler occurred in the context of an approach to have subordinated debt excluded from total liabilities for ratio calculation purposes. But the reference to the ‘term’ is to the maturity of the facility. Accordingly, at this early stage, Griffiths had in mind at least two factors (subordination and the maturity date) in support of the approach to have the treatment of ‘liabilities’ changed.
    2726 On 9 July 1985 the directors met again. The minutes contain the following relevant entry:
    There was a need to raise further equity in the Bell Group Ltd and the Board discussed alternatives. A concept offered from Switzerland was a A$75m redeemable convertible note issue in Australian dollars at approximately 10% p.a. interest, convertible into shares at any time, with a possible term of 10 to 15 years. This was an attractive concept with no currency risk, tapping a new market with European investors. This possibility would be considered further later in the year.
    The Company’s objective was a target of $1 billion in spending power, comprised of $75m Swiss note issue, $200 million preference shares, a restructuring of the Negative Pledge to a factor of 70%, the bringing to account of the intangible assets in the balance sheet and the sale of ACC’s music interests. It was intended that the convertible preference shares and the Swiss note issue would be in place before the Annual General Meeting.
    2727 On 22 August 1985 the board of TBGL met again. There was further discussion about approaching the banks to have them agree to a different treatment of liabilities for NP ratio purposes, in particular bringing some intangible assets within the definition of total assets.
    12.7.3. Implementation and finalisation of the first bond issues
    2728 In a memorandum to RHaC dated 3 September 1985, Griffiths proposed that Bell conclude negotiations with SBCIL, Soditic and Citibank with a view to awarding a mandate to raise an amount of $75 million to $100 million by the issue of subordinated, unsecured convertible bonds. Griffiths proposed that the bonds be issued by an offshore subsidiary of the Bell group and be guaranteed by TBGL. He noted:
    The key to the issue is to have the issue clearly subordinated and acceptable to our banks as quasi equity. To be comfortable banks will probably look to have this issue subordinated in time as well as nature. The ten year term should enable Bell to achieve subordination for 3 to 4 years at least. It should be noted however that banks are not used to the subordination concept and will probably require some additional restrictions in the balance sheet or cash flow to prevent the gearing becoming too high.
    2729 The reference to the issue being subordinated in time is to the fact that a 10‑year bond issue would not mature prior to the banks’ facilities coming to an end (anticipated to be in three to four years time). Griffiths said that from discussions (he did not say with whom) he was aware that the banks (primarily the Australian banks) were not as familiar with subordinated debt as they were with secured and unsecured liabilities.
    2730 It had long been contemplated that the convertible bond issue might be coupled with a conventional equity raising. On 7 October 1985 SBCIL, on behalf of itself and Banque Paribas (Paribas), wrote to Griffiths setting out indicative terms for an Australian convertible issue combined with Euro‑equity issue. The issuer was to be a suitable offshore financing vehicle, the bonds were to be subordinated and the amount of the issue would be $150 million, allowing for $75 million of the issue to be purchased by RHaC on terms identical to the $75 million placed on the open market. The reason RHaC was to receive a matching placement of bonds was to prevent dilution of his overall percentage shareholding in TBGL.
    2731 There was another train of reasoning behind adopting a structure of this nature. Griffiths testified that throughout the negotiations, legal and taxation questions played a significant part in the arrangements and taxation considerations were largely driving the structure of the bond issue. Some aspects of taxation, namely, interest deductibility and the absence of withholding tax, were vital to consideration about whether and in what form the bond issue would be made. Ultimately, interest payments from the parent to the bondholder had to be deductible. Without that, the bond issue would have been very unattractive. The absence of withholding tax for the European investors was another important consideration, but perhaps not as important as the deductibility of interest.
    2732 TBGL eventually engaged SBCIL to arrange and act as lead manager of the first issue. In the process of negotiating and establishing the issue, SBCIL advised TBGL that to ensure no withholding tax was payable in respect of the issue it may be necessary to use an offshore vehicle to issue the bonds. TBGL was further advised by the DCT that to enable the withholding tax exemption to be granted it would be necessary for any issue of the subordinated convertible bonds to be widely held. Consequently, it was decided by TBGL to split the issue so that TBGL would directly issue the bonds to be held by interests associated with RHaC and an offshore subsidiary would be incorporated to issue bonds into the Eurobond market. Eventually, a Netherlands Antilles subsidiary, BGNV, was incorporated for this purpose.
    2733 On 8 October 1985 the directors resolved to go ahead with a $150 million convertible note issue through SBCIL and Paribas and the placement of $50 million of ordinary shares. The issue and the placement would require shareholder approval. SBCIL and Paribas were commissioned to lead the issue and preparation of documentation began in earnest.
    2734 In the Treasury report that went to the directors there is no mention of the bonds being subordinated, but I do not think anything turns on that omission. Griffiths’ memorandum dated 3 September 1985 makes it clear that it would be an issue of subordinated bonds and there is no evidence that anything changed in that respect. Further, the fact that the directors resolved to confer the mandate on SBCIL and Paribas suggests that the approval was based on the 7 October 1985 communication from those banks. That document did say that the bonds would be subordinated.
    2735 Notice of a general meeting to be held on 12 November was conveyed to shareholders under cover of a letter dated 17 October 1985. TBGL advised that the reason for calling the meeting was, among other things, to seek shareholder approval for a convertible note issue of $150 million on the terms and conditions summarised in the annexure to the notice; and the issue of $50 million worth of ordinary shares. The annexure was a report by C&L setting out the terms of the proposed issue, including that the notes were to be issued on condition that they were subordinated to all other secured and unsecured liabilities of TBGL.
    2736 There is no mention in these documents of the proposal to use an offshore vehicle as the issuer. In fact, TBGL is nominated as the issuer. But the shareholders were asked to approve the issue of convertible notes for an amount of up to $75 million to be acquired by RHaC or interests associated with him. This issue was to be part of the $150 million issue. Shareholders were also asked to approve the subsequent allotment to RHaC or interests associated with him of shares to which he or they might become entitled as a consequence of the conversion of notes.
    2737 On 31 October 1985 Griffiths prepared a Treasury report for the directors. In it he said that the NP group was then maintaining a relatively high‑level of money market borrowings but that the maturities on the majority of those borrowings would compare with the anticipated receipt of $200 million from the proposed convertible bond and equity issues. He estimated that the borrowing capacity of the NP group would increase by approximately $143 million from the $50 million equity raised by the issues. This would increase by a further $428 million when the group obtained the banks’ consent to treat the subordinated bonds as equity for banking purposes.
    2738 As I understand it, the last sentence is a reference to the compounding effect of injection of funds in this manner. From time to time during the hearing it was referred to as ‘the double whammy effect’. In closing submissions, counsel for the banks referred to it as ‘a magical product’. It entitled the company to borrow money that was not to be counted as debt and, having received those funds, to borrow even more money. In fact the company could borrow 1.86 times what they had ‘just actually borrowed but notionally not borrowed’.
    2739 I can illustrate ‘the double whammy effect’ by a hypothetical example using the 65 per cent ratio of liabilities to total assets. If borrowings are $60 and total assets are $100, the injection of a further $100 that is not counted as a liability means that the borrowings of $60 are now to be compared with assets of $200, comfortably within the specified ratio. Further borrowings of up to $70 (lifting total liabilities to $130) could be arranged before the 65 per cent ratio would be breached.
    2740 Another simple example demonstrates the reverse side of the argument. If a borrower is on the 65 per cent ratio and borrows a further $100 (that is treated as a liability), there must be a further injection of $53 of additional assets or capital to maintain the ratio at the required limit.
    2741 The shareholders duly met on 12 November 1985 and acceded to the directors’ recommendation by passing these resolutions:
    1 That approval be hereby given for the issue of convertible notes for an amount of up to $150,000,000, such convertible notes to be issued by the Directors at their discretion upon application and against payment of the issue price.
    2 That approval be hereby given for the issue of, at current market price, such number of ordinary shares of $1.00 each in the Company as shall have a total issue price of up to $50,000,000 (the issue price of such shares being apportioned $1.00 to capital and the balance to premium) and that such shares be allotted by the Directors at their discretion upon application and against payment of the issue price.
    2742 The minutes of the meeting record that in response to a question on the need for additional capital RHaC had told shareholders that ‘a company always needs more capital if it [is] growing and investing either in new activities or building up its existing ones’. Cutler attended the meeting on behalf of Westpac. He made a note in which he recorded comments made by RHaC on the terms of the convertible notes. Cutler’s note included this: ‘They are subordinated ie stand behind existing borrowings’.
    2743 For some time a debate had been going on among officers of TBGL about whether there needed to be an offshore vehicle. Griffiths said that the sentiment was to try to keep it as simple as possible and it was likely (given the omission of any reference to it in the information sent to shareholders) that at the time of the shareholders’ meeting the uncertainty had not been resolved.
    2744 On 14 November 1985 SBCIL advised that an offshore vehicle was needed because under provisions in the Companies Code the conversion rights could be equated to an option to acquire shares and it was not permissible to grant options for a duration of more than five years. On 15 November 1985 Griffiths received advice from TBGL’s in‑house counsel that the position was not as believed by SBCIL. Griffiths contacted SBCIL on two issues. First, he asked whether they had applied to the DCT for a certificate under s 128F of the ITAA exempting the proposed bond issue from withholding tax. Secondly, he passed on the advice he had received about conversion rights and asked SBCIL to get confirmation from their Australian lawyers. He also said: ‘If our understanding is correct, no offshore vehicle is needed and we can issue direct from [TBGL]’.
    2745 SBCIL responded, saying that TBGL should seek the tax clearance from Australia. It also clarified the advice it had relayed about the need for an offshore vehicle. The advice (given in relation to the Elders IXL Ltd bond issue) had been that a conversion bond would be regarded as a debenture and that debentures were not caught by the relevant provision of the Companies Code.
    2746 On 19 November 1985 the directors of TBGL resolved that, in accordance with the decisions of shareholders at the general meeting, TBGL would guarantee the issue of $150 million convertible notes by a wholly owned subsidiary and enter into such agreements and authorise the execution of such other documents as may be necessary to give effect to the decisions.
    2747 On 21 November 1985 Griffiths travelled to London to assist with the preparation of the offering circular for the convertible bond issue. In this task he was working with Oliver Graham, the Deputy Treasurer (UK). Uncertainty remained about whether an offshore vehicle was necessary. On 22 November 1985 Burghard was told that TBGL was ‘considering setting up a Netherlands Antilles subsidiary to issue the convertible bonds recently approved by shareholders’ but that full details of the mechanics of the proposal had not then been finalised. Burghard was asked to enquire whether the name ‘Bell Group NV’ might be available.
    2748 Also on 22 November 1985, TBGL received a copy of advice given to SBCIL by its Australian lawyers that an offshore vehicle was necessary to overcome problems under the Income Tax Assessment Act (ITAA). The advice was that the relevant tax clearance could be obtained provided that (among other things) the offshore company did not receive from TBGL any margin over the interest rate payable by the issuer to the bondholders.
    2749 On 22 and 23 November 1985 further drafts of the offering circular were prepared. These drafts referred to BGNV as the issuer of the bonds. It seems, therefore, that from this time it was accepted by Bell group officers that they would have to use an offshore vehicle and steps were taken, through Burghard, to incorporate an appropriate entity. That having been said, in late November and early December the question was revisited. But the decision to use an offshore vehicle was confirmed. On 27 November 1985 BGNV was incorporated in the Netherlands Antilles as a direct, wholly owned subsidiary of TBGL. Its directors (on incorporation and for the period during which all three bond issues were made) were Graham, Burghard, Williams and Curacao Corporation Company NV. The articles of incorporation state the purpose of BGNV as:
    to finance directly or indirectly the activities of the companies belonging to the concern [TBGL], a company organised and existing under the laws of the State of Western Australia, Australia, to obtain the funds required thereto by floating public loans and placing private loans, to invest its equity and borrowed assets in the debt obligations of one or more companies of the concern, and in connection therewith and generally to invest its assets in securities, including shares and other certificates of participation and bonds, as well as other claims for interest bearing debts however denominated and in any and all forms as well as the borrowing and lending of monies.
    2750 On 28 November 1985 the directors of BGNV (Williams, Graham and Burghard having appointed Curacao as proxy) resolved to approve the issue of 11 per cent guaranteed, convertible subordinated bonds due 1995 with conversion bonds convertible into shares in TBGL, pursuant to the terms of a document identified as the ‘preliminary offering circular’. The directors also resolved to publish and distribute the circular. At that time, the interest rate and the amount to be received were left blank in the circular.
    2751 Meanwhile, on 25 November 1985, TBGL wrote to the DCT formally seeking a tax clearance certificate. The letter stated:
    [TBGL] recently announced that it intends to make a Euro-Issue of Convertible Subordinated Bonds, which will raise the US dollar equivalent of A$150 m. A summary of the terms of this issue is attached. It is intended that the issue be made by Bell Group NV a company which will be incorporated in the Netherlands Antilles. This company, when incorporated, will be a wholly owned subsidiary of [TBGL], who will also guarantee its obligations.
    It is proposed that the funds raised from this issue will be lent by Bell Group NV to [TBGL] on the same terms as the issue. Bell Group NV would therefore act as a financing intermediary and the Group would receive no taxation benefit from this proposed structure.
    We wish to obtain taxation clearance for the creation of the above financing structure which will result in annual interest and any redemption payments, on the same terms as the issue, to be made by [TBGL] to Bell Group NV.
    2752 This letter is significant for at least three reasons. First, in both the text of the letter and the attached summary terms sheet, the issue is described as being of subordinated bonds. Secondly, it refers to the intention to pass the proceeds of the bond issue from BGNV to TBGL by way of loans. Thirdly, it says that the on‑loan would be on the same terms as the bond issue.
    2753 During this period (late November 1985) Griffiths, Graham, representatives of SBCIL and others had been preparing the offering circular. A number of drafts had been circulated. Griffiths, Williams and others went on a ‘roadshow’ to sell the proposed issue to prospective European investors.
    2754 On 28 and 29 November 1985 new problems surfaced. The lawyers for SBCIL pointed out that there was a difference between the structure of the issue that was then in contemplation compared to that which had been approved by shareholders on 12 November 1985. The difference lay in the absence from the information given to shareholders of the intention to use BGNV as the issuer. But the lawyers said that, ‘after hard reflection’, they had concluded this should not create a problem so long as the proceeds of the bond issues flowed through to TBGL.
    2755 The second problem related to the taxation clearance. The DCT advised C&L (who had been seeking the clearance on behalf of TBGL) that a withholding tax exemption would not be granted in respect of the bond issue if Heytesbury Securities took up half the issue of bonds. They also advised that there would be no difficulty in obtaining a s 128F withholding tax exemption in respect of the non‑Heytesbury tranche if the issue was split into two components: one for the widely held non‑Heytesbury interests and one solely for the Heytesbury interest. It seemed to follow that the arrangement could only work if the Heytesbury issue was made directly by TBGL.
    2756 On 30 November 1985 a telephone conference was held involving officers of Bell and SBCIL, and their lawyers and David Cullen of C&L. Cullen made a file note of the conference in which he said:
    It seems that the wording of the resolutions passed by Bell Group shareholders is sufficiently wide to allow the following alternative strategy to be adopted:
    Two separate loan raisings are made on virtually identical terms, the first to the non‑Heytesbury interests and the second to Heytesbury.
    Both issues are made directly by [TBGL] (ie the Netherlands Antilles subsidiary is not used).
    The terms of the issues are modified to comply with the requirements of section 82SA which limits deductions claimed for interest on convertible notes …
    Application is made for a section 128F withholding tax exemption certificate in respect of the first issue which is to the non‑Heytesbury interests.
    By avoiding the use of the Netherlands Antilles subsidiary, no Australian withholding tax problem arises in relation to the interest payable on the notes held by Heytesbury.
    2757 But on 3 December 1985 Cullen made another file note referring to further research and concluding that the price adjustment mechanism required by the European investors could not comply with the strict restrictions of Australian taxation law. It would therefore be necessary to use the Netherlands Antilles subsidiary for the Euro portion of the issue as originally planned. He also said this about the tranche of bonds to be issued to RHaC interests:
    the Heytesbury issue will be made domestically, directly by [TBGL] to Heytesbury with modified price adjustment clauses sufficient to comply with the strict requirements of [Australian taxation law] … No withholding tax problems will arise in respect of the Heytesbury domestic issue.
    2758 On 2 December 1985 SBCIL, as lead manager, sent out an invitation telex and a preliminary offering circular to elicit interest in institutions joining the selling group. This would then have marked the commencement of grey market trading in the bonds. It caused SBCIL to report on 2 December 1985 that ‘to date the Bell issues seem to have been well received’.
    2759 On 6 December 1985 Linklaters forwarded a draft trust deed for the proposed issue and advice was taken about the requirements for listing on the Luxembourg Stock Exchange.
    2760 A number of things occurred on 10 December 1985. First, the subscription agreement between BGNV as issuer, TBGL as guarantor, and 15 institutions (including SBCIL and Paribas) as managers was completed. This was in the nature of an underwriting agreement because, under cl 2(B), to the extent the bonds were not subscribed for, the managers jointly and severally agreed to take them up and pay for them.
    2761 Secondly, SBCIL sent out further telexes indicating the final terms of the bond issue (as contained in the offering circular) and calling on the addressees to accept the offer by 12 noon on the following day, with settlement on 20 December 1985. Accordingly, secondary market trading commenced on 10 December 1985 with the issue to close on 20 December 1985.
    2762 The other event on 10 December 1985 was the promulgation of the final version of the offering circular. It provided for the issue by BGNV of $75 million worth of bonds at 11 per cent (with attached conversion bonds) and of 2,620,000 ordinary shares of TBGL at a price of $11.80. The use of proceeds clause is in these terms:
    The net proceeds of the issue of Bonds of approximately A$73,025,000, will be loaned by [BGNV] to [TBGL] for funding the Group’s business activities. The net proceeds of the issue of Ordinary Shares of approximately A$29,320,200 will be used by [TBGL] for funding the Group’s business activities.
    2763 The word ‘Group’ is defined as TBGL together with its subsidiaries. There are some other aspects of the offering circular that should be noted. It describes the bonds to be issued by BGNV as ‘guaranteed, convertible subordinated bonds’ and mentions that the guarantee (by TBGL) is also subordinated. The offering circular also refers to the intention contemporaneously to make a private placement to interests controlled by RHaC of $75 million convertible subordinated bonds ‘each having similar terms and conditions to the bonds’.
    2764 On 11 December 1985 TBGL wrote to each of the bankers to the NP group advising of the first BGNV bond issue and the TBGL bond issue and requesting that the banks agree to regard the issues as equity when considering balance sheet ratios for the purposes of the banking covenants. I will return to this question later.
    2765 There was a last‑minute scare brought about by one of the closing documents for the bond issues, namely, an opinion given by Patrikeos (in‑house counsel for TBGL) concerning the subordination provisions in the trust deed. The Patrikeos opinion, which mirrored advice given by ARH to the bond issue banks and LDTC, noted that the subordination provisions in the trust deed purported to modify or affect the order of distribution of funds or assets in a winding up of the company. Patrikeos said that a problem might arise if Australian courts were to follow British Eagle International, which, it will be remembered, was a decision of the House of Lords. Patrikeos thought the better view, based on existing Australian precedent, was that such provisions were not contrary to public policy and would be upheld. It seems that this advice was accepted. The question was not raised again, save in the closing documents for the second and third BGNV bond issues, at which time identical advice was given and, apparently, accepted.
    2766 The issue closed on 20 December 1985 and on that date a number of things occurred. First, TBGL executed a closing certificate in which it certified that there had been no material adverse change in the financial condition of the company since the date of the offering circular. Secondly, BGNV, TBGL and LDTC executed a trust deed for the first BGNV bond issue. Thirdly, a paying and conversion agency agreement was entered into between BGNV, TBGL, SBCIL, Kredietbank and LDTC regarding the bonds issued by BGNV. Fourthly, TBGL and BGNV executed global conversion bonds and global bonds respectively.
    2767 Fifthly, TBGL and Heytesbury Securities entered into an agreement to document the arrangements for the TBGL bond issue. The agreement noted that in consideration of $75 million paid that day by Heytesbury Securities to TBGL, TBGL agreed to issue to Heytesbury Securities convertible notes (known as the ‘Australian Securities’) on the terms and conditions set out in the schedule. The bonds are described as ’11 per cent convertible subordinated conversion bonds due 1995 convertible into ordinary shares of [TBGL]’. The terms and conditions, in relation to coupon rate, dates for payment of interest, maturity date and conversion rights, are the same as the terms specified for the first BGNV bond issue. Clause 2 of the agreement provides:
    The parties acknowledge that the Australian Securities are identical in all respects to the convertible notes (‘European Securities’) to be issued by [BGNV] for listing on the Luxembourg Stock Exchange, save that in order to comply with provisions of the Income Tax Assessment Act the Australian Securities will differ from the European Securities with respect to rights and other issues, capital distributions and optional redemptions, as set out in item (ix) of the Schedule.
    2768 I do not need to relate the provisions of item (ix) of the Schedule as they have no impact on the question of subordination and, since the moneys came straight into the hands of TBGL, no question of on‑lending arises. Another obvious difference between the TBGL bond issue and the first BGNV bond issue was that the former were unlisted, registered bonds while the latter were listed, bearer bonds.
    2769 I was not able to find among the tendered documents a form of bond issued by TBGL to Heytesbury Securities for the TBGL bond issue. It seems that no trust deed was executed for this issue until July 1988. The subordination provisions of that deed (cl 5) are in very similar terms to those in the trust deed covering the first BGNV bond issue.
    2770 On 20 December 1985 US$29,364,900, being the net subscription moneys due to BGNV for the issue of the bonds, was transferred to an account that BGNV held with NAB in New York. These moneys were transferred to Australia on 23 December 1985.
    2771 Finally in this section, I note a letter dated 5 December 1986 from C&L to the DCT requesting the issuance of a withholding tax exemption certificate under s 128F(4) of the ITAA in respect of the first BGNV bond issue. The letter said, in part:
    The Bonds were issued by [BGNV], a company incorporated in the Netherlands Antilles. This company is a wholly owned subsidiary of [TBGL] and its only business is the borrowing of money to fund [TBGL]’s business activities.
    Funds raised from the issue of the Bonds have been lent by BGNV to [TBGL] on the same terms as the issue so that no profit will result to BGNV. BGNV therefore acts as a financing intermediary only.
    …
    The net proceeds of the issue of the Bonds were loaned by BGNV to Bell for funding the business activities of that company. (emphasis added)
    2772 Similar requests were made on 15 April 1988 in relation to the second and third BGNV bond issues. The wording of the relevant paragraphs is the same.
    12.8. The second bond issues (May 1987)
    2773 It seems that the first BGNV bond issue was regarded as a commercial success. The January 1986 Treasury report to directors said there had been ‘a significant decrease in net Group borrowings since the last Treasury Report of 21 November, 1985 as a result of the injection of funds into the Group from the issue of A$150 million Convertible Subordinated Bonds’. It also said that there had been a significant increase in the group’s liquidity position and ‘theoretical additional borrowing capacity’ brought about by the banks agreeing to treat the bonds as equity for the purposes of calculating NP ratios.
    2774 Group Treasury made several reports to the TBGL board about the gearing question throughout the second half of 1986 and the first half of 1987. The Bell group balance sheets remained highly geared. For example, a report to the TBGL board in May 1986 indicated that as at 30 June 1986, the ratio of total liabilities to total assets would be 70 per cent (equity accounted) or 67 per cent (non‑equity accounted). But treating the convertible bonds as equity (as allowed by the NP group bankers) reduced the ratio to 60 per cent, ‘well within the permitted ratio’. The report went on to say that the banks and analysts regarded the Bell group as ‘highly geared but not uncomfortably geared’ and that the ‘banks would prefer that gearing levels be corrected by an equity issue and such an issue would be prudent when the timing is right’.
    2775 On 23 June 1986, Griffiths advised the board that the NP group would need to reduce total liabilities by about $92 million in order to remain within banking covenants. There was general acceptance of the proposition that the balance sheet needed to be strengthened by an injection of equity so as to strengthen borrowing capacity and lower gearing.
    2776 The structure of the Treasury reports was to compare the gearing ratio according to the treatment of the bonds as debt or as equity. In the May 1986 report the directors had been told that as at 30 June 1986 the equity accounted consolidated balance sheet would disclose a ratio of about 70 per cent but that ‘treating the convertible notes issue as equity (as allowed by [the NP group’s] bankers)’ would reduce it to 62 per cent. On a non‑equity accounted basis the ratio would be approximately 67 per cent. For the NP group, after allowing for equity accounting, the ratio would be 60 per cent. Later reports continued this comparison. Some of them also provided an additional calculation, including intangible assets at appraised values.
    2777 Table 26, which appears at the end of this section, summarises the ratios disclosed in the Treasury reports between November 1986 and June 1987 (omitting the adjustment of intangible assets). The June 1987 and September 1987 reports reflect the effect of the bond issues made in May 1987 and July 1987. Generally speaking, the gearing ratios (treating the bonds as debt) were around 74 per cent, reducing to between 64 per cent and 68 per cent when the bonds were treated as equity. There is a marked difference in June 1987 and September 1987, when the latter figures reduces to a little over 60 per cent.
    2778 In January 1987 Treasury officers recommended a further $300 million issue of convertible notes so as to reduce balance sheet gearing from 67.7 per cent to 54.4 per cent and to improve theoretical borrowing capacity from approximately $200 million to between $750 million and $1,000 million. The report notes that ‘as the notes would be subordinated they would effectively be treated as equity for banking purposes’. This report was considered by the board on 27 January 1987 but they decided to defer consideration of an equity issue until after the market had digested the group’s half‑yearly results.
    2779 In February 1987 both SBCIL and Paribas told officers of the Bell group that there was investor interest in ‘Bell group paper’ and that the time was right for a further issue in the European market. Both institutions provided indicative terms for an issue. So too did Potter Partners in relation to an Australian convertible note issue.
    2780 The board decided to go ahead with a European issue and Paribas was awarded the mandate. The plan was for an issue of $125 million in the Eurobond market, by an offshore subsidiary of BGF (advice having been received that there would be tax advantages if the issuer were to be a subsidiary of BGF rather than of TBGL) and $75 million to Heytesbury Securities (by BGF).
    2781 On 25 March 1987 the board of BGF resolved to acquire from TBGL all of the issued share capital of BGNV. The ASX was advised that the companies within the Bell group were to make convertible bond issues totalling $200 million to provide additional working capital for the group. The amount to be sought from the Eurobond market was later increased from $125 million to $175 million.
    2782 On 6 April 1987 the board of TBGL resolved that, in relation to the $175 million issue by BGNV of guaranteed, convertible, subordinated bonds due 1997, TBGL would issue non-detachable conversion bonds in the same aggregate principle amount as the bonds, convertible into ordinary shares of TBGL. The board also resolved that TBGL would guarantee on a subordinated basis the indebtedness of BGNV arising from the issue of the bonds. Similar resolutions were passed in relation to the $75 million issue of convertible bonds to RHaC or interests associated with him.
    2783 The directors of BGF resolved that BGF would issue to Heytesbury Securities guaranteed convertible subordinated bonds due 1997, unconditionally guaranteed on a subordinated basis by TBGL and accompanied by non-detachable conversion bonds issued by and convertible into ordinary shares of TBGL. It was also resolved that BGF would enter into an agreement between TBGL, BGF and Heytesbury Securities setting out the terms and conditions of the issue of the bonds and the conversion bonds.
    2784 On 7 April 1987 the directors of BGNV resolved that the company would issue $175 million 10 per cent guaranteed convertible subordinated bonds due 1997, substantially in accordance with the terms set out in the draft offering circular dated 3 April 1987. The resolution also approved the form of various documents including the draft offering circular, the form of the bonds and conversion bonds and the trust deed.
    2785 On 9 April 1987 the subscription agreement was executed, as was the offering circular. For the questions raised in this litigation there are no material differences between it and the offering circular prepared for the first BGNV bond issue. The use of proceeds clause is in these terms:
    The net proceeds of the issue of the Bonds, amounting to approximately A$170,505,000, will be lent by [BGNV] to members of the Group for funding the Group’s activities.
    2786 On 15 April 1987 TBGL wrote to each of the bankers to the NP group requesting that the banks treat the bonds as equity for the purposes of the banking covenants. The agreement of various banks was eventually obtained.
    2787 On 22 April 1987, John Murray (a taxation adviser within the Treasury division) advised the accounting office that to ensure the interest withholding tax exemption for interest paid from Australia to BGNV, the loan moneys from BGNV must go to BGF directly and be on‑lent by BGF to relevant companies. He also advised that the terms of the loan between BGNV and BGF must be that there was no resulting profit to BGNV.
    2788 The TBGL shareholders approved the $75 million subordinated bond issue by BGF at a meeting on 28 April 1987. The terms of the bonds were described in a document called ‘Summary of Terms and Conditions of the Convertible Bond Issue’ circulated to the shareholders of TBGL on 31 March 1987.
    2789 On 6 May 1987 TBGL, BGF and Heytesbury Securities entered into an agreement for the issue by BGF to Heytesbury Securities of guaranteed convertible subordinated bonds to the value of $75 million. The parties acknowledged that the terms of the bonds were as set out in the schedule and that ‘subject to the schedule … the terms which are standard to convertible bond issues in the Eurobond market at this time shall apply to the issue of the [bonds and conversion bonds]’. The schedule describes the ranking of the bonds as ‘direct, unconditional, unsecured and subordinated obligations of [BGF/TBGL] … [ranking] pari passu with all other present and future unsecured and subordinated obligations of [BGF/TBGL]’.
    2790 On 7 May 1987 bonds and conversion bonds were issued for both the second BGNV bond issue and the BGF bond issue. In relation to the latter, the ranking of the bonds is described in identical language to that set out in the previous paragraph. An amount of $170,505,000 was paid to the account of BGF with Westpac in Melbourne.
    2791 Also on 7 May 1987, BGNV, TBGL and LDTC entered into a trust deed and BGNV, TBGL, Paribas, LDTC and others entered into a paying and conversion agency agreement. Again, there are no material differences between those documents and the corresponding instruments used for the first BGNV bond issue. As with the TBGL bond issue, it seems that no trust deed was executed for the BGF bond issue until 25 July 1988. The subordination provisions of that deed (cl 5) are in very similar terms to those in the trust deed covering the first BGNV bond issue.
    Table 26
    NP RATIOS FROM TREASURY REPORTS: 1986 AND 1987
    MONTH GEARING RATIO (BONDS AS DEBT) GEARING RATIO (BONDS AS EQUITY)
    November 1986 73.9 67.7
    December 1986 74.6 68.5
    January 1987 74.4 68.4
    February 1987 70.7 64.6
    March 1987 72.4 67.0
    June 1987 73.9 60.7
    September 1987 75.8 60.4

12.9. The third bond issue (July 1987)
2792 In mid‑1987 the Bell group repeated the fundraising exercise and BGNV made a further issue of subordinated convertible bonds into the Eurobond market and on‑lent the proceeds of the issue to BGF. There are two relevant differences between this and the earlier issues. First, on this occasion (although a draft letter was prepared) there was no approach to the banks for specific agreement to treat the bonds as equity because, by then, the relevant provisions of the NP guarantees were in contemplation. Secondly, the Eurobond issue was not accompanied by a domestic issue.
2793 One of the difficulties besetting the group was a pound sterling imbalance in the consolidated balance sheet. This had been brought about (at least in part) by a draw down of £50 million by the Australian Bell group companies and BGUK to fund TBGIL’s requirements. At a board meeting in December 1986, the directors of TBGL had recognised a need to inject additional equity capital into TBGIL. Treasury had told the directors that TBGL did not, at that time, have sufficient borrowing capacity to make the necessary capital contribution.
2794 By 14 May 1987, attention had turned to the possibility of a pound sterling convertible bond issue. Merrill Lynch, Warburg Securities, Chase Investment Bank Ltd and SBCIL all gave indicative terms for such an issue. In an internal memorandum sent by Graham to Griffiths, the objectives of such an issue were described as:

1. To take advantage of the current favourable interest rate environment.
2. To fund and match the injection of subordinated debt from [TBGL] into [TBGIL].
3. To take advantage of the current strength of equity markets in general and [TBGL’s] share price in particular.
4. To attempt to reach a different investor base thus avoiding further calls on our normal lenders.
   2795 But Graham also recognised that it would be necessary ‘to overcome [RHaC’s] dilution problem’. That is a reference to the reason behind the domestic bond issue, namely, to provide a mechanism by which RHaC could, by converting bonds to shares, match conversions by the European bondholders and thus keep his percentage shareholding in TBGL at approximately the same level. On 3 June 1987 Cahill sent to Griffiths a memorandum, which said that the critical issue regarding the capitalisation of BGUK was continuing to create problems for TBGL and a solution had to be found quickly.
   2796 On 11 June 1987, the directors of TBGL resolved that an issue of £75 million guaranteed convertible subordinated bonds be made, such bonds to be issued by BGNV and to be guaranteed on a subordinated basis by, and convertible into fully paid ordinary shares of, TBGL. SBCIL sent out invitation telexes for the issue of £75 million worth of subordinated bonds. The invitation telex also contained an invitation to join the selling group of the issue. In the invitation telex queries were raised whether it would be more appropriate to use a UK registered company (rather than BGNV) as the issuer. By 18 June the idea of using a UK company had been ‘killed off’ as it did not solve tax loss problems that had been identified. The decision was made to proceed with BGNV as the issuer.
   2797 On 23 June 1987, the directors of BGNV resolved to issue £75 million guaranteed convertible subordinated bonds substantially on terms set out in a draft offering circular. The resolution also approved the execution of various documents necessary for the issue. The offering circular and subscription agreement were completed on 25 June 1987.
   2798 On 14 July 1987 a paying and conversion agency agreement was entered into between BGNV, TBGL, Chase Manhattan Bank and others. On the same date, the temporary global bond for the £75 million bond issue was issued, a certificate of no material adverse change was issued by C&L and BGNV, and a trust deed between BGNV, TBGL and LDTC was entered into. The subordination provisions of the trust deed (cl 5) are in the same terms as those in the deeds for the earlier issues. Payment was made by Midland Bank to Westpac (for the account of BGF) of £73,075,000, being the net proceeds of the issue.
   2799 I was not able to find in the evidence how the dilution problem affecting RHaC was overcome. It may be that by this time those in control of the Heytesbury interests decided that they would accept the consequences if there were to be conversions of the bonds into shares. In any event, it is common ground that there was no parallel issue to RHaC’s interests at the time of (or after) the third BGNV bond issue.
   2800 In early 1987 TBGL had commenced negotiations with its bankers to replace the existing NP agreements with the NP guarantees. The proposed NP guarantees were again to include a covenant that total liabilities of the NP group not exceed 65 per cent of total tangible assets of the NP group. However, it was proposed to exclude from definition of Total Liabilities all non‑current subordinated debt. The purpose of that exclusion, as stated by TBGL to the banks, was:
   [T]o exclude from Total Liabilities subordinated debt such as the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes.
   2801 By 30 July 1987 each of the Australian banks had entered into the NP guarantees with TBGL. On 27 August 1987 the Lloyds syndicate banks entered into the LSA No 1 with TBGL, BGF and BGUK. It contained the same terms as those contained in the NP guarantees entered into with the Australian banks. I will come back to the significance of the change from the NP agreements to the NP guarantees later. For present purposes, it is sufficient to say that there was no approach to the banks (as there had been in December 1985 and in April 1987) to have the bonds treated as equity rather than as liabilities.
   12.10. The commercial purpose of the bond issues
   2802 As I have already said, the Bell group of the mid‑1980s was an acquisitive beast and it relied heavily on borrowed funds to continue with its expansion plans. Its negative pledge arrangements were a fetter on access to additional borrowings from conventional sources; hence its move into the Eurobond market. And in terms of access to funds, the move was successful. Immediately before the December 1985 bond issues, the borrowings by NP group companies stood at $386.2 million. By December 1987 this figure had increased to $1.85 billion.
   2803 In his witness statement, Griffiths said that he perceived a number of advantages in subordinated convertible bond issues. First, they were issued in a market different to the traditional lending bank market and accordingly provided an alternative source of funding to the NP group’s existing bank lenders. Secondly, the loans had a longer effective duration than many existing bank loans. Thirdly, the bonds were convertible into ordinary shares (at a premium to current share price) and thereby attracted a lower interest rate. Lastly, the proposals involved, as a feature, that the loans from bondholders would be subordinated.
   2804 Griffiths said that to his mind, subordination was one of the most desirable features of the proposals. It provided the NP group with an argument that could be put to its banks that the bonds not be included in liabilities for the purpose of the negative pledge ratio calculations. That argument gained support from the long‑term maturity of the bonds and the fact that they were convertible into equity. However, he felt that neither of those two additional features, either alone or in combination, was a sufficient basis for approaching the banks for their agreement to treat the bonds as equity and by that means exclude them from the ratios. To his mind, subordination was the key. Given his understanding of RHaC’s desire for flexibility in the ability of the NP group to raise funds, the potential to raise funds that could be excluded from the ratios was significant and particularly attractive to him at the time.
   2805 In relation to the commercial purpose of the borrowings made through the entry into the Eurobond market, Griffiths said this:
   My understanding at the time, and at all times since, was that the decision which the Board made at the Board meeting on 8 October 1985 was a decision that TBGL pursue the bond issue … for the specific purpose of introducing long term convertible, subordinated funds into the [NP group] so that those funds could be excluded from the ratios with the consequent benefits to borrowing capacity. This understanding was principally derived from contemporaneous discussions which I recall having with [RHaC].
   2806 Graham testified that he was aware of the proposal to raise funds by the issue of convertible bonds in the Eurobond market. As he understood it, the structure of the bond issue was organised in Australia, primarily by David Griffiths or by others at his direction or under his supervision. He understood at the time (from discussions with Griffiths and (or) Newman) that an important consideration was the raising of funds by the group by a mechanism that would accommodate the treatment of the bonds not as liabilities but as equity for the negative pledge ratios. He saw this as an advantage of a convertible subordinated bond issue, namely, that finance was raised as debt (that is, an interest rate coupon was paid rather than a dividend) but could count, in most circumstances, as equity and the cost was likely to be less than ordinary debt. He said that he had a greater personal involvement in the detail of the two 1987 issues than he did in the 1985 issue. In relation to the former, he said this:
   To my understanding the 1987 issues were intended to adopt essentially the same structure as the 1985 issue so that the object of injecting into the [NP group] funds which could be treated as equity and so excluded from the negative pledge ratios could be repeated.
   2807 Graham also commented on the advantages of a bond issue that is treated as equity rather than as debt in effecting a compound increase in the borrowing capacity of the companies. This is another example of a witness referring to the ‘double whammy effect’: see Sect 12.7.3.
   2808 Williams seems to have played a lesser role than Graham at the United Kingdom end, although he did participate. He said it was his understanding that the funds brought into the Bell group were subordinated and ranked behind debt owed to banks, in order to raise funds in a manner that would not cause a problem with the bankers of the Bell group and that would not put pressure on or cause a breach of negative pledge ratios.
   2809 Studdy was the only person who was a director of TBGL at the time that was available to give evidence. He said he had a recollection that convertible subordinated bond issues were made by the Bell group in 1985 and 1987 but he did not recall much about the details of those issues. Because of the Bell group’s reliance on borrowed funds and the need to maintain the asset to liability ratios, Studdy was always personally very concerned with gearing. For this reason, he was keen to look at financing proposals that involved the raising of funds in the form of ‘quasi-equity’. His early understanding of convertible subordinated bonds was that they had this advantage.
   2810 In the course of acting as a director of TBGL Studdy had frequent dealings with RHaC and many discussions about matters affecting the Bell group. His experience of RHaC was that RHaC’s practice was to keep the board fully informed and that he put forward detailed proposals with recommendations for approval.
   2811 Studdy’s experience on the board of TBGL suggested to him that there probably would not have been a great deal of discussion about the detail of the subordinated bond proposal at the 8 October 1985 board meeting. The proposal referred to in the 8 October 1985 minutes would have been accepted by the board quickly on the basis that the chairman and officers of the company had looked at it carefully and were happy with it.
   2812 He said that he could not recall the detail of his thinking at the time. But his experience and commercial understanding led him to say that had he been aware of the terms of the requests to the banks to treat the issues as equity and, had he turned his mind to the issue, he would have viewed subordination as the key issue for the banks. He would have thought that in order to encourage the banks to accept the bonds as equity for the purposes of the NP ratios it was essential that they be subordinated and not merely convertible.
   2813 He was cross-examined at some length about the relative importance of the two questions − subordination and convertibility − to the decision whether or not to treat the bonds as equity. In the course of that exchange Studdy said this:
   The other element was the banks themselves and the banks were told that those bonds were subordinated at [TBGL] level. It’s something I’m very familiar with because I remember discussions with [RHaC] many a time when he was telling me that the banks were prepared to accept this as quasi equity and the important thing from The Bell Group point of view was that they would accept it as quasi equity because of borrowing ratios and that sticks firmly in my mind because I was probably more adamant on the board on bringing in more equity than any other director at the time.
   2814 The plaintiffs submit that care needs to be taken to avoid a false dichotomy implicit in the banks’ case, namely, that I should find that the commercial purpose of the fundraising arrangements was to inject subordinated debt into the NP group or that there was a commercial purpose in BGNV making each of the on‑loans on an unsubordinated basis. The plaintiffs characterise the reasoning process in that dichotomy as fallacious. They say the first fallacy is the ‘excluded middle’, which ignores the existence of alternatives other than the two put forward by the banks. For example, it may be that the on‑loans were consciously and deliberately being made as ordinary inter‑company loans in accordance with the usual lending practices of the group. One of those practices was that inter‑company loans were not ordinarily made on a subordinated basis.
   2815 The plaintiffs say that the prospect of the bond issue being treated as equity was a ‘happy by‑product’ but was not integral to the fundraising arrangements constituting the 1985 bond issues. The plaintiffs submit that, on the evidence, TBGL’s commercial purpose was to obtain a source of funds that was, among other things:
   (a) long‑term and subject to a significantly lower interest rate than bank borrowings that were then at a historical high;
   (b) not subject to foreign exchange risk;
   (c) able to diversify the sources of finance available to the Bell group outside Australia;
   (d) convertible and likely to expand the equity base of TBGL from institutions to include a spread of retail investors; and
   (e) tax effective in terms of qualifying for deduction of interest payments and also being exempt from withholding tax.
   2816 The plaintiffs point out that the letter requesting that the banks treat the bonds as equity was made after the bond issues were launched in the Eurobond market and that TBGL and BGNV were committed to the issue regardless of whether the banks agreed to equity treatment. This belies the assertion that the purpose of the bond issues was to achieve equity treatment. This proposition was put directly to Studdy in cross‑examination but he did not agree:
   But with regard to commercial purpose of the bond issue, Bell had not obtained the agreement of the banks?—I don’t know that.
   …
   Do you say that you don’t know one way or the other whether some, many or all of the banks had made any decision about quasi equity treatment at the time that the bond issue closed?—I agree with that.
   …
   You agree that if there were banks which had not agreed at that stage to the quasi equity treatment, either orally or in writing, that would suggest that the question of bank acceptance of quasi equity treatment was not central to the issue?—No, I can’t agree with that.
   You would agree, would you not, that in the context of the negative pledge agreement, it would only need one bank to put a spanner in the works, that is, to prevent the others from treating it as quasi equity?—That would be the way that most negative pledge agreements work, yes.
   And it’s more likely than not, I would suggest, that Mr Holmes à Court and his executives would not have committed Bell to this bond issue without the approval of all of the banks prior to the issue if the central commercial purpose of the bond issue was in the terms that you set out in paragraph 31?—No, I can’t agree with that.
   2817 Studdy also said that one of the principal reasons for having the bond issue was to make sure that the banks would agreed to it as quasi‑equity in the sense of the words of the borrowing limits.
   2818 On this aspect I accept the evidence of Griffiths, Graham, Williams and Studdy that the ability to have the bond issues treated as equity was a primary consideration. Given the lapse of time between the events, the time at which the witnesses were asked to prepare statements and the time at which they gave oral evidence it is not surprising that there are degrees of imprecision of people’s recollection of events and documents. But the general impression of what these witnesses told me was their state of mind at the time accords in sufficient measure with the contemporaneous documents to which I have referred.
   2819 I do not think that the timing point (the letter to the banks was not sent until 11 December 1985 and the issue had been completed before all banks had signified consent) necessarily tells against the banks. The aim had always been to have the funds available before the end of the year. In a later section I will set out the text of the 11 December 1985 letter. It is sufficient to say here that I am satisfied the letter had been preceded by discussions with the banks. The responses of the 23 NP group banks to the 11 December 1985 letter is set out in DP par 11ED(18). It is difficult to tell exactly when the responses came in because many of the letters are undated. But at least five of the banks had given a positive response before the issue closed on 20 December 1985.
   2820 The 11 December 1985 letter commences with the phrase ‘as you have previously been advised’. I can see no reason why I should not accept this phrase at face value. Certainly, it was not put to the author (Cahill) that this was not an accurate statement at the time. The letter did not come ‘out of the blue’ and there had been earlier approaches to the banks. Cahill agreed in cross‑examination that when he sent the letter out he would not have known whether all banks would consent. He said there was high expectation but no guarantee of unanimous agreement. Cahill had only been with Bell a short time before 11 December 1985 and would not have had much knowledge of the prior communications with the banks.
   2821 There is no evidence that any bank communicated to the company a reluctance to agree. Indeed, on 31 October 1985 Chapman of TBGL had written to CBA enclosing NP reports and saying: ‘We will be contacting the banks in coming months to discuss matters such as the appropriate treatment of the proposed convertible note issue of which you were recently advised’. The letter has on it a handwritten notation (by an officer who was not called) saying: ‘ie should look at it as equity not debt’. Evidence of other internal CBA communications in early December shows that the request was regarded as ‘reasonable’.
   2822 It was put to Griffiths that the timing of the letter to the banks made it unlikely that the purpose of the bond issue was to obtain agreement by the negative pledge bankers to a particular treatment for ratio purposes. He said this was not necessarily so because that proposition assumed the letter was the first communication with the principal banks. That was not the fact. While he could not say that he (or anyone else) had the consent of all banks before the issue was finalised, his work practice at the time was to canvass opinions from the important banks. I have already referred to Studdy’s evidence on this point.
   2823 On 31 December 1985 Cahill made a note in which he recorded that, by then, 12 of the banks had signified agreement. He went on to say that ‘there [had] been no serious criticism of the proposal to have the convertible subordinated bonds considered as equity for the purposes of the negative pledge ratios’ and that the banks were ‘having some difficulty in obtaining the necessary signatories over the Christmas/New Year break’. Cahill also said in cross‑examination that at the time, had any bank been uncomfortable with the proposal, it was possible the Bell group had the capacity to pay that bank out, thus negating the problem.
   2824 A Treasury report to the TBGL directors dated 8 January 1986 noted the improved liquidity position and borrowing capacity of the group. It went on to say that the substantial increase in the NP group’s liquidity had been brought about by the NP group banks ‘agreeing to treat [the bonds] as equity for the purposes of calculating banking ratios thus bringing about a significant increase in borrowing capacity through the gearing ratios’. Against this background I am prepared to draw the inference that the relevant officers had sufficient confidence in the outcome of the approaches to the banks for TBGL to have proceeded as they did.
   2825 This leads me to find that the belief and intention of TBGL, through its relevant officers, in relation to the first BGNV bond issue and the TBGL bond issue was as follows:
5. The Bell group had an ongoing need to raise funds.
6. There were limits to what the local markets could bear by conventional equity‑raising mechanisms. In addition, there were fetters on the capacity of the NP group companies to borrow by conventional means because of the NP ratios.
7. In 1985 market conditions were ripe for a foray into the Eurobond market with an Australian dollar equity raising. One way of moving into the Eurobond market was by a convertible bond issue.
8. There was a precedent for a subordinated convertible bond issue being treated as equity rather than debt for balance sheet purposes. An advantage of such an issue being treated as equity was that it had a twofold impact: it injected funds in a way that would improve (or at least not worsen) the liabilities to assets ratio, and it would (in addition) provide room for further borrowings.
9. Given all of this, the commercial purpose of the Bell group in making the bond issues was to inject debt into the NP group that the banks would agree to treat as equity rather than as a liability for NP ratio purposes.
   2826 Griffiths, Graham and Studdy all gave evidence that the 1985 bond issues were regarded as commercial successes and that the 1987 bond issues were structured in the same way and reflected similar terms. For example, Griffiths said that the terms and structure of the later bond issues were closely based on the first issue. The 1985 issues were perceived by Griffiths, and to his observation others in the Bell group (including RHaC) to have successfully provided a means by which the NP group was able to raise funds in a manner that, by agreement, permitted their exclusion from the ratios. So far as he could recall, the 1987 bond issues were motivated by a desire to repeat that process.
   2827 Graham testified to his understanding that the 1987 issues were intended to adopt essentially the same structure as the 1985 issues so that the object (of injecting into the NP group funds that could be treated as equity and so excluded from the negative pledge ratios) could be repeated. Studdy said that, while he could not recall the details of the 1987 bond issues, he believed that the structure and purpose of the subsequent bond issues reflected the 1985 issues. Studdy also gave evidence that he was keen to look at proposals that raised funds as ‘quasi-equity’ and he regarded the bond issues as such.
   2828 I accept this evidence. It supports the conclusion about the commercial purpose of the 1985 bond issues. It also supports the view that the same commercial purpose and general structure of the 1985 bond issues was carried forward into, and repeated in, the two sets of bond issues in 1987.
   2829 I have not dismissed in an offhand fashion the entreaty made by the plaintiffs to avoid the false dichotomy. The question of BGNV’s commercial purpose in arranging and effecting the bond issues and the commercial purpose in making the on‑loans, while clearly connected, are not necessarily one and the same thing. Nor have I overlooked the plaintiffs’ complaint about a shift in the banks’ case in describing the rationale of the bond issues to raise funds for the NP group on a subordinated basis as being ‘a purpose’ rather than ‘the purpose’. There is a further argument raised by the plaintiffs to the effect that the funds raised by the fundraising exercise, represented by the various bond issues, were to be injected into the Bell group, rather than into the NP group.
   2830 The first question, and the one to which my findings here are directed, relates to the purpose of the Bell group in raising funds in a way that would be treated as equity rather than as debt, rather than to whether the subordination of the bonds carried over to the on‑loans. While this is of central significance to the question of subordination, it does not provide a complete answer. There is an additional question: is subordination an essential element, without which the company would never have asked the banks to treat the bonds as equity and the banks would never have agreed to do so? Would, for example, the fact of convertibility and the likelihood of conversion (given the share market performance of TBGL) have been sufficient (with or without subordination) to achieve that end? There is a long way to go before that can finally be resolved.
   2831 I am attempting to deal with issues in a systematic way, but the analogy of the spider’s web returns. Unravelling the threads and strands is both tedious and tortuous. I cannot answer the question about subordination and its place in the decision‑making process (both of Bell group officers and bank officers) other than against the background of a whole range of factual considerations that are (slowly) emerging.
   12.11. The interposing of BGNV and the splitting of the issue
   2832 The idea of using an offshore subsidiary as the issuer had been around since inception and was included in Griffiths’ September 1985 memorandum to the board. But doubts and debate continued until about 3 December 1985. The structure, as presented to the shareholders on 12 November 1985, was for a single issue of $150 million by TBGL, with bonds to the value of $75 million being issued to interests associated with RHaC and another $75 million in the Eurobond market.
   2833 The structure eventually adopted had two separate issues: one of $75 million by BGNV (guaranteed by TBGL), with the proceeds to be ‘loaned by [BGNV] to [TBGL] for funding the [Bell group’s] business activities’; and the other of $75 million by TBGL to interests associated with RHaC. Why were these changes made?
   2834 The decision to interpose BGNV was made because of two sets of legal advice. First, there was conflicting legal advice whether, under the Companies Code, an Australian corporation could issue notes where the period during which they could be converted was longer than five years (and these bonds were to have a convertibility period that expired a few days before the 10‑year maturity date). One way of avoiding the doubt was for the issuer to be an offshore company.
   2835 The second problem was legal advice to the effect that an offshore vehicle was essential to overcome the problem that the conversion terms may not strictly comply with s 82SA(1)(D)(xi) of the ITAA. The issue raised in relation to that section of the legislation was whether intervening rights and scrip issues might require the conversion price to be adjusted to a price less than the minimum price required by the statute. If they did, the deductibility would be in jeopardy.
   2836 The efficacy of RHaC’s interests taking half of the bonds in a single issue was called into question by advice from C&L, received on 29 November 1985, about the DCT’s response to the request for a withholding tax exemption certificate. The attitude of the DCT was to the effect that a withholding tax exemption would not be granted in respect of the bond issue if Heytesbury Securities took up half the issue of bonds. But there would be no difficulties in obtaining an exemption in respect of the non‑Heytesbury component if the issue was split in two: one part going to the widely held non‑Heytesbury interests and the other to Heytesbury Securities. The advice suggested that this structure would only work if the issue to Heytesbury Securities was made directly by TBGL.
   2837 This is one of the few areas in the subordination case that is, I think, reasonably clear. The preference of the Bell group officers was to keep the issue as simple as possible. Introducing an offshore subsidiary to act as issuer was not helpful in that respect. But by 22 or 23 November 1985 the decision had been made to proceed using BGNV. The company was incorporated on 27 November 1985 and on the following day the directors resolved to issue the bonds. But that was not the end of the debate. Between 29 November and 2 December 1985 a change of heart was still on the cards; however, on 3 December 1985 the decision to use BGNV was confirmed.
   2838 In my view the decision to use BGNV as the issuer was driven solely by income tax considerations: the deductibility of interest payments and the availability of an exemption for withholding tax. There were other legal considerations but in the main they were associated with the taxation issues. BGNV was a special purpose vehicle in the sense that it was established for taxation reasons. Its only role and its only business was to make the bond issues and on‑lend the proceeds to TBGL and BGF. BGNV had no office of its own in the Netherlands Antilles (or elsewhere) it had no staff of its own. It was not intended to, could not and did not derive a profit from its role, and it had no capacity to pay and was not intended to have any capacity to pay the interest due under these arrangements other than from funds provided by TBGL or BGF for that purpose.
   2839 This is confirmed by reference to a letter sent on 5 December 1986 by C&L, on behalf of TBGL, to the DCT in support of the request for a withholding tax exemption certificate. The letter said that the bonds were issued by BGNV, a wholly owned subsidiary of TBGL, and that ‘its only business is the borrowing of money to fund [TBGL’s] business activities’. The letter also reported that funds raised from the issue of the bonds had been lent by BGNV to TBGL ‘on the same terms as the issue so that no profit will result to BGNV. BGNV therefore acts as a financing intermediary only’.
   2840 It is also consistent with the evidence given by Graham and Williams, who were directors of BGNV. Graham said that BGNV was a special purpose vehicle used solely for the subordinated convertible bond transaction, primarily to avoid withholding tax for the bondholders. He could not recall attending any meetings as a director of BGNV and his conduct as a director was aimed at achieving the purposes of the bond issues as he understood them. He was aware that BGNV had no borrowings other than those pursuant to the issue of subordinated convertible bonds, the repayment of which were guaranteed on a subordinated basis by TBGL.
   2841 Williams’ evidence is that he understood that the decision was made to use an offshore vehicle because it was more favourable for Australian tax purposes to do so. The only business conducted by BGNV during his directorship was the making of the three bond issues and lending the funds raised to TBGL and BGF.
   2842 There was, in my view, never any intention by any relevant person that the interposition of BGNV would make any difference to the underlying purpose that TBGL was trying to achieve by way of the bond issues.
   2843 Nor, in my view, was there any intention to alter the underlying purpose by splitting the issue into two tranches each of $75 million. Save for the obvious differences brought about by the identity of the issuer and some terms relating to conversion (again dictated by taxation considerations), there was no intention that the terms of the Heytesbury Securities issue should be different from that of the BGNV issue. This much is clear from (among many other documents):
   (a) TBGL’s letter to the banks dated 11 December 1985 (see below);
   (b) The memorandum from C&L to Griffiths dated 29 November 1985 following discussions between C&L and the DCT; and
   (c) Clause 2 of the agreement between TBGL and Heytesbury Securities dated 20 December 1985.
   12.12. Dealings with the banks
   2844 I am now moving to two areas that are of critical significance to this aspect of the case: the approaches to the banks to obtain agreement for the bonds to be treated as equity and the accounting treatment of the bonds in the periods after December 1985.
   12.12.1. Letter to banks: 11 December 1985
   2845 On 11 December 1985 Cahill wrote to each of the NP group bankers. I am satisfied on the evidence of Cahill and Griffiths about their usual work practices that it would have been drafted by Cahill and given to Griffiths for comment and approval. The letters are in the same terms. An example copy of the letter is attached as an Annexure: see Schedule 38.24 ‘P’. But because of its significance I will set out the text of the letter in full:
   As you have previously been advised [TGBL] will through its financing subsidiary [BGNV] issue into the Euro markets $A75 million Convertible Subordinated Bonds which will mature in December 1995.
   At the same time interests associated with [RHaC] will take up a further $A75 million Convertible Subordinated Bonds with a December 1995 maturity which will be issued by [TBGL].
   The two issues will with the exception of issuers and minor variations due to different domiciliary laws be identical.
   The Bonds will have attached to them a right to convert on or after 20th February 1986 to ordinary shares of [TBGL] at a premium of 18% above an initially agreed market price of $A11.80 per share.
   Based on past price performance of [TBGL’s] shares it is anticipated investors will exercise their right to convert prior to the redemption date. Given that the Bonds are a subordinated debt which will not be payable for 10 years with a strong likelihood of being converted, [TBGL] considers that the issues should be regarded as equity when considering balance sheet ratios for the purposes of its banking covenants.
   Details of the issue have been summarised and are attached for your information.
   The Bell Group requests that you agree to the treatment of the Convertible Subordinated Bonds due December 1995 in this manner and asks that you signify your agreement by signing the duplicate copy of this letter.
   2846 Although nothing much turns on the summary of terms attached to the letter, I will mention a couple of aspects. It recites the status of the bonds in exactly the same language as used in the offering circular and Condition 1A of the bonds (see Sect 12.3.1). It notes the intention of TBGL to make an issue to Heytesbury Securities ‘having similar terms and conditions to the Bonds’. And it also notes the intention to make a contemporaneous issue of 2.62 million ordinary shares.
   2847 The material in the fourth paragraph of the 11 December 1985 letter has special significance. It posits three reasons why the bonds should be regarded as equity. First, that they were convertible and, based on past share price performance, there was a strong likelihood that the right to convert would be exercised. Secondly, that the bonds were subordinated debt. Thirdly, that because of the 10‑year term (coupled with the strong likelihood of conversion) the banks’ facilities would mature before the company had to redeem the bonds.
   2848 There is also significance (certainly to the plaintiffs’ case) in the words ‘the issues should be treated as equity’. I will return to the significance of that phrase shortly.
   2849 Between 11 December 1985 and 7 March 1986 all of the NP group bankers signified assent to the arrangement.
   12.12.2. The SocGen information memorandum
   2850 In January 1986, SocGen was awarded a mandate to lead a syndicated facility to raise $50 million. The SocGen information memorandum for this facility was prepared by or under the supervision of Peter Edward in consultation with Bell group officers, primarily Cahill. On 29 January 1986, in response to a query, Cahill told Edward that he could advise prospective syndicate members that there had been unanimous acceptance of TBGL’s proposal to treat the convertible subordinated bonds as equity.
   2851 The SocGen information memorandum, finalised on 3 February 1986, refers to the convertible bond issue of $150 million ‘recently made by Bell Group Ltd NV [sic]’, which it describes as ‘part of further equity raisings by the company’. It goes on to say: ‘in this regard it should be noted that existing bankers have agreed to treat this issue as equity and participants in this facility will likewise be requested to so treat it’. Later in the SocGen information memorandum there is another reference to the bond issue with this comment: ‘The nature of the bonds is such that they may be considered as equity for the purpose of gearing calculations’.
   12.12.3. The Information Memorandum
   2852 The Information Memorandum sent by Lloyds Bank to prospective members of the Lloyds syndicate in April 1986 is another significant document.
   2853 Graham testified that he was involved in arranging a syndicated loan facility through LMBL on behalf of BGUK and BGF. The loan had two borrowers so that the funds could be taken up in the United Kingdom or Australia. The arrangement of this facility was at his initiation because he was a former employee of Lloyds Bank and had worked with John Eggleshaw who negotiated the facility on behalf of Lloyds Bank. It seems that Graham gave a copy of the SocGen information memorandum to Lloyds Bank to be used as the basis of the Information Memorandum.
   2854 In relation to the 1985 bond issues, the references in the Information Memorandum are similar to those in the SocGen document. After stating that TBGL had authorised the making of the Information Memorandum, it said:
   Under the convertible bond issue $75 million was raised by [TBGL] and $75 million by [BGNV]. In this regard it should be noted that existing bankers have agreed to treat this issue as equity and participants in this facility will likewise be requested to so treat it.
   2855 In a later part of the Information Memorandum, the authors repeat that in December 1985 the company issued $150 million of convertible bonds and this comment follows: ‘All current lenders under the [NP agreements] have agreed to treat these bonds as equity for the purpose of calculating liability ratios and syndicate participants are also required to agree with this treatment’.
   2856 I take two things from this. First, it draws no distinction between the TBGL bond issue and the BGNV bond issue insofar as equity treatment is concerned. Secondly, it was a condition of participation in the Lloyds facility that member banks agree ‘to treat these bonds as equity for the purpose of calculating liability ratios’.
   2857 There is a further significant aspect of the Information Memorandum. The 1985 TBGL Annual Report was included in the package that went with the memorandum. Accordingly, a person reading the Information Memorandum would have had available the balance sheet for the holding company and for the consolidated Bell group. Section E of the Information Memorandum is entitled ‘Summary of Financial Information’. It commences with a table giving a summary of financial data for the 10 years from 1976 to 1985. It then relates seven material events that had occurred since 30 June 1985. One of them, item (5), is in these terms:
   In December 1985 [TBGL] raised A$150 million in subordinated convertible bonds … The nature of the bonds is such that they may be considered as equity for the purposes of gearing calculations. At the same time, [TBGL] raised A$30 million of funds from an ordinary share placement.
   2858 The word ‘subordinated’ is underlined in the copies that were tendered at the trial. No‑one suggested that this was not so in the versions that were distributed in April 1986. The concluding paragraph of the section on post‑balance date items (which appears at p 23 of the Information Memorandum) is as follows:
   The impact of the above post 30 June events has been a substantial increase in the consolidated net worth of [TBGL] with a resultant significant reduction in effective gearing and hence increase in borrowing capacity. Restated net worth including convertible bonds is in excess of A$650 million ignoring any premium over book value for the investments in associate companies.
   2859 The Information Memorandum also contained an attachment. The preface to the attachment indicated that it comprised the half‑yearly report of TBGL to 31 December 1985, an unaudited consolidated balance sheet and profit and loss statement to the same date and an unaudited balance sheet and profit and loss statement of the NP group, also as at 31 December 1985. The preface contains this note:
   NOTE: The ‘restated net worth … of A$650 million … ‘ referred to on page 23 of the Information Memorandum is based on the figure of A$496 million shown for ‘Total Share Capital and Reserves’ in the consolidated balance sheet at 31 December 1985 (attached) to which has been added A$150 million being the convertible issue made in December 1985. This item is currently shown under Non Current Liabilities as ‘Unsecured Loans’. The justification for treating this item as capital is that [TBGL’s] current share price is higher than the conversion price and conversion can be currently exercised. Under Australian accounting practice, however, the convertible must be treated as loan capital until conversion. Note that conversion could not occur pre 20 February 1986.
   An independent valuation by Allen & Co of New York of the film and TV copyrights (currently owned by the ITC Group which is part of The Bell Group International Ltd) has shown that their current value is about US$76 million. The net worth of [TBGL] incorporates a value of only A$10 million at present (see page 23).
   2860 The unaudited balance sheet for the consolidated group as at 31 December 1985 discloses assets of $1.24 billion and liabilities of $742 million. This accounts for the figure of $496 million as shareholders’ funds. If $150 million (being the amount of the bond issues) is removed from liabilities and added to shareholders’ funds, the latter increases to $646 million. Allowing for other adjustments, this appears to explain the statement in item (5) of the post‑balance date events and in the note to the preface that ‘restated net worth is in excess of $650 million’.
   2861 In the pro forma balance sheet for the NP group as at 31 December 1985, assets are shown as $923 million and liabilities as $426 million, giving shareholders’ funds of $497 million. In this instance, one of the line items within shareholders’ funds is ‘convertible notes’ of $150 million. In other words, in the balance sheet for the NP group (unlike the consolidated group balance sheet) there was no need for a restatement of net worth because the bond issues had not initially been included in liabilities.
   2862 The plaintiffs rely on these documents for two main reasons. First, they say the documents support the proposition that convertibility, not subordination, was the key factor in the process of persuasion aimed at having the banks agree to treat the bonds as equity. Secondly, the restatement flows from the consolidated balance sheet, not from the NP group balance sheet. As to the second of those propositions, I think the short answer is that the unaudited consolidated balance sheet was a statutory document that prospective lenders would expect to see and, to the extent that the company felt it was in a material sense at odds with how the arrangements were to be implemented, would have required explanation. It does not, in my view, assist the plaintiffs in the broad argument (to which I will return in due course) about decisions being related to the consolidated group rather than the NP group.
   2863 The first of the contentions is more difficult to answer. It must be noted that in neither in the SocGen information memorandum nor in the Information Memorandum is there any express reference to subordination as being the (or a) reason justifying the treatment of the bonds as equity. Indeed, in the latter, the justification for the treatment is expressly related to convertibility. In cross‑examination Cahill conceded that as at December 1985, and again at the time of the Information Memorandum, he may have held the view that convertibility alone might have justified the treatment of the bonds as equity. No such concession was made by Graham when he was cross-examined on the issue. He was prepared to agree that part of the information being conveyed to prospective lenders by the company (through Lloyds Bank) was that convertibility was a justification, but he said that it was not the only reason and pointed to the reference to subordination in item (5). So far as I can recall, Griffiths did not refer to the Information Memorandum in his evidence in chief and it was not raised with him in cross‑examination. The effect of the Information Memorandum on the subordination question is yet another strand in the spider’s web. The unravelling process must continue.
   12.12.4. Letter to the banks dated 15 April 1987
   2864 On 9 April 1987 the offering circular was despatched, marking the launch of the second BGNV bond issue and the BGF bond issue. On 15 April 1987 Cahill wrote to the NP group bankers in relation to these issues. I have attached a copy of the letter as an Annexure: see Schedule 38.24 ‘Q’.
   2865 The letter commences by referring to the success of the first BGNV bond issue and the TBGL bond issue and the intention of BGNV to make another issue of bonds to the value of $175 million. It indicates that RHaC intends to take up a further $75 million of bonds to be issued by BGF, with the two issues to be identical save for identity of the issuer and minor variations due to domestic regulatory laws. The letter mentions the conversion bonds and the conversion price. The balance of the letter is in these terms:
   [TBGL] considers that, in line with treatment of the December 1985 issues, these issues should be treated as equity when considering balance sheet ratios for the purposes of banking covenants for the following reasons:-
   i) The past performance of [TBGL] Ordinary Shares indicates that it is likely that investors will exercise their right to convert prior to the redemption date.
   ii) The current conversion price of the December 1985 issue is A$5.22 per fully paid Ordinary Share and, of the original A$75 million Convertible Bonds placed in Europe in December 1985, A$10.875 million had been converted or requests made for conversion as at 15 April 1987. The current market price of the Bonds is approximately A$190.00.
   iii) The bonds are a subordinated debt which is not due for repayment until May 1997 and in which there is no right of put by the investor.
   A copy of the offering circular is enclosed for your information.
   [TBGL] requests that you agree to the treatment of the Convertible Subordinated Bonds due May 1997 as equity for the purposes of banking covenants and asks that you signify your agreement by signing the enclosed duplicate copy of this letter.
   2866 All NP group banks agreed to the request. The plaintiffs raise the same timing point about this letter: it was despatched after the issue had been launched and consent of all banks had not been obtained by the time the issue closed. But in relation to this issue there is an additional reason why I think the relevant officers of TBGL could have embarked on the fundraising with confidence that consent would be forthcoming. The reason is that the banks had agreed to the treatment for the December 1985 issues and these ones were following the same structure.
   12.12.5. The third BGNV bond issue and the NP guarantees
   12.12.5.1. Draft letter to banks dated 10 July 1987
   2867 When they came to launch the third BGNV bond issue, Cahill (or someone at his direction) prepared a letter (dated 10 July 1987) to the NP group bankers in similar terms to the 15 April 1987 letter. One difference is that there is, of course, no mention of a separate issue to interests associated with RHaC. Another difference is brought about by the inclusion in the terms of the proposed issue of a put option entitling the bondholders to require BGNV to redeem the bonds at a premium to the face value. The put option could only be exercised on 14 July 1992. Because of this provision, item (i) in the letter was drafted to read: ‘the past performance of [TBGL] Ordinary Share price indicates that it is unlikely that investors will redeem their bonds or exercise their put option’.
   2868 The draft letter was never sent to the banks. There is a handwritten notation made by Cahill on 17 July 1987 indicating that the letter was not sent because the NP guarantee was to be signed on 30 July 1987 ‘at which time the subordinated bonds will automatically become equity for banking purposes’.
   2869 I need now to go back in time to give more detail than I did in Sect 4.2.2.5 about the negotiations for the change from the NP agreements to the NP guarantees.
   12.12.5.2. The NP guarantees
   2870 In the period 1985 to 1987 TBGL considered, on a number of occasions, the reorganisation of the arrangements governing the NP group bank borrowings. The reason for the consideration of the proposed reorganisation, at least initially, was to unite the two banking groups. As part of the process, the concept of subordinated debt and its possible exclusion from the calculation of the NP ratios was raised within the Bell group.
   2871 On 8 October 1985 Graham sent a memorandum to Griffiths entitled ‘Possible Amalgamation of Banking Groups’. The memorandum stated that the documentation should include a number of core standard clauses, including ‘subordinated debt’. On 20 November 1985 an internal memorandum addressed to Newman spoke of ‘the proposal for a unified banking structure [being] motivated by the need to increase the group’s borrowing capacity’. It recommended, among other things, that the NP group bankers should be asked to accept a 70 per cent ceiling on liabilities and to agree ‘to exclude subordinated debt and redeemable preference shares from liabilities for the percentage calculations’.
   2872 An undated memorandum (with an estimated preparation date of October 1985) entitled ‘Amalgamation of Bell Group’s Banking Structure’ noted a proposal that the Bell group should present to the banks a number of changes to its banking covenants. One proposed change was that
   any clearly subordinated debt or redeemable preference share will be treated as equity for the purposes of calculating liabilities for ratio purposes provided it has a term to redemption greater than five years and that the total amount of such issues is not to be greater than 25 per cent of issued capital including the subordinated issue. Any amount in excess of this will be treated as debt.
   2873 On 21 July 1986 Graham forwarded to Cahill a memorandum containing ‘some thoughts on unification’ and posing a question: ‘What definition of subordinated debt do we want?’ On 29 August 1986 Chapman sent a memorandum to Griffiths entitled ‘Amalgamation of Banking Groups’ in which she noted that moving to a unified borrowing structure might decrease borrowing capacity. She described the package as involving three elements (moving to a 70 per cent ceiling, using equity accounting and including intangibles), all of which would have to be accepted by the banks to achieve the objective of increasing borrowing capacity. Chapman also remarked that the proposed package was ‘aggressive, particularly when the treatment of subordinated debt was placed beside it’.
   2874 The proposed unification of the two banking groups was never put in place. But following negotiations with Merrill Lynch to establish a transferable revolving underwriting facility, TBGL wrote to many of its bankers on 10 February 1987 with a proposal to replace the NP agreements with a simple parent guarantee by TBGL. The proposal was stated in the following terms:
10. The Negative Pledge Agreement is to be collapsed and replaced with a parent guarantee from Bell for all loans to the current Negative Pledge Group.
11. [BGF] will be the borrowing vehicle for the majority of fund raising within Bell except where taxation implications are such that this is impractical; for example in the funding of offshore operations. In this event a subsidiary domiciled in an appropriate taxation jurisdiction will be the borrower.
12. All borrowings by [BGF] and the offshore borrowing subsidiaries under the proposed structure will rank pari passu with all unsecured unsubordinated obligations of Bell.
13. Restrictions will be placed on all other Negative Pledge Group subsidiaries borrowing from sources external to Bell other than for purely trade related purposes.
14. Similar negative covenants, liability ratios and reporting requirements to those currently contained in the Negative Pledge Agreement will be maintained within the parent guarantee.
    2875 Griffiths’ evidence (which I accept) about the rationale behind the proposal to collapse the NP agreements and replace them with the NP guarantees was as follows. RHaC had perceived a trend at that time amongst corporate groups to move to simpler borrowing covenants and structures by the creation of finance companies that borrowed funds from a variety of sources for and on behalf of the group. Consideration was then being given to a possible overseas commercial paper issue. It was envisaged that this would involve issuing Euronotes that would be without conversion rights and would be short term and unsubordinated. The prospect of a paper issue of this kind was an impetus for the restructuring of the negative pledge arrangements. For such a programme to be successfully marketed, the holders of the commercial paper would have to have the same access to the group assets as the banks lending under the negative pledge arrangements. This would not have been the case if the banks had multiple direct access to the companies in the NP group by the cross indemnities and the Euronote holders only had direct access to the issuer of the notes and TBGL through a parent company guarantee.
    2876 Drafts of the proposed guarantee were prepared and circulated. TBGL took advice from, among others, A&O. On 14 May 1987 TBGL circulated among the banks an amended draft guarantee. The covering letter noted that non‑current subordinated debt had been excluded in the definition of ‘total liabilities’. The reason proffered for the change was to exclude, from total liabilities, subordinated debt ‘such as the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes’.
    2877 Each of the Australian banks executed an NP guarantee on 30 July 1987. When LSA No 1 was executed on 27 August 1987, the Lloyds syndicate banks accepted the negative pledge guarantee arrangement. In the NP guarantees, the relevant ratio of total liabilities to total tangible assets was maintained at 65 per cent. But the notion of ‘total liabilities’ was altered, as reflected in the definitions, which I will summarise:
    (a) total liabilities: the aggregate amount of all liabilities of NP group companies on a consolidated basis that would under accounting principles generally accepted in Australia be classified as liabilities (including contingent liabilities) together with such adjustments that in the opinion of the auditor are appropriate to make a proper determination of the total amount of aggregate liabilities of the NP group companies but excluding (insofar as they are included in the aggregate) non‑current subordinated debt;
    (b) subordinated debt: the aggregate amount of all borrowings that are expressly defined as subordinated and expressed in their terms to rank after all unsecured and unsubordinated debt of the NP group companies;
    (c) non‑current subordinated debt: subordinated debt that is not due within the next 12 months.
    2878 Under the NP guarantees, the borrowing by companies in the NP group was restricted to the ‘nominated borrowers’. ‘Nominated borrowers’ was defined to mean TBGL and any Australian subsidiary (which included BGUK) nominated by TBGL, with the consent of the banks, as a borrower. It is common ground that the only ‘nominated borrowers’ were TBGL, BGF and BGUK.
    2879 By the end of September 1987, all banks had written to the Bell group releasing TBGL and the indemnifying subsidiaries from liability under the NP agreements. Most of the plaintiff Bell companies were indemnifying subsidiaries under the NP agreements.
    2880 This collapsing of the NP agreements and their replacement by the NP guarantees is an important feature of the banks’ estoppel case: they say that there was a representation by the companies that the funds were subordinated and that the banks relied (to their detriment) on the representation. But it is also relevant to the contract argument because the banks point to the material in, for example, the 14 May 1987 letter as revealing the intention that the funds would be subordinated.
    12.13. The accounting treatment of the bonds and the on‑loans
    2881 The plaintiffs allege that the on‑loans were ordinary, unsecured, unsubordinated loans with no fixed terms of repayment. The plaintiffs’ position is that there was no recording in the primary records, the ledgers or the audited accounts of the on‑loans being subordinated and that I should conclude that there is prima facie evidence of the matters stated in those accounts that show the on‑loans were not subordinated. The plaintiffs say that these allegations are consistent with the recording of the loans in the balance sheets of TBGL, BGF and BGNV for the financial years ended 30 June 1986, 30 June 1987, 30 June 1988 and 30 June 1989.
    2882 In this part of the reasons I consider how the on‑loans were treated in the annual accounts of TBGL, BGF and BGNV and how they were treated in the other accounting records of these entities. It will be necessary to consider whether these documents and records lead to any conclusion about the status of the on‑loans.
    12.13.1. The evidence to be considered
    2883 Expert evidence was adduced by the plaintiffs (from Geoffrey Brayshaw) and by the defendants (from Steven Scudamore). Both men have extensive experience in accounting, auditing and related areas of commerce. The scope of the experts’ reports included an assessment of the negative pledge reports provided to the banks that were lending to TBGL and its subsidiaries and an assessment of the accounts of TBGL, BGF and BGNV. Other matters considered by these experts were the information packages provided to the lenders by TBGL (dated 6 November 1987, 27 November 1987 and 29 February 1988) and the NP group balance sheets. In addition to the expert reports, each party filed points of agreement documents following a series of conferences between the experts. Relevant evidence was also given by Woodings, Trevor, Walkemeyer, di Giacomo, Graham, Griffiths and Williams.
    12.13.2. Source documents, annual accounts and annual reports
    2884 Woodings testified that he had examined the books and records in respect of the financial years ended 30 June 1986, 30 June 1987, 30 June 1988 and 30 June 1989 for TBGL (consolidated, and for each holding company), BGF and BGNV and the accounts of TBGIL in respect of those years. He had looked specifically at the way in which the BGNV on‑loans were recorded in those accounts and whether the books and records of various Bell group companies indicated that the BGNV on‑loans were subordinated liabilities.
    2885 Woodings’ general conclusion was that in relation to each of those years ended 30 June 1986, 30 June 1987, 30 June 1988 and 30 June 1989:
    (a) the BGNV on‑loans were aggregated with other advances made by other Bell group companies to TBGL or BGF (as the case may be);
    (b) that figure was netted off against all advances made by TBGL to its subsidiaries or by BGF to those companies; and
    (c) the net figure was disclosed in the annual accounts of TBGL under the heading ‘non‑current assets … investments’ and in the accounts of BGF as ‘non‑current liabilities creditors and borrowings’.
    2886 In relation to both of the years ended 30 June 1986 and 30 June 1987, the notes to the accounts provided the following information in relation to the net figure: ‘Advances to subsidiaries are unsecured and carry no fixed terms of repayment’. In relation to each of the years ended 30 June 1988 and 30 June 1989, the notes to the accounts provided the following information in relation to the net figure: ‘Advances to subsidiaries are unsecured, interest bearing and carry no fixed terms of repayment’. The 30 June 1989 annual accounts for BGF contained a slightly different note under the heading ‘inter‑group loan accounts’: ‘Unless otherwise stated, interest is charged on inter-group loan accounts at commercial rates of interest. Inter-group balances are periodically repaid or offset during the year’.
    2887 The on‑loans were disclosed in BGNV’s accounts under the heading ‘non‑current assets ‑ amount owing by ultimate holding company’. The note to that item read: ‘The amount owing by the holding company is unsecured and has no fixed terms of repayment’ or ‘the amounts owing by the ultimate holding company and the holding company are unsecured, interest bearing and have no fixed terms of repayment’, depending on the year. In relation to the years ended 30 June 1988 and 30 June 1989, the second and third BGNV on‑loans were aggregated.
    2888 Woodings also said that the journal vouchers and ledger entries relating to those liabilities are consistent with the treatment summarised in the annual accounts. He said there are no statements in those records to the effect that the BGNV on‑loans were subordinated.
    2889 The general conclusions reached by Woodings accord with my own reading of the relevant source accounting documents and the annual accounts. I will now look at the material in a little more detail.
    2890 The plaintiffs contend that the terms of the BGNV on‑loan contracts were that the loans were unsecured with no fixed term of repayment and that they carried interest. The rate of interest was equal to the rate payable on the bonds issued by BGNV. The terms of the BGNV on‑loans were as recorded in the books of account of TBGL, BGF and BGNV and as stated in the audited accounts of BGNV. The plaintiffs contend that the BGNV on‑loans contracts do not contain any terms about subordination having regard to the following matters:
    (a) the accounts and accounting records of TBGL, BGF and BGNV, which are evidence of the truth of the matters stated;
    (b) the evidence given by Woodings and Trevor about the recording of the BGNV on‑loans in the accounts of TBGL, BGF and BGNV;
    (c) the evidence given by Griffiths, Corr, Williams and Graham regarding BGNV bond issues and the making of the BGNV on‑loans;
    (d) the evidence of Brayshaw; and
    (e) the fact that there is no evidence regarding the making of the BGNV on‑loans and the terms of the BGNV on‑loan contracts that was inconsistent with or rebutted the evidence contained in the accounts and accounting records.
    2891 It is common ground that there was no express statement that the on‑loans were subordinated in the consolidated accounts for the financial years ended 30 June 1986, 30 June 1987, 30 June 1988 and 30 June 1989. In fact, there was no mention of any of the terms attaching to the on‑loans, although there was a general reference to inter‑company lending in the BGF accounts. There was also a reference to the on‑loans in the BGNV accounts. I will explain the reason for the difference between the various accounts shortly.
    2892 The first financial statements to reflect the bond issues were the unaudited half‑yearly accounts as at 31 December 1985. The consolidated balance sheet within those accounts showed the convertible bonds as non‑current liabilities. This probably explains the comment in the Lloyds syndicate banks’ Information Memorandum (a document finalised early April 1986) that ‘under Australian accounting practice … the convertible must be treated as loan capital until conversion’. But in the consolidated balance sheet in the accounts as at 30 June 1986 the convertible bonds were disclosed as quasi‑equity, appearing as a separate line item in a section usually reserved for shareholders’ funds, namely, ‘share capital, reserves and convertible bonds’. Whether the company was entitled to treat the bonds in that way in its published accounts and whether the auditors erred in accepting that treatment is not something I have to decide. The fact is that they did so.
    2893 This manner of treating the convertible bonds, namely as quasi‑equity, was repeated in each set of annual accounts and half‑yearly accounts up to and including 31 December 1987. But in the annual accounts for the year ending 30 June 1988 a change was made to the accounting treatment of the convertible bonds. The reason for the change was explained as follows:
    In 1987, the convertible bonds were shown as quasi‑equity in the balance sheet in a separate category under the heading of Total Share Capital and Reserves and Convertible Bonds. This treatment was adopted because the expectation at that time was that redemption would not apply and that all the bonds would ultimately be converted into ordinary shares.
    In 1988, following the fall in world share market prices since October 1987, the expectancy is that redemption is more than likely and for that reason the directors now believe it is prudent to show the convertible bonds as subordinated debt in Non‑Current Liabilities.
    2894 The 1988 accounts (note 20) indicated that included in creditors and borrowings was $585.2 million of debt arising from ‘subordinated convertible bonds’. The several issues were described in detail in note 22 (as they had been in each preceding set of annual accounts). The heading to the note is ‘convertible bonds’ and the rights of conversion are spelled out. So too is the fact that the rights of the bondholders are subordinated to the unsubordinated creditors of the issuer in the manner provided in the trust deed.
    2895 In my view there was another reason for the change in treatment of the on‑loans in the 1988 accounts. The introduction of a new Sch 7 of the Companies Regulations required reporting entities to comply with the new regulations at a balance date that would be determined depending upon the commencement of their reporting periods after the introduction of the new Sch 7 in October 1986. The amendments to the regulations were accompanied by an explanatory statement. Transitional provisions within these regulations enabled a delay in reporting under the new Sch 7; in the case of the consolidated group accounts, until the financial year ended 30 June 1988.
    2896 The introduction of the new Sch 7 into the Companies Regulations and its operative date are relevant to the question (dealt with by some of the experts) whether the accounts provide a ‘true and fair view’, as required by s 269(8) of the Companies Code. I will return to this issue when I consider the expert testimony. The on‑loan from BGNV to TBGL was not included in the liabilities of TBGL at all, but it was included in the parent company accounts as an investment in non‑current assets. This is because all amounts owing to and from subsidiary companies were netted together and the balance disclosed in the notes to the accounts as ‘amount to subsidiaries (net)’. The TBGL guarantee of the subordinated convertible bonds was not described in the TBGL accounts as subordinated but rather in these terms:
    The Company has guaranteed the due and punctual payment of principal, premium and interest on convertible bonds issued by a subsidiary company.
    2897 The position was different in the BGF accounts. The on‑loans from BGNV to BGF were included in non‑current liabilities. The notes to the 1986 and 1987 accounts of BGF indicated that the on‑loans were unsecured and had no fixed terms of repayment, whilst the 1989 accounts stated that interest was charged on inter-group loan accounts at commercial rates.
    2898 In the BGNV accounts, the on‑loans from BGNV to TBGL and BGF were included in non‑current assets. The notes to the accounts indicated that the on‑loans were unsecured and had no fixed terms of repayment and the notes to the 1988 and 1989 accounts went further by stating that the on‑loans were interest bearing.
    2899 There was a difference of opinion between Scudamore and Brayshaw about whether, if the on‑loans were subordinated, there was, at the relevant time, any requirement to disclose the fact of subordination of an inter‑company loan in the published accounts. Scudamore said there was no specific requirement for such disclosure under the legislation, the Australian Accounting Standards or generally accepted accounting practices. Scudamore concluded that the absence of such disclosure in the accounts was not inconsistent with the inter‑company on‑loans being subordinated.
    2900 Brayshaw agreed that the rules and standards at the time did not contain a specific requirement governing how subordinated inter‑company loans should be treated in company accounts. But in his first report Brayshaw said that generally accepted accounting practices at the relevant time required disclosure of subordination of inter‑company loans. Brayshaw opined that the ‘true and fair view’ requirement in s 269(8) of the Companies Code and the requirement in Sch 7 of the Regulations regarding the classification of liabilities meant that disclosure was necessary.
    2901 In cross‑examination Brayshaw accepted that his conclusion that the truth and fairness requirement in the Companies Code required disclosure of subordination of inter‑company liabilities was dependent upon the Sch 7 requirement and which liabilities were correctly to be described as a ‘class’. In his supplementary report, Brayshaw said that International Accounting Standard 5 and Statement of Accounting Standards 5 (‘Materiality in Financial Statements’) provided support for his opinion that a subordinated loan was a separate class of liability because of its nature and function.
    12.13.3. True and fair view
    2902 Section 269(1) and s 269(8B) of the Companies Code, as it stood in the late 1980s, required accounts and group accounts to be prepared so as to provide a true and fair view of the financial state of affairs of the company or the consolidated group, as the case may be. The legislation also mandated compliance with applicable prescribed requirements (S 269(8)) and with applicable approved accounting standards (s 269(8A)), but subject to the overriding obligation to ensure that the accounts gave a true and fair view of the matters dealt with in the financial statements.
    2903 I can feel another of my gratuitous asides coming on. In my view, one of the retrograde trends that has occurred in accounting practice in Australia over the past decade or so is the tendency to elevate the requirement to comply with the accounting standards to a position of primacy and to downgrade the importance of the true and fair view stipulation. I am not convinced that this tendency was, at any stage, well founded in law. Be that as it may, the primacy of the true and fair view was alive and well in and before 1990.
    2904 The component parts of the accounts of a reporting entity that are involved in the obligation to give a true and fair view under s 269 of the Companies Code are a profit and loss account and a balance sheet. In respect of a corporate group, the accounts must reflect the position of both the holding company as a separate entity and of the consolidated affairs of the holding company and its subsidiaries. Both Brayshaw and Scudamore filed a series of reports on the accounting treatment, between 1985 and 1989, of the BGNV on‑loans.
    2905 Brayshaw was cross‑examined on his understanding of the meaning of the true and fair view requirement and the meaning of ‘generally accepted accounting practices’. The following is a summary of his evidence:
15. Informed minds could differ about the needs of particular users of accounts, the various classes of liabilities and the nature and functions of a liability in a company’s business. This, he said, was a matter of professional judgment.
16. At the relevant time there were uncertainties and difficulties with the concept of ‘true and fair view’, as exemplified by the commentary in an NCSC report A True and Fair View and the Reporting Obligation of Directors and Auditors (1984).
17. There was no single qualitative definition of a true and fair view of accounts during the relevant period.
18. He was not aware of a judicial interpretation of the true and fair view requirement.
19. There was a debate at the time about whether or not the requirement for group accounts to prepare a true and fair view was only from the perspective of the members of the holding company.
20. As the truth and fairness requirement was without definition, it required professional judgment to come to a conclusion.
21. The decision‑making process about what was required to be disclosed in order to render the accounts true and fair was not an easy process.
22. There was, at the relevant time, no fixed or accepted meaning to the phrase ‘generally accepted accounting practice’.
    2906 In cross‑examination Brayshaw was asked whether he was aware of a practice at the time concerning disclosure of the subordination of an on‑loan from a bond issue made by a Netherlands Antilles subsidiary. Not surprisingly (given the specificity of the question) Brayshaw agreed that he was not aware of an accounting standard that required such disclosure, but he believed it should be disclosed and then said: ‘I think there are some examples that provide that precedent’. The only reference that I could see in Brayshaw’s reports to precedents of disclosure of subordinated lending were inter‑company loans from HHL to BGF, from BRF to BGF and from BGUK to TBGIL.
    2907 Scudamore’s evidence is that the accounts of TBGL, BGF and BGNV were presented in accordance with generally accepted accounting principles. Scudamore also gave evidence that there was considerable debate in the 1980s about what constituted generally accepted accounting principles. He proffered the opinion that it meant compliance with the accounting standards that were in place as well as other ‘authoritative professional pronouncements’. He said that the key principles of accounting were embodied in the standards and that there was no specific requirement in any standard regarding the disclosure of subordination; however, he did acknowledge the additional requirement in s 269(8) of the Companies Code for the directors to consider any further disclosure that may be required in order to give a true and fair view.
    2908 Scudamore also gave evidence that the requirement for additional disclosure was determined by the accounting standard on materiality (AAS 5), which required that consideration be given to whether any omission was material to the users of the accounts. Scudamore said that, in reaching his opinion that disclosure of on‑loans subordination was not required in order to give a true and fair view, he had looked at the parent company accounts and the BGF accounts and had considered the users of those accounts. He also had regard to the fact that subordination took effect in a liquidation and it was necessary to bear that in mind when considering accounts that were prepared on a different basis.
    2909 This formed one of the bases on which the banks approached the cross‑examination of Brayshaw. The banks made submissions concerning the objective reasons why subordination of the on‑loans did not need to be disclosed in the accounts in order for TBGL and BGF to comply with the requirement that the accounts present a true and fair view. The banks’ submissions can be summarised as follows:
23. Subordination in this case was only operative on a liquidation and did not otherwise preclude, for example, payment of interest.
24. Each set of accounts was prepared on a going concern basis and not on the basis that the companies would enter into liquidation, which would trigger the subordination regime.
25. Looked at from the perspective of users of the accounts, if liabilities (which were actually subordinated) were not disclosed as subordinated, the position of ordinary unsubordinated creditors would be better than they appeared on the accounts. In other words, it would not be to the detriment of ordinary unsubordinated creditors.
    2910 Brayshaw opined, as matter of professional judgment, that information about subordination would be useful for a user of financial statements. But the way in which the TBGL consolidated accounts were constructed tended to lessen the efficacy of disclosure. As a result of a netting off process, the on‑loan from BGNV to TBGL was not recorded in the TBGL annual accounts as a liability of TBGL at all. There was, therefore, no straightforward way to indicate one way or the other whether such on‑loan was subordinated. In addition, in the consolidated accounts the bonds were described as subordinated liabilities of the group. The bonds were, however, issued by BGNV that had no role other than issuing the bonds and passing the proceeds on to the group. If the effect of the on‑lending of the proceeds of the bonds was to reverse the subordination of the bonds, then the express statement referring to the bonds as subordinated in the group accounts would be a material matter in respect of which truth and fairness would require disclosure.
    2911 Brayshaw did not accept the proposition that the consolidated accounts would not give a true and fair view if the bonds, issued by the Netherlands Antilles subsidiary and described in the consolidated accounts as subordinated, were not actually subordinated. The reasoning underlying that proposition is that the mechanism of the on‑loan did not show up in the consolidated accounts because it had been eliminated through the netting off process between BGNV and TBGL in order to show one single liability to the external creditors, being the bondholders.
    2912 The position of the disclosure of the status of the BGNV on‑loans in the BGF accounts is different. The BGNV on‑loan appears as part of the global figure of non‑current liabilities in the BGF balance sheet. And the commentary on non‑current liabilities refers the user to note 12 ‘Amounts owing to subsidiary companies’. Note 12 is titled ‘Related Parties’ and there is then insufficient information from the two relevant subparagraphs within the note to determine (one way or the other) whether the BGNV on‑loans were subordinated.
    2913 Even if it were true that, in respect of the BGF accounts, there was a generally accepted accounting practice at the time requiring the on‑loans to be described as subordinated, the existence of such a practice would not necessarily reveal if these on‑loans were subordinated. No evidence was led about an accepted accounting practice requiring disclosure of the status of the on‑loans from the accounting officers at TBGL who were called to give evidence. I also note the lack of a consistent practice in relation to the $50 million subordinated loan from BRF to BGF. In the BGF accounts for the year ended 30 June 1988, this liability was accounted for as part of non‑current liabilities − creditors and borrowings. Note 7 identified the liability as an amount owing to a related company. There was no statement or other means (from those accounts) of determining whether or not this loan was subordinated. In the consolidated accounts for TBGL for the year ended 30 June 1988 the liability was accounted for as part of non‑current liabilities − creditors and borrowings. Note 20 to that item described the loan as an ‘Unsecured subordinated loan’.
    2914 The existence of a consistent practice relating to disclosure of subordination of inter‑company indebtedness is brought further into doubt by looking at the TBGL, BGF and BGNV accounts for the 15 months ending 5 October 1990. These accounts deal with the relevant inter‑company debts but do not indicate whether or not they are subordinated, notwithstanding the execution of the subordination deeds during that period.
    2915 Brayshaw acknowledged that the disclosure of subordination to satisfy the truth and fairness requirement was a matter of professional judgment, in respect of which minds could differ. His opinion and the opinion of Scudamore show that they disagreed in the application of professional judgment on this issue. I note also that C&L, as auditors, did not see fit to qualify the truth and fairness of the accounts on the ground that they should have, but failed to, disclose the subordination of the on‑loans.
    2916 In my view it is not possible to say from the way the accounts were prepared that the truth and fairness of the accounts was jeopardised by the failure to make such a disclosure.
    12.13.4. Schedule 7 of the Companies Regulations
    2917 The second point upon which Brayshaw relied for his opinion that there was a generally accepted accounting practice of disclosure of subordination of inter‑company loans, was the requirement in Sch 7 that liabilities be classified according to class. This was also part of his reasoning process in relation to the true and fair view argument. The provisions of Sch 7 were amended during the relevant period. Until 30 June 1987 the relevant Sch 7 requirements for accounts were as follows:
    5(2) There shall be shown in the accounts or group accounts at the end of the financial year (whether by way of note or otherwise) the amounts and descriptions of all current liabilities and non‑current liabilities, under headings appropriate to the business of the company or of the company and its subsidiaries, and arranged in classes under those headings according to their nature or function in the business, each of the following being shown separately:
    (a) bank loans;
    (b) bank overdrafts;
    (c) debentures held by [subsidiaries, the holding company, other related corporations and other persons];
    (d) the amounts due to trade creditors and on bills payable;
    (e) other amounts payable to [subsidiaries, the holding company and other related corporations]. (emphasis added)
    2918 The Sch 7 requirements for disclosure that applied to the 30 June 1988 and 30 June 1989 accounts for each of the Australian entities were as follows:
    11(1) For the purposes of this Schedule the assets, liabilities, share capital and reserves of the corporation, or group of companies, and the provisions made by a corporation or by a group shall each be divided according to its nature and function in the business of the corporation or group, as the case may be, into classes.
    11(2) In relation to each sub-heading in a balance sheet forming part of the accounts or the group accounts, those accounts or group accounts, as the case may be, shall include a note of each of the classes included in determining the aggregate amount specified in that sub-heading.
    11(3) Without limiting the classes that may be included in a note in accordance with subclause (2) in relation to a subheading in the balance sheet forming part of the accounts or the group accounts, those classes shall include the classes which in accordance with clause 12 relate to that subheading.
    11(4) A note referred to in clause 12 shall specify particulars and the aggregate amount of each class to which it relates. (emphasis added)
    2919 Under cl  12, companies were required to include in the accounts or the group accounts a note in relation to each of specified types of current and non‑current liabilities including bank loans, debentures, bills of exchange and promissory notes, trade creditors, lease liabilities and ‘other loans’. They were also required to include a note about provisions for dividends, taxation and employee entitlements.
    2920 One change between the provisions of the old and the new Sch 7 was in relation to the ‘nature or function’ requirement. It was expressed in the disjunctive in the cl 5(2) of the old Sch 7 and in the conjunctive in cl 11(2) of the new Sch 7. In cross‑examination, Brayshaw said his understanding of the phrase ‘nature and function in the business’ was based on the need to provide information to an outsider reading the accounts and as such it was information that he believed they would like to know. The following short extract encapsulates Brayshaw’s view:
    I think what we are doing here is trying to report to an outsider and that is why I talk about outsiders reading the accounts and trying to understand a company and its structure and its liability position, its security position et cetera, et cetera. Where that subordinated debt fits within the business is required from the point of view not just of management but also of the user trading with or dealing with the company or lending to the company.
    2921 I do not think these matters are relevant to the classes of liabilities as enumerated in either version of Sch 7. In this respect, I note Scudamore’s evidence about the nature of the debts, namely, that they were inter‑company loans and their function was for funding the business of the group. Against that background, subordination of a debt does not go to the nature and function of a debt in the business of the company.
    12.13.5. International Accounting Standards
    2922 Brayshaw also gave evidence about the application of international accounting standards (IAS 5) as supporting his view that Sch 7 required a subordinated loan to be described as a separate class of liability. IAS 5 prescribed minimum general and specific disclosure requirements in financial statements, and applied to financial statements prepared in periods occurring on or after 1 January 1977. Paragraph 6 of IAS 5 stated, in the context of general disclosure of information in financial statements:
    All material information should be disclosed that is necessary to make the financial statements clear and understandable.
    2923 Paragraph 14 of IAS 5 stated, in the context of specific disclosure of long‑term liabilities in financial statements:
    Long term liabilities: The following items should be disclosed separately, excluding the portion repayable within one year:
    (a) Secured loans
    (b) Unsecured loans
    (c) Intercompany loans
    (d) Loans from associated companies.
    A summary of the interest rates, repayment terms, covenants, subordinations, conversion features and amounts of unamortised premium or discount should be shown. (emphasis added)
    2924 At the relevant time, an AAS equivalent to IAS 5 had not been issued. The following is an extract of a statement about IAS 5 in Brayshaw’s supplementary report filed in September 2005. It is worth setting out in some detail because it explains Brayshaw’s reason for referring to IAS 5:
26. In paragraph 10 of my First Report I state that ‘In my opinion, a subordinated loan would be considered a separate class of liability by virtue of its nature and function, and therefore should be described as such in the financial statements.’ To further support my opinion, I point also to the then International Accounting Standard IAS 5 ‑ Information to be Disclosed in Financial Statements, in particular paragraph 14, which states ‘A summary of the interest rates, repayment terms, covenants, subordinations, conversion features and amounts of unamortised premium or discount should be shown. (emphasis added)
27. This requirement of disclosure is in the context of paragraph 6 of IAS 5 which states ‘all material information should be disclosed that is necessary to make the financial statements clear and understandable.’
28. Although compliance with the IAS 5 was not mandatory or required by either the Code at the time or the professional standards APS 1 of the Professional Accounting Bodies, International Accounting Standards were recognised by the professional accounting bodies in paragraph 2 of APS 3. International Accounting Standards were also a respected reference for best practice in the preparation and presentation of financial statements and could be regarded as a useful guide to what was generally accepted accounting practice.
    2925 In cross‑examination Brayshaw conceded that IAS 5 ‘was not something that we necessarily had to comply with’. There is no evidence from the relevant accounting officers of TBGL who were called as to the impact (if any) of IAS 5 on the way the accounts were prepared. Again, it is not something that appears to have influenced C&L at the time it prepared the audit certificates for the accounts.
    2926 In my view, there was no generally accepted accounting practice applicable at the relevant times and in accordance with which the subordination of inter‑company loans should have been disclosed on the face of accounts.
    12.13.6. Negative pledge reports: purpose and presentation
    12.13.6.1. Purpose of the negative pledge reports
    2927 Because the NP group did not encompass all of the companies in the Bell group and because the arrangements to protect lenders were limited to NP group companies, there had to be a mechanism to identify assets and liabilities of NP group companies, as opposed to assets and liabilities of the global group. The NP agreements addressed this problem in the second schedule, which was in a common form across the banks. In the discussion that follows, unless otherwise indicated, a reference to a clause is to a provision in the common form second schedule of the NP agreements.
    2928 Two things need to be remembered. First, the NP ratios are found within the NP agreement. The NP ratios cannot be understood divorced from the definitions of total liabilities and total tangible assets and those definitions, too, are found in the NP agreements. Secondly, BGNV was not a party to the NP agreements, nor did it become an indemnifying subsidiary pursuant to any supplemental agreement. Accordingly, its liabilities as issuer of the convertible subordinated bonds did not come within the definition of total liabilities. But any liability by TBGL (which was a party to the NP agreements) or an indemnifying subsidiary to BGNV was within the definition and so was required to be included in the calculation of total liabilities.
    2929 The clause in the NP agreements that required the provision of information and which is presently relevant is cl 11.1(a) and (b):
    Bell undertakes that, so long as there remains outstanding [any indebtedness covered by the NP agreement] it will furnish, or cause to be furnished, to the [bank]:
    (a) within (4) months of the close of each financial year:
    (i) a copy of the annual report of [TBGL],
    (ii) a copy of the duly audited consolidated balance sheet and profit and loss account of [TBGL] and the Indemnifying Subsidiaries for the last completed financial year, and
    (iii) a report signed by the Auditor setting out, as of the close of the financial year:-
    (A) calculations in reasonable detail of the amounts of each of Total Liabilities, Total Secured Liabilities and Total Tangible Assets,
    (B) calculations as to the ratios referred to in Clause 7, and
    …
    (b) a copy of the unaudited half‑yearly consolidated balance sheet and profit and loss account of [TBGL] and the Indemnifying Subsidiaries together with a report signed by the auditor and a separate report signed by two directors of [TBGL], each report setting out, with respect to that half-year, the matters mentioned in par 111.1(a)(iii) above, as soon as practicable and in any event within four months of the end of each accounting period of six months.
    2930 When the NP agreements were collapsed and replaced by the NP guarantees, provisions to similar effect were included as cl 16 02. While there is some change in wording, there are no material differences.
    12.13.6.2. The form of the negative pledge reports
    2931 The reports required by cl 11.1(a)(iii) and (b) are referred to as the negative pledge reports. The auditors of the Bell group for the relevant period were C&L. I have set out in Schedule 38.14 to these reasons, the negative pledge reports completed by C&L and by the directors of TBGL, respectively, for the accounting periods from 31 December 1985 to 30 June 1989. In addition to the negative pledge reports, other relevant information was produced by TBGL and distributed to the banks. This material includes information packages of 6 November 1987 and 27 November 1987 and NP group balance sheets for each half‑year from 31 December 1985 to 30 June 1989 (inclusive).
    2932 The format of the reports changed during the period under review. I will discuss the relevant changes under the section on each report. In practice, the Bell group did not comply strictly with cl 11.1(a)(ii) because it did not provide an audited consolidated balance sheet and profit and loss account of TBGL and the indemnifying subsidiaries (that is, an audited balance sheet of the NP group). Rather, the base document from which the ratio calculations were extracted was the audited balance sheet of the consolidated Bell group. Each report was based on the consolidated accounts of the Bell group for the preceding December or June balance date. These accounts took into consideration the liabilities and assets of all companies in the Bell group including those which were not indemnifying subsidiaries under the NP agreements or TBGL (as guarantor) and Australian subsidiaries within the meaning of the NP guarantees. As a matter of practice, the banks appear to have accepted this form of reporting without demur and as being within the spirit of what was required.
    2933 There was a change in the reporting requirements between the NP agreements and the NP guarantees. In the former, the definitions of total liabilities and total tangible assets spoke of liabilities and assets disclosed by the ‘Latest Consolidated Balance Sheet’. This was itself a defined term and it related to the accounts of the NP group, not the consolidated Bell group. When the NP guarantees were prepared, the words ‘Latest Consolidated Balance Sheet’ were omitted from the definitions of total liabilities and total tangible assets, thus recognising the reality of what had been the reporting practice to that time. Somewhat curiously, the equivalent to cl 11.1(a)(ii), requiring the presentation of an audited consolidated balance sheet of the NP group, was retained. Although it is a matter of record, I do not think anything much turns on the change, for the reasons that I will explain shortly.
    2934 Generally speaking, the format adopted was for C&L to provide a report addressed to the directors of TBGL explaining the calculations according to the clauses in the NP agreements. It was supported by four appendices: a summary sheet, a schedule of secured liabilities, a calculation of consolidated liabilities and a calculation of consolidated total assets. The directors would then forward the report (and the appropriate accounts or annual reports) to the banks together (in the case of the half‑yearly balance dates) with the certificate signed by two directors.
    2935 It appears that the auditors deconsolidated the consolidated accounts to the extent that was necessary to arrive at audited negative pledge accounts. This approach was criticised by the plaintiffs. They contended that the auditors should have prepared a set of dedicated negative pledge accounts instead of starting with the audited consolidated group accounts and deconsolidating to the extent necessary to arrive at the audited negative pledge group members’ accounts.
    2936 I think what the plaintiffs were saying was that the sum of the consolidated audited parts is diminished by working back from the consolidated group accounts to arrive at the audited negative pledge group accounts. I do not think much turns on this criticism. It is, as I have already said, not strictly in accordance with the reporting obligations in the NP agreements and the NP guarantees. So far as I am aware (from the evidence), the accounting officers did not prepare formal financial statements for the NP group as opposed to the consolidated group. They did prepare balance sheets and profit and loss statements for the NP group but they were not in a statutory format (accompanied by notes) and were not subjected to audit over and above the audit process applied to the consolidated group accounts. This seems to have been accepted by all parties.
    2937 Importantly for present purposes, the removal of audited group member accounts was expressly referred to in the negative pledge reports. BGNV was a member of the Bell group and its assets and liabilities were taken into account for the purpose of the preparation of the consolidated accounts, but it was not an indemnifying subsidiary or an Australian subsidiary for the purpose of calculating the NP ratios. Accordingly, BGNV was one of the adjustments of non‑negative pledge group members from the consolidated accounts in order to arrive at the audited negative pledge group accounts that would be used in the preparation of the negative pledge reports.
    12.13.6.3. The four categories of reports
    2938 In the way that the liabilities of the NP group companies were presented in the negative pledge reports, it is possible to identify four categories. The report dated 31 October 1985 for the year ending 30 June 1985 can be ignored because it preceded the December 1985 bond issues.
    2939 The first category comprises the negative pledge report dated 30 April 1986 for the half‑year ending 31 December 1985. The summary sheet discloses that total liabilities are $427.8 million. The detailed calculation is in Appendix C of the report, as reflected in Table 30, which appears at the end of this section.
    2940 There is no dispute concerning the calculation of total tangible assets. They are represented as being $915.2 million. In the explanatory text of the C&L report, compliance with cl 7.1(a) of the NP agreements is expressed as follows:
    Total tangible assets $915.2 million
    65% thereof $594.9 million
    Total liabilities $427.8 million
    2941 In other words, treating the $150 million arising from the issue of the bonds as equity rather than as liabilities, the relevant ratio is 46.7 per cent, well within the threshold of 65 per cent.
    2942 Scudamore analysed the negative pledge reports and explained the process that the auditors appear to have undertaken. First, they adopted the amounts contained in the unaudited consolidated balance sheet as at 31 December 1985 for non‑current and current liabilities. Secondly, they deducted from each category the liabilities of non‑indemnifying subsidiaries, the largest of which (in numerical terms) were TBGIL and BGNV. In other words, the liabilities owed by BGNV (as issuer of the bonds) to the bondholders was deducted. Finally, they added back an amount representing liabilities arising from reversal of inter‑company accounts on deconsolidation of non‑indemnifying subsidiaries. The result of this last step was to add back $75 million, being the amount of the on‑loan made by BGNV to TBGL.
    2943 The opening figure for non‑current liabilities in Appendix C is $439.3 million. This is the figure recorded in the unaudited consolidated balance sheet of TBGL at 31 December 1985. In the balance sheet, the convertible subordinated bonds on issue by TBGL and BGNV at that date are included as non‑current liabilities, so they are part of the figure of $439.3 million. All inter‑company balances were eliminated on consolidation such that these accounts disclosed liabilities of companies in the Bell group to external parties only and at 31 December 1985 included liabilities of TBGL and BGNV to the bondholders.
    2944 The deductions made directly below the total of non‑current liabilities of $439.3 million constitute the deconsolidation process of the consolidated group accounts of which I spoke earlier. The deductions amounting to $101.4 million from non‑current liabilities included BGNV’s $75 million liability to the bondholders. This adjustment was made because the non‑current liabilities included in the consolidated accounts included the liabilities of companies within the Bell group that were not indemnifying subsidiaries. The terms of the NP agreements required that only external liabilities of indemnifying subsidiaries were to be included in the calculation of total liabilities.
    2945 The next adjustment to the consolidated position was the addition of liabilities of indemnifying subsidiaries to non‑indemnifying subsidiaries, because those liabilities had previously been eliminated on consolidation. The only liability dealt with in this way was that of TBGL to BGNV in respect of the on‑loan of $75 million by BGNV to TBGL.
    2946 The next adjustment deducted the TBGL convertible subordinated bonds of $75 million (the direct issue to the bondholders) on issue at 31 December 1995 from the calculation of total liabilities and the deduction also of the liability of TBGL to BGNV in respect of the on‑loan at the same date of $75 million. The reason for those deductions is expressly stated: because ‘the convertible note borrowings’ of TBGL and the ‘convertible note borrowings of [BGNV] on‑lent to [TBGL] [are] treated as equity’. I am satisfied that this means what it says. In the 30 April 1986 negative pledge report, the liabilities arising from the bond issue by TBGL, and the inter‑company liability owing by TBGL to BGNV in respect of the on‑loan of the proceeds of the bond issue by BGNV, were excluded from total liabilities (and were regarded as equity) for the NP ratios.
    2947 If the on‑loan made by BGNV had been included in total liabilities, the adjusted total liability figure would have been $502.8 million, not $427.8 million. The relevant ratio would have been 54.9 per cent rather than 46.7 per cent, still comfortably within the 65 per cent ratio limit.
    2948 The second category comprises the negative pledge reports dated 23 October 1986 for the six months ended 30 June 1986, dated 30 April 1987 for the six months ended 31 December 1986 and dated 30 October 1987 for the six months ended 30 June 1987.
    2949 Total liabilities were calculated in each of these reports (and specifically set out in Appendix C of the reports) as reflected in Table 31, which appears at then end of this section.
    2950 Once again, there is no dispute about the calculation of total tangible assets in these reports. Based on the figures as represented in the reports, compliance with the ratios can be expressed in accordance with Table 27.
    Table 27
    RATIO CALCULATIONS
    AUDITED 30/06/86
    $000S UNAUDITED
    31/12/86
    $000S AUDITED
    30/06/87
    $000S
    Total tangible assets $1764.5 $1981.6 $2516.9
    65% thereof $1146.9 $1288.0 $1636.0
    Total liabilities $1075.6 $1227.7 $1396.5
    Ratio 60.9 per cent 61.9 per cent 55.5 per cent

2951 The total non‑current liabilities reported in the consolidated TBGL accounts were included in the relevant negative pledge reports. But in each of those balance sheets, the convertible subordinated bonds of TBGL, BGNV and BGF on issue at the end of each six-month period were totalled and included on a separate line as part of shareholders’ funds. This was a change from the way they were treated in the 31 December 1985 unaudited consolidated balance sheet. It follows that the total non‑current liabilities of each consolidated balance sheet did not include any of the convertible subordinated bonds on issue in the periods covered by these negative pledge reports. But even though the bonds were not included in non‑current liabilities (because they were placed as a line entry in shareholders’ funds), there had to be consistency of treatment with other similar non‑current liabilities of other non‑indemnifying subsidiaries. Accordingly, the calculation of total non‑current liabilities was reduced by deducting the non‑current liabilities of non‑indemnifying subsidiaries, including the liability of BGNV to its bondholders for the convertible subordinated bonds on issue at the end of each six-month period.
2952 The next step was to add back the liabilities of indemnifying subsidiaries to non‑indemnifying subsidiaries. This included (specifically) the liability of TBGL to BGNV in respect of the on‑loan in the 30 June 1986 reports and the liabilities of TBGL and BGF to BGNV in respect of the on‑loans in the reports for 31 December 1986 and 30 June 1987. In relation to the last of those reports, the amount involved had increased by $237.9 million to take account of the May 1987 bond issues. In these reports, unlike the April 1986 report, no further adjustment was made to deduct the liabilities of indemnifying subsidiaries for any subordinated convertible bonds on issue by the indemnifying subsidiaries, namely, TBGL and BGF (in respect of the direct issues). Nor was any further deduction made for the liabilities of TBGL and BGF as indemnifying subsidiaries to BGNV, a non‑indemnifying subsidiary, in respect of the on‑loans.
2953 These reports are considerably more confusing than the one in the first category and the disclosure of the methodology used in them is less than satisfactory. To the uninitiated, deducting an amount from a total in which it was not included in the first place is, at best, illogical. But I think the same effective position as had been described in the 31 December 1985 report was reached in these reports because all liabilities in respect of the bond issues were deducted from the consolidated position at the outset (through the treatment as equity and inclusion under shareholders’ funds). There was, therefore, a ‘double deduction’ of the liabilities of BGNV in respect of the subordinated convertible bonds in the adjustment that removed the non‑current liabilities of BGNV, as a non‑indemnifying subsidiary, to its bondholders.
2954 The problems associated with the double deduction, and the general lack of clarity in the methodology that has occurred with this series of reports, can be traced to the lack of notation of the starting position. The bonds, at a consolidated group level (which would in reality, after relevant eliminations, be a combination of the bonds and the on‑loans) were included as an entry in the section for shareholders’ funds and were, therefore, not included in the total of non‑current liabilities in the consolidated accounts over the period. It would have been clearer if, for example, a note had been appended to the starting figure of the total of non‑current liabilities as per the accounts that gave details of the treatment of the bonds, as part of shareholders’ funds, in the consolidated accounts.
2955 Such a note would have required further explanation to exclude the deduction of the non‑current liabilities of BGNV as was necessary for other non‑indemnifying subsidiaries. It may have also required a notation for the reversal of inter‑company accounts on deconsolidating the non‑indemnifying subsidiary BGNV after relevant eliminations. I can appreciate the difficulty that this might have caused in expressing clearly the necessary eliminations of inter‑company debts, deductions and add-backs for non‑indemnifying subsidiaries and the treatment of the bonds as equity. It would have necessitated either significant and detailed notes throughout, or a correction to the starting figure of the consolidated total of non‑current liabilities with an appropriate note to that starting figure. But it would have permitted this series of reports to have been compared more directly with the report for 31 December 1985. The result has been continuing confusion, throughout this series of negative pledge reports, resulting from the double deduction of the liabilities of TBGL and BGF to BGNV in respect of the on‑loans.
2956 In summary, the amount representing total liabilities of TBGL and the indemnifying subsidiaries included in the negative pledge reports based on the balance sheets at 30 June 1986, 31 December 1986 and 30 June 1987 effectively did not include the liabilities of any Bell group company for any convertible subordinated bond issue or for the on‑loans made by BGNV to TBGL (in respect of the 1986 reports) and to TBGL and BGF (in respect of the 1987 reports). If the on‑loans made by BGNV were included in liabilities, then total liabilities and the liability ratio would have to be adjusted, as set out in Table 28 below.

Table 28
RATIO CALCULATIONS
 AUDITED 30/06/86
$000S UNAUDITED
31/12/86
$000S AUDITED
30/06/87
$000S
Adjusted total liabilities 1,150,672
(+75,000) 1,302,715
(+75,000) 1,634,418
(+237,900)
Adjusted ratio 65.2% 65.7% 64.9%

2957 As an aside, if the direct issue bonds had also been treated as liabilities there would have been non‑compliance with the ratios in all three periods.
2958 The third category of report is represented by the negative pledge report dated 12 February 1988 for six months ended 31 December 1987.
2959 It is important to note that this report (and all subsequent reports) was prepared after the collapsing of the NP agreements and their replacement by the NP guarantees. After the entry into the NP guarantees, and the consequent change to the definition of total liabilities, the companies were contractually entitled to exclude from the calculation of total liabilities all non‑current subordinated debt. If the on‑loans of the proceeds of the issues by BGNV were non‑current subordinated debt, then they were eligible for exclusion. If not, they could only be excluded in accordance with an arrangement reached outside the confines of the definitions in the NP guarantees. In Appendix C of this report, total liabilities were calculated as set out in Table 32, which appears at the end of this section.
2960 The total non‑current liabilities included in the consolidated accounts as at 31 December 1987 did not include the convertible subordinated bonds on issue by any Bell group company. As in the category two reports referred to above, the convertible subordinated bonds were treated as part of shareholders’ funds. No deduction was made for the non‑current liabilities of BGNV (a non‑Australian subsidiary) despite its name being included as a line item entry.
2961 Next, there was an adjustment made to add back the consolidated liabilities of non‑Australian subsidiaries to the consolidated liabilities of Australian subsidiaries arising from the reversal of inter‑company accounts on deconsolidation. The figure in respect of BGNV (a non‑Australian subsidiary) was $23.4 million. The accounts of BGNV as at 31 December 1987 showed the principal amount of the on‑loans as $406.3 million. Accordingly, the amount reflected in this line of Appendix C does not represent the total of the on‑loans made by BGNV to TBGL and BGF. Scudamore opined that the amount of $23.4 million may have represented the current liabilities of TBGL and BGF to BGNV at 31 December 1987. I doubt this is so, given the preceding section of the report dealt with current liabilities where a current liability of $23.1 million was deducted. I am not at all sure what the figure of $23.4 million (as a debt due to BGNV) was intended to represent.
2962 It seems to me that the total liabilities for the purposes of the negative pledge report based on the 31 December 1987 balance sheet did not include the liabilities of any Bell group company for any convertible subordinated bond issue, or the non‑current liabilities of TBGL and BGF to BGNV in respect of the on‑loans. As a result, the liability ratio was 63.56 per cent, slightly under the 65 per cent limit. If the principal amounts of the on‑loans made by BGNV were included in liabilities then the total liabilities would have been $1,999.3 million, resulting in an adjusted ratio of 79.77 per cent.
2963 The fourth and final category of negative pledge reports are those dated 25 October 1988 for the year ended 30 June 1988, dated 15 March 1989 for the six months ended 31 December 1988 and dated 29 November 1989 for the year ended 30 June 1989. The Appendix C calculation of total liabilities is represented in Table 33 below.
2964 Three things need to be borne in mind. First, these negative pledge reports were all prepared after the company adopted a different accounting treatment for the convertible bonds and reflected them as non‑current liabilities rather than as part of shareholders’ funds. Secondly, the 30 June 1988 balance date was the first date on which the new Sch 7 of the Companies Regulations had to be applied to the accounting treatment for convertible bonds and other debt securities that could be converted into shares. These securities had to be shown as long‑term borrowings in the accounts. Thirdly, the reports were all prepared under the NP guarantees, and accordingly proceeded under a different definition of total liabilities than had applied under the NP agreements.
2965 The principal amount of the convertible subordinated bonds on issue for each of the Bell group companies was specifically deducted from total liabilities. It follows that total liabilities, for the purposes of these reports, did not include the domestic bonds of TBGL and BGF or the on‑loans from BGNV to TBGL and BGF. The liability ratios noted in the reports are summarised in Table 29.
Table 29
RATIO CALCULATIONS
AUDITED
30/06/88
$000S UNAUDITED
31/12/88
$000S AUDITED
30/06/89
$000S
Total tangible assets $2292.3 $1800.7 $1883.7
65% thereof $1490.0 $1170.6 $1224.41
Total liabilities $1398.1 $768.3 $860.7
Ratio 60.9 per cent 42.7 per cent 45.7 per cent

2966 If the on‑loans made by BGNV to TBGL and BGF had been included in liabilities, then the liability ratios over the corresponding periods would have been 79.9 per cent, 66.5 per cent and 68.2 per cent respectively. In other words, there would have been breaches of the 65 per cent liability ratio covenant in each period. Had the direct issue bonds of TBGL and BGF also been included as liabilities, the liability ratios over the corresponding periods would have been 86.52 per cent, 74.82 per cent and 76.19 per cent respectively. It should be borne in mind that the period reflected in Table 29 was after the October 1987 stock market crash and after RHaC had transferred control of the Bell group to BCHL. Whatever the position may have been before October 1987, the likelihood of conversion of the bonds into shares (one of the factors put forward in support of the argument that the bonds should be treated as equity) had receded.
2967 Bearing in mind the definition of total liabilities and subordinated debt in the NP guarantees, if the on‑loans from BGNV to TBGL and BGF were other than subordinated I would have expected to see them in the calculation of total liabilities. In my view this supports the proposition that the directors (and the auditors) believed that the on‑loans were subordinated.
2968 Brayshaw analysed the negative pledge reports and spoke of ‘errors’ on the part of the auditors in the preparation of the reports. He pointed to three errors that had occurred during the deconsolidation process. First, the auditors did not deduct the subordinated bonds at step one of that process, because ‘those bonds were not liabilities of the Negative Pledge Group’. The second error occurred at step two of the process, namely, ‘where the equivalent amount of the BGNV on‑loans were not added back in’. Step three of the process also contained an error, which Brayshaw described in these terms:
An amount including the amount of the BGNV Bonds was then deducted at ‘Step 3’. From the perspective of the deconsolidation process this was an error as the BGNV Bonds were not liabilities of the Negative Pledge Group.
2969 It is difficult not to have sympathy with the claim of error. The negative pledge reports are complicated and confusing documents, not aided by the lack of consistency over time in the way the calculations were done. But it is not within my remit to find error as such. I have to take these imperfect documents and decide what, if anything, they say about the status of the bonds, the on‑loans and the reason for their treatment (for NP ratio calculations) as equity rather than debt.
2970 The problems with the deconsolidation process in these reports stem, at least in part, from the fact that they adopt the basic approach used in previous reports. Some of the difficulties in the previous reports arose from, among other things, the accounting treatment of the convertible bonds as, variously, a component of non‑current liabilities or as part of shareholders’ funds. After 30 June 1988, that difficulty no longer persisted because of the directors’ statement that redemption, rather than conversion, was to be expected. It was also affected by the more stringent accounting requirements of the new Sch 7, as a result of which the bonds were thereafter included in non‑current liabilities.
2971 Bearing in mind that the definition of total liabilities in the NP guarantees required the exclusion of subordinated debt, it was not inappropriate that the liability for the subordinated convertible bonds and BGNV on‑loans was deducted in a separate calculation to that reserved for the deductions associated with the liabilities of non‑Australian subsidiaries. An alternative way of expressing this would have been to show a deduction as a non‑Australian subsidiary, and then add it back before the definitional adjustment. But this would have necessitated a note giving a clear explanation for the several deductions and additions, thus compounding the complexity of the reports.
2972 The covering letters that accompanied the reports referred expressly to the relevant provisions of RLFA No 1 and the NP guarantees (as the earlier reports had with the NP agreements). The covering letters also contained an explanation of what had been done in respect of assets of, and liabilities to, non‑Australian subsidiaries. The text of the letters explained that the accounts of some non‑Australian subsidiaries, including (among others) TBGIL, BGNV and BIIL, were included within the consolidated accounts and that, for this reason, some adjustments (as set out in the appendices, in particular Appendix C) had been made.
2973 It is at least arguable that the auditors and the directors erred in the way they treated both the adjustments (or lack thereof) upon identifying the entity as a non‑Australian subsidiary and subsequent adjustments (or lack thereof) as part of the definitional interpretation of total liabilities. In my view, the reports would have been easier to understand if the definitional adjustment had distinguished between the BGNV on‑loans and the direct issue bonds. The authors could, for example, have put the former into the line item ‘non‑current subordinated debt’ (along with the $100 million subordinated loan), thus leaving only the direct issue bonds in the line item ‘subordinated convertible bonds’. But as I have already said, it is not part of my function to discern error in the reports. I do not believe that these problems necessarily affect the integrity of the reports. All that was required were ‘calculations in reasonable detail’ of the amounts of both total liabilities and total tangible assets.
2974 In this regard, I note that in the calculation of consolidated tangible assets in Appendix D of the negative pledge reports, the author uses a figure of $406.4 million as the value of BGNV’s assets. This is made up entirely of the BGNV on‑loans. On the other hand, to distinguish between the direct issue bonds and the BGNV on‑loans in Appendix C, as contemplated, may have required a note to identify the on‑loans as the proceeds of the BGNV bonds and may have added further to the complexity of what was already arguably ‘reasonable detail’.
2975 It is easy to approach the preparation of these reports with the benefit of hindsight and to subject them to a degree of scrutiny that, this litigation apart, might never have been contemplated. But I believe that the auditors and the directors met the basal requirements of the relevant clauses of RLFA No 1 and the NP guarantees in respect of these reports. It follows that, while I appreciate the concerns expressed by Brayshaw, I think that the category four negative pledge reports at least proceed from the correct starting point, brought about by the changed accounting policy in respect of the subordinated convertible bonds and the express exclusion of subordinated debt by way of definition.
2976 Scudamore recalculated the NP ratios on the basis that the on‑loans were included in total liabilities. The results of his revisions are set out in Table 34, which appears at the end of this section. According to Scudamore, the recalculated NP ratios would have been in excess of 65 per cent at all reporting dates except 31 December 1985 (54.9 per cent) and 30 June 1987 (64.9 per cent).
2977 Brayshaw agreed with the majority of the ratio calculations save for the periods ended 30 June 1986, 31 December 1986 and 30 June 1987. But his disagreement with the calculations in these periods was based on the way in which the figures were used to calculate total liabilities. He characterised the steps taken in the negative pledge reports to calculate total liabilities as involving errors and counterbalancing errors. But the result is a consensus that the figure for total liabilities used in these periods did not contain an amount for the on‑loans. Unfortunately, this is where the parties’ agreement ends and the customary (for this litigation) divergence of views reappears.
Table 30
APPENDIX C: 31 DECEMBER 1985 REPORT
ITEMS $000S UNAUDITED
31/12/85
$000S
NON –CURRENT
Total non‑current liabilities per the unaudited accounts at 31 December 1995
Less: Non‑current liabilities of non‑indemnifying subsidiaries
TBGIL
Woodward Tyres Pty Ltd
BGNV

26,445
18
75,000

439,371

101,463
337,908
Add: Liabilities arising from reversal of inter‑company accounts on de‑consolidation of non‑indemnifying subsidiaries
BGNV

75,000
412,908
Less: $75 million Convertible Note borrowings of TBGL plus $75 million Convertible Note borrowings of BGNV on‑lent to TBGL treated as equity

150,000
TOTAL NON‑CURRENT LIABILITIES 262,908
CURRENT
Current liabilities per the unaudited accounts
Less: Current liabilities of non‑indemnifying subsidiaries

TBGIL
BGNV
Other   

139,588
217
4,903
302,871

144,708
158,163
Add: Liabilities arising from the reversal of inter‑company accounts on de‑consolidation of non‑indemnifying subsidiaries

5,446
TOTAL CURRENT LIABILITIES 163,609

TOTAL CURRENT AND NONCURRENT LIABILITIES
Add contingent liabilities 426,517

1,297
TOTAL LIABILITIES (as per cl 7) 427,814

Table 31
APPENDIX C: JUNE 1986, DECEMBER 1986 AND JUNE 1987 REPORTS
AUDITED 30/06/86
$000S UNAUDITED
31/12/86
$000S AUDITED
30/06/87
$000S
NON‑CURRENT
Total non‑current liabilities per the accounts 893,520 1,094,556 1,284,700
Less: Non‑current liabilities of non‑indemnifying subsidiaries
TBGIL
BGNV
Other 47,732
75,000
3,127 246,606
75,000
6,223 292,700
237,900
9,638
125,859 327,829 540,238
767,661 766,737 744,462
Add: Liabilities arising from reversal of inter‑company accounts on de‑consolidation of non‑indemnifying subsidiaries
BGNV 75,000 75,000 237,900
Add: Amount lent by TBGIL to TBGL 71,368 ‑ ‑
TOTAL NON‑CURRENT LIABILITIES 914,029 841,737 982,362

CURRENT
Total current liabilities per the accounts 337,126 611,450 579,900
Less: Current liabilities of non‑indemnifying subsidiaries
181,158
227,117
170,712
155,968 384,333 409,188
Add: Liabilities arising from reversal of inter‑company accounts on de‑consolidation of non‑indemnifying subsidiaries

  2,568    


     336    


         ‑

TOTAL CURRENT LIABILITIES 158,536 384,669 409,188
1,072,565 1,226,406 1,391,550
Contingent liabilities 926 ‑ 926
Bank guarantee and outstanding letters of credit
2,181
1,309
4,042
TOTAL LIABILITIES (as per cl 7.1)
1,075,672
1,227,715
1,396,518

Table 32
APPENDIX C: DECEMBER 1987 REPORT
$000S UNAUDITED
31/12/87
$M
NON‑CURRENT
Total non‑current liabilities per the unaudited accounts at 31 December 1987
1,357.1
Less: Non‑current liabilities of non‑Australian subsidiaries:
TBGIL
BGNV
Other 315.8
‑
47.4
363.2
993.9
Add: Liabilities arising from reversal of inter‑company accounts on de‑consolidation of non‑Australian subsidiaries
BGNV
Bell Property Trust 23.4
77.8
101.2
1,095.1
Less: Non‑current subordinated debt 100.0
TOTAL NON‑CURRENT LIABILITIES 995.1
CURRENT
Total current liabilities per unaudited accounts 826.3

Less: Current liabilities of non‑Australian subsidiaries
TBGIL
BGNV
Other 198.7
23.1
19.8

          241.6
    584.7

Add: liabilities arising from the reversal of inter‑company accounts on de‑consolidation of non‑Australian subsidiaries TBGIL

             7.3

TOTAL CURRENT LIABILITIES 592.0
1,587.1
Contingent liabilities 0.9
Bank guarantees and outstanding letters of credit 5.0
TOTAL LIABILITIES (as per cl 12.01(A))
1,593.0

Table 33
APPENDIX C: REPORTS FOR JUNE 1988 AND FOLLOWING
AUDITED 30/06/88
$M UNAUDITED
31/12/88
$M AUDITED
30/06/89
$M
NON‑CURRENT
Total non‑current liabilities per the accounts
1,426.1
782.1
621.2
Less: non‑current liabilities of non‑Australian subsidiaries:
TBGIL
Others 242.4
13.5 0.1
‑ 3.1
‑
­­­______
1,170.2
782.0
624.3
Add: Re‑classification from non‑current assets
‑
225.9
‑
Non‑current liabilities arising from reversal of inter‑company accounts on deconsolidation of TBGIL

15.1

‑

504.3
­­­______
1,185.3 ­­___
1,007.9 ­­­____
1,122.4
Less: Non‑current subordinated debt (100.0) (100.0) ‑
Subordinated Convertible Bonds (585.2)
­­­______ (578.9)
­­­______ (574.5)
­­­______
TOTAL NON‑CURRENT LIABILITIES
500.1
­­­______
329.0
­­­____
547.9
­­­______
CURRENT
Total current liabilities per the accounts 1,040.8
464.6
524.6

Less: Current liabilities of non‑Australian subsidiaries
TBGIL
BGNV
Others (152.8)
(15.0)
(2.7)
­­­______ (201.0)
(15.2)
‑
­­­______ (321.4)
(13.6)
‑
­­­______
870.3 248.4 189.6
Add: Liabilities arising from inter‑company accounts on de‑consolidation of non‑Australian subsidiaries
BGNV
TBGIL 15.0
10.3
­­­______ ‑
190.9
­­­______ ‑
123.2
­­­______
TOTAL CURRENT LIABILITIES 895.6
­­­______ 439.3
­­­______ 312.8
­­­______
1,395.7 768.3 860.7
Contingent liabilities 0.6 ‑ ‑
Bank guarantees and outstanding letters of credit
1.8
­­­______
‑
­­­______
‑
­­­______
TOTAL LIABILITIES (as per cl 12.01(A)) 1,398.1 768.3 860.7

Table 34
SCUDAMORE’S RECALCULATIONS OF NP RATIOS
DATE ADJUSTED RATIO
31 December 1985 54.9%
30 June 1986 65.2%
31 December 1986 65.7%
30 June 1987 64.9%
31 December 1987 79.8%
30 June 1988 79.9%
31 December 1988 66.5%
30 June 1989 68.2%

12.13.7. Negative pledge reports: the notional conversion thesis
12.13.7.1. The notional conversion thesis explained
2978 A significant plank in the plaintiffs’ argument about the negative pledge reports and their importance in the resolution of the on‑loan subordination question is something that came to be described as the ‘notional conversion argument’. It involves the proposition that once the bonds were removed from liabilities and included as equity in the consolidated balance sheet there was a notional conversion of the bonds at the TBGL level that led to an extinguishment of the on‑loans. If that were the case, there would be no relevant debts for inclusion in the ratio calculations.
2979 The genesis of the notional conversion thesis lies in Brayshaw’s expert report, in which he made this statement:
I have been asked to assume that the bank lenders had consented to a request made in a letter dated 11 December 1985, an example of which has been briefed to me. I understand that letter to permit the convertible bonds (including the BGNV bonds) to be treated as equity of TBGL. If the bonds are so treated then, in my view, it would follow that the on‑loans should be treated as if they had been repaid. This is because the situation is the same as what would have occurred if the bond holders had exercised their rights of conversion. In Appendix D I have set out the sort of journal entries in the books of TBGL and BGNV that would have been raised to account for the conversion of the bonds. (emphasis added)
2980 The proposition was further explained by the plaintiffs in their closing submissions. It is necessary to bear in mind the steps identified in the previous section of these reasons, in particular step three (in which the amount of the BGNV bonds was deducted). The argument proceeds on the basis that the authors of the negative pledge reports treated the BGNV bonds as having been converted into equity, with the on‑loans being notionally extinguished, and that was the reason the on‑loans were deducted during step three. In their written submissions, the plaintiffs said this:
It is submitted that the defendants’ explanation of that which was done at Step 3 was not the only available explanation. An equally available, if not more plausible, explanation was that Step 3 constituted an adjustment in which the BGNV Bonds were treated as if converted into equity, with the result that the BGNV On‑loans were notionally regarded as having been repaid and therefore eliminated from Total Liabilities.
2981 Scudamore was asked about this in cross‑examination. The proposition was put that TBGL was, in its letter dated 11 December 1985, asking for a hypothetical treatment of the bonds as equity for the purpose of the balance sheet ratios. Scudamore accepted that it was possible that the request contained in the 11 December 1985 letter could have been interpreted by the accountant preparing the negative pledge reports as seeking a hypothetical treatment of the bonds. But he emphasised that the hypothetical treatment was in respect of the ratios only.
2982 I do have some problems with the proposition that notional conversion was an ‘equally available, if not more plausible, explanation’. First, the theory is inconsistent with the reality that there had not been a conversion. This was recognised both by the Bell group companies and their auditors. Secondly, there is no reference in the negative pledge reports to treating the bond debts as if converted. Instead, the bonds are treated as sounding in a monetary liability. Thirdly, there is no suggestion in any of the documents from C&L, or the company, that they approached the negative pledge reporting task as if the bonds had been converted.
12.13.7.2. Notional conversion: categories one and two reports
2983 The notional conversion thesis does not fit comfortably with the express terminology about on‑lending in the category one negative pledge reports. They speak of the ‘borrowings’ of the $75 million convertible notes of TBGL and of the $75 million ‘borrowings of BGNV on‑lent to TBGL’.
2984 I have similar doubts when it comes to marrying the notional conversion thesis with the category two negative pledge reports. I accept that not all of the assumptions made by the authors of that series of reports can be identified with precision. The process involved adding back the liabilities of BGNV, a non‑indemnifying subsidiary, and then deducting the liabilities of TBGL and BGF to BGNV. If the figure for total non‑current liabilities, taken from the consolidated group accounts, had already deducted the liability for the direct issue bonds and on‑loans and, had these liabilities been described as a single line item in shareholders’ funds, then I can see a difficulty in reconciling the position with the notional conversion thesis. It seems to me that if the on‑loans were treated as if they had been converted in the category two reports, the additional steps are more difficult to explain.
12.13.8. Report categories three and four: another issue
2985 The third and fourth categories of negative pledge reports were prepared under the regime contained in the NP guarantee. The third category (the report for the half‑year ending 31 December 1987) was prepared by the auditors, although their input was not strictly necessary under the terms of the NP guarantees. The unaudited accounts, from which the category three report was prepared, had not yet adopted the new Schedule 7 protocol and thus included the convertible bond securities within shareholders’ funds. This did not add to the clarity of the category three report.
2986 The plaintiffs’ case regarding the third and fourth categories of negative pledge reports involves the proposition that the auditors and the directors, when preparing the negative pledge reports, forgot that BGNV was outside the negative pledge group. In their written submissions, the plaintiffs said this:
It is submitted that Brayshaw’s analysis of these negative pledge reports is an available analysis and, it is submitted, is to be preferred to Scudamore’s analysis. Schedule C to each of the negative pledge reports exposed on its face the methodology that was adopted and it should be inferred that the intention of the author of the reports was to apply that methodology consistently.
Indeed, the explanation provided by Brayshaw under cross‑examination of the likely error made by the author of the reports is compelling – if the author of the reports had overlooked the fact that BGNV was not a member of the Negative Pledge Group and instead treated BGNV as a member of that group then the reports would make perfect sense.
2987 As I understand the plaintiffs’ case, it is that the auditors and the directors forgot BGNV was not a member of the NP group, but this only occurred following the introduction of the NP guarantees and, accordingly, it only applies to the category three and four negative pledge reports.
2988 I do not think the problems came about by a mistake of this nature. The thesis that the auditors would have made such a mistake appears to me to be at odds with the documentation prepared in preceding negative pledge reports. The auditors had prepared the negative pledge reports over a long period of time and had referred to BGNV as a ‘non‑indemnifying subsidiary’, carrying with it the notion that it was outside the NP group. When they came to prepare the category three and four reports, they were aware of the NP guarantees. This is apparent from the fact that in the covering letters they refer to the relevant provisions of the NP guarantees. They refer also to the non‑Australian subsidiaries (of which BGNV was one) as defined in cl 1.01.
2989 The banks pressed the proposition that I should draw inferences from the fact that the plaintiffs did not call Montgomery, the partner of C&L in charge of the Bell group audit at the time. As I have said elsewhere in these reasons in relation to the rule in Jones v Dunkel, the drawing of an inference against a party that a witness who has not been called by that party and who might have been able to give some relevant evidence on an aspect of the case will not be done lightly. The plaintiffs provided an explanation for not calling Montgomery and I accept it. Given the uncertainties surrounding the negative pledge reports, it would have been nice to have heard from the person ultimately responsible for the decision to release them. But I did not hear from him and that is that. I want to make it clear that in concluding that the auditors did not forget that BGNV was outside the NP group, I have not drawn Jones v Dunkel inferences. I have done my best with the documentary evidence, such as it is, and the expert and lay testimony proffered.
2990 I doubt also that the directors would have made such a mistake. It would have been a change of some significance for BGNV to have been included in the NP group. Certainly, in the process of negotiating the change to the NP guarantees, officers of the Bell group considered whether BGNV should be added to the NP group, possibly even as a nominated borrower. It seems that by mid‑July 1987 (so far as can be seen from the draft agreements that were being circulated for comment) that idea had been abandoned. The covering letters made express reference to the relevant provisions of the NP guarantees and to BGNV (among others) being a non‑Australian subsidiary. The evidence, as adduced, gives little support for the proposition that the directors (by oversight or otherwise) treated BGNV as if (by dint of the revised arrangements) it had become a member of the NP group.
2991 The proposition that the non‑inclusion of BGNV within the NP group had been overlooked was not put to Studdy, the only TBGL director from that period capable of giving evidence. According to Griffiths, the NP guarantees were being negotiated by legal and Treasury representatives and he said he would have been aware of the major changes between the NP agreements and the NP guarantees. As I understood the evidence about the way the Bell group operated at the time, in a matter such as this, Treasury would have briefed the directors on the changes. I do not recall it being put to any of the Treasury officers who gave evidence (Griffiths, Cahill, and Corr, for example) that there had been such a mistake.
12.14. Two specific factual issues
2992 There are at least two other issues that are relevant for the resolution of the subordination question. One is the correspondence between C&L and the DCT in relation to the convertible bond issues seeking withholding tax exemption certificates. The other is a proposal (raised in 1987) to incorporate a new subsidiary and to seek the banks’ consent to it being a ‘nominated borrower’ as defined in the NP guarantees.
12.14.1. Correspondence with the DCT
2993 I have already mentioned, in Sect 12.7.3, the letter written by TBGL to the DCT on 25 November 1985 seeking a withholding tax exemption in relation to the December 1985 bond issues and the response received. That response was a critical factor in the decision to split the bond issues into two tranches of equal amounts, with one half being issued to European investors and the other to interests associated with RHaC.
2994 It is not necessary for me to describe in detail the workings of the income tax regime and the legislative provisions with which the companies had to comply. It is sufficient to say that there had to be a ‘spread’ (that is, a large number) of bondholders in order to qualify for the withholding tax deduction and to ensure that interest by the Australian companies to BGNV was deductible. The achievement of the requisite spread would be in jeopardy if there were to be one issue in which half of the bonds were taken by RHaC interests.
2995 The 25 November 1985 letter contained, as an attachment, a schedule summarising the terms and conditions of the issues. The attachment listed six matters:
• the amount of the issue;
• the maturity date;
• that the bonds were convertible into ordinary shares of TBGL;
• the interest rate and timing of interest payments;
• the optional redemption of bonds in certain circumstances; and
• that shares were to be issued upon conversion.
2996 I also mentioned, in Sect 12.11, the letter sent by C&L to TBGL on 5 December 1986, seeking a withholding tax exemption certificate for the first BGNV bond issue.
2997 Two further letters were sent by C&L, on behalf of TBGL, to DCT on 15 April 1988 seeking withholding tax exemption certificates for the second and third BGNV bond issues. The letters were in materially the same terms and stated, relevantly:
Funds raised from the issue of the bonds have been lent by BGNV to [BGF], the immediate Australian holding company BGNV and a wholly owned subsidiary of TBGL, on the same terms as the issue so that no profit will result to BGNV. BGNV therefore acts as a financing intermediary only.
2998 The letter sent by C&L sets out various details of the bond issue under headings such as issuer details, note details, loan terms, currency details, issue details, interest payments, Reserve Bank approval, distribution details and purpose of the loan. The letters disclosed the aggregate principal amount of the bonds, the applicable interest rate and the fact that interest was payable on the bonds annually in arrears. They also indicated that the bonds were guaranteed convertible subordinated bonds due 1997 and that they had attached to them a non‑detachable interest‑free conversion bond issued by TBGL in the same aggregate principal amount of each bond. Enclosed with the letters were some documents concerning the issue of the bonds, including the offering circular.
2999 The plaintiffs submitted that the reference in the 25 November 1985 letter to the on‑lending of the funds being made ‘on the same terms as the issue’ was to be understood as referring to those terms stated in the correspondence, being the terms that were relevant to the taxation clearance requested by TBGL. If that is correct in relation to the first letter, this interpretation would apply equally to the subsequent correspondence. The plaintiffs also contend, in relation to the 1985 letter, that Griffiths conceded that the letter did not, in its terms or by reference to the schedule, identify subordination as being a relevant term of the issue. The plaintiffs put three propositions to Griffiths in cross‑examination, namely:
(a) the terms numbered par 1 to par 6 of the attachment did not refer to subordination;
(b) the letter itself (in the middle paragraph) did not raise the question of subordination; and
(c) consequently ‘the same terms as the issue’ did not include a reference to subordination.
3000 Griffiths accepted the first two propositions but rejected the last. As he pointed out, the first paragraph of the letter refers to ‘the ‘Euro‑issue of convertible subordinated bonds’ and the heading to the summary includes the words ‘convertible subordinated bonds’. I did not understand Griffiths to have conceded that the letter and attachment, as a whole, made no reference to subordination as a relevant term of the issue.
3001 The banks submit that there is no rational reason for limiting the application of the phrase ‘on the same terms as the issue’ merely to those terms set out in par 1 to par 6 of the attachment. The attachment otherwise stated in its heading that the issue was subordinated and that point was repeated in the letter itself.
3002 The banks also submitted that the plaintiffs’ construction of the letter was that the on‑loan from BGNV to TBGL was on the same terms as the issue, save in respect of the term of subordination. This, the banks say, does not fit with the Bell group’s understanding that subordination was the key to obtaining the consent of the banks to treat the bond issue proceeds as equity. This is especially so given that it was the liabilities of companies in the NP group companies that were relevant to the calculation of total liabilities, not the liabilities of companies outside of that group, such as BGNV.
3003 The banks also submit that the plaintiffs’ attempt to limit the phrase ‘on the same terms as the issue’ to such terms as maturity date, amount of issue, convertibility, interest rate and timing of payments is even less attractive when the terms of the letters of 5 December 1986 and 15 April 1988 are examined. Those letters provided more detail of the terms of the issue than the letter dated 25 November 1985. It is inapposite, therefore, to choose certain subparagraphs from these letters and to draw from them the conclusion that those were the terms of the issue to which the phrase ‘on the same terms as the issue’ referred. Further, the letters enclosed the relevant offering circulars, which set out in great detail the relevant terms of the issues. There is therefore no basis upon which it could be contended in respect of the letters of 15 April 1988 that ‘the same terms as the issue’ did not extend to the term of subordination.
3004 This is a line of argument with which I have some sympathy. I do not think that the text of the individual paragraphs of the letter or the attachment can be divorced from the opening paragraphs and the headings in which subordination (admittedly of the bonds) is mentioned. I agree with the banks’ contention that if it is accepted that the letters of 5 December 1986 and 15 April 1988, on their face, cannot have the limited construction that the plaintiffs seek to apply, then there is no basis for drawing a distinction in the approach to the letter dated 25 November 1985. I am satisfied on the evidence that the 1987 bond issues adopted the structure used in the 1985 issues.
3005 There is, I think, a logical difficulty with the plaintiffs’ arguments in this respect. The plaintiffs contend that the terms of the on‑loans were limited to the conditions set out in the letters that were required to obtain a tax exemption certificate, and subordination was not one of them. It would follow that it was a term of the on‑loans from BGNV to TBGL that the loan was convertible into shares in TBGL (convertibility being one of the relevant terms set out in par 1 to par 6 of the attachment).
3006 Under the offering circulars, TBGL and BGNV undertook not to create or to have outstanding any other indebtedness for borrowed money convertible into the equity of TBGL, unless such indebtedness was subordinated and ranked equally in all respects with or junior to the bonds. As this undertaking was given for the first issue, it necessarily means, on the plaintiffs’ case, that the on‑loans to the second and third issues were required to be subordinated. Otherwise, TBGL and BGNV would have been in breach of that undertaking. I accept the banks’ argument that if the second and third on‑loans were subordinated, there is no basis for reaching any different conclusion in respect of the first on‑loan because the same structure was adopted for all issues.
3007 I do not regard the letters to the DCT as determinative of the question. By themselves, they do not establish, conclusively, that the on‑loans were subordinated. But they are, in my view, consistent with the proposition that the intention was to on‑lend on a subordinated basis and thus they support the banks’ case. On the other hand, I do not see in them much support for the case advanced by the plaintiffs.
12.14.2. Bell Group Finance (ACT) Ltd
3008 In September 1987 TBGL approached the banks to seek their consent to a new subsidiary, Bell Group Finance (ACT) Ltd (BGF(ACT)), being added to the list of nominated borrowers under the NP guarantees. A question arises: what, if anything, does that request have to say about the subordination of the on‑loans from the BGNV bond issues?
3009 The scheme of the banking arrangements in place under the NP guarantees included an undertaking by TBGL that all borrowings by the NP group (other than inter‑company borrowings) would be undertaken by nominated borrowers: cl 14.01(a). TBGL also undertook to procure the Australian subsidiaries’ compliance with that provision. Under cl 14.02(a), that undertaking did not prevent an Australian subsidiary that was not a nominated borrower from borrowing funds if the borrowing was in the ordinary course of its operating activities and the total of all such borrowings did not exceed 10 per cent of total tangible assets.
3010 The nominated borrowers specified in the schedule to the NP guarantees were (in addition to TBGL) BGF and BGUK. Clause 14.03(b) contemplated that TBGL could, with the consent of the banks, nominate other Australian subsidiaries to be a nominated borrower. The equivalent provisions of RLFA No 1 are cl 18.2(f)(i) and (ii) and the definition of ‘nominated borrower’ is found in cl 1.1.
3011 Before August 1987 there was discussion within TBGL of making a convertible note issue. During the discussions it was recognised that if an Australian subsidiary were to be the issuer, it would be necessary to obtain the consent of all lenders to it becoming a nominated borrower. If the issuer was an overseas entity then it would be outside the NP group and consent would not be required. There was a problem with TBGL being the issuer if it was not able to obtain an exemption from some of the ASX listing requirements, and it might also breach the terms of facilities it had with Merrill Lynch. Such a contravention would be a potential breach of the NP guarantees and go against the spirit of the arrangements with the banks. Similar problems were foreseen should BGF be used as the issuer.
3012 On 3 September 1987 TBGL wrote to LMBL outlining the proposal and asking for ‘any comments you may have on the … structure as soon as possible’. The relevant parts of the letter are as follows:
The Bell group of companies is currently considering making an issue of long term unsecured subordinated notes convertible into shares in [TBGL].
One of the options under consideration is that the convertible notes be issued by a subsidiary of [TBGL] incorporated in Australia. Clause 18.2(f)(i) of [RLFA No 1] provides that all indebtedness incurred by [TBGL] and the Australian subsidiaries shall be undertaken by a nominated borrower. The existing nominated borrowers are [TBGL, BGF and BGUK].
…
[I]t has been suggested that a public company incorporated in the Australian Capital Territory act as the issuer of the convertible notes. The obligations of the Canberra company under the convertible notes would be guaranteed on a subordinated basis by [TBGL]. Monies received by the Canberra company would be on lent to [BGF], again on a subordinated basis.
3013 The 3 September 1987 letter was not sent to the Australian banks. On 11 September, TBGL wrote to LMBL and the Australian banks concerning the same subject. The letter started with the comment that TBGL ‘has been giving consideration to issuing debt instruments in Australia under a trust deed and the implications of any such issue with respect to the provisions of the [NP guarantees]’. It concluded with these paragraphs:
For the reasons outlined above it has been decided to establish a new ACT incorporated public company to act as issuer for these types of instruments. The company, Bell Group Finance (ACT) Ltd will be a wholly owned subsidiary of [BGF]. All monies raised by Bell Group Finance (ACT) Ltd from these issues will be on lent to [BGF].
Accordingly [TBGL] hereby nominates Bell Group Finance (ACT) Ltd to be a Nominated Borrower for the purposes outlined and requests your consent to treat it as such pursuant to the provisions of Clause 18.2(f)(ii) of [RLFA No 1].
3014 The 11 September 1987 letter was in similar terms to that dated 3 September 1987. But there were some material differences:
(a) the first paragraph referred to TBGL’s intention to issue ‘debt instruments’, rather than ‘long term unsecured subordinated notes’;
(b) there was no indication that those debt instruments would be guaranteed by TBGL;
(c) whilst it was stated that the moneys would be lent by the issuing company, BGF(ACT) to BGF, it was not stated that the on‑loan would be subordinated; and
(d) it sought consent for BGF(ACT) to be a nominated borrower, rather than simply asking for comments on the proposed structure.
3015 In due course BGF(ACT) was incorporated and most of the banks consented to it being regarded as a nominated borrower. The evidence is silent as to what, if any, business activities BGF(ACT) undertook after incorporation. All that can be said is that the SNAs disclose that, as at 26 January 1990, BGF(ACT) had assets (cash) of $5 and no liabilities. I draw from this the inference that BGF(ACT) did not issue any debt instruments and did not lend funds to BGF.
3016 The main relevance of the BGF(ACT) issue is in relation to questions of reliance and detriment in the banks’ estoppel case. I will have to come back to that later. Here I am only dealing with the contractual question, namely, whether there was a term that the on‑loans were subordinated. The plaintiffs assert that all the Bell group had to do to ensure that the subordinated debt raised by BGF(ACT) under the contemplated issues was excluded from the calculation of total liabilities was to obtain the banks’ consent to BGF(ACT) acting as nominated borrower. This is because, on the plaintiffs’ thesis, once BGF(ACT) was within the NP group it could issue subordinated debt that would be excluded from total liabilities but could also on‑lend it on an unsubordinated basis to BGF.
3017 The only former officer of TBGL who was asked about the formation of BGF(ACT) or about these letters was Cahill. In cross‑examination he was asked to note the difference in wording between the 3 September 1987 and 11 September 1987 letters, particularly the omission in the latter of the reference to on‑lending on a subordinated basis. It was put to Cahill that the terms of the 11 September 1987 letter were consistent with an understanding at the time that the banks agreed there would be no need to subordinate debt because of the definitions within NP guarantees. His response was: ‘I actually don’t recall the creation of [BGF(ACT)] or what went behind it, but in terms of how we’ve developed the argument, somewhere along the line its come out and it’s entirely plausible that it’s for the reasons that you say’.
3018 In view of the opening words of that answer I do not think it counts for much. Cahill was doing little more than agreeing that a particular interpretation arising from the contents of a document was open. There is no doubt that Cahill was involved in the preparation of these documents but I think it is likely that one of the legal officers, probably Sue Wilson, was primarily responsible for their drafting. There have been many instances during the trial where a person who drafted a document (or saw a document at the time it was prepared) but could no longer remember it, was able to say something about its contents or about a view that he or she held at the time: see Sect 8.4.3. This was not such an instance. I would prefer to rely simply on the contemporaneous documents.
3019 In this respect it is interesting to trace through the various drafts leading to the 11 September 1987 letter. There are four relevant documents. On 4 September 1987 a draft was prepared that contained (among many others) these two paragraphs (to which I am ascribing numbers that do not appear in the original document):
(1) The Bell group of companies is currently considering making an issue of long term unsecured subordinated notes convertible into shares in [TBGL] (‘the Convertible Notes’).
(2) The obligations of the Canberra company under the Convertible Notes would be guaranteed on a subordinated basis by [TBGL]. Monies received by the Canberra company would be on lent to [BGF] again on a subordinated basis.
3020 The next draft is dated 7 September. The opening paragraph is the same as par (1). The equivalent to par (2) omits the sentence about the TBGL guarantee and, instead of the last sentence, these words appear: ‘Monies received by the Canberra company will be on‑lent to [BGF] on a subordinated basis’.
3021 A typed draft was prepared on 10 September 1987. Its opening paragraph reads: ‘[TBGL] has been giving consideration to the implications of issuing debt instruments such as debentures and convertible notes in Australia under a trust deed in relation to the [NP guarantees]’. The paragraph that equates to par (2) above again omits reference to the TBGL guarantee and the last sentence reads: ‘Monies received by [BGF(ACT)] would be on‑lent to [BGF]’.
3022 There is a further version of the 10 September draft that has on it a number of handwritten annotations. As amended by hand, the opening paragraph is in the same terms as found their way into the 11 September 1987 letter. The paragraph equivalent to par (2) above has not been altered from the typed version.
3023 In my view, the most compelling inference about why the reference to subordination (and to the TBGL guarantee) was omitted sometime between 3 September 1987 and 10 September 1987 is that the fundraising options then under consideration were widened. The 3 September 1987 letter and the early drafts contemplated subordinated convertible note issues. This reflects the language of the 1985 and 1987 bond issues. In my view, the change from that language to ‘debt instruments such as debentures and convertible notes’ and then to ‘debt instruments’ is significant. This is fundraising of a different genre. While it is wide enough to cover subordinated convertible bonds, it would not be so limited.
3024 Once again, the letters and the drafts are not determinative of the question whether the BGNV on‑loans were subordinated. The banks submitted that the 3 September 1987 letter contemplated that where the group intended to make a subordinated issue it also intended to on‑lend the funds intra‑group so as to ensure that the debt was effectively subordinated to bank debt. If the plaintiff Bell companies intended such a structure in September 1987 with respect to that proposed bond issue, there is no logical reason why it was not also the same structure intended for the earlier issues.
3025 I think this is basically correct. In my view, the express terms of the 3 September 1987 letter (and the drafts of 4 and 7 September 1987) are consistent with the view that the relevant officers of Bell believed (in September 1987) that the on‑lending of funds that had come from a subordinated source was itself subordinated. The terms of the letter and the drafts support the proposition that the BGNV on‑loans (all of which had been made by the time this correspondence came to be drafted) were made on a subordinated basis. The changes from that correspondence to the 11 September 1987 version do not detract from that proposition.
12.15. Practices and usages in the Eurobond market
3026 The initial foray of the Bell group into the Eurobond market was not the first time that a corporate group had raised funds by the issue of convertible bonds or other debt instruments from that market. Nor was it the first time that a group wishing to acquire funds from that source had used a special purpose borrowing vehicle with the express intention that the nominated vehicle would pass the proceeds on to other group entities.
3027 Both parties called expert evidence to identify market practices and usages and to compare documentation from various issues to show that subordinated on‑lending was normal, abnormal, common, uncommon, none of or a combination of those descriptions.
3028 I have yet to enter into a detailed consideration of the on‑loan contracts inter se or the alleged on‑loan contracts between the Bell group companies and the banks concerning the on‑loans. But before I do so, it would be appropriate to look at the expert evidence to see what, if any, conclusions as to market practices or usages can be drawn that may assist in deciding whether the on‑loans were subordinated.
12.15.1. The evidence called and its relevance
3029 The plaintiffs called evidence from Verne Grinstead and André Prüm. The banks led evidence from Anthony Stranger‑Jones, Clifford Dammers and Michael Williamson.
3030 Grinstead presented the following written reports:
(a) witness statement and expert report dated 29 November 2005;
(b) expert report dated 16 January 2006; and
(c) supplementary report dated 10 February 2006.
3031 Grinstead was a director of Bear Stearns International Ltd, then a global investment bank. He has worked in international capital markets for over 25 years and has had experience with convertible bonds and other equity‑linked issues for corporations. One aspect of his evidence requires explanation. The plaintiffs originally engaged Brian Keelan to provide an expert report. Grinstead and Keelan knew one another and in fact had worked together from time to time. Keelan prepared a report dated 26 November 2003 but it was not filed. Keelan had discussed his report with Grinstead in September and had showed him a draft. Grinstead gave Keelan some comments on the draft. Sadly, Keelan died in August 2005. In his November 2005 report, Grinstead explained all of this and annexed Keelan’s report. He indicated areas of Keelan’s report with which he agreed, disagreed, was unable to comment on or wished to comment further on.
3032 On 14 December 2005, I rejected an application by the plaintiffs to admit the Keelan report under the Evidence Act 1906 (WA) s 79C. I did so for a number of reasons, including a concern that Keelan and the banks’ experts could not confer to discuss, and hopefully minimise, differences. I was also uneasy about the level of disclosure of the reasoning process in the Keelan report. It followed that Grinstead’s ‘peer review’ of the Keelan report, which was contained in his November 2005 report, could not stand. But I gave leave to the plaintiffs to file other evidence from Grinstead. This explains how Grinstead’s January 2006 and February 2006 reports came into existence.
3033 While on the subject of Keelan, I should add, for the sake of completeness, that in October 1990 he had been asked to give some advice to LDTC concerning the affairs of the Bell group. He filed a lay witness statement about those matters and I admitted it under s 79C.
3034 Prum is a Professor of Law at the University of Nancy and a barrister in France and Luxembourg. He filed a report dated 4 April 2003 in which he commented on rules that applied to the listing of bonds on the Luxembourg Stock Exchange in 1985 and 1987. Prum was not required to attend to be cross‑examined on his report.
3035 Stranger‑Jones had followed a career in banking since 1967. Between 1982 and 1986 he was director and head of Eurobonds, London for Barclays Merchant Bank. He filed:
(a) an expert report dated 3 April 2003;
(b) a supplementary expert report dated 5 February 2006; and
(c) a second supplementary report dated 19 February 2006.
3036 Dammers is a lawyer by training. He had been involved in structuring and documenting bond issues from about 1969. Between 1984 and 2005 he had held various relevant positions, including as a member of the Legal and Documentation Committee and as Secretary General of the International Primary Market Association, the trade association representing international finance houses underwriting and distributing international debt and equity securities in primary markets. He filed an expert report dated 7 February 2006.
3037 Williamson has had over 25 years’ experience of international finance, during the majority of which he was engaged in the Eurobond market. He has experience in dealing with issues of preference shares and of convertible bonds and subordinated convertible bonds. He filed an expert report dated 5 February 2006 and a supplementary report dated 19 February 2006.
3038 It can be seen, then, that Grinstead, Stranger‑Jones, Dammers and Williamson might be described as bond market practitioners and Prum as a lawyer with expertise in the rules and regulations of the Luxembourg Stock Exchange. Subject to one qualification, I can say at the outset that I had no difficulty in accepting that each of these men was qualified to give expert evidence on the matters on which they opined. The one qualification, to which I will return later, relates to Grinstead’s evidence about the propriety of a ‘later subordination’ (that is, BGNV entering into the BGNV Subordination Deed).
3039 The banks submissions on Grinstead’s evidence were unnecessarily hyperbolical. According to the banks, hardly a single word written or uttered by Grinstead had even a remote relevance to any pleaded issue. I do not agree. The primary (although not the only) focus of Grinstead’s evidence is the materiality to investors of subordination of the on‑loans and whether disclosure of that fact (if it be the fact) was required.
3040 In their written closings the plaintiffs said that the evidence was relevant on four grounds. First, whether TBGL and BGNV decided that the proceeds of the bond issues would be lent on a subordinated basis: ADC pars 11ED(19A), (46A) and (55A); PR pars 24, 53 and 64.
3041 Secondly, the evidence about disclosure as a matter of market practice and under the Luxembourg listing rules was also relevant to the implied contractual term arsing from ADC par 11EG.
3042 Thirdly, they said Grinstead’s evidence was relevant to the issue of detriment or loss, namely, that the banks would not have availed themselves of any opportunity to order their banking affairs with TBGL, BGF and the NP group companies in a fundamentally different way: PR par 96 and ADC par 11ED(86).
3043 Finally, the evidence was relevant to the argument, under PR pars 22 and 50 (replying to ADC pars 11ED(18) and (44)), that the timing and circumstances of the bond issues and the requests for equity treatment were such that TBGL and BGNV were committed to proceed with the bond issues well before they knew that they would be entitled to equity treatment.
3044 On the question of relevance, the plaintiffs win the argument four‑nil. But that, of course, does not mean that the evidence establishes the points to which it is relevant.
3045 On 15 February 2006, Grinstead, Stranger‑Jones, Dammers and Williamson conferred. After the conference a ‘notice of points of disagreement among experts’ was filed. It revealed that the experts remained in disagreement on all substantive issues covered in their reports, and in particular on these matters:
(a) whether it was the practice in the Eurobond market in the 1980s to disclose the status of an on‑loan by an overseas finance vehicle of the proceeds of a convertible bond issue;
(b) whether investors would expect an on‑loan of the proceeds of an issue by an offshore finance vehicle of subordinated convertible bonds, guaranteed on a subordinated basis by the parent, to be subordinated;
(c) what was the role of the use of proceeds clause in an offering circular published in the Eurobond market in the 1980s; and
(d) whether it would be proper for an unsubordinated on‑loan to be subsequently subordinated.
12.15.2. The offering circulars
3046 I can be relatively brief about this question. In the end, despite close consideration of the expert evidence, I have not been satisfied about the existence of a consistent market practice requiring disclosure. The relative brevity of this section of the reasons should not be taken as an indication that I have overlooked the written submissions of the parties, particularly those of the plaintiffs. I will set out, once again, the relevant part of the use of proceeds clause in the offering circular for the first BGNV bond issue:
The net proceeds of the issue of Bonds of approximately A$73,025,000, will be loaned by [BGNV] to [TBGL] for funding the Group’s business activities.
3047 I will summarise, briefly, the approach of the plaintiffs and of the banks on this question, through the evidence given by their expert witnesses. A central feature of the plaintiffs’ case is that there was, both in the offering circular and in the Luxembourg Stock Exchange listing requirements, a duty to disclose material matters. For example, there is a statement in the offering circular that the issuer and guarantor have made reasonable enquiries and confirm that (to the best of their knowledge, information and belief) the information in the circular ‘is true and accurate in all material respects’. Further statements warrant that it does not contain any untrue statement of a material fact, or omit, or state any fact necessary to make the statements within it ‘in the light of the circumstances under which they are made, not misleading’.
3048 There is evidence in the form of a telex from SBCIL to ARH, sent in the course of preparing the offering circular for the first BGNV bond issue, in which the statement described in the preceding paragraph is said to contain ‘absolutely standard language for eurotransactions’. The telex explained that the statement was designed to convey that
the information actually in the offering circular is true and accurate and not misleading and that no other facts would make any statement in the offering circular misleading in any material respect. The statement is only dealing with the information actually contained in the offering circular. It is not stating that ‘all’ material information is in the Offering Circular.
3049 Although this was tendered as part of the factual matrix going to the preparation of the offering circular for the first BGNV bond issue, I have no reason to doubt that it reflects accurately the market view at the time.
3050 I should say at the outset that I am aware that there are examples, from bond issues in the mid‑1980s, of disclosure of the status of the on‑loans. For example, Elders IXL Ltd (through an offshore entity called Elders NV) made a bond issue in 1984, which was an unsubordinated issue and in the offering circular for which there is no mention of the status of the on‑loans. In 1986 Elders IXL Ltd made another bond issue. This time it was a subordinated issue and in the offering circular the on‑loan was described as subordinated. However, the question is not whether disclosure was ever made, but rather whether there was a consistent practice in this regard.
3051 Grinstead testified that in the case of banking groups, the on‑loan by an offshore bond issuer to the holder of the banking licence was commonly subordinated to enable the bank to treat that on‑loan as appropriate tier capital for prudential or regulatory purposes. But there was no consistent practice on the part of industrial groups of making on‑loans on a subordinated or unsubordinated basis. He said that if the funds were to be on‑lent on a subordinated basis then market practice would be to disclose that intention in the offering circular. He understood that the reason for that practice was that on‑loan subordination was considered by the market (and particularly credit-orientated investors) to be material to the credit analysis of the issuer.
3052 While the main focus of the credit analysis was on the guarantor, some investors (of a more fixed income or asset-swap rather than equity type) would analyse on a ‘what if’ basis the issuer’s ability to perform in the event the guarantor could not in future perform under its guarantee. This was especially the case for issuers without a formal credit rating. The reasoning process, as Grinstead understood it, involved the following matters.

1. A loan that was not stated to be subordinated was understood to be unsubordinated (that is, ranking senior to subordinated loans). It was not necessary expressly to describe such a loan to be senior for that status to be understood. On the other hand, a subordinated loan or security needed to be specifically described as such so that it was not assumed to be senior.
2. A creditor of a subordinated loan would have been more at risk than a creditor of a senior loan with otherwise identical characteristics because the subordinated loan would have ranked behind the senior loan. Thus, if an issuer proposed to lend the proceeds of a bond issue to another company on a subordinated basis, then that would have been relevant to an assessment of the quality of the assets of the issuer – a matter that would in turn have been relevant to the creditworthiness of the issuer.
3. The creditworthiness of the issuer of bonds was a matter that would have been material to the risk of investing in the bonds.
   3053 Stranger‑Jones commented that the use of proceeds clause in an offering circular was usually very bland. It was designed to say something about what the money would be used for. Occasionally it may say something of interest to investors, for example, that the proceeds would be used to fund a particular asset or project, but that was uncommon. The important information that could be taken from the use of proceeds clauses in these offering circulars was that the money was staying within the group. He said the listing requirements of the Luxembourg Stock Exchange required that the intended use of proceeds be stated but that nothing more than the general statements in the three offering circulars was needed.
   3054 Stranger‑Jones also opined that investors and the company alike considered convertible bonds as deferred equity. The focus of investors was not on where they would rank on a liquidation if they still held the bonds. If that were a matter of concern to them they would not buy the convertible bonds issued by that company because the coupon rate they were to receive would be less than if it were a straight bond issue. He went on to say that the use of proceeds clause had to be read in the context in which it appeared. In the case of the BGNV bond issues the clause appeared in a document, the front cover of which expressly stated that the guaranteed convertible bonds and the rights against the guarantee (which could be substituted on issue) were subordinated.
   3055 The reason Netherlands Antilles issuers were used was discussed by Stranger‑Jones. He said it centred upon the need to alleviate or eliminate withholding tax. As he put it, it is a fundamental condition of all Eurobond market offerings that interest is paid gross, without deductions of any kind. He characterised the vehicles set up for these purposes as not being ‘creditworthy’ and, accordingly, no or very little reliance would be placed by bondholders or managers on the issuer as a source of repayment. Rather, they would examine the standing and creditworthiness of the parent company guaranteeing the bonds.
   3056 Williamson made the positive statement that there was no consistent market practice from which a requirement to disclose the status of the on‑loan could be implied. He agreed with the proposition that ‘it was good practice for the lead manager to advise its client to err on the side of disclosure whenever in doubt’, as Grinstead had said. But this did not necessarily imply that if an on‑loan of a convertible bond issue was subordinated, that matter should have been disclosed in the prospectus or offering circular. He agreed that with the benefit of hindsight, it might have been advisable for the status of the on‑loan to be disclosed explicitly. But this is different from saying that there was a requirement to disclose it in express terms or that failure to disclose in this way would have been expected to result in investors being misled on a material matter.
   3057 Williamson also testified as to the use of offshore vehicles. He said that from a credit perspective, as opposed to a tax perspective, the intention of companies which issued through offshore finance vehicles, and of the investment banks that sponsored the issues, was to put investors (insofar as possible) in the same position that they would have been in had they purchased a bond issued directly by the parent company. In effect, the use of the offshore finance company was as a device, the purpose of which was to avoid the payment of withholding tax that would have made the issue impossible to distribute to international investors and (or) would have made it prohibitively expensive. In light of this, it was not intended that the finance company would have any substance of its own in credit terms and issues were undertaken solely on the basis of parent company guarantees, which typically were direct, unconditional and irrevocable.
   3058 Dammers’ view was that the use of proceeds clauses usually, but not always, referred to on‑lending by the issuing subsidiary and when they did so, they sometimes described the on‑lending as on a subordinated basis and at other times did not specify the basis. In his view, the use of proceeds sections in Eurobond prospectuses issued in the 1980s frequently did not refer to the status of the on‑loan ‘because investors were not interested in the arrangements within the group of companies that was accessing the Eurobond markets and, therefore, the draftsman of the prospectuses did not specify the status’.
   3059 Dammers discussed the International Primary Market Association recommendations for the drawing up of documentation. The checklist did not provide for disclosure of the status of any on‑lending. The checklist and explanatory notes were first issued in May 1985 and had been regularly updated, but at no time had any such recommendation addressed the issue of the status of any on‑lending.
   3060 Generally speaking, I prefer the evidence of the banks’ experts to that of Grinstead, largely because, in my view, it fits better with the contemporaneous documentation. My reluctance to reach a conclusion that there was a market practice requiring disclosure is, accordingly, influenced by that consideration. There are several reasons. First, Williamson carried out an analysis of 42 offering circulars issued between 1980 and 1996. On this analysis:
   (a) 11 of the use of proceeds clauses referred to a subordinated on‑loan;
   (b) none referred to a senior on‑loan;
   (c) 22 made no reference to the ranking of an on‑loan at all; and
   (d) in nine cases there was either no use of proceeds clause or the clause did not disclose whether or not there was an on‑loan.
   3061 Secondly, the view that disclosure was required was predicated on the assumption that the status of the on‑loan was important to an investor’s assessment of the creditworthiness of the issuer. If it had that degree of materiality it is surprising that the documentation checklist and explanatory notes issued by the International Primary Markets Association did not cover the question.
   3062 Thirdly, the problem of identifying a market practice is brought into sharp relief by reference to one of the practical examples adduced in evidence and discussed by the experts. In August 1991 HIH Capital Ltd (which I will call HIH, even though it is an unfortunate acronym) made an issue of convertible capital bonds guaranteed on a subordinated basis by Huntingdon International Holdings plc (Huntingdon). HIH was a special purpose vehicle for the capital bond issue. The use of proceeds clause said:
   It is intended that the entire proceeds will be lent to [Huntingdon] for the purpose of repayment of the same amount of outstanding US dollar denominated borrowings of the [Huntingdon] and its US subsidiaries.
   3063 This was an issue on which Grinstead had worked while employed by Hill Samuel. It is, presumably, one of the bases on which he proffered the opinion that it was market practice that where the offering circulars were silent as to the status of the on‑loan, that would have been understood by participants in the market to mean that those on‑loans were unsubordinated. But the evidence discloses that on 9 August 1991 the directors of HIH resolved to lend the proceeds of the capital bond issue to Huntingdon, in consideration of the issue to HIH by Huntingdon of subordinated debentures. In other words, the offering circular was silent as to the status of the on‑loan but other documentation showed it to be subordinated.
   3064 Grinstead’s credibility was attacked on the basis of his reliance on the HIH issue and his handling of questions about the subordinated debentures. I have not taken anything from that attack. Nonetheless, it is another reason why I think the available evidence counts against a finding that there was a market practice requiring disclosure of the status of the on‑loan. It suggests to me that there are problems in relying solely on the issue documentation to determine the status of on‑loans. This being so, identifying market practices without recourse to the entirety of the documentation may be dangerous. Of course, the HIH documentation is an example where the subordination of the on‑loan was dealt with expressly by the parties to the loan. There is, therefore, a limit to the comfort that the banks can take from it.
   3065 The plaintiffs pressed on me that I should find that:
   (a) it was market practice for all matters that were material to the risk of the investment to be disclosed in offering circulars;
   (b) investors in convertible bonds included investors who paid particular interest in the credit risk of the investment, including the creditworthiness of the issuer;
   (c) there was no practice in the case of industrial corporations of on‑lending on a senior or subordinated basis – often the question whether the on‑loan should be subordinated was simply not considered; and
   (d) there was either a practice of disclosing that on‑loans would be subordinated (if that was the intention) or, if there was no particular practice, then the matter fell to be determined according to the general test for disclosure.
   3066 It will be apparent from what I have already said that while there is some force in what is said in item (a), and to some extent item (c), I do not agree with the critical matters in either item (b) or of the first part of item (d). The plaintiffs also submitted that they did not require such a finding to succeed on this issue. They argued that if, according to the test for disclosure, the subordinated status of an on‑loan was required to be disclosed and disclosure was not made, similar consequences would follow.
   3067 I prefer the evidence of the banks’ experts to that of Grinstead (and to a lesser extent Prum) concerning disclosure. I am satisfied that the primary focus of investors would have been on the guarantor rather than the issuer. Investors would have looked to the creditworthiness of the guarantor (in reality the source of repayment and the entity into whose shares the bonds could be converted) rather than to that of the issuer. This was at the heart of the reasoning process of the banks’ expert witnesses and to me it makes sense. I will explain why.
   3068 In their closing submissions the plaintiffs characterised the banks’ case as involving an assertion that if a bond issue made by an offshore subsidiary is supported by a subordinated guarantee from the holding company of the corporate group, then the on‑lending of the proceeds of the bond issue to a company in the group on an unsubordinated basis makes the subordinated guarantee nugatory. They also submitted that the banks had changed their approach to assert that it was the status of the guarantee rather than the status of the bonds from which investors took their cue about how they regarded the bond issue. They say that the question whether subordinated guarantees come into play in a liquidation depends on what other assets and liabilities there are at the time of liquidation. The status of each of the bonds, guarantees and on‑loans potentially changes the recovery of the bondholders upon a liquidation. Thus, whether or not each of those obligations is subordinated or unsubordinated is, by definition, material to the risk of investing in the bonds.
   3069 While I accept much of what the plaintiffs say in that submission (and certainly the alternative scenarios set out in the three figures supporting the submission show that the result can differ) the question still remains how a prospective investor would have assessed risk and what he, she or it would have regarded as material.
   3070 The banks responded by saying that it remained a mystery how a subordinated guarantee by a parent company, in relation to a convertible subordinated bond issue where the offering circular made it clear that the money was to be lent to the parent company, could have any justification, commercially or rationally, if the on‑loan was said to be unsubordinated. That question is interesting but it is not the precise issue with which I am dealing here. In any event, I am not sure that its resolution would be determinative one way or the other.
   3071 No bondholder was called to testify how he or she assessed risk and what matters were regarded as material in relation to the decision to invest. Given the lapse of time I would not have expected to have heard from any of the bondholders. So I am left with the expert witnesses trying to identify market practices. The position is this. The bonds were to be issued by a company that had no independent assets and no independent means. The investors’ claims against the issuer were to be subordinated to the claims of other creditors of the issue. The bond issue documentation made it clear that the money was to be lent to the parent company of the issuer. The offering circular devoted about half a page to the financial position of BGNV and about 40 pages to that of TBGL and the Bell group. The circular named the directors of BGNV, described its issued capital, and commented that BGNV’s only business was borrowing money for the purposes of TBGL and that BGNV had not engaged in any business activities. The investor could look to the guarantee given by the parent company but any claim the investor might make under the guarantee would rank behind the claims of other creditors of the parent company.
   3072 In these circumstances, I have difficulty seeing the commercial or rational justification for a conclusion that the investor would say: ‘they haven’t said the on‑loan is subordinated, therefore it is unsubordinated and I am in a much better position than I thought – in reality, I am not subordinated at all’. The coupon rate attached to convertible bonds was usually lower than that which other forms of investment would attract. The main reason for the lower rate was because of the opportunity to convert the investment into shares in the parent company. It is likely that the decision whether or not to convert would be dictated by the financial health and wellbeing and the share market performance of TBGL, not that of BGNV. I find the combination of these considerations persuasive.
   3073 I prefer the case put by the banks to that of the plaintiffs on the first three of the four items mentioned in the notice of points of disagreement among experts. The expert evidence also went to the fourth of those points, namely, whether it would be proper for an unsubordinated on‑loan subsequently to be subordinated. I will deal with that question separately.
   3074 In my view, if it is stated in bond documentation that the bonds are subordinated and the guarantee is subordinated, failure to state that the funds were to be on‑loaned on a subordinated basis would not, of itself, be a material non‑disclosure so as to bring into play the disclosure requirements of, for example, the offering circular and the Luxembourg Stock Exchange listing rules.
   3075 I wish to make one thing clear. I am not saying that the status (subordinated or unsubordinated) of the bonds is not a material matter. The contrary is the case. Nor am I saying that, where there is an on‑loan, the status of the on‑loan could never, in any circumstances, be a material matter. All I am saying is that I am not satisfied that a failure to make an explicit statement about the status of an on‑loan is necessarily a material non‑disclosure or that there was any market practice covering that situation.
4. The contracts inter se and subordination
   3076 I turn now to the specific question whether, in relation to each of the three BGNV on‑loans, there was a contract between BGNV as lender and TBGL or BGF (as the case may be) as borrower. If the answer to that question is in the affirmative, were the resulting agreements:
   (a) contracts of subordination, that is, the on‑loans would be made on a subordinated basis; or
   (b) contracts, one term of which was that the on‑loan would be made on a subordinated basis?
   13.1. Was there an on‑loan contract?
   3077 As I have previously said, there is no serious dispute whether contracts were made between TBGL, BGF and BGNV concerning the BGNV on‑loans. The issue is the terms of the contract. That there were contracts is clear from the contemporaneous documents that speak of ‘loans’ or ‘lending’. The concept of a ‘loan’ carries with it the notion of mutual promises, namely, a promise to advance funds and a promise to repay. It is this notion that is at the heart of our understanding of ‘contract’.
   3078 One example is the use of proceeds clause in the offering circular for the first BGNV bond issue: ‘The net proceeds of the issue of Bonds of approximately A$73,025,000, will be loaned by [BGNV] to [TBGL] for funding the Group’s business activities’ (emphasis added). Reference could also be made to the letter from TBGL to the DCT dated 25 November 1985: ‘It is proposed that the funds raised from this issue will be lent by Bell Group NV to [TBGL] on the same terms as the issue’ (emphasis added).
   3079 The existence of a contract relating to the on‑loans is also supported by subsequent documentation generated within the Bell group. For example, in a communication on 17 July 1987 from Cahill to C&L in answer to some queries C&L had raised concerning the charging of guarantee fees by TBGL to BGF, Cahill said: ‘The A$250 million issue in May 1987 consisted of $175 million issued by [BGNV] and A$75 million issued by [BGF]. The A$175 million was in turn on‑lent to [BGF] however there is no formal agreement in place’ (emphasis added). And a memorandum dated 22 April 1987 from John Murray to TBGL Treasury contained the following advice:
   (1) to ensure the interest withholding tax exemption on interest paid from Australia to BGNV the loan moneys from BGNV must go to BGF directly and be on‑lent by BGF to relevant companies; and
   (2) further, the terms of the loan between BGNV and BGF must be that there is no resulting profit in BGNV. (emphasis added)
   3080 It follows, then, that the answer to the question posed in the first sentence of this section is yes. The original idea was for TBGL to deal directly with the investors. It would have been a relatively straightforward transaction. TBGL would have issued the bonds (with the rights of conversion) and the funds would have come straight into TBGL, either from the lead managers or through the trustee of the bond issue. There would not have been an on‑loan. This was the situation approved by the shareholders of TBGL at the meeting on 12 November 1985. The May 1987 and July 1987 transactions would have been a little more complicated because the issuer would have been BGF, rather than TBGL, necessitating the addition of the conversion bonds. But there would still have been no necessity for an on‑loan: the money would have come directly into BGF.
   3081 In late November or early December 1985, the decision was finally taken to interpose the offshore issuing vehicle, largely for tax reasons. I accept the evidence of Williamson that in the Eurobond market at that time, corporate groups raising funds, and the financial institutions sponsoring the issues, regarded the purpose of these entities as being ‘to put investors insofar as possible in the same position that they would have been in had they purchased a bond issue directly by the parent company’. He described it as a ‘mere conduit’, a description with which Grinstead did not agree as applying to all special purpose vehicles. I accept the phrase ‘mere conduit’ as being apt to describe the role intended for BGNV, although I acknowledge the force of the plaintiffs’ argument that this does not detract from the fact that BGNV was a separate entity and that its directors had individual responsibilities to it.
   3082 The decision to make the issue through a special purpose vehicle made the bringing into existence of on‑loan contracts inevitable. There was never any intention that the funds would remain in BGNV or that BGNV would, itself, engage in the business activities for which the moneys raised by the bond issues were to be employed.
   3083 The point made by Allsop J in Branir v Owston Nominees (see Sect 12.5.1) is apposite. In some cases, the best that can be done is to identify a certain point by which it can be said with confidence that the parties mutually assented to a sufficiently clear regime. It is a problem that has troubled me in this aspect of the case. The on‑loan contracts were informal and it is not easy to identify the precise date on which the contracts were formed. Did the contracts come into existence at the time TBGL decided that the bond issues would be of convertible subordinated bonds? Is the relevant date that upon which the final decision was made to interpose BGNV, thus making an on‑loan inevitable? Taking the first BGNV on‑loan as an example, it is known that the funds arrived in the coffers of TBGL on 23 December 1985. Perhaps the best that can be said is that this is the latest date by which a contract must have been formed.
   13.2. The formation and terms of the on‑loan contracts
   3084 Having decided that there was a contract, the next step is to embark on what Deane J in Hawkins v Clayton called the first stage of a two‑stage exercise.
   The first stage is essentially one of inference of actual intention: what, if any, are the terms which can properly be inferred from all the circumstances as having been included in the contract as a matter of actual intention of the parties?
   3085 Intention is not found in the subjective state of mind of each party, even if shared but not communicated. Rather, the search must be for the objective intention of each party to be inferred from what is manifested by its communications and other conduct. It is nonetheless instructive to ascertain what each party thought at the relevant time in order to explain or illuminate the communications from which a manifested intention may be gleaned.
   13.2.1. Decision‑making
   3086 Evidence was given by Griffiths that ‘most important matters concerning planning, strategy and corporate policy for the Bell group were overseen by the Chairman’s Office’ and that ‘[t]he Chairman’s Office operated in a relatively free form way, the chairman spoke to whoever was dealing with particular issues he was interested in at a particular time, often without regard to defined roles’. Further, he stated that the lists of personnel in the chairman’s office in the TBGL annual reports were not ‘necessarily definitive’. He also gave evidence that the group was primarily managed by RHaC and decisions on important matters of corporate policy and strategy or direction, including in relation to financial matters, principally rested with and were made by RHaC as chairman.
   3087 Studdy gave evidence about the way the board of TBGL operated. In the course of acting as a director of TBGL he had frequent dealings with RHaC and they had many discussions about matters affecting the Bell group. Studdy’s experience of RHaC was that his practice was to keep the board fully informed and that he put forward detailed proposals with recommendations for approval. Because Studdy was resident in the eastern states, he did not regularly attend TBGL’s offices in Perth. However, a lot of matters were discussed amongst members of the board in telephone conversations between board meetings. He had frequent telephone conversations with RHaC and he was also in regular telephone contact with Newman. Studdy had less contact with Griffiths, outside of board meetings to which Griffiths was often invited.
   3088 Studdy’s experience on the board of TBGL suggested to him that there probably would not have been a great deal of discussion about the detail of the subordinated bond proposal at the 8 October 1985 board meeting. The proposal would have been quickly accepted by the board on the basis that the chairman and officers of the company had looked at it carefully and were happy with it. He recalled that the subordinated bonds issued in the Eurobond market were issued through BGNV and that BGNV did nothing other than issue the bonds. BGNV was introduced into the bond issues for tax reasons. At no time did anyone suggest to him, either at a board meeting or elsewhere, that the bonds issued in the Eurobond market were in any significant way different to those bonds that were issued to interests associated with RHaC.
   3089 Graham was a director of BGNV, although he could not recall having attended any board meetings. He was appointed a director by the chairman’s office in Perth. His evidence is that BGNV was a special purpose vehicle incorporated solely for the subordinated convertible bond transaction. As a director of BGNV, Graham was involved in ‘facilitating and achieving the purposes of the bond issues’, as he understood them from his communications with Griffiths and others.
   3090 Williams recalled that in 1985 a decision was made by the chairman’s office to incorporate a Netherlands Antilles company to raise funds for the Bell group. Williams had experience in setting up offshore companies and was requested to be a director of BGNV and to assist in the incorporation of the company. Williams was not directly involved in the detail concerning the fundraising activities of BGNV; from his observations, Graham dealt with Griffiths and others in the chairman’s office in relation to the details of those activities. He gave evidence that he was not involved in drafting or creating any of the documents required for the bond issues, although he said he would have read them, primarily to pick up obvious errors.
   3091 In this case, it is difficult to identify the exact time at which (and the manner in which) an ‘offer’ was made and at which there was an ‘acceptance’ of the offer in relation to the on‑loans. For example, the September 1984 communication from SBCIL to TBGL envisaged an issue of bonds by an offshore subsidiary, thus necessitating an on‑loan. That question does not seem to have surfaced again in the documents created between May 1985 and September 1985. But in the 3 September 1985 memorandum to RHaC, Griffiths proposed that the issue be made by an offshore subsidiary. The same proposal is made in the 7 October 1985 communication from SBCIL and Paribas to Griffiths.
   3092 This is the proposal that was approved by directors (admittedly without any express reference either to subordination or to the use of an offshore vehicle) on 8 October 1985. The meeting was attended by RHaC and the resolution approving the issue contains an expression of congratulations to Griffiths for having arranged finance ‘on these terms’. This suggests to me that the directors, particularly RHaC, were being kept advised by Griffiths and that they were amenable to his advice and recommendations.
   3093 But in the proposal that was sent to TBGL shareholders (on 17 October 1985) and was voted on by them (on 12 November 1985), there is no mention of the plan to use an offshore vehicle. It seems to have slipped off the radar. Quite why this happened is not clear. SBCIL had suggested to Griffiths that in the information to shareholders TBGL should avoid as far as possible providing specific indications of the terms of the issue but that they did not object to TBGL revealing that an offshore issuer would be used. It seems that, at least at this stage, TBGL had not accepted that an offshore issuer was necessary. It came back into prominence sometime after the shareholders’ meeting, but was apparently forgotten by 30 November 1985. The plan to use an offshore vehicle was resurrected (again and finally) on 2 or 3 December 1985. The invitation telex sent out by SBCIL on 2 December 1985 (and reported to Griffiths on the same day) is in respect of an issue by BGNV. This was the commencement of the ‘grey market’.
   3094 On 28 November 1985, the directors of BGNV had approved the issue of bonds pursuant to the term of the preliminary offering circular. That circular, of course, referred to the intention to lend the net proceeds of the issue to TBGL. Around 16 December 1985 TBGL requested that NAB establish a bank account for TBGL in New York. On 19 December 1985 the solicitor for BGNV wrote to the Inspector of Taxes, Curacao, advising that BGNV had been incorporated on 27 November 1985 and that the ‘net proceeds of the issue of the bonds [would] be loaned by [BGNV] to [TBGL] for the funding of its business activities and that of its subsidiaries’. The funds (representing the on‑loan) were transferred to TBGL on 23 December 1985.
   3095 The directors of TBGL met again on 3 December 1985. There is a reference in the minutes to the bond issue (which indicates that it was discussed) but there are no details of the discussion and no resolutions passed in respect of the issue. There is, therefore, no evidence that once the final decision had been taken to use an offshore vehicle (and thus to engage in an on‑loan), the directors formally discussed or passed a resolution concerning the terms of the on‑loan. The minutes of the meeting of directors on 20 December 1985, at which the agreements for the issue to Heytesbury Securities was approved, makes no reference to the BGNV bond issue or to the on‑loans.
   3096 I am satisfied, on the basis of this evidence, that by 20 December 1985 TBGL had decided to raise funds through a convertible bond issue in a way that would allow the issue to be treated as equity rather than as debt, to use an offshore issuing vehicle for that purpose, and for the funds so raised to be provided to TBGL or NP group companies. The decision was made by RHaC, acting on the advice and recommendation of Griffiths, and was endorsed by the directors.
   3097 I am also satisfied, largely on the evidence of Graham, that BGNV was aware of the commercial purpose of the fundraising and that it saw its role as directed towards facilitating and achieving TBGL’s purposes in undertaking the bond issue. There is nothing inherently inappropriate in the commercial purpose outlined by TBGL. This case is not about whether, in agreeing to on‑lend the funds to TBGL, the directors of BGNV acted inappropriately. Nor is it inherently inimical to the separate entity thesis within corporate law for the directors of a subsidiary to enter a transaction to achieve the commercial purpose of the holding company. Of course, directors have to look to the interests of the company of which they are directors. This may cause (as is alleged in this case in relation to the Transactions of January 1990 and in the case of BGNV, the Transaction of 31 July 1990) a tension between a director’s duty to the company and the interests of other companies within the group of which it is a member. But, in my view, this has little to say about whether, in or about December 1985, an agreement was reached between TBGL and BGNV concerning the on‑loan. In any event, I think the general position was covered by Graham in the course of this apologia in his evidence in chief:
   I cannot recall attending any meetings as a director of BGNV. Subject to my determining that it was proper to do so consistently with my duties as a director of BGNV, which it always was in my view, my conduct as a director of BGNV was directed to facilitating and achieving the purposes of the bond issues as I understood them from my communications with David Griffiths, and likely others, referred to earlier. From late 1985 until I ceased to be a director of BGNV, I was aware that BGNV had no borrowings other than pursuant to the issue of subordinated convertible bonds, the repayment of which were guaranteed on a subordinated basis by TBGL.
   3098 In this respect I can see no basis for differentiating between the first BGNV on‑loan, on the one hand, and the second and third BGNV on‑loans, on the other. I accept the evidence of Griffiths, for example, that the terms and structure of the later bond issues were closely based on the first issue, which had been perceived by him (and to his observation, by others in the Bell group, including RHaC) to have successfully provided a means by which the NP group was able to raise funds that were excluded by agreement from the NP ratios. As far as he could recall, the 1987 bond issues were motivated by a desire to repeat that process. Studdy also recalled that the structure and purpose of the 1987 bond issues reflected the 1985 issues.
   3099 Similar evidence was given by Graham. He testified to his understanding that the 1987 issues were intended to adopt essentially the same structure as the 1985 issues. The object was to inject into the NP group funds that could be treated as equity (and thus excluded from the NP ratios) in the same way as the earlier issue.
   3100 There were some differences between the 1987 issues and the 1985 issue. But in my view, these differences are immaterial to any consideration of formation or terms of the on‑loan contracts. The differences I have in mind are:
   (a) the use of BGF (rather than TBGL) as the issuer of the domestic bonds accompanying the second BGNV bond issue;
   (b) the use of BGF (rather than TBGL) as the borrower of the funds from BGNV in the second and third BGNV on‑loans;
   (c) the absence (in the third BGNV bond issue) of an accompanying domestic issue; and
   (d) the inclusion in the third BGNV bond issue of a put option in favour of the bondholders.
   3101 The formation of a contract in those circumstances was, in my view, the actual intention of TBGL, as inferred from the communications between the relevant decision‑makers and the other surrounding circumstances to which I have referred. It seems to me not to matter a great deal whether it is characterised as an express, although informal, contract or as an informal contract to be inferred from the circumstances. If it is the latter, I am satisfied that there was a tacit agreement or understanding reached between the parties and that there is a manifestation of mutual assent to be bound. I also believe that there was an intention to enter into a legally binding arrangement; in other words, there was an intention to effect legal relations.
   3102 In this section I have, in the main, limited my consideration to matters arising before the date or dates on which or from which the contract was formed. One possible exception is the transfer of funds on 23 December 1985. I did not think it necessary to go beyond that date in order to make the findings that are outlined in this section.
   13.2.2. Terms of the on‑loan contracts: introductory comments
   3103 I mentioned in Sect 12.4.2.4 a tentative view that there was little room for the characterisation of a separate contract of subordination standing side by side with a more general contractual arrangement covering other aspects of the on‑loans. I think that tentative view is confirmed by the evidence that I have outlined in the preceding section.
   3104 Having decided that there are on‑loan contracts, the next question is whether they include a term concerning subordination. It is a further part of the first stage of the two‑stage Hawkins v Clayton exercise. In accordance with the general legal principles that I outlined in Sect 12.5, it is permissible to have regard to evidence of the surrounding circumstances, including conduct or events occurring after the formation of the contract, in order to identify the terms of the contract. I repeat that I am well aware that post‑contractual conduct is not admissible in order to construe or interpret (rather than to identify the existence of) a term of the agreement.
   3105 I have already made the finding that the commercial purpose of the Bell group in making the bond issues was to inject funds into the NP group that the banks would agree to treat as equity rather than as a liability for NP ratio purposes. But that is not enough for the banks to sustain their argument. They allege that it was an integral part of the commercial purpose that subordinated funds be injected into TBGL or the NP group because this was a necessary condition of the banks’ agreement to quasi‑equity treatment. In order to achieve that purpose, the banks say, the proceeds of the bond issues were provided to TBGL or the NP group on a subordinated basis.
   3106 This brings into sharp relief many of the arguments raised in response by the plaintiffs. For example, is there a false dichotomy? Is the commercial purpose of BGNV in making the on‑loans the same as the commercial purpose of TBGL in arranging and effecting the bond issues? Are ‘the bonds’ and ‘the proceeds of the bonds’ one and the same? Has there been an illegitimate shift in the banks’ case in describing the rationale of the bond issues to raise funds for the NP group on a subordinated basis as being ‘a purpose’ rather than ‘the purpose’? Were the fundraising exercises represented by the various bond issues designed to inject money into the Bell group, rather than into the NP group and, if so, does that affect the outcome?
   3107 In the sections that follow, I will examine what the various people involved in making decisions about the bond issues understood about the concept of subordination and its application in the context of the on‑loans. I do so to assist an understanding of the communications passing between individuals, rather than to determine the intention of the contracting parties, which must be determined objectively.
   3108 The question whether or not the on‑loans were subordinated raises a peculiar problem in relation to intention. No‑one doubts that the bonds, when they came to be issued, were subordinated. They ranked behind all current unsecured and unsubordinated indebtedness of the issuer and equally with all future unsecured and subordinated indebtedness. And the same goes for the guarantee. There is no dispute as to the contractual intent of BGNV and of TBGL in that respect.
   3109 But herein lies the rub. Using my own language rather than that of the parties, the banks say the contractual intent goes further than mere subordination; it is subordination for a purpose. And it is a purpose that would be rendered inutile unless the contractual intent flowed through to, and applied equally to, the on‑loans. Not so, say the plaintiffs. There is no necessary correlation between the two and, in any event, the contractual intention concerning subordination did not extend to the stated purpose.
   3110 I mention this to explain why I have considered it necessary to go deeply into the manifestation of contractual intent in relation to something that is not contentious (namely, that the bonds in the strict sense were to be subordinated) to gauge, for example, the consistency of its manifestation. This, it seems to me, is a necessary step in deciding whether the undisputed contractual intent (in relation to the bonds in the strict sense) flowed through to and applied to the on‑loans.
   3111 There is another reason. The banks’ estoppel case proceeds from the premise that both sides believed that the funds were subordinated and that the banks, TBGL, BGF and the other members of the NP group conducted their relationship based on a common assumption that all debt brought about by the bond issues was subordinated to the indebtedness to the banks. Whether the relevant persons within the Bell group held that belief or assumption is relevant to that premise. Although I am, in this section, dealing with contractual questions, the same evidence will bear on the estoppel case.
   13.2.3. Terms of the on‑loan contracts: the concept of subordination
   13.2.3.1. State of mind of the decision‑makers
   3112 Griffiths’ evidence is that the letter from TBGL to the DCT dated 25 November 1985 reflected his understanding, at the time, about how subordinated funds would move from the bondholders into TBGL. The offshore issuing vehicle was regarded by him as a sole purpose finance company, that is, a conduit to facilitate the flow of subordinated funds from the bondholders into the NP group.
   3113 He did not recall having any discussion about the proceeds of an issue moving from BGNV to TBGL (or later BGF) on an unsubordinated basis. Such a conversation would have been entirely inconsistent with what he understood to be the purpose of the issues, namely, to raise funds on a subordinated basis so that they might be excluded from the ratios. He generally understood that unless the proceeds from the bond issues flowed into the NP group on a subordinated basis, those proceeds would have to be included within total liabilities when calculating the NP ratios.
   3114 In my view, this evidence about his state of mind is consistent with the memorandum dated 3 September 1985 in which he said: ‘The key to the issue is to have the issue clearly subordinated and acceptable to our banks as quasi‑equity. To be comfortable banks will probably look to have this issue subordinated in time as well as nature’. It is also consistent with the note taken by Cutler of his conversation with Griffiths in June 1985.
   3115 In relation to the on‑loans, Griffiths said that he could not recall giving any consideration to the effect of the on‑loans by BGNV to TBGL and BGF of the funds raised by the Eurobond market issues. He did not find surprising the fact that there is little or no documentation regarding the BGNV on‑loans. As far as he could recall, the only documentation in respect of most agreements, or decisions concerning transactions, between TBGL subsidiaries or between TBGL and its subsidiaries was company minutes or accounting book entries. Generally, more substantive documentation would only be prepared if such documentation was necessary for tax purposes or to show to someone outside the Bell group.
   3116 In cross‑examination Griffiths agreed that he had not negotiated, on anyone’s behalf, the terms upon which BGNV lent the money to TBGL and in subsequent years to BGF. He could not recall having anything to do with the on‑loan. It did not enter his thinking about the funds transfer. That was something for the lawyers and the accountants to arrange.
   3117 Griffiths also agreed that he could not identify a document that contained the terms of the on‑loan and the nature of its subordination. He was confident that RHaC understood the issue of subordination from information he had received, but Griffiths could not say what was in RHaC’s mind. He suggested that Newman was someone who might know about these matters.
   3118 In relation to the last matter, the banks submit that the plaintiffs had the onus on the issue and that they had determined not to call Newman, their former officer, to give evidence in respect of the issue. This submission fits into a category that I would term ‘cute’. The banks obviously felt able to call some of the plaintiff Bell companies’ former officers. I am not sure whether either party actually invited me to draw a Jones v Dunkel inference from the failure to call Newman. In any event, on this issue I would not have done so. Newman might have said, for example:
   (a) I knew the terms of the on‑loans: they were X;
   (b) I knew the terms of the on‑loans: they were Y; or
   (c) I do not recall the terms of the on‑loans.
   3119 It would be speculation to conclude how Newman would have responded when these alternatives were put to him or to conclude that the reason he was not called was that he was more likely to have offered one of the alternatives rather than the others. The fact is he was not called. The matter ends there.
   3120 Studdy’s evidence is that he had many conversations with RHaC and others, in and outside board meetings, concerning the bond issues. He was particularly interested in fundraising proposals of this type because he was ‘probably more adamant on the board [about] bringing in more equity than any other director at the time’. In cross‑examination he agreed that at the time no‑one was contemplating the insolvency of TBGL, and those associated with TBGL either expected or hoped that the quasi-equity (the bonds) would become equity (shares issued on conversion of the bonds).
   3121 In his evidence in chief Studdy said he had been made aware of the contention that the on‑loans from BGNV were made on an unsubordinated basis, with the effect that the bondholders were effectively unsubordinated on a liquidation of TBGL (in respect of the 1985 subordinated bond issue) and BGF (in respect of the 1987 issues). He said his understanding at the time that each of the sets of bonds were issued, both in the Eurobond market and to interests associated with RHaC, was that the bonds were convertible and subordinated. If in fact the on‑loans by BGNV of moneys raised in the Eurobond market to TBGL and BGF were unsubordinated, and the use of BGNV as an intermediary had created unsubordinated borrowings, he would not have been of the view that the bonds were subordinated. As it was, he was always of the view that all of the bonds were subordinated. In cross‑examination he said he always thought the on‑loan was subordinated.
   3122 Corr gave evidence that he was aware the bonds were subordinated to the facilities governed by the negative pledge agreement. Within Treasury at the time, the bonds and the proceeds of the issue of the bonds were not treated as debt for the purposes of the NP ratios. He agreed in cross‑examination that it would have been inconsistent with his understanding, as the Assistant Treasurer at the time, for the debt raised by the bonds to rank equally with the bank lending to the NP group. He clarified the reference to ‘bonds and the issue of the proceeds of the bonds’ by (in essence) reciting the ‘double whammy effect’: see Sect 12.7.3.
   3123 Cahill gave evidence that he had been informed of the contention that the on‑loans were made on an unsubordinated basis with the effect that the subordinated bondholders would, through BGNV, compete equally with the banks lending to companies in the NP group in any liquidation of TBGL and BGF. He said he had no knowledge or understanding at the time that the on‑loans were unsubordinated. After reading the documents he drafted or read at the time he said he understood that the bond issues created subordinated debt for the purposes of the NP group. Had he understood the position now asserted by the plaintiffs to be the position at the time, he would have viewed it as necessary to include the unsubordinated BGNV on‑loans in the calculation of the gearing ratios for banking covenants purposes.
   3124 Cahill acknowledged that he had not seen any specific documentation about the on‑loans. He referred to this as ‘a deficiency [in] the way in which the funds were lent from BGNV down to [TBGL] and on that basis the contention is, as I understand it, that they were actually unsubordinated in terms of that lending down’. When asked what he meant by ‘a deficiency’ he said, ‘either there never was or no‑one has been able to find any record that specifically states them as being subordinated’. I took this to mean that Cahill believed the on‑loans to be subordinated and if there was no written confirmation, it was a gap in the records of the company. I did not read into his evidence any support for the contention that the ‘deficiency’ meant that the on‑loans were, in fact, unsubordinated.
   3125 Cahill said he now thinks that, in December 1985 and April 1987 when he wrote the letters to the banks seeking consent to quasi‑equity treatment, he probably did not give consideration to the on‑loans and subordination of on‑loans. He was more concerned ‘about whether or not we could obtain the agreement of the banks to actually having it treated as subordinated for the purposes of the calculations that needed to be done on certain covenants: In cross‑examination he agreed that when he wrote the letters his mind was not directed to on‑loan subordination or to liquidation. But he did not agree when it was put to him that on‑loan subordination had nothing to do with his thought process at the time. He said it was very hard to be absolute on such a proposition but he would have thought that it was more probable that the focus was on the bonds and the ratios, rather than on the mechanics of how the moneys flowed.
   3126 The last two witnesses with whom I wish to deal in this section are the two directors of BGNV: Graham and Williams. Graham explained his understanding of the meaning of subordination:
   The essential fact of subordination is what happens when something goes wrong and there isn’t enough money left in the pot, so if I ever lent his Honour a pound and you have lent his Honour a pound and at the end of the year sadly he has only one pound left and we both ask for our money back, the fact that you were subordinated means you don’t get the pound; it means I do. That’s the essential behind subordination.
   3127 I digress here to say that it is a very long time since anyone has lent me ‘a pound’. If there has been such a loan and if it has not been repaid, the limitation period has surely expired. Graham went on to recite his understanding that it was possible to subordinate some categories of debt and not others and that there might be subordination that takes effect only on liquidation, or subordination that takes effect immediately.
   3128 Like most of the other former officers of Bell group companies, Graham and Williams were adamant in the assertion of a subjective understanding that the on‑loans were subordinated. Graham said he could not recall whether the funds raised through the 1985 bond issue were intended to be directed to any specific use or uses. Nor could he recall if there was any documentation of the loans from BGNV to the Australian Bell group companies. During Graham’s cross‑examination there was a thinly veiled suggestion he had been coached. This exchange occurred:
   Were you assisted?—Yes, I was assisted to the extent that after 20 years I needed my memory jogging a little bit and I didn’t have access to all the documents that are here, but if I can make one point: the basis of the case when it was put to me seemed to me to be quite wrong to the extent that – which is why, frankly, I’ve stuck with this over rather a long period of time. Did anybody who bought these bonds believe that they were on a pari passu basis with the senior debt providers to Bell Group? I don’t think so.
   Is that your answer?—I beg your pardon?
   Is that your answer?—It’s a statement. It wasn’t really in answer to your question.
   No. All right?—It was what’s, if you like …
   Something you wanted to get off your chest?—I’m explaining my motivation, if you like, for having been involved in this situation for such a long time.
   3129 Graham, it will be remembered, testified that his conduct as a director of BGNV was intended to achieve the purposes of the bond issues as he understood them. He said his understanding at the time (and at all times since) of the commercial intent and purpose of each of the bond issues was that the proceeds of the bond issues in the hands of the relevant companies in the NP group were subordinated to the senior debt of the banks. This was the assumption upon which he acted in his dealings with Bell group banks and prospective lenders.
   3130 Williams gave evidence that the whole purpose of setting up the Netherlands Antilles company was to on‑lend to the Bell group. As long as that happened, it satisfied the requirements. He played no part in fixing the nature or status of the on‑loan between BGNV and TBGL. Nor was he involved in the receipt of the proceeds by BGNV, save for correspondence with Griffiths concerning details of the bank to which the funds were to be paid.
   3131 In his evidence in chief Williams said that in relation to each bond issue he understood, at the time and at all times since, that the funds raised from the bond issue would be on‑lent to an Australian Bell group company for group purposes (the identity of the relevant company was a matter for the chairman’s office or Treasury to determine). He also understood that the on‑loan was to be of the same character as the initial funds raised, that is, subordinated. He understood that the funds brought into the Bell group were subordinated and ranked behind debt owed to banks, in order to raise funds in a manner that would not cause a problem with the bankers of the Bell group and that would not put pressure on, or cause a breach of, the NP ratios.
   3132 I realise that much of this evidence, relating (as it does) to state of mind, could be described as self‑serving. But it must be remembered that this litigation is essentially about what happened in January 1990 when the Bell group was under the control of BCHL. Griffiths, Cahill and Studdy left the Bell group on, or shortly after, the BCHL takeover. Williams was ‘inherited’ by the Bell group when it took over the ACC group. I do not recollect any evidence linking him with BCHL or with the events of 1989 and 1990. Nor do I recollect any evidence indicating that Graham was involved in those events. In my view, generally speaking, there is support for the position advanced by the witnesses in the contemporaneous documentation. I accept the evidence they have given.
   3133 There is another finding that arises from the preceding discussion. There is no evidence from which I could conclude that any relevant decision‑maker actually turned his (they are all male) mind to the terms of the on‑loans. Griffiths, Cahill and Williams all said so in express terms. The inevitable conclusion from the totality of the evidence of Graham and Studdy is that they did not do so. There is no evidence, for example, that once the decision to use the offshore issuing vehicle had been made (or at any previous time when that proposal had currency) any person said (and communicated) words to this effect: ‘This changes things. The moneys will come in from the investors but they will come in to BGNV. The funds are of no use to us in BGNV. They have to be passed on to other group companies where they can be used for the business activities of those companies. This should be done by way of loans and the terms of the loans will be X, Y and Z’.
   3134 Had there been evidence of such a process it would have been a relatively simple to task to determine whether X or Y or Z concerned subordination. There were times during the hearing when I thought that the absence of a process of that nature might be a complete answer to the banks’ case on this question. But I do not think it is that simple. The absence of evidence of this type is not fatal to the banks’ case. The question remains the one I described at the end of Sect 12.5.1: looking at the entire body of the conduct of the parties, can I infer a real intention to be bound by a term that the on‑loans were to be made on a subordinated basis?
   3135 The finding that no individual actually turned his mind to the nature and terms of the on‑loans does not detract from the earlier findings as to the state of mind of various witnesses. Properly understood, the evidence of Griffiths, Studdy, Cahill and Williams is to the effect that they understood that the proceeds of the issues were the subordinated debt of the NP group. This is slightly different from saying they understood the terms of the on‑loan contracts, and that those terms included subordination.
   13.2.3.2. Communications concerning subordination
   3136 At the risk of tedious repetition, the important thing (in deciding what were the terms of the on‑loan contracts) is objective manifestations from which a contractual intent can be inferred, rather than the subjective intention or state of mind of individuals. In this respect, communications between individuals within the decision‑making process of the Bell group and between those decision‑makers and third parties are material.
   3137 The September 1984 communication from SBCIL to Newman and RHaC proposed bonds constituting unsecured obligations that would rank pari passu with all present and future unsecured and unsubordinated obligations of the issuer and the guarantor (TBGL). In May 1985 officers of the Bell group, including Griffiths, came to consider the documentation for the first of the bond issues made by Elders IXL Ltd. But that issue did not involve subordinated bonds or a subordinated guarantee. The focus of attention at that time (and the main subject dealt with in the memorandum dated 27 May 1985) was possible equity treatment of a bond issue, based on how other entities had represented it in their accounts.
   3138 On 30 May 1985, in a telex from SBCIL to Griffiths, there is an explanation of the terms of issues in various currencies. All of them are described as ‘subordinated’. Interestingly, that telex makes reference to the Elders IXL Ltd issue, which SBCIL had arranged. It seems that the documentation for the Elders issue was used to assist in the preparation by TBGL of the documentation for the first BGNV bond issue: see, for example, Griffiths’ note to Tony Davies dated 10 October 1985.
   3139 This is, I think, of some significance. Officers of the Bell group had been aware for some time of the Elders issue. It was an issue of unsubordinated bonds. TBGL finally opted to pursue an issue of subordinated bonds. Why the change? One feasible explanation is because it was seen as necessary to ensure the issue would be regarded as quasi − equity. I accept that there may have been other reasons why a subordinated issue was to be preferred. But it seems to me to be a factor favouring the view contended for by the banks.
   3140 There are three relevant communications in June 1985, all of them involving Griffiths: the Treasury report for the board meeting on 5 June, the memorandum to RHaC dated 10 June and the discussions of 11 June referred to in Cutler’s note. All of these communications proceed on the basis that the bond issue would be subordinated. It is true that the minutes of TBGL board meetings of 9 July 1985 and 22 August 1985 do not refer to the subordinated status of the proposed bond issue. But there is no evidence that anything had changed since the June communications.
   3141 Indeed, as late as 1 July 1985 there had been a further telex from SBCIL to Newman and Griffiths with indicative terms for an issue of bonds constituting ‘subordinated obligations of the issuer ranking after all unsecured and unsubordinated obligations but equally with all other present and future subordinated obligations of the issuer and the guarantor’. And on 2 July 1985 Soditic sent a telex to RHaC and Griffiths referring to an offer of ‘a subordinated Swiss Franc convertible bond issue’.
   3142 I think it is a reasonable inference that the board discussion on 9 July 1985 was in the context of either or both of the telexes from SBCIL and Soditic. The SBCIL proposal was predicated on the use of a ‘suitable offshore financing vehicle’ to act as issuer. The banks submit that the wording in the SBCIL proposal is significant. There is no wording to say that the status of the bonds is to be carefully confined, in relation to TBGL’s liability, purely to its obligations as guarantor. Rather, the bonds constitute subordinated obligations ranking (it is said) equally with ‘all other or present or future subordinated obligations of the issuer and the guarantor’. Thus, the bonds and their status were expressly intended to rank equally with subordinated obligations of TBGL. They were not, through an on‑loan from the issuer, envisaged as ranking effectively pari passu with unsubordinated obligations of TBGL. I accept the force of this submission. And it flows through to later communications from SBCIL to the Bell group.
   3143 I should also mention that the status wording contained in the offering circular, in the form of bonds and in the trust deed for the bond issues of December 1985, May 1987 and July 1987, while not identical to the wording contained in the indicative terms, is to the same effect. I have set out the wording at the beginning of Sect 12.3.1.
   3144 The 3 September 1985 memorandum from Griffiths to RHaC recommended that SBCIL be engaged to lead the issue. This is the memorandum in which Griffiths made the statement that the key to the issue was to have it ‘clearly subordinated and acceptable to our banks as quasi-equity’. In my view, this is a significant document. It follows on from the memorandum dated 10 June 1985 in which Griffiths proposed a subordinated bond issue. It is true, as the plaintiffs pointed out, that there is no evidence that the memorandum went to any of the directors other than RHaC. But RHaC was, in my view, the driving force in the decision‑making process and there is evidence, for example from Studdy, of many discussions outside board meetings about the bond issue proposal. I think it would be unrealistic to divorce this memorandum from the decision taken by the directors on 8 October 1985 to proceed with the issue and to congratulate Griffiths on arranging finance of that nature. I place no weight on the use of the word ‘and’ in the phrase that I have quoted above. It is not, in my view, to be understood disjunctively, as if subordination and acceptance by the banks were separate and distinct matters.
   3145 There was a further telex from SBCIL on 23 September 1985 with indicative terms that also progressed on the assumption that the issue would be subordinated. There is no change in the description of the status of the bonds from that contained in the 1 July 1985 version. Identical wording in that respect appears again in the telex from SBCIL to Griffiths and Newman on 7 October 1985. I have no doubt that this is the proposal that formed the basis of the Treasury report (including the terms of the proposed issue) that went to the board on 8 October 1985 and which resulted in the resolution to proceed with the issue and to award the mandate to SBCIL and Paribas.
   3146 The plaintiffs submit that it is significant that neither the terms of the proposed issue nor the board resolution mention that the issue was to be subordinated. I do not share that concern. All of the communications from May 1985 to October 1985 were in respect of a ‘subordinated’ issue. Griffiths was well aware of that and I accept the evidence that he was in constant contact, throughout this period, with RHaC concerning the proposals. The award of the mandate to SBCIL can only be explained, sensibly, on the basis that the directors had given in principle approval to the terms proposed by SBCIL.
   3147 There is no indication in the communications after 8 October 1985 and until the issue was launched in early December 1985 of any change in the intent apparent from the earlier communications. There is nothing to suggest that there was any intent to change the status of either the bonds or the guarantee from subordinated to unsubordinated. There were many other aspects of the proposal (including whether or not to utilise an offshore issuing vehicle) that were revisited, but not the status of the bonds.
   3148 The 25 November 1985 letter from TBGL to the DCT also bears on this question. In both the text of the letter and the attached summary terms sheet, the issue is described as being of subordinated bonds. The letter also refers to the intention to pass the proceeds of the bond issue from BGNV to TBGL by way of a loan and that the loan would be on the same terms as the bond issue.
   3149 The plaintiffs made some play of the fact that the word ‘subordinated’ does not appear in the letter dated 17 October 1985 giving notice of the 12 November 1985 meeting, or in the resolutions passed at that meeting. In my view nothing turns on it. There was a reference to subordination in the C&L report. A note Cutler made at the meeting contained reference to subordination having been mentioned. The inevitable conclusion is that the shareholders were told, both in the documents accompanying the notice of meeting and at the meeting, that the bonds were to be subordinated to all other secured and unsecured liabilities of TBGL.
   3150 I did not understand the plaintiffs to be contending that the issue of bonds and the giving of a guarantee on a subordinated basis was not part of the decision‑makers’ thinking. Rather, I took the plaintiffs to be asserting that the failure to mention it in various documents reflects on the relative importance that the decision‑makers placed on subordination as a factor in the approaches to the banks to obtain consent to quasi‑equity treatment of the bonds. I take a different view. I am satisfied that at all times after May 1985, subordination was an important factor in the decision‑making process and nothing changed in that respect. This goes some way towards resolving the question whether the on‑loans were also made on a subordinated basis but it does not, of itself, provide the answer.
   13.2.3.3. Legal effectiveness of subordination
   3151 One of the matters raised by the plaintiffs was the legal effectiveness of subordination and whether TBGL contemplated that it might not be possible to subordinate the bonds. This relates back to the opinion given by Patrikeos and by ARH in the closing documents for the bond issues about the effect of British Eagle International.
   3152 The plaintiffs cross‑examined Griffiths in relation to the Patrikeos opinion dated 20 December 1985 concerning the legal effectiveness of the subordination provisions in the trust deed. He had no recollection of the question coming to light during the issue of the bonds. He also said it was not necessarily the type of matter that would be discussed with him as Treasurer, particularly in circumstances where Patrikeos had taken the view that there was no reason for concern.
   3153 The proposition that TBGL might have contemplated a problem with subordinating the debts was put to, and rejected by, Studdy. Having been shown the opinions he said: ‘I can’t read into that any statement that the board of [TBGL], or anyone else, thought that there was any doubt about this’. In re‑examination, Studdy said that he could not recall ever being aware, in 1985 or 1987, that there was a question mark over the legal efficacy of subordination.
   3154 I am satisfied that the possibility, which was raised in the legal opinions in the closing documents, that the subordination provisions of the trust deed might not be legally effective was not something that played on the minds of the TBGL decision‑makers at the relevant times.
   13.2.3.4. The decision to split the 1985 issue
   3155 The next area I wish to explore is whether the decision to split the bond issue into two, one made to investors in the Eurobond market and the other to interests associated with RHaC, has any significance in deciding whether the on‑loans were subordinated.
   3156 I described, in Sect 12.7.3, the process by which the decision to split the issue was made, and the reasons for that decision. Briefly, the position is this. There were two overriding factors. First, the bond issue had to be tax effective. In particular, the interest payable to investors had to be deductible to the Australian companies and free of withholding tax when paid to overseas investors. Secondly, RHaC was concerned that his overall equity percentage holding in TBGL not be diluted by investors converting their bonds into shares.
   3157 Early advice, based on the experience of other companies raising funds in the Eurobond market by comparable means, indicated that the proposal would be tax effective. To prevent dilution, it was envisaged that one half of the bonds would be issued to interests associated with RHaC.
   3158 This mechanism was considered viable on 12 November 1985 when the shareholders met and approved the arrangement. But legal and accounting advice taken after the meeting and the tentative response of the DCT to a request for a withholding tax certificate put in jeopardy the tax effectiveness of the envisaged arrangements. If interests associated with RHaC took one half of the bonds that were to be issued, there might not be a wide enough spread of bondholders to qualify for the withholding tax certificate. These problems could be avoided if there were two separate bond issues: one to investors in the Eurobond market and the other to interests associated with RHaC.
   3159 An issue arose about whether the revised arrangements could be implemented within the terms of the shareholders’ resolution that had been passed on 12 November 1985. Further legal advice suggested that they could. So it came to pass that Heytesbury Securities took bonds to the value of $75 million in the TBGL bond issue, rather than participating (to the extent of one half) in the bond issue to be made by BGNV as originally planned.
   3160 At the shareholders’ meeting on 12 November 1985, RHaC, as chairman, explained the purpose of the meeting. He said that approval was sought for him to subscribe up to 50 per cent of the note issue ‘on exactly the same terms as offered to the public’. This must be taken to represent his state of mind at time. Of course, this preceded the final decision to interpose BGNV and the decision to split the issue and to have a separate issue to Heytesbury Securities. There is ample evidence of RHaC’s continued involvement in the preparations for the bond issue. For example, he attended, and made presentations at, the selling ‘road shows’ in Europe in the last week of November 1985 and he was present at the TBGL board meeting on 3 December 1985.
   3161 When the domestic bond issue became a part of the arrangements, it was practically impossible for the phrase ‘on exactly the same terms’ to be applied literally. For a start, the issuer had to be a different entity. But there is no evidence of any communication to or by RHaC (nor is there any other evidence) from which it could be inferred that there was any change of intent other than to make those changes that were necessary to preserve the tax effectiveness and the anti‑dilution objectives of the issue
   3162 That the BGNV bond issue and the domestic bond issue were on the same terms is illustrated by the documentation entered into between Heytesbury Securities and TBGL on 20 December 1985. I have described the agreements towards the end of Sect 12.7.3. Relevantly, the parties to the agreement acknowledge that the domestic bonds were ‘identical in all respects’ to the bonds issued by BGNV, save that in order to comply with provisions of the ITAA the domestic bonds would differ from the Eurobonds with respect to rights and other issues, capital distributions and optional redemptions, as set out in the schedule. Nowhere in the schedule is there any indication that the subordinated status of the domestic bonds was in any way different from that of the Eurobonds.
   3163 As I have previously indicated, there were other differences between the domestic bonds and the Eurobonds. For example, the former were registered bonds and the latter were bearer bonds. But these differences have no bearing on the present question. The bonds were always treated in the same way in the accounts and in the negative pledge reports.
   3164 The position as I see it is this. The domestic bonds were unarguably subordinated. The rights of Heytesbury Securities (as bondholder) were subordinated in right of payment to the claims of all other unsubordinated creditors of TBGL. The Eurobonds were unarguably subordinated. The rights of the Eurobond holders against BGNV (as issuer) and TBGL (as guarantor) were likewise subordinated in right of payment to the claims of all other unsubordinated creditors of BGNV or TBGL (as the case may be). Had the bonds been issued in the manner envisaged at the time of the shareholders’ meeting, the position would have been the same as under the final domestic bond arrangements. In other words, the rights of the European bondholders (who held half of the issued bonds) and the rights of Heytesbury Securities (which held the other half of the bonds) would have been subordinated in an identical manner in right of payment to the claims of all other unsubordinated creditors of TBGL. TBGL would have received $150 million and all claims against it in respect of that amount would rank behind other unsubordinated creditors.
   3165 If the on‑loans were made on an unsubordinated basis by reason of a change that was brought about purely and simply for taxation purposes, a curious situation would arise. Nothing would change with respect to the domestic bond issue but a quite fundamental change would be made to the Eurobond issue. TBGL would still receive $150 million: $75 million from the Eurobond holders (via BGNV) and $75 million direct from Heytesbury Securities. But if there were no subordination restrictions on the right of BGNV to claim against TBGL, then Heytesbury Securities would have to stand behind BGNV (and other unsubordinated creditors) before it could claim. In my view it is accurate to characterise this scenario as meaning the Eurobond holders were not effectively subordinated.
   3166 The evidence of John Corr also supports the view that there was no relevant distinction between the Eurobonds and the domestic bonds. In his capacity as Assistant Treasurer he was involved in the bond issues. He said that in his work between 1985 and 1987 no‑one suggested to him that there was any distinction between the bonds that were issued to RHaC and the Eurobonds. He recalled that there were two series and they were extremely similar. There may have been some concern in relation to one series being issued in Australia but he viewed them as being the same for all intents and purposes. In particular, no‑one suggested to Corr that there was any distinction between the bonds in terms of their priority or ranking to assets in the negative pledge group.
   3167 I have no idea whether RHaC was a philanthropic soul. I accept the evidence of Griffiths that RHaC was confident in the financial performance and future of TBGL. I accept also that it is unlikely that he would have been contemplating a liquidation scenario. But it seems to me likely that had RHaC determined to award the Europeans a ‘free kick’ of that type it would at least have been discussed. There would, it seems to me, have been some discussion about half of the money (the on‑loans) going into the NP group on an unsubordinated basis and half (from the RHaC interests) on a subordinated basis. The evidence is all the other way. There were no such discussions.
   3168 The conclusion can, I think, conveniently be expressed in terms similar to those used in ADC par 11ED(71). None of TBGL, BGF, BGNV, the other NP group companies or Heytesbury Securities believed or intended that the use of an offshore finance subsidiary, or the splitting of the issue, would make any difference to the effective subordinated position of the Eurobond holders in BGNV bond issues, compared to the position of bondholders under the domestic bond issues.
   13.2.4. Terms of the on‑loan contracts: quasi‑equity
   13.2.4.1. Importance of commercial purpose
   3169 Again at the risk of tedious repetition, there is no doubt in my mind that the commercial purpose of the Bell group in entering into the Eurobond market was to inject funds into the NP group in a such way that the banks would consent to it being treated as quasi‑equity. The reasons for this are simple:
   (a) the Bell group needed cash to fund its acquisitive aspirations;
   (b) the NP ratios restricted the capacity of the NP group to borrow funds through its usual mechanisms and from its usual sources; and
   (c) convertible bond issues were a new source of funds that could be accessed and which, if treated as quasi-equity, would increase borrowing capacity further (the so‑called ‘double whammy effect’).
   3170 But the banks go further. They say the commercial purpose was to inject ‘subordinated funds’ into the NP group because this was the way to attract favourable treatment from the bankers. The banks say that the subordinated status of the bonds was an essential element of the process, without which the issues would have been treated as liabilities, not equity, in calculating the NP ratios.
   3171 Not so, say the plaintiffs. The essential element was convertibility: because there was a likelihood that the bonds would one day be converted to shares they could, in the interim, be treated as if they were part of capital. Subordination, the plaintiffs say, was but a happy by‑product of the arrangement.
   3172 I have to resolve this question. Am I able to find, from the entire body of conduct of the decision‑makers, an objective manifestation that subordination was regarded as essential to the attainment of the commercial purpose? And if that is answered in the affirmative, does it follow that the on‑loans were made on a subordinated basis?
   13.2.4.2. The state of mind of the decision‑makers
   3173 In Sect 13.2.3.1 I described in some detail the evidence given by various individuals involved in the arrangements for the convertible bond issues about their beliefs concerning the subordinated status of the bonds and the on‑loans. In Sect 13.2.2 I explained why I was undertaking that exercise. I intend here to embark on a similar task in relation to the question posed in the last paragraph of the preceding section and I am doing so for the same purpose. But on this occasion I think the process will require the spilling of less ink.
   3174 In his evidence in chief, Griffiths outlined four major advantages of a convertible subordinated bond issue. First, it provided access to a market different to the traditional lending market, which provided an alternative source of funding to the NP group’s existing bank lenders. Secondly, the loans were longer in duration than the existing bank loans. Thirdly, the bonds were convertible into ordinary shares and thereby attracted a lower interest rate. Finally, it aided in putting an argument to the banks that the bonds be excluded from total liabilities for the purpose of the NP ratio calculations.
   3175 Griffiths said that the fact that the loans from bond issues would be subordinated was an important feature. To his mind, subordination was one of the most desirable features of the proposals. It provided the NP group with an argument that could be put to its banks that the bonds not be included in liabilities for the purpose of the NP ratio calculations. That argument gained support from the long‑term maturity of the bonds and the fact that they were convertible into equity. However, neither of these two additional features, either alone or in combination, was a sufficient basis in his view for approaching the banks for their agreement to treat the bonds as equity in order to exclude them from the ratios. To his mind, subordination was the key. This last phrase was the very language he had used in his memorandum dated 3 September 1985.
   3176 Griffiths was cross‑examined about the description of the bonds as ‘deferred equity’ in the annual reports and a letter from C&L to the directors of BRL dated 3 February 1988 which stated that ‘whether bonds should be regarded as equity or debt at a point of time during the life of the bonds depends on views as to the likelihood of future conversion’. Griffiths agreed that this was an accurate statement, ‘certainly for the accounting treatment’.
   3177 I have no doubt that Griffiths regarded convertibility as an important feature. But I also have no doubt, as he said in the 3 September 1985 memorandum, that he believed the key was to have the issue ‘clearly subordinated and acceptable to our banks as quasi‑equity’. The two things – subordination and treatment of the bonds by the banks as quasi‑equity – are tied together. Convertibility is not mentioned as a relevant factor. It follows, in my view, from the use of the word ‘key’ in this context that Griffiths believed that subordination was a necessary element in achieving the commercial purpose of the arrangements.
   3178 Cahill’s evidence is more supportive of the plaintiffs’ position. In his evidence in chief, Cahill said he had no knowledge or understanding at the time that the BGNV on‑loans were unsubordinated. He said that if he had understood the position now asserted by the plaintiffs to be the position at the time, then he would have viewed the statements in the letters dated 11 December 1985 and 15 April 1987 to be inconsistent with that position and he would not have wanted those statements to be made.
   3179 But in cross‑examination it was put to Cahill that convertibility alone would, on his view, justify treating the bonds as equity for NP ratio purposes. Cahill effectively agreed, but added that there would have to be a reasonable expectations of conversion as well. He agreed that in December 1985 he had at the forefront of his mind that the bonds were anticipated by the company to be converted into shares and that this was a sufficient reason for them to be treated as quasi‑equity. Convertibility was, he agreed, a complete reason to present to the banks when asking for quasi‑equity treatment.
   3180 But the fact remains that one of the reasons put in the 11 December 1985 and 15 April 1987 letters (both written by Cahill) why the banks should agree to treat the bonds as equity for NP ratio calculations was that the bonds were subordinated. His evidence in chief that, assuming the plaintiffs’ position that the on‑loans were unsubordinated to be correct, he would not have wanted the statement about subordination to have been made in those letters, stands.
   3181 Studdy’s evidence in chief is that, while he could not recall the detail of his thinking at the time, if he had been aware of the terms of the requests to the banks and had he turned his mind to the issue, he would have viewed subordination as the key issue for the banks treating the bonds as equity for the purposes of the ratios. He would have thought that in order to encourage the banks to accept the bonds on this basis, it was essential that they be subordinated and not merely convertible.
   3182 In cross‑examination Studdy was questioned about the Elders IXL Ltd issue, which was of convertible, but not subordinated, bonds. He accepted that in the Elders IXL Ltd accounts, the bonds were treated as equity. He also accepted, by reference to the chairman’s statement in the annual report of the Bell group for the financial year ended 1986, that the company understood that the bond issues, being convertible, were appropriately to be treated as deferred equity, given the strength of the company and its share price. He said he had an expectation, in the period between 1985 and the stock market crash in October 1987, that the bondholders would convert because of the TBGL share price.
   3183 As a consequence of those matters, it was put to Studdy that the commercial purpose of raising funds in the form of quasi‑equity would have been satisfied regardless of whether or not the on‑loans were subordinated. His response was that he could not say because he could not recall thinking about that issue at the time, and could not speculate as to what he might have thought. But I accept the submission of the banks that, in giving that evidence, Studdy was referring to the commercial purpose of raising quasi‑equity for the Bell group and the treatment of the bonds as equity in the financial statements. He drew a distinction between those matters and obtaining the banks’ consent to treatment of the issues as equity for the purposes of the NP ratio calculations.
   3184 Studdy summed up his position by saying he had a clear memory of the need for additional capital for the group. He had discussions in which RHaC had reported on his dealings with Westpac, acting on behalf of the banks. In his view the banks would not have accepted it as quasi‑equity ‘if they had only been subordinated at the top level and not downstream, because it wouldn’t have meant anything: I mean the situation would have been absolutely intolerable because how could the banks have actually regarded this as equity if they were not going to rank ahead of these bonds?’
   3185 Corr was also questioned about this issue. In cross‑examination, he seemed to agree that the subordinated debt was not included in the calculation of total liabilities because it was subordinated to the negative pledge facility. The following exchange took place in re‑examination:
   My question was: do you recall now we have adverted to the fact that these were convertible subordinated bonds, convertible into shares – do you recall whether that played any role in their classification as something other than debt?—Well, the fact they were convertible made you refer to them as quasi equity and that was – they were always referred to in two ways that I can recall: either as subordinated notes or as quasi equity. How the banks viewed them, I’m not quite – you know, I never knew because I never asked them, but the reality of the matter was that they always – those loans were always subordinated to bank debt and always were outside of the negative pledge covenant.
   3186 The first sentence of that answer appears to support the plaintiffs’ case, while the last sentence seems more in line with what the banks are saying. I think, in relation to Corr, it is a nil‑all draw.
   3187 The phrase ‘happy by-product’ in this respect was introduced by Graham during his cross‑examination. It was put to him that lying behind the decision by the Bell group to issue the bonds was, in short, the desire to improve its gearing ratios. He said that improving the gearing ratios was not the only reason: ‘It was a happy by‑product, if you like, improving the gearing ratios. It raised us money. It improved our cost of funds. It diversified our sources of funds in terms of other entities than the banks who already had lent to us. It wasn’t the only purpose’. This exchange then occurred:
   Do you agree with me that with regard to the happy by-product in the published explanation by the company what was driving that was a view that these bonds would be converted into equity?—That depends on who’s reading it. I mean, again referring back to a point raised earlier, if it was a senior debt provider reading it they would pick up on the subordination point. They would be happy with the convertible aspect and they would be happy with the track record of the share price but they would want the certainty of the subordination.
   Thank you, but from the company’s point of view what was driving the happy by-product, I suggest to you, was the expectation that these bonds were going to turn into equity before they would get near to redemption. Do you agree with that or not?—It was an important point for the company. It wasn’t the only point.
   No, but with regard to what this category which we will call for the purpose the happy by-product ‑ with regard to that item, do you agree with me that what was driving the company’s thinking was that these are going to convert into equity therefore properly they should be regarded as a form of capital?—I think it was important to the company as well that they were subordinated. It enabled us to approach our senior debt providers with a sound argument.
   3188 Based on his experience as a banker, and looking at it as a bank would in order to determine whether to permit some funds raised by the company to be treated as equity, Graham also said that convertibility would be one mechanism to be considered. But the mere possibility that the convertible bond might at some point in the future be made into equity would not be enough. There would need to be certainty in the event of a problem. Although he did not say it in explicit terms, I understood Graham’s position to be that the requisite ‘certainty’ would be injected by the mechanism of subordination. I hasten to add that I have not accepted this evidence as in any way ‘expert’. It goes simply to Graham’s state of mind at the relevant time.
   3189 I do not think Williams gave any evidence concerning the relative importance of convertibility. But he did say that it was important from his point of view (running the London Sterling Treasury Office) that the funds be subordinated because otherwise he thought they would have had some problems with the banks.
   3190 In my view, the state of mind of these individuals was that convertibility was an important feature, perhaps (certainly in the case of Cahill) the most important one. But I am satisfied, especially on the evidence of Griffiths and Graham, that the relevant decision‑makers regarded subordination as a necessary element in the approach to the banks to gain consent to the treatment of the bonds as equity. There is nothing to suggest, in relation to any relevant person, that his state of mind on the question changed at any time between December 1985 and July 1987.
   13.2.4.3. Communications concerning convertibility
   3191 I do not wish to repeat what I have said about the various documents and communications from September 1984 to October 1985 and about the capacity of the contents to demonstrate an objective manifestation of an intention that the bond issues should be subordinated. Those documents and those considerations are relevant to this question as well. The 3 September 1985 memorandum from Griffiths to RHaC has particular significance in this respect.
   3192 The document entitled ‘Amalgamation of Banking Structure’ (undated, but with an estimated preparation date of 8 October 1985) is also relevant. The bipartite borrowing structure had a number of problems; one of which was that the banking agreements and the negative pledge arrangements did not cope with several concepts, including a suitable definition of subordinated debt. The recommendation was to renegotiate the banking position to try to increase the ratio from 65 per cent to 70 per cent. This point was made: ‘Any clearly subordinated debt … will be treated as equity for the purposes of calculating liabilities for ratio purposes provided it has a term of redemption greater than five years and that the total amount of such issues is not greater than 25 per cent of issue capital including the subordinated issue’. The two points mentioned there are subordination and maturity term (not convertibility). These two things are part of the case that the authors were suggesting could be put forward in a recommended attempt to renegotiate a higher ratio.
   3193 The Treasury report for the directors’ meeting of 12 November 1985 refers to the increase in borrowing capacity in the NP group due to the $50 million equity raised by this issue. It also says: ‘This will increase by a further $428 million when we have the banks’ consent to treat the subordinated notes as equity for banking purposes’ (emphasis added). This seems to me to place some emphasis on the subordination aspect as a factor contributing to the increased borrowing capacity. It is to be remembered that one effect of treating the bond issues as equity for NP ratio calculations is to influence borrowing capacity.
   3194 Both sides rely on the terms of the 11 December 1985 and 15 April 1987 letters. The banks submit that those letters clearly list the subordination of the bonds as one of the reasons the debt raised from the bond issues could be treated as equity. If subordination played no role in obtaining the banks’ consent, then there was no reason to include it in a list of bases upon which the bonds could be treated as equity. No other cogent explanation for its inclusion was offered. The plaintiffs say that on a proper construction of the letters, the three criteria advanced for the banks’ consideration (convertibility, term of maturity and subordination) apply to the bonds per se but not to the on‑loans. The phrase ‘bonds per se’ means the physical bearer instruments issued by BGNV or the paper certificate issued by TBGL (or BGF) as opposed to the instruments and the funds that the issues generated. This is a significant topic in its own right and I will deal with it separately.
   3195 The plaintiffs also rely on the attachment to the Information Memorandum sent by LMBL to prospective members of the Lloyds syndicate in April 1986. I spent some time in Sect 12.12.3 describing the Information Memorandum. The attachment sheet says of the convertible bond issue: ‘The justification for treating this item as capital is that [TBGL’s] current share price is higher than the conversion price and conversion can be currently exercised’. This is unequivocal. It says the justification, it refers only to convertibility and it does not mention subordination.
   3196 On the other hand it is expressly tied to page 23 of the Information Memorandum and therefore to item (5). That item mentions the December 1985 convertible bond issue and it expressly refers to the issue as subordinated. More than that, the word ‘subordinated’ is underlined. It further says: ‘The nature of the bonds is such that they may be considered as equity for the purpose of gearing calculations’. There is no mention in item (5) of convertibility in connection with the treatment of the bonds as equity.
   3197 If regard is had solely to the attachment, it is an important piece of evidence that favours the position contended for by the plaintiffs. But if the attachment and item (5) are taken together, there is less force in that argument. There is support in this material for a finding that a person reading all relevant sections would piece together the parts and come away with an understanding that there were to be on‑loans and that they (like the bonds) would be subordinated. I accept that it is less clear that the reader would necessarily understand that the subordinated status of the bonds and the on‑loans was a reason being advanced in favour of equity treatment. But, on balance, I have come to the conclusion that this meaning is sufficiently clear for these purposes.
   3198 In the course of preparing for the May 1987 bond issues, two internal memoranda reflected on subordination. On 9 January 1987 Johnston sent a memorandum to RHaC, Newman and Griffiths in which he recommended an issue of convertible notes and stated:
   Reduction in balance sheet gearing from current levels of 67.7 per cent to 54.4 per cent and improvement in theoretical borrowing capacity from current levels of approximately $200 million to between $750 –  $1000 million. As the notes would be subordinated they would effectively be treated as equity for banking purposes.
   3199 In a memorandum to Griffiths dated 13 March 1987 Cahill said:
   The new banking structure will allow for the deduction of non‑current subordinated debt from the calculation of total liabilities. Therefore providing there is an optional redemption clause provided in the agreement the issue should never affect the Group’s gearing ratio.
   3200 These two memoranda are examples of internal communications in which there is express mention of subordination, rather than convertibility, as an argument in favour of equity treatment and that tie that notion into the overall objective of increasing borrowing capacity.
   3201 In a letter dated 14 May 1987 from TBGL to the banks (written in the course of negotiations to collapse the NP agreements and to replace them with NP guarantees) the author explained the purpose of the exclusion of non‑current subordinated debt from total liabilities in the proposed NP guarantee in the following terms: ‘to exclude from total liabilities subordinated debt such as the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes’. In this instance, TBGL is referring to the ‘subordinated convertible bonds’ (being those issued in December 1985 and earlier in May 1987) as being subordinated debt of the type that was to be excluded from the calculation of total liabilities.
   3202 The plaintiffs place reliance on the statement in the TBGL annual report for the year ended 30 June 1986 that: ‘[TBGL] together with two of its associates, [BRL and JNTH] raised over $1.2 billion in the aggregate of both new equity and deferred equity’. In the TBGL annual report for the year ended 30 June 1987 there is a similar statement referring to ‘quasi‑equity’. I am not sure that the fact that, within the Bell group and in its relationship with investors, TBGL used the phraseology ‘deferred equity’ or ‘quasi‑equity’ assists a great deal. There is no doubt that the directors (and the auditors) were comfortable with the treatment of the bonds, for accounting and reporting purposes, as part of shareholders’ funds. Hence the description ‘deferred equity’ or ‘quasi‑equity’ in relation to the item in the consolidated balance sheet.
   3203 I think it is probable that convertibility was a major reason for that state of affairs. I say this because, when it came to the annual report for the year ended 30 June 1988 (after the October 1987 stock market crash) the balance sheet treatment of the bond issues changed. And the reason for the change was expressed in these terms: ‘In 1988, following the fall in world share market prices since October 1987, the expectancy is that redemption is more than likely and for that reason the directors now believe it is prudent to show the convertible bonds as subordinated debt in non current liabilities’. In other words, the thing that changed was the likelihood of conversion. There was no change in the subordinated status of the bonds.
   3204 But the reason why I say that I do not think the terminology ‘deferred equity’ or ‘quasi‑equity’ for balance sheet purposes takes the matter much further is that the question here is a different one. The plain fact is, as I tried to explain at the outset of the discussion of the subordination question, convertible bonds are not equity, they are debt. If TBGL, and apparently Elders IXL Ltd, were fortunate enough to convince their auditors to agree to equity treatment for balance sheet purposes, it was their good luck. It might have come as a surprise to the author of the attachment to the Information Memorandum, who told readers that Australian accounting practice required ‘the convertible bonds to be treated as loan capital until conversion’. At around the same time as the Information Memorandum was finalised (3 April 1986), Anne Tregonning sent a memorandum to Cahill to assist with a response to queries that had been raised by Lloyds Bank. She said: ‘The actual balance sheet at 31/12/86 includes the $150 million of convertible notes in non‑current liabilities, whereas the forecast balance sheet of 4/2/86 includes the $150 million in equity. Under the Australian Companies Code, convertible notes are required to be shown as debt, not equity’.
   3205 But whether or not the treatment of the bonds as part of equity for balance sheet purposes was right or wrong, the question here is different. The definition of total liabilities in the NP agreements encompassed the bond issues. The banks were being asked to agree to a different method of treatment and TBGL was advancing reasons why it thought the banks should acquiesce in that request.
   3206 Another relevant document is the three‑year business plan dated 13 May 1988. In it, TBGL included a page devoted to the convertible bonds. It said in the first and second lines: ‘All bonds are fully and explicitly subordinated to all unsubordinated debt’ (emphasis added). It then set out a table showing the growth in share price that would be necessary to justify conversion by bondholders. Management expressed a belief that the share price performance was capable of sufficient strength during the term of the bonds for a high conversion rate to be attained. But in my view, this is a document of a different genre. It was not designed to convince the banks that they should agree to equity treatment of the bond issues. That had already been done. In fact, equity treatment of the bonds issues is assumed in the summary results and projections set out in the plan.
   3207 The purpose of the plan, as I understood the evidence, was to give the banks comfort in their dealings with the Bell group generally, given the radically changed financial climate after the stock market crash. As Griffiths put it in his evidence in chief: ‘My role in maintaining the relationships with the Bell group’s bankers became particularly time consuming after the crash. To help in settling down the Bell group’s bankers after the crash, [and to alleviate the] banks’ concerns, a three‑year business plan was prepared setting out the existing position of the Bell group and its future plans’.
   3208 This, and the fact that there is an express reference to subordination, suggests to me that this document does not count against the proposition that subordination was regarded as an essential element in the equity treatment of the bonds.
   3209 A series of spreadsheets were prepared either weekly or fortnightly between 15 January 1988 and 23 December 1988 entitled ‘Negative Pledge Group Borrowing Position’. In each of these spreadsheets, the convertible bonds were included as ‘subordinated borrowings’ of the NP group.
   3210 I have come to the view that these documents exhibit an objective manifestation of an intention that subordination would be an essential element of the argument to be put to the banks for equity treatment of the bonds. I accept that this does not emerge consistently from each and every document or communication. The attachment to the Information Memorandum and the reasons given in the 1988 Annual Report for the change of balance sheet treatment are instances from which a contrary inference might have been drawn. I have not overlooked them. But when the communications are considered in their entirety, I think the better view is the one I have mentioned.
   13.2.5. ‘Bonds’ and ‘proceeds’
   3211 This, then, takes the matter a step further. It elevates the subordination question to somewhere near the forefront of the efforts by the Bell group to achieve its commercial purpose. I need, however, to test this conclusion against some other considerations. But in order to reach a final conclusion on the terms of the contracts inter se I need to look at several other issues. One of them is a question that arose time and time again during the hearing, namely, whether the use of the phrase ‘bonds’ or ‘issues’ in the communications meant the bonds per se or whether it encompassed the on‑loans. This enquiry also extends to what is meant by the request to the banks to ‘regard the issues as equity’ or to ‘treat the issues as equity’ when considering balance sheet ratios for the purposes of the banking covenants.
   3212 In their closing submissions, the plaintiffs pointed out that in much of the correspondence, particularly the 11 December 1985 and 15 April 1987 letters, the words ‘issues’ and ‘bonds’ were used interchangeably. This led the plaintiffs to characterise the gravamen of the banks’ approach as relying on a mantra that ‘bonds means proceeds’ or ‘bonds/issues means proceeds/on‑loans’. In other words, that references to ‘issues’ and ‘bonds’ must necessarily import reference to the on‑lending of the proceeds of the BGNV bond issues. The banks contend that the term ‘bonds’ (or ‘issues’) captures the inter‑company investment and deployment throughout the Bell group of the proceeds of each series of bonds. The plaintiffs, on the other hand, say that the proper construction of the communications is that the various references to ‘bonds’ and ‘issues’ are to the bonds per se.
   3213 I acknowledge that the submissions on this point were made in the context of the representations said to underpin the banks’ estoppel case. But in my view the point also has significance when attempting to identify the terms of the contracts inter se.
   3214 To illustrate the difficulty, I will give examples of the language used in some of the relevant communications. I stress that these are examples and I do not suggest the communications I have chosen here are all of the ones in which the terms are used. In the 3 September 1985 memorandum, Griffiths said: ‘The key to the issue is to have the issue clearly subordinated and acceptable to our banks as quasi‑equity’. The following are all extracts from the 11 December 1985 letter:
   (a) ‘[TGBL] will through its financing subsidiary [BGNV] issue into the Euro markets A$75 million Convertible Subordinated Bonds’.
   (b) ‘At the same time interests associated with [RHaC] will take up a further A$75 Convertible Subordinated Bonds … which will be issued by [TBGL]’.
   (c) ‘The two issues will with the exception of issuers and minor variations due to different domiciliary laws be identical’.
   (d) ‘The Bonds will have attached to them a right to convert on or after 20th February 1986 to ordinary shares of [TBGL]’.
   (e) ‘[T]he issues should be regarded as equity when considering balance sheet ratios for the purposes of its banking covenants’.
   (f) ‘Details of the issue have been summarised and are attached for your information’.
   (g) The Bell Group requests that you agree to the treatment of the Convertible Subordinated Bonds … in this manner’.
   3215 The 15 April 1987 letter contains similar imprecision in the language that has been used. For example, it says: ‘[TBGL] considers that, in line with the treatment of the December 1985 issues, these issues should be treated as equity’. It goes on to speak of the ‘right to convert’ and also to the current market price of the bonds. It says that ‘the bonds are a subordinated debt’. And it concludes with these words: ‘[TBGL] requests that you agree to the treatment of the Convertible Subordinated Bonds … as equity’.
   3216 An internal memorandum dated 31 December 1985 records that: ‘There has been no serious criticism of our proposal to have the convertible subordinated bonds considered as equity’. The 8 January 1986 Treasury report to the TBGL board reported that there had been a marked increase in liquidity ‘brought about by the … banks agreeing to treat the A$150 million Convertible Subordinated Bond as equity’. Finally, in the SocGen information memorandum the following appears: ‘In December, 1985, [TBGL] raised A$150 million subordinated convertible bonds … The nature of the bonds is such that they may be considered as equity for the purpose of gearing calculations’.
   3217 While it is a document that was raised after the completion of the third BGNV bond issue, I should also mention a memorandum dated 26 August 1987 from Connie Chapman (then TBGL’s assistant treasurer) to Peter Patrikeos (in‑house counsel) and Steve Johnston (an analyst) concerning the change to an NP guarantee. In the memorandum, Chapman said:
   Our convertible bond trust deeds for the public issues require that any indebtedness for borrowed money convertible into TBGL equity be subordinated and rank either equally with or junior to the convertible bonds.
   3218 That is a reference to the provisions of cl 3 of the offering circular and Conditions 3A and 3B of the bonds. There is no suggestion there that, so far as the officers within the Bell group were concerned, there was any intention to limit the subordination to the bonds in the strict sense. Nor is there any evidence that Patrikeos, Johnston or any other officer of TBGL took a view different from that communicated by Chapman in accordance with the plain words of the memorandum.
   3219 In each of the extracts from contemporaneous documents that I have set out in the preceding paragraphs, the emphasis has been added by me. It must be remembered that it is not part of the banks’ case that any of these documents have contractual effect. It seems to me, therefore, that it is not so much a question of the literal interpretation or construction of the words used but rather a question of the intention (if any) that can be gleaned from them. It is not appropriate to take a particular or individual document and subject the language to minute analysis as would be the case if it were a contractual document. Rather, the documents should be taken in context and read as a whole to ascertain what, if anything, can be drawn from them. But on the other hand, the plain ordinary meaning of the words used by the authors cannot be ignored.
   3220 I wish to make another general comment. Questions were put during cross‑examination of the witnesses aimed reasonably directly at this very question, namely, whether the language used in the communications was intended to convey the idea that the ‘bonds’ and the ‘proceeds’ were the same thing. Without in any way criticising either the cross‑examiner or the witness, it was not an easy distinction to explain or to draw and often caused confusion. I will give one example. Griffiths was cross‑examined about balance sheet projections in the three‑year business plan. In his statement he had said that insofar as the projections dealt with senior debt (due to the banks) and subordinated debt, ultimately derived from the bondholders, it accorded with his understanding at the time of the relative ranking of the banks on the one hand and of the bond proceeds on the other. The following exchange (which I have edited) occurred:
   If you’re dealing with a consolidated balance sheet what you call the Bond proceeds are simply the proceeds received by BGNV from the investors, are they not?—As a consolidated group … Yes.
   So when you use the words ‘bond proceeds’, you really mean simply bonds, do you not?—The proceeds of the bond issue, yes.
   Well, no, I’m saying that given that it’s a consolidated projection, it doesn’t say anything other than that BGNV was indebted to the bondholders and that bondholder debt ranked after the banks. Do you agree with that?—Yes, I think – it’s consolidated accounting treatment. That sounds right.
   So the words ‘bond proceeds’ should really be ‘bondholders’, should it not?—If we’re dealing with the consolidated accounting group, as you describe it, yes.
   3221 I do not want it to be thought that I have ignored or overlooked this line of cross‑examination. But in the end, it depends on the context and the purpose. There is a significant difference between the consolidated accounts, prepared for statutory reporting purposes, and other forms of financial presentation, such as the negative pledge reports. I did not find evidence of this type of great assistance and it has not played much of a part in my reasoning process.
   3222 It is true (as the plaintiffs point out) that neither the text of the 11 December 1985 letter nor the summary of terms attached to it made any reference to the use to which the proceeds were to be put. In other words, there was no reference to the on‑loans. But that is not true of the 15 April 1987 letter. It had attached to it a copy of the offering circular which, it will be remembered, included the use of proceeds clause. In any event, the banks would have been aware, from the published accounts and from the negative pledge reports, that the funds had not remained in BGNV and that BGNV was not carrying on any trading activities or holding investments other than the on‑loans.
   3223 There remains an element of mystery (at least to me) as to why the problem about the banks treating the bond issues as equity arose at all. It seems that at the time of the December 1985 bond issues, TBGL took the view that they had to be accounted for as liabilities under Australian accounting practices: see the Information Memorandum. But by the time the company published its first set of accounts after those issues (the accounts as at 30 June 1986), TBGL had adopted the practice of including them as part of shareholders’ funds: see the balance sheet in the 1986 Annual Report. This treatment was repeated in the 30 June 1987 accounts. The NP agreements do not define ‘liability’. The definition of total liabilities refers to ‘the aggregate amount (as disclosed by the Latest Audited Consolidated Balance Sheet) of all … unsecured liabilities’. This suggests that ‘liabilities’ fall to be assessed according to generally accepted accounting principles.
   3224 As I have previously said, I do not have to decide whether or not, under Australian accounting standards and practices as they applied in 1987 (and for that matter in December 1985), the company was permitted to treat the bonds as part of shareholders’ funds. If the answer is that the company was permitted to treat the bond issues as shareholders’ funds, it is difficult to see how they would come under the definition of total liabilities in the NP agreements. I can see nothing in the remainder of the definition of total liabilities in the NP agreements that would impinge on such an understanding.
   3225 If this is correct, it may not have been necessary for TBGL to make the request that it made in the 15 April 1987 letter. This may be a further indication that no person actually thought through the implications and mechanics of the on‑loans. In any event, I can do no better in providing an explanation here than I did when discussing the negative pledge reports and the ‘double deduction’ problem in Sect 12.13.6.3. The fact is that the TBGL decision‑makers thought they needed the banks’ consent: they made the request and the banks approved it. I will leave it at that.
   3226 I need, I think, to revisit the paperwork and some basic concepts about bonds or, more accurately, bonds of the type issued by BGNV in the Eurobond market. In what I am about to say I will be referring to the first BGNV bond issue. But I do not think any different considerations apply to either the second or the third BGNV bond issues. The bonds are essentially debt instruments. In this respect they are not unlike a promissory note. They are, however, something of a hybrid because they also have elements of a security instrument, like a share or a debenture. The hybrid aspect arises through the right of conversion. That right, in turn, arises through the conversion bonds issued by TBGL. The conversion bonds go with the bonds; they cannot be detached from, or dealt with separately from, the bonds to which they are attached.
   3227 If and when a bond is redeemed, it becomes equity of TBGL. But what happens before conversion or if the redemption date arrives without the bondholder having exercised the right to convert? As a debt instrument, it is the bonds (not the conversion bonds) that carry the obligation to pay interest and to pay the principal sum on redemption. Each of the bonds has a face value of either $1000 or $5000 and together they make up the total principal amount of the issue. The conversion bonds do not bear interest. The sole monetary liability of TBGL on redemption of the conversion bonds is the paid up amount on those bonds, namely, the sum of 1 cent for each $1000 bonds and 5 cents for each $5000 bond. In other words, if all of the bonds and conversion bonds in the first BGNV bond issue had been redeemed in December 1995, BGNV would have been liable to pay the principal sum on the bonds, namely $75 million, and TBGL the amount paid up on the conversion bonds, namely $750.
   3228 This can be put in another way. The bonds, as a debt instrument, sound in money. The issuer (in this case BGNV) has a right to receive the issue price of the bonds. It has an obligation to pay interest along the way and, unless the bond is repurchased or cancelled (upon conversion), it has an obligation to repay the principal sum on the redemption date. The conversion bonds, on the other hand, do not sound in money. The issuer (in this case TBGL) has a right to receive the conversion price if and when a bondholder decides to convert and it has an obligation to deliver. The conversion price (in amount) bears no relationship to the principal sum on the bonds: see Table 4 in Sect 4.3.3.4.
   3229 The process for the conversion of bonds included an obligation on the bondholder to pay the conversion price to a nominated conversion (paying) agent. But this process also included an obligation on the issuer (that is, BGNV) to redeem the bonds at their principal amount and, on behalf of the bondholder, to apply the proceeds in paying up in full the relative conversion bond. The ultimate effect of all of this would have seen TBGL receive funds to the extent of the conversion price, less any commissions and less the principal amount of the relative bonds. Another effect would have been the extinguishment of the on‑loans to the extent of the converted bonds. I assume that this would have been effected by journal entries and then reflected in the accounts of both TBGL and BGNV.
   3230 Just as the debt instrument sounds in money, so too does its representation in the accounts. It is shown as a monetary sum, regardless of whether it appears in non‑current liabilities or as a line item in shareholders’ funds.
   3231 All of this, it seems to me, counts against the view that the communications both internally and to the banks about the ‘bonds’ or the ‘issues’ being regarded as equity were aimed at the bonds as a paper security, that is the bonds per se, rather than the money sum that the bonds represent. For the reasons explained in Sect 12.13.7.2 I do not think the answer lies in the plaintiffs’ notional conversion thesis. I accept that there is imprecision in describing the money sum for which the debt instrument stands as something that can be regarded as ‘equity’, be it deferred, quasi or any other equally inapt description. But the communications with the banks concerned (in respect of the first BGNV bond issue) an amount of $75 million. This is the figure that is the subject of the request for equity treatment. This cannot be a reference to the obligation of TBGL to redeem the conversion bond because treating the paid up value of the bonds (that is, an amount of $750) as equity would not have achieved anything much in terms of ratio calculations. Nor, it seems to me, is it to be explained by any other aspect of the conversion bonds or by TBGL’s position as a guarantor of BGNV’s obligations under the bonds.
   3232 While the letter dated 11 December 1985 refers to the attached conversion bonds and posits the likelihood of conversion as a reason militating in favour of equity treatment, it still relates back to an amount that happens to be the same as the principal sum of the bonds. In saying this, I do not shy away from the finding that while the likelihood of conversion may have been an important reason, it was not the only one.
   3233 This leads, I think, to a search for an explanation about what was entailed in the request to have $75 million removed from liabilities and included as equity for ratio calculations. I wish now to posit a simple hypothetical example to explain how this may have worked. The example proceeds on the following assumptions:
   (a) prior to the bond issue mentioned in (d), NP group companies had total tangible assets of $100;
   (b) again prior to the bond issue, NP group companies had total liabilities of $50 (after eliminating inter‑company balances between NP group companies);
   (c) BGNV was not a member of the NP group;
   (d) BGNV raised $50 from a subordinated convertible bond issue in the Eurobond market, guaranteed by TBGL;
   (e) BGNV on‑loaned the proceeds ($50) to TBGL (a member of the NP group);
   (f) TBGL retained the $50 in cash on deposit; and
   (g) TBGL’s contingent liability under the guarantee is valued in the accounts at $5.
   3234 Prior to the bond issue in (d), the ratio of total liabilities to total tangible assets was 50 per cent, and thus within the approved limit. After the bond issue, assets would increase to $150. The $50 liability of BGNV to the Eurobond holders would not come into the ratio calculation because total liabilities only includes liabilities of NP group companies. But the liability of TBGL to BGNV under the on‑loan would come into the ratio calculation. This is because it is a debt of an NP group company and (because it is owed to a company within the consolidated group but outside the NP group) it would not be subject to elimination of inter‑company balances.
   3235 Leaving to one side the distinction between the bonds per se and the proceeds, if the additional $50 is treated as a liability and the contingent liability under the guarantee is added, total liabilities increase to $105. The ratio would then be 70 per cent, and thus outside the approved limit. If, however, that $50 is transferred to shareholders’ funds and is not counted as a liability, assets remain at $150, liabilities increase to $55 and the ratio is 37 per cent.
   3236 If the hypothetical example is re‑worked with only one changed assumption, namely, that BGNV was a member of the NP group, the ratio calculations remain the same. This is because the liability of BGNV to its bondholders (being a liability of an NP group company) would be taken into account. But the liability of TBGL to BGNV under the on‑loan would not be taken into account because it would have been eliminated in the off‑setting of inter‑company balances.
   3237 I raise this because it demonstrates that while the ratio does not change, the mechanical working of the calculation does change depending on whether or not BGNV is a NP group company. The fact is that BGNV was not an NP group company. There is no evidence that any person thought (mistakenly) that it was. As I mentioned in Sect 12.13.8, in the middle of 1987 consideration was given to bringing BGNV into the NP group as a nominated borrower. There is no documentary evidence to suggest, for example, that the relevant Bell group officers overlooked the fact in 1985 and remembered it in 1987.
   3238 It seems to me, therefore, that the original working of the hypothetical example, including the assumption (as was the case) that BGNV was not a member of the NP group, represents the reality as it was in 1985 and in 1987. Before I started with this example I had eliminated TBGL’s obligations under the conversion bond or as guarantor as the explanation for the request. It must therefore be something to do with the money sum represented by the debt instrument, namely, the bonds issued by BGNV. If BGNV is not a member of the NP group, it cannot be the money sum representing the liability of BGNV to the bondholders. To my mind, this leaves only one reasonable possibility: TBGL’s obligation to BGNV under the on‑loans.
   3239 If that is correct, as I believe it is, the objective manifestation of intent contained in, for example, the 11 December 1985 letter, is that the money sum the subject of the request was a subordinated debt. That is what the letter says. It is consistent with the 25 November 1985 letter to the DCT: ‘It is proposed that the funds raised from the issue will be lent by [BGNV] to [TBGL] on the same terms as the issue’ (emphasis added).
   3240 It is consistent also with a number of documents prepared after December 1985. One such document is the first category negative pledge report (30 April 1986). Appendix C of that report discloses a deduction of ‘$75 million convertible note borrowings of [TBGL] plus $75 million convertible note borrowings of [BGNV] on‑lent to [TBGL] treated as equity’ (emphasis added). The intention to on‑lend on the same terms as the bond issue was also raised in the correspondence of 15 April 1988 between C&L and the DCT: see Sect 12.14.1.
   3241 I mentioned many other documents in Sect 13.2.3.2 and in Sect 13.2.4.3. They included the weekly or fortnightly spreadsheets prepared in 1988 concerning the NP group borrowing position. In each of these spreadsheets the convertible bonds were included as ‘subordinated borrowings’ of the NP group. I accept the banks’ submission that this could only be a reference to the proceeds of the issues lent to the companies in the NP group, again because BGNV was not a member of that group. This is an example of the Bell group, over a substantial period in its internal documentation, describing the bond issue proceeds as a subordinated debt of the NP group.
   3242 Considerable difficulties are presented in this regard about construction of the language and the concepts involved in capital raising practices using unsecured notes, convertible notes and the like. I acknowledge those difficulties but in the end I find myself satisfied that the thesis ‘bonds means proceeds’, as contended for by the banks, has been made out.
   3243 In Sect 12.10 I announced a finding that the commercial purpose in making the bond issues was to raise funds in such a way that the banks would agree to treat the new borrowings (for that is what they were) as equity, not debt. I have also indicated a degree of comfort with a conclusion that the likelihood of conversion of the bonds into shares was a major reason advanced in support of the case put to the banks. But it was not the only reason. There is, in my view, no warrant for a conclusion that the other reasons advanced in support of the case, especially the subordinated nature of the borrowings, were other than an integral part of attaining the commercial purpose. I am satisfied that it was more than just a ‘happy by-product’ of the arrangement. In my view, the intention of the contracting parties, as manifested by their conduct, was to make the on‑loans on a subordinated basis.
   13.2.6. Three relevant issues relating to the on‑loan contracts
   3244 I need now to test this conclusion against a number of other considerations. First, whether the interrelationship between the BGNV bond issues and the domestic bond issues has any effect on the status of the on‑loans. Secondly, the extent to which the absence from the accounting records of the Bell group companies of express references to the subordinated status of the on‑loans indicates a contrary intention. Thirdly, whether the relationship between TBGL and BGNV, properly understood, supports a conclusion that BGNV was a party to contracts that included a term subordinating the on‑loans.
   13.2.6.1. Relationship of Eurobonds to domestic bonds
   3245 I think further support for the conclusions I have reached can be found in the circumstances in which the bond issues came to be split. I dealt with this at some length in Sect 13.2.3.4 and I am not going to repeat what is said there.
   3246 At the shareholders’ meeting on 12 November 1985 RHaC, as chairman, explained the purpose of the meeting. He said that approval was sought for him to subscribe up to 50 per cent of the note issue ‘on exactly the same terms as offered to the public’ (emphasis added). This, of course, was before a final decision had been taken to use BGNV as the issuer and before the tax problems arose that militated against interests associated with RHaC taking one half of a single bond issue. But the evidence is overwhelming: the sole reason for the change to a split issue was to obtain the maximum taxation advantage from the arrangements.
   3247 The very fact that the issue was to be split, along with the taxation considerations that compelled the group to move in that direction, meant that RHaC’s participation could not be ‘on exactly the same terms as offered to the public’. But there is no evidence that anyone considered or intended that one of the terms that would change was the effective subordination of the bonds. In my view, the preponderance of evidence is to the contrary.
   3248 In the offering circular, completed on or about 10 December 1985, there is reference to a ‘contemporaneous bond issue’ by TBGL to interests controlled by RHaC. Those bonds were described as $75 million convertible subordinated bonds ‘having similar terms and conditions to the [BGNV] bonds’. The only sensible way to read this is that the Eurobonds and the domestic bonds were to be issued on similar terms and conditions, including that both issues be subordinated. It is clear, therefore, that TBGL’s obligations to its bondholders are both direct and subordinated. The use of proceeds clause is, it seems to me, a ‘term and condition’ of the bonds. It says (without mentioning subordination and without reference to the domestic bond issue) that the ‘net proceeds of the issue of bonds … will be loaned by [BGNV] to [TBGL] for funding the group’s business activities’.
   3249 In their closing submissions the banks mentioned this point. They contended that, on the plaintiffs’ case, the statement that the domestic bond issue must be characterised as indicating to the reader that the provision of funds on a subordinated basis under the domestic bonds would not be understood to be a similar ‘term and condition’. But this is a strained and unnatural interpretation. It depends on an investor separating the prominent statement about subordination on the face of the document and the clear reference to the subordinated domestic bonds from statements made, or implied, about the use of the BGNV proceeds, or a determination that such use, commercially integral (on both parties’ case) to the issue, was not a ‘term and condition’ of the bonds. This would be so even though on the plaintiffs’ own case, paradoxically, the statement as to similarity would be a term of the issue but either not a material term of the issue or, if so, would be confined by the plaintiffs’ construction of ‘term and condition’ in this section.
   3250 I think there is merit in the banks’ approach. Two things are clear. First, the obligation of TBGL to Heytesbury Securities (its bondholder) for the money directly received by it from its bondholder is subordinated. In other words, the proceeds of the domestic bond issue are subordinated. Secondly, the domestic bond issue was expressed to be made on similar terms and conditions as the BGNV bond issue. Assume, as the plaintiffs contend, that the obligation of BGNV to its bondholders is not effectively subordinated because the obligation of TBGL to BGNV for the money received (indirectly) by it from the BGNV bondholders, being the proceeds of the BGNV bond issue, is not subordinated. If that assumption is correct, the BGNV bond issue and the domestic bond issue are not on ‘similar terms and conditions’.
   3251 The agreement entered into between Heytesbury Securities and TBGL on 20 December 1985 states:
   The [domestic bonds] are identical in all respects to [the Eurobonds] save that in order to comply with the provisions of the Income Tax Assessment Act the [domestic bonds] will differ from the [Eurobonds] with respect to rights, and other issues, capital distribution and optional redemption as set out item (ix) of the schedule’.
   3252 At the commencement of the schedule the domestic bonds are described as convertible and subordinated. There is nothing in the Schedule to suggest that the subordinated status of the bonds was, or was to be, in any way different to the Eurobonds. And the differences in item (ix) are all tax driven.
   3253 The 11 December 1985 letter to the banks was in respect of both the first BGNV bond issue and the TBGL bond issue. No distinction is drawn between the two issues; rather, it is said: ‘The two issues will with the exception of issuers and minor variations due to different domiciliary laws be identical’. The same phrase appears in the 15 April 1987 letter to the banks.
   3254 Note 9 to the balance sheet, reproduced in the TBGL annual report as at 30 June 1986, describes the first BGNV bond issue and the TBGL bond issue. In relation to the former it says (among other things) that the rights of the bondholders are subordinated to the rights of all other unsubordinated creditors of BGNV in the manner set out in the trust deed. In relation to the TBGL bond issue, the note describes the issuer, the amount of the securities and the placement. It mentions that the issue is not listed and states that: ‘All other terms and conditions are similar to those stated above’. It is likely, in my view, that had there been an intention for the effective subordination of the bonds in the two issues to be different, it would have been disclosed in the note. The same note appears in the 1987 Annual Report. It is even clearer in the annual reports for 1988 and 1989 because the descriptions of the respective BGNV bond issues and the accompanying domestic bond issues are merged into the same section with the same description of their subordinated status.
   3255 The last documents I wish to mention in this section are the 1988 spreadsheets describing the NP group borrowing position: see Sect 13.2.4.3. These documents lump the BGNV bond issues and the accompanying domestic bond issues together and describe them as ‘subordinated borrowings’.
   3256 It seems to me, therefore, that the intention was for the subordinated status of the BGNV bonds and the domestic bonds to be the same. This must mean the effective status. Unless the on‑loans were subordinated, the domestic bonds would effectively be subordinated and the BGNV bonds would effectively be unsubordinated. That does not accord with what I believe to be the manifest intention of the contracting parties.
   13.2.6.2. The accounting records
   3257 In oral closing submissions, counsel for the plaintiffs agreed that TBGL must have been authorised to set the terms of the on‑loans in accordance with ordinary inter‑company lending within the Bell group. The money was received and was subject to the ordinary manner in which lending among the group companies occurred. The terms were set by the Accounts department, not by Treasury. The significance, according to the plaintiffs, is that the documentary evidence of those contracts does not suggest that they are subordinated. The only reasonable inference to draw from the absence of an express statement that the lending is subordinated is that the standard course of lending within the Bell group was to apply, namely, that the loans were made on an unsubordinated basis.
   3258 I agree that the normative, ordinary course of inter‑company lending within the Bell group was on an unsubordinated basis. This is the conclusion to be reached from the primary accounting materials and the treatment in the annual accounts of various group companies: see Sect 12.13.2. But whatever may have been the standard practice for setting the terms of intra‑group lending, I do not agree that the terms for these on‑loans were set by the accounting department rather than by Treasury. The evidence of Griffiths, Cahill and Studdy was clear: the office of the chairman and the Treasury were intimately involved in the whole of the arrangements for this fundraising. I can see no reason why that would not also extend to the arrangements by which the bond issue proceeds, having come into BGNV, made their way into the NP group.
   3259 So far as I can see from the evidence, there are only three instances in which inter‑company lending was expressed to be on a subordinated basis. One is an arrangement between TBGIL and BGUK, the second is a loan from HHL to BGF and the third is a loan from BRF to BGF.
   3260 Woodings’ investigations disclosed that in the consolidated accounts of TBGIL for each of the years ended 30 June 1987, 30 June 1988 and 30 June 1989, a loan from BGUK to TBGIL of £100 million was recorded under the heading ‘Subordinated loan’. The note to that item also states that the loan was a subordinated loan. This loan is the subject of a written loan agreement (including a term concerning subordination) dated 30 June 1987 made between BGUK and TBGIL. Woodings said he had not been able to locate ledgers and journal vouchers for TBGIL or BGUK.
   3261 In August 1987, a subordinated loan was made by HHL to BGF. The loan was recorded in BGF’s journals and ledgers as a subordinated loan. This loan account was discharged on 27 and 28 April 1988 and was therefore not recorded in the accounts of BGF for the year ended 30 June 1988. The terms of the loan (including the term concerning subordination) were contained in a letter of agreement restated as at 26 November 1987.
   3262 In April 1988, a subordinated loan was made by BRF to BGF. This loan, too, was recorded in BGF’s ledgers as a subordinated loan. In the accounts of BGF for the year ended 30 June 1988 this liability is accounted for as part of ‘non‑current liabilities, creditors and borrowings’. Note 7 then identifies this liability to be an amount owing to a related company. There is no statement in the note to the effect that this liability was subordinated. In the consolidated accounts of TBGL for the year ended 30 June 1988, this liability is accounted for as part of ‘non‑current liabilities creditors and borrowings’ and in the note to that item (note 20) it is described as an ‘unsecured subordinated loan’. The 30 June 1989 accounts of BGF contain this note: ‘In May 1989 [BGF] repaid its unsecured subordinated loan from [BRF]’. Like the HHL loan, the terms of the loan (including the term concerning subordination) were contained in a letter of agreement dated 27 April 1988.
   3263 The fact that the normative, ordinary course of inter‑company lending within the Bell group was on an unsubordinated basis does not, of course, mean that every loan made by one group company to another had that status. That there were at least three instances of subordinated loans being made establishes the contrary argument. But it is relevant to note that in the only instances of which evidence was given concerning subordinated loans, there was mention of the fact in the records.
   3264 On the other hand, inter‑company dealings can take many forms and be aimed to achieve quite different objectives. There is not much evidence explaining the genesis or objectives of those three transactions. It is not surprising that the TBGIL loan was the subject of a formal agreement because it contained a term permitting the lender to convert the loan into capital at the rate of four 25p shares for each £1 of the outstanding advance.
   3265 The terms of the loan agreements suggest that the HHL and BRL loans were in the nature of ‘come and go’ facilities. It might be said that they justify or require more formality than a straight loan, although I do not place much store on that distinction. In any event, save for the caveat mentioned in the next paragraph, there is no evidence that officers of the Bell group made a deliberate decision not to document the BGNV on‑loans. But, unlike the TBGIL, HHL and BRF loans, there is an abundance of evidence about the genesis and objectives of the bond issues and the on‑loans.
   3266 The caveat mentioned in the preceding paragraph is this. Griffiths said that as far as he could recall, the only documentation in respect of most agreements, or decisions concerning transactions, between TBGL subsidiaries or between TBGL and its subsidiaries were company minutes or accounting book entries. Generally more substantive documentation would only be prepared if such documentation was necessary for tax purposes or to show to someone outside the Bell group. On 13 February 1987, Wilson sent a memorandum to Griffiths and others advising of changes to the Stamp Act 1921 (WA). She said it was essential in the light of the changes that no written offers be brought into existence with respect to inter‑company loans, otherwise there would be a liability to stamp duty. She recommended that all inter‑company loans be done by minute. This might explain why the second and third BGNV on‑loans were not documented (although there is no evidence they were minuted either), but it does not apply to the first BGNV on‑loan.
   3267 It would have been better had the journals and ledgers recording the BGNV on‑loans contained a clear statement that the debts were subordinated, as they did in relation to the three loans that I have just mentioned. And, notwithstanding the laudable objective of minimising stamp duty, it would have been better had the on‑loans been made the subject of a formal agreement, even a simple one (a description that fits the documentation of the TBGIL, HHL and BRF loans). Had they done so, this litigation might never have arisen. But the primary source documents contain no such references, no formal agreements were prepared and the loans were not mentioned in a minute. This litigation (or at least this aspect of it) is a result. ‘There but for a ha’penneth of tar’, as the old saying goes. I suspect that it is another indication that no‑one actually thought through the mechanism of the on‑loans.
   3268 The lack of express recording (in the journals and ledgers) of the on‑loans as subordinated liabilities cannot be dismissed as an immaterial consideration. In some ways the absence of such a statement in the annual accounts, while still of concern, may be less worrying because there is a description of subordination in the note relating to the convertible bond issues. And I note there was a lack of consistency in the treatment of the BRF−BGF loan, (so far as concerns an express note of its subordinated status) in the annual accounts of TBGL and of BGF as at 30 June 1988. Coming back to the source materials, there are other documents, such as the 1988 borrowing position spreadsheets that, in my view, fall to be read as encompassing the on‑loans and which refer to the liabilities as subordinated.
   3269 How did this situation arise? It might be yet another indication that no‑one (at the time) thought through the mechanics of the on‑loans. But that does not, of itself, mean that the intention of the contracting parties was to on‑lend on an unsubordinated basis. It depends on the evidence as whole. I have come to the view that the absence from the accounting documents of an explicit acknowledgement that the loans are subordinated is outweighed by the probative force of the other documentary evidence that I have outlined. It does not displace the conclusion to which I have otherwise come based on a review of all of the relevant evidence.
   13.2.6.3. TBGL’s authority; BGNV as a contracting party
   3270 In terms of contractual authority, the critical part of the pleading is ADC par 11ED(19A). The banks say that by 20 December 1985 TBGL ‘had decided’ that the purpose of issuing the bonds was to inject subordinated funds into TBGL or the NP group, that the proceeds of the issue would be provided to TBGL or the NP group and that they would be provided ‘on a subordinated basis’. I note also ADC par 11ED(71)(ei), which pleads that BGNV was created and participated in the bond issues as an agent of TBGL, for the purpose of raising and passing on subordinated funds to TBGL or its nominee.
   3271 In their closing submissions, the plaintiffs submitted that the accounts section of the office of the chairman impliedly had authority to make the BGNV on‑loan contracts on the same terms as inter‑company lending within the Bell group generally. The boards of TBGL, BGF and BGNV did not consider the on‑loans. Further, there was no communication between any of the directors of BGNV and any of the directors or executive officers of TBGL regarding the terms of the on‑loans. However, the terms of the on‑loans as stated in the accounts of BGNV were the same as other inter‑company lending within the Bell group. I dealt with that submission in Sect 13.2.6.2.
   3272 The plaintiffs went on to submit that no actual authority to subordinate the BGNV on‑loans can be implied, having regard to:
   (a) subordination of the on‑loans being a significant matter for the financial position of BGNV (as the on‑loans represented its only real assets); and
   (b) the need for an express agreement as to subordination, which counted against the implication of an authority conferred on TBGL to subordinate the on‑loans.
   3273 The plaintiffs characterised the banks’ position on these matters as, in effect, making the mistake identified by Robert Walker J in Re Polly Peck International plc (In Administration) [1996] 2 ALL ER 433, namely, it ignored that BGNV is a separate legal entity. Submissions to the effect that it was a ‘mere conduit’ or a ‘vehicle’ do not and cannot, as a matter of law, alter its status. Nor can they justify an approach that, in substance, only pays lip service to BGNV’s separate corporate personality. The need to give substantive effect to the separate corporate existence of BGNV is reinforced by the obligation imposed on BGNV under the terms of the trust deeds for each of the BGNV bond issues to conduct its affairs in a proper and efficient manner. This obligation was imposed on BGNV independently of TBGL (which was under its own similar obligation).
   3274 It is quite correct to say that BGNV was, and must be regarded as, a separate legal entity, distinct and apart from TBGL. And it cannot be the case that an agency relationship arises automatically between a parent company and its subsidiary. But the question remains: what is the true nature of the relationship between BGNV and TBGL? It is not part of the plaintiffs’ case that the directors of BGNV breached their duties to BGNV by any act or omission committed by them in the course of arranging the bond issues. Nor do the plaintiffs contend that the mere making of the on‑loans (or their terms) involved a breach. In any event, the evidence of Graham and Williams (the only two directors of BGNV from whom I heard) was that they were well aware of the separate legal entity theory and of their obligations to act in the best interests of the company of which they were a director.
   3275 If it be the case, as the plaintiffs appear to accept, that TBGL possessed the authority to decide the terms of the on‑loans, I have difficulty seeing why that authority should necessarily be limited to terms that accorded with the normative, ordinary process of inter‑company lending. I say this because BGNV was a ‘special purpose vehicle’ and the bond issues were a different type of debt funding. Accordingly, it is not surprising that the intra‑group dealings were effected on a different basis.
   3276 Graham gave evidence that BGNV was a special purpose vehicle used solely for the subordinated convertible bond transaction, primarily to avoid withholding tax for the bondholders. He could not recall attending any meetings as a director of BGNV and his conduct as a director was aimed at achieving the purposes of the bond issues as he understood them. From discussions he had at the time with, among others, Griffiths and Newman, he understood that an important consideration was the raising of funds by the group by some mechanism that could stay within the NP ratios by being treated not as liabilities but as equity. To his understanding, the advantage of a convertible subordinated bond issue was that finance was raised as debt but could count, in most circumstances, as equity.
   3277 Williams’ evidence is that he understood the decision to use an offshore vehicle was made because it was more favourable for Australian tax purposes to do so. The only business conducted by BGNV during his directorship was the making of the three bond issues and the lending of the funds raised to TBGL and BGF. The role of BGNV was to issue the bonds so that the funds could be brought into the Bell group in a manner that would not cause a problem with the bankers and that would not put pressure on or cause a breach of the NP ratios.
   3278 In outlining the testimony of Graham and Williams I do not mean to elevate evidence of a subjective intention of individuals into the arena of objective intent of the corporation. Rather, it is background information about the existence and role of BGNV. I believe the evidence overall supports the conclusion of a manifest intention on the part of TBGL that the on‑loans would be subordinated. Given the background to the creation and operation of BGNV, I am satisfied that BGNV was a party to the tacit understanding by which a contract with a term as to subordination came into being.
   3279 The plaintiffs argued that the Articles of Incorporation of BGNV do not restrict the way in which BGNV could raise funds. It might choose to raise funds and to on-lend those funds in a variety of ways. Further, the method employed on particular occasions cannot be construed as a limitation of the terms of the company’s articles of incorporation. I accept this argument. However, the conclusion to which I have come, namely, that BGNV on‑lent the funds of a subordinated basis, stems from what happened in fact rather than from any express or implied restrictions in the constitutional documents.
   13.2.7. A subordination term in the on‑loan contracts: a summary
   3280 In my view, there were on‑loan contracts and they did include a term relating to subordination. The next question will be what, precisely, was the term relating to subordination and can it be identified with sufficient certainty to have contractual effect? Before I proceed to that issue, I will attempt to summarise why I have come to the conclusion mentioned in the preceding sentence. The relative brevity of this summary belies the importance or difficulty of the question and, accordingly, this short dissertation needs to be taken in the context of all that has preceded it in Sect 12 and Sect 13.
   3281 The structure envisaged at the time of the shareholders’ meeting in November 1985 was for the issue by TBGL of subordinated convertible bonds to the value of $150 million. The claims of the bondholders (whether they were European investors or Heytesbury Securities) against TBGL in respect of those bonds would have been subordinated. In other words, the money would have come into the hands of TBGL as subordinated borrowings.
   3282 BGNV was then introduced solely to facilitate the tax effectiveness of the overall funding arrangements. But further problems emerged concerning the tax treatment of the arrangements. Thus, not only was there a need to interpose an offshore issuing entity, but tax considerations also demanded that the issue be split. The ramifications of this include the following related matters:
   (a) the interposition of BGNV meant there would have to be an on‑loan; and
   (b) all of the proceeds from the bond issues would (still) come into the hands of TBGL, but from two different sources.
   3283 On 25 November 1985 TBGL wrote to the DCT advising of these arrangements and seeking a withholding tax exemption certificate. The letter said, among other things, that the funds raised from the issue would be lent by BGNV to TBGL on the same terms as the issue. The subordination regime was one of the ‘terms of the issue’. And it is a material term. If the on‑loans do not contain a term as to subordination, they are not on the same terms as the issue.
   3284 On 10 December 1985 the final version of the offering circular was promulgated. The offering circular recited that:
   (a) the bonds to be issued by BGNV were to be subordinated;
   (b) the proceeds of the bond issue were to be on‑lent to TBGL;
   (c) there was to be a contemporaneous issue of subordinated bonds by TBGL to interests associated with RHaC; and
   (d) those bonds were to be on similar terms and conditions to the BGNV bonds.
   3285 It would have been apparent on the face of the offering circular that the moneys coming into the hands of TBGL, from the issue by it of subordinated bonds to RHaC’s interests, would have been subordinated. If the moneys coming into the hands of TBGL from BGNV were not subordinated, the bond issue by BGNV and the bond issue by TBGL would not have been on similar terms and conditions.
   3286 In my view, the balance of probabilities favours the conclusion that the on‑loan contracts included a term that they (the on‑loans) would be subordinated on the terms and conditions applying to the bonds per se.
   13.2.8. The precise term as to subordination
   3287 I turn now to two related matters concerning the subordination term. The first point revolves around the necessity to identify with some precision the content of the subordination term in the on‑loan contracts. It is one thing to say the on‑loans would be subordinated ‘on the terms and conditions applying to the bonds per se’. It is another thing to identify precisely what that means. The second question is whether a term as to subordination can be implied (as opposed to inferred by conduct) into the contractual arrangements. This section deals with the first of those questions.
   3288 The starting point is the well-known principle that the law requires the parties to make their own contract. The law will not make a contract for the parties out of terms that are indefinite or illusory. The plaintiffs say that even if, contrary to their primary position, there was some form of understanding that the on‑loans would be subordinated, it could not have contractual effect. This is because the nature of the subordination contended for is, at best, a congeries of concepts and lacks the requisite degree of certainty. Not so, say the banks. It is in fact dead simple and as clear as crystal: even the Sidhe could understand it. I will attempt to summarise the main features of the competing contentions as they appear in the closing submissions.
   13.2.8.1. The banks’ case
   3289 The banks allege, in respect of each on‑loan, that it would be subordinated to the claims of the unsubordinated creditors of TBGL (in respect of the 1985 on‑loan) and BGF (in respect of the 1987 on‑loans) substantially on terms that in the event of the winding up of TBGL or BGF (as the case may be):
   (a) the claims of BGNV against TBGL or BGF in respect of that on‑loan would be postponed to the claims of unsubordinated creditors of TBGL or BGF; or, alternatively
   (b) if any amount was paid to BGNV in the liquidation of BGF or TBGL (as the case may be) in respect of that on‑loan, such money would be held in trust.
   3290 The banks contend that the on‑loan contracts were on the same terms as the bond issues. In summary, the basis for that contention is that BGNV was interposed for tax reasons only and was not intended to affect the subordination of the proceeds of the issues into the NP group. They say, again in summary, that these terms provided:
   (a) a postponement of claims, that is, an agreement that in the liquidation of the relevant company those claims would not be met until the claims of unsubordinated creditors were paid in full; and
   (b) that if, notwithstanding the term in (a), any moneys were paid in the liquidation in respect of the subordinated claims, those moneys would be held in trust for satisfaction of the claims of unsubordinated creditors.
   3291 The banks contend that the subordination terms of the on‑loan contracts depend on the subordination regime contained in the trust deeds. That regime, the banks say, was effected in two parts that were cumulative (if necessary) in effect. The subordination provisions of the trust deeds contemplate the lodging of a proof by the creditor (in the case of the BGNV bond issue trust deeds, by the trustee LDTC in the winding up of BGNV), but subject to an agreed (and thus contractual) postponement of the right to share in any dividend. Nevertheless, the importance of subordination was such that the parties recognised that it was at least possible that, despite that postponement, funds might be paid to the trustee.
   3292 If funds were to find their way to the trustee before the senior creditors were paid in full, then a turnover trust would operate and the funds would be held on trust for the senior creditors until they were paid.
   3293 It is not a criticism, the banks say, of the contractual certainty of such a regime to say that it is unknown, in advance, how or why the initial postponement might not be honoured by a liquidator or external administrator. That is beside the point. The agreement in the trust deeds, which on the banks’ case formed part of the agreement in the on‑loans, was that if a dividend were paid before the full discharge of the obligations to senior creditors, then the trust would operate.
   3294 The banks point to the plaintiffs’ assertion that the bargain in the trust deeds (and that is the bargain that the banks say was reproduced in the on‑loans) was that the parties had not agreed and could not agree on the mechanism of subordination. The plaintiffs’ implicit argument is that the term alleged was that subordination could be effected in any one of three ways and the parties had not agreed upon which would operate.
   3295 The banks say that there is nothing to support these contentions. They ignore the fact that the mechanism for subordination is clear and operates at two stages in the distribution of the debtor company’s assets after the lodging of a proof:
   (a) postponement of the creditor’s claim to a dividend until senior creditors are paid; and
   (b) the status of any funds that may be paid to the creditor, notwithstanding the postponement.
   3296 Whilst it might be uncertain what a liquidator might or might not do in recognising and implementing the subordination regime, the operation of the regime is clear and certain. The two terms are, in addition, pleaded in the alternative. This simply recognises that it may be asserted by the plaintiffs that the proper construction of the trust deeds (and thus the on‑loans) results in one or other of the above terms. The banks’ primary case in respect of the terms is as set out above.
   13.2.8.2. The plaintiffs’ case
   3297 The plaintiffs deny that TBGL made the decision alleged in ADC par 11EE(2) to (4), namely, that the on‑loans would be subordinated to the claims of other creditors of TBGL. Further, the plaintiffs say that even if it were found that TBGL did make those decisions, the terms alleged to be the subject matter of the decisions were illusory, too vague and too uncertain to be enforceable.
   3298 The subordination terms of the BGNV on‑loan contracts alleged by the banks (and which are the subject of the contract inter se and the various estoppel pleas) include either or both of the two terms concerning subordination. The ‘and/or’ pleading of the alleged subordination terms immediately introduces an element of uncertainty into the decisions said to have been taken by TBGL and the terms of the on‑loan contracts that are alleged to have been made as a result of those decisions or which are to be inferred or implied according to the defendants. That uncertainty also infects the alleged representations, assumptions, intentions and beliefs on which the estoppels are based.
   3299 The plaintiffs submit that the uncertainty introduced by the ‘and/or’ plea is not a semantic quibble. Contractual and trust subordinations are fundamentally different. Importantly, they do not operate to reinforce each other in every circumstance. It cannot be said, as a matter of course, that TBGL, BGF and BGNV, or those parties and the bank lenders to the NP group, would have agreed to contractual or trust subordination, or to contractual and trust subordination.
   3300 It should also be noted, the plaintiffs contend, that the terms alleged by the banks involve a springing subordination that would only be triggered in a winding up of TBGL and (or) BGF and they subordinate the claims of BGNV to the claims of all unsubordinated creditors of TBGL and (or) BGF. These terms are significantly different to those contained in the BGNV Subordination Deed. This is part of the plaintiffs’ ‘deeper subordination’ argument, with which I will deal later.
   3301 The plaintiffs point to the innate complexity and variability of subordination as a concept. There is no universal form of subordination nor are there ‘standard’ terms of subordination that have been developed through commercial experience and which are, or were in the 1980s, routinely adopted as a matter of practice. The commercial reality is that subordination agreements will vary according to the circumstances in which they are made. The plaintiffs rely on this passage from an article, Ryan HR, ‘The Subordinated Liability of Junk Bonds’ (1988) 105 BLJ 4, 4 – 5:
   Debt subordination is what the subordination provisions say it is. The phrase ‘subordination of debt’ has no meaning. The provision that a specified junior debt is ‘subordinated to’ specified senior debt of the common debtor would be so ambiguous or uncertain as to not be enforceable. The terms of subordination must state how – that is, in what circumstances, to what extent, and for how long – the junior debt is subordinated to the senior debt.
   3302 On a matter of such complexity as the terms of subordination of a loan, no inference as to those terms can be drawn from the mere description of the bonds as being subordinated, or even from disclosure of the terms on which the bonds were subordinated at the level of the issuer.
   3303 The plaintiffs also pose the rhetorical question: subordinated to which claims? The banks allege that the BGNV on‑loan contracts, expressly or by implication, contained terms that subordinated BGNV to the claims of all creditors of TBGL and BGF. It is not clear why that would be so on the banks’ case; that is, why the subordination should have been in favour of all creditors and not just as against the claims of the bank lenders to TBGL and BGF. No attempt was made in the opening to explain why that should have been expressly agreed or is to be inferred or implied given what was agreed in the BGNV Subordination Deed. That is, TBGL, BGF, BGNV and the banks agreed on subordination in favour of the banks when they actually considered the question of subordination of the BGNV on‑loans.
   13.2.8.3. Certainty of the subordination term: the trust deeds
   3304 It will be convenient to deal with the last matter raised by the plaintiffs at the outset of this section. The proposal to enter into a bond issue was put forward on the basis that the bonds would rank after all unsecured and unsubordinated obligations of the issuer (and the guarantor). That is what the shareholders were told in the C&L report that accompanied the notice dated 17 October 1985 convening the general meeting of shareholders. That is the wording in the form of the bonds. It also follows from the definition of ‘relevant claims’ in the subordination provisions of the bond issue trust deeds.
   3305 I am not aware of any evidence (oral or documentary) indicating or suggesting that consideration was given at any time to changing that situation. In particular, there is no evidence that consideration was given to subordinating the claims of bondholders behind the banks but not behind other unsecured and unsubordinated creditors.
   3306 It does no mischief to the formulation of the commercial purpose of the bond issue to express it as being (1) to raise funds, (2) to do so in a tax effective way and (3) to do so in a way that would allow it to be treated as equity rather than debt. The ‘and’ is conjunctive. The objective in (1) was to be achieved by issuing the convertible bonds into the Eurobond market and to Heytesbury Securities. The goal expressed in (3) was to be achieved by having the banks agree to treat the borrowings as equity, not debt.
   3307 Against this background, there are at least two explanations why the subordination provisions did not distinguish between the banks and other unsecured creditors. First, Griffiths testified that the sentiment was to try and keep things as simple as possible. Differentiating between the banks and other creditors, insofar as subordination was concerned, would have added a layer of complexity. As I understood the expert evidence, the pricing of the bond issue was sensitive to many things, including risk. It is at least possible that a decision to differentiate between classes of creditors might have had an impact in this area. Secondly, the banks were ordinary unsecured creditors. Their only protection was the negative pledge undertakings. There is a certain logic in them continuing to be treated as ordinary unsecured creditors with (at least in terms of the protection offered by the subordination regime) the same rights and protections as other ordinary unsecured creditors.
   3308 This being so, I do not see anything problematic in the banks being asked to treat the borrowings as equity on the basis that the liabilities would be subordinated behind the claims of unsecured creditors, a class into which they (the banks) fell. The fact that objective (1), even if achieved, was of little use unless objective (3) was also achieved is not an argument that raises uncertainty about whether the intention was to benefit (by the subordination regime) all, or a particular class only, of the unsecured creditors.
   3309 The distinction in this regard between the on‑loan contracts on the one hand and the 1990 subordination deeds on the other, while it is significant for other reasons, does not bear upon the terms of the on‑loan contracts. The situation in 1985 and 1987 was quite different to that in 1990. In the earlier years the preponderance of evidence supports the view that the banks were happy to deal with the Bell group and to do so on an unsecured basis, supported by the negative pledges. Not so in 1989 and 1990, following the change of control of the Bell group. The banks, as a broad generalisation, wanted to end their relationship with the Bell group but could not do so immediately. A central feature of the 1990 refinancing was the change of status of the banks from unsecured to secured creditors. This is a horse of a different colour
   3310 I notice that in their closing submissions, the plaintiffs pointed out that it was not only the 1990 subordination deeds in which the beneficiary of the subordination regimes was the banks, rather than unsecured creditors generally. They point to the loan agreement between TBGIL and BGUK, which limits the protection to those banks lending to BGUK. That is true. But the same does not apply to the loan agreements between HHL and BGF and between BRF and BGF. In each of those agreements the protection extends to all unsubordinated creditors.
   3311 There is, in my view, no issue of lack of certainty in the on‑loan contracts by reason of the fact that:
   (a) it would have been sufficient, in order to achieve the commercial purpose, for the bonds to be subordinated only to the banks and not to all other unsubordinated creditors; or
   (b) that in other (later) loan arrangements, the subordination regime was so limited.
   3312 It will be apparent from what I have said in Sect 12.2.2 and Sect 12.2.3 that I accept that subordination, as a concept, is a complex thing. I accept also that the use of the word ‘subordination’, by itself, does not tell the reader much. The commercial reality is that subordination agreements will vary according to the circumstances in which they are made. There is no common form of subordination agreement. But an understanding of ‘subordination’ in a general sense has little meaning and utility unless it is then applied to the circumstances in which a particular creditor and a particular debtor found themselves at the time.
   3313 In Sect 12.3 I described in detail the subordination regime in the offering circulars and the bond issue trust deeds. The provisions are complex. But complexity does not, of itself, mean there could not be a tacit understanding about a purported term. Subordination regimes can be long, tortuous and convoluted, as they are in the trust deeds for the BGNV bond issues and the domestic bond issues. With all due respect to the draftsperson, the provisions are not easy to read. But subordination agreements can also be blissfully succinct. The relevant provisions in the loan agreement between HHL and BGF, for example, fit into the latter category:
   [The lender] acknowledges and confirms that in the event of the winding up of the borrower the claims of [the lender] under this facility shall be postponed to the claims of all other unsubordinated creditors of the borrower outstanding at the commencement of or arising by virtue of the winding up of the borrower and the indebtedness of the borrower under this facility shall rank with other indebtedness of the borrower which is expressly defined as subordinated and expressed in its terms to rank after all unsecured and unsubordinated indebtedness of the borrower.
   3314 There have been occasions on which succinct subordination provisions have survived a challenge on the grounds of certainty: see, for example, Re NIAA Corporation Ltd (in Liq), 356 (Santow J). Also, in Re British and Commonwealth Holdings plc (No 3) (1992) 1 WLR 672, subordination provisions identical to cl 5(A) of the third BGNV bond issue trust deed were held to be effective, although in a different context and without any express reference to a problem of certainty. This last‑mentioned case suggests that this litigation is not the only occasion on which the precedent collection from which the bond issue trust deed was taken has troubled the courts.
   3315 The question, so far as it is relevant here, is whether the term can be identified with sufficient precision to satisfy the requirements of certainty that are a hallmark of contract law. This depends, of course, on the circumstances of the particular case and the factual matrix in, or from, which the tacit understanding is said to have arisen.
   3316 The argument is, of course, whether the subordination terms applying to the bonds per se have been incorporated into the on‑loan contracts. It is necessary, therefore, to decide what are the relevant terms in the bond issue documents and whether they are bedevilled by a lack of certainty or any similar contractual impediment.
   3317 The starting point is the subordination provisions in the offering circulars and the conditions of the bonds. They provide that the rights of the bondholders are subordinated in right of payment to the claims of all other unsubordinated creditors of BGNV (or of TBGL under the subordinated guarantee) in the manner provided in the trust deed. The relevant provisions of the trust deed are difficult to summarise. Briefly, the regime is that on a winding up of the issuer the claims of the bondholders against the issuer are postponed to the claims of other unsubordinated creditors. No amount is payable to the trustee for the bondholders until claims of unsubordinated creditors have been satisfied. But if moneys are paid to the trustee in the winding up, the trustee is to hold them on trust to be applied in a specified order of priorities. The specified order ranks the claims of unsubordinated creditors ahead of the bondholders’ claims.
   3318 Using the categorisation of types of subordination described in the general discussion of the subject, the trust deeds seem to me to provide for an inchoate subordination that, if triggered, brings about a turnover trust. I have described the subordination provisions of the trust deed as ‘long, tortuous and convoluted’. I have also visited favonian criticism on the draftsperson. It is a mystery even to me why I mentioned the draftsperson of a document that was prepared more than 30 years ago. It must have been a moment of pure self indulgence. But then again, perhaps not. In Sect 12.3.2 I mentioned that during the hearing differing views had been advanced as to the proper construction of the subordination regime. I need to say a little more about that dispute.
   3319 The banks contend that the subordination is, first and foremost, contractual, brought about the ‘postponement’ mentioned in the early part of cl 5(A)(2) of the trust deed. This involved an agreement that in a liquidation, the claims of the bondholders would not be met until the claims of unsubordinated creditors were paid in full. But if, notwithstanding the contractual subordination, moneys were paid in a liquidation in respect of the subordinated claims, those moneys would be held in trust for satisfaction of the claims of unsubordinated creditors. The banks say these are two parts that are cumulative (if necessary) in effect. The trust deed contemplates the lodging of a proof by the trustee but subject to a postponement of the right to share in any dividend. That the two parts have individual and (or) cumulative effect is in accord with the ‘and/or’ pleading: see, for example, ADC pars 11EE(2), (3) and (4).
   3320 The plaintiffs say that on its proper construction, the trust deed envisages that the trustee will prove in a liquidation and that the liquidator will not differentiate between subordinated and non‑subordinated claims but rather treat them as if they ranked pari passu. The liquidator will create a fund in the liquidation by the realisation of assets and then deal with it in accordance with the scheme of priorities set out in the legislation. If there is a balance of funds to be distributed to unsecured creditors then, as between the subordinated and non‑subordinated creditors, it will be apportioned between them on a pari passu basis. But at this stage the trust regime prescribed by cl 5(A)(2) will take over.
   3321 As I indicated earlier, I think the construction advanced by the plaintiffs is the better one. But, for the purpose of deciding whether the provisions are sufficiently certain, I do not think anything turns on the distinction. Courts entertain constructions summonses every day of the week. The fact that there is a dispute as to what the terms of a contract mean does not mean that those provisions cannot have contractual effect because they lack certainty.
   3322 The early words in cl 5(A)(2) cannot be ignored: the claims of the bondholders ‘shall be postponed’ to the claims of unsubordinated creditors. In a winding up, a liquidator would be obliged to recognise the claims of bondholders because, after all, they are creditors. The description ‘subordinated’ does not alter that. What it does alter is the ranking, as between creditors of different classes or genres, of the right to receive dividends from the surplus funds available for distribution in the administration. The regime recognises this. The liquidator must know (and, if necessary, be able to adjudicate on) the extent of the claims of bondholders. Hence the proof of debt by the trustee.
   3323 In turn, the trustee has obligations to the bondholders. To fulfil those obligations, the trustee must know (and, if necessary, be able to challenge) the extent of the claims of creditors who rank before the bondholders. Hence the certificate mentioned in cl 5(A)(3). Once there is a fund for distribution, one of three things might happen:
   (a) the liquidator declares dividends to all creditors, regardless of whether they are subordinated or unsubordinated, with the bondholders’ entitlement being passed to the trustee for distribution pro rata among bondholders;
   (b) the liquidator declares dividends to all creditors, regardless of whether they are subordinated or unsubordinated, and the liquidator, by agreement with the trustee, pays out the entitlement of bondholders direct to them for distribution pro rata among bondholders; or
   (c) the liquidator declares dividends to all creditors, regardless of whether they are subordinated or unsubordinated, and pays out the entitlements of the latter. But the liquidator, by agreement with the trustee, holds the entitlement of bondholders and distributes it, too, among unsubordinated creditors.
   3324 Whichever way it works, the claims of the bondholders are ‘postponed’. The entitlements they would have received had they not been subordinated are held, either by the liquidator or by the trustee, until the claims of unsubordinated creditors have been satisfied in full. In other words, whichever way it works, unless and until the claims of unsubordinated creditors are satisfied to the extent of 100 cents in the dollar, the bondholders get nothing. This, in my view, is the effective contractual subordination. It is inchoate because it arises only on liquidation. But, once triggered, there is a turnover trust of the moneys (if any) paid to the trustee by the liquidator in the course of the winding up. From a drafting perspective, it would have been better had the alternatives I have described (in (a), (b) and (c) above) been more clearly spelled out. But I am satisfied that there is sufficient certainty to permit a conclusion of contractual efficacy.
   3325 There is another issue relating to the subordination regime in the trust deeds that I need to mention. In oral opening, counsel for the plaintiffs suggested that the turnover trust was a future trust; that is, one operating in the future if and when there was a liquidation, if and when proofs of debt were lodged and if and when moneys were paid to the trustee. I took this to be a challenge to the efficacy, as a matter of law, of the turnover trust. This would raise questions about the proper subject matter of a trust and whether or not an inchoate future trust of property can be the subject of a presently existing trust: Norman v The Federal Commissioner of Taxation (1963) 109 CLR 9; Shepherd v The Federal Commissioner of Taxation (1965) 113 CLR 385.
   3326 I intend to deal with this very briefly because the argument was not developed either in the written opening of the case in reply by the plaintiffs or in any of the plaintiffs’ oral or written closing submissions. It is sufficient for me to say that I accept the banks’ submission that there was a presently constituted trust in favour of unsubordinated creditors covering the right to prove, and distributions made, in the winding up.
   13.2.9. An implied term as to subordination
   3327 In case I am wrong in my conclusion that a term as to subordination comes into the on‑loan contracts by tacit understanding or mutual assent to be inferred from conduct, I need to address the question whether such a term could be implied. In what I have said to date I have concentrated on a search for actual intention to be inferred from the conduct of the parties amounting to a tacit understanding or mutual assent. I am moving now to a different approach, namely, the question whether a term as to subordination is to be implied into the on‑loan contracts as a matter of presumed or imputed intention.
   3328 Put in the broadest terms, the answer to the question will depend on whether it is necessary to imply the term for the reasonable or efficient operation of the contracts assessed against the background of, but without rigidly applying, the BP Refinery criteria. It depends, I think, on what is regarded as ‘the contract’ into which the term is to be implied. There are at least two possible scenarios. The first one is to look at the ‘contract’ as a simple, straightforward instance of inter‑company lending. Using the phraseology of the annual reports (and thus leaving to one side the contentious issue of subordination) a contract for a simple and (in the context of the Bell group circa 1985 to 1987) conventional inter‑company loan would be: ‘the amounts owing by the ultimate holding company and the holding company are unsecured, interest bearing and have no fixed terms of repayment’. Under this scenario the loan would effectively be divorced from its context. It would not matter where the funds came from and nor would it be relevant to identify the purpose or objective for which the moneys were advanced.
   3329 In such an example I think there would be considerable difficulties standing in the way of an implied term as to subordination. Such a term might be reasonable and equitable and it might not contradict any express term of the simple contract in the way I have expressed it. But I doubt it could be said that it would it be necessary to imply a term as to subordination in order to give business efficacy to the contract. Given what I have said about the concept of subordination and the various forms it can take, identifying the term as one capable of clear expression and as one that is so obvious that ‘it goes without saying’ would not be at all easy.
   3330 The second scenario involves broadening the concept of ‘contract’ into which the term is implied. If the contract is not a simple incident of inter‑company lending but, rather, an on‑loan of the proceeds of a bond issue made ‘on the same terms as the issue’, the situation might be quite different. The contract would fall to be considered in the context of the bond issue. Even if the phrase ‘the same terms as the bond issue’ left a lacuna because, for example, there was seen to be some ambiguity as to whether the word ‘terms’ included the subordination provisions, the commercial purpose of the fundraising exercise would be a relevant consideration.
   3331 I have found that the commercial purpose was to inject funds into the borrower company (a member of the NP group) in a such way that the banks would consent to it being treated as equity rather than debt for NP ratio calculations. I have also found that subordination was regarded as an essential element of the argument to be put to the banks for equity treatment of the bonds and thus for the attainment of the commercial objective. On the basis of those findings I think it would follow that a subordination term was reasonable and equitable and necessary to give business efficacy to the contract. I think it could properly be said in those circumstances, that the contract would not be effective without it and no question would arise of any inconsistency between it and any express term of the contract. Applying the analysis of the content of the subordination in the way I have done in Sect 13.2.8.3 I think it would be capable of clear expression and so obvious that ‘it goes without saying’.
   3332 I think the second scenario is the one that more closely resembles the reality of the relationship between BGNV and the other Bell group companies in 1985 and 1987. It would be open, if necessary, to imply a term as to subordination.
   13.3. Ability of the banks to enforce the on‑loan contracts: privity
   13.3.1. The privity argument described
   3333 In ADC par 143(a)(1) the banks say they fear that, unless restrained, the plaintiffs will not give effect to, or comply with, the terms of the contracts inter se or the terms of the contracts inter partes. Insofar as it relates to the contracts inter se, the plaintiffs plead in PR par 99 that even if TBGL made the decisions pleaded in ADC pars 11EE(2), (3) and (4) (in other words, if the on loan arrangements contained a subordination term), the banks have no standing to enforce them because the banks were not parties to the on‑loan contracts.
   3334 This is all good, solid, contract law fare. It goes all the way back to Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 but with liberal doses of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 and the Property Law Act s 11 thrown in for good measure.
   3335 In simple terms, the principle generally known as privity of contract is that only a person who is a party to a contract can sue on it. Put in a slightly different way, a contract cannot confer any rights on one who is not a party to the contract, even if the (or an) object of the contract may have been to benefit the third party. There are exceptions. Some of them arise at common law. Another exception takes statutory form, namely, Property Law Act s 11, subsection (2) of which is in this form:
   (2) … where a contract expressly in its terms purports to confer a benefit directly on a person who is not named as a party to the contract, the contract is … enforceable by that person in his own name but ‑
   (a) all defences that would have been available to the defendant in an action or proceeding in a court of competent jurisdiction to enforce the contract had the plaintiff in the action or proceeding been named as a party to the contract, shall be so available;
   (b) each person named as a party to the contract shall be joined as a party to the action or proceeding; and
   (c) such defendant in the action or proceeding shall be entitled to enforce as against such plaintiff, all the obligations that in the terms of the contract are imposed on the plaintiff for the benefit of the defendant.
   13.3.2. The parties’ cases
   3336 The banks contend that the on‑loan contracts satisfy all the requirements for formation of a contract and constitute a contract between the parties for the purposes of Property Law Act s 11(2). Section 11 is a remedial statute and should be given a beneficial construction.
   3337 Each on‑loan intended to, and did, confer the benefit of subordination on the unsubordinated creditors of TBGL and BGF. The subordination of BGNV’s claims in respect of the on‑loans to the claims of the unsubordinated creditors of TBGL and BGF is of benefit to them. Such subordination effects a priority in the ranking of their debt. It is, the banks submit, a benefit of the type contemplated by s 11(2).
   3338 The on‑loan contracts sufficiently identify the unsubordinated creditors as third party beneficiaries. In order to confer a benefit expressly on a person by contract, it is not necessary that the third party be named specifically as a third party beneficiary. It is sufficient for the third party to be ascertained by reference to a class (or, at least, an existing and identifiable class) or by answering a particular description. In postponing and subordinating the claims of BGNV in respect of the on‑loans (in the winding up of TBGL and (or) BGF) to the claims of the ‘unsubordinated creditors’, the on‑loans expressly purported to confer the benefit of such subordination upon the class identified as unsubordinated creditors of TBGL and (or) BGF. Each bank is or became a member of the requisite class and is sufficiently identified as a third party beneficiary within the intended operation of s 11(2).
   3339 The banks submit that the requirement in s 11(2) to confer a benefit expressly on a person accommodates contracts of the type alleged in this case, including those arising from conduct and the ‘tacit agreement’ approach. The contracts alleged contain express terms and expressly confer benefits in the same way as express terms in written contracts.
   3340 The requirement for a contract to confer a benefit ‘expressly in its terms’ does not confine s 11(2) to benefits conferred by express terms but also applies in respect of implied terms. Where a term of a contract purports to confer a benefit, whether the term is an express or implied term of the contract, is irrelevant to the operation of the sub-section. Accordingly, each of the three identified alternative sources of contractual subordination fall within the terms of s 11(2).
   3341 Finally, the banks say that the benefit is conferred directly on them. It is not to the point that none of the banks were named as a party to the on‑loan contracts. What is relevant is that the benefit of subordination of BGNV’s claims was conferred directly on the banks as members of the class of unsubordinated creditors rather than simply resulting in an ancillary or unintended benefit for them or being of benefit to them.
   3342 The plaintiffs contend that even if the contracts inter se contained terms as to subordination as pleaded by the banks, s 11 of the Property Law Act does not confer upon the banks any entitlement to relief in respect of those contracts. Section 11(2) does not apply for a number of overlapping reasons.
   3343 First, s 11(2) only applies to written contracts. The on‑loan contracts were informal. Section 11(2) speaks of ‘a contract expressly in its terms [purporting] to confer a benefit’. The expression ‘contract’ denotes a contract in writing, as s 11 appears in Part II of the Property Law Act, which bears the heading ‘Deeds and Other Instruments’. Alternatively, s 11(2) only applies to express conferrals of benefits, and not to conferrals of benefits inferred from conduct or to implied terms. In the on‑loan contracts, there was no express conferral of benefits upon the banks or other creditors.
   3344 Secondly, s 11(2) requires that the contract identify the person upon whom a benefit is to be conferred. The plaintiffs’ primary submission is that this requires the person to be ‘named’ expressly in the contract. In any informal contract, there was no such ‘naming’. The plaintiffs’ alternative submission is that there is at least a requirement for a defined class to be ‘unmistakeably identified’ in the contract. In the on‑loan contracts, there was no such ‘unmistakeable identification’. This is so whether or not an identified class of beneficiaries is capable of satisfying this requirement.
   3345 Thirdly, the intention to benefit a third party must be ‘expressed’ in the contract: Trident General Insurance, 134 (Brennan J). The benefit has to be conferred ‘directly’.
   3346 Fourthly, s 11(2) only applies where a benefit is conferred ‘directly’ on a person who is not named as a party to the contract. Any benefit to the banks and other creditors from subordination was one which they enjoyed indirectly or incidentally.
   3347 Fifthly, in any event s 11(2) does not apply in favour of someone who was not in existence, or not a member of an identified class, at the time of the contract. Section 11(2) contains no equivalent to the explicit statements in Property Law Act 1974 (Qld) s 55 and Law of Property Act 2000 (NT) s 56 that a person may take the benefit of the covenant even if that person was not in existence and identifiable at the time the covenant was made.
   13.3.3. Whether s 11(2) applies to informal contracts
   3348 I have not been able to find any authority which answers, directly, the question whether s 11 applies only to written contracts or whether it can apply to an informal agreement, such as the on‑loan contracts. It is a difficult question that has troubled commentators over the years. Of course, the absence of authority alone would not deter me from any extension of the application of the section if I was convinced that the legislation intended to deal with oral agreements.
   3349 There is much to be said for the position advanced by the plaintiffs. Most of the provisions of the Property Law Act are devoted to the creation of interests in land. The law has long been suspicious of the creation of interests in land other than by instruments in writing or supported by some form of writing: see, for example, the Statute of Frauds 1677. But the legislation has many general and specific provisions applying to other forms of property and to arrangements such as powers of attorney.
   3350 I accept that the Property Law Act is a remedial statute and, as such, it ought to be given a broad construction. Section 11 was designed to relax the strict application of the common law privity rule in the prescribed circumstances. Unlike the creation of interests in land, the law has always recognised the existence and operation of informal contracts.
   3351 What, then, is the answer to this question? In my opinion, the better view is that Property Law Act s 11(2) is confined to formal written agreements.
   3352 None of the authorities cited in argument involved an oral or informal agreement such as the on-loan contracts. All of the authorities concern written agreements. In particular, I refer to Westralian Farmers Co-operative Ltd v Southern Meat Packers Ltd [1981] WAR 241; Toal v Aquarius Platinum Ltd (No 2) [2004] FCA 550; and Trident v McNiece.
   3353 I note the view expressed in Cheshire and Fifoot’s Law of Contract in Australia 8th Australian ed (2002) [7.16] (footnote 104) that ‘arguably’ the section applies only to contracts in writing. The authors of Greig and Davis, The Law of Contract (1987) 1045 express a similar view. They refer to the ‘removal of the restraints of privity in respect of all promises in writing’ (my emphasis). In Bradbrook MacCallum Moore Australian Real Property Law 3rd ed (2002) [18.02] the authors do not deal directly with this question. But they do suggest that the Western Australian legislation is somewhat limited in its application.
   3354 Section 11(2) sits within Part II of the Property Law Act and it is headed ‘Deeds and Other Instruments’. The definition of ‘instruments’ in s 7 is not all that helpful as it, relevantly, goes no further than deeds and wills within the term. In its ordinary meaning, an ‘instrument’ is something reduced to writing. Butterworths Australian Legal Dictionary defines the term ‘instrument’ as: ‘A formal legal document in writing; for example a deed, will, agreement or guarantee’. But it also recognises that a statute can widen or narrow the general meaning.
   3355 The banks urged me to see the use of the word contract within s 11(2) as including agreements other than written agreements. However, every section within Part II deals with written agreements. Section 8 commences with the words: ‘In every deed, contract, will, order or other instrument that is executed, made or comes into operation’. Section 10 deals with the formalities relating to execution of instruments. The concentration on execution suggests a legislative intent to confine the operation to documents. I can see nothing in the words of the statute to broaden the concept of ‘contract’ beyond the general meaning of ‘instrument’.
   3356 Furthermore, I think I am constrained in the interpretation of this section by Interpretation Act 1984 (WA) s 32. The provision is intended to aid interpretation of the statute even if the statute itself came into existence prior to that Act (s  3(1)). Section 32(1) of the Interpretation Act provides that the headings of the parts, divisions and subdivisions into which a written law is divided form part of the written law. The heading ‘Deeds and Other Instruments’ cannot be ignored.
   3357 The banks referred to the Explanatory Memorandum to the Property Law Bill 1969. On page 4 of the memorandum mention is made of the proposal for reform advocated by the then Lord Chancellor to the English Law Commission in 1965. The need for the English reforms upon which this legislative intervention is based was explained in a paper delivered to the University of Western Australia Law Summer School in 1968: GD Samuels QC, ‘Contracts for the Benefit of Third Parties’ (1968) 8 West Aust L Rev 378.
   3358 The author traces the history of the privity rule, its emergence from traditional authorities such as Tweddle v Atkinson (1861) 1 B&S 393 and Dunlop v Selfridge and its relationship to the doctrine of consideration. As the author explained, the common law recognised deeds of two distinct varieties − indentures and deeds poll. Indentures were generally executed by two or more parties. Deeds could be polled, that is, executed unilaterally. The difference in the form of the document made for a distinction in the enforceability of third party rights.
   3359 The common law rule was that a grantee or covenantee, even if identified as such in an indenture under seal expressed to be made between parties, could not take an immediate interest as grantee nor the benefit of a covenant unless named as a party to the document. The rule did not apply to covenants for the benefit of third parties if contained in a deed poll. However, the rule did apply to deed polls of real estate, personal grants and covenants: see Beswick v Beswick [1967] 3 WLR 932; Coulls v Bagots Executor and Trustee Co. Ltd [1967] HCA 3; (1967) 119 CLR 460.
   3360 I have no difficulty with the proposition that the Act is remedial. However, the reforms were intended to do away with archaic forms of documents and the strict consequences affecting third parties that flowed from those forms. Section 11(1) duplicates the provisions of s 56(1) of the Real Property Act 1925 (UK) precisely. The legislative intention was to ensure that in creating interests in land intended to benefit third parties, including successors in title, it was not necessary specifically to identify those successors or use a particular form of deed poll to confer an entitlement to sue on the covenants. ‘Property’ in s 11(1) has been held to be confined to interests in real property. Westralian Farmers v Southern Meat Packers; citing Beswick v Beswick.
   3361 In relation to s 11(2), the Full Court in Westralian Farmers v Southern Meat Packers pointed out that sub-section (2) does not speak of ‘property’ but ‘benefit’. The Full Court held that where there is an express intention in a contract to benefit a third party, the section ensures that the contract is enforceable by the third party. Such benefits are not confined to interests in real property. However, nothing removes what I believe is the requirement that there be a contract in writing for the section to operate. This, it seems to me, is the proper interpretation of the term ‘contract’ as used in s 11(2) and construed in the context of, and in sympathy with, the scope and purpose of Part II and of the Act generally.
   13.3.4. The other indicia of s 11(2)
   3362 In case others may take a different view of the interpretation of s 11(2), I should deal with several other matters raised in the submissions concerning the privity argument.
   3363 First, it is essential that there be an intention to benefit the third party: Trident v McNiece, 122 – 123 (Mason CJ and Wilson J). In addition, s 11(2) requires that the contract expressly in its terms confers a benefit directly on a person who is not named as a party to the contract. I am not sure whether this requirement is fulfilled. I say this for two reasons. The first of them is that it is not easy to identify the ‘benefit’ to be conferred on the banks. The banks had a right; namely, the right to insist on compliance with the NP ratios. They were asked by the companies to relax that right and to treat what would otherwise be a liability as equity. There is an obvious ‘benefit’ to the companies but it is more difficult to see the corresponding benefit to the banks. I think the answer is that the benefit lies in the fact that on a liquidation of the relevant companies the claims of BGNV in respect of the on‑loans would be postponed behind the claims of the banks and would not be repaid until the banks’ claims had been satisfied.
   3364 The second reason why I hesitate on this question is that, in the peculiar factual circumstances, the benefit may arise from the representations made as to the form of the contract rather than from the contract itself. If that is the case, then the benefit would not be conferred ‘directly’ on the third party by virtue of the contract. However, the commercial purpose of the bond issue was to inject into the NP group funds that, while actually borrowings, would be treated as equity for NP ratio calculations. And the status of the on‑loans as subordinated was central to the achievement of that purpose: see the findings summarised in Sect 13.4. On balance, I think this qualifies as a direct conferral of a benefit.
   3365 Secondly, the third party must be identified. In my view, it is not necessary expressly to name a third party beneficiary before that person can take advantage of s 11(2). It is sufficient for the person to be ascertained by reference to an existing and identifiable class or by answering a particular description. Third party beneficiaries have included, for example, entities answering the description ‘shareholders’ or ‘subsidiaries’: Toal v Aquarius Platinum Ltd; Leighton Holdings Ltd v HIH Casualty and General Insurance Ltd [2001] WASC 34.
   3366 I have found that the on‑loan contracts included a term that they (the on‑loans) would be subordinated on the terms and conditions applying to the bonds per se. Condition 1A of the bonds says that the rights of the bondholders are subordinated in right of payment to the claims of all other unsubordinated creditors of BGNV. Applying this to the first BGNV on‑loan, the rights of the bondholders (through BGNV) are subordinated in right of payment to the claims of all other unsubordinated creditors of TBGL. As at the time when the on‑loans were made, the banks were ‘other unsubordinated creditors’ of TBGL. That is an existing class and they are members of it.
   3367 Thirdly, the section requires that the contract expressly in its terms confers a benefit directly on a person who is not named as a party to the contract. Once again, taking the whole of the evidence of commercial purpose into account, I think there is sufficient to say there was an express conferral of the benefit on the class. I see no tension between that conclusion and the idea that the term as to subordination arises as a matter of tacit understanding or mutual assent. It is a question of actual intention inferred from the circumstances.
   3368 The fourth issue can be posed as a question: does the section apply where the conferral of the benefit arises under an implied term? I accept the broad thrust of the banks’ submissions on this point. The banks point out that s 11(2) substantially adopted the wording of the recommendation of the English Law Revision Committee in its Sixth Interim Report (Cmd 5449, 1937, pars 41‑49): see Westralian Farmers v Southern Meat Packers; the Explanatory Memorandum to the Property Law Act, 4.
   3369 The inclusion of the words ‘expressly in its terms’ in the English Law Revision Committee’s recommendation was directed towards the problem of ‘incidental beneficiaries’, that is, towards ensuring that there was an intention to confer a benefit directly on third parties and that third parties did not gain enforceable rights merely because the contractual provisions would be of benefit to them. The banks contend that it was to this end that the requirement for expressly in its terms evolved.
   3370 The banks further contend that it is only in a sense of excluding ‘incidental beneficiaries’ that any distinction can or should be drawn by the words ‘expressly in its terms’ in s 11(2) between benefits conferred by an implied term and benefits conferred by an express term. The proper construction of s 11(2) is one that, consistent with the English Law Revision Committee recommendation, upholds an intention to confer a benefit regardless whether it be manifested by an express or implied term of the contract. On this construction, third parties would still not get enforceable rights where an implied term did not purport to confer a benefit on the third party but simply was of benefit to such third party.
   3371 I see no tension between this conclusion and my earlier construction of s 11(2) as applying only to written contracts. In this instance, the third party would be enforcing rights under a written contract, even though the particular rights might not appear expressly but arise by implication. The intention to confer a benefit directly on the third party would still have to appear expressly in the agreement.
   3372 Finally, enforceability of the contract by the third party is subject to the three qualifications in s 11(2)(a), (2)(b) and (2)(c). I accept what was put to me by the banks, namely, that the present case raises no issues involving these qualifications.
5. Section 11(2)(a): all defences that would have been available to the defendant in an action or proceeding in a court of competent jurisdiction to enforce the contract, had the plaintiff in the action or proceeding been named as a party to the contract, are available.
6. Section 11(2)(b): each company that was as a party to the contract is a party to the litigation.
7. Section 11(2)(c): each of the banks (defendants in the action) is entitled to enforce, as against each plaintiff, all the obligations that in the terms of the contract are imposed on the plaintiff for the benefit of the bank. This is what the banks seek to do by way of their counterclaim.
   3373 I conclude, then, that if s 11(2) does apply to informal contracts, such as those governing the on‑loans, lack of privity would not be a bar to the banks seeking to enforce the third party rights conferred on them.
   13.3.5. Trust of a contractual promise
   3374 As an alternative to the claim under the Property Law Act, the banks plead in their counterclaim that the terms of the on-loan agreements were:
   (a) covenants and promises by BGNV to TBGL (in respect of the 1985 on-loan) and BGF (in respect of the 1987 on-loans) held on trust by TBGL and BGF for the unsubordinated creditors of TBGL and BGF; and
   (b) covenants and promises by TBGL (in respect of the 1985 on-loan) and BGF (in respect of the 1987 on-loans) held on trust by BGNV for the unsubordinated creditors of TBGL and BGF.
   3375 In Trident v McNiece, Mason CJ and Wilson J recognised that in some circumstances a trust of a contractual promise could arise and it could affect the conventional rules relating to privity. Their Honours said, at 121:
   [T]he courts will recognize the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention.
   3376 However, I cannot glean in the dealings between the companies inter se and between the companies and the banks an intention to create a relationship of trustee and beneficiary in relation to the contractual promises. In this respect, I believe that the contracts inter se were formed; the contracts contained the subordination terms; and the companies made representations to the banks in relation to those terms. But in my view those circumstances are not a sufficient basis from which to conclude that all or any of TBGL, BGF and BGNV intended to constitute themselves or itself a trustee in relation to the promises implicit in the subordination terms.
   3377 Equity does have a part to play in these arrangements. But, as will appear in Sect 15 and following, the protective role of equity is manifested in estoppel. In my view, estoppel (rather than an express trust) is a more appropriate vehicle in which to assess all of the circumstances in which the parties found themselves and under which they conducted (and continued to conduct) their commercial relationships over time. In this sense, the circumstances of this case echo the cautionary note of Deane J in Trident v McNiece (at 147) that not only must the requisite intention exist but, in addition, the imposition of a trust must be the appropriate legal mechanism for giving effect to that intention.
   13.4. Contracts inter se: conclusion
   3378 For present purposes, the critical question is whether the on‑loans (at the time they were made) contained a subordination term. If they did, the evidence is all one way: there was no change to the status of the on‑loans at any time before the January 1990 refinancing. This is a pivotal matter when considering the importance of the subordination question to the matters mentioned in, for example, Sect 7.3.2 and Sect 12.1.4. In my view, the on‑loans were, as between the relevant Bell group companies, subordinated by virtue of the contracts that attended their formation.
   3379 A troubling feature of this entire question is that no‑one actually thought through the mechanics of the on‑loans and the implications of subordination. Can the conduct of parties manifest a tacit understanding or agreement or mutual assent about a matter that was not actually considered with any degree of precision by any party? Does the failure actually to advert to the precise subject matter mean that the explanation for the objective conduct must lie elsewhere? Can a tacit understanding shared by parties to an agreement or a mutual assent arise when the matter was not considered, so that neither party actually turned his or her mind to the precise subject matter said to be a term of the contract?
   3380 After careful consideration I have come to the view that failure actually to advert to the precise subject matter is not necessarily fatal. The evidence permits me to draw the following conclusions.
8. The relevant persons involved in one way or another in the making of decisions, particularly RHaC, Griffiths, Cahill, Studdy and Newman, knew the bonds per se were to be subordinated.
9. They understood that the decision to interpose an offshore issuer would necessitate the making of on‑loans because there was never any intention that the funds would remain in BGNV.
10. They understood that the reason for the interposition of the offshore issuer was to make the issue tax effective. They had no reason to think, nor did they think, that the interposition of the offshore issuer would make any other material difference, including in relation to the status of the on‑loans. Their communications within the group and to others (including the banks) are consistent with those understandings
11. They understood that the commercial purpose of the bond issue was to inject into the NP group funds that, while actually borrowings, would be treated as equity for NP ratio calculations. Subordination was an essential (but not necessarily the only) element in a regime designed to achieve the commercial purpose of the issues.
12. They understood and intended that the funds raised from the bond issue would be lent by BGNV to TBGL on the same terms as the issue.
13. The knowledge and understandings referred to in the preceding items was communicated within the group and to outsiders, including the DCT and the banks.
    3381 Against that background, I believe there is sufficient manifestation of a mutual assent or intention that the on‑loans should be made on the same terms as the bond issues. One of those terms was subordination. I am also satisfied that the term as to subordination can be identified with sufficient precision to meet the requirements of certainty that are a hallmark of contract law. The subordination regime in the bond issue trust deeds is complex but it is not uncertain. This is the regime that has been imported into the on‑loan contracts.
    3382 In Sect 12.4.2.4 I posited four possibilities to explain the nature of the on‑loan contracts for which the banks were contending. I think the answer is best explained by the third possibility, namely, express contracts, probably oral (ADC par 11EA(a)(1) and par 11EE), with an inferred term (arising from a tacit understanding or agreement or from a manifested mutual assent) concerning subordination (ADC par 11EF). In the analysis of this point I have concentrated on the first BGNV on‑loan. I am satisfied that if, as I have found, the first on‑loan was subordinated, so too were the second and third loans. There is no evidence that any different considerations came to the fore when the 1987 bond issues were being arranged.
    3383 The plaintiffs complain of a shift in the banks’ case in describing the rationale of the bond issues to raise funds for the NP group on a subordinated basis as being ‘a purpose’ rather than ‘the purpose’. In my view the case was clear from the outset. If there was such a shift, I do not think the plaintiffs suffered any prejudice from it.
    3384 I have placed some reliance on post‑contractual conduct. But I think that even had I not done so, there would have been sufficient material that pre‑dates the first on‑loan to have found the manifestation of the relevant objective intention. I realise that there is a danger in singling out particular items of evidence and not mentioning others. But I think the Griffiths’ memorandum dated 3 September 1985, the 25 November 1985 letter from TBGL to the DCT and the 11 December 1985 letter to the banks, each of which pre‑dates the contract for the first BGNV on‑loan, are of particular significance in this respect.
    3385 My categorisation of the 11 December 1985 letter as a pre‑contractual communication is based on the on‑loan contract effectively evolving over time and being in place by the time the funds were passed over on 23 December 1985. Of course, anything that happened between December 1985 and May 1987 or July 1987 would be pre‑contractual conduct for the second and third BGNV on‑loans respectively. I said a little earlier that if the first on‑loan was subordinated, so too were the second and third loans. I think the reverse also applies. If the second and (or) the third BGNV on‑loan was or were made on a subordinated basis, there is no warrant for holding that the first loan was different.
    3386 There are two pieces of evidence arising after July 1987 that I regard as significant. One is the explanation in the annual accounts as at 30 June 1988 about why the treatment of the bonds reverted to debt rather than equity: see Sect 12.13.2. There are elements of this from which both parties might take comfort. The note to the accounts says that the expectation of the directors was that, following the share market crash, redemption rather than conversion was more likely. This favours the plaintiffs’ case. On the other hand, the bond issues were then shown as subordinated debt, and the banks continued to recognise the whole amount as subordinated in accordance with the NP guarantee regime. This favours the banks’ case.
    3387 The other item of evidence was the collection of 1988 spreadsheets concerning the borrowing position of the NP group: see Sect 13.2.6.1. These documents lump the BGNV bond issues and the accompanying domestic bond issues together and describe them as ‘subordinated borrowings’. This favours the banks’ case. This looks like a 2:1 score‑line in favour of the banks but if both items of evidence are disregarded it might still be a nil‑all draw.
    3388 Although the privity question relates essentially to enforcement, it was, I think, important to mention it here. In light of the conclusion in the preceding section that the banks lack standing to enforce the contracts inter se because there is no relevant privity of contract, the finding that the on‑loans were subordinated may seem a pyrrhic victory. But that is not necessarily the case. I say this for two reasons.
    3389 First, the facts that the contracts inter se contained the subordination terms and that the companies made representations to the banks in relation to those terms, are an essential underpinning of the estoppel arguments. This is where an equity, enforceable at the behest of the banks, may arise.
    3390 Secondly, the problem of the on‑loans does not end at the time the loans were made (1985 and 1987) or at the moment of execution of the main refinancing documents (January 1990). Further complications arise because of the execution of the BGNV Subordination Deed on 31 July 1990 and because of the execution by LDTC in the mid‑1990s of supplemental deeds. Although I have not seen the deeds, as I understand it their evident purposes was to amend the bond issue trust deeds so as (effectively) to ‘unsubordinate’ the on‑loans and perhaps also the domestic bonds. It seems that the supplemental deeds were the trigger for the commencement by the banks of the LDTC action. All of these things will be aired in due course.
14. The contracts inter partes and subordination
    14.1. Introduction
    3391 In Sect 12.4.2.3 I introduced the case concerning the second species of agreements, namely, contracts between the banks and the NP group companies.
    3392 Briefly, the allegation is that there were contracts between the banks (other than HKBA) and the various NP group companies relating to the first and second (but not the third) BGNV on‑loans. The relevant pleading is ADC par 11EK to par 11EP. The effect of these pleas is that the banks agreed to treat the liabilities of TBGL (or BGF) under the bond issues as equity for the NP ratios and the companies agreed that the liabilities would, in the event of liquidation of TBGL (or BGF), be subordinated to the liabilities of TBGL (or BGF) to the bank lenders.
    3393 The banks explain the importance of the contracts inter partes this way: if the argument is made good, the contracts will operate by way of defence to the plaintiffs’ causes of action based on allegations of breach of duty by the directors in entering into the Transactions and, in particular, by way of answer to the allegation that the interests of bondholders were deleteriously affected by those Transactions. In addition, the contracts inter partes:
    (a) will prevent the plaintiffs from inducing and relying on any breach of contract by them, or some of them, as elements in the causes of action relied upon by the plaintiffs;
    (b) lay the basis for the damages claim pleaded in the counterclaim which will operate by way of set-off against any claims against the banks made by companies that were parties to the agreement; and
    (c) lay a basis for the claims in the counterclaim for injunctions preventing the parties to the contracts from acting in the liquidation of TBGL and BGF on any basis other than that the on‑loans are subordinated.
    14.2. The contracts inter partes: the pleadings
    3394 Three separate contracts are said to have some into existence between the banks and the relevant Bell group companies. Each of them is said to have been made by the banks, or some of them (on the one hand), and all of TBGL, BGNV and the then members of the NP group (on the other). There is an alternative basis, namely, that the contracting parties (apart from the banks) are (i) TBGL or (ii) TBGL and BGNV or (iii) TBGL and the then members of the NP group. The terms of each of the contracts are identical:
    (a) in consideration of the promise in (b) below, each of the banks would treat the liabilities of TBGL (or BGF), as a member of the NP group, arising from the raising and deployment of funds in and about the first (or second) BGNV bond issue and the TBGL (or BGF) bond issue as equity when considering balance sheet ratios for the purposes of banking covenants; and
    (b) the liabilities of TBGL (or BGF), as a member of the NP group, arising from the raising and deployment of funds in and about the first (or second) BGNV bond issue and the TBGL (or BGF) bond issue would in the event of liquidation of TBGL (or BGF) be subordinated to the liabilities of TBGL (or BGF) to the bank lenders.
    3395 The first of the contracts is pleaded in ADC pars 11EK and 11EL. It relates to the first BGNV bond issue and the TBGL bond issue. The contracting parties (so far as concerns the banks) are the Australian banks (other than HKBA). The circumstances in which the contracts are said to have been entered into include:
    (a) the provision by late 1985 of financial accommodation and facilities by the Australian banks to TBGL and the Bell group;
    (b) the letter dated 11 December 1985 from TBGL to the banks;
    (c) the agreement to the request contained in that letter by the banks in December 1985 and January 1986; and
    (d) certain other conduct of TBGL that is said to have bound BGNV and (or) the then members of the NP group and each of them, including BGF, at the time the conduct was engaged in and thereafter. BGNV and (or) the then members of the NP group are alleged to have known of and authorised the conduct of TBGL and, on that basis, to be bound by that conduct. The conduct relied on includes:
    (i) the proposal to replace the NP agreements with the NP guarantees;
    (ii) the various negative pledge reports;
    (iii) the provision of information packages in November and December 1987 and February 1988; and
    (iv) the three‑year business plan delivered in May 1988.
    3396 The second of the contracts is pleaded in ADC pars 11EM and 11EN. It relates to the first BGNV bond issue and the TBGL bond issue. The contracting party is the Lloyds syndicate banks. The circumstances in which the contract is alleged to have arisen are:
    (a) the preparation of the Information Memorandum by LMBL and TBGL and the contents of that document;
    (b) the invitation to each of the Lloyds syndicate banks to participate in the syndicated loan and the provision to each of them of a copy of the Information Memorandum;
    (c) the participation by each Lloyds syndicate banks in the syndicated loan and the allegation that by their participation each agreed to treat the liabilities of TBGL as equity for NP ratio calculations; and
    (d) the other conduct mentioned in (d) in the discussion of the par 11EK contract.
    3397 The third contract involves the Australian banks and the Lloyds syndicate banks and relates to the second BGNV bond issue and the BGF bond issue. It is to be found in ADC pars 11EO and 11EP. The circumstances in which the contract is alleged to have arisen are:
    (a) the novation of rights and obligations under the Lloyds syndicate banks’ facility in and between various of the Lloyds syndicate banks;
    (b) the letter dated 15 April 1987 from TBGL to the banks;
    (c) the agreement to the request contained in that letter by the banks (other than Skopbank) on various dates after 15 April 1987; and
    (d) the other conduct mentioned in (d) in the discussion of the par 11EK contract.
    3398 I think the reason that HKBA is excluded from the list of the parties to the contract alleged in ADC par 11EK is that HKBA was not incorporated until 1986. In December 1985, the financial arrangements between HSBC and the Bell group were through Wardley, not HKBA. It will be remembered that Skopbank did not take up its participation in the Lloyds syndicate banks’ facility until 25 July 1988. This explains why it is omitted from the list of banks that agreed to the request in the 15 April 1987 letter. But by reason of the novation arrangements, Skopbank is still said to be a party to the contracts alleged in ADC pars 11EM and 11EO.
    3399 It is important to note the precise allegation made in the pleading as to what the banks agreed to treat as equity. It is not ‘the bond issues’ but, rather, the ‘liabilities arising from the raising and deployment of funds in and about’ the bond issues. This raises similar questions to those discussed in, for example, Sect 13.2.5, concerning the distinction between the bonds per se and the proceeds from the bond issues.
    14.2.1. The contracts inter-partes: contractual intent
    3400 I think the easiest way to deal with this question is to take what I regard as the most significant (of many) reasons advanced by the plaintiffs against the argument for the existence of contracts inter partes and subject it to close analysis. The plaintiffs contend that there was no intention to create a binding contract pursuant to the letters dated 11 December 1985 and 15 April 1987 or the Information Memorandum.
    3401 It is trite to say that not everything said or done in the course of negotiations for a contract will become terms of the contract. They may be mere representations not intended to have contractual effect. A representation is a statement or assertion made by one party to another, before or at the time of the contract, of some matter or circumstance relating to it: Behn v Burness (1863) 3 B&S 751, 753. The distinction is between statements that are promissory (terms) and those that are merely representational (representations): JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435, 442. In Hospital Products, Gibbs CJ said, at 61:
    A representation made in the course of negotiations which results in a binding agreement may be a warranty – ie it may have binding contractual force – in one of two ways: it may become a term of the agreement itself, or it may be a separate collateral contract, the consideration for which is the promise to enter into the main agreement. In either case the question whether the representation creates a binding contractual obligation depends on the intention of the parties. In JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 at 442 and Ross v Allis-Chalmers Australia Pty Ltd (1980) 55 ALJR 8 at 10 and 11, it was said that a statement will constitute a collateral warranty only if it was ‘promissory and not merely representational’, and it is equally true that a statement which is ‘merely representational’ – ie which is not intended to be a binding promise – will not form part of the main contract.
    3402 A statement may constitute a representation and an inducement (and be made in circumstances where the person making the representation intended the other person to act on the statement) yet fail to satisfy the promissory criterion which is essential to an action framed in contract: Ross v Allis Chalmers Australia Pty Ltd (1980) 55 ALJR 8, 12 (Aickin J). Whether a statement is promissory or representational depends upon the intention of the parties, and their intention is to be ascertained objectively from the totality of the evidence. The distinction between a representation on the one hand and a promise on the other is, however, fine, and the distinction is often difficult to apply: Emu Brewery Mezzanine Ltd v Australian Securities & Investments Commission [2006] WASCA 195; (2006) 32 WAR 204, [90].
    3403 I can see no reason why these principles should not apply equally where the question is whether a statement or assertion was merely representational and where no contract ever came into existence. This is similar to the two‑step process that I discussed in Sect 12.5.1: the first step is to ascertain what the contract is and the second is to determine what its terms are. The Privy Council adopted a similar approach (in relation to implied terms) in Aotearoa International Ltd v Scancarriers AIS [1985] 1 NZLR 513, 556.
    3404 I accept, generally, the position advanced by the plaintiffs on this question. There are two aspects to it: the legal relationship and the commercial relationship at a day‑to‑day level. The legal relationships between each of the Australian banks and the Bell group were constituted by formal written contracts comprising facility agreements and the NP agreement and later, the NP guarantee. In the case of the Lloyds syndicate banks, their legal relationship was governed by the 1986 Loan Agreement and subsequently, LSA No 1. The inference is that the banks and TBGL, BGF and the other members of the NP group intended their contractual relations to be constituted by agreements that were formally recorded. The agreements were comprehensive and it is to be inferred from their contents and subject matter that they were intended to comprise the entire contractual relationship between the banks and the Bell group.
    3405 The letters dated 11 December 1985 and 15 April 1987 contained a statement that was expressed as a statement of existing fact: the bonds are a subordinated debt. The language was representational not promissory. There was no promise, express or implied, by TBGL to do anything in the future. Further, the language used in relation to the purpose of the letters was not promissory. In the letter dated 11 December 1985 it was stated that ‘the Bell group considers that the issues should be regarded as equity when considering balance sheet ratios for the purposes of its banking covenants’ (emphasis added). Similarly, the letter dated 15 April 1987 stated that, ‘the Bell Group considers, that in line with treatment of the 1985 issues, these issues should be treated as equity when considering balance sheet ratios for the purposes of banking covenants’ (emphasis added).
    3406 Similarly, the Information Memorandum contained a statement of opinion: ‘the nature of the bonds is such that they may be considered as equity for the purposes of gearing calculations’.
    3407 A contract to the effect alleged by the banks would have fettered all of the numerous bank lenders to the NP group in relation to the treatment of the bonds for the future. I do not think the letters and the Information Memorandum evince an intention to create any contract. It would not have been open to TBGL or any member of the NP group to enforce as a contract the banks’ acceptance of the requests contained in the letters and the requirement that was incidental to the Lloyds syndicated loan.
    3408 The phrase ‘as a contract’ in the last sentence is important. Suppose that an individual bank had, on receipt of the negative pledge report in October 1986, decided that it would no longer permit the liabilities to be reported under shareholders’ funds. I doubt that TBGL could have maintained an action against the bank for breach of contract. This is not to say that the bank’s actions would have been without consequences. They might, for example, have led to claims in estoppel in much the same way as has been advanced in this litigation. But claims of that nature are not the same as a claim sounding as a breach of contract.
    3409 It seems to me that what happened between the banks and the Bell group companies, in relation to the letters and the Information Memorandum, had more to do with their commercial day‑to‑day relationship than it did with their legal relationship. It is of some significance that when it came to the third BGNV bond issue the parties did include the arrangements about the treatment of the obligations as equity rather than debt in their legal relationship. I acknowledge that this was done in the context of a major change (the collapsing of the NP agreements and their replacement by NP guarantees) and was not confined to the amended definition of total liabilities. Nonetheless, it does point to a difference in emphasis.
    3410 The plaintiffs also submit that the statements relied upon by the banks are so ambiguous that they could not evince an intention to create contractual relations, or that any promises contained in the letters or in the Information Memorandum were so vague and uncertain as to be unenforceable and illusory. I am not as troubled by this line of attack as I am by the more general contention of lack of contractual intent. In this respect, I think the same considerations apply as I have already outlined when considering the ‘bonds per se’ and the ‘proceeds from the bond issues’.
    3411 It is true that the phrase used in the pleadings, ‘the liabilities … arising from the raising and deployment of funds in and about’ the bond issues, does not appear in the letters dated 11 December 1985 or the 15 April 1987 letter or the Information Memorandum. But I do not think that is fatal. Those words are descriptive of what I have found to be the nature of the dealing between BGNV and TBGL (or BGF) in relation to the on‑loans. And it is that dealing (as part of the overall fundraising exercise, including the bonds per se) that was the subject of the approaches to the banks.
    3412 There is, however, a different aspect of certainty that does trouble me. There are a variety of alternatives set up in the pleading about the identity of the contracting parties. Pleading in the alternative is a valid technique. But it can also highlight difficulties. And in this case, the difficulty is fundamental because it concerns the parties that are said to have incurred obligations and attracted benefits that would be legally enforceable. Four possibilities are posited, namely, that the contracting party or parties from the Bell group side was or were:
    (a) all of TBGL, the other NP group companies and BGNV;
    (b) both of TBGL and BGNV but without the other NP group companies;
    (c) all of TBGL and the other NP group companies but without BGNV; or
    (d) TBGL alone.
    3413 I could not find in the banks’ written closing submissions any refinement of these alternatives. And my own analysis of the position was without reward in this respect. The separate legal entity thesis of corporate law is a recurring theme in the banks’ case. Applying that analysis to this problem, if a contract had arisen in the circumstances posited in ADC par 11EK, and had (say) SocGen refused to agree to equity treatment in October 1986, on what basis could (say) Industrial Securities, as opposed to TBGL, have enforced the contract?
    14.2.2. The contracts inter partes: conclusion
    3414 In my view the banks have not made good the argument that contracts came into existence between the banks the relevant Bell group companies in relation to the liabilities arising from the raising and deployment of funds from the first and second BGNV bond issues.
    3415 This is not to downplay the importance (at the time) to the Bell group of getting the banks to agree to equity treatment in order to achieve the commercial purpose of the fundraising exercise. I do not resile from anything I said in Sect 12 or Sect 13 in that regard. The question here is a different one. Within the Bell group, an arrangement had been struck: the bonds would be issued and the funds would be on‑loaned to TBGL or BGF for use in the NP group. That is the ‘primary arrangement’. The primary arrangement had three main goals: to raise funds, to do so in a way that was tax effective, and to do so in a way that would not result in non‑compliance with the NP ratios (and would provide opportunities for other borrowings). Those three goals were interdependent, not independent. Subordination was an aspect of the arrangement. But it does not follow that in order to achieve the interdependent goals, all (or only some of) the NP group companies and (perhaps) BGNV must enter into a legally binding contract with the banks that would oblige the companies to subordinate the on‑loans and oblige the banks to treat the liabilities as equity.
    3416 The finding that there were contracts inter se but not contracts inter partes may have flow‑on effects in relation to relief, especially if the contracting parties are as set out in ADC par 11EK, rather than the more limited possibilities in par 11EL. I will have to return to those consequences in due course.
15. The estoppel case and subordination of the on‑loans
    15.1. Introduction
    3417 Unfortunately, I have not finished with the subordination argument. I am obliged to ignore the admonition of Lord Chesterfield: ‘Talk often, but never long; in that case, if you do not please, at least you are sure not to tire your hearers’.
    3418 The banks contend that, regardless of the contractual position, the plaintiff Bell companies were (and are), estopped from asserting otherwise than that the loans were made on a subordinated basis. If I am correct in my conclusion that there were contracts inter se, the remedy will sound in contract, not by way of estoppel. But, even then, if there is some bar to contractual relief (for example, because of the doctrine of privity), estoppel will become a live issue. And the relief (if any) that the banks could claim might be different depending on whether the relief arises under the contracts inter se or under, for example, an estoppel arising from representations made during the contractual process.
    3419 The same reasoning will apply if I am wrong in the conclusion that there were no contracts inter partes; that is, the relief will sound in contract unless there is some other operative bar. But, in any event, the finding that there were no contracts inter partes necessarily throws open the estoppel question. For these reasons it is necessary to deal with the banks’ assertion that, regardless of the contractual position, the plaintiffs are estopped from asserting otherwise than that the on‑loans were subordinated.
    3420 In later sections I will have to explore two other bases on which the banks say they are entitled to similar relief, namely, that if the loans were made on an unsubordinated basis:
    (a) the Bell group companies engaged in misleading and deceptive conduct under the Trade Practices Act; and
    (b) that situation arose through mistake, entitling the banks to restitutionary relief.
    3421 It is a little difficult to see from the way the pleadings are framed whether the estoppel claims (and for that matter the other two bases mentioned above) are put forward as being ‘further’, ‘further or alternative’ or ‘alternative’ to the contractual claims. Perhaps it does not matter a great deal. In any event, it is a path along which I must travel in the hegira that is the Bell reasons.
    3422 The estoppel claims work at two levels. The first assertion is of an estoppel as between BGNV on the one hand, and the NP group companies, including TBGL and BGF, on the other (the estoppels inter se). The second is of an estoppel between the plaintiffs generally and the banks (the estoppels inter partes). Three species of estoppel are put forward: estoppel by representation or conduct, conventional estoppel, and promissory or equitable estoppel.
    3423 The banks say that the estoppel case has three roles in the action. First, in respect of the allegation that BGNV and the bondholders were prejudiced by the Transactions, the banks say that each plaintiff Bell company is estopped from asserting that the on‑loans were unsubordinated. Secondly, to the extent that the plaintiffs seek relief on the basis that the on‑loans were not subordinated, such relief is discretionary and should be refused because it is predicated on the plaintiffs setting up a state of affairs contrary to the estopped position. Finally, the banks contend that this Court should make orders to mould relief consequent upon and conformable with the estoppel pleaded. This Court should do this by dismissing or staying the plaintiffs’ claims (wholly or in part) or restraining the plaintiffs from enforcing any relief except for relief predicated on the on‑loans being subordinated.
    3424 It has to be borne in mind that each of the banks makes its own estoppel case. Each bank led evidence relating to the representations contained in the documents and reports. To support the estoppels based on representations, evidence was led of conduct and common assumptions. A common question in each case is the proper construction and interpretation of the representations said to flow from the various documents and reports and the allied question of what assumptions were adopted by the parties.
    3425 One of the few features of the estoppel claims on which the parties agree is the spelling of the word ‘estoppel’. The reader should not expect this section of the reasons to be much shorter than those that have preceded it.
    15.2. The estoppel case as pleaded
    15.2.1. The banks’ case
    3426 I will outline the banks’ pleaded case regarding the estoppels. In doing so, I will draw attention to the areas in which there is a material dispute. The estoppels are introduced in ADC par 11EA(2) and (4) and I do not need to repeat that material. The estoppels relied upon by the banks are based upon the allegations in par 11EB to par 11ER. Most of the basal facts are contained in the subparagraphs to par 11ED. The essential elements for the estoppel case are as follows.
    3427 The same background material as was advanced in the contract case is put forward here, namely, the facilities advanced to the Bell group companies between 1985 and 1989, the terms of the NP agreements and the 1986 Loan Agreement (particularly in relation to the NP ratios) and the various bond issues.
    3428 The banks rely on the letter dated 11 December 1985, and the enclosed summary document, which they allege contains the representations set out in ADC par 11ED(17). The paragraph is lengthy. It sets out a number of things that were ‘stated’ in the letter and summary in a way that, I think, is unobjectionable. The representations themselves are set out in the following subparagraphs:
    (d) thereby represented that it was the view of TBGL and that it was the fact, that the two issues were, or would be, identical in terms of effective subordination;
    (g) in the light of the considerations referred to in the letter, and referred to above, requested each of the banks which at that time provided banking accommodation to the Negative Pledge Group to agree to the treatment of the convertible subordinated bonds as equity and not as a liability when considering balance sheet ratios for the purposes of its banking covenants and to signify that agreement by signing a duplicate copy of the letter;
    (h) thereby represented that it was the view of TBGL and that it was the fact, that the bondholder debt was, or would be, subordinated and ranked, or would rank, behind existing and future bank borrowings of the Negative Pledge Group;
    (i) thereby represented that the liabilities of TBGL, as a member of the Negative Pledge Group, arising from the raising and deployment of moneys in and about the bond issues were, or would be, subordinated to the liabilities of TBGL to the bank lenders; and
    (j) to the extent that the representations in subparagraphs 11ED(17)(d), (h) and (i) above contained representations as to future matters, impliedly represented that TBGL had reasonable grounds for making such representations.
    3429 In PR par 21, the plaintiffs admit the sending of the letter. They go on to say that the letter conveyed that the bonds referred to were yet to be issued and the trust deed, or deeds referred to were yet to be entered into. In other words, they relate to future conduct. They also say that the letter expressly stated, in respect of the BGNV bonds, that the rights of the bondholders would be subordinated in right of payment to the claims of all other unsubordinated creditors of the issuer in the manner provided in the trust deed and that the domestic bonds ‘would have similar terms and conditions to the BGNV bonds’. But that aside, almost the entirety of ADC par 11ED(17) is in dispute. In particular, the plaintiffs deny that:
    (a) the domestic and European issues would be identical in terms of effective subordination; and
    (b) the banks were requested to treat the convertible subordinated bonds as equity because they would be subordinated and would rank behind existing and future bank borrowings of the NP group.
    3430 The Australian banks, other than HKBA (not then a lender), agreed to the request in the letter.
    3431 The banks also rely on the provision of the Information Memorandum and its distribution to the Lloyds syndicate banks. The banks say the Information Memorandum contained a number of representations that are set out in par 11ED(30). The plaintiffs deny the representation that TBGL’s liabilities to bondholders could be treated as a form of equity of the NP group and deny a representation that the liabilities of TBGL arising from the raising and deployment of moneys in the bond issues were subordinated to the liabilities of TBGL to bank lenders. That the Lloyds bank syndicate participated on the strength of the Information Memorandum is not contested, although some of the novations alleged are. The plaintiffs admit that by participation in the syndicate, the Lloyds syndicate banks agreed to the treatment of the bonds ‘referred to in the Information Memorandum’, but I did not understand this submission to go beyond the bonds per se.
    3432 The banks rely upon the circumstances of the raising of further bond moneys in 1987. The letter dated 15 April 1987 contained statements relied upon by the banks as representations. They are set out in ADC par 11ED(43). The representations are similar to those set out in ADC par 11ED(17). The plaintiffs’ response is also similar. In particular, they dispute that:
    (a) the letter contained a representation that it was the view of TBGL, that in fact the two issues (domestic and European) would be identical in terms of effective subordination;
    (b) TBGL represented that the bond issue could be regarded as equity given the subordinated status of the bonds and other matters;
    (c) the banks were requested to treat the convertible subordinated bonds in those issues as equity and thereby TBGL represented that it was the view of TBGL, and was the fact, that the bondholder debt was subordinated and would rank behind existing and future bank borrowings and TBGL and BGF’s liability with respect to the moneys raised by such bonds would be subordinated to the liabilities of those companies to the bank lenders.
    3433 The parties agree that consent to the request in the 15 April 1987 letter was forthcoming.
    3434 The third BGNV bond issue is dealt with in ADC par 11ED(49) and following. The banks place reliance on the collapse of the NP agreements and their replacement by the NP guarantees. The effect of that arrangement was that the indemnifying subsidiaries were released from their liabilities under the NP agreements and, in the definition of total liabilities in the NP guarantees, the non‑current subordinated debt of the group, which lenders had previously agreed to treat as equity, could be excluded.
    3435 The banks say the agreement to treat subordinated debt as equity was acted upon in the period from 1985 to 1989 in the negative pledge reports. The plaintiffs deny that the negative pledge reports contained any representations to the effect alleged. They also say that each report delivered after the one for the period ended 31 December 1985 contained errors in relation to the calculation of total liabilities (as defined).
    3436 The information packages sent to the banks in November and December 1987 and February 1988, following the stock market crash, are also relied on. The banks say that in those packages the funds raised from the bond issues are treated as a form of shareholders’ funds and, by excluding them from the calculation, TBGL represented that the asset to liabilities ratio was being met. The plaintiffs deny that the representations alleged by the banks were made or that they could properly be inferred or understood from the matters relied on.
    3437 The three‑year business plan, despatched to the banks in May 1988, is another document on which the banks rely. They say it contained representations that bank debt was different, from shareholders’ funds and subordinated bonds, because it was senior debt, and involved a calculation of the ratios based on that distinction. The business plan described the convertible subordinated bonds issued up to then as ‘fully subordinated’ and ‘fully and explicitly subordinated to all unsubordinated debt’ and, accordingly, represented that the bondholders ranked behind the bank lenders in respect of recovery of moneys from assets of the Bell group. The plaintiffs make some limited admissions about the business plan, but dispute the core representations.
    3438 The groundwork is laid for the banks’ conventional estoppel case in ADC par 11ED(71), where the beliefs and conduct of TBGL, BGNV and the other members of the NP group are pleaded. Those beliefs relate to:
    (a) the status of the moneys raised by the bond issues;
    (b) the use of BGNV; and
    (c) the treatment of the moneys under the NP agreements and the NP guarantees.
    3439 The crux of the banks’ case is that those matters go to show that none of the relevant entities, through their directors and executives, intended that the use of BGNV would make any difference to the intended effective subordinated position of the European bondholders in respect of the Eurobond market’s capital raisings, compared with those made to Heytesbury Securities. The plaintiffs dispute most of the beliefs and conduct relied upon.
    3440 The main representations and conduct of the Bell companies are summarised in ADC par 11ED(72). In summary, the banks plead the following circumstances:
    (a) the sending and content of the 11 December 1985 and 15 April 1987 letters from TBGL to the banks;
    (b) the preparation and content of the Information Memorandum and the authorisation given to LMBL to distribute it to prospective syndicate members;
    (c) the making of the proposal to collapse the NP agreements and replace them with NP guarantees and representations made in the course of those negotiations;
    (d) the provision to the banks of the negative pledge reports; and
    (e) the provision to the banks of the information packages in November 1987 and February 1988 and of the three‑year business plan in May 1988 and the content of those documents.
    3441 Those representations and conduct are said to have bound BGNV and the NP group companies. The plaintiffs’ answer is in PR par 85, which is, in essence, a joinder of issue and, in addition, a denial that the alleged conduct of TBGL did, or could as a matter of law, bind BGNV but did not bind BGF or any other NP group company.
    3442 The banks’ case is that if the bonds were not subordinated, that would have been contrary to all the knowledge, awareness, intentions, beliefs and assumptions pleaded in ADC par 11ED(74). Again, practically all of these matters are in dispute: PR par 87.
    3443 ADC par 11ED(76) pleads that TBGL and the members of the NP group conducted their banking relationships, from late 1985 to at least 1989, on the basis that all of the funds raised by the bonds were subordinated to and ranked behind existing and future indebtedness to the banks. Not surprisingly, this too is in dispute: PR par 89.
    3444 In ADC par 11ED(78), the banks plead that at no time did BGNV advise TBGL or BGF that the on‑loans were unsubordinated and at no time did any NP group company advise the banks that in their view the on‑loans from BGNV to TBGL or BGF were unsubordinated.
    3445 Further elaboration of the common assumption or conventional estoppel case is to be found in ADC par 11ED(80). The banks’ case is that the documents referred to could only have been written, and ‘could only be sensibly commercially understood’, on the basis that the funds raised from the issues resulted in liabilities that were subordinated on a winding up to the obligations of the issuer and the members of the NP group to the bank lenders. The common beliefs and assumptions are restated in par 11ED(81). The banks plead that they shared the belief alleged in relation to TBGL, BGF, the NP group and BGNV: ADC par 11ED(82) and par 11ED(83). I will describe the plaintiffs’ retort to these propositions separately.
    3446 The banks plead reliance upon the representations, conduct and common assumptions. They also plead that detriment would be caused to them if the representors were allowed to resile from the representations: ADC par 11ED(85). The plaintiffs deny that there was reliance.
    3447 Essentially, the banks’ case is that had they been informed of the alleged non‑subordination they could, prior to about 1989, have ordered, or would have had the opportunity to order, their banking affairs on a fundamentally different basis, consistent with the alleged non‑subordination of the on‑loans: ADC par 11ED(86). The plaintiffs assert that even if the banks had found out that the loans were not subordinated, it would not have resulted in the relationship being conducted in any ‘fundamentally different way’: PR par 96.
    3448 The conclusion of the estoppel case is to be found in ADC par 11EJ and 11ER. If, contrary to the banks’ case, the on‑loans were not subordinated, then it would be unfair and unjust for the plaintiffs to resile or depart from the representations and conduct pleaded in par 11ED(83), which, in turn, picks up the conduct summarised in par 11ED(72). The banks say they were induced to hold the assumptions summarised in par 11ED(82). It would be unjust for the plaintiffs to be allowed to resile or depart from the common assumptions held by them with the banks, as pleaded in pars 11ED(76), (81) and (82).
    3449 Accordingly, the banks argue, the plaintiffs are estopped from denying that the on‑loans are and always were subordinated on the terms set out in ADC par 11EE(2) and (4). Those paragraphs, it will be remembered, plead the subordination in these terms:
    [The on‑loans] would be subordinated to the claims of other creditors of TBGL [or BGF] substantially on terms that in the event of the winding up of TBGL [or BGF]:
    (i) the claims of BGNV against TBGL [or BGF] in respect of the [on‑loans] would be postponed to claims of unsubordinated creditors of TBGL [or BGF]; and/or
    (ii) if any amount was paid to BGNV in the liquidation of TBGL [or BGF] in respect of the [on‑loans] such money would be held on trust by BGNV for satisfaction of the claims of unsubordinated creditors of TBGL [or BGF] until those claims had been satisfied in full, and accordingly such were terms of the [on‑loans].
    3450 The basal facts are then repeated (by incorporation) in ADC par 145 for the purposes of the counterclaim. The banks contend that these facts amount to representations and conduct by the corporate plaintiffs (not the liquidators) founded on the factual assumption that all liabilities of the NP group arising from the raising and deployment of moneys from all issues of convertible subordinated bonds were subordinated to, and ranked behind, the indebtedness of the companies to the banks.
    15.2.2. The plaintiffs’ case
    3451 I have already set out in some detail the plaintiffs’ retort to the claims in ADC par 11ED(17) and (43) and I will not repeat them.
    3452 Another significant part of the plaintiffs’ response is PR par 92, in which issue is joined on the allegations about the belief and conduct of the banks in ADC par 11ED(82). In essence, the plaintiffs say that the allegations are not relevant to the commercial intentions and beliefs of TBGL, BGF and BGNV and that the intentions and beliefs of the banks, however they arose, cannot form a basis for a finding as to the commercial intentions and beliefs of TBGL, BGF and BGNV. In any event, if the banks conducted their banking relationships with TBGL and the NP group in the belief and on the assumption alleged, then that, included a belief and an assumption that any subordination of the European and domestic bonds to the liabilities of TBGL and BGF to the bank lenders would be subject to the terms of the trust deeds and the particular bonds. The plaintiffs go on to say that from late 1989, the banks did not conduct their banking relationships with TBGL and the NP group as alleged, as they:
    (a) were aware (using that phrase to cover various states of mind) that the directors were aware the on‑loans might be unsubordinated;
    (b) failed to take any steps to assert any right or entitlement and (or) remained silent as to what they now say was the true state of affairs; and
    (c) took the steps to facilitate and protect the Scheme that are alleged in 8ASC.
    3453 As to the allegation in ADC par 11ED(76) that the banking relationship was conducted on the basis that all debts arising from bond issues were subordinated, the plaintiffs say:
    (a) as BGNV had no banking relationship with the banks, it does not encompass an allegation about BGNV;
    (b) the basis upon which the banking relationship is alleged to have been conducted does not expressly refer to the on‑loans (unlike, for example, ADC par 11EE where the reference is explicit) or the terms of those loans;
    (c) the banking relationship is said to have been conducted on the basis alleged from late 1985 to at least late 1989; and
    (d) the basis of the relationship is alleged to be that the debts were subordinated to and ranked behind debt due to the banks (and not all unsubordinated creditors).
    3454 The conclusion to the banks’ estoppel case in ADC par 11EJ is the subject of a substantive response in PR par 104. In summary, the plaintiffs contend that:
    (a) the alleged commercial intentions and beliefs of TBGL, BGF and BGNV are too ambiguous and uncertain to found the estoppel contended for by the banks;
    (b) as at 1989 or 1990 any equitable relief based on the alleged estoppels would have been refused;
    (c) the matters alleged are not sufficient to found an estoppel in that there was no representation or other conduct between BGNV on the one hand, and TBGL and BGF on the other hand so as to engender a mutually held belief or expectation that if TBGL or BGF were wound up, the BGNV on‑loans would be subordinated. Similarly, there could be no mutually held belief or expectation that there were terms as to subordination in the form pleaded in ADC par 11EE(2) to par 11EE(4);
    (d) the alleged estoppels cannot be asserted or relied upon by the banks but can only subsist as between or be asserted by BGNV, TBGL and (or) BGF;
    (e) the matters alleged do not give rise to an estoppel in the terms pleaded in ADC par 11EE(2) to par 11EE(4); and
    (f) any entitlement to the estoppel alleged was extinguished and was no longer enforceable following execution of the BGNV Subordination Deed.
    15.3. Estoppel: some general legal principles
    15.3.1. Some introductory comments
    3455 The Oxford Dictionary defines ‘estoppel’, relevantly, as ‘the principle which precludes a person from asserting something contrary to what is implied by his or her previous action or statement’. Put in general terms, it is a doctrine designed to protect a party from the detriment that would flow from that party’s change of position if the assumption or expectation that led to it were to be rendered groundless by another.
    3456 There are many different species or types of estoppel. Despite the best efforts of some members of the High Court in the 1980s and early 1990s, the separate categories of estoppel have been maintained. In Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 [7] the majority noted the dicta of Mason CJ concerning ‘a single overarching doctrine’ and of Deane J about ‘a general doctrine of estoppel by conduct’: see The Commonwealth v Verwayen (1990) 170 CLR 394, 411, 440. But in Giumelli, the majority noted that other members of the High Court in Verwayen had not accepted this thesis and that the instant appeal was no occasion on which to consider whether the various doctrines and remedies in the field of estoppel should be brought together. That this remains the position seems clear from cases such as MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39, [71].
    3457 While the categories of estoppel remain separate and distinct, they share many ideas and criteria: S & E Promotions Pty Ltd v Tobin Brothers Pty Ltd (1994) 122 ALR 637, 653. There are three species of estoppel that are advanced in this action: estoppel by representation or conduct, estoppel by convention and equitable (or promissory) estoppel.
    3458 Estoppel exists both at common law and in equity. And there are individual species of estoppel that are recognised both by the common law and by equity. The response of the law to the finding of an estoppel differs depending on whether the estoppel is legal or equitable. Generally speaking, the common law doctrines operate as a rule of evidence and preclude the estopped party from denying the truth of the assumed state of affairs. Equitable estoppel is more flexible. It does not necessarily preclude a departure from the assumption. Rather, equity intervenes only to the extent necessary to avoid the detriment that, if the assumption were departed from, would be suffered by the party who has relied on the assumption. See, generally: Beech A, ‘The Remedy for Estoppel’ in Carroll (ed), Civil Remedies, Issues and Developments (1996) 156.
    15.3.2. Estoppel by representation or conduct
    15.3.2.1. The nature of estoppel by representation
    3459 The species of estoppel by representation or conduct is also encompassed within the phrase ‘estoppel in pais’. Estoppel by representation originated in equity but was applied by the common law courts with similar requirements as the equitable doctrine before the Judicature Acts: Pichard v Sears (1837) 6 Ad & E 469; 112 ER 179. The well-known observations of Dixon J in Grundt v The Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641, 674 – 675 are applicable to this type of estoppel:
    The principle upon which estoppel in pais is founded is that the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations … One condition appears always to be indispensable. That other must have so acted or abstained from acting upon the footing of the state of affairs assumed that he would suffer a detriment if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption.
    3460 His Honour also remarked, at 657 – 658, that the justice of an estoppel is not established by the fact, in itself, that a state of affairs has been assumed as the basis of action or inaction and that a departure from the assumption would turn the action or inaction into a detrimental change of position. It depends also on the manner in which the assumption has been occasioned or induced. Before a person can be estopped, he or she must have played such a part in the adoption of the assumption that it would be unfair or unjust if he or she were left free to ignore it. But the law does not leave such a question of fairness or justice at large. It defines with more or less completeness the kinds of participation in the making or acceptance of the assumption that will suffice to estop the party if the other requirements for an estoppel are satisfied.
    3461 In Thompson v Palmer (1933) 49 CLR 507, 547, Dixon J held that it was necessary for the representee to show it had acted, or abstained from acting, upon the footing of any state of affairs assumed by it, so that it would suffer a detriment if the other party were afterwards allowed to set up rights against it inconsistent with the assumption.
    15.3.2.2. The subject matter and clarity of the representation
    3462 Estoppel by representation or conduct depends on the existence of a representation. A representation can be made expressly or by implication and by words or by conduct. This is an issue in this case because the plaintiffs contend that if representations were made (which they deny), the statements were too vague and illusory to found an estoppel.
    3463 Another contentious issue is whether a representation can arise as a matter of implication from silence. The parties are not far apart in this respect. I think they agree that a representation by conduct that is simply passive, or partly passive, can amount to a representation for the purpose of common law estoppel but there has to be a positive duty to speak before silence can ground an estoppel. Silence can give rise to an estoppel where a reasonable person would expect the person against whom the estoppel is raised, acting honestly and responsibly, to bring the true facts to the attention of another party known by him to be under a mistake as to their respective rights. The banks appear to accept that it is necessary to show that the person making the representation knew of a mistake made by the other person as to the party’s legal entitlements.
    3464 Another area in which the parties appear to take a similar view is whether the common law doctrine of estoppel extends to representations or assumptions about future events. The law is that in order to support a plea of estoppel by representation, the representation must be one of an existing fact; a promise or representation of an intention to do something in the future is insufficient: Ferrier v Stewart (1912) 15 CLR 32, 44 (Isaacs J); Yorkshire Insurance Co Ltd v Craine (1922) 31 CLR 27, 38 (Privy Council, Lord Atkinson): Verwayen, 499 – 500 McHugh J).
    3465 The case put forward by the banks is that the estoppel in pais is predicated upon the representation that the bonds were subordinated and that this is, in effect, a representation of a present fact. A representation may involve mixed questions of fact and law, but that does not prevent an estoppel arising. There has been conjecture about this point ever since Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226. The High Court said, at 244 – 245, that estoppel by representation and estoppel by convention require the assumed state of affairs to be an assumed state of fact and that an assumption as to the legal effect of conduct would not suffice.
    3466 In Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, 188, a majority of the Court of Appeal characterised the statements in Con-Stan as obiter. Their Honours held that whilst a statement about the general law is not a representation of fact, statements about private rights or the effects of documents are, so that an estoppel by convention can rest upon a foundation of assumed law as well as of assumed fact.
    3467 In Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 415 – 416 Brennan J, in dealing with estoppel in pais, said that the assumed state of affairs to which a party can be bound to adhere may be more than a state of mere fact; it may include the legal complexion of a fact as well as the fact itself, that is, a matter of mixed fact and law. In Foran v Wright (1989) 168 CLR 385, 435, Deane J accepted that the doctrine of estoppel by conduct extends, as a matter of general principle, to a representation or induced assumption of fact or law. This view has been accepted in this Court as applying to estoppel by convention: Government Employees Superannuation Board v Martin (1997) 19 WAR 224, 244 (Ipp J). A similar view was expressed in Sumampow v Mercator Property Consultants Pty Ltd [2005] WASCA 64 [180] – [181] (Malcolm CJ, Templeman J agreeing). Malcolm CJ said that in this context it did not matter whether the estoppel is characterised as a promissory estoppel by representation or estoppel by convention.
    3468 Gummow J, sitting in the Full Court of the Federal Court, in Caboche v Ramsay (1993) 119 ALR 215, 238 noted the dicta in the High Court cases since Con‑Stan to the effect that there was no distinction between statements of fact and law, at least in the field of estoppel by representation. His Honour felt it unnecessary to determine the issue in the instant case because a common but mistaken assumption of law had not been made out on the facts. In Heggies Bulkhal Ltd v Global Minerals Australia Pty Ltd [2003] NSWSC 851; (2003) 59 NSWLR 312, [147] and following, Austin J also drew attention to the developing jurisprudence. His Honour remarked that it would be odd if different principles were to be applied for estoppel by convention to those applying to estoppel by representation because they were both species of estoppel in pais.
    3469 I accept that there are authorities that have applied Con-Stan according to its tenor: see, for example, Santos v Delphi Petroleum Pty Ltd [2002] SASC 272, [471] – 489; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194, [112] (Holmes J). But I think I should follow what was said in Government Employees Superannuation Board v Martin and in Sumampow, namely, that a promissory estoppel by representation or an estoppel by convention can arise from an assumption of law. I need hardly mention the fact that Sumampow is a decision of the Full Court of this Court. By extension (following what was said by Brennan J in Waltons Stores and Deane J in Foran v Wight), the same principle would apply to a common law estoppel by representation. While it is convenient to speak generally of ‘an assumption of law’, I think that it is more accurate to describe it as an assumption relating to private legal rights: see GEC Marconi Systems Pty Ltd v BNP Information Technology Pty Ltd [2003] FCA 50; (2003) 128 FCR 1, [426] (Finn J).
    3470 A representation must be clear and unambiguous to found an estoppel. In Low v Bouverie [1891] 3 Ch 82, 86, Bowen LJ said:
    Now, an estoppel, that is to say, the language upon which the estoppel is founded, must be precise and unambiguous. That does not necessarily mean that the language must be such that it cannot possibly be open to different constructions, but that it must be such as will be reasonably understood in a particular sense by the person to whom it is addressed.
    3471 This statement was cited with approval in Western Australian Insurance Co Ltd v Dayton (1924) 35 CLR 355, 375 (Isaacs ACJ) and in Legione v Hately (1983) 152 CLR 406, 435 – 436 (Mason and Deane JJ).
    3472 It appears both parties accept that the position as to clarity of the representation is as I described it in Witham v Witham [2000] WASC 236. For that reason (and that reason alone) I will set out what I said in that case at [84] (bearing in mind that Witham concerned promissory estoppel):
    If the basis for an estoppel argument is a promise, it must be clear and unambiguous: Legione at 436-37. Indeed the word ‘unequivocal’ has been used: Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1971] 2 QB  3 at 60. This is because there must be an inference drawn that the statement was intended to affect the legal relations between the parties. It does not follow that the words must be such that they cannot possibly be open to constructions. But it is essential to show that the statements were of such a nature that they would have misled a reasonable person: Western Australian Insurance Co Ltd v Dayton (1924) 35 CLR 355 at 375. The onus lies on the person asserting the estoppel to establish these elements: China-Pacific SA v Food Corporation of India [1981] 1 QB 403 at 429.
    3473 The reference in that quote to an intention to affect legal relations needs to be understood in context. I was not using that phrase in the sense that it is used in the formation of contracts as an intention to create contractual relations. What I had in mind was conduct that might have consequences of a legal kind for the relationship between the parties. I have in mind (and agree with) what Tobias JA said in Galaxidis v Galaxidis [2004] NSWCA 111, [93]: ‘even if a representation is insufficiently precise to give rise to a contract … that fact does not necessarily disqualify the representation from founding a promissory estoppel’.
    3474 That the standard of precision is not that of the ineluctable proposition was made clear by Lord Hailsham in Woodhouse AC Israel Cocoa Ltd v Nigerian Produce Marketing Co Ltd [1972] AC 741. In commenting on the passage from Low v Bouverie (set out above), his Lordship said, at 741:
    I am satisfied that, in the second sentence of the above quotation, the meaning is to exclude far-fetched or strained, but still possible, interpretations, whilst still insisting on a sufficient precision and freedom from ambiguity to ensure that the representation will (not may) be reasonably understood in the particular sense required. I did not regard this second sentence as any authority for general qualification of the first. On the contrary the first sentence governs the second and contains the very proposition for which Low v Bouverie is rightly cited as an authority.
    3475 I do not think this goes as far as the plaintiffs seemed to submit, namely, that the particular sense contended for by the person advancing the proposition must be the only interpretation reasonably open. But it must be such that the court will construe it as the way in which the statement would reasonably be understood by the person to whom it is addressed.
    3476 Once again, in relation to the degree of clarity that is required, I can see no relevant distinction between estoppel by representation, estoppel by convention and equitable estoppel.
    15.3.2.3. Estoppel by representation: intention
    3477 For a common law estoppel by representation, there must be an intention that the representation be acted on. To put it a slightly different way, there must be an intention, on the part of the person making the representation, to induce the person to whom the representation is directed to act on the representation: Low v Bouverie, 111; Quadrant Constructions Pty Ltd v HSBC Bank Australia Ltd [2004] FCA 111, 20. I do not think there is much difference in the positions taken by the parties as to the principles involved here, as opposed to the application of the principles to the facts. Nonetheless, I will explain briefly the part played by intention in relation to estoppel.
    3478 The party seeking to raise the estoppel has to show that the representor conducted itself in such a fashion that a reasonable person would believe that the representor held the requisite intention. The test is objective: Citizens’ Bank of Louisiana v First National Bank of New Orleans (1873) LR 6 HL 352, 360 ‑ 361; Sydney Bolsom Investment Trust Ltd v E Karmios & Co (London) Ltd [1956] 1 QB 529, 541. An intention that the person to whom the representation was made will rely on it can be presumed: Re Exchange Securities & Commodities Ltd (in liq) [1988] Ch 46, 54.
    3479 In Sydney Bolsom, Lord Denning pointed out that in relation to the concept ‘intended to be acted upon’ as an element in such an estoppel, a person must be taken to intend what a reasonable person would understand him or her to intend. This is a classic formulation of the objective test.
    3480 Such an element is also required in relation to equitable or promissory estoppel. In Waltons Stores, Brennan J commented, at 413, on the position of a person who induces another to make an assumption that a state of affairs exists, knowing or intending the other to act on that assumption. In that situation, his Honour said, the person is estopped from asserting the existence of a different state of affairs as the foundation of their respective rights and liabilities if the other has acted in reliance on the assumption and would suffer detriment if the assumption were not adhered to.
    15.3.2.4. Estoppel by representation: reliance
    3481 A further requirement of an estoppel by representation is that the person to whom the representation is directed did in fact form a relevant assumption and then relied on that assumption and was induced to act by the alleged representation: Thompson v Palmer, 547. The foundation for common law estoppel is the adoption of an assumption by the representee, rather than a categorisation of any particular type of conduct on the part of the representor. What has to be established in order to satisfy the requirement for reliance, and who bears the burden of proving it, are issues in this action.
    3482 The authorities focus upon limiting liability of a representor in relation to estoppel by examining the position of the representee and requiring that reliance on the representation be reasonable. In turn, the reasonableness of relying upon a particular representation and adopting an assumption based on it depends on the form and content of the representation actually made and which induced that assumption to be adopted. In Standard Chartered Bank Aust Ltd v Bank of China (1991) 23 NSWLR 164, 180 Giles J noted that notions of good conscience and fair dealing underlie the doctrine of estoppel by conduct. This calls for consideration of the part played by the representor in occasioning the adoption of the assumption by the representee, including the reasonableness of the conduct of the representee in adopting and acting upon the assumption. The question of reasonableness, his Honour said, is inherent in reliance, although not always enunciated as such. In other words, ‘reasonableness’ has two aspects:
    (a) whether it was reasonable for the representee to adopt the assumption in question on the strength of the representation made; and
    (b) whether the action taken by the representee in reliance upon the representation was itself reasonable.
    3483 In Standard Chartered Bank v Bank of China, Giles J explained how reasonableness should be assessed. His Honour indicated that the question of the unconscionability of a departure from the assumption and the criteria of reasonableness were linked, and cited the passage from Deane J’s judgment in Verwayen, at 445:
    The question whether departure from the assumption would be unconscionable must be resolved not by reference to some preconceived formula framed to serve as a universal yardstick but by reference to all the circumstances of the case, including the reasonableness of the conduct of the other party in acting upon the assumption and the nature and extent of the detriment which he would sustain by acting upon the assumption if departure from the assumed state of affairs were permitted.
    3484 Giles J, at 180 – 81, then said that actual knowledge that the representation is untrue will defeat the estoppel, because the representee cannot be found to have reasonably adopted and acted in reliance upon the truth of the representation. He also proffered the view that ‘the preferable approach is to take account of the representee’s actual knowledge in asking whether the representee reasonably adopted and relied upon the representation, rather than ask whether the representee had constructive notice that the representation was untrue’. The same approach was taken in Macquarie Bank Ltd v Lin [2005] QSC 221 (McMurdo J). I, too, propose to follow the approach adopted by Giles J.
    3485 In one of the submissions, the banks draw from the authorities support for the proposition that if a representation is of such a nature that no‑one could reasonably believe it was intended to be acted upon, reliance would not be reasonable. I think that is correct. But I agree with the caveat placed on it in the plaintiffs’ submissions, namely, that there does not follow, as a corollary, something akin to an unreasonableness test in administrative law of the type promulgated in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223. In other words, it does not follow that reliance is reasonable unless no reasonable person could have so relied. To adopt that test would be to commit the error to which Deane J referred in Verwayen; that is, to assess it against some preconceived formula framed to serve as a universal yardstick rather than against all the circumstances of the case.
    3486 There is a further contentious aspect of reliance on which I should make a comment. The submission of the banks on this aspect can be summarised as follows. In an appropriate case the court will presume, in the absence of proof to the contrary, that a representee acted on the faith of an assurance to his or her detriment. This reflects a general position, namely, that once detriment has been proved, it is not for the representee to establish causation, but for the representor to establish that the other party’s change of position was not as a result of reliance on the representation. In the absence of evidence to the contrary, such reliance may be proved: Greasley v Cooke [1980] 3 All ER 710.
    3487 The banks also relied on Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723. Rich, Dixon and Evatt JJ, at 735, made the following statement of general applicability:
    Where inaction is the natural consequence of the assumption, the prima facie inference may be drawn in favour of the causal connection … Any general presumptive connection between inaction and a belief in a state of facts must depend upon probabilities which arise from the common course of affairs, and accordingly must be governed by circumstances.
    3488 The same approach, namely, inferring reliance, has been applied in relation to actions under the Trade Practices Act: Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, [48].
    3489 In summary, according to the banks, whilst the party asserting an estoppel bears the onus of showing reliance and detriment in the relevant sense, such party can call in aid the court’s power to draw an inference of reliance upon a representation or assumed state of affairs. What emerges from the authorities is that there must be a causal connection between the assumption made and the detriment that would flow from its abandonment. This is a concept related to the proportionality of the relief to be granted.
    3490 The plaintiffs contend that the banks have overstated the position. They rely on this passage from Feltham, Hochberg and Leech, Spencer Bower Estoppel by Representation (4th ed, 2004) [V.2.4] (which I will refer to as ‘Spencer Bower’):
    Given proof of communication of the representation to the representee the court may, however, infer from the materiality of the representation to the conduct of the representee that the representee was induced by the representation so as to act without direct evidence from the representee to that effect. This has come to be regarded as an automatic but rebuttable presumption, placing the onus on the representor to prove that the representee was not induced by the representation if it was material. However, the language of some authorities suggests, to the contrary, that where, although the representation was material to the relevant conduct of the representee, a reasonable man in the position of the representee might as easily have acted as he did for reasons wholly independent of the representation, the burden of establishing reliance remains on the representee. It is submitted that the resolution of the difference in these approaches lies in the court taking a practical view as to whether the representation, in the particular context, is such that the court would expect it to induce the relevant conduct, and if it is not, requiring proof of reliance.
    3491 The plaintiffs also rely on dicta of Peter Gibson J in Nationwide Building Society v Lewis [1998] Ch 482, a partnership case. His Honour opined, at 491, that it would not be impractical or unjust for the law to require a person claiming an estoppel to have to prove in a partnership context what he would have to prove in other contexts. Reliance is a necessary requirement and, accordingly, it was not obvious that there should be a presumption in favour of the person who claims reliance and who was in a better position to know whether he did rely on the holding‑out and who should thereby be able to prove it. His Honour went on to cite from a text: ‘Though on questions of fact the onus will be upon the representee, it may happen that the probability of inducement from a given set of facts is so great, or in other words the materiality is so plain and palpable, as to justify a finding of the inducement itself merely from the circumstantial context. But it must be remembered that the inference so made is one of fact and not of law’.
    3492 Perhaps the answer lies in the way the issue was put in Gillett v Holt [2001] Ch 210. At 226 – 227, Robert Walker LJ explained some of the relevant principles of reliance and detriment. One was that there must be a sufficient link between the promises relied on and the conduct which constitutes the detriment. Another is that once it has been established that there was conduct by the representee of such a nature that inducement may be inferred, then the burden shifts to the representor to establish that the representee did not rely on the promises.
    3493 There might be direct evidence of conduct establishing inducement. But as the Full Court pointed out in Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471, the absence of direct evidence of reliance does not necessarily preclude a finding of reliance. It is legitimate for the trier of fact to draw an inference of reliance. The nature of the inference in such a case was described in Gould v Vagellis (1985) 157 CLR 215, 236 (Wilson J) as a ‘fair inference’. Gould also stands for the proposition that a ‘fair inference’ can be rebutted.
    3494 For my part, dealing with the question of reliance on the basis of a rebuttable presumption, without more, is not attractive. Reliance is fundamental to the whole notion of estoppel. That is not to say that the other elements, such as changing position, are not important. They certainly are. But if the person to whom the representation was made did not rely on the representation, how can it be said that it is unconscionable for the person who made the representation to resile from it? I am not suggesting that the presumption does not exist. But what I do say is that, because of the centrality of reliance to the entire concept of estoppel, the level of persuasion that must be reached before the burden shifts will be substantial. In the end, the trier of fact has to be satisfied on the balance of probabilities that there was reliance. It is the party who asserts the existence of that fact who must establish it. There may have been, along the way, some shift in evidential onus, but it will come back to the same question and the answer will have to be apparent according to the same standard.
    15.3.2.5. Estoppel by representation: detriment
    3495 For all categories of estoppel that are relevant to this case, it is necessary to show detriment. What qualifies as ‘detriment’ for these purposes, particularly whether and in what circumstances a loss of an opportunity to do something other than what was done (or not done) in reliance on the representation constitutes detriment, is raised as an issue in the action.
    3496 In Grundt, at 674 – 675, Dixon J made it clear that the basal purpose of the doctrine of estoppel in pais was to ‘avoid or prevent a detriment to the party asserting the estoppel’ by compelling the other party to adhere to the assumption upon which the former acted or abstained from acting. His Honour described detriment in these terms:
    The real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it … His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment.
    3497 In Verwayen at 415, Mason CJ noted that when a person relies on the correctness of an assumption that is subsequently denied by the party who has induced the making of the assumption, two distinct types of detriment may be caused. In a broad sense, there is the detriment that would result from the denial of the correctness of the assumption on which the person has relied. In a narrower sense, there is the detriment that the person has suffered as a result of his or her reliance on the correctness of the assumption. His Honour there differentiates between the costs of the induced act or abstention to the induced party, as distinct from the value to the induced party of the fulfilment of the induced promise or other assumption.
    3498 Mason CJ was led by his discussion of the broader or narrower approaches to detriment into the question of relief. His Honour concluded that while detriment in the broader sense was required in order to found an estoppel, the remedy that the law provided would often be closer in scope to the detriment suffered in the narrower sense. The language of these passages indicates that, in a remedial sense, the law could, by choice of remedy, seek to prevent detriment less than the detriment in the broader sense but greater than the detriment in the narrower sense. His Honour had earlier, at 413, discussed a principle of proportionality in remedy in cases of estoppel.
    3499 Deane J spoke in similar terms of relief that would not, in full, avoid ‘the real detriment’ identified by Dixon J in Grundt (674). But, again, Deane J was speaking in terms of remedy rather than the existence of the real detriment as an element in establishing an estoppel.
    3500 In Foran v Wight, at 412, Mason CJ applied the observations of Dixon J in Grundt. His Honour was considering the question whether a purchaser acted in reliance on a representation by a vendor by not continuing efforts to procure finance and tendering performance. Mason CJ looked at whether, quite apart from the making of that representation, the purchaser would have been unable to tender performance on the requisite date, due to the inadequacy of its financial resources. If that were so there could be no basis for concluding that the purchaser was induced by the representation to act to its detriment. Mason CJ was in dissent in the result of the case.
    3501 Also in Foran v Wight, Deane J concluded that the vendor was estopped, by its solicitor’s implied intimation that the vendor did not require a tender on the due date, from relying on the purchasers’ failure to tender. His Honour concluded that the purchasers would be placed in a position of ‘significant and unjust material disadvantage’ if the vendor were permitted to depart from that intimation. His Honour said, at 436 – 437:
    [T]hey would have been induced to lose the benefit of a real chance that they would have actually tendered performance within the time fixed by the contract and thereby avoided any need to establish what might have happened but for the vendors’ intimation. The detriment of the loss of that real chance which would be sustained by the purchasers if the vendors were permitted to assert that the purchasers remained obliged to tender performance or to become ready and willing to perform within the stipulated time is adequate to sustain the estoppel upon which the purchasers rely to establish their right to rescind.
    3502 Detriment has to be real or material. A speculative possibility of detriment is insufficient for an estoppel case: Territory Insurance Office v Adlington (1992) 2 NTLR 55, 62. But although detriment must be material or real, it is not necessary to prove pecuniary loss: Yovich v Collyer (1972) WAR 143, 147 (Wickham J, Jackson CJ and Virtue J concurring).
    3503 In Austral Standard Cables Pty Ltd v Walker Nominees Pty Ltd (1992) 26 NSWLR 524, Handley JA held that an estoppel could be established although the evidence to support it did not justify a positive finding that the representee would otherwise have avoided the detriment. His Honour said, at 540, that it would be sufficient for the representee to establish that reliance caused it to lose a real chance of avoiding that detriment. Handley JA also proffered the view, relying on Foran v Wight (at 427), that an estoppel by representation may be established if the representation is a cause, even if only a contributing cause, of the representee’s reliance. It was sufficient if the representation was an inducing cause though not necessarily the inducing cause.
    3504 In this case the banks argue that detriment lies in the loss of the opportunity to reorder their banking relationships with the Bell group companies. How the law looks upon loss of opportunity as an element of detriment is a matter of contention between the parties.
    3505 The banks contend that it is sufficient, to show a relevant detriment, for the representee to establish that its reliance caused it to lose a real chance of avoiding the detriment which ensued: Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1994) 8 ANZ Ins Cas 61-235; Austral Standard Cables, 537 (Clarke JA).
    3506 The banks rely on Spencer Bower [V.5.5], which refers to authorities where a representee proves a failure to enter negotiations to protect his position or to demand a payment because of the representation. In such cases, the court will regard the loss of a chance of protecting his position as sufficient detriment, without requiring direct evidence that he would thereby have succeeded in protecting or improving his position. The learned authors submit that whilst the legal burden remains on the representee, the evidential burden shifts to the representor to prove that the representee would not have succeeded in protecting or improving his position.
    3507 The banks also point out that in the realm of contract law, a loss of opportunity is compensable in damages: Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 348, 355. This case also stands for the proposition that once it has been proved on the balance of probabilities that some loss has been suffered, then in evaluating hypotheses or possibilities in arriving at the damages suffered, the balance of probabilities has no part to play in that process of evaluation.
    3508 The plaintiffs contend that the banks have not accurately paraphrased the relevant discussion in Spencer Bower. They point to a footnote to the relevant passage:
    There are … authorities to the effect that, if a representee proves failure to enter negotiations to protect his position or to demand a payment because of the representation, the court will regard the loss of a chance of protecting or improving his position as sufficient to establish detriment, without direct evidence that he would thereby have succeeded in protecting or improving his position. Although the legal burden lies on the representee of proving that he has been disadvantaged, the court is necessarily speculating on the balance of probabilities, and if the representee establishes that he would have had a real chance of protecting or improving his position, and (it is submitted) that he would have taken it, the evidential burden may then, it seems, shift upon the representor of proving (again on the balance of probabilities) that the representee would not have succeeded. The first task of the court is to determine whether the representation caused the inactivity; the second task is, nonetheless, to assess on the evidence available whether, on the balance of probabilities, had the inactivity not been caused, the representee would be in a better position. It should, therefore, be at least necessary to identify what the representee would have done and prove that he would have done it. (emphasis added)
    3509 The plaintiffs also point to another footnote to the passage: ‘it is submitted … that the court requires proof, on the balance of probability, as to how the estoppel raiser would have acted, but not necessarily as to the result of such action, if affected by factors outside his control, such as the response of third parties’. Thus, the plaintiffs say, in considering the contention that the authors of Spencer Bower ‘submit that …the evidential burden shifts to the representor to prove that the representee would not have succeeded in protecting or improving his position’, it must be noted that the authors make that submission on the basis that:
    (a) before moving to the question of whether the representee has established that he or she would have had a real chance of protecting or improving his or her position, the ‘first task’ is to determine the question of causation, that is, whether the representation caused the inactivity; and
    (b) the representee must prove on the balance of probabilities what he or she would have done.
    3510 Save to say that I am not comfortable with the idea of ‘speculating on the balance of probabilities’ (I am not sure I understand what that means), I think the position advanced by the plaintiffs is correct. Where a party asserting an estoppel wishes to rely upon a loss of opportunity as a relevant detriment, that party must first prove (on the balance of probabilities) that it would have done something to pursue the opportunity in question. But that party need not prove on the balance of probabilities that pursuit of that opportunity would have been successful, so long as there was a real chance of success. This, it seems to me, is the force of Austral Standard Cables. The person relying on the representation, and alleging a loss of opportunity because of it, does not have to prove that he or she could actually have avoided the detriment. If that were the case, the phrase ‘a real chance’ would have little meaning. And just as reliance can be established by inference, so too can detriment. The absence of direct evidence of detriment does not necessarily preclude a finding of detriment.
    3511 I think it is fair to say that the juridical exercise in deciding whether or not detriment has been established will follow much the same course as for reliance. It, too, is a central issue. In the end, the trier of fact has to be satisfied on the balance of probabilities that there was detriment. It is the party who asserts the existence of that fact who must establish it. There may have been, along the way, some shift in evidential onus, but it will come back to the same question and the answer will have to be apparent according to the same standard.
    15.3.2.6. Estoppel by representation: consequences
    3512 Another area of dispute between the parties is the consequences that flow from an estoppel of this genre. The banks say that common law estoppel is more than just an evidentiary rule. It is a doctrine with an ‘all or nothing’ operation. If the representor is estopped, he is prevented from denying the truth of what was represented in absolute terms, and what flows from that evidential fact, as an element in a cause of action or otherwise in a defence, is a matter for the substantive law. Unlike equitable or promissory estoppel, there is no intermediate position or alternative remedy. No question of proportionality of remedy intrudes.
    3513 The plaintiffs, on the other hand, say that the outcome of an estoppel by representation need not be ‘all or nothing’. They point out that historically estoppel by representation developed in both common law and equity. ‘All or nothing’, at its highest, describes common law estoppel untempered by equity. It does not describe how equity operates in parallel with, and prevailing over, the common law.
    3514 It is conceivable that, for example, the same assumption might give rise to a common law estoppel and to an estoppel in equity. Should the court then give relief according to the common law rules or should equity prevail? For this reason, consideration of these questions is best left to the discussion on remedies in the context of the species of estoppel (if any) found to have been established on the evidence.
    15.3.3. Estoppel by convention
    15.3.3.1. The nature of estoppel by convention
    3515 Estoppel by convention is a species of common law estoppel and it, too, falls within the general phrase estoppel in pais. It is based on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying. This marks out a fundamental difference between it and representational estoppel, which stems from a representation of fact made by the representor and acted on by the representee to his or her detriment. This is the effect of Con‑Stan (244). In the third edition of Spencer Bower (157) the traditional formulation is described in this way:
    This form of estoppel is founded, not on a representation of fact made by the representor and believed by the representee, but on an agreed statement of facts the truth of which has been assumed, by the convention of the parties, as the basis of a transaction into which they are about to enter. When the parties have entered into their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped against the other form questioning the truth of the statement of facts so assumed.
    3516 As appears in Sect 15.3.2.2 I believe this definition has to be expanded to encompass representations of law (or mixed statements of fact and law) as well as representations of fact.
    3517 In Waterman v Gerling Australia Insurance Co Pty Ltd (2005) 65 NSWLR 300, [83], Brereton J identified a number of things that a plaintiff has to establish in order to succeed in a conventional estoppel claim. I am content to adopt his Honour’s analysis. First, that the plaintiff has adopted an assumption as to the terms of his or her legal relationship with the defendant. Secondly, that the defendant has adopted the same assumption. Thirdly, that both parties have conducted their relationship on the basis of that mutual assumption. Fourthly, that each party knew or intended that the other act on that basis. Finally, that departure from the assumption will cause detriment to the plaintiff. This last point flows from the discussion in MK & JA Roche, at [72].
    3518 The banks’ contention is that an estoppel by convention arises on the facts of this case because the banks entered into contractual or other mutual relations with the Bell group companies, or otherwise acted in respect to such relations, on the basis of an agreed or assumed state of facts. It would therefore be unconscionable to permit the Bell group companies, in this action, to resile from that state of facts.
    3519 There are some aspects concerning estoppel by convention about which the plaintiffs and the banks seem to agree. If ‘agree’ is an inapposite description, the level of contention is mild. These aspects are as follows:
    (a) the parties must have entered into contractual or other mutual relations with each other or otherwise operated in respect of those relations;
    (b) they must have done so on the basis of an agreed or assumed state of facts. The banks, correctly in my view, would add ‘or law’ after ‘facts’;
    (c) detriment is an essential element for all relevant forms of estoppel. The discussion concerning detriment in Sect 15.3.2.5 applies in much the same way to estoppel by convention;
    (d) there must be some statement or conduct by the party alleged to be estopped on which the other party was entitled to rely and did rely; and
    (e) as a common law estoppel, it cannot be founded on language or conduct that relates to intended future conduct, as opposed to present fact (as to which see Sect 15.3.2.2).
    3520 But the notion that agreement or consensus, rather than representation, lies at the heart of conventional estoppel is the point at which the parties diverge in the approach they take to some other aspects of the doctrine. It is to the points of difference that I now turn.
    15.3.3.2. Conduct amounting to a common assumption
    3521 It seems clear that there must be some mutually manifest conduct by the parties that is based on a common but mistaken assumption. But what exactly does this mean? As McPherson J remarked in Queensland Independent Wholesalers Ltd v Coutts Townsville Pty Ltd [1989] 2 Qd R 40, 46, the conventional basis for the assumption relied upon must first be identified. The word ‘conventional’ in this context carries connotations of agreement, not necessarily express but to be inferred. There must be at least a demonstrable acceptance of a particular state of things as the foundation for the dealings of the parties. There has to be a course of dealing between the parties, that is to say, acts or conduct that impinge upon their mutual affairs. McPherson J also noted that acts done privately by one party without them coming to the knowledge of the other are not capable of forming a conventional or accepted basis of their relations. The point that communication is necessary was also made by Lord Steyn in Republic of India v India Steamship Co Ltd (No. 2) [1998] AC 878, 913.
    3522 It was put in slightly different terms by Lander J in Santos v Delhi Petroleum at [455]. His Honour spoke of conduct indicating that the parties must have ‘agreed the facts upon which the conduct is based or at least assumed those facts’. His Honour went on to say that the conduct of each of the parties must be such that one of the parties can be satisfied that the other party is acting upon an agreed or assumed state of facts. There must be mutuality.
    3523 This leads to a related notion. A party sought to be estopped must have played such a part in the adoption of the assumption by the other party that it would be unjust to permit that party to depart from the common assumption. A phrase that has become common in the jurisprudence in this area is that the party against whom the estoppel is directed must have ‘crossed the line’. That phrase appears to have come from K Lokumal & Sons (London) Ltd v Lotte Shipping Co Pte Ltd (The August Leonhardt) [1985] 2 Lloyd’s Rep 28, 34. Kerr LJ said:
    All estoppels must involve some statement or conduct by the party alleged to be estopped on which the alleged representee was entitled to rely and did rely. In this sense all estoppels may be regarded as requiring some manifest representation which crosses the line between representor and representee, either by statement or conduct. It may be an express statement or it may be implied from conduct, eg a failure by the alleged representor to react to something said or done by the alleged representee so as to imply a manifestation of assent which leads to an estoppel by silence or acquiescence. Similarly, in cases of so called estoppels by convention, there must be some mutually manifest conduct by the parties which is based on a common but mistaken assumption. The alleged representor’s participation in this conduct can then be relied upon by the representee as a basis for this form of estoppel.
    3524 In K Lokumal, Kerr LJ also said, at 35, that an estoppel could not arise unless the alleged representor had said or done something, or failed to do something, with the result that his action or inaction had produced some belief or expectation in the mind of the alleged representee. Further, such conduct would only ground an estoppel if, because of the circumstances, it would thereafter no longer be right to allow the alleged representor to resile by challenging the belief or expectation that he or she had engendered.
    3525 What is required over and above agreement itself is that the person sought to be estopped must have contributed, in some active way, towards the creation or continuance of the mistaken basis on which the parties conduct their dealings, thus making it unconscionable to allow that party to resile from the stance he or she has taken: Coghlan v H Lock (Australia) Ltd (1985) 4 NSWLR 158, 166-167 (Samuels JA). As McHugh JA pointed out in that case, at 177, estoppel is not concerned with a self-induced mistake even if both parties have made the same mistake. The person alleged to be estopped must have contributed to or occasioned the other party’s mistake.
    3526 In both Grundt and Thompson v Palmer, Dixon J spoke of the party against whom the estoppel is raised ‘participating’ in the making and acceptance of the assumption in a way that would preclude that party from departing from the assumption. In my view ‘participation’ is the key element here. There must be some active contribution by the party sought to be estopped and it must be a contribution that ‘crosses the line’ so as to make it unjust to permit the person to deny the truth of a belief or assumption which that person has induced.
    15.3.3.3. The need for clarity
    3527 The parties differ as to the legal test of the degree of clarity needed to found an estoppel by convention. The banks submit that since the basis of estoppel by convention is the consensual character of the shared assumption or agreement, the question whether or not there has been a ‘clear and unequivocal representation’ does not arise as it does in cases of estoppel by representation. The approach in relation to conventional estoppel is to consider the terms of the agreement or arrangement upon which both parties acted and the language and conduct that is used. All that is required is that the language or conduct upon which the estoppel is said to be based is ‘sufficiently unambiguous’. The plaintiffs’ position can be put shortly: the ‘clear and unequivocal’ requirement in relation to an estoppel by representation also applies to an estoppel by convention.
    3528 The banks rely on Troop v Gibson [1986] 1 EGLR 1. Arnold P opined, at 3, that the relevant question was one of interpreting the terms of the convention once the language had been established by the evidence, in the same way that the terms of a contract must be interpreted. In this regard, estoppel by convention was different from estoppel by representation, which was founded on a representation that was ‘clear and unequivocal’. Purchas LJ said, at 5, that where both parties engage in negotiations representing mutually that a certain state of affairs is accepted, then the need for clear and unequivocal statements is of less importance. Ralph Gibson LJ agreed but added, at 6:
    The court must determine what the state of affairs is which the parties have accepted and decide whether there is sufficient certainty and clarity in the terms of the convention to give rise to any enforceable equity. For my part I think that the extent to which the importance of clear and unequivocal statements is reduced in cases of estoppel by convention is probably small. In all cases the representation or statement must be sufficiently clear; and, since the doctrine of estoppel, when applied deprives a party of the ability to enforce a legal right for the period of time and to the extent required by equity which the estoppel has raised, the clarity required will seldom fall below what is unequivocal for the relevant purpose. (emphasis added)
    3529 In Queensland Independent Wholesalers, McPherson J also turned his mind to the type of conduct, affecting mutual relations or raising assumptions, that was capable of forming a conventional or accepted basis governing relations between the parties. His Honour said, at 46:
    To produce that consequence the acts or conduct relied upon must point plainly, if not unequivocally, to the assumption put forward as the conventional basis of relations. A course of dealing that is explicable by reference to some other equally plausible assumption inevitably falls short of establishing that the parties accept as the basis of their relations the particular assumption contended for. (emphasis added)
    3530 In GEC Marconi Systems Pty Ltd [426] Finn J cited with apparent approval what was said by the New Zealand Court of Appeal in National Westminster Finance NZ Ltd v National Bank of New Zealand Ltd [1996] 1 NZLR 548, 550, namely, that the assumption must be ‘sufficiently clear to be enforceable’.
    3531 There are, however, other Australian authorities in which the ‘clear and unequivocal’ requirement (or something akin to it) has been applied to estoppel by convention. In both Western Australian Insurance Co Ltd v Dayton (374‑75) and Dabbs v Seaman (1925) 36 CLR 538, 550, Isaacs J (in parts of the judgments dealing with conventional estoppel) cited with approval the dicta from Low v Bouverie that I have set out in Sect 15.3.2.2. The essence of this dicta is that the language upon which the estoppel is founded must be ‘precise and unambiguous’; it might be open to different constructions, but it must be such as will reasonably be understood in a particular sense by the person to whom it is addressed. I can see no relevant distinction between ‘precise and unambiguous’ and ‘clear and unequivocal’. In Legione v Hately, Mason and Deane JJ said, at 435, that it had long been recognised that ‘a representation must be clear before it can found an estoppel in pais’, again citing Low v Bouverie. It is to be remembered that conventional estoppel is a species of estoppel in pais.
    3532 Similar language has been used in a number of other cases (in each instance in relation to estoppel by convention):
    (a) Wright v Hamilton Island Enterprises Ltd [2003] QCA 36, 84: ‘clear and precise’;
    (b) Discount & Finance Ltd v Gehrig’s NSW Wines Ltd (1940) 40 SR (NSW) 598, 603 (Jordan CJ): ‘precise and unambiguous’; and
    (c) Waterman v Gerling Australia Insurance Co Pty Ltd [2005] NSWSC 1066, (2005) 194 FLR 419, 91: ‘clear and unequivocal’.
    3533 I am not sure that, even in the United Kingdom, Troop v Gibson stands for the distinction for which the banks contend here. In Baird Textile Holdings Ltd v Marks & Spencer plc [2002] 1 All ER (Comm) 737, [84] – [95], Mance LJ recognised that there are, on the authorities, certain distinctions between the characteristics of estoppel in different contexts. His Lordship gave an example. He cited the need, in relation to promissory estoppel, for a representation that was clear and unequivocal. In relation to estoppel by convention, his Lordship cited the passage from Ralph Gibson LJ’s reasons in Troop that I have set out. He then said: ‘In contrast, a proprietary estoppel may arise from promises of an equivocal nature’. The way I read this, the distinction is between estoppel by representation and conventional estoppel on the one hand, and proprietary estoppel, on the other − not between estoppel by representation and conventional estoppel.
    3534 I believe the better view, and the one that accords with High Court authority, is that there is no relevant distinction between estoppel by representation and conventional estoppel in relation to the degree of clarity required. Whether the terms used are ‘clear and unequivocal’ or ‘plain and unambiguous’ or a combination of those words it seems to me not to matter a great deal. The essence is the same. The representation in relation to estoppel by representation and the language of conduct for conventional estoppel must meet the same standard of clarity.
    15.3.4. Equitable estoppel
    15.3.4.1. The nature of equitable estoppel
    3535 The third species of estoppel advanced by the banks in this case is equitable estoppel, also known by the term ‘promissory estoppel’. There is an interesting discourse on the historical development of equitable estoppel in the banks’ written closing submissions. There is no need for me to engage in a detailed discussion of the circumstances by which we have arrived at the current state of the relevant jurisprudence. It is sufficient to say five things by way of an introduction to the doctrine of equitable estoppel before covering the one matter on which the parties are in dispute.
    3536 First, in Legione v Hately the High Court recognised equitable estoppel as part of the law of Australia. The point in issue in that case was whether promissory estoppel should apply to preclude the enforcement of rights between parties to an existing contract. The species of estoppel that arose in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 was part of this development, although the court did not, on that occasion, extend the doctrine to relationships outside a pre‑existing contract. As it has developed, promissory estoppel is now better defined as equitable estoppel (which encompasses the High Trees‑type estoppel) and the old species of estoppel by encouragement, or acquiescence, and proprietary estoppel.
    3537 Secondly, in Waltons Stores the court took the next step and extended the doctrine to relationships outside a pre‑existing contract. Mason CJ and Wilson J, at 404, identified a common thread from previous authority, namely, the principle that equity will come to the relief of a plaintiff who has acted to his detriment. The basis for intervention was that one party to a transaction had a basic assumption in relation to which the other party to the transaction had ‘played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it’, citing Dixon J in Grundt at 675. Their Honours explained that equity comes to the relief of such a plaintiff on the grounds that it would be unconscionable conduct on the part of the other party to ignore the assumption.
    3538 Mason CJ and Wilson J said, at 406, that the doctrine of promissory estoppel extends to the enforcement of voluntary promises on the footing that a departure from the basic assumptions underlying the transaction between the parties must be unconscionable. But mere reliance on an executory promise would not necessarily amount to unconscionable conduct. Something more would be required. That ‘something’ might be the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party.
    3539 The seminal description of the doctrine of promissory estoppel appears in the judgment of Brennan J in Waltons Stores (428). His Honour set out six criteria that are necessary in order to establish an equitable estoppel.
16. The plaintiff has assumed that a particular legal relationship then existed between the plaintiff and the defendant or has expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship.
17. The defendant has induced the plaintiff to adopt that assumption or expectation.
18. The plaintiff has acted or has abstained from acting in reliance on the assumption or expectation.
19. The defendant knew or intended him to do so.
20. The plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled.
21. The defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.
    3540 Brennan J provided further detail in relation to the second element. His Honour said that a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so in certain circumstances. Those circumstances occur where the assumption or expectation can be fulfilled only by a transfer of the defendant’s property, a diminution of his rights or an increase in his obligations and the defendant, knowing that the plaintiff’s reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.
    3541 The third general point I wish to make is that, whatever may be the position in relation to estoppel by representation or conduct and conventional estoppel, with promissory estoppel there is no distinction between representations as to law and fact: Waltons Stores (415 – 416, 432) (Brennan J), (452) (Deane J); Verwayen (413) (Mason CJ), (501) (McHugh J); Caboche v Ramsay (238) (Gummow J).
    3542 Fourthly, unlike the common law estoppels, promissory estoppel applies to representations concerning future conduct: Legione v Hately (432) (Mason and Deane J); Waltons Stores (399) (Mason CJ and Wilson J).
    3543 Finally, in Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466, 472, Priestley JA set out a list of principles distilled from Waltons Stores. It is a convenient summary and I will repeat it:
    (a) common law and equitable estoppel are separate categories, although they have many ideas in common;
    (b) common law estoppel operates upon representations of existing fact and, when certain conditions are fulfilled, establishes a state of affairs by reference to which the legal relations between the parties are to be decided. This estoppel does not of itself create a right against the party estopped. The right flows from the court’s decision on the state of affairs established by the estoppel;
    (c) equitable estoppel operates upon representations or promises as to future conduct, including promises about legal relations. When its conditions are fulfilled, in contradistinction to a common law estoppel, this estoppel creates an equity, being an independent source of legal obligation;
    (d) cases described historically as estoppel by encouragement and by acquiescence, proprietary estoppel and promissory estoppel are all species of equitable estoppel;
    (e) for there to be an equitable estoppel there must be the creation or encouragement of an assumption that a contract will come into existence or a promise be performed, and reliance upon that promise in circumstances where departure from the assumption by the defendant would be unconscionable;
    (f) equitable estoppel may lead to a plaintiff acquiring an estate or interest in land, that is, it may act as a sword, not merely as a shield; and
    (g) the remedy granted to satisfy the equity (which is either the estoppel or is created by it) will be what was necessary to prevent detriment resulting from the unconscionable conduct.
    3544 In Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582, 610, Priestley JA returned to that list and said that (e) should be expanded by adding after the word ‘performed’ the words ‘or an interest granted to the plaintiff by the defendant’.
    3545 The matter referred to in (g) above marks out what is potentially a significant difference between common law and equitable estoppels. If the rule is that the former are ‘all or nothing’, the remedy might be quite different depending on whether the estoppel sounds in equity or at common law. This is the issue to which I referred in Sect 15.3.3. I will return to it when I come to discuss remedies.
    15.3.4.2. The clarity of the representation
    3546 The requirement that a representation must be clear before it can found an estoppel applies to the doctrine of promissory estoppel. In Sect 15.3.2.2 I set out what I said in Witham at [84]. Witham was a promissory estoppel case. In relation to the clarity of the promise I used the words ‘clear’, ‘unambiguous’ and ‘unequivocal’. I also said this, at [85]:
    It seems that at least the same type of certainty as to terms is required to support an estoppel argument as is necessary for the enforcement of a contract. In The Law of Contract, Grieg and Davis, the authors say this, at 156: ‘At present, there is a slight preponderance of authority in favour of a higher level of proof being required for promissory estoppel than is necessary for a contractual undertaking’. In Cheshire and Fifoot’s The Law of Contract, 7th ed (Aust), the authors say, at para 2.3: ‘The need for certainty parallels, or is possibly more stringent than, the requirement for certainty in contract formation’. Legione, at 435-437, is cited as authority in support of that proposition.
    3547 This approach has the support of high authority. In Legione v Hately, at 436 – 437, Mason and Deane JJ cited with approval what had been said by Lord Denning MR in the Court of Appeal in Woodhouse Ltd v Nigerian Produce Ltd [1971] 2 QB 23, 60:
    If the representation is put forward as a variation, and is fairly capable of one or other of two meanings, the judge will decide between those two meanings and say which is right. But, if it is put forward as an estoppel, the judge will not decide between the two meanings. He will reject it as an estoppel because it is not precise and unambiguous. There is good sense in this difference. When a contract is varied by correspondence, it is an agreed variation. It is the duty of the court to give effect to the agreement if it possibly can: and it does so by resolving ambiguities, no matter how difficult it may be. But, when a man is estopped, he has not agreed to anything. Quite the reverse. He is stopped from telling the truth. He should not be stopped on an ambiguity. To work an estoppel, the representation must be clear and unequivocal. That is clear from Low v Bouverie and Canadian and Dominion Sugar Co Ltd v Canadian National (West Indies) Steamships Ltd.
    3548 I can see no reason to change the views I expressed in Witham at [84] and [85], except to say that I am disinclined to extend the test of certainty of a representational promise beyond what is necessary for the enforcement of a contract. In other words, I am not disposed towards a test that is more stringent for a promise than it is for a contract. I am content to proceed on the basis that the two are the same or similar.
    3549 It follows that in my opinion the representations said to ground a promissory estoppel must be clear and unambiguous. This is one miniscule step along the path towards a unified doctrine of estoppel. The way I look at it, there is no material difference in relation to the degree of clarity required between the three species of estoppel that are advanced in this case. The burden of establishing that the requisite degree of certainty exists is on the party propounding the estoppel.
    15.3.5. The three species of estoppels: conclusion
    3550 In the factual circumstances as they arise in this case there are more similarities than differences between the three species of estoppels. I can summarise my views as follows.
    3551 First, the main differences lie in the consequences that flow from a finding of a common law, rather than an equitable, estoppel. The banks contend that in relation to the former, the establishment of the estoppel entitles the successful party to relief, the effect of which will be to hold the other party to the representation or promise. This follows from its description as ‘all or nothing’. The relief following the establishment of an equitable estoppel is directed more at avoiding the detriment and will be fashioned or tailored to achieve that end. To avoid the detriment the party may be required to make good the promise but, on the other hand, the relief will be proportionate to the detriment and may therefore be less than would be the case were it aimed at enforcing the promise.
    3552 Secondly, common law estoppels are restricted to existing fact. On the other hand, equitable estoppels can extend to representations about the future. Estoppel by representation or conduct, in its common law incarnation, differs from promissory estoppel, which may also arise from a representation, in this regard.
    3553 Thirdly, in relation to the degree of certainty or clarity required in the representations, language or conduct from which the estoppel arises and as regards assumptions of law (or more correctly the legal effect of documents or legal aspects of private rights), there is no material difference. And in relation to all three species, reliance and detriment are necessary.
    3554 I wish now to turn to three basal issues, namely, whether the relevant Bell group companies made representations or engaged in conduct that could ground an estoppel and, if so, whether the banks relied on them and whether they suffered relevant detriment. If the answer to each of those questions is in the affirmative, I will then consider whether estoppels have been made out and into which of the three species they fall.
22. The estoppel case: representations and conduct
    16.1. Introduction
    3555 Put simply, the banks’ estoppel case is that from late 1985 until early 1990 the banks conducted their banking relationships with the NP group companies (including TBGL and BGF) in the belief that the bonds were subordinated and ranked behind the bank borrowings of those companies. The word ‘bonds’ in that sentence is a reference to all liabilities arising from the raising and deployment of funds in the convertible bond issues, that is, to the bonds per se and to the on‑loans. That belief, the banks say, was induced (and later confirmed) by representations made by, and other conduct of, those companies.
    3556 The representations and conduct relied on by the banks did not occur in a vacuum. They have to be considered in context. That context includes the existing banking relationships between the NP group companies and the NP group bankers, the financial reporting requirements within those relationships and the negotiations for, and the commercial purpose of, the convertible bond issues. Much of what I have said in Sect 12, Sect 13 and Sect 14 about those issues is relevant here and should be borne in mind as the discussion in this section unfolds.
    16.2. Identifying the representations and conduct
    16.2.1. Some introductory comments
    3557 Repetitive though it may be, I think it is necessary to identify with some precision what representations the banks say were made by (or which bound) the NP group companies.
    3558 The starting point is the 11 December 1985 letter written by TBGL to the NP group banks. The whole of the letter is relied on because of the information contained within it, but the banks identify three representations:
    (a) it was the view of TBGL (and the fact) that the first BGNV bond issue and the TBGL bond issue were, or would be, identical in terms of effective subordination;
    (b) it was the view of TBGL (and the fact) that the bondholder debt was, or would be, subordinated and would rank behind bank borrowings of the NP group companies; and
    (c) the liabilities of TBGL arising from the raising and deployment of moneys in and about the bond issues were, or would be, subordinated to the liabilities of TBGL to the bank lenders.
    3559 The subordinated status of the liabilities was put forward (along with the maturity date and the strong likelihood of conversion) as a reason why TBGL believed that the bond issues should be treated as equity in the calculation of the NP ratios. In the light of those considerations, the banks were requested to treat the liabilities as equity rather than debt.
    3560 The next document is the Information Memorandum. The banks rely on the whole document, on the circumstances of its preparation, and on its dissemination to the prospective Lloyds syndicate members. The banks say that the Information Memorandum contains a representation by TBGL that the liabilities of TBGL arising from the raising and deployment of moneys in and after the bond issues were subordinated to the liabilities of TBGL to bank lenders.
    3561 Attention then moves to the 15 April 1987 letter written by TBGL to the NP group banks, including, by that time, the Lloyds syndicate banks. The purpose of the letter and the representations identified within it are the same as for the 11 December 1985 letter, except that the relevant domestic issue is the BGF bond issue and, in relation to (b), it was part of the representation that the debt would be subordinated in the same manner as the 1985 bond issue.
    3562 In relation to the proposal to collapse the NP agreements and replace them with the NP guarantees, the banks rely on a representation contained in a letter dated 14 May 1987 from TBGL to the NP group banks in which it forwarded a draft guarantee document. The letter included this comment (among others): ‘non‑current subordinated debt has been excluded in the definition of total liabilities. The reason for this is to exclude from Total Liabilities subordinated debt such as the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes’.
    3563 The banks also rely on the negative pledge reports in which the obligations of NP group companies to BGNV were excluded from the calculation of total liabilities and, accordingly, represented that those obligations were non‑current subordinated liabilities of the NP group. There is little I can say in addition to what is contained in Sect 12.13.6, Sect 12.13.7 and Sect 12.13.8.
    3564 The information packages sent by TBGL to the NP group bankers on 6 November 1987, 27 November 1987 and 29 February 1988 do not contain an express reference to the bond issues being subordinated. But they include a pro forma balance sheet entitled ‘Forecast Negative Pledge Group Balance Sheet’. In that document the bond liabilities are described as ‘convertible notes’ and they are included as part of the shareholders’ funds. The banks say that by treating the funds raised from the bond issues as a form of shareholders’ funds, and by excluding them from the NP ratio calculations, TBGL represented that the assets to liabilities ratio was being met. Taken in the context of the other matters relied on, this amounted to a representation that the bond issue proceeds were subordinated debt of the NP group.
    3565 Finally, the banks point to the three‑year business plan distributed in May 1988. It contains a statement that ‘all bonds are fully and explicitly subordinated to all unsubordinated debt’. In a table of summary financial information entitled ‘results at a glance’, a distinction is drawn between ‘senior debt’ and ‘shareholders’ funds and subordinated debt’. I think it is common ground that the former includes the bank debt and the latter the convertible bonds. The summary also contains a gearing ratio calculation that proceeds on the basis of that distinction. The pro forma balance sheet shows ‘total share capital, reserves and convertible bonds’ (including the bond issues) on one line and ‘total non‑current liabilities’ (not including the bond issues) on another. This, the banks say, is both an express and a contextual representation that the banks ranked ahead of liabilities arising from the issue of the bonds and the use of the proceeds by NP group companies.
    3566 Thus far I have been concentrating on the representations said to have been made. To the extent that what is relied on is conduct rather than representations as strictly understood, I do not think it is necessary to do any more than refer back to ADC par 11ED(72), a summary of which appears in Sect 15.2.1.
    16.2.2. Intention that representations be relied on
    3567 One of the points emerging from the summary of legal principles set out above is that it is necessary to establish that the person making the representations intended that they be acted upon. I do not think this aspect is contentious but, in case it is, I should say I have no doubt that, assuming the statements about subordination are ‘representations’, TBGL intended that the banks should act on them. That is the whole import of, for example, the 11 December 1985 letter. It says (using my words): ‘we think the bonds should be treated as equity and these are the reasons why; please oblige’. Subordination is one of the reasons proffered by TBGL. And the letter makes provision for the banks to signify assent: ‘We hereby agree to and accept the treatment of the convertible subordinated bonds due 1995 as set out in your letter dated 11 December 1985 of which the above is a copy’.
    3568 I note also three internal documents in which the intention is clearly expressed. First, in the 3 September 1985 memorandum from Griffiths to RHaC, the author said: ‘The key to the issue is to have the issue clearly subordinated and acceptable to our banks as quasi‑equity. To be comfortable banks will probably look to have this issue subordinated in time as well as nature’. In a file note dated 31 December 1985, Cahill said: ‘There has been no serious criticism of our proposal to have the convertible subordinated bonds considered as equity for the purposes of the negative pledge ratios. The banks are having some difficulty in obtaining the necessary signatories over the Christmas/New Year break’. The Treasury report contained in the board pack for the TBGL directors’ meeting on 28 April 1987 stated that the borrowing capacity would increase ‘when the [NP group] banks agree to accept the May 1987 $250 million convertible bond issues as equity for banking purposes’.
    16.2.3. The letters of 11 December 1985 and 15 April 1987
    3569 In their written submissions the plaintiffs identify what they described as three common themes with respect to the alleged representational conduct. The plaintiffs did not suggest that all of the themes are manifested in respect of each of the representations. But each of them arises in relation to the 11 December 1985 letter and it is convenient to consider them in that context. First, references to ‘issues’ and ‘bonds’ must necessarily import reference to the on‑lending of the proceeds of the BGNV bonds. This is the theme the plaintiffs say was characterised by the defendants’ mantra of ‘bonds means proceeds’. Secondly, TBGL’s comparison between the BGNV bonds and the TBGL bonds must necessarily have extended to a comparison of TBGL’s liabilities for negative pledge purposes arising, on the one hand, from the issue of the TBGL bonds, and on the other hand, from the inter‑company loan of the proceeds of the BGNV bonds from BGNV. The banks’ shorthand for this is that the two series of bonds were represented to be identical in terms of ‘effective subordination’.
    3570 Thirdly, the request for equity treatment as conveyed by use of the phrases ‘regard as equity when considering balance sheet ratios for the purposes of [TBGL’s] banking covenants’ and ‘treatment of the convertible subordinated bonds due December 1995 in this manner’ necessarily turned on the deduction from ‘total liabilities’ of the liability in respect of TBGL bonds, the liabilities representing the BGNV on‑loan and the TBGL guarantee of the BGNV bonds. The plaintiffs say that this theme is best encapsulated by asking what is conveyed by a request to regard or treat as equity? Conceptually the parties are agreeing to adopt a convention; at issue is the nature of the convention conveyed by the request for equity treatment.
    3571 In relation to the ‘bonds means proceeds’ thesis, there is little I can say in addition to what is contained in Sect 13.2.5. In that section I was dealing with this question in the context of the manifestation of an objective intent as part of the arguments concerning the existence of contracts inter se. The same reasoning process applies here, especially in relation to the import of the 11 December 1985 and 15 April 1987 letters. In relation to the ‘effective subordination’ thesis, I refer to what I have said in Sect 13.2.3.4 and Sect 13.2.6.1. The conclusions in those three sections support the argument advanced on behalf of the banks that there was relevant representational conduct.
    3572 In relation to the third of the common themes, the plaintiffs place particular emphasis on the words in the 11 December 1985 letter ‘the issues should be regarded as equity when considering balance sheet ratios for the purposes of [the] banking covenants’. The plaintiffs contend that in the letter the banks were asked to regard one thing as another thing for a particular purpose. The subject of the pretence is ‘the bonds’. The object of the pretence is ‘equity’. The purpose for which the pretence is employed is the ‘consideration of balance sheet ratios’.
    3573 The plaintiffs point out that the letters do not stipulate the mechanism by which the agreed pretence is to be effected and it is on this fundamental ambiguity that the banks’ representational claims falter. They say the banks’ submissions depend on the court finding that the letters represented that the mechanism by which the pretence was to be effected was by deducting the BGNV on‑loan liability and the TBGL bond liability from the calculation of ‘total liabilities’. The banks’ starting point is to characterise the request made in the 11 December 1985 letter as a request to accede to ‘the treatment of debt as equity’ for the ‘the calculation of balance sheet ratios for banking covenants’. That is neither what the letters say nor what, by inference, the letters must necessarily mean. The plaintiffs submit that the banks’ position leaves too much to inference and requires the letters to be read in a manner that is contrary to their plain meaning.
    3574 I accept the need for clarity and certainty in the representational conduct. It is the same or a similar standard of certainty as that required to support an estoppel argument and as is necessary for the enforcement of a contract: see various parts of Sect 15.3. But the fact that a statement is open to more than one construction will not, of itself, preclude a finding that it is of representational effect, provided that it is sufficiently clear and free from ambiguity to enable the court to say how it would reasonably be understood by the person to whom it is addressed.
    3575 If, as I have found, there is merit in the ‘effective subordination’ and ‘bonds means proceeds’ approach, many of the literal difficulties with the letter fall away. The phrases ‘the two issues will … be identical’ and ‘the issues should be regarded as equity’ would reasonably be understood as meaning the debt represented by the paper securities. There is, in my view, no warrant for restricting the word ‘issue’ (which is, of course, the bonds) to the bonds per se. As I have said many times, the bonds are debt. They are, in accounting parlance, liabilities. They are not shares or a similar form of capital equity, strictly so‑called. The meaning is clear. There is, as the plaintiffs have construed it, a pretence. The pretence is that something that is, in accounting parlance, a liability is to be treated, for accounting purposes, as something other than a liability.
    3576 The plaintiffs also place reliance on the fact that the letter relates the purpose of the pretence to the task of ‘considering balance sheet ratios for the purposes of its banking covenants’. The letters do not state that the purpose of the pretence is for ‘calculating’ balance sheet ratios for the purposes of its banking covenants as the banks would have it. The entrenched practice was to use Bell group consolidated balance sheets as the starting point for calculating the ratio integers. The language of the letter requires a reader to regard bonds as equity when considering balance sheet ratios. It does not say that subordinated debt arising from either the bonds or the on‑lending of the moneys raised by the bonds is to be excluded from the total liabilities calculation.
    3577 I do not share this concern. The ‘mechanism’ was not the subject of detailed analysis in the letter. But in my view it did not have to be. There was, in the NP agreements, a definition of total liabilities, a definition of total tangible assets and a specification of a ratio that had to be met when those two things were compared. The request was to remove an item from total liabilities (where it actually belonged) by treating it as equity (a pretence) and for the comparison to be made on the basis of the pretence. It is to that ‘comparison’ that the phrase ‘when considering balance sheet ratios for the purposes of the banking covenants’ relates.
    3578 I can see no material difference between ‘consider’ and ‘calculate’ in this regard. The ratio is a number. It is arrived at by taking one number total tangible assets) and dividing it by another number (total liabilities). This is a ‘calculation’. There is nothing else that has to be done (relevantly) to arrive at the ratio. It is possible, I suppose, to read the word ‘consider’ as referring to the cerebral act of reading and digesting a piece of information, namely, the ratio number. But that cannot be done without a calculation of the number and it would not have any meaning without that number and, therefore, without the calculation.
    3579 It is true that the letter does not say: ‘please remove the bond proceeds from liabilities’. But the bonds cannot (or should not) be counted twice. It follows that the request for the bonds to be treated as equity necessarily carries with it the removal of the bond proceeds from non‑current liabilities. They (the bonds) cannot then be ignored. For accounting purposes they have to be reported somewhere. And that ‘somewhere’ is in the equity section of the balance sheet, not as share capital but as a separate line item within the general category of shareholders’ funds. In Sect 12.13.7 I indicated that I was not inclined to accept the notional conversion thesis. It follows that the mechanism is not to be explained by treating the bonds ‘as if’ they had been converted into shares. This is why I do not think it is correct to construe the letter as being a request to ‘consider’ the banking covenants on an ‘as if’ basis, namely:
    (a) treating the bonds as if they had been converted, and thus effectively a part of share capital; and
    (b) eradicating the bonds and the on‑loans from non‑current liabilities as a consequence of the notional conversion.
    3580 It is, in my view, more simple than that. In my view the proper construction of the 11 December 1985 letter is that there were to be two bond issues and they were, save for the issuer and minor matters, to be identical. TBGL believed the bond issues should be treated as equity and there were three reasons underpinning that belief, one of which was that ‘the bonds are a subordinate debt’. The sensible and reasonable construction of the letter is that the term ‘bonds’ extends beyond the bonds per se and encompasses the proceeds and hence the on‑loans. There is, in my view, sufficient clarity to support the existence of representations that:
    (a) it was the view of TBGL that the first BGNV bond issue and the TBGL bond issue would be identical in terms of effective subordination;
    (b) it was the view of TBGL that the bondholder debt would be subordinated and rank behind bank borrowings of the NP group companies; and
    (c) the liabilities of TBGL arising from the raising and deployment of moneys in and after the bond issues would be subordinated to the liabilities of TBGL to the bank lenders.
    3581 The wording in (c) carries with it the meaning that to the extent that TBGL’s liabilities included the on‑loans, that indebtedness would rank behind moneys due to the banks on a liquidation of TBGL. I say this acknowledging that in neither the text of the letter nor the accompanying summary of terms is there a description of the precise nature of the subordination. There is not, for example, a statement whether the subordination was a liquidation subordination or a subordination that arose from the issuing of the instruments. But from TBGL’s perspective, there was never any doubt about the nature of the subordination. The 1 July 1985 telex from SBCIL to TBGL described the proposed issue as ‘subordinated obligations of the issuer ranking after all unsecured and unsubordinated obligations but equally with all other present and future subordinated obligations of the issuer and the guarantor’. The offering circular and the conditions attaching to the bonds say much the same thing. It is only in the trust deeds that the mechanism of the subordination is spelled out.
    3582 I accept that there are many ways in which the subordination mechanism can operate. For example, it can operate only on a liquidation or it can operate before a liquidation so that interest on the junior debt cannot be paid while the senior debt is outstanding. Debt which is subordinated can be subordinated to a creditor, or to a class of creditors, or to all creditors. And subordination of debt can be achieved either by a contractual postponement or by a turnover trust. But here, the irresistible inference from the 11 December 1985 letter is that the issues, being subordinated, would rank behind bank debt. Why else would the letter have been addressed to the banks? It would make no sense to write such a letter if the class of creditors was not to include the banks. And it does not seem to me to matter that the letter did not say that ordinary unsecured and unsubordinated creditors other than the banks were also in the class of beneficiaries of the arrangement.
    3583 As will become apparent when I examine the oral evidence of individual bank officers, there was a general, and relatively consistent, understanding of the concept of subordination. In my view the concept of subordination, as understood, is itself sufficient to carry with it the meaning that on a liquidation the on‑loans would rank behind bank debt. It matters not that the precise mechanism by which the subordination of the debt, and therefore that ranking, was to be effected was not described in detail in the communications said to constitute the representation.
    3584 These findings are in accord with the representations pleaded in ADC par 11ED(17), except that I have omitted the words ‘were, or’. This is because the neither the first BGNV bond issue nor the TBGL bond issue had been ‘made’ by 11 December 1985. As I mentioned in Sect 12.7.3, in relation to the first BGNV bond issue, a number of events occurred on 10 December 1985 and the ‘grey market’ or secondary trading commenced on that day. But the issue did not close until 20 December 1985 and the funds were received by BGNV on that date. The proceeds were passed over to TBGL in Australia on 23 December 1985. In relation to the TBGL bond issue, the agreements were executed on 20 December 1985 and the $75 million paid over on that date.
    3585 There are four noteworthy differences between the 15 April 1987 letter and the December 1985 request. First, the former relates back to the latter. The paragraph leading in to the reasons advanced by TBGL for equity treatment, is as follows: ‘[TBGL] considers that, in line with the treatment of the December 1985 issue, the issues should be treated as equity when considering balance sheet ratios for the purposes of banking covenants’ (emphasis added). Secondly, in the explanation of the reasons favouring equity treatment, an additional factor is added, namely, that ‘there is no right of put by the investors’. In other words, the bondholders did not have an option to require the issuer to redeem the bonds (other than on maturity). The first BGNV bond issue did not include a put option either, but this factor was not mentioned in the 11 December 1985 letter. Thirdly, a copy of the offering circular for the second BGNV bond issue was enclosed with the 15 April 1987 letter. Fourthly, the addressees included the Lloyds syndicate banks as well as the Australian (and other) banks.
    3586 In my view none of these differences detract from the reasoning that I have applied to the 11 December 1985 letter. Its representational character is much the same and I draw the same conclusion in relation to the representations pleaded in ADC par 11ED(43). The agreement between BGF and Heytesbury Securities for the BGF bond issue was executed on 6 May 1987. The second BGNV bond issue closed on 7 May 1987 and the funds were received by BGF on that day.
    16.2.4. The Information Memorandum
    3587 I dealt with the Information Memorandum in Sect 12.12.3 and Sect 13.2.4.3. Similar reasoning applies here. The representation contended for in ADC par 11ED(30) is that, by the Information Memorandum, TBGL represented that its liabilities, as a member of the NP group, arising from the raising and deployment of the moneys in and after the bond issues were subordinated to its liabilities to bank lenders.
    3588 For the same reasons as set out in the earlier sections, I think a person reading all relevant sections would piece together the parts and come away with an understanding that there were to be on‑loans and that they (like the bonds) would be subordinated. It is less clear (but nonetheless sufficiently clear) that the reader would necessarily understand that the subordinated status of the bonds and the on‑loans was a reason being advanced in favour of equity treatment.
    3589 There is no material in the Information Memorandum describing the type of subordination applying to the first BGNV bond issue and the TBGL bond issue and therefore, on my findings, to the on‑loans. There is, however, a fuller description of the status of the bonds (although not the subordination mechanism) in the offering circular.
    3590 John Eggleshaw, an officer of LMBL who was closely involved with the negotiations for the Lloyds syndicate banks’ facility, said that he was given a copy of the offering circular and discussed it with Oliver Graham. But he could not recall whether the offering circular had been included with the Information Memorandum when it was sent out to prospective syndicate members. He could not recall whether he knew, at the time, whether the subordination was a liquidation subordination or a subordination that arose from the issuing of the instruments. In any event, he would not have known that from the offering circular alone. He could only have obtained that knowledge by reading the trust deed. Nonetheless, just as I did with the 11 December 1985 letter, I am prepared to draw the inference that the reference to ‘subordination’ carried with it the meaning that the on‑loan was a debt that would, on a liquidation of TBGL, rank after moneys owed to the banks.
    16.2.5. Collapsing and replacing the NP agreements
    3591 In Sect 4.2.2.5 I described the background to the proposal to collapse the NP agreements and replace them with NP guarantees. The negotiations were undertaken from February 1987 and draft guarantee documents were prepared and discussed. On 14 May 1987 TBGL circulated among banks an amended draft guarantee. The covering letter noted that non‑current subordinated debt had been excluded in the definition of total liabilities. The reason proffered for the change was to exclude from total liabilities subordinated debt ‘such as the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes’.
    3592 In ADC par 11ED(59A) the banks plead that this constitutes a representation that the convertible bonds had created non‑current subordinated debt of companies within the NP group. If, as I have found, ‘subordinated debt’ encompasses the on‑loans as well as the bonds per se, the 14 May 1987 letter seems to me to be a clear representation that funds arising from the deployment of the first and second BGNV bond issues, as well as from the TBGL and BGF bond issues, have that status. And for the same reasons as I explained in connection with the 11 December 1985 letter, the reference to ‘subordinated debt’ is itself sufficient to carry with it the meaning that on a liquidation the on‑loans would rank behind bank debt. It does not matter that the precise mechanism by which the subordination of the debt, and therefore that ranking, was to be effected is not described in detail in the letter.
    16.2.6. Provision of financial information
    3593 The banks also rely on material in the negative pledge reports, the information packages and the three‑year business plan as constituting relevant representations.
    3594 In ADC par 11ED(63) the banks plead that in each of the negative pledge reports between 1986 and 1989 the NP group companies represented to the banks that the 65 per cent NP ratio had not been breached and that this was consistent only with the exclusion of liabilities of companies in the NP group to BGNV in the calculation of total liabilities.
    3595 As indicated in Sect 12.13.6, the negative pledge reports contained errors and are not always easy to decipher or explain. But, for the reasons set out in those sections, I believe the general thrust of the negative pledge reports is consistent with the exclusion of the debts of TBGL and BGF to BGNV (that is, the on‑loans) from total liabilities. In the discussion in and around Table 27, Table 28 and Table 29 (see Sect 12.13.6.3), the impact on the NP ratios of treating the on‑loans (and the domestic bond issues) as part of total liabilities is set out. This, it seems to me, supports the contention that in the negative pledge reports the companies were representing that the ratios were being complied with and that this is only consistent with the exclusion of the on‑loans from total liabilities.
    3596 ADC par 11ED(67) contains an assertion that the information packages (November 1987 and February 1988) represented that the funds raised by the bond issues in 1985 and 1987 were, and could be treated as, a form of shareholders’ funds and that the NP group was complying with the 65 per cent ratio. I accept the banks’ submission that in the context of the letters of 11 December 1985 and 15 April 1987, the Information Memorandum, the letter dated 14 May 1987 and the definitions of Total Liabilities and subordinated debt in the NP guarantees, the treatment of the bond issues in this way was a representation that the bond issue proceeds were subordinated debt of the NP group.
    3597 In ADC par 11ED(70) the banks assert that the three‑year business plan (circulated in May 1988) contained a representation that the bondholders ranked behind the bank lenders in respect of recovery of moneys from assets of the Bell group. In the plan, bank debt (described as senior debt) was distinguished from shareholders’ funds and subordinated bonds, and the ratios were calculated on the basis of that distinction. The plan described the convertible subordinated bonds issued to that time as ‘fully subordinated’ and ‘fully and explicitly subordinated to all unsubordinated debt’. There was a representation that if a liquidation of TBGL, BGF or other NP group company were to occur, the banks would rank ahead of liabilities arising from the issue of the bonds and the use of the proceeds thereof by such companies.
    3598 This is another area in which the plaintiffs point to a problem arising from the use of the consolidated whole group balance sheet (rather than the NP group balance sheet) as the starting point for the calculations. The plaintiffs say that the three‑year business plan concerned the consolidated group and that the only representation made was that there was a liability by a company within that group, BGNV, to a party external to that group which was subordinated. Accordingly, the plan could not and did not inform the reader about the internal disposition of funds within the consolidated group and the effective subordination of the subordinated debt to other debt.
    3599 I do not think this is correct. I have previously said (Sect 12.13.6.2) that I do not place much store on the fact that the primary documents from which the ratio calculations were made (as reported in the negative pledge reports) were the audited consolidated group accounts rather than accounts of the NP group. The banks to which the three‑year business plan was sent were interested primarily in the NP group companies, with whom they had a contractual relationship. But they were also interested in the consolidated group because of the indemnity given by TBGL under the NP agreements and later the guarantee under the NP guarantees. TBGL was the company at the apex of both the consolidated group and the NP group.
    3600 It is true that the calculation of gearing in the ‘results at a glance’ section of the plan (for example, the estimate of 47 per cent as at 30 June 1989) relates to the consolidated group rather than the NP group. In this respect, the three‑year business plan is a different type of presentation from that in the November 1987 and February 1988 information packages, which did concentrate on the NP group. But the figure contained in the plan does not purport to replicate the calculation required by the definitions in the NP guarantees. For example, the calculation relates to total assets and total liabilities taken from the pro forma forecast balance sheets rather than total tangible assets and total liabilities from actual results. The reality is that the ratios with which the banks were entitled to demand compliance were ratios of the NP group, not those of the consolidated group. And in the ‘results at a glance’ gearing calculation (like the NP ratio calculation in the negative pledge reports) the bonds were not treated as liabilities.
    3601 The plaintiffs’ submission in this respect is at odds with the findings concerning the interdependence of the bond proceeds and the bonds per se. I accept what was put to me by the banks, namely, that it ignores the express statements in the plan that the subordinated debt was ‘fully and explicitly subordinated’ that it supported unsubordinated debt and that the ‘comfortable position for medium term lenders’ would improve by reason of the reduction in unsubordinated debt. I do not think the representation was limited to a statement that it was only the external liabilities of BGNV that were subordinated. I do not accept the proposition that those statements necessarily contemplated that the proceeds of the issue were lent on an unsubordinated basis so that the debt ranked equally with the so-called ‘non‑subordinated debt’ of ‘senior lenders’.
    16.3. The on‑loans remaining subordinated
    3602 In this section it will be convenient to deal with two related issues. First, did the representations identified in the preceding sections include a representation not only that the on‑loans were subordinated but also that they would retain that status going into the future? The related issue is whether the representations so identified were sufficiently certain to satisfy the legal tests set out in various parts of Sect 15.3.
    3603 The plaintiffs’ case is that even if there was a representation that the bonds were subordinated there was no promise that the bonds would always be subordinated. The plaintiffs submit that commercial men and women would understand that a simple statement that a particular security is subordinated does not pretend to describe all the terms and conditions upon which that security is subordinated. The word ‘subordination’ itself is but an appellation to describe a genus of liabilities in a broad and imprecise way. The identification of the particular species of subordination would require an examination of the terms upon which that particular liability is subordinated. It would also be expected that the terms of the particular contract between the issuer of the securities and the purchasers of the securities would contain other clauses, including clauses pursuant to which the terms of the securities could be modified. Thus, commercial men and women would appreciate that the mere description of a liability as ‘subordinated’ leaves open a number of questions, the answers to which could be obtained (if important to the representee) by examining the terms and conditions upon which the liability is subordinated. In this case, it is important to appreciate that the entities to which the representations were directed were sophisticated international banks.
    3604 The plaintiffs note that the trust deeds for the bonds contained a power of amendment pursuant to which the trustee could consent to an alteration if the change was not materially prejudicial to the interests of the bondholders. Accordingly, there might have been an amendment of the subordination clause of the trust deed. If immutability of subordination had been truly important to the bankers then it is likely that they would have called for the terms and conditions of the bonds. There is no evidence that any banker did so.
    3605 Finally, the plaintiffs point to the long-standing principle of estoppel that a representation or assumption can be departed from on notice, subject to questions of detriment.
    3606 The banks’ case is that a representation that a debt is subordinated has two features. First, it is a representation that the debt has a present characteristic, namely, that it is subordinated. Secondly, it is a representation as to a future matter, namely, that the subordinated characteristic of the debt means that on a liquidation it will rank after other unsubordinated debt.
    3607 So understood, the banks contend, a representation was made by TBGL that the BGNV on‑loans would, on a liquidation of TBGL, rank after the banks’ claims. Once the representation was made and the banks relied on the representation, TBGL was not free to resile from it. Having asked the banks to act on the basis that the debt was subordinated, the companies were not free to make the debt unsubordinated and that was the effect of the representation made to the banks.
    3608 This raises again the difficulty to which I adverted in discussing the contracts inter se: there is no evidence that anyone sat down and turned his or her mind to the precise mechanism by which the on‑loans would be made. Accordingly, it is futile to search for a precise, explicit, representational statement made by anyone on behalf of the Bell group companies to anyone on behalf of the banks along these lines: ‘The loans made by BGNV [or which BGNV is going to make] to TBGL [or BGF] of the bond issue proceeds are subordinated; that is the position now and that is how things are going to remain in the future. So you don’t have to worry; if TBGL [or BGF] goes into liquidation you will get your share of the spoils before BGNV gets anything back’. But is that the true import of what was said or otherwise communicated at the time?
    3609 To answer this question I need to go back and refer again to some of the material discussed in the sections about the concept of subordination generally and about the contracts inter se. I accept that ‘subordination’ is a many splendoured thing and covers many different possibilities and circumstances. But the question is not what it means in a general sense but, rather, what it means in the circumstances confronting the Bell group and the banks in 1985 and following.
    3610 I will start by repeating some of the findings I have made. First, the bond issues (that is, the bonds per se) were to be subordinated. Secondly, the decision to interpose an offshore issuer would necessitate the making of on‑loans because there was never any intention that the funds would remain in BGNV. Thirdly, the reason for the interposition of the offshore issuer was to make the issue tax effective. Fourthly, the commercial purpose of the bond issue was to inject into the NP group funds that, while actually borrowings, would be treated as equity for NP ratio calculations. Fifthly, the funds raised from the bond issue would be lent by BGNV to TBGL (or BGF) on the same terms as the issue. Sixthly, these fundraising endeavours, if done in accordance with the commercial purpose, would involve a ‘double whammy’. They would entitle the company to borrow money that was not to be counted as debt and, having received those funds, borrow even more money. In fact the companies could borrow 1.86 times what they had ‘actually borrowed but notionally not borrowed’. Finally, subordination was an integral (although not the sole) factor in achieving the commercial purpose of the fundraising exercises. These findings constitute, in part, the factual matrix against which the representations fall to be considered.
    3611 In Sect 4.2, I have described the financial arrangements between the Bell group and the Australian banks from the early 1980s to 1990. Most of the facilities were of an ongoing nature subject to annual reviews. But there is no evidence that in December 1985 there was a real prospect that before December 1986 any of the facilities would be terminated. I mention December 1986 because that is when the first interest payment was due under the first BGNV bond issue and the TBGL bond issue, something mentioned in the summary of terms attached to the 11 December 1985 letter. It seems to me, therefore, to be a reasonable inference that, in December 1985, neither the Bell group nor the banks anticipated that the subordination of the bond issues would prevent the companies from paying interest when due to the bondholders, even though the banks’ facilities had not then been satisfied in full. And I would draw the same inferences from the Information Memorandum to the Lloyds syndicate banks and from the 15 April 1987 letter. In other words, the circumstances in which the representations were made dictate that the reference to ‘subordination’ was not to a complete subordination prohibiting any payment of any description to a subordinated creditor before the banks had been satisfied. What, then, did it entail?
    3612 The drafts of the offering circular prepared in November and early December 1985 all indicated that the rights of the bondholders would be subordinated ‘in the manner provided in the trust deed’. By 6 December 1985 a draft trust deed had been prepared and sent to TBGL. Advice was sought by the authors (Linklaters) from ARH as to the effectiveness of the subordination arrangements contained in the draft under Australian and Netherlands Antilles law. The form of subordination proposed (and adopted in the trust deed when executed on 20 December 1985) was therefore known to the relevant officers of TBGL at the time the 11 December 1985 letter was despatched to the banks. The subordination provisions of the trust deed were not altered and the same regime was used for the bond issues of May 1987 and July 1987. This material, too, is part of the factual background in which the representations were made.
    3613 The commercial purpose of the bond issue was (1) to raise funds and (2) to do so in a way that would allow it to be treated as equity rather than debt. The ‘and’ is conjunctive. The objective in (1) was to be achieved by issuing the convertible bonds into the Eurobond market and to Heytesbury Securities. The goal expressed in (2) was to be achieved by having the banks agree to treat the borrowings as equity, not debt. In relation to the latter, TBGL put forward three arguments in order to persuade the banks to consent to equity treatment:
    (a) the anticipation that the bonds would be converted into shares in TBGL;
    (b) the status of the bonds as subordinated debt; and
    (c) the fact that, even if the bonds were not converted, they would not fall due for redemption until after the maturity of the banks’ facilities.
    3614 These three things were, as I have previously said, interdependent, not independent. The Bell group had an obligation to report to the NP group banks twice a year on, among other things, compliance with the NP ratios. The achievement of the commercial purpose depended on the banks continuing to treat the bonds as equity. If they did not do so, there was a danger of a breach of the NP ratios and a reduction in the borrowing capacity of the group companies. If, as I have found, the subordination was an integral part of the ‘package’ and not a mere side wind, it would make no sense to read the representation as if it were along these lines: ‘The on‑loans are subordinated but, by the way, we might unsubordinate them at our pleasure at any time’. Had the companies attempted to do so, they would have run the risk of the banks withdrawing their consent to equity treatment and the commercial purpose of the fundraising exercise would have unravelled. That is not what is said in any of the materials mentioned in Sect 16.2.3, Sect 16.2.4, Sect 16.2.5 and Sect 16.2.6. To read them in that way would defy commercial logic.
    3615 I have no difficulty in accepting the proposition put by the plaintiffs that it is possible for a person making a representation to resile from it on notice and subject to questions of detriment. But there is no evidence that at any time prior to the negotiations for and the preparation of the supplemental trust deeds referred to in par 49 of the statement of claim attached to the writ in the LDTC action, any Bell group company contemplated or gave notice of intention to resile. In any event, as discussed in Sect 17, questions of detriment do arise.
    3616 I think the proper way to interpret the representations is that the on‑loans were (or would be when made) subordinated; that is, they would rank behind bank debt. Further, on a liquidation of the relevant companies the claims of BGNV in respect of the on‑loans would be postponed behind the claims of the banks and would not be repaid until the banks’ claims had been satisfied. In my view, the representation is sufficiently certain to satisfy the legal tests described in cases such as Legione v Hately.
    16.4. Representations binding other Bell group companies
    3617 In almost all instances the representations that I have identified emanated from the chairman’s office, that is, from TBGL. The next question is whether the conduct of TBGL in making those representations was done with the authority of or bound BGNV and the NP group companies as alleged in ADC par 11ED(72). Without diminishing the importance of the question, I can deal with it in relatively short order.
    3618 In Sect 13.2.6.3 I outlined the evidence on which I based the finding that BGNV was a party to the on‑loan contracts inter se (which included the subordination term) and that TBGL had the authority to decide the terms of the on‑loans. Similar reasoning applies here. The main thrust of the evidence of Graham and Derek Williams was that they were aware that the decision to interpose an offshore issuer was made so as to facilitate the achievement of the commercial objective or purpose of the fundraising exercise. The commercial purpose has been described several times in these reasons: see, for example, Sect 16.3. This was the reason for BGNV’s existence. It had no other business activities. In my view, TBGL had BGNV’s authority to make the representations that it did.
    3619 In relation to the other NP group companies, I refer to the material set out in Sect 4.1.2 concerning the administration of the Bell group under RHaC and, in particular, the centralisation of the borrowing function in the chairman’s office. TBGL, through Treasury, procured facilities for companies in the NP group pursuant to the terms of the NP agreements and conducted and monitored the operation of that agreement. BGF was incorporated as a finance vehicle in February 1986 to facilitate the raising of funds for use within the group.
    3620 The chairman’s office was likewise intimately involved in the negotiations for the Lloyds syndicate banks’ facility taken out by BGUK. It was TBGL who approached LMBL in relation to a mandate to arrange a syndicated facility in January 1986. Most of the material for the Information Memorandum came from TBGL. The NP agreements contained the ratio limitations that had to be observed throughout the group and each NP group company and BGUK was aware of all these things.
    3621 In the main, the NP group companies had common directors. The NP group companies can therefore be taken to have been aware of those things of which TBGL (through its directors) was aware. Not all of the NP group companies were in existence or members of the NP group in December 1985. Some joined the NP group at a later time. But each can be taken to have had the requisite awareness from the time when it joined the group.
    3622 I am satisfied that the allegations set out in ADC par 11ED(72) as to authority have been made out.
    16.5. Intention that representations be acted on
    3623 As indicated in Sect 15.3.2.3, there must be an intention that the representation be acted on or, put it in a slightly different way, there must be an intention, on the part of the person making the representation, to induce the person to whom the representation is made to act on the representation. This is certainly so in relation to estoppel by representation or conduct and promissory estoppel.
    3624 The banks submitted that the intention that the banks should rely upon the key representations is self-evident:
    (a) the representations were offered as an inducement for consent by the banks to treat the proceeds of the bond issues as other than liabilities for the terms of the ratio calculation;
    (b) the representations were made formally in documents and correspondence;
    (c) the subject matter of the representations was something of considerable importance to all parties, including the banks;
    (d) all parties appreciated the importance of the subject matter;
    (e) TBGL and its subsidiaries knew and accepted that if the consent of the banks was not forthcoming, they would have to include liabilities created by the issue of the bonds as liabilities;
    (f) TBGL and its subsidiaries believed that the key to obtaining the banks’ consent was subordination;
    (g) this, in turn, would remove in its entirety the ‘double whammy’ effect sought by the treasury officials and directors of TBGL; and
    (h) the representations were made both to induce acceptance of the position and to ensure that the banks were in a position of having agreed, on a permanent basis, to the treatment of the proceeds of the bonds in that manner.
    3625 With one caveat I accept this submission. The caveat relates to the words ‘on a permanent basis’ in par (h). This has to be understood subject to what I have said in Sect 16.3 about the ability of a representor to resile from a representation subject to questions of detriment. It would also be subject to the continuation of the commercial relationship between the companies and the banks, including continuing compliance by the NP group companies with the NP ratios and other obligations under the facilities agreements, the NP agreements and the NP guarantees.
23. The estoppel case: reliance and detriment
    17.1. Some introductory comments
    3626 A further requirement of an estoppel by representation and of a promissory estoppel is that the person to whom the representation is directed formed a relevant assumption and then relied on that assumption and was induced by the alleged representation to act in accordance with it. In relation to conventional estoppel there must be reliance on the agreed or assumed state of facts. For all forms of estoppel relevant in this litigation, the person contending for the estoppel must demonstrate detriment; that is, a disadvantage brought about by having relied on the representation or state of facts. The detriment must be real or material and not merely a speculative possibility. It need not be a pecuniary loss and can be the loss of an opportunity to avoid the disadvantage.
    3627 While these two aspects (reliance and detriment) are separate, it will be convenient to deal with them together. In essence, the banks say that they relied on the representation that the on‑loans were subordinated and were induced into doing so by the conduct of TBGL. The banks also say that, in so relying, they lost the opportunity to conduct their banking relationship with the Bell group in a way different from that in which they did engage, namely, a way that would have been consistent with the existence of the on‑loans as unsubordinated liabilities within the NP group.
    3628 The evidence on these issues is voluminous and I have tried to cut through the detail so as not to over‑complicate the task. Despite the great volume of evidence, the question to which it was directed is relatively simple. It will be apparent from what I have already said that I have little difficulty with the notion that, objectively speaking, the representations carried the meaning that the bonds were effectively subordinated. This meant that the on‑loans were subordinated. Further, the companies intended the banks to act on that basis. Three questions follow. First, did the banks hold, on the basis of those representations, the belief or assumption that the on‑loans were subordinated? Secondly, were they induced by those representations to hold that belief or assumption? Thirdly, by relying on the representation, did they suffer detriment; in particular, did they lose the opportunity to conduct their banking relationships on a basis consistent with the non‑subordination of the on‑loans?
    3629 It has to be borne in mind that each bank makes its own estoppel case. Each bank led evidence relating to the representations and relies on that evidence to support the estoppels based upon representations, conduct and common assumptions. What is common to each case is the proper construction and interpretation of the representations said to flow from the various documents and reports and the allied question of what assumptions were adopted by the parties in relation thereto.
    3630 A corporation cannot, of course, rely on anything other than through a human agency. In a practical sense, reliance is relevantly to be found in decisions that were taken at the time. To understand what decisions each bank made and how they came to be made, it is necessary to appreciate the decision‑making structure of the bank concerned. I remind the reader that this material has been outlined in Sect 11.
    3631 There is a particular feature of the equity treatment of the bond issues that requires comment; that is, ‘the double whammy effect’: see Sect 12.7.3. If the on‑loans were unsubordinated, the bond issues would not be effectively subordinated. If that were the case, the banks would be at risk not just in relation to the unsubordinated status of the on‑loans, but also to the effect of the additional borrowing power that consent to equity treatment conferred on the companies.
    3632 The agreement by the banks to treat the bonds as equity rather than as liabilities, as a result of the representations made to them, is a central feature of the reliance and detriment case. Given what I have said in Sect 12 and Sect 13 it will come as little surprise that I regard it as perhaps the single most important item in this aspect of the case. Indeed, having found in the banks favour on this item it may have been possible to stop the enquiry at that stage. However, the banks go further and say that having agreed to treat the bonds as equity, on an understanding that the on‑loans were subordinated, the banking relationships from that point on were conducted on that basis. The banks contend that consequences flow from the ongoing dealings. This is the reason why I have gone on to look at other aspects of the reliance and detriment case.
    3633 In relation to the Lloyds syndicate banks, the first BGNV bond issue and the TBGL bond issue had already been made when the facility was established. The starting point for those banks is the decision to enter into the facility on the basis that the bonds would be treated as equity. In this respect, their position is a little different from that of the Australian banks. They were, of course, involved in the May 1987 request to treat the second BGNV bond issue and the BGF bond issue as equity.
    3634 I will commence by describing, generally, the pleaded case relating to the questions of reliance and detriment. I will then discuss some issues that can be dealt with on a global basis because they apply to the banks generally. I will then turn my attention to each bank in turn.
    17.2. The pleaded case
    3635 In ADC par 11ED(82) the banks allege that they held a belief or assumption that:
    That all debt of the Bell group and the [NP group] brought about by the fundraising arrangements involving the issue of all convertible subordinated bonds in 1985 and 1987 (including that raised in the Eurobond market in respect of which BGNV was the Issuer) was subordinated and ranked behind existing and future bank borrowings of the [NP group].
    3636 The banks contend that they were induced by the representations and conduct that I have identified to hold those beliefs and assumptions and that this was the basis on which they conducted their banking relationships with the Bell group in the period from late 1985 to early 1990. In ADC par 145 (as part of the Trade Practices Act claim in the counterclaim) the beliefs and assumptions are worded in a slightly different way: ‘all liabilities of TBGL, BGF and the [NP group] arising from the raising and deployment of moneys from all issues of convertible subordinated bonds (whether as direct issuer or otherwise) were subordinated to, and ranked behind, the indebtedness of the companies in the group and, more particularly, the NP group to the banks’. However, I do not believe there is any material difference in meaning between the two formulations. In ADC par 11ED(83) the banks assert that the inducement was confirmed by the lack of any statement to the banks by any Bell group company of any supposed lack of subordination of the on‑loans.
    3637 The force of the detriment case is, as I have said, the loss of an opportunity to avoid the disadvantage. The banks say that had they been informed of the supposed non‑subordination of the on‑loans, then prior to 1989 they could have ordered, or would have conducted, their banking relationships with the Bell group on a fundamentally different basis, consistent with the alleged non‑subordination. I need to describe in a little more detail what is alleged in ADC par 11ED(85) and (86) in this respect.
    3638 First, the banks plead that if, as is alleged by the plaintiffs, the on‑loans were not subordinated, then from late 1985 to variously late 1989 and early 1990, the banks entered into, conducted and remained in (on the terms and conditions which they did) their respective banking relationships with TBGL and the NP group on a false hypothesis and under a serious misapprehension about the financial arrangements of the companies and the group. Secondly, at various times TBGL was in breach of its banking covenants, which breaches entitled the banks to deal with TBGL, BGF and BGUK on that basis. Thirdly, in late 1985 and following the banks had been misled into agreeing to treat the first and second BGNV bond issues, the TBGL bond issue and the BGF bond issue as equity for ratio purposes and were and had been entitled to deal with TBGL and the NP group on that basis. Fourthly, from 1985 and following the banks had been misled in the entry into, and conduct of, the banking relationship with TBGL and the NP group and were and had been entitled to deal with TBGL and the NP group on that basis. Finally, the question of detriment is pleaded in these terms:
    (86) Had the banks been informed of the supposed non‑subordination of the on‑loans from BGNV to TBGL and BGF prior to about 1989 the banks would have ordered, or would have had the opportunity to order, from various dates from late 1985, their banking affairs with TBGL and the [NP group] on a fundamentally different hypothesis, consistent with the supposed non‑subordination of the said on‑loans.
    3639 The plaintiffs’ response to these claims is to be found in PR par 92 to 96. It proceeds from several bases. First, the banking relationships were not conducted on the strength of the alleged representations. Rather, they were carried out in the context of beliefs and matters particularised by the plaintiffs. Those particulars (found in PRP) deal with each bank separately. They cover some 250 pages and are impossible to summarise. Secondly, the beliefs and assumptions alleged by the banks were not induced or confirmed by the representations. Alternatively, if the banks did hold those beliefs or assumptions they did not do so reasonably.
    3640 Thirdly, from late 1989 the banks knew the on‑loans might not be subordinated and took no steps to assert any right or entitlement based on the state of affairs now said to exist. But they did take steps to facilitate and protect the Scheme: see 8ASC par 36T to par 36APC.
    3641 Fourthly, the banks entered into the BGNV Subordination Deed, which afforded them a status that was materially different from and more advantageous to the banks than any right or entitlement they are said to have in the estoppel case. I intend to deal separately with the whole question of the BGNV Subordination Deed and its effect, both in relation to the contract case and the estoppel case.
    3642 Finally, the plaintiffs say that had the banks held the beliefs alleged and had they learned the beliefs were false they ‘would not have availed themselves of the opportunity to order their banking affairs with TBGL, BGF and the [NP group] in a fundamentally different way’. Further, any opportunity the banks may have had to order their banking affairs with the Bell group differently did not include an opportunity to secure the subordination of the on‑loans.
    17.3. Reliance and detriment: a global approach
    17.3.1. Identifying the issues
    3643 Some aspects of the reliance and detriment analysis are susceptible to global treatment. In other words, the same or at least very similar considerations apply to all banks or groups of banks. Before I begin the discussion of the individual banks it will be useful to look at those issues. In some instances the global analysis will not deal completely with the argument insofar as it relates to all banks. When that occurs, matters peculiar to an individual bank will be mentioned in the section dealing with that entity.
    3644 I will start by posing a series of questions that, I think, encapsulate the arguments on reliance and detriment:
24. Did Bell group officers represent that the on‑loans were subordinated?
25. Did the banks hold a belief or assumption that all debt brought about by the fundraising arrangements involving the convertible bond issues was subordinated to bank borrowings?
26. Were the banks induced by the representations to hold those beliefs and assumptions?
27. If the on‑loans had not been subordinated:
    (a) Would the banks have been conducting their banking relationships on a false hypothesis and under a serious misapprehension as to the financial arrangements of the group?
    (b) Would TBGL have been in breach of the banking covenants from time to time?
    (c) Would the banks have been misled into agreeing to treat the bond issues as equity for NP ratios purposes?
    (d) Would the banks have been misled in the conduct of their banking relationships?
28. Had the banks been informed of the alleged non-subordination, would they have ordered, or would they have had the opportunity to order, their banking affairs differently, and on a fundamentally different basis, namely, one consistent with the supposed non-subordination of the on‑loans by:
    (a) deciding not to participate in a facility;
    (b) declining to treat to treat the bonds as equity in the calculation of the NP ratios;
    (c) withholding consent to replace the NP agreements with the NP guarantees;
    (d) refusing to extend the facilities from time to time; and (or)
    (e) making or refusing to make other decisions concerning the continued provision of facilities and their terms?
    3645 In formulating these questions I have not followed the exact wording of the pleadings. But I think the questions capture the essence of the pleaded allegations. The fourth question has, implicit within it, a further phrase or sentence arising from the way DP par 11ED(85) is worded. For example, the unstated part of 4(b) is: ‘If the answer is yes, would the banks have been entitled to deal with the companies on the basis that they were in breach’?
    17.3.2. The representations (Q 1)
    3646 It will be apparent from Sect 16.2.3 that I am satisfied that in the letters of 11 December 1985 and 15 April 1987, Bell group officers made representations to the banks that:
    (a) it was the view of TBGL that the first and second BGNV bond issue and the TBGL bond issue and BGF bond issue, respectively, would be identical in terms of effective subordination;
    (b) it was the view of TBGL and BGF that the bondholder debt would be subordinated and rank behind bank borrowings of the NP group companies; and
    (c) the liabilities of TBGL and BGF arising from the raising and deployment of moneys in and after the bond issues would be subordinated to the liabilities of TBGL and BGF to the bank lenders.
    3647 The wording in (c) carries with it the meaning that to the extent that the liabilities of TBGL and BGF included the on‑loans, that indebtedness would rank behind moneys due to the banks on a liquidation of TBGL. This encompasses the effective subordination argument.
    3648 The 15 December 1985 letter affects only the Australian banks. But the 15 April 1987 letter was addressed to all banks. I have reached a similar conclusion in relation to:
    (a) the Information Memorandum distributed to prospective members of the Lloyds syndicate: see Sect 16.2.4;
    (b) the documentation leading up the change from NP agreements to NP guarantees: see Sect 16.2.5; and
    (c) the financial information, including the negative pledge reports, provided to the banks from time to time: see Sect 16.2.6.
    17.3.3. Belief as to subordination (Q 2)
    3649 The belief or assumption for which the banks contend in ADC par 11ED(82) is critical to the estoppel claim. In my view each bank held, at the relevant time, a belief or assumption that all debt brought about by the fundraising arrangements involving the convertible bond issues was subordinated to bank borrowings. The sections that follow contain a laborious recitation of evidence adduced on behalf of each bank on this issue.
    3650 Most of the direct statements on which I have relied relate to the subordinated status of the bonds and do not make express reference to the on‑loans. I have accepted the banks’ arguments concerning the concept of effective subordination (Sect 13.2.6.1). I have also found that neither the officers of the Bell group companies nor the bank officers drew a distinction between the bonds per se and proceeds of the bonds (Sect 13.2.5). Accordingly, statements of belief about the subordinated status of the bonds apply equally, in my view, to the on‑loans.
    3651 The plaintiffs contend that if the banks held those beliefs or assumptions, they did not do so reasonably. On the totality of the evidence I can see no basis for that submission and there is little that I can usefully add.
    17.3.4. Inducement (Q 3)
    3652 I am satisfied that each of the banks was induced by the representations to hold the beliefs and assumptions mentioned in the preceding section. Once again, in the sections that follow I have set out in some detail the evidence adduced on behalf of each bank on which I have relied to reach that conclusion.
    3653 In relation to the third question, it will be necessary to include some discussion in the sections on individual banks about aspects of the inducement argument. For example, it is a plank of the plaintiffs’ case on this issue that the banks were card‑carrying members of the RHaC fan club (my expression, not the plaintiffs) and were falling over themselves to support his endeavours and thus to increase business. This, not the representation that the bonds were subordinated, was the inducement to treat the bonds as equity.
    3654 I do not accept that proposition. It is one thing to say that a commercial enterprise, such as bank, is likely to chase business. But it is quite another thing to say that, in doing so, the bank will put the advancement of business opportunities and relationships ahead of usual practices and procedures in assessing individual approaches and proposed transactions. Nonetheless, it is necessary to look at what each bank did to ascertain whether it was overwhelmed by the RHaC aura and reputation.
    3655 I wrote what appears in the preceding paragraph before some of the more extraordinary commercial nonsense of the last 18 months or so came to light. With less comfort than I felt when I first wrote it, I have left the paragraph in.
    3656 In dealing with inducement or reliance solely the court must be satisfied that there is a causal link between the inducement and the detriment: see Sect 15.3.2.4. There is, therefore, considerable overlap between this issue and the matters raised in the fifth question. An obvious example is the discussion as to whether the banks would have agreed to treat the bonds as equity in the absence of a representation that the bonds were subordinated.
    3657 I can develop this a little further by reference to an example. I have found that the Bell group’s commercial purpose in making the bond issues was to raise funds in such a way that the banks would agree to treat the new borrowings as equity, not debt. In pursuing that commercial purpose, the Bell group put forward three reasons why the banks should agree. First, that the bonds were convertible and, based on past share price performance, there was a strong likelihood that the right to convert would be exercised. Secondly, the bonds were subordinated debt. Thirdly, because of the 10‑year term (coupled with the strong likelihood of conversion) the banks’ facilities would mature before the company had to redeem the bonds.
    3658 I have also found that the likelihood of conversion of the bonds into shares was an important reason advanced in support of the request that the companies put to the banks. But it was not the only reason. The other reasons advanced in support of the request, especially the subordinated nature of the borrowings, were an integral part of attaining the commercial purpose.
    3659 The question is whether there is a causal link between the representation that the bonds were subordinated and the decision to treat the bonds as equity. It is not necessary to establish that the representation as to subordination was the only inducing factor, so long as there was a causal nexus. This then flows into detriment, namely, the loss of an opportunity to refuse equity treatment and (or) to order or re-order the banking relationship on a basis consistent with the unsubordinated status of the bonds or, more accurately, the on‑loans.
    17.3.5. A false hypothesis (Q 4(a))
    3660 Suppose, for the purposes of the fourth question, that the representations were made, those representations engendered a belief as to subordination, the banks were induced to act in reliance on the belief but it turned out that the representations were untrue. Where would that have left the banks? In my view, had the on‑loans not been subordinated the banks would have been conducting their banking relationships on a false hypothesis and under a serious misapprehension as to the financial arrangements of the Bell group.
    3661 I think it is possible to deal with this question globally and without a long list of specific evidentiary references. I am satisfied that each bank was aware that under the negative pledge arrangements, the NP group was obliged to comply with certain ratios and, in particular, to maintain total liabilities at no more than 65 per cent of total tangible assets. The banks were also aware that the treatment of debt as something other than debt, more particularly as equity, was germane to the calculation of the ratios. Shifting a debt from the liabilities section of the balance sheet to shareholders funds leaves open the possibility of the ‘double whammy’ effect described in Sect 12.7.3. Given the unsecured status of the banks (until January 1990), having an additional $435 million in liabilities that the banks thought were subordinated but were not would amount to a serious misapprehension of the financial arrangements of the group. I accept the figure involved was not $435 million from the outset. It increased incrementally with each of the bond issues, but the principle remains the same. It amounts to a false hypothesis.
    3662 There is another factor here. The problem is not confined to the calculation of the NP ratios. Antόnio Neto (Banco Espírito) was, in my view, one of the more impressive of the former bank officers called to give evidence and I have placed considerable weight on his testimony. In his witness statement he said:
    If I had found out that the BGNV bonds were not effectively subordinated to the bank lending and the Bell group was in breach of the banking covenants if the on-loans and proceeds were treated as debt, I would have regarded that as an event of default.
    3663 In cross‑examination his attention was directed to that passage and the following exchange occurred:
    Prior to the October 1987 stock market crash, if the bonds were treated as liabilities, and the companies were in compliance with the negative pledge ratio, you would not have regarded that then as an event of default, would you?—That is a difficult – it is not a difficult question, it is a difficult answer. I mean, as far as a negative pledge group or the accounts of a negative pledge group were concerned, if I ever found out that those bonds, convertibles – the bonds were treated as liabilities, I would certainly immediately in any circumstances, at any time, have the ratios recalculated and talk probably to our people in London, to our legal department in Lisbon, to see if there was an event of default or not. But the problem would not be just an event of default. It would be the ranking of our credit. (emphasis added)
    3664 In my view, the last two sentences raise an important consideration. The ratios are one thing: if the companies are in breach of the ratios there is an event of default, giving rise to certain entitlements in the banks. But compliance with the ratios is not the beginning and the end of the argument. There is a fundamental proposition about the ranking of debt, and subordination is directly relevant to that question. This is not to downplay the importance of the ratios or the effect that equity treatment might have on them. But it does show that there are significant conceptual and practical considerations that have an impact on the way that the issues are approached.
    17.3.6. Breach of the ratios (Q 4(b))
    3665 The breach of the banking covenants referred to in part (b) of the fourth question is, as I understand it, non‑compliance with the NP ratios. I am satisfied that there would have breaches of the ratios: see Sect 12.13.6.3.
    3666 In introducing this topic I said that some of the sub‑parts in the fourth question carry an implicit further phrase or sentence arising from the way DP par 11ED(85) is worded. The unstated part of 4(b) is: ‘If the answer is yes, would the banks have been entitled to deal with the companies on the basis that they were in breach’? The answer must be in the affirmative: see, for example, cl 7.1, cl 17.1(b)(ii) and cl 17.1(A) and (B) of the Westpac NP agreement dated 28 June 1983.
    17.3.7. The remaining questions
    3667 The questions whether the banks were misled into agreeing to treat the bond issues as equity for NP ratio purposes and whether they were misled, generally, in the conduct of the banking relationships are not susceptible to global treatment. The unstated parts of (c) and (d) of the fourth questions are. Once again, it must follow that if the banks were misled, the banks were entitled to deal with the companies in accordance with the actual state of affairs.
    3668 The fifth question relates to the allegations of detriment; although, as I mentioned earlier, there is an overlap with inducement issues. I refer to what I said in Sect 15.3.2.4 about the legal principles relating to detriment. To qualify, detriment has to be real or material and not merely a speculative possibility. Detriment is not limited to pecuniary loss and can lie in a loss of opportunity. A party asserting an estoppel based on a loss of opportunity must establish that it would have done something to pursue the opportunity. But it does not have to establish that the pursuit of the opportunity would have been successful. That having been said, the issue of detriment, and the causal link to the assumptions or beliefs, must be dealt with on a bank‑by‑bank basis.
    17.3.8. Miscellaneous matters raised by the plaintiffs
    3669 The plaintiffs raised several matters in relation to the conduct of some, but not all, banks in support of the argument that the banks were not induced by the subordination representations to make the decisions that they did. It will be convenient to deal with them together.
    17.3.8.1. BGF (ACT)
    3670 In Sect 12.14.2 I mentioned the September 1987 approach by TBGL to the banks for approval to add a new company, BGF(ACT), as a nominated borrower under the NP guarantee arrangements.
    3671 The strongest submission made by the plaintiffs is in relation to Westpac and SocGen, so I will describe the issue so far as it affects these banks. The plaintiffs submit that the events surrounding this proposal disclose that the banks recognised that the introduction of BGF(ACT) as a nominated borrower had the potential to lead to the introduction of an unlimited amount of debt which:
    (a) if issued by BGF(ACT) on a subordinated basis, would for so long as it was of greater than 12 months’ maturity, not be required to be included in the 65 per cent borrowing ratio; and
    (b) if lent by BGF(ACT) to BGF on an unsubordinated basis would rank equally with the bank’s lending to BGF in an insolvency scenario.
    3672 Notwithstanding this, the banks consented to the proposal after taking legal advice on the basis that it was a commercial decision. The plaintiffs submit that the following points arise out of that context. First, BGF(ACT) would be in the same position as BGNV vis a vis BGF in terms of inter‑company debt. That is, BGF(ACT) could, within the terms of the proposal, issue subordinated debt and deploy the funds raised by way of an ordinary unsubordinated inter‑company loan to BGF. By virtue of the definitions in the NP guarantee, the funds raised by BGF(ACT), if subordinated and long‑term, would not be considered as liabilities for negative pledge ratio purposes.
    3673 Secondly, the artificiality of a premise that during the RHaC period the banks were concerned about the effect of inter‑company lending within the Bell group in the event of a liquidation. Neither liquidation, nor possible ranking between bank debt and Bell group inter‑company debt was then ‘on the radar’ and they have only become so with ‘retrospective foresight.’
    3674 Thirdly, the banks’ consent was given notwithstanding that they realised there were circumstances in which the holders of the debt instruments issued by BGF(ACT) would potentially rank equally with the banks. This, the plaintiffs say, is a clear demonstration of how the banks approached the inter‑company arrangements within the Bell group during the RHaC period and is the best evidence available to the court to gauge whether the banks would in fact have acted any differently in the hypothetical scenario posited with respect to the BGNV on‑loans.
    3675 The plaintiffs’ case is that once the banks agreed to BGF(ACT) acting as a nominated borrower, it could issue debt instruments that were subordinated or unsubordinated. If the debt instruments were subordinated, that debt would be excluded from the calculation of total liabilities for NP ratios purposes. BGF(ACT) could then choose to lend the moneys on an unsubordinated basis to BGF so that the holders of the debt instruments effectively ranked equally with the banks. Because the banks were willing to agree to BGF(ACT) as a nominated borrower, and because the structure of its borrowing and on‑lending could have those results it must follow that subordination was an unimportant issue to the banks.
    3676 I do not accept that the banks’ consent to BGF(ACT) acting as a nominated borrower demonstrates that subordination was unimportant to the banks. I accept the banks’ contention that the natural consequence of the plaintiffs’ argument is that the banks were willing to have debt excluded from the ratio calculations in unlimited amounts, whether or not that debt was ultimately subordinated to bank debt. Such a proposition would render inutile the benefit to the banks of any gearing covenant. It does not fit with the earlier dealings between the companies and the banks concerning the bond issues and the move from NP agreements to NP guarantees.
    3677 The 11 September 1987 letter, even when read alone, does not indicate that if funds were raised on a subordinated basis they would be on‑lent with a different status. It is simply silent on the issue. In any event, the letter cannot be read in isolation. It has to be considered in the context of the 3 September 1987 letter and the various drafts that preceded it. I have set out my views on this in Sect 12.14.2.
    3678 If BGF(ACT) were to become a nominated borrower, debt instruments which it used would be prima facie liable for inclusion in the calculation of the NP ratios. If the instruments were in the form of subordinated paper, they would not be included in the calculation. If they were unsubordinated, they would be taken into account. In my view, this has little to say about the mechanism by which the funds arising from the issues would find their way from BGF(ACT) to BGF. It does not follow that by agreeing to it the banks were exhibiting a disinterest in the issue of subordination.
    3679 There is another reason why I do not think the letter has the force contended for by the plaintiffs. It is dependent upon a construction of the NP guarantee concerning the definition of subordinated debt. Under the plaintiffs’ construction, if BGF(ACT) issued subordinated debt and on‑lent it to BGF on an unsubordinated basis, that would be non‑current subordinated debt within the meaning of the NP guarantee and automatically excluded from total liabilities. That is because, on the plaintiffs’ construction, the only relevant matter to examine for the purpose of determining what was non‑current subordinated debt was the liabilities of companies in the NP group to parties external to that group.
    3680 There is a tenable argument for an alternative construction. Subordinated debt was defined as: ‘the aggregate amount of all borrowings … expressed in their terms to rank after all unsecured and unsubordinated debt of the guarantor and/or the Australian subsidiaries’. Debt which was issued by a company, whether within or outside of the NP group, and on‑lent on an unsubordinated basis to the guarantor or an Australian subsidiary would not be debt which ranked after the unsubordinated debt of the guarantor and the Australian subsidiaries.
    3681 Given the evidence of various bank officers to whom questions about the BGF(ACT) matter were put, I am not at all sure that the letter (in the context of the definitions of NP guarantee) would have been read at the time in the way suggested by the plaintiffs. In this respect, I refer in particular to the evidence of Cutler (Westpac), Latimer (CBA) and Edward (HKBA).
    3682 When he wrote to TBGL on 22 September 1987 consenting to the request, Farr (HKBA) noted that the trust deeds ‘[did] not allow the holders of the notes priority over other lenders’. As the plaintiffs pointed out, Farr’s concern is expressed to be that new debt might rank ahead of the banks. But this has to be seen in light of the notification by TBGL of the issue of ‘debt instruments’ (without reference to status). It has little to say about the on‑lending of funds the source of which was itself subordinated debt.
    17.3.8.2. Reaction to the on‑loan issue in 1989 and 1990
    3683 Questions were put to a number of bank officers during cross‑examination suggesting that the way the banks reacted to the on‑loan problem when it arose in December 1989 and January 1990 demonstrated that subordination of the BGNV bond issue debt was a matter which was unimportant to the banks during the conduct of its banking relationship. I have in mind, for example, questions asked of Latimer (CBA), Brodie (Banco Espírito), Rex (Crédit Agricole) and Goodall (Crédit Lyonnais).
    3684 The questions were put on the basis that, at least for some of the banks, there is no contemporaneous documentation in which a bank officer expressed surprise when told of the possibility that on‑loans might rank equally with the banks. There are several things that should be said about this. First, there is oral evidence from some bank officers that the revelation came as a surprise. The reaction of the banks, especially Westpac, SCBAL, and Lloyds Bank, in late December 1989 and January 1990 when the problem came to light, is consistent with a general note of surprise and concern. This gives me comfort in treating the oral evidence on the issue as reliable and not simply reconstruction.
    3685 Secondly, the individual members of the Lloyds syndicate did not have much direct knowledge of the on‑loan problem until after the February 1990 meetings in Perth. By that time, of course, the banks had taken security and events took a different course. The focus of attention was on matters that would (or might) have an in impact on the integrity of the securities during the hardening period.
    3686 Thirdly, there is a hint of inconsistency in the plaintiffs’ approach in this respect. The plaintiffs’ case is that the revelation of the on‑loan problem provided a strong incentive for the banks to proceed with the refinancing package. And once the securities were in place, fear that the bond issues might be triggered (thus bringing the on‑loan problems to the fore) was, according to the plaintiffs, the reason why the banks allowed the companies to use asset sales proceeds to pay bondholder interest. If the banks were unconcerned about the subordinated status of the on‑loans, I am not sure why it would have been a motivating factor in any of this conduct.
    3687 I will have a lot more to say about the knowledge, belief and understanding of various bank officers in 1989 and 1990 as to whether or not the on‑loans were subordinated, and the consequence of that state of mind: see, for example, Sect 30.18. But I have not given weight to those matters for the purpose to which this section is directed.
    17.3.9. Remainder of this section: the content
    17.3.9.1. The general approach
    3688 There is a good deal of commonality in the way the case for reliance and detriment was presented on behalf of each of the banks. Generally speaking, the banks assert that each bank conducted its banking relationship with TBGL and the NP group in the belief and on the assumption that all debt arising out of the bond issues was subordinated and ranked behind existing and future bank borrowing. The banks argue that by acting on the basis of this assumption, each bank lost the opportunity to conduct its banking relationship with TBGL on the basis that the debt created by the on-loans ranked equally with it, and that this loss was to its detriment. The banks assert that because of the assumption that the bond proceeds were subordinated, each bank lost the opportunity to:
    (a) decline the 11 December 1985 and the 15 April 1987 requests from TBGL to treat the bonds as equity in the calculation of the NP ratios or, in the case of the Lloyds syndicate banks, decline to participate in the facility and (or) to reject the April 1987 request;
    (b) decline to replace the NP agreements with the NP guarantees;
    (c) refuse to extend the facilities from time to time;
    (d) make or refuse to make other decisions concerning the continued provision of facilities, generally relating to the period after October 1987.
    3689 There are some exceptions to that list. For example, SocGen relies on an additional matter, namely, its decision in January 1986 to lead an additional $50 million facility. These decisions were, of course, taken after the December 1985 request concerning equity treatment. Skopbank did not take up its participation until July 1988 and thus was not involved in items (a) and (b).
    3690 The plaintiffs deny that that the alleged representations by TBGL engendered, fostered or induced in any officer of any bank the belief and assumption alleged. They also say that there were other factors in play and that any alleged belief or assumption was not a decisive factor in the decisions relating to a bank’s treatment of the on‑loans or the conduct of the banking relationship generally. They also contend that the banks have failed to identify and establish, in relation to each alleged loss of opportunity, what (if anything) a bank would have done to pursue that opportunity had it believed that the bond proceeds were unsubordinated.
    3691 I will not mention these general approaches again each time I come to deal with them in relation to an individual bank. Rather, I will move straight into the discussion. It will become apparent when there are matters that are peculiar to one of the banks or if there is a matter in the list on which a bank does not rely.
    3692 The gravamen of this aspect of the litigation lies in an alleged loss of opportunity for the banks to conduct their banking relationships with the Bell group on a basis consistent with effective subordination of the bonds. The indebtedness of the Bell group companies through the convertible bond issues was a significant component of the financial structure of the group. The bond issues were not the only aspect but because of their size they had a marked effect on the balance sheet and therefore on the interests of parties, including the banks, who dealt with the companies. Relationships tend to build over time and are sensitive to, and usually affected by, significant events that occur from time to time. The bond issues were significant events that had an effect on the banking relationships with the Bell group.
    3693 I wish to spend some time dealing with the way each of the Australian banks dealt with the December 1985 request to treat the bonds as equity for NP ratio calculations because it underpins the relationships as they continued and developed in 1986 and beyond. The equivalent question so far as the Lloyds syndicate banks are concerned lies in their respective decisions to participate in the facility. Again, that is the underpinning of the relationships. For this reason, I intend to deal with those aspects of the relationship on a bank by bank basis.
    3694 When it comes to the April 1987 request, the decision to collapse the NP agreements and replace them with NP guarantees, and dealings in the period after October 1987, I intend to take a different approach. As there is a good deal of commonality in the arguments advanced in relation to each bank on those matters I will deal with them in a more composite way.
    3695 In the next section I will outline the background to the three composite questions and explain how I propose to deal with them. I will then move to a bank by bank consideration of the evidence and the arguments.
    17.3.9.2. The three composite questions
    3696 It will be apparent from what I have said in previous sections that I regard the banks’ acceptance of the April 1987 request to treat the second BGNV bond issue and the BGF bond issue as equity for NP ratio calculations as an event of great significance. The same can be said about the agreement by the banks to collapse the NP agreements and replace them with NP guarantees. Nothing that I am about to say should be taken as detracting from the importance that I attach to these events.
    3697 I have accepted the banks’ arguments as to why these events constitute the loss of an opportunity to conduct their banking relationships with the Bell group companies on a different basis, consistent with a lack of subordination. The reasons advanced in support of the argument are broadly similar. To save unnecessary repetition, in relation to the composite questions I propose to set out the evidence on which I have relied, the reasoning process and the conclusions in some detail in relation to Westpac, SocGen, Banco Espirito and Indosuez. I have chosen those banks because the way they approached these incidents is reasonably typical of the course of events generally.
    3698 In relation to the other banks I have prepared a table (Schedule 38.15) that identifies the parts of the banks’ written closing submissions in which the evidentiary references relevant to those issues are to be found. The reader can take it that I have applied a similar process of reasoning, based on those pieces of evidence (although not necessarily every aspect of the reasoning advanced in the submissions) to reach a conclusion that there was reliance and detriment in a relevant sense.
    3699 There is a caveat to what I have just said. The argument in relation to SCBAL and Skopbank is set out in their individual sections because I am not satisfied that they relied on the subordination representation. It is also set out in the Lloyds Bank section. This is because the written closing submissions are structured in a way that makes it virtually impossible to identify where the evidentiary references are. The reason for treating it this way is no doubt apparent to the author of the submission. It is not to me. In the submissions for Gentra, I could not find evidentiary references in relation to the April 1987 equity treatment request. I have made no finding of reliance by Gentra in relation to that event.
    3700 I have used a similar process in relation to the other question, namely, the ongoing relationship of the banks with the Bell group after the stock market crash of October 1987. As with the other aspects of the reliance and detriment case, the argument is much the same for each bank. But in this instance the detailed argument is limited to one Australian bank (Westpac) and one of the Lloyds syndicate banks (Banco Espírito). I have come to the conclusion that Westpac and Banco Espírito did, indeed, lose a real chance to re‑order their affairs. It was open to them to do so in accord with the unsubordinated status of the bonds and probable breaches of the NP ratios.
    3701 Schedule 38.15 also contains a list of the evidentiary references on which I have relied in considering the case advanced by the other banks. Once again, the reader can take it that I am satisfied on the basis of those pieces of evidence (not necessarily every aspect of the reasoning advanced in the submissions) that there was reliance and detriment in a relevant sense to those banks. HKBA did not contend that it had suffered detriment in the later period. I could not identify from the submissions material on which Lloyds Bank or Gulf Bank relied in this respect. I do not find that any of those three banks relied to their detriment on the subordination representation in their dealings with the Bell group after October 1987.
    3702 Before I move on I wish to say a little more of a general nature about the post‑October 1987 events and their relationship with the other bases on which the reliance and detriment case is advanced. This is necessary for a proper understanding of the weight I have attributed to the evidence about them.
    3703 In the aftermath of the stock market crash the financial status of the RHaC companies (including the Bell group) took on a distinctly different look. Because of the changed circumstances, the companies were providing the banks on a regular basis with information packages giving details of the financial position, steps in train to reduce debt and the revised business plan. While there were no reported breaches of the NP ratios there certainly would have been had the bond proceeds been treated as liabilities rather than equity. It is to be remembered that in the post‑October 1987 period, the companies changed the way they accounted for the bonds in their financial statements; then, in mid‑1988, the BCHL takeover of TBGL was effected.
    3704 This element of the reliance and detriment case arises against that background. Briefly, the banks say that they continued to hold the belief or assumption that the bonds were subordinated. They continued to rely on that assumption or belief when they made or refused to make decisions concerning the Bell group facilities. The banks allege that due to the representations of subordination, they lost the opportunity to order their affairs by demanding the repayment of the facility or the provision of security, such as an effective subordination deed. The plaintiffs assert that given the position of TBGL after the crash, the banks would not have chosen to act any differently, therefore no opportunity was lost.
    3705 Apart from the post‑October 1987 matters, the banks assert four broad categories of incidents or events where they relied on the subordination representation and from which detriment is said to flow:
    (a) the December 1985 decision to treat the bonds as equity (Australian banks);
    (b) agreement to participate in the Lloyds syndicate facility (Lloyds syndicate banks);
    (c) the April 1987 decision to treat the bonds as equity (all banks); and
    (d) agreement to collapse the NP agreements and replace them with the NP guarantees (all banks).
    3706 It is in those areas that, in my view, the essence of the reliance and detriment argument lies. It was in those areas that the fundamental nature of the banking relationships (insofar as the bond issues formed a part of the relationships) was formed. I think there was a compounding effect of those instances or events, each building on and to an extent confirming what had gone before. As between the banks and the Bell group companies there was no direct relationship concerning the bonds. It was a significant matter because of the sheer size of the indebtedness (nearly $600 million) and the fact that the banks had granted an indulgence that was material to the calculation of the NP ratios.
    3707 By October 1987, the arrangements by which the banks would accept equity treatment of the bond proceeds for NP ratio calculation purposes was entrenched. By ‘entrenched’ I do not mean set in concrete and legally incapable of reversal in any circumstances. I mean that it was a well accepted, well understood facet of the dealings between the entities. As I have found elsewhere, this well accepted and well understood arrangement was based, at least in part (and a critical part at that) on a representation by the Bell group companies, and a consequent assumption by the banks, that the on‑loans were subordinated.
    3708 At the heart of the plaintiffs’ opposition to this aspect of the banks’ claim is the absence of any (or any sufficient) express, unambiguous and definite references in documentation to subordination as a reason for making or refusing to make a particular decision. Further, the whole economic situation had changed and there were other factors that were then in play. All of this may be so. But it does not change the fact that the relationship had developed on a peculiar basis, namely, the fiction of treating a species of debt as equity and doing so, in part, because the debt was subordinated.
    3709 It would, in my view, be illogical and commercially unreal to say that the bank officers must have put all of that to one side and thereafter relied on different assumptions and factors, relegating the subordination considerations to the dustbin of history. It is one thing to say that new factors entered the arena. It is another to say that they replaced, rather than added to, what had gone before. I am not aware of any evidence to support an approach of that sort. This is a rather long‑winded way of saying that I do not believe that the events after October 1987 can be examined without reference to what went before.
    3710 As I have said, the essence of the reliance and detriment case lies in the first four items set out above. If, as I have found, the bank officers relied on the subordination representation in making decisions on those matters, it is much easier for me to say that the reliance carries forward to the later period. If the on‑loans were not, in fact, subordinated, continuing reliance on the representations in making decisions in the later period also created detriment. The detriment lay in the loss of a real chance to re‑order the banking affairs on the basis that the bond proceeds were not effectively subordinated.
    3711 There are two caveats to this conclusion. First, I have not treated what the plaintiffs referred to as the new factors as being of no account. While I have given weight to the later events, I do not regard them as being of the same significance as the early history.
    3712 Secondly, there are two distinct phases in the period under consideration; namely, October 1987 until the BCHL takeover in mid‑1988 and then the period following the takeover. In my view the case for reliance and detriment is stronger in relation to events occurring in the former period and weaker in the latter. The debt reduction strategies of the Bell group were already in operation during RHaC’s stewardship and they continued after the BCHL takeover. But in the latter period the situation changed. Some of the banks had a clear dislike for any dealings with companies controlled by Alan Bond. After the takeover, the primary concern of most of the banks was to minimise the risk of raids by BCHL companies on the coffers of the Bell group. The focus of the attention was on continued debt reduction, leading to a discharge of the facilities or their replacement by new facilities.
    3713 As I have already said, it is possible to divorce the events of 1988 and beyond from the history of the relationship before the BCHL takeover. Nonetheless, I doubt the subordination factor played as great a role in the banks’ decisions after the BCHL takeover as it did in the earlier periods. In my view the case for reliance or detriment is weaker following the BCHL takeover and I have not placed much weight on those incidents. But this does not detract from the force of the arguments in the earlier periods.
    17.4. Westpac
    17.4.1. General evidence of reliance and detriment
    3714 Westpac bank officers generally gave evidence that had they believed that the on‑loans were unsubordinated, so that the BGNV bondholders effectively ranked equally with the bank, they would have changed how they conducted their banking relationship with the Bell group.
    3715 Bill Cutler said that had he understood the bonds were unsubordinated, he would have sought comfort from TBGL to protect the bank’s position, involved the bank’s legal department and reported the position in any relevant credit application. John Salamonsen said that the understanding that the on‑loans from the bond proceeds were unsubordinated would have caused him to view the financial position of the Bell group significantly differently; in particular, he would have viewed the Bell group’s balance sheet as being more highly geared. He asserted that he would not have described the bonds as subordinated obligations of the Bell group in any of the credit applications containing balance sheet information; and further, that he would have included the bonds as liabilities and calculated the gearing on that basis in all credit applications containing balance sheet information. He said he would have investigated the Bell group’s position and reported to the head office and board credit committees with recommendations attending on the outcome of the investigation.
    3716 Iain Thompson gave evidence that at the time of the refinancing he would have insisted that the bonds issued by BGNV be treated as debt for the purposes of assessing compliance with the NP ratios. He regarded the 65 per cent ratio as generous and would not have permitted a breach. He said that because of Westpac’s relationship with the Bell group, he would have told them to fix any breach before taking action.
    3717 Thompson also said that while RHaC was involved with the Bell group, he would have ensured that the bank looked at its options, including asking the Bell group to rectify the problem by having BGNV enter into a subordination deed. Thompson believed if the Bell group was unwilling or unable to do anything about the problem, the relationship might have become ‘nasty’. But because of the extent of Westpac’s lending to the group, he believed that the bank had sufficient leverage to expect a reasonable response to any bank request.
    17.4.2. Treating the bonds as equity for the NP ratios
    17.4.2.1. The December 1985 equity request
    3718 On 11 December 1985 TBGL asked Westpac to treat the convertible subordinated bonds as equity for the purpose of its banking covenants. Cutler signed the acceptance and returned it to TBGL on 20 December 1985. He did so after having discussed matters with Griffiths and having attended the 12 November 1985 TBGL shareholders’ meeting: see Sect 12.7.3 and Sect 13.2.3.2.
    3719 Cutler expressed the view that subordinated debt was a concept that TBGL wanted to use in facilities and that the debt arising from the bond issue would rank behind all existing borrowings. This was reflected in his diary note for 12 November 1985:
    Term of convertible notes is 10 years (interest 10% pa). Notes can be converted at any time up to maturity or can be redeemed at maturity. They are subordinated, ie stand behind existing borrowings.
    3720 The view that ‘the notes are a subordinated debt to all other secured and unsecured liabilities’ is also recorded in Cutler’s file note dated 19 December 1985 concerning TBGL’s request. Cutler gave evidence that, while it appeared likely that the bonds would convert in the future, that eventuality was not guaranteed. Further, in his witness statement, Cutler said that had he understood the on‑loans were not subordinated:
    I would then have requested the subordination of the on-loan before agreeing to the request in the letter of 11 December 1985. Unless the on‑loan was subordinated I would not have regarded the bonds as being relevantly subordinated. I would not, in any circumstances, have agreed to treat the bonds as equity if I understood them to be effectively unsubordinated.
    17.4.2.2. The April 1987 equity request
    3721 On 15 April 1987 TBGL sent a request to Westpac asking the bank to treat the liabilities arising from the TBGL bond issues and 1985 BGNV bond issue as equity for the NP covenants. This request was considered by Diane Browning and Paul Reed, who was relieving as manager of the corporate division at the time. The request was the subject of a credit application dated 28 April 1987 which contained this statement: ‘[TBGL] is issuing A$250m subordinated convertible bonds maturing 1997 and requests the bank treat bonds as equity for negative pledge purposes’. It also contained the following comments:
    [TBGL] subsidiary [BGNV] intends issuing $175 convertible subordinated bonds (10%) in Europe, to mature May 1997. Contemporaneously, [BGF] will issue 75 convertible subordinated bonds to [RHaC] interests … The Bonds will carry non-detachable Conversion Bonds … Bonds are convertible on or after 7/7/87 at any time at the election of the holders.
    (A similar issue of A$150 in December 1985 was treated by Bankers for negative pledge purposes as equity … In view of the attractive pricing structure and no attaching right of put to investor, it is highly unlikely that bonds will ever be redeemed by investors but will be converted to ordinary shares.)
    3722 The credit application also noted that the figures for the shareholders’ funds for BRL and TBGL did not allow ‘for BRL and [TBGL] current subordinated bond issues $540[m] and $150[m] respectively’ and included the comment that the ‘subordinated convertible bond issue of A$250[m] by [TBGL] considerably improved its equity position’.
    3723 On 23 April 1987, Browning prepared a memorandum concerning the request. In her witness statement, Browning said that while subordination was not discussed in the credit application, it appeared evident from the terms of the letter from TBGL that the bonds were subordinated. She said that Westpac relied on this information. Browning also said that if she had contemplated that the bondholders would compete with Westpac in a liquidation of TBGL or BGF, or if she thought any subordination provisions could have been amended without reference to Westpac, she would have included this information in the credit application. Browning asserted that she would have recommended against Westpac agreeing to treat the bonds as equity if she thought the proceeds of the bond issues were not effectively subordinated to Westpac’s debt. Although I have had difficulty with some aspects of Browning’s evidence, on this issue her testimony is supported by contemporaneous documentation and I accept it.
    3724 Frank Ward, Graham McCorkell, Thompson and Phillip Deer from the head office credit committee supported the request to treat the bonds as equity. However, minutes of their deliberation on the matter recorded that their approval was subject to:
    Exclusion of preference shares and premiums on such shares, definition of shareholders’ funds in proposed parent company guarantee gearing covenants in the event that such shares are redeemable and/or non-subordinated.
    3725 The board credit committee approved the credit application subject to this qualification. Westpac’s consent was given by Cutler on 6 May 1987. Cutler said in his witness statement that he would have recommended against approval had he understood the on‑loans from the bond issues were not subordinated. Deer gave evidence that he would not have given his approval to treat the bonds as equity in such circumstances. He said he would not have permitted any application prepared by his department that ‘represented those bonds as subordinated debt of the Bell group or included those bonds in capital’ to be submitted to the head office credit committee or to the board credit committee.
    3726 McCorkell supported this position. He said: ‘Had I been aware of the assumed circumstances, I would not have regarded the bonds as subordinated. As such I would not have agreed to treat the bonds as equity and would not have supported the proposal for Board approval’.
    3727 Thompson said that the most important factor in his approval was the subordination of the bondholders to TGBL’s liabilities to the bank. He acknowledged that the timing of the redemption of the bonds and the likelihood of redemption as against conversion were other factors he considered.
    3728 Warren Hogan (of the board credit committee) gave evidence that he would not have agreed to the proposal at the 1 May 1987 meeting had he understood that the bonds were unsubordinated. He said this would have caused him to form a significantly different view about the financial position and creditworthiness of the Bell group.
    3729 White also gave evidence that if the bonds were not subordinated, he would not have agreed with the request to treat them as equity. The convertibility of the bonds would not have been a sufficient reason to agree to the request because their conversion was not certain.
    17.4.2.3. Conclusion on the equity requests
    3730 The plaintiffs contend that the Westpac officers would not have done anything differently had they believed the bonds were not subordinated. They say the evidence does not accord with the commercial reality of Westpac’s relationship with RHaC (and subsequently the Bell group) at the time when the equity requests were made.
    3731 First, the plaintiffs assert there are no contemporaneous documents that support the finding urged by the banks and that the concept of ‘subordination’ was not as relevant to the officers’ consideration of the equity requests as ‘convertibility’ and the likelihood of conversion. The plaintiffs also contend that the witnesses’ evidence was ‘uniformly reconstructed under the constant influence of hindsight and their understanding of the issues in the case’. Secondly, they say that hypothetical evidence of what the witness would have done in given circumstances ignores the bank’s pre‑existing relationship with RHaC. The suggestion is that because of the nature of that pre‑existing banking relationship, it would have been unlikely for Westpac to refuse the equity requests merely on the basis that the on‑loans were not subordinated.
    3732 Westpac’s assertions of a loss of opportunity are based on the relevant officers’ lack of knowledge about the Bell group’s true financial situation. I am satisfied on the evidence that the bank officers relied on the premise that the debt was subordinated in their consideration of the requests to treat the bonds as equity. Further, there is a real possibility that the bank officers would not have made the same recommendations had they believed that the on‑loans were not subordinated. As a result, Westpac lost the opportunity to consider TBGL’s equity requests on that basis.
    3733 Overall, I accept that the bank officers acted on the basis that the bonds were subordinated and arranged Westpac’s relationship with the Bell group accordingly. Further, if there was a course of action available to cure any breach of ratios, the bank lost the opportunity to pursue it because of its reliance on the Bell group’s representation as to subordination of the bonds.
    17.4.3. Replacing the NP agreement with an NP guarantee
    3734 On 10 February 1987, TBGL requested that Westpac alter its banking structure by collapsing the NP agreement and replacing it with the NP guarantee. Cutler set out Westpac’s concerns about the request in a letter to TBGL dated 24 February 1987. The primary concern was that without an indemnity from subsidiaries, Westpac had no direct recourse to the assets of the subsidiaries. Cutler considered the guarantee would weaken Westpac’s position because of the loss of the cross-indemnities from the subsidiaries. He noted that whilst the bondholder debt was quite small at the time of the application, he was aware of the further proposed issue of $250 million of subordinated convertible bonds by the Bell group.
    3735 In the credit application dated 9 April 1987, in which the bonds were described as ‘convertible subordinated bonds forming part of the surplus’, Cutler recommended approval of TBGL’s request for the NP agreement to be collapsed and replaced by a guarantee for all loans to the NP group. The credit application was considered by Deer and McCorkell of the head office credit committee and then approved by Ward. Cutler said in evidence that his recommendation would have been affected had he thought that the BGNV bondholders would, through BGNV, rank equally with Westpac and the other banks in a liquidation of TBGL and BGF. Cutler accepted that, at the time of the credit application (9 April 1987), the matters of the change of structure were subject to ongoing negotiations. He said that the terms of the draft guarantee would not have been settled at this point.
    3736 In my view, the essential features of the new negative pledge arrangements (in particular, the 65 per cent ratio of total liabilities to total tangible assets) were settled by 9 April 1987. However, there is nothing in Cutler’s recommendation to approve the credit application that detracts from his evidence as to what he would have done had he believed the bonds were not subordinated. His concerns about the weakening of Westpac’s security are supported by the contemporaneous documentation.
    3737 Cutler sent a letter on 2 April 1987 to the senior manager (legal) of Corporate Banking concerning the draft guarantee. When he wrote to TBGL on 7 April 1987, he said that the document had been studied by Westpac’s legal division. In cross‑examination, Cutler said he had expected the legal division would have responded to his enquiry by the time he sent that letter. While this was not technically the correct process within the bank, I do not see anything in Cutler’s actions that affects his evidence as to how he would have acted with respect to the credit application had he believed the bond proceeds to be unsubordinated.
    3738 Deer gave evidence that had he understood the BGNV bondholders ranked equally with Westpac because the on‑loans were unsubordinated, he would not have supported the proposal to collapse the NP agreement. Further, he said that prior to the change he would not have allowed any weakening of Westpac’s position. McCorkell said in evidence that had he been aware the BGNV bondholders effectively ranked equally with the banks, he would have reconstructed the balance sheet. He said it was unlikely he would have been willing to agree to the collapse of the NP agreement because he would have wanted Westpac to have direct access to as many assets as possible.
    3739 The plaintiffs contend that the bank’s decision to agree to execute the NP guarantee was not affected by its reliance on a representation that the bond issue proceeds were on‑lent on a subordinated basis. In arguing that the decision was made on a different basis, namely, the desire to develop the commercial relationship with the Bell Group, the plaintiffs highlight the fact that Westpac capitulated on the introduction of a clause which required subordination of certain inter‑company lending. The bank initially wanted such a clause (referred to as cl 13.02) included in the new arrangements, but ultimately the NP guarantee was executed without it. This, the plaintiffs say, supports the proposition that Westpac was willing to accommodate the Bell group in order to develop the banking relationship between Westpac and companies associated with RHaC. Alternatively, the plaintiffs submit that even if Westpac relied on a representation that the on‑loans were subordinated, the bank’s reliance did not result in any detriment.
    3740 There was no direct challenge to Cutler’s evidence that his decision to recommend the change in structure would, in all likelihood, have been affected had he been aware that the bonds were unsubordinated. I accept his statements and, in my view, his answers to the points raised in cross‑examination do not affect his evidence about how he would have acted in those circumstances.
    3741 Overall, I am satisfied that Westpac lost the opportunity to decline to approve the change in the negative pledge arrangements and to afford itself appropriate protection in its banking relationship with the Bell group. Westpac’s reliance on the representations prevented the bank from conducting its banking relationship with the Bell group on the basis that the bonds and on‑loans were unsubordinated.
    17.4.4. Extension of the facilities from time to time
    17.4.4.1. The 10 August 1987 request
    3742 On 10 August 1987, TGBL made a credit application in which it requested a $420 million facility to assist in the purchase of 16.6 per cent of Pioneer Concrete Ltd. Thompson’s evidence in relation to this application is that he would have thought it inappropriate to treat the on-loan of the bond proceeds as equity unless they were subordinated to TGBL’s liabilities to the bank. He said that if Westpac knew of the possibility that the bondholders were not subordinated, he would have been uneasy about agreeing to the facility. Thompson said that if the bonds had been treated as liabilities in the application, the balance sheet would have led him to seriously question the capacity of Bell to borrow such a sum. Further, he said that at that time he would not have been willing to provide new facilities that would result in a breach of ratios whether Westpac had security or not.
    3743 Hogan’s evidence is that he would not have approved the facility if it had resulted in a breach of the NP covenants caused by treating debt as liability. He said that at that time he was not prepared to extend any further facilities nor increase Westpac’s exposure to any member of the Bell group in circumstances where existing covenants were breached.
    3744 The plaintiffs argue that subordination was not the critical consideration in the bank’s decision to agree to grant the $420 million facility. They highlight, for example, that Thompson, McCorkell and Deer were absent from the head office credit committee meeting at which the 10 August 1897 application was considered and that the NP ratio had not been breached at this time. The plaintiffs say the latter point and the significance of the RHaC account to the bank should lead me to conclude that on the balance of probabilities Thompson would have acceded to the request contained in the 10 August 1987 credit application even had he believed that the on-loans were not subordinated.
    3745 The plaintiffs also assert that the 10 August 1987 credit application was a ‘temporary short term facility’ rather than an ‘increase’ to an existing facility as specified in ADC 11ED(86) and that therefore the banks’ submission relates to a loss of opportunity that is outside the pleaded case. This is another area where, in the absence of demonstrated prejudice, I would rather focus on substance rather than a strict reading of the particulars. In any event, I am satisfied on the documentation concerning this request that this particular credit application was to extend TBGL’s borrowing from the Westpac. All I am concerned with is whether Westpac agreed to this proposal in reliance on the assumption that the on‑loans were subordinated.
    3746 The credit application dealing with the 10 August 1987 request does not refer to the NP ratios. The credit application lists the ‘convertible bonds’ as ‘assets’ in the financial analysis. As I have said time and time again, they were not ‘assets’: they were debts. The only comments about the bonds in these documents refer to the fact they ‘have been steadily converted into ordinary shares’ since being issued. It is therefore difficult to conclude that the status of the bonds played no, or no significant, part in the bank’s decision‑making process on this occasion. I see no reason to reject Thompson’s evidence that he would not have assented to the proposal had he understood that the bondholders ranked equally with the bank.
    3747 From the documents, the asset‑to‑debt ratio appears to be an important consideration in the credit application for the $420 million facility. Because I accept that Westpac lost the opportunity to treat the bonds as debt due to its belief and assumption that the on-loans were subordinated, the logical conclusion is, as I see it, that the assumption caused Westpac to lose the opportunity to refuse the 10 August 1987 application.
    17.4.4.2. The 12 November 1987 request
    3748 On 12 November 1987 TBGL asked Westpac to agree to participate in a $1 billion standby facility for the Bell group following the events of the October 1987 stock market crash. This proposal was considered by the head office credit committee on 13 November 1986. In principle support for a $250 million participation in the $1 billion facility was forwarded to the board credit committee for its consideration subject to conditions that TBGL would move forward with asset sales to facilitate a reduction of debt during the three‑month term of the facility.
    3749 Both McCorkell and Hogan gave evidence that they would not have supported this request (and in the case of Hogan, its subsequent approval) had they been aware that the bondholders were ranked equally with Westpac’s debt. Hogan said that if the treatment of the bonds as liabilities had resulted in a breach, he would have recommended that Westpac take steps to reduce its exposure and its existing relationship with the Bell group.
    3750 White gave evidence that if, at the time of the board credit committee meeting on 13 November 1987, he had been aware that the bondholders ranked equally with Westpac, the committee would have been dealing with a breach of the negative pledge arrangements. He said it was unlikely that he would have agreed to approve the additional facility, despite the general sentiment for tolerance and the continuance of existing facilities following the share market crash.
    3751 In relation to this request, the plaintiffs submit that Westpac’s focus in assessing the position of the Bell group after the share market downturn was on the consolidated accounts of the RHaC group and BRL, not the NP ratio or the condition of the NP group. This argument is not without merit, particularly in relation to the detriment concerning the bank’s decisions following the October 1987 stock market crash, discussed below.
    3752 In cross‑examination McCorkell was taken to sections of the credit application dated 12 November 1987. It was put to him that insofar as the document commented on the financial status of TBGL, it did not appear to focus on negative pledge issues. McCorkell agreed with this proposition. On 11 November 1987 White had a discussion with RHaC. Among other things, the record of the discussion notes the federal government had indicated that banks could expect strong support from the Reserve Bank and Treasury if it became necessary to render any ‘special assistance’ to avoid any ‘major collapses’.
    3753 The plaintiffs argue that Westpac would have tolerated a breach of the NP ratio at this time regardless of whether the bond issue proceeds were treated as debt for negative pledge purposes. They allege that the bank’s focus was, as expressed by Hogan in cross‑examination, on ‘taking steps to nurse … the financial stability and the balance sheet’ of the Bell group through difficult times.
    3754 It appears clear from the evidence that the bank’s existing relationship with the Bell group did have an impact on its decision to continue providing TGBL with financial support following the market downturn in the latter part of 1987. I accept that supporting the companies through that turbulent period was a consideration for the bank. However, looking at the evidence overall, I do not think it is possible to divorce those considerations from the ongoing assumption that the on‑loans were subordinated. By this time (November 1987) the balance sheets included $585 million in convertible bonds and their treatment was critical to the way in which the accounts were presented to the bank. In my view the assumption that the bonds (and the on‑loans) were subordinated continued to result in the companies’ balance sheets appearing as they did. I am satisfied that the bank relied on this assumption when making the decision to participate in the $1 billion standby facility.
    17.4.5. Continued provision of the facilities: late 1987 and following
    17.4.5.1. Immediately after October 1987
    3755 The banks allege that following the October 1987 stock market crash Westpac, continuing to rely on the assumption that the on‑loans from the bond proceeds were subordinated, lost the opportunity to demand either repayment of the facilities or the provision of security including, but not limited to, the execution of an effective inter‑company subordination agreement.
    3756 Thompson’s evidence is that had he understood, at the relevant times, that the on‑loans were not subordinated and that the recalculated NP ratio exceeded 75 per cent, he would have recommended that the bank insist on larger and swifter reduction of debt. However, because of the regard in which the Bell group and RHaC were held, Thomson said the bank would not have necessarily called on the debt. Thompson said that before any action was taken he would have wanted Westpac to work though the group’s problems with his involvement. He said he would have requested a quick resolution of the breach, that the debt be subordinated and that Westpac’s exposure be reduced.
    3757 McCorkell said that had he understood that the on-loans were not subordinated, he would have regarded an NP ratio of 78 per cent as a significant breach of the negative pledge arrangements. He said he would have requested that the Corporate Banking division explore with the Bell group any method of correcting the ratio breach that was acceptable to Westpac, or have Westpac involved in an asset sale and debt reduction programme.
    3758 McCorkell was cross-examined about the credit application dated 12 November 1987 in which the current financial standing of the RHaC group following the stock market crash was reviewed. In respect of that credit application, McCorkell said he had not heard that the government or the Reserve Bank had suggested that the banking sector support public companies following the stock market crash in order to prevent corporate failures on a large scale. He said he approached the credit application without taking into account the issue of the desirability of preventing corporate collapses and while Westpac had a heavy commitment and a significant exposure to the RHaC group, the bank had confidence in RHaC at that time.
    3759 McCorkell was then taken to the credit application dated 11 December 1987 and the discussion on page 13 of the document, where the following comments appeared:
    Both [TBGL] and its auditors recently confirmed that both [TGBL] and [TBGIL] negative pledge ratios had not been breached. The position is under constant review.
    3760 In respect of the post‑crash period, McCorkell said that he could not recall it ever being suggested to him that either TBGL or RHaC’s HHL appeared to be in breach of the NP ratios. He said that if there had been a breach, the bank would have made enquiries of TBGL as to what steps were being taken to rectify the breach. McCorkell said that he did not think the lending area would knowingly and willingly have disregarded the breach; he said that he would not have liked the precedent that would have been set by that particular course of action. In cross‑examination McCorkell was asked about the bank’s attitude to its exposure to the Bell group:
    The bank’s attitude would be to have regard to its own exposure to Bell rather than by investigation, perhaps finding that there had been an event of default under the negative pledge agreements. Do you agree with that or not?—I can’t really answer it because there would be more examination of the parties to the negative pledge – who were they. There may have been others with the bank or they may not have. I can’t answer the question as you have put it.
    3761 He was then taken to a credit application dated 17 February 1988 drafted by the Corporate Banking division described as ‘Up‑date Memorandum for Chief Manager, Credit Corporate Banking Division’. McCorkell said that he had not seen the memorandum previously and he would not, in the ordinary business of the bank, have expected to have received a copy of the memorandum, or information about its contents. In the body of the memorandum, there was a handwritten note from Chadwick addressed to Bruce Daglish (Chief Manager, Credit), as follows:
    Please treat as interim report. We need to do more work on assessments re Negative Pledges, especially [TGBL], when detailed Information Package received.
    Prima facie [TGBL] looks in breach of NP [ratios] but we are aware that some debt reduction has occurred since 31/12/87 which may have corrected.
    We will confer with you regarding subsequent report(s).
    3762 McCorkell was cross‑examined at some length about whether he saw, or would have seen, this memorandum and Chadwick’s handwritten note at the time. McCorkell said that he would not have seen this document because the tenor of the handwritten note suggested that more information would be forthcoming. He thought that Daglish would not have forwarded the information until he received the full review. McCorkell was unable to tell from reading the memorandum whether that information would have gone to the head office credit committee, although he had no recollection of it.
    3763 McCorkell was then taken to the last page of a credit application dated 24 February 1988, on which he had written:
    Reported to Board credit committee. Review of interim accounts to be presented to full Board as soon as convenient.
    Review to cover compliance with ratio covenants.
    3764 It was put to McCorkell that he had made the above notation because of the ‘Up‑date Memorandum’ dated 17 February 1988. He did not agree with that proposition. It was then suggested to McCorkell that he and the head office credit committee were content to go along with ‘any possible breach’ of the NP ratio at this time. This proposition was also rejected. Further, McCorkell did not accept the proposition that his view at the time was that it ‘was simply unwelcome news to explore the question of a negative pledge breach by the Bell group’.
    3765 White was asked about the figures of 65.07 per cent gearing on a cost basis and 66.53 per cent on a market basis that appeared in Schedule A to the credit application dated 12 November 1987. He said he would not have had any special reaction to those figures as they were fairly close to what was required by the NP agreement. During cross‑examination, he said he thought that the bank procedures in 1987 were that the Corporate Banking division at a State level dealt with breaches of the NP ratio and decided if steps should be taken to call an event of default and that it would not necessarily have come up to his level. However, his evidence in chief was that:
    Even a small breach of the ratios, caused by treating any of the bonds as liabilities, would have been unacceptable to me.
    3766 Hogan gave evidence that if the treatment of the bonds as liabilities had resulted in a breach, he would have recommended that Westpac take steps to reduce its exposure and its existing relationship with the Bell group, with recommendations made to the board credit committee.
    3767 On 16 November 1987 Ward sent a letter to Chadwick, which was copied to Deer and Alexander. Ward introduced the key points of his letter by saying:
    In the presentation of proposals as above there are a few aspects which I feel should be covered to give a true and fair picture to the Credit Committee and Board, and for ease of reference these are listed sequentially below. (emphasis added)
    3768 The letter then set out five issues relating to Westpac’s credit policy for the Bell group:
    (a) that separate submissions should be presented for TBGL and BRL (so they should not be considered collectively under the banner of the RHaC group);
    (b) that ‘the convertible notes are to be shown in the liabilities in line with normal policy. [This] is in order to show … that liabilities include A$576.3 of convertible notes … In view of the amount it is appropriate to outline in [a schedule] the terms and conditions for conversion as this is a material point in considering the credit’ (emphasis added);
    (c) that ‘the long term subordinated debt is to be treated similarly to the convertible notes’;
    (d) that the negative pledge ratios were to be shown ‘to establish that the respective companies can give the security they are agreeing to give without breaching other agreements’; and
    (e) that forward cash flows should be provided.
    3769 The plaintiffs highlight the fact that in Ward’s letter the convertible bonds and the long‑term subordinated debt are treated separately; the conversion of the bonds was a material factor in considering the credit; and the calculation and provision of NP ratios was required. The plaintiffs argue that the fact that subordination was not mentioned in a letter from one of the bank’s highest officers is indicative of the fact that the alleged assumption played no part in the bank’s decision‑making process and that therefore there is no relevant detriment.
    3770 I do not think it is quite as clear‑cut as that. I do not have any trouble with the proposition that the likelihood of conversion was a material factor in the banks’ decision to treat the bonds as equity. But Ward’s letter suggests that treating the bonds as liabilities and the question of conversion relate to ‘the credit’. This is a factor going both to risk generally and to equity treatment.
    3771 Cutler was cross‑examined about HHL’s breach of its NP agreement immediately after the stock market crash, particularly his diary note of 12 November 1987 that recorded a meeting with himself, Reed and HHL officers, which concluded with the following comments:
    We probably have little choice but to accept the present breach and impending event of default, on the basis that company and directors have achievable plans to correct the position within maximum 6 months.
    3772 Cutler accepted that this statement represented his considered view at the end of October 1987, but he rejected the proposition that it reflected a view within the Westpac’s Corporate Banking division that every step should be taken to support important customers like the RHaC group. Cutler said that risk management for the bank was uppermost in his mind at the time. He said the bank was not overlooking a NP ratio breach but rather that, at the relevant time, its officers’ conduct was part of the risk management process. He accepted that he would have applied a similar policy or principle in relation to risk management across the whole of the Bell group.
    3773 The banks submit that the fact that Cutler was willing to waive the HHL breach for six months does not provide any indication about what Westpac would have done in response to a breach of ratios caused by the non-subordination of the BGNV bond issue proceeds following the stock market crash. I accept that submission.
    3774 The basis of my conclusion in relation to this particular alleged detriment is different to those in the preceding parts of this section. It is one thing for a bank to grant new facilities and change existing structures, but it is another thing entirely to consider ‘pulling the pin’ in circumstances such as those following the October 1987 stock market crash, which is essentially the substance of the 12 November 1987 request.
    3775 I accept that the bank’s existing relationship with the RHaC group would have softened the consequences for TBGL, but I am satisfied that had the true balance of TBGL’s accounts (due to the unsubordinated on‑loans) been known to Westpac, the bank would have taken further steps to reduce debt or otherwise alter the basis of the banking relationship.
    17.4.5.2. Support for TBGL facilities after BCHL takeover
    3776 Thompson’s evidence is that had he been aware that the bondholders were not effectively subordinated during the period May to April 1988, he would have wanted Westpac to apply more pressure to have the Bell group facilities repaid as early as possible. This would have resulted in a lack of support for extensions of repayment dates and pursuing the repayment of other banks’ facilities. Thompson said that if he had, at the relevant times, understood that the BGNV bondholders might not be properly subordinated after BCHL gained control of the Bell group, he would not have been amenable to any extensions of repayment dates. He said he would not have been willing to see other banks repaid before Westpac (although Westpac might have allowed banks with small loans to be repaid) and would have wanted Westpac’s facilities repaid, although not necessarily at the expense of an orderly disposal.
    3777 The plaintiffs submit that what transpired between May 1988 and August 1988 and then through to mid‑1989 was an ‘orderly disposal’ and that therefore Westpac would not have done anything differently and thus did not suffer any loss of opportunity.
    3778 Thompson was cross‑examined about a memorandum from Ward dated 19 February 1988 to Baillieu, the chairman of the board credit committee. Thompson said he did not have any recollection that Westpac took a permissive attitude to possible ratio breaches by the Bell group and HHL in the period immediately after the stock market crash, but he could neither agree nor disagree with the proposition that there might have been apparent ratio breaches by the Bell group at the time which were treated in a permissive way.
    3779 Deer gave evidence that he would have been more inclined to recommend the bank demand repayment of its facilities after BCHL had taken an interest in TBGL. Deer said he did not have a positive relationship with BCHL at this time. Hogan also gave evidence that if debt were treated as liability and this caused a breach following the BCHL acquisition of a controlling interest, he would have recommended that Westpac take steps to protect its position.
    3780 The plaintiffs note that in August and September 1988 TBGL provided additional covenants to the NP group lenders, which were intended to ensure the ‘integrity’ of the NP group and allow the banks to ‘maintain the status quo while [BCHL] outlines in detail its plans for Bell’, including the development of an appropriate banking structure for the new BCHL/TBGL group. The plaintiffs assert that the fact that Westpac discovered two drafts of the covenants given in August should lead to an inference that Westpac played a role in drafting acceptable covenants. The additional covenants were referred to in the 16 September 1988 credit application that was approved by the head office credit committee on 21 September 1988 and the board credit committee on 22 September 1988.
    3781 The plaintiffs also submit that in light of the extensive asset sale programme already underway and the additional covenants that were drafted to prevent proceeds of those asset sales being ‘upstreamed’ to BCHL, Hogan would have accepted any recommendation made by the credit committee to allow the asset sale programme to continue, with the proceeds being deployed in the reduction of bank debt.
    3782 The banks allege that Westpac suffered a loss of opportunity to have the facilities repaid and a loss of opportunity to take steps to protect its position. In my view the entire situation changed after the BCHL takeover. The focus of the attention was on continued debt reduction, leading to a discharge of facilities or the replacement with a new facility. I am not convinced that the subordination factor played as great a role in the bank’s decisions latter in the piece as it did earlier. The key decision‑makers do not appear to have arrived at a clear consensus regarding Westpac’s position in relation to assumptions about the on‑loans during this period. In my view, the case for reliance and detriment is much weaker following the BCHL takeover.
    17.5. CBA
    17.5.1. General evidence of reliance and detriment
    3783 A number of CBA officers gave general evidence about the basis on which CBA conducted its banking relationship with the Bell group and the reliance and detriment that the bank suffered.
    3784 Gordon Latimer gave evidence that his belief and understanding about the subordination of liabilities arising from the bond issues was that the claims of subordinated creditors would rank behind any claims of unsubordinated creditors, including the bank, on liquidation. He understood that the fact that the convertible bonds were placed in shareholders’ funds in the Bell group’s balance sheet indicated that the bonds were subordinated because convertible bonds would usually be treated as a liability in a balance sheet unless they were subordinated to the debt of other creditors (including the bank).
    3785 In his witness statement, Ian Payne said he could recall discussions within the credit committee and amongst the management of the Corporate and International Division (CID) concerning requests by borrowers to treat different forms of debt as equity for the purposes of ratio calculations under NP arrangements. He said the substance of those discussions was that it was permissible to treat some forms of debt instruments as equity if the debt was subordinated.
    3786 Accordingly, he said the placement of the bonds as equity in the balance sheet in the credit applications dated 9 April 1987 and 19 November 1987 would have indicated to him that they were subordinated debts and that the bank’s exposure would have priority over those debts in a liquidation. Payne said that if the proceeds of the bonds issued by BGNV had been on‑lent to TBGL and BGF on an unsubordinated basis, he would not have regarded the bond issues as relevantly subordinated.
    3787 Payne was cross‑examined on his evidence about the bank’s policy of treating certain liabilities as equity. He accepted there was no documentation that instructed processing officers on how to deal with subordinated debt. He said that only a small group of officers handled accounts of this size; that the banks’ delegated authority structure was such that any significant unsecured exposure would need to go to a very senior level in the bank; and that the question of equity treatment was only relevant as far as exposures of that nature.
    3788 In cross‑examination, Payne was taken to a review of the Bell group account conducted on 19 November 1987 and conceded that it was not clear from that document whether the bonds were subordinated. However, he said that review was part of a long chain of events and the fact that the convertible bonds were included in shareholder’s funds was evidence of the committee’s acceptance that they were subordinated.
    3789 Payne recognised he could not speak on behalf of the credit committee about whether they knew that the bonds were subordinated. When re‑examined about the committee’s knowledge, and in response to the question whether he personally had an understanding in the relevant period that the on‑loans were subordinated, he responded that he did have an understanding: he believed those bonds were subordinated.
    3790 Peter Dennis said in his witness statement that CBA had an unwritten policy of treating bonds as liabilities unless they were subordinated. This evidence was unchallenged. While Dennis’ statement did not specify his knowledge and belief regarding the subordination of the BGNV bond issues, in cross‑examination he said that he had regarded the bonds as subordinated.
    3791 Barry Poulter gave evidence that if the proceeds of the bonds issued by BGNV had been on‑lent on an unsubordinated basis, he would not have regarded the bonds as subordinated.
    3792 I accept the evidence of these witnesses. In my view, the officers of CBA acted on the belief and assumption that the bonds, and therefore the on-loans, were subordinated.
    17.5.2. The December 1985 request for equity treatment
    3793 The decision‑maker in respect of the 11 December 1985 request was Patrick O’Halloran, an assistant general manager. In a memorandum dated 20 December 1985, O’Halloran advised the Perth loans department of his approval to the treatment of the convertible subordinated bonds as equity.
    3794 John Sim, a manager in CBA’s head office, made handwritten notes in respect of the request on 19 December 1985. These notes stated that if the bond issues were treated as debt, the ratio would be 69.6 per cent. The notes also said:
    Even if treated as debt, the gearing would be considered acceptable and if an approach was made by the group to increase liabilities/assets to 70% we would probably agree. In the event of default by the issuer all bondholders would rank equally with the Bank. However, given the standing of the group it is considered unlikely that this would happen. Due to the long term involved and the strong possibility that the bonds will be converted, it is considered we can accept the position and agree to the request (We are trying to present the CBA in a better light to Bell executive and no doubt the other bankers to the group will agree to the request). (emphasis added)
    3795 The plaintiffs rely on these notes to support their contention that CBA made the decision to accede to the request on the bases that default was unlikely, that the bonds were long‑term, that there was a strong likelihood of conversion and that CBA would accept an NP ratio of 70 per cent. The banks argue that the note can only be evidence of the views and opinions of Sim and no other officer of CBA, and that O’Halloran’s state of mind is the relevant issue.
    3796 O’Halloran passed away before being able to give evidence in this case. Notwithstanding the banks’ inability to tender a statement from O’Halloran, they submit that there is sufficient evidence in the contemporaneous documentation from which I can conclude that O’Halloran understood and relied on the bonds being subordinated in reaching his decision. As evidence of his understanding about the subordinated position of the bondholders, the banks rely upon O’Halloran’s 20 December 1985 memorandum together with the evidence given by Latimer, Payne, and Dennis.
    3797 Their evidence is not inconsistent with Sim’s note. As both Payne and Dennis indicated, the policy applied by those senior officers who were responsible for the account was that bonds were to be treated as liabilities unless they were subordinated. The banks highlight that O’Halloran was the decision-maker and the senior officer responsible for the account at the time. I do not think Sim’s views have enough weight to affect the banks’ case here. Because he was a relatively junior officer and in any event because it does not seem that other bank officers shared or acted on his comments, his views do not bind the bank: see Sect 30.18.2.
    3798 To my mind, it is evident that the bank officers’ contemplation of the requests to treat the bonds as equity relied on the premise that the debt was subordinated. Further, the bank officers relied on this representation to determine the banking relationship between CBA and the Bell group and, in my view, it is unlikely that the bank officers would have made the same recommendations if, at the relevant times, they had understood that the bonds were not subordinated.
    3799 I am satisfied that CBA acted upon the representations that the on‑loans from the bond issue proceeds were subordinated to liabilities that TBGL would owe the bank. Because it acted upon those representations in respect of the equity requests, CBA lost the opportunity to conduct its banking relationship with TBGL on the basis that the proceeds of the bond issues created debt ranked equally to CBA, and this loss was to its detriment.
    17.6. HKBA
    17.6.1. The December 1985 request for equity treatment
    3800 On 11 December 1985 TBGL asked HKBA to treat the convertible subordinated bonds as equity for the purpose of its banking covenants. This request was the subject of a credit application dated 14 January 1986.
    3801 The stated purpose of the credit application was to provide the credit committee with details of the proposed bond issue to seek consent for the proposed treatment of the bonds as equity. It then set out the following information about the negative pledge ratios:
    Effect of Issue on the Facility:
    Bell has requested [the bank’s] consent to treat the convertible subordinated bonds as equity when considering the negative pledge covenants. We believe that consent should be granted on the basis:
    • the bonds are a subordinated debt
    • interests associated with [RHaC] will subscribe for AUD 75 million of the bond issue and therefore it is only the balance of the issue which is uncertain.
    • the bonds are convertible to ordinary issued shares and given Bell’s past price performance, it is anticipated that investors will exercise their right to convert prior to the redemption date in December 1995. …
    • should the bonds not be converted to ordinary issued capital then they are not due for redemption for 10 years.
    As the bonds are a subordinated debt [the bank’s] security position will be maintained. … (Emphasis added.)
    3802 The credit application noted that the bond issue and the proposed treatment of the bonds as equity in the NP ratios would increase the Bell group’s borrowing capacity by approximately $97 million. The credit application concluded with the following notes:
29. The facility throughout its term has been conducted satisfactorily. …
30. [TGBL] has complied with its negative pledge covenants to date. …
31. Consent to the treatment of the convertible subordinated bonds as equity for the purpose of the negative pledge covenants will not deteriorate [the bank’s] security position.
    3803 The reference to an increased borrowing capacity of $97 million demonstrates an appreciation of the ‘double whammy’ effect: see Sect 12.7.3. This is an important consideration because it has an additional effect on the NP ratios.
    3804 That credit application was recommended by Hutton and later annexed to another credit application dated 10 March 1986. Leung and Farr said in their witness statements that they read this document, although neither of them was actually involved in the decision made in relation to the 11 December 1985 request.
    3805 The plaintiffs note that Leung summarised the financial statistics for the Bell group taken from the 10 March 1986 credit application, which were prepared from the consolidated accounts for the 1983, 1984 and 1985 financial years. They note that since her financial analysis was therefore conducted on consolidated group accounts prior to the first BGNV bond issue, there was no reference to the bonds in that analysis. In her evidence, Leung conceded that she did not look at the position of the bonds in compiling these financial statistics.
    3806 However, I do not think the omission of the bonds from that calculation has much impact on the banks’ argument. In a letter dated 4 February 1986, McDowell (Wardley, now HKBA) notified TGBL that the bank agreed to the treatment of ‘the convertible subordinated bonds’ as equity as requested by the 11 December 1985 letter. In other words, the decision to approve the request was made before the 10 March 1986 credit application, and Leung’s financial analysis contained in it, were prepared.
    3807 The 14 January 1986 credit application lists subordination as the first reason supporting the recommendation to agree to TGBL’s request. In this respect, it should be noted that in the request letter, subordination came after convertibility in the list of reasons advanced by TBGL in favour of the proposal. I am not suggesting that this is conclusive but it is some evidence supporting the proposition contended for by the banks. I am satisfied that while other considerations also played a part, subordination was an aspect of the bank’s consideration of the request. By the time of the 10 March 1986 credit application, the decision to treat the bonds as equity had already been made, and there is nothing in that document that supports a conclusion that subordination played no part in that decision‑making process.
    3808 On the basis of the documentary evidence I am satisfied that HKBA relied on the representation that the on‑loans were subordinated. I accept the banks’ submissions that in acting on that representation, HKBA lost the opportunity to decline TBGL’s 11 December 1985 request to treat the bonds as equity. I note once again that part of the lost opportunity is the chance to avoid the consequences of the ‘double whammy’ effect of equity treatment.
    17.6.2. The decision to approve the $100 million facility to BGF
    3809 Early in 1987 BGF made a request for an additional $100 million facility. This request was discussed in a memorandum dated 28 April 1987, which was signed by Farr and Baker on 12 May 1987 and on behalf of Rankin on 13 May 1987. The memorandum recommended that the bank provide the additional $100 million facility to BGF.
    3810 In their closing submissions the banks highlight that the memorandum referred to the importance of the subordinated debt on three separate occasions. First, in relation to increasing the borrowing capacity of the NP group and improving gearing and strengthening the equity capital of the Bell group. Secondly, in relation to the financial position of the consolidated group. And thirdly, the impact of the bonds on compliance with the negative pledge covenants as at 31 December 1986.
    3811 The memorandum ‘strongly recommended’ the provision of the additional facility on the basis that:
    There is an excellent opportunity for us to increase our involvement with one of the major corporations in Australia. [TBGL] and [RHaC] have an impeccable record of success and integrity. We see a strong future for the group with the downside risk being well covered.
    3812 Rankin sent the request for approval by HSBC Hong Kong on 13 May 1987, stating that HKBA’s approval was subject to another office providing support for $85 million of the facility. The request was approved by HSBC Hong Kong on 20 May 1987 and HSBC Singapore agreed to support HKBA for $85 million of the risk on 28 May 1987.
    3813 Farr said in his witness statement that had he understood when he was considering the request for $100 million additional facility that the on-loans were not subordinated, he would have treated the bonds as debt and not equity in his calculations. He said that if that calculation resulted in a breach of the ratios, he would not have recommended approving the request. He said that even had the ratios not been breached, he would have recommended against the request or, alternatively, that the proposal proceed on different terms. The different terms he would have considered related to the pricing of the facility because the proposed pricing was fairly low at that time.
    3814 Farr also said that if he had recommended the facility on different terms, he would have detailed the fact of the non-subordination of the on-loans in the memorandum concerning the request. The request would still have required approval from HKBA Melbourne, HSBC Hong Kong and some other branch of HSBC willing to take $85 million of the risk. In cross‑examination, Farr said that even if the pricing on the facility had been increased, the question whether HKBA would have provided the facility in the circumstances of a breach of ratios remained.
    3815 Leung said in her witness statement that had she understood that the on-loans were not subordinated, she would not have recommended approving the increase in the Bell facility from $15 million to $115 million.
    3816 Rankin said that had he understood that the on‑loans were not subordinated, he would have required HKBA Perth to reconsider and reformulate the memorandum concerning the request to increase the facility by including an express statement that the on‑loans were not subordinated, re‑presenting the financial information and recalculating the ratios on the basis that the bonds were treated as liabilities.
    3817 Rankin said he was not sure whether he would have recommended the request for approval if those amendments had been made: the outcome would depend upon how the financials of the Bell group looked following the different treatment of the bonds. He said that if treatment of the bonds as a liability had resulted in the NP group not having the capacity within its ratios to seek the additional facility, he would not have recommended the facility for approval until the issue had been resolved by the Bell group.
    3818 When cross‑examined on his evidence, Rankin said that if treating the on‑loans as liabilities had resulted in a ratio of 64.9 per cent, there may still have been other factors to take into account in determining whether to approve the loan. But he said such a close result to the specified ratio would have added uncertainty to what he would have done.
    3819 In their submissions, the plaintiffs note HKBA’s views about the financial position of the Bell group and the lending by the HSBC group to the wider group of companies associated with RHaC. However, they do not raise any specific allegation that, because of these matters, HKBA would have provided the additional facility regardless of whether the on-loans were subordinated. This proposition was not put to any of the witnesses from HKBA
    3820 Leung’s evidence was not challenged at all. In cross‑examination, the plaintiffs put to Farr and Rankin that there would have been no breach of ratios as at 30 June 1987 and that therefore they would have made the same decision even if they had thought that the bonds were not subordinated. The banks submit that the plaintiffs’ choice of 30 June 1987 is curious given that the recommendation was made on 12 and 13 May 1987 and the last reported figures were as at 31 December 1986 (at which date the existence of a breach of ratios is uncontroversial). The banks submit that the plaintiffs could not have put to the witnesses that there was no breach of ratios on the dates of the approval because, as at those dates, treatment of the BGNV bond issue proceeds as liabilities would have resulted in a breach of ratios.
    3821 Whether or not the bank would have provided the additional facility should also be examined in light of the documentary evidence. As noted above, the memorandum recommending the request referred to the subordinated debt and its positive impact on borrowing capacity and the balance sheet. The assumption underlying the reasoning in the memorandum is that the Bell group only had the relevant borrowing capacity because of the recent convertible subordinated bond issues. I accept the banks’ submissions that the analysis in the memorandum would have been entirely different if the BGNV bond issue proceeds were not subordinated.
    3822 The plaintiffs’ cross‑examination was, in part, based on the fact that the wider HSBC group had a large exposure to the wider RHaC group. The banks make two submissions in this regard. First, the banks say that prior to the provision of the additional $100 million facility in June 1987 the facilities provided worldwide by the HSBC group to RHaC (personally and the wider group of companies associated with him) totalled, at most, $60 million. The banks submit that the plaintiffs have not explained why this would compel HKBA to provide a new facility, far in excess of the existing facilities, if it otherwise considered that its credit analysis did not justify this outcome.
    3823 Secondly, the banks say that the facilities provided by HKBA represented 92 per cent of the total facilities provided by the HSBC group to the wider RHaC group. I accept that the plaintiffs have not demonstrated that the wider HSBC group, outside of HKBA, had a wide exposure to RHaC and that this was not a reason why the bank would have agreed to provide the facility regardless of whether or not the bonds were subordinated.
    3824 I accept the witnesses’ evidence that HKBA would not have provided the additional facility had they understood the bond issues to be unsubordinated. I am satisfied that the bank’s officers lost the opportunity to decline to approve the facility on the basis that the NP ratios had been breached. If the bond issue proceeds were, contrary to the representations, not subordinated and were classified as a liability, then there would have been a breach of ratios. Even if there was no such breach of the ratios, I am satisfied that the memorandum concerning the request would have been presented on very different terms both as to its analysis of the financial position of the Bell group and NP group and the terms upon which HKBA would have been willing to provide any facility. For these reasons I am satisfied that HKBA suffered a loss of opportunity to decline the provision of the additional $100 million facility to BGF.
    17.7. NAB
    17.7.1. The December 1985 request for equity treatment
    3825 On 11 December 1985 TBGL sent a letter to the NAB credit bureau with a request that the bank treat the bonds as equity. This request was considered by officers of the Credit Bureau (Gregory Willcock, Phillip Dowse and Frank Cicutto) on 2 and 3 January 1986.
    3826 Handwritten notes made by Willcock on 2 January 1986 indicate that he understood that the bonds ranked behind all unsubordinated debts, and his consideration of TBGL’s request was based upon that understanding. Willcock’s evidence is that, in his opinion, the subordination of the bondholders to the bank’s debts would have been a key issue in his decision to treat the bonds as equity. When giving evidence, he said he found it difficult to differentiate between what was important to him at the time of his witness statement and what would have been important to him in the 1980s. He did say, however, that if the on-loans were not subordinated, he would have wanted the ratios recalculated on the basis that the bonds were a liability and not equity.
    3827 The decision to agree to the December 1985 request was made by Dowse and Cicutto. Dowse supported Willcock’s approach. In his hand-written file note, Dowse noted the fact that the bonds could only be redeemed at the option of the issuer and that the bondholders were ‘locked in’ until 1995 as justification for treating them as equity for the purposes of calculating the banking covenants. Cicutto’s handwritten notes indicate that he agreed with Dowse. Notice of NAB’s approval of the request was sent to Wallace on 6 January 1986.
    3828 In cross‑examination, Dowse conceded that he did not mention subordination as a factor in his reasoning in his file note:
    I note that I made no comment on subordination in my hand-written notes in respect of this request. There would have been no reason to do so. Subordination had already been highlighted in the analysis by the Manager Corporate Bureau. It was a given.
    3829 Dowse also said that had he understood that BGNV had on‑lent the proceeds of the issue to TBGL on unsubordinated terms, he would not have agreed to treat the bonds issued by BGNV as equity. Cicutto was not called as a witness.
    3830 It was put to Wallace in cross‑examination that he would have consented to the request regardless of whether or not the on‑loans were subordinated given NAB’s relationship with the companies associated with RHaC. Wallace said he would have only recommended that NAB agree to treat the bonds as equity if he was willing to recommend an increase in the level of the ratio limits. He said he believed it unlikely that he would have been willing to recommend an increase as NAB had some apprehension concerning RHaC group companies and a conservative approach to risk in general. Wallace rejected the plaintiffs’ proposition that he would have recommended approval of TBGL’s request simply because of a desire to build a relationship with RHaC.
    3831 The plaintiffs contend that NAB would not have done anything differently even had its officers understood that the bonds were not subordinated. This argument is based mainly on the assertion that the NAB officers were more concerned with building and maintaining the bank’s relationship with companies associated with RHaC. I will discuss this premise more fully later in this section, but, in my view, this argument cannot stand in the face of the evidence of the bank’s witnesses.
    3832 To my mind, it is evident that the bank officers’ contemplation of the requests to treat the bonds as equity relied on the premise that the debt was subordinated. Further, the bank officers relied on this representation to determine the banking relationship between NAB and the Bell group and, in my view, it is unlikely that the NAB officers would have made the same recommendations had they understood that the bonds were not subordinated.
    3833 I am satisfied that NAB acted upon the representations that the on‑loans from the bond issue proceeds were subordinated to liabilities TBGL would owe the bank. Because it acted upon those representations, NAB lost the opportunity to conduct its banking relationship with TBGL in relation to the equity requests on the basis that the proceeds of the bond issues created debt ranked equally to NAB, and this loss was to its detriment.
    17.7.2. Extension of the facilities from time to time
    17.7.2.1. The June 1986 request
    3834 As mentioned in Sect 4.2.4.1, TBGL’s loan facility with NAB was increased to $145 million in 1986, with a new advance of approximately $90 million. The credit application dated 10 June 1986 was prepared by Newby and considered by Willcock on 12 June 1986. Willcock recommended the credit application to be sent to the board lending committee, but his approval was subject to a comment regarding breach of the NP covenants:
    Although CFM states that disciplines will not be broken, on the information before us, discipline (gearing) will be breached. Our fate would need to include a requirement for the State to be totally satisfied with this aspect.
    3835 In a memorandum dated 13 June 1986 and addressed to Wallace, Argus said he could anticipate approval of the proposal ‘on the basis that you are satisfied that gearing disciplines will not be breached’ but noted: ‘On the information before us, it would appear that BGF’s gearing discipline will be breached’. The credit application was approved by the board lending committee on 19 June 1986.
    3836 In cross‑examination, Willcock said: ‘I don’t think there would [have been] cause to go back to Western Australia and seek clarification had no breach been evident’. Wallace said that, if the ratios had been breached after recalculation because the bond proceeds were unsubordinated and those ratios could not be fixed in the short term, it would have been necessary to prepare a new credit application in respect of the proposed increase to the facility (including the increase in ratio limits). Willcock said it was impossible for him to say what the decision on the application would have been if that process had been undertaken.
    3837 Smith was a member of the board lending committee and was the ultimate decision‑maker on the credit application. Smith said in his witness statement that unless the bonds were subordinated to the bank debt, he would have wanted NAB to treat liabilities arising from the bonds as liabilities, not equity. Further, he said he would not have agreed to the application to increase the facility if treating the debt as a liability for the purposes of the covenants resulted in a breach of the covenants. He said the issue at the time would not merely have been whether there was a breach of the ratios, but whether there was a breach of any other arrangement with NAB.
    3838 In cross‑examination, Smith was asked what he would have done in respect of the credit application on the basis that, as at 19 June 1986, there would have been no breach of the covenants treating the on‑loans as a liability. The banks submit that the cross‑examination does not advance the plaintiffs’ case because Smith’s evidence made it clear that the issue for him at that time would not merely have been whether there was a breach of the ratio covenants, but whether there was a breach of any other arrangement with the bank.
    3839 The plaintiffs did, however, ask Smith in cross‑examination what he meant by a breach of any other arrangement. The banks say that it was made clear in re‑examination that Smith would have included the bank’s agreement to treat the bond issues as equity on the basis that they were subordinated. According to the bank, Smith’s answer that he would have been more likely than not to accede to the application if there was no breach of arrangements was premised on the fact that at the time the representation as to subordination had not been called into question.
    3840 The banks also submit that the plaintiffs have not established that the ratios would not have been breached if the on‑loans were treated as a liability as at 19 June 1986. The banks assert that, as at that date, the ratio for the negative pledge covenants, even without treating the bond issue as a liability, stood at 66 per cent. Treating the liabilities arising from the $75 million bond issue by BGNV as a liability would have exacerbated the breach.
    3841 I accept Smith’s evidence about how his decision‑making process for the 19 June 1986 credit application would have changed had he understood that the on‑loans were not subordinated. His evidence that the unanimous approval of all members of the board lending committee was required was not challenged and I am satisfied that the banks have demonstrated that but for the representations that the proceeds from the bond issues were subordinated, NAB would not have approved the additional $90 million facility.
    17.7.2.2. The October 1987 request
    3842 In October 1987, a facility made available to TBGIL was transferred to BGF, thereby increasing the amount available to BGF (but not to the group overall) to £5 million. On 14 October 1987, Hunt (Corporate Banking WA) sent a memorandum to the credit bureau with a recommendation to approve the request to increase the facility to BGF.
    3843 The memorandum noted that there had been some tension between the NAB London branch and TGBIL. In recommending approval of the proposal, the memorandum said that:
    In effect we are retaining our [Bell group] exposure at approximately the same level with the same ultimate risk (ie TBGL) but are obtaining a considerably better return (pricing to remain at 7.0 BP all up) for less management time expended.
    3844 Weir and May, who approved the request, did not make a note of their reasons for approval. The documents indicate, however, that the credit bureau merely confirmed the actions and decision already made by Corporate Banking, WA.
    3845 Byfield said that had he understood that the bond issue proceeds were unsubordinated, he would have not have recommended increasing the BGF facility. He also said he would not have supported the facility increase if the ratios had been breached. In re‑examination, he added that the material change in circumstances would not have been looked upon in a good light by NAB. Byfield conceded that the proposal was effectively for a reallocation of the facility rather than a new facility because the facility was technically still in place in the United Kingdom.
    3846 Hunt also said that had he understood that the bond issue proceeds were unsubordinated, he would have not have recommended increasing the BGF facility. However, he went further by saying that he would not have recommended the proposal even if there was ratio compliance because it would have amounted to a large debt that ranked pari passu with NAB. In cross‑examination, the plaintiffs put to Hunt that there would have been no breach of ratios as at the last reported date on 30 June 1987. I have already discussed the breach of the NP ratios by TBGL in Sect 12.13.6.3. If the on‑loans had been treated as liabilities, it is likely that as at 14 October 1987, there would have been a breach of ratios. If there had been a breach of ratios, TBGL would not have been in a position to have sought the increase in its facilities.
    3847 The banks contend that NAB’s beliefs and assumptions about the subordination of the bonds caused NAB to lose the opportunity to decline to extend the facilities available to TBGL and BRL. I accept that the requests were based on representations concerning TBGL’s financial status, including the subordination issue. The argument about loss of opportunity has been made out.
    17.8. SocGen
    17.8.1. Treating the bonds as equity for the NP ratios
    17.8.1.1. The December 1985 equity request
    3848 Graham Purves and Peter Edward acceded to TBGL’s request (dated 11 December 1985) to treat the 1985 bonds as equity for negative pledge covenant purposes. Edward and Purves said they would not have agreed to TBGL’s request if the bonds were not effectively subordinated and ranked behind the bank’s lending.
    3849 Edward said in his witness statement that had he thought the bonds were not subordinated to bank debt he would not have agreed to the request. He said if he had understood that the subordinated bonds could later become unsubordinated (such as if the bond proceeds had been on‑lent on an unsubordinated basis), he would not have allowed SocGen to agree to the request. He said that if any of those circumstances arose, his first reaction would have been to discuss this issue with David Griffiths and John Cahill and ask them to fix the problem; for example, by subordinating the on‑loan or by BGNV providing a guarantee.
    3850 Purves said in his witness statement that he would have understood the reference to subordination in TBGL’s letter dated 11 December 1985 to mean that, on a liquidation, the bondholders ranked behind SocGen and all other unsubordinated (senior) creditors and would not be repaid until SocGen and the other senior creditors had been repaid. He said he would have understood that that position could not change without the consent of the senior creditors and he would not have agreed to treat the bonds as equity unless they were subordinated and ranked behind SocGen.
    3851 I need to move forward to April 1987 when a similar request was made in relation to the second BGNV bond issue and the BGF bond issue. In my view, what happened them has a direct impact on the treatment by SocGen of the December 1985 request.
    17.8.1.2. The April 1987 equity request
    3852 On 15 April 1987, TBGL requested that SocGen treat the liabilities arising from the second BGNV bond issue and the BGF bond issue as equity for the purposes of ratio calculation of the NP covenants. Purves and Godfrey prepared a memorandum to the SocGen credit committee dated 4 May 1987 that recommended acceding to TBGL’s request. That proposal was approved by the SocGen credit committee on 12 May 1987.
    3853 The memorandum dated 4 May 1987 was sent to SG Paris for approval. Following telexes between SG Paris and SocGen dated 19 May and 20 May 1987, SG Paris sent a telex dated 21 May 1987 in which the head office notified SocGen that it did not agree to the proposal.
    3854 Edward said that he then signed the telex dated 25 May 1987 to SG Paris which stated, among other things, that the bonds should be treated as equity because they were subordinated. SG Paris finally agreed to the request to treat the bonds as equity by telex dated 29 May 1987.
    3855 In relation to the telex dated 25 May 1987, Edward said he would not have sent such a telex without first reading the letter dated 15 April 1987 and would not have drafted a telex in the same terms as the one dated 25 May 1987 had he understood that the on‑loans were not subordinated. He said that had he understood that the bonds were not effectively subordinated, he would not have permitted SocGen to agree to treat the bonds as equity.
    3856 Purves said he would not have recommended to the SocGen credit committee that SocGen agree to the request had he understood that the BGNV on-loan was not subordinated. He said he would not have signed the memorandum to the credit committee recommending the agreement to the treatment of bonds as equity without first reading the letter dated 15 April 1987.
    3857 Joyet said in his witness statement that he certainly read, and probably discussed, the memorandum to the credit committee dated 4 May 1987 that recommended SocGen accede to TBGL’s request. He said he read and initialled the telex from SG Paris to SocGen dated 21 May 1987, in which the head office notified it did not agree to the SocGen credit committee’s recommendation. He also read and approved the telex from SocGen to SG Paris dated 25 May 1987 that requested SG Paris reconsider its decision on TBGL’s request. Joyet then said he initialled and read the telex from SG Paris to SocGen (marked to his attention) dated 29 May 1987 in which SG Paris agreed to accede to TBGL’s request.
    3858 Joyet’s evidence in chief was that had he understood that the BGNV bondholders effectively ranked as unsubordinated creditors of TBGL and BGF because of unsubordinated on‑loans, he would not have wanted SocGen to agree to TBGL’s request, particularly in circumstances where SG Paris had declined the request when it was first put to it.
    3859 Auxenfants said in his witness statement that he was involved in SG Paris’ decision to accede to TBGL’s request. He said that if he become aware that the BGNV on‑loans to TBGL and then BGF were not subordinated, he would not have acceded to TBGL’s request to treat the bonds as equity for the purposes of the NP covenants. Auxenfants said he would have wanted to know how those subordinated bonds could rank effectively pari passu with SocGen. He also said that the whole basis of the SocGen facilities would have changed because the Bell group’s financial position would have looked very different in circumstances where the bonds were not effectively subordinated. Auxenfants’ evidence is that he would have wanted the bank to take steps to protect its senior creditor position over the bondholders, such as requesting that the on‑loans be subordinated or having a guarantee put in place.
    3860 Auxenfants was cross‑examined at length about his decision to accede to TBGL’s request of 15 April 1987. The banks submit that Auxenfants’ evidence, to the effect that he would not have acceded to TBGL’s request of 15 April 1987 had he understood that the bonds were not effectively subordinated, should be accepted because the evidence of the other witnesses shows that the request would have been rejected at every level of SocGen and SG Paris if it had been understood that the bonds were not effectively subordinated.
    3861 The banks submit that the effect of Edward’s and Purves’ evidence is that TBGL’s request would not have reached the SocGen credit committee in circumstances where the officers had understood the bonds to be effectively unsubordinated. Joyet said that if there had been an understanding that the bonds were not effectively subordinated and TBGL’s 15 April 1987 request been put before the SocGen credit committee, he would not have wanted SocGen to have consented to the request. Edward’s evidence is that the SocGen telex of 25 May, which led to SG Paris changing its view about TBGL’s request, would not have been sent had he understood that the bonds were not effectively subordinated. Auxenfants’ evidence is that SG Paris would not have agreed to accede to TBGL’s 15 April 1987 request without the bonds being effectively subordinated.
    3862 The most telling piece of evidence in favour of the banks’ argument is the memorandum sent by SocGen to SG Paris asking head office to reconsider its refusal of the request. The memorandum contains the following paragraph, which, in my opinion, clearly articulates the SocGen officers’ beliefs and the reason they supported the request.
    We acknowledge that in a strictly legal sense the bonds remain debt until converted into ordinary shares. The debt however is subordinated to our facilities and its maturity date (1997) is well beyond the maturity date of our facilities. In a practical, commercial sense, therefore, the bonds are effectively equity.
    3863 The banks argue that if SocGen had understood that the issues of bonds had created unsubordinated debt of the NP group, SocGen would not have consented to TBGL’s 15 April 1987 request to treat bonds as equity for the purpose of NP ratio covenants. SG Paris only approved the request after that argument regarding subordination had been made. I accept the witnesses’ evidence that the bank lost the opportunity to decline the request.
    3864 The plaintiffs point to the fact that the credit application made in December 1985 did not refer to the bonds as being subordinated. Further, it included a balance sheet analysis in which the bonds are shown as equity. This, according to the plaintiffs, indicates that subordination was not a relevant consideration. In my view that does not follow. In January 1986 a further credit application was considered by a similarly constituted credit committee. In that document the bonds are referred to as being ‘subordinated to all other creditors’. I have no reason to doubt that the relevant officers held the same view in December 1985.
    17.8.2. Leading and extending the SocGen syndicated facility
    3865 In January 1986, SocGen agreed to lead a syndicated facility for TBGL in the amount of $50 million. SocGen participated in the sum of $10 million; initial approval was given by the credit committee for a facility of between $100 and $200 million with the bank’s participation in the amount of $20 million. Edward and Purves said that if they had understood that BGNV had on‑lent the proceeds of the 1985 bonds on an unsubordinated basis, they would not have proceeded to lead and participate in the SocGen syndicated facility.
    3866 Edward gave a number of reasons why it was unlikely he would have proceeded with the proposal for the SocGen syndicated facility in such circumstances. First, the Bell group would have been required to resolve the problem with the existing bankers that had agreed to treat the convertible subordinated bonds as equity before SocGen could get any new bank to lend money in a syndicated facility. Secondly, the NP group would have been either very close to or in breach of the NP ratio. If it had been in breach, the Bell group could not have sought the additional facility. If the NP ratios had been close to breach, participation in a proposed syndicate would have been a difficult proposal to sell to any bank.
    3867 Edward also said that in circumstances where the Bell group had gone to significant trouble to set up the bond issue and request the banks to treat it as equity on the basis that the bonds were subordinated, to have neglected to subordinate the on‑loan would have been a significant mistake for the Bell group to have made. Edward said that would have caused him and, in his view, other banks to have questioned the competence of the Bell group.
    3868 Edward then said if he became aware that the bondholders effectively ranked equally with the banks after SocGen’s decisions to lead and participate in the SocGen syndicated facility, then he would not, under any circumstances, have sent out an invitation telex or the SocGen Information Memorandum which contained the statements relating to subordination. Edward had the authority to decide not to proceed with the proposal for the SocGen syndicated facility, or not to send out the invitation telex or the SocGen Information Memorandum.
    3869 Purves’ evidence is that had he understood that BGNV had on‑lent the proceeds of the bond issue on an unsubordinated basis, he would not have supported the proposal unless the on‑loan was first subordinated. He said this was because a syndication proposal of this nature (where syndicate participants were asked to treat subordinated bonds as equity but subordination was effectively defeated by the terms of the on‑loan of the proceeds) would not, in his view, have been a matter capable of explanation to potential syndicate participants or a proposal he would have wished to put forward. Purves said that if the bond issue had been treated as a liability, it may have been that the Bell group did not have the capacity to borrow these additional funds and in this regard he would have relied on Edward for his analysis. Purves said that the 16 January 1986 proposal would not have proceeded without his support.
    3870 Notwithstanding Purves’ evidence, there is also evidence that had the proposal reached the SocGen credit committee, knowing that the bonds were not effectively subordinated, that information would have negatively affected Joyet’s deliberation on the proposal. Joyet testified that the proposal may not have gone ahead at that level. Without the SocGen credit committee approving and recommending the proposal to lead and participate in the SocGen syndicated facility, the proposal would not have been sent to SG Paris and would not have gone ahead.
    3871 Edward said that had he been aware the BGNV bonds were not effectively subordinated after SocGen had made its decision to lead and participate in the SocGen syndicated facility, he would not have sent out any invitation telexes or information memoranda that contained statements relating to the subordination of the bonds. It is logical to conclude that in those circumstances, the SocGen syndicated facility would not have gone ahead in that form.
    3872 In December 1986 SocGen approved and recommended an increase in the SocGen syndicated facility from $50 million to $110 million and an increase its participation in that facility from $10 million to $20 million. The SocGen credit proposal dated 15 December 1986 was then approved in SG Paris by Auxenfants. Edward’s evidence is that had he understood that the BGNV bondholders, through unsubordinated on‑loans from BGNV, would rank equally with the banks on a liquidation of TBGL he would not have allowed the proposal to be put forward to the credit committee. He said he would have instead sought to increase the syndicated facility by the introduction of additional banks.
    3873 Purves’ evidence is that had he believed that the on-loans were not subordinated he would not have supported the 15 December 1986 proposal and it would not have proceeded. One of the reasons he gave for that was that the Information Memorandum that had already been provided to syndicate banks described the bonds as subordinated and had put forward subordination as a reason for agreeing to treat the bonds as equity for the purposes of the NP ratio. He said he would not have wished to go forward with a proposal to increase the syndicated facility unless the subordination of the on‑loan had been effected.
    3874 Joyet’s evidence is that if the $75 million of the bonds on issue at the time of the 16 January 1986 and 15 December 1986 credit applications had effectively ranked with the bank, then that would have affected his decision in respect of those applications. He said it was possible that he would not have permitted the bank to go ahead with those proposals.
    3875 Auxenfants’ unchallenged evidence is that after becoming aware that the bonds issued by BGNV ranked effectively pari passu with it, SocGen had the authority to decide, without SG Paris’ approval, not to increase its participation in the syndicated facility (as per the credit proposal dated 15 December 1986). He said SocGen could have decided to not treat the bonds as equity for NP purposes and terminate the facility at that point.
    3876 Notwithstanding the above evidence that the proposal would not have reached the SocGen credit committee, there is evidence that if the proposal had reached SG Paris, it would not have been approved in that form by the head office. Auxenfants gave evidence that if, at the time he was considering the December 1986 credit application, he had been informed that the on‑loan of the bond issue proceeds was not subordinated then he would have wanted SocGen to present the financial statements of the Bell group taking into account the non‑subordination of the on‑loan. He said he would not have agreed to the treatment of bonds as equity for the purposes of NP ratios and would have told SocGen to calculate the NP ratios with the bonds treated as debt from that time on. He also said he would have sought an explanation from SocGen as to how the bonds were able, effectively, to rank pari passu with SocGen.
    3877 Further, Auxenfants said that he would have required SocGen to take steps to protect its position as a senior creditor of the Bell group; that is, as ranking ahead of the subordinated bonds. Such steps would have included requiring SocGen to check whether the on-loan from BGNV to TBGL was, in fact, unsubordinated and, if so, whether the situation could be corrected. This evidence was not challenged. Auxenfants said he would also have required SocGen to advise the Bell group that the bank would not treat the bonds as equity under the NP covenants if it was not possible for the situation to be corrected. He said he would have also required SocGen to advise the Bell group that the bank would keep a close eye on the Bell group’s gearing and he would tell the Bell group to avoid any deterioration in its gearing ratio if it was not possible to have the on‑loan subordinated.
    3878 The evidence establishes that if either Edward or Purves had understood that the bonds were not effectively subordinated to the bank’s debts, the proposal would not have reached the SocGen credit committee. Auxenfants’ unchallenged evidence was that SocGen was entitled to decide to decline that proposal without referring it to SG Paris.
    3879 Notwithstanding the above evidence that the proposal would not have reached the SocGen credit committee, there is also unchallenged evidence that if the proposal had reached SG Paris, the head office would not have approved it in that form.
    17.8.3. Replacing the NP agreement with an NP guarantee
    3880 On 10 February 1987, TBGL sent a letter to SocGen requesting that the existing NP agreement be collapsed and replaced with a parent guarantee from TBGL. The credit application dealing with TGBL’s request to collapse the NP agreement was signed by Purves and Edward, then forwarded to the SocGen credit committee on 20 February 1987. The credit application was approved by the SocGen credit committee on 20 February 1987. SG Paris’ approval was required for the alteration to the negative pledge arrangements because they represented a major alteration to the facility. SG Paris agreed to TBGL’s request and documentation regarding the head office’s decision was signed by SocGen on 30 July 1987.
    3881 Edward said if, at any time during the negotiations about changing the negative pledge arrangements, he had understood that the bonds were not effectively subordinated, he would not have agreed to the collapse of the NP agreement and release of the cross‑indemnities. He said, first, that if the bond issues were included in the calculation of total liabilities, the NP ratio would have been breached or close to its limit. Secondly, the cross‑indemnities put SocGen in a better position than the bondholders. He said that if the bondholders were not effectively subordinated, he would not have wanted to have given up that position.
    3882 In cross‑examination, the plaintiffs put two propositions to Edward about his evidence. First, they said that in February 1987, when in‑principle approval to the change was given, there was only a minor breach of the NP ratios (65.7 per cent). The second proposition was that if, at 30 June 1987, the first two bond issues were treated as liabilities, the ratio would not have been breached (it would have been 64.9 per cent).
    3883 Edward responded that if he had understood the on‑loans were not subordinated, he would have attached a condition that TBGL ensure ratio compliance before proceeding to seek in principle approval in February 1987 and, in June 1987, he would still have reviewed his decision in relation to the cross‑indemnities. He said he would not just have considered the ratio but also the total amount of debt TBGL was carrying and, if the on‑loans were not subordinated, the amount of debt would have been material in relation to any decision to release the cross‑indemnities.
    3884 Purves’ evidence is that if, at any time before the replacement of the NP agreement, he had understood that the on‑loans were not subordinated he would have discussed the issue with Edward and requested Edward’s view on whether SocGen should agree to the change in structure in those circumstances. Purves said he would have required that the bonds be included as a liability in the calculation of the ratios, and if that led to a breach of the ratios, he would not have agreed to the change without the breach being fixed. If Purves had sought Edward’s view in these circumstances, he would have learned that Edward was against the collapsing of the NP agreement.
    3885 Auxenfants’ said that SocGen could, within its authority, have decided not to agree to the collapse of the NP agreement without consulting with SG Paris if the bond proceeds were not unsubordinated and ranked pari passu with SocGen. This evidence was not challenged. He said that if, at the time he was considering the collapse of the NP agreement, he had become aware that the on‑loans were not subordinated, then, among other things, he would not have approved the change in the negative pledge structure without SocGen taking steps to protect its position as a senior creditor of the Bell group, for example, requiring the loans to be subordinated or seeing a guarantee before proceeding.
    3886 Further, Auxenfants said he would have wanted more details about the proposed change and further information in order to understand why the change to the negative pledge arrangements had been requested. Auxenfants also said if treating the bonds as liabilities did not cause a breach of the negative pledge covenants, and SocGen had taken the outlined steps to protect its position, then he would probably would have recommended SG Paris agree to the proposed changes to the negative pledge arrangement.
    3887 Joyet’s evidence in chief is that if he had understood that the bondholders effectively ranked as unsubordinated creditors of TBGL and BGF, he would not have wanted SocGen to agree to that proposal. In cross‑examination he admitted he could not recall having seen the NP guarantee, could not recall what, if anything, he knew about the NP agreement referred to in the 16 January 1986 credit application and could not recall if he had read the document. However, the banks submit that the plaintiffs failed to disprove reliance because they have not demonstrated that:
    (a) other banks would have agreed to the proposal notwithstanding the alleged non‑subordination of the on‑loans;
    (b) the Bell group would withdraw its business or threaten to withdraw its business from SocGen rather than simply address the issue (for example by subordinating the on‑loans); and
    (c) despite those circumstances, Joyet would have agreed to the proposal.
    3888 I accept the evidence of the bank’s witnesses. Overall, I am satisfied that SocGen lost the opportunity to decline to approve the change of the negative pledge arrangements to the NP guarantee, and to afford themselves appropriate protection in their banking relationship with the Bell group. SocGen’s reliance on the representations prevented the bank from conducting its banking relationship with the Bell group on the basis that the bonds and on‑loans were unsubordinated.
    17.9. SCBAL
    17.9.1. The December 1985 request for equity treatment
    3889 In a letter dated 11 December 1985, TBGL requested that SCBAL treat the 1985 bonds as equity for negative pledge covenant purposes. The letter has handwritten comments on it:
    Max. Is this OK? What do others think. Bonds may not be converted.
    …
    other lenders will treat as equity.
    3890 This handwriting has been identified as belonging to John Stone, a Senior Associate Director responsible for corporate lending. ‘Max’ is Max Carling, a Senior manager in corporate lending. He reported to Stone. In his witness statement Stone said he had no recollection of reading the letter but would not have written the comment unless he had. But he was not able to say anything further about it. On 7 March 1986 Carling notified TGBL that SCBAL agreed to the request, on the condition that the other lenders also agreed.
    3891 The banks did not call Carling, the apparent decision-maker on this request. Stone gave evidence that he was not involved in the decision. Despite this, the banks submit that it is still open for me to infer that absent the representation concerning subordination of liabilities arising from the bond issues, SCBAL would not have agreed to the request.
    3892 The banks rely on their estoppel submissions generally and the evidence of other senior SCBAL officers about the bank’s practices in relation to the importance of subordination in the treatment of bond issues as equity.
    3893 The banks also say that Stone’s handwritten comments on the letter dated 11 December 1985 that the ‘bonds may not convert’ indicates that little reliance was placed upon the convertibility aspect of the bonds. They say that the Bell group intended subordination to induce the bank’s consent and that, in the absence of any contrary evidence, I should conclude that the logical consequence of a representation intended to induce particular conduct is that the representation had its intended effect.
    3894 I cannot accept these submissions. In this instance there is a distinct lack of contemporaneous documentation showing how the decision was arrived at. If it be the case that Carling, rather than Stone, was the effective decision maker, Stone’s note ‘bonds may not convert’ does not take the matter much further. It may be that subordination and the extended maturity date carried the day. But equally, it may be that Carling felt there was a strong likelihood of conversion, as TBGL’s letter suggested.
    3895 It was also put that SCBAL can take comfort from the fact that had the bank understood that the bonds were not effectively subordinated, the condition precedent to SCBAL’s agreement (the consent of the other banks) would not have been satisfied. I do not think this is enough.
    3896 As I said in the introductory section, the decision of the banks to agree to the December 1985 request concerning equity treatment is a critical factor in the banking relationships. It sets the scene for subsequent events. I have looked for some acknowledgement in the contemporaneous documentation to indicate that subordination was a factor, not necessarily the only factor, influencing the decision that was taken. In this instance I am left with evidence of the bank’s general practices, without more, to elucidate what factors were relied upon in this decision‑making process.
    3897 Two of the SCBAL officers gave evidence about general practices. Peter Cameron was the Managing Director and a member of the Australian lending committee. He said he would not have regarded it as appropriate that SCBAL treat the bonds as equity for negative pledge purposes if the bonds were not subordinated to SCBAL’s Bell facility. If the bondholders, through the mechanisms of the on-loans, effectively ranked as unsubordinated creditors of TBGL and BGF, Cameron would not have regarded the bonds as subordinated and would have required that the ratios be calculated on the basis that they were treated as liabilities.
    3898 Raymond Walsh was an Associate Director and the State Manager for New South Wales. He gave evidence that if as alleged by the plaintiffs, the bonds did not rank behind the bank, there would have been no basis for treating the bonds as equity for the purposes of the calculation of the ratios under the negative pledge guarantee. He explained that the only basis for treating the bonds as equity was that the bonds were subordinated debt of the Negative Pledge group.
    3899 The problem I have with this evidence is that Cameron did not join SCBAL until June 1987. Walsh joined the bank in April or May 1988. In other words, while I have little doubt that they held the views to which they testified, there is no evidence that this was the prevailing practice within SCBAL in December 1985 or for that matter in April 1987. On the other hand, there is evidence is relevant, and I accept it, in relation to the post‑October 1987 events. Walsh said that had he discovered the bonds were unsubordinated he would have caused the NP ratios to be recalculated and, if that demonstrated a breach, he would have advised head office. A joint decision would have been taken as to the appropriate course to be followed. At very least he would have pressed hard for repayment of the facility. Cameron’s evidence was to similar effect.
    17.9.2. The April 1987 equity request
    3900 On 15 April 1987 TBGL requested that SCBAL treat the liabilities arising from the second BGNV bond issue and the BGF bond issue as equity for the calculation of the NP covenants. The bank agreed to the request and Desmarchelier, the Manager for SCBAL in New South Wales, sent a letter confirming the bank’s acceptance to TBGL on 15 May 1987.
    3901 The banks did not lead any evidence from Desmarchelier in respect of this decision. For the reasons set out above, the banks submit that consent to treat bonds as equity would not have been forthcoming without the bonds being effectively subordinated.
    3902 I do not accept those submissions. The bank’s argument for reliance on this request finds even less support from contemporaneous documents or direct evidence than the arguments about the December 1985 request. There is no evidence from which I could infer what the SCBAL officers would have done had they understood that the bonds were not subordinated.
    3903 The plaintiffs contend that SCBAL, without analysis, acceded to TBGL’s requests to treat the bonds as equity because of the financial strength of the Bell group, the relationship between SCBAL and SCB and the wider RHaC group, the terms and timing of the bond issue, and the repayment date of the facilities. They say SCBAL would not have refused the request because the on‑loans were not subordinated. There is no evidence to support these submissions.
    3904 In view of the lack of evidence regarding the decision‑making process for the equity requests, I am unable to find that SCBAL relied on a representation that the bonds were effectively subordinated and that it lost the opportunity to refuse those requests on the basis that they were not subordinated.
    3905 As I have already said, this means that the foundation for the banking relationships (based on subordination as a factor in the banks’ agreement to treat the bonds as equity) is missing. This flows on to other incidents in the relationship.
    17.9.3. Replacing the NP agreement with an NP guarantee
    3906 On 14 May 1987 TBGL wrote to SCBAL and advised that it had negotiated with a number of Australian and international banks to change the negative pledge arrangements so that the NP agreement would be collapsed and replaced with a guarantee structure. TBGL requested that SCBAL enter into the NP guarantee and release the cross‑indemnities.
    3907 In a letter dated 27 May 1987, TBGL asked SCBAL to communicate any queries on the draft guarantee by 2 June 1987. Handwritten comments on that letter (attributed to Michael Musso) say:
    Roger, the guarantee is in the normal format and I do not think the bank would be any worse off than with the present negative pledge agreement.
    3908 TBGL’s request was the subject of a credit application dated 22 June 1987. There is no reference to subordination in the document; it does, however, mention TBGL’s ‘moderately high‑level of debt’, but the debt is referred to as ‘manageable’. The credit application was recommended and signed by Desmarchelier, Patten, Middleton and the General Manager of SCBAL.
    3909 Again, the banks did not lead oral evidence about how that decision would have been affected if SCBAL had understood that that the proceeds of the bond issues had been on‑lent on an unsubordinated basis. Handwritten notes on TBGL’s letter dated 14 May 1987 and the 22 June 1987 credit application do not provide any relevant information about SCBAL’s reliance on the representation that the bonds were effectively subordinated.
    3910 The banks submit, however, that an inference that SCBAL relied on such a representation should be drawn. This submission is supported by the existence of an extant default if the bonds were treated as liabilities on or before 30 July 1987. The banks submit that it is unlikely that any bank would have weakened its security in such circumstances.
    3911 I do not find these submissions persuasive. In view of the lack of evidence regarding the decision‑making process for the change of the negative pledge arrangements, I am unable to find that SCBAL relied on a representation that the bonds were effectively subordinated and that it lost the opportunity to refuse those requests on the basis that they were not subordinated.
    17.10. Banco Espírito
    17.10.1. Participation in the facility
    17.10.1.1. Information and events
    3912 The banks argue that Banco Espírito would not have participated in the Lloyds syndicate facility had it believed, at the time of the decision to participate, that the first BGNV bond issue was not subordinated. The plaintiffs contend that the bank officers did not rely on the fact that the bonds were subordinated because no financial analysis of the Bell group or the NP group was conducted in the bank’s decision‑making process and the bank’s documents recording that process did not refer to subordination. The plaintiffs also note that Banco Espírito was prepared to lend on a negative pledge basis with a ratio of 65 per cent. Accordingly, the plaintiffs conclude, subordination was not a decisive factor in the bank’s decision to participate in the facility.
    3913 On 30 April 1986 Banco Espírito approached LMBL about involvement in the Lloyds syndicate facility. LMBL replied to Hugh Stewart with the following:
    (a) the Information Memorandum and attachment;
    (b) TBGL’s half-year balance sheet and profit and loss statement as at 31 December 1985;
    (c) a copy of the company’s announcement to the Perth stock exchange; and
    (d) the director’s report and accounts of BGUK as at 30 June 1985.
    3914 On 30 April 1986 Pedro de Almeida prepared a two‑page credit application recommending a £5 million participation in the Lloyds syndicate facility. The application indicated that participation in that amount had been approved by the London Credit Committee (LCC). The credit application was sent to Antόnio Neto and Joao Rodrigues. It put forward six reasons in favour of the proposal:
32. The Bell group was a substantial Australian group with vast interests in Canada and the United Kingdom.
33. The Bell group had a pattern of persistent growth and higher profits each year.
34. The NP agreement provided very conservative ratios.
35. Lenders had recourse to a large pool of assets.
36. The bank had no exposure in Australia at the time.
37. The return offered on‑lending was attractive.
    3915 On 5 May 1986 Adelino Ribeiro, the bank’s in-house lawyer in the Lisbon head office, received and considered the credit application. He made a lengthy handwritten note on page 27 of the Information Memorandum stating that he could not see any problems from a legal point of view. This page, and the page following, concerned the details of the NP agreement and the liability ratios. Neto considered the application and recommended that it be approved, noting Ribeiro’s opinion. He made a handwritten note on the application saying ‘favourable recommendation to a participation of £5 million’. Rodrigues also received and considered the credit application. By telex dated 7 May 1986, the bank’s International Division informed the LCC that the board had approved the credit application. Stewart passed this information to LMBL by telex the same day.
    3916 The banks submit that the following procedure occurred in contemplation of the credit application:
    (a) the credit application was discussed informally within the International Division between Rodrigues, Neto and Monteiro,
    (b) a consensus was reached to recommend that Banco Espírito participate in the Lloyds syndicate facility;
    (c) the credit application was presented to the Executive Credit Committee (ECC) by Rodrigues (or, in his absence, Neto) at an ECC meeting; and
    (d) the ECC unanimously decided in favour of participation.
    3917 Neto gave evidence that he had no reason to believe that the bank’s usual practices in relation to a credit application were not followed with respect to the Lloyds syndicate facility. I am prepared to accept that this is what occurred.
    3918 Neto also testified that he would not have considered it appropriate to treat the bonds as equity for the purpose of the calculation of the liability ratios unless he had understood that the first BGNV bonds were effectively subordinated to, and ranked behind, Banco Espírito’s participation in the Lloyds syndicate facility. He also said that had he been told that the proceeds of the bonds had been on‑lent to TBGL on an unsubordinated basis, participation in the facility would not have made commercial sense. Further, Neto said he would not have understood how the proceeds of subordinated instruments issued in the Eurobond market by a sole‑purpose financing vehicle (with no other creditors and no business other than to raise those funds and on‑lend them) could become effectively unsubordinated by virtue of an intra‑group on‑loan. Had this come to his attention, he would have raised the issue of lack of subordination with Rodrigues and Ribeiro because the nature of the credit would have been materially changed.
    3919 Neto gave evidence that he would not have considered the bonds to be subordinated and would not have agreed to treat them as equity for the purpose of calculating the liability ratios had he been told that the bonds had been on‑lent on an unsubordinated basis. In his view, there would have been no justification for treating effectively pari passu ranking debt as equity for that purpose. He said that he would have assumed that the first BGNV bond issue had been issued with subordinated status so that they could rank behind unsubordinated debt to strengthen the capital in the balance sheet of the Bell group and the NP group. He said he would have regarded an unsubordinated on-loan of the proceeds as defeating this purpose because the gearing of TBGL and the NP group would have increased. In his witness statement, Neto asserted that if the Bell group had said that it was unable or unwilling to subordinate the on-loan to Banco Espírito’s lending, he would probably not have agreed to the bank participating in the facility.
    3920 In cross‑examination, Neto rejected the plaintiffs’ suggestion that Banco Espírito decided to participate in the facility without knowledge of the balance sheet ratio. Neto said that regardless how comfortable the ratio, he would have had a problem with the bonds being treated as liabilities because there was less room for the company to make new borrowings. Neto agreed that he took into consideration the factors identified by de Almeida in the credit application as being in favour of participation. But he did not accept that none of those factors would have been affected if the bonds were unsubordinated and treated as liabilities.
    3921 Neto said that, in his view, when de Almeida wrote that under the NP agreement TBGL had undertaken to maintain very conservative ratios, he did not just look at compliance with the ratio, but also the fact that TBGL had shown the ability to raise quasi‑capital by way of subordinated bonds. Neto said that this consideration was implicit from the context of the proposal, which included an attachment expressly referring to the NP ratios and the subordinated convertible bond issue. Neto also said that that the written recommendation from the London office, and his own and Lisbon’s consideration of the proposal, would have been different had it been understood that the bonds were not subordinated, irrespective of the ratio being within the NP agreement. In his opinion, TBGL’s strong balance sheet and capacity for future borrowings were an essential part of the application.
    3922 In cross‑examination, Neto’s attention was directed to the last paragraph on page 28 of the Information Memorandum, and in particular to the second sentence:
    In December 1985 the Company issued $150 million of convertible subordinated bonds due in 1995. All current lenders under the NPA have agreed to treat these bonds as equity for the purpose of calculating liability ratios. Syndicate participants are also required to agree with this treatment.
    3923 It was put to him that the second sentence contained no justification for treating the bonds as equity. Neto refused to accept this contention because he said he felt that the paragraph had to be read as a whole and when that was done, it contained an explicit justification. Neto said that, for him, conversion was only part of the issue in relation to convertible subordinated bonds. If they were not only convertible, but also subordinated, it made legal and technical sense to treat them as equity for the liability covenant.
    3924 I have said elsewhere (Sect 17.3.5) that I found Neto to be an impressive witness. I have no hesitation in accepting his evidence generally and on this point in particular. Again, I refer to the exchange in his cross‑examination where he pointed out that subordination is not just a question of ratios: it affects the ranking of credit. In my view, this is an important consideration.
    3925 The plaintiffs’ argue that the bank officers did not rely upon subordination because they did not consider the aspects of the Information Memorandum that referred to subordination. The plaintiffs ask me to find that the comment that there was a requirement to ‘treat the bonds as equity for the purpose of calculating liability ratios’, as mentioned on page 28 of the Information Memorandum, is not a sufficient basis from which to conclude there was a representation concerning subordination.
    3926 The basis of the plaintiffs’ argument is that Banco Espírito had a structure that required the creation of paper record of its decision-making process. I accept the plaintiffs’ argument that the bank officers determining the bank’s participation in the facility only considered the information in the credit application and the Information Memorandum and that page 28 of the Information Memorandum that was attached to the credit application was the only document viewed and considered by the International Division that referred to subordination. According to the plaintiffs, since the credit application did not otherwise record (and therefore convey) the representation of subordination, there is no evidence of reliance and detriment.
    3927 The plaintiffs say that because there is no record of the basis of the ECC’s decision (apart from the note by Monteiro that the ‘executive committee has authorised participation as proposed by International’) I should infer that the ECC’s decision was based on Rodrigues’ presentation of the credit application. Further, the plaintiffs assert that even if the issue of subordination was a factor before the ECC, the ECC would not have made a different decision having regard to the contents of the credit application before it and the reasons identified by the London office and Ribeiro as the basis for approval.
    17.10.1.2. Conclusion
    3928 I have already found that there was a representation of subordination in the Information Memorandum. The next question is whether, in the absence of such a representation, there was a real chance the bank would have declined to participate in the facility. In other words, was there a real chance that it would have changed the actions of the bank officers? If so, the bank will have suffered detriment.
    3929 In order for the banks to prove reliance, subordination does not need to have been the only factor in the bank’s decision to participate in the Lloyds syndicate facility. It need not even have been a decisive factor, so long as it was material and not a mere side‑wind. I accept that reasons were put forward in favour of the facility, and that subordination was not expressly one of them. I am satisfied, however, that Rodrigues, Neto and Monteiro relied on the subordination of the bonds by virtue of their consideration of the credit application and page 28 of the Information Memorandum.
    3930 I accept that there were other elements mentioned in the credit application, such as the convertibility of the bonds, that commended themselves to the decision makers and on which they relied. This does not mean that subordination was not also a part of the reliance. I accept that had the bank officers believed that the bonds were not subordinated there was a real chance they would have taken different steps to manage the relationship between Banco Espírito and TBGL in a materially altered lending environment. In particular, had Neto believed the bonds to have been unsubordinated, he would not have agreed to participate in the facility.
    3931 The fact that not all of the Information Memorandum was brought to the attention of the International Division does not, to my mind, result in a lack of reliance on the subordination of the bondholder debt. The information presented to the Banco Espírito officers to assist them to determine whether the bank should enter into the facility was premised on the fact that the bondholder debt was subordinated and ranked behind the bank borrowings of the NP group companies. That was the basis of the document, whether subordination of the bonds was explicitly stated or not. The Lloyds syndicate participants were told that the bonds were ‘convertible subordinated bonds’ and that agreement to treat the bonds as equity was a condition of participation in the facility. The bank’s financial analysis was predicated on that understanding. The bank officers cannot be criticised for failing to carry out extensive analyses based on other assumptions
    3932 I am satisfied that the Information Memorandum, in particular pages 23 and 28, carried with it a representation that the bonds were subordinated. I am also satisfied that the Information Memorandum would have conveyed to a person considering it that the bonds were subordinated and that this was a reason for treating the bonds as equity: see Sect 12.12.3, Sect 13.2.4.3 and Sect 16.2.4. I am satisfied that Banco Espírito understood this and relied on it.
    3933 The same Information Memorandum was sent to all the Lloyds syndicate banks and, as will appear in the succeeding sections, I am satisfied that bank officers from all the banks saw the Information Memorandum. The reader can take it that I find reliance on subordination existed for all bank officers of those banks that considered the Information Memorandum in deciding to participate in the facility. I have applied the same reasoning to each of the Lloyds syndicate banks unless I make an express statement to the contrary.
    3934 Overall, I am satisfied that Banco Espírito lost the opportunity to decline to participate in the Lloyds syndicate facility on the basis that the bonds were not effectively subordinated, and this loss was to its detriment.
    17.10.2. Treating the bonds as equity for the NP ratios
    17.10.2.1. The April 1987 request for equity treatment
    3935 The banks contend that if Banco Espírito had learned that the on-loans were not subordinated after its participation in the Lloyds syndicate facility but before the October 1987 stock market crash, it would not have agreed to treat the liabilities arising from the second BGNV bond issue as equity. The plaintiffs assert that even had the bank understood that the on-loans were unsubordinated, it would have made the same decisions because the bank officers did not consider subordination in making this decision.
    3936 On 8 May 1987 LMBL sent Banco Espírito a bundle of documents under a covering letter addressed to Margaret Wright in the bank’s London office. The covering letter referred to the ‘treatment of the convertible subordinated bonds’, being the second BGNV bond issue. The bundle included, among other items, the 15 April 1987 letter seeking agreement to the equity treatment of the second BGNV bond issue and the BGF bond issue. Wright received and considered the 15 April 1987 letter and made a note at the top of the letter to Antonio Saude, which said ‘I think we can agree to this’. Saude communicated the bank’s acceptance of the 15 April request to LMBL on 27 May 1987.
    3937 The banks submit that the decision to accede to the 15 April 1987 request was most likely taken by the LCC in accordance with its usual practice, rather than by a single manager. Evidence about Banco Espírito’s usual practice was given by Ian Brodie. He said that when a decision was required from the bank on an existing facility the matter would be decided by the LCC. However, if one or more of a manager, senior manager or general manager considered that the matter would not weaken or materially change Banco Espírito’s lending, then they would make a decision on the matter without bringing it before the LCC. Brodie said he could not tell from the handwritten note from Wright to Saude on the 8 May 1987 letter indicated which of these two practices was followed in relation to the 15 April 1987 request. He confirmed that he had no recollection of the request; but, he asserted, this did not mean that he was not involved in the decision, nor did it mean that he agreed or disagreed to the request. The banks contend that it is more likely than not that Brodie did participate in the decision, given his unchallenged evidence that his practice was to attend LCC meetings when he was at the office. I accept this contention.
    3938 Neto gave evidence that such an LCC decision would have been communicated to and noted by head office in Lisbon, and the notification process was that the letter itself would be sent to the International Division, along with the minute of the LCC meeting approving the request. Neto said he was ‘almost certain’ that the decision to agree to TBGL’s request was decided by the LCC because it was ‘normal [for the] London branch to [make] this decision’.
    3939 In relation to the 15 April 1987 request to treat the bonds as equity, Neto said that if he been told that the on-loans were not subordinated, he would not have wanted Banco Espírito to agree to treat the bonds as equity for the purpose of the banking covenants. Further, if the request had come to him, he would not have agreed to that treatment. Neto gave evidence that had he understood that the on-loans were unsubordinated he would have brought the issue to the attention of Rodrigues and the Executive Credit Committee for the purpose of protecting the bank. He would have required the liability ratios to be recalculated with the on‑loans treated not as equity but as liabilities, and considered whether an event of default could be called for the loans to be repaid or the bank’s lender status to be secured.
    3940 Brodie gave evidence that if he had not understood from the 15 April 1987 letter that the bonds were subordinated to Banco Espírito’s lending, he would not have agreed to treat the bonds as equity. He said that convertibility of the bonds into shares would not have been taken into consideration and, if they had, it would not have been sufficient justification for him to have agreed to treat the bonds as equity. In cross‑examination, Brodie said that he did not accept the plaintiff’s proposition that the convertibility of the bonds was the justification for treating them as equity. In his supplementary statement, he said that he understood the statement on page 28 of the Information Memorandum to represent that the bonds would be subordinated to the lending to the Bell group by the syndicate participants. Brodie said that he did not know of any reason why he would have read these statements differently in 1986.
    3941 Brodie said that he would have been surprised and concerned to be told that the bonds were unsubordinated and he would have discussed the matter with his colleagues and the senior management of the London branch both generally and formally in the LCC. He would have wanted the matter to be raised with Lloyds Bank and would have requested that the ratios be recalculated with the bonds as liabilities. Whether the recalculation resulted in a breach of covenant or not, he would have requested that the on-lending be subordinated because the banks’ position would be weakened. If this did not occur, he would have wanted the facility repaid. Brodie was asked what de Almeida would have done in circumstances of a lack of subordination if there had not been a breach of ratios. In cross-examination, Brodie agreed that de Almeida would have considered such things as ‘how the relationship was going with the Bell Group, how you were getting on with them, whether there were problems in other areas, whether you were doing other business with them, what their plans were’.
    3942 The plaintiffs argue that Banco Espírito would have agreed to the 15 April 1987 request, provided it was satisfied that conversion of the bonds was likely. Accordingly, the bank officers would have agreed to treat the bonds as equity even had they understood that the bonds were not subordinated in view of the financial strength of the Bell group, the terms and planning of the bond issues, and the repayment date of the Lloyds syndicate facility.
    3943 The plaintiffs assert that Banco Espírito acceded to the 15 April 1987 request ‘without analysis’. They argue that the banks did not provide enough evidence to support their assertion of reliance on the representation about subordination. Further, the plaintiffs say that the banks’ reliance on contemporaneous documents is not sufficient because there was no mention in those documents of subordination of the bonds. They point to the absence of any evidence of the decision-making process and submit that Brodie and Neto’s evidence was unreliable because they were not involved in the decision to approve the request. No witness was able to give evidence of fact based upon their recollection of the process leading to the agreement by Banco Espírito to agree to treat the second BGNV bond issue as equity for negative pledge purposes. In those circumstances, the plaintiffs say, I should determine the facts by reference to the contemporaneous documents, none of which refer to subordination.
    3944 Further, the plaintiffs submit that the 15 April 1987 letter was not forwarded to the LCC for consideration. They say the absence of any document recording the reasons that the bank acceded to the request is not accidental and suggests that the request was not seen as an important or significant feature of the facility. The plaintiffs submit that the bank’s decision on the 15 April 1987 request to treat the bonds as equity is consistent with its decision to participate in the facility, when de Almeida did not specifically note the requirement for quasi‑equity treatment in the six reasons listed in support of the proposal for consideration of the relevant decision-makers.
    17.10.2.2. Conclusion
    3945 I am prepared to accept the evidence of Neto and Brodie on this issue. Based on the Information Memorandum, the bank was already aware that the first BGNV bond issue and the TBGL bond issue were subordinated. The bank was also aware that subordination had been put forward as a justification for treating the bonds as equity. As I have already said, I accept that the bank relied on this representation.
    3946 I can see nothing that would cause me to view the situation differently when it comes to the second BGNV bond issue and the BGF bond issue. The covering letter sent to Wright on 8 May 1987 states that the bonds were subordinated. I am therefore satisfied that the bank officers considered the bonds to be subordinated and made their decisions concerning the facility accordingly. Once again, the reader can take it that I apply the same reasoning in relation to the other banks unless I indicate to the contrary.
    3947 I accept that the usual practice of Banco Espírito would have been followed in the consideration of TBGL’s request. As a result, the 15 April 1987 request would have been decided by the LCC and Brodie would, as a part of the LCC, have been involved in the decision‑making process. As Brodie was jointly responsible with de Almeida for the TBGL loan portfolio, I accept that had Brodie learnt of a subordination problem he would have discussed it with de Almeida. I am further satisfied that Neto as Deputy Head of the International Division would have seen the decision with regard to the treatment of the bonds. I am also satisfied that had he been informed of a lack of subordination, he would not have approved the treatment of the bonds as equity.
    3948 Overall, I am satisfied that Banco Espírito lost an opportunity to decline to treat the bonds as equity on the basis that the bonds were not subordinated and that the loss of opportunity was to the bank’s detriment.
    17.10.3. Replacing the NP agreement with an NP guarantee
    17.10.3.1. Information and events
    3949 The banks contend that if Banco Espírito had learned that the on‑loans were unsubordinated after its participation in the Lloyds syndicate facility but before the October 1987 stock market crash, it is probable that it would not have agreed to collapse the NP agreement into an NP guarantee. The plaintiffs assert that the bank officers did not rely on a representation of subordination in making the decision to replace the NP agreements with NP guarantees, and that Banco Espírito would have agreed to the request provided it was satisfied that conversion of the bonds was likely.
    3950 On 23 July 1987 Banco Espírito was sent a bundle of documents from LMBL. The covering letter was addressed to Stewart and it set out the request by TBGL to collapse the NP agreement and replace it with an NP guarantee. Included with the covering letter was a draft Supplemental Agreement dated 22 July 1987, which incorporated a draft copy of RFLA No. 1. Stewart made a handwritten note on the letter, which said: ‘AJ please have a look at this and let me have your comments’. The reference to ‘AJ’ is, I think, to Saude. Banco Espírito’s London office confirmed the bank’s agreement to the terms of the NP guarantee by telex dated 30 July 1987 to LMBL. No reasons for the approval were mentioned. The plaintiffs assert that there is no documentary evidence of the London office having involved the Lisbon office in the decision on the matter, or indeed as to how the decision was made to agree to TBGL’s proposal.
    3951 In his evidence in chief Neto did not recall that he read the letter dated 23 July 1987 or received the request that the NP agreement be replaced with the NP guarantee. Neto gave evidence that he would have met with Rodrigues and Monteiro to discuss the effect of the changed status of the bonds. Neto said that Monteiro would have then communicated this to the ECC as soon as possible, because the loan terms would have been different to that which the bank thought were in place. If the London branch had already agreed to collapse the NP guarantee, the supposed lack of subordination would have been reported to Neto and Rodrigues, and they would have notified the ECC.
    3952 Neto gave evidence that had he received TBGL’s request and discovered that the proceeds of the bonds were not subordinated, he would not then have agreed to collapse the negative pledge structure. He would have withheld approval until the lack of subordination had been resolved to his satisfaction and Banco Espírito had been restored to its position of senior creditor vis a vis the bondholders. As the bank would be placed in a weaker position, he would not have agreed to collapse the NP agreement and would have taken steps to protect the bank. Neto said he would have wanted the ratios recalculated with the bonds as liabilities because the ratios would have previously been calculated on an incorrect assumption. If the Bell group had indicated that it would not or could not fix the effect of the subordination of the bonds, he would have wanted to press for repayment.
    3953 The banks assert that Brodie’s evidence about Banco Espírito’s usual practice is equally applicable to a decision to amend the loan agreement. Given the request to collapse the NP agreements would have weakened Banco Espírito’s position, the banks argue that it is likely that the decision was referred to the LCC. I accept that if the LCC had been notified about a lack of subordination it would have come to the attention of Brodie and he would have had the ratio recalculated with the bonds treated as liabilities. If there had been a breach of ratios, then Brodie would have sought the repayment of the facility or the securing of a deed of subordination. If the Bell group were unwilling or unable to do this, Brodie would have wanted an event of default called so that the bank could be repaid.
    3954 The plaintiffs assert that Banco Espírito London gave its consent to the request without first seeking the approval of the Lisbon head office and without considering the merits of the request. The plaintiffs state that the approval to the request was quick, with no documented analysis of the nature of the restructure or the financial situation of TBGL. There are no documents in evidence from the bank’s file clearly indicating who approved the request or the basis for the approval. Stewart and Saude were not called, nor was de Almeida.
    3955 Based on this lack of evidence, the plaintiffs ask that I infer that the decision was made in London, most likely by a manager in the London office. They assert that the absence of documentation signifies that the request was not seen by Banco Espírito as an important decision or one that required careful analysis. As a result, the subordination was not a factor, let alone a decisive factor, for the purposes of the bank’s decision. Further, the plaintiffs assert, Banco Espírito would have agreed to the request provided it was satisfied that conversion of the bonds was likely and the bank would not have acted differently had the representations not been made.
    17.10.3.2. Conclusion
    3956 In my view the evidence establishes that sufficient consideration was given to TBGL’s request to collapse the NP agreement. The existence of the handwritten note to Saude indicates that the request would have been sent to the LCC. I accept that the bank’s usual practice, as attested to by Brodie, was applied in this instance and that as a result, Neto and Brodie would have seen the request and their evidence is applicable. As I have already indicated, subordination was a factor in the initial decision to participate. Because of their earlier involvement with the Lloyds syndicate facility, I am satisfied that the relevant officers would have had a good understanding of the facility and its underlying premise of subordination.
    3957 The plaintiffs’ further argument that even if the bank officers had believed the on-loans to be unsubordinated the bank would have accepted TBGL’s request regardless, cannot be sustained in light of the evidence of Brodie and Neto. Both bank officers gave evidence that had they known of a lack of subordination they would not have agreed to the release of the indemnifying subsidiaries. I am satisfied that the representation of subordination by TBGL caused Banco Espírito to miss an opportunity to refuse to replace the NP agreement with an NP guarantee.
    3958 The failure to call Stewart, Saude and de Almeida is not, I think, fatal to this conclusion. There is sufficient in the other evidence to satisfy me that the proposal would have been considered according to usual practice. There is no basis for an adverse inference to the contrary.
    17.10.4. Continued provision of facilities: late 1987 and following
    3959 In the period after the stock market crash, Banco Espírito did not demand, or ask LMBL to demand, immediate repayment of the facility as a consequence of any breach of the liability ratio or the acquisition of shares in TBGL by interests associated with BCHL. The banks assert that had Banco Espírito learned that the on‑loans were unsubordinated after its participation in the Lloyds syndicate facility but before the stock market crash, it would have pressed for repayment of the facility or sought different terms to bring about the subordination of the bondholders. The plaintiffs argue that subordination was not a factor in the decisions made by Banco Espírito during this period and that knowledge of any lack of subordination would not have impacted the decisions made in their relationship with the Bell group.
    3960 After the stock market crash, Banco Espírito’s London office received the November 1987 and February 1988 information packages from TBGL, all of which contained indications that the Bell group was in compliance with its banking covenants under the NP guarantee. A handwritten notation on a telex from LMBL on 1 December 1987 indicates that Saude spoke to Leslie Tinsley at LMBL and requested that he raise some questions with the Bell group; namely, ‘how are they going to repay the huge amount of debt in Dec. 87? How do they foresee 88 in the light of the crash in stock markets?’ On 3 December 1987 the LCC met. The minutes of this meeting indicate that the facility was discussed and that a meeting would occur between LMBL and the bank to discuss TBGL.
    3961 On 4 December 1987 LMBL wrote to Wright and enclosed a copy of the information packages in relation to the NP group and TBGL. Also on 4 December 1987, LMBL sent the bank a copy of the letter from TBGL to LMBL and enclosed the consolidated balance sheet and profit and loss statement of TBGL for the 1986–1987 financial year, and the negative pledge report for the period ending 30 June 1987. On 7 December 1987 LMBL wrote to Wright and enclosed (among other things) a copy of the TBGL information package dated 27 November 1987 and final dividend details for TBGL for the financial year ending 30 June 1987.
    3962 On 8 December 1987 LMBL wrote to Wright following the meeting between LMBL and TBGL, in this letter LMBL:
    (a) explained how TBGL was managing the effect of the stock market crash and that no committed credit lines had been withdrawn;
    (b) noted that TBGL would be producing information packages for TBGL and the NP group at approximately one month intervals and was formulating longer terms which would be made available to the banks once finalised;
    (c) noted that all Bell group companies were ‘complying with their covenants and have a positive cash flow’; and
    (d) noted that TBGL was looking at businesses which were ‘[complimentary] to their “core” business and/or which generated liquidity’.
    3963 The letter also recorded the following question and answer in response to Saude’s question to Tinsley: ‘Do Bell have any plans to repay their debt? How do Bell propose to manage their debt? … There are no plans currently to prepay any debt and Bell did not indicate that they proposed to change their existing debt strategy’.
    3964 On 11 May 1988 LMBL forwarded Wright a telex from TBGL stating that interests associated with RHaC had sold their shares in TBGL to BCHL and SGIC, and that a three-year business plan would be circulated before the end of the month. No documents from Banco Espírito’s file contemporaneous with the change in ownership were tendered. In the period after the BCHL takeover, a number of memoranda were filed concerning the facility. I will not go through all of these documents because they do not assist with my conclusions about reliance.
    3965 As previously mentioned, had Brodie understood the on-loans to be unsubordinated he would have had the ratio recalculated with the bonds treated as liabilities. Brodie would have wanted the Bell group to subordinate the on‑loan. If they were unwilling or unable to do this, Brodie said, he would have wanted an event of default to be called so that Banco Espírito could be repaid. Neto gave evidence that if he had discovered that the bond proceeds were not subordinated after the crash and there was breach of the ratios when the proceeds were treated as debt, the bank would have acted to protect its position by demanding security or attempting to recover its money. In cross‑examination, Neto agreed that the decision to call the loan would have been made at a higher level in London and at the level of the Executive Director in charge of the International Division and the head of that division. I accept the bank’s assertion that Neto was significant in the decisions taken in relation to calling events of default or demanding repayment of loans. His desire to seek repayment if there was a breach of the ratios suggests that subordination was a factor in his decision‑making.
    3966 The plaintiffs submit that the contemporaneous documentary material is the best evidence of the state of mind of Banco Espírito’s officers in the period after the stock market crash. They assert that this material does not support a finding that the bank relied on the subordination of the bonds or would have acted differently if it had been told during this period that the on-loans were not subordinated. Further, the plaintiffs assert that even if Banco Espírito had known that after the stock market crash TBGL was in breach of the 65 per cent ratio covenant, it would not have conducted the facility in a different or materially different way. Also, the plaintiffs state, there is no evidence that the officers were looking to detect a breach of the ratio.
    3967 The plaintiffs contend that the documents generated during this time do not show any independent analysis of TBGL following the stock market crash or following the takeover by BCHL. According to Banco Espírito’s records, the bank did not conduct any independent financial analysis until Otilia Florencio, one of the bank’s analysts, prepared a memorandum for the LCC dated 18 August 1988 on the financial status of TBGL. Florencio analysed the Bell group’s consolidated accounts, not the NP group accounts, and calculated various ratios, but none based on the negative pledge. Florencio referred to the bonds as ‘convertible’. Although the bonds were described as ‘subordinated’ in the TBGL 1987 Annual Report from which the figures were derived, Florencio did not use that phrase. Conversion was the only reason ever listed by the bank to warrant a change in the treatment of the bonds from equity to liabilities. This was mentioned in a memorandum dated 7 December 1988 by Florencio to the LCC. The plaintiffs say that the LCC was not disturbed by the further memorandum prepared by Florencio dated 20 December 1988 regarding the Bond group, which suggested that it ‘may suffer further’ due to the Bell acquisition being funded entirely out of debt.
    3968 Many documents were passed back and forth between the bank and TBGL during the period after the stock market crash and the period after BCHL’s takeover of TBGL. I have studied these memoranda and they do not, to my mind, have much to add (either way) to the arguments about reliance and detriment. They seem to be more concerned with the business performance of TBGL.
    3969 I have no hesitation in saying that if Banco Espírito had understood that there was a problem with the status of the on‑loans, the bank officers would have acted to secure the bank’s position. The fact that there was no mention of subordination in the memoranda created during this period does not mean that there was no ongoing reliance on subordination. I accept the banks’ assertions that in all the representations that had been made to Banco Espírito concerning the facility, the subordinated nature of all the bonds vis a vis senior creditors was made clear. This was, in late 1987 and during 1988, an integral part of their continuing banking relationship. The ongoing effect of the status of the on-loans was mentioned by Brodie in his witness statement. He said he had been aware from very early on that TBGL had issued subordinated bonds and he had always understood that those bonds ranked behind the creditors of the Bell group. I have no reason to believe that this understanding was not shared by other Banco Espírito officers.
    3970 The ability to convert the bonds may have played a role in the continued provision of the facility but I am satisfied that it was not the only consideration in the minds of the officers. It may be right that there was no analysis of the ratio at this time. That may well be explained by the bank’s understanding that the bonds would be treated as equity rather than as liabilities. For example, the 8 December 1987 letter from LMBL indicates that all Bell group companies were complying with their covenants. One of the covenants was that the NP ratios and compliance would be measured treating the bonds as equity. The plaintiffs’ submissions do not, to my mind, overcome Neto’s and Brodie’s evidence that if there had been a breach of the ratios, Banco Espírito would have called an event of default. I am satisfied that had they understood there to be a lack of subordination, the foundation of their support for TBGL would have been altered such that they would not have made the same decisions. As a result, they lost the opportunity to protect Banco Espírito’s position as senior creditor or make a call of default on the facility.
    3971 In discussing this issue in the context of Westpac, I expressed the view that the case for reliance and detriment is much weaker in the period following the BCHL takeover: Sect 17.4.5.2. A similar result flows in relation to Banco Espirito. It had no real wish to be associated with the BCHL group and this must have coloured the thinking of the relevant bank officers. I would make the same comment about most of the remaining Lloyds syndicate banks.
    17.11. BoS
    Participation in the facility
    3972 In May 1986, BoS subscribed for a £5 million participation in the Lloyds syndicate facility. The invitation to participate in the facility was sent by LMBL to BoS Treasury department for John Drummond’s attention. Drummond forwarded the Information Memorandum to Douglas Gunn (London chief office). On 9 April 1986, Gunn advised that the London chief office did not wish to participate in the facility. Drummond advised Jack Duthie on 11 April 1986 of the reasons for their disinclination: ‘[U]pon enquiry, mention was made of a profit record which did not suit the Bank’s criteria – over the past 10 years, Bell’s compound annual profit growth is 34 per cent – and the fact that the Bell Group operate in the style of Lonrho’. Duthie and Peter Burt, upon reading comments made by Jack Dykes on 17 April 1986, both recommended participation. This recommendation was approved by Bruce Patullo (Treasurer) and signed by Burt on 18 April 1986.
    3973 The existing financial position of the Bell group was of concern to the bank. Colin Ferguson stated in a file note, written on 16 April 1986, that ‘its financial structure is reasonable, although liquidity is below 1’. Dykes, in a comment prepared in respect of the credit proposal, also noted that its liquidity was ‘not healthy’.
    3974 No officer from BoS was questioned about what their view of the financial position of the group would have been if they had understood the bond issue proceeds were effectively unsubordinated. I accept that any opinion given by the bank officers about the health of the Bell group at the time of the decision to participate in the facility cannot be maintained if the basis for their understanding is changed, namely, the subordination of the bond proceeds. Burt said that if the proceeds of the issue had been on‑lent on an unsubordinated basis, then he would have viewed the balance sheet as not sufficiently strong to warrant participation in the facility.
    3975 In the analysis of BoS’ participation, Ferguson included the bonds as liabilities. Gordon Smith said that this analysis of their participation was in accordance with the usual processes of the bank. It is evident, to my mind, that the treatment of the bonds as liabilities was a matter taken into account by the bank officers in determining BoS’ participation. However, each of Dykes, Duthie and Burt said that had they understood that the bond issue proceeds had been on‑lent to TBGL on an unsubordinated basis, such that the bondholders would rank equally with BoS in respect of a claim against the NP group, they would not have agreed to BoS participating in the facility.
    3976 Dykes agreed in cross‑examination that he focussed on TBGL’s good performance over the past 10 years, its enhanced earnings and its track record. But Dykes also said that if he had thought that the bondholders might rank equally with the banks, he would not have agreed to BoS participating in the facility on the basis that the bonds were treated as equity. Further, he would not have recommended participation because the return of 0.4 per cent over the London Interbank Offered Rate was not an attractive rate of return for BoS. The fact that this return was described as ‘satisfactory’ by Dykes does not, to my mind, amount to a wholesale endorsement. He was also aware the London office had declined to participate in the facility and the pari passu ranking of bondholders would have been a negative feature.
    3977 Duthie said that he would not have agreed to treat the bonds as equity if they had been unsubordinated. Given the importance of the bonds to the NP group balance sheet, and the unusual position of the bank ranking, in effect, equally with bondholders who had bought subordinated debt in a capital market, he did not think he would have recommended participation in the Lloyds syndicate facility at all.
    3978 Burt said that he would not have agreed to treat the debt of the first BGNV bond issue as equity for financial ratios unless he was of the view that the bonds were effectively subordinated to the bank’s debt. If the proceeds of the bond issues had been on‑lent to TBGL on an unsubordinated basis, and had this created unsubordinated liabilities for the financial ratios, Burt said he would have rejected the application. The decision to participate was already marginal, the loan was finely priced and the subordinated bonds were necessary to create a sufficient safety margin for BoS. He felt the TBGL balance sheets were not strong enough to warrant acceptance if the bonds were unsubordinated. In his witness statement, Burt said:
    I would not have been prepared, as a bank lender, to rank against the parent with bond debt (with attached equity options) which was, supposedly, subordinated and which had been marketed as subordinated, but which, by the way the net proceeds had been passed on, had become unsubordinated debt of the parent.
    3979 The plaintiffs say this evidence ought not to be accepted. They contend that the motivating factors for BoS included the attraction of foreign exchange and business from other Bell group companies. They also point to the absence of analysis of the bonds as equity in the BoS review of TBGL’s financial position.
    3980 I accept that the attraction of more business from the RHaC group would have influenced the decision. However, given the reaction of the London chief office and the fact that the International Division’s involvement was marginal, I doubt the lure of more business would have been their primary consideration. Duthie said that, in the end, the proposal had to stand up to the International Division’s assessment. In Duthie’s cross‑examination, this exchange occurred:
    It was your view that the future prospects of The Bell Group were very good at this time?—That was one aspect that was brought out from the information that was given to us, and the analysis and the trends, yes.
    That’s why you saw it as a good source of potential future business for the bank, wasn’t it?—It was only one aspect but, I mean, it had to stand up in light of the assessment of the lending proposition.
    3981 Dykes acknowledged that the Bell group had been targeted for lending by BoS, but that this did not influence his opinion. Burt similarly recalled that this aspect of the lending relationship with TBGL did not have an impact on his decisions. Dykes also conceded that he would have probably recommended that BoS participate in the facility if TBGL had treated the bonds as liabilities so long as there was no breach of the ratio.
    3982 The plaintiffs contend that BoS held a positive view of RHaC and his associated companies and that decisions made by BoS in relation to the Lloyds syndicate facility should be viewed against the background of commercial imperatives arising from BoS’ strategy to increase business with RHaC. The plaintiffs outline a series of events that they assert show BoS’ confidence in TBGL. This includes the $55 million deposit by TBGIL into BoS’ Treasury department and identification of the Bell group as a target for BoS market development.
    3983 While I accept that the relationship between BoS and the RHaC group was a factor in the bank’s decisions, I do not think this materially affected the decision to enter into the facility. So much is clear from the fact that that the decision to participate was not taken lightly and there was a body of opinion opposed to involvement.
    3984 The plaintiffs point out that there is little mention in the BoS documentation of subordination as the primary focus for the entry into the facility. For example, reviews of the material did not mention the TBGL or BGNV bonds or any review of the NP group position. The plaintiffs submit that this shows that the equity treatment of the bonds was not a reason in favour of BoS’ participation and that the NP ratios would not have affected BoS’ entry into the facility.
    3985 I am not inclined to agree with this submission. The fact that subordination was not mentioned does not necessarily mean that it was not thought of at all. In cross‑examination, Dykes agreed that in recommending the proposal to Duthie, he had focussed on Bell’s good performance and its track record. However, it was unnecessary for Dykes to spell out the justification for the equity treatment of the subordinated bonds, because the other bank officers would have understood that his agreement was based on the bonds being subordinated.
    3986 The plaintiffs further submit that the officers making decisions did not have sufficient recollection of the events to give evidence about their state of mind at the time the proposal was considered. The plaintiffs say that BoS’ credit approval process was ‘on the paper’ and that the bank officers would have included in their written communication all of the information that they thought was relevant to the credit approval process. Because subordination was not a matter mentioned in the bank officers’ written communications during the credit approval process, it cannot be relied on.
    Conclusion
    3987 The BoS officers had read the Information Memorandum. They were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons set out in Sect 17.10.1, that subordination was a factor in the assessment process. I accept that had the bank officers understood that the bonds were not effectively subordinated there was a real chance they would have taken actions to manage the relationship between BoS and TBGL in a way that reflected the materially different lending environment.
    3988 BoS’ reliance on TBGL’s representation of subordination contributed to the bank’s willingness to participate in the facility. The evidence of the bank officers shows that had they understood that the bonds were not effectively subordinated they would have made different decisions about the bank’s participation in the facility. As a result, BoS lost the opportunity to decline to enter, or to alter, the agreement to participate in the facility, or to refuse to treat the bonds as equity.
    17.12. Indosuez
    17.12.1. Participation in the facility
    3989 On 7 May 1986 Indosuez was invited by Oliver Graham (of the RHaC group) to participate in the Lloyds syndicate facility. In a memorandum dated 7 May 1986, Ralph Haman Indosuez London recommended participation in the facility to the members of the London Credit Committee (LCC). Haman and Robert Wilson further recommended participation in the facility to Chantal Gautier of the Paris office of Indosuez in a fax dated 8 May 1986. Attached to this fax was Haman’s 7 May 1986 memorandum and excerpts from the Information Memorandum. Haman recommended entry into the facility on the following bases:
    We recommend the committee accept the proposal to participate in the subject GBP5M term facility for the following reasons:
38. Enhance the developing relationship between The Bell Group of companies and Indosuez Australia, Sydney.
39. Strong financial position and historical profitability.
40. Strict financial covenants arising from the NPA.
41. Under-valuation of assets.
42. Geographical and product diversification.
43. Proven management capability.
    3990 Haman’s memorandum did not mention the NP ratio and did not disclose the position of the NP group following the issue of the bonds. Haman referred to the bonds as ‘convertible subordinated bonds’ in Appendix B to the application, which stated that ‘all current lenders agreed to treat these bonds as equity for the purpose of calculating liability ratios’.
    3991 In a fax dated 14 May 1986, the Australian office of Indosuez (ISAL) encouraged Indosuez London to participate in the facility but to limit its involvement to £2.5 million or £3 million. On 14 May 1986, Gautier confirmed Indosuez’s participation by fax and on 19 May 1986 the bank took up £2.5 million of the Lloyds syndicate facility. I accept the banks’ evidence that if participation in the facility had not been recommended by Haman, the proposal would not have proceeded to Indosuez Paris for authorisation by Gautier.
    3992 On 20 May 1986, Haman prepared a facility review to document the transaction. This review noted that approval had been given by Indosuez Paris and that relationship factors between TBGL and Indosuez were central to the decision to participate in the facility. The LCC recommended participation in the facility subject to satisfactory answers being given to two handwritten questions, which I cannot decipher. Haman considered this to be ratification of the facility.
    3993 On 2 June 1986, Haman sought analysis of the facility from the International Department in Paris. In his evidence he recalled concern that Indosuez Paris had given approval to the facility without completion of all necessary paperwork through the LCC. Haman said that the London branch’s decision was ‘not made in a vacuum’ and that the branch was relatively small and financial reviews were seen by all officers. On 23 June 1986, Adrian Phares and Wilson informed Gerard Jeannin (ISAL) by letter that they had formally received Indosuez Paris’ permission to participate in the facility.
    3994 It is evident from contemporaneous documentation that Indosuez bank officers were keen to participate in the Lloyds syndicate facility. For example, in a telex to ISAL on 7 May 1986, Haman and Wilson described participation in the Lloyds syndicate facility as ‘an excellent opportunity to enhance Indosuez Australia’s relationship with the Bell Group’. These sentiments were repeated in their fax to Indosuez Paris on 8 May 1986.
    3995 It appears Haman and Wilson saw participation in the facility as an opportunity to enable ISAL to develop a relationship with the London branch and to facilitate further business with the Bell group. Haman said in cross‑examination that he was excited about the opportunities presented by the invitation. Given his enthusiasm for the proposal, I accept that this was reflective of the Indosuez London’s attitude in favour of the facility.
    3996 Haman gave evidence that he would not have recommended participation in the facility unless he had thought the bonds were subordinated to existing and future bank lending to TBGL. In his witness statement he said that if at the time he drafted the 7 May 1986 memorandum he had been told that the bond proceeds were unsubordinated, he would have understood that TBGL had issued the bonds to strengthen its balance sheet and that this would have reversed the subordination. Haman said that Indosuez would have been unwilling to the treat the bonds as equity under these circumstances. If the bonds were treated as liabilities he did not think he would have recommended the deal.
    3997 Haman also said that in these circumstances he would have had reservations about pursuing the Bell group as a reasonable credit risk and continuing the bank’s relationship with RHaC. He said that his confidence in the RHaC group’s competence would have been shaken had he been aware that it had issued instruments that were not effectively subordinated.
    3998 The plaintiffs took Haman through the calculation of the NP ratio. In cross‑examination, Haman said that his recommendation of the facility was not only based on the ratio calculations: ‘It’s the overall position of the company and it’s stated before as being subordinated … so we take that as given the way it’s been defined. It has been written to us’. Haman stated that he would have calculated the subordinated debt as equity whether or not it fell within the NP ratios. I accept that the issue of subordination was present in Haman’s contemplation of the facility.
    3999 In their closing submissions, the plaintiffs state that Haman’s 7 May 1986 memorandum ‘made no mention of the request that the syndicate banks agree to equity treatment of the bonds nor did he discuss why such equity treatment was appropriate’. But the Information Memorandum did say that:
    All obligations are secured by a Negative Pledge Agreement made between [TBGL], certain subsidiaries and lenders. Under the terms of the NPA all obligations of the borrowers are fully indemnified by [TBGL]. See Appendix “B” for further NPA information.
    4000 In addition, in his discovered copy of the memorandum, handwritten notes indicate Haman’s attention to the bonds being convertible and subordinated.
    4001 It seems that Gautier was not keen on Indosuez’s participation in the facility. In her witness statement, Gautier said that the subordination of the bonds was very important to her assessment of the credit application and that she would not have agreed to the bonds being treated as equity unless they were subordinated to bank debt. She said that she would have wanted to examine the balance sheets of TBGL and the NP group to see the effect of the non‑subordination. In cross‑examination Gautier conceded that, in terms of her exposure to the Information Memorandum, she ‘would only have read the excerpts, if any, enclosed in the request for authorisation’.
    4002 Gautier gave evidence that if $75 million of the $150 million was taken out of shareholder funds and put into liabilities, she would have considered that the credit was just on the limit for short‑term lending but the gearing was too high for a five‑year deal. She would not have accepted the credit had all $150 million been put into liabilities. In cross‑examination, Gautier was asked about the breach of ratios and their impact on her decision‑making. Gautier said that ratio compliance was a part of her consideration but she also considered:
    The way of going the business, the whole environment … what was important is the fact that we had a new quasi equity of $150 million. That was a major change, and that makes comfort for five years. When you enter into a five-year deal, you want to have a rebuffer. And new money, quasi equity, is a real importance of a buffer.
    4003 In cross‑examination, Gautier asserted that had she been told that $75 million of the $150 million bonds was not subordinated, she would not have been comfortable with the five‑year loan period as the buffer of quasi‑equity would have been halved. I accept that subordination was a matter that influenced Gautier’s recommendation of the Lloyds facility. I also accept the banks’ submission that, given Gautier’s perception that TBGL’s gearing was too high, she would have insisted on higher remuneration to make up for the higher gearing if the bank were to participate in the facility. It is evident in my opinion that the ratios were an important part of Gautier’s decision-making about the facility in order to protect the bank’s position.
    4004 The plaintiffs assert that other factors, such as the banking relationship between Indosuez and TBGL (and RHaC), influenced Indosuez officers’ decision‑making when entering into the facility. They highlight that the contemporaneous documentation from Haman and Gautier did not centre on the issue of subordination and that there is no evidence to show that Indosuez relied on the representation of subordination to determine its entry into the facility.
    4005 The plaintiffs point out that Gautier agreed that her understanding about the bonds and equity treatment had been based at least partly on ‘what ISAL had told me two months before’ and that the only information ISAL had given her was that the group had issued convertible notes. Also, Haman’s memorandum did not refer to the bonds being subordinated.
    4006 But the banks submit, and I accept, that Gautier must have read appendix B to Haman’s memorandum, because in the description of the NP agreement in her 14 May 1986 fax, Gautier referred to ‘the benefit of cross‑guarantees from the Bell Group Limited and all Australian and Canadian subsidiaries’. This information is contained in appendix B. I also agree that this supports Gautier’s evidence that when she referred to the NP agreement in the 14 May 1986 fax, she was referring to the summary in appendix B to Haman’s memorandum, which in turn dealt with the bonds and their subordinated status.
    4007 The plaintiffs also assert that Indosuez’s involvement in a number of other facilities to the Bell group and associated companies impacted on the bank officers’ decision‑making. There was little cross‑examination of the witnesses about these facilities and it was not put to them whether the existence of the other facilities had been taken into account in their evidence in chief. I have little doubt that the overall banking relationship was a factor but I do not see that the existence of these facilities would have been a determining factor in the decision to participate.
    Conclusion
    4008 Officers of Indosuez were aware of, and had read, the Information Memorandum. They were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the reasons set out in Sect 17.10.1, that subordination was a factor in the assessment process. I accept that Haman’s recommendations were premised on the debt being subordinated, as evidenced by the memorandum of the 7 May 1986, and that Gautier approved these recommendations on the understanding that Indosuez would rank above other debt of the NP group.
    4009 I accept Haman’s evidence that he would not have recommended the facility with such enthusiasm, if at all, had he understood that the bonds were not effectively subordinated. Further, I accept that Gautier’s approval of the facility relied on the ‘quasi‑equity buffer’ to provide a satisfactory environment for the Lloyds facility. I am satisfied that had the bank officers’ thought the bonds were not subordinated, there was a real chance they would have taken actions to manage the relationship between Indosuez and TBGL in a materially different lending environment. As a result, Indosuez lost the opportunity to decline to participate in the facility or to alter the terms of its participation to reflect the different lending environment, and that loss was to its detriment.
    17.12.2. Treating the bonds as equity for the NP ratios
    4010 On 15 April 1987, TBGL requested that Indosuez treat the subordinated convertible bonds to be issued in May 1987 as equity for the purposes of the NP covenants. This request was received by Haman at Indosuez London. The request was forwarded on 1 July 1987 to ISAL for its consideration. ISAL responded on 2 July 1987, saying the bank should agree to TBGL’s request. On 6 July 1987, Indosuez London confirmed to Lloyds Bank its and ISAL’s acceptance of TBGL’s request.
    4011 Haman gave evidence that had he understood that the proceeds from the second BGNV bond issue were not effectively subordinated, he would not have agreed to their treatment as equity or to any other request by TBGL until the issue of subordination had been remedied. In his witness statement, Haman said that:
    I would have seen [the subordination] as needing to be remedied because I would have seen this situation to which I have just referred as being contrary to what we had been told about the bonds at the original taking up of the [Lloyds syndicate facility] and what I understood about the bonds.
    …
    If I had learnt that there was any question about the full and effective subordination of the bondholders at any time, I would have immediately reported it to my superiors in London and Paris.
    4012 In her witness statement, Gautier said that if she had been told about any lack of subordination after the loan had been taken up, she would have conducted an investigation into the bank’s relationship with TBGL, sought an explanation and considered that Indosuez had been misled. If the subordination issue was not remedied, Gautier said that she would have felt ‘cheated’ and ‘would not have hesitated’ in demanding repayment of the facility, particularly if there had been any breach of NP ratios.
    4013 In cross-examination, Gautier expounded on that theme in a way that I regard as important. It is similar to the evidence of Neto (Banco Espírito) that I discussed in Sect 17.3.5. Gautier said that the question of subordination, and the need to remedy the situation if subordination was later found to be absent, did not relate simply to the NP ratios; she said:
    The solution, I am sure they would have fixed it and cleaned – they would have been able and willing, I am really sure, willing to clean the thing. To clean by making new subordinated on‑loans … it was not only a matter of ratio. The fact to have subordinated debt, a clean subordinated debt, was a key point … not only for this line, for this facility, for the whole group’s facilities.
    4014 The importance of subordination in Gautier’s thinking was stressed in another exchange. While in the witness box she drew a diagram showing ‘assets’ (on one side) and ‘equity’, ‘quasi-equity’ and ‘bank debt’ on the other. The entry for quasi-equity is ‘quasi-equity = subordinated bonds’. In the exchange she again emphasised ‘ranking’ and said:
    [O]n a banker point of view, which is the way we calculate a ratio, we look at – you know, you have a balance sheet, you have the assets in one hand and you have equity, quasi equity which is subordinated bonds, or – you call it ‘quasi equity’ or ‘liability’ if you want, but for us it is above all liabilities. So as it is, we are first rank in terms of the cash flow, these subordinated bonds is for us like equity, you see, so when you make the calculation, you just take the bank liabilities, which are the non‑subordinated debts, the bank debts.
    4015 The plaintiffs argue that a belief of subordination was not part of Indosuez’s decision to treat the bonds as equity. They say that the bank officers would have agreed to treat the bonds as equity even had they believed the bonds were not subordinated because of the bank officers’ view of the financial strength of the Bell group, the terms and planning of the bond issue, and the repayment date of the Lloyds syndicate facility.
    4016 The plaintiffs assert that this request was not brought to the attention of Indosuez Paris and that Indosuez London relied on the decision made by ISAL. They assert that London only asked ISAL for a recommendation, not an approval, and that Haman’s evidence should not be given any weight. Indosuez deferred to the decision of ISAL and cannot claim it relied on any belief or assumption as its decision was made for it by ISAL.
    Conclusion
    4017 Based on the Information Memorandum, Indosuez was aware that the first BGNV bond issue and the TBGL bond issue were subordinated. The bank was also aware that subordination had been put forward as a justification for treating the bonds as equity. As I have already said, I accept that the bank relied on this representation and I can see nothing that would cause me to view the situation differently when it comes to the second BGNV bond issue and the BGF bond issue. I also accept that if Haman had understood that the bonds were not effectively subordinated, he would not have agreed to TBGL’s request and would have informed the London and Paris offices of the problem.
    4018 The 15 April 1987 request was sent to Haman on 8 May 1987 and the request brought to his attention in the cover letter. I am satisfied that while he could not recall whether he read it, it is probable that he did. The exchange of correspondence between London and ISAL in July 1987 does not establish in my mind that ISAL was deciding the matter for London as well as itself. The consent that was sent to LMBL was signed by London, not only on behalf of ISAL, but on its own behalf. I am satisfied that all the factors set out in the letter of request were relied upon, which includes the subordinated nature of the 1987 bonds. I am further satisfied that those officers who were involved in the decision – David Blair and John Stubbs in ISAL, and Andrew Trypanis, Paul O’Connor and Margaret Garner in London – read the letter and participated in the decision to accede to it, having adopted the assumption that the 1987 bonds were subordinated to Indosuez’s lending.
    4019 Gautier would have been informed and, given what she said in her evidence, it is unlikely that she would have agreed to the request without securing the subordinated status of the bond proceeds. The decision to treat the bond proceeds as equity on the basis of the bonds being subordinated did not allow Haman and Gautier the opportunity to secure Indosuez’s position in the facility. The bank lost the opportunity to refuse TBGL’s request or the opportunity to demand repayment of the facility.
    17.12.3. Replacing the NP agreement with an NP guarantee
    4020 On 23 July 1987, LMBL wrote to Indosuez and asked it to approve the collapse of the NP agreement into an NP guarantee. Haman signed a letter on 10 August 1987 agreeing in principle to the requested amendments to the loan agreement. He did not recall who made the decision but agreed he was involved in it. On or about 27 August 1987, Indosuez entered into the NP guarantee and released the indemnifying subsidiaries from the NP agreement.
    4021 Haman said that he did not recall the 23 July 1987 letter from LMBL but that his comments on a telex dated 5 August 1987 meant he must have been aware of the request. The banks infer, and I accept from Haman’s earlier evidence, that had he understood that the bonds were not effectively subordinated he would have immediately reported the issue to Indosuez London and Indosuez Paris.
    4022 There is no evidence that Gautier was involved in approving this request, but she gave evidence that had she been aware of a request to abandon the cross indemnities in circumstances where there was not effective subordination, she would not have consented until the subordination question had been resolved to her satisfaction. Given Indosuez’s authority structure, if Gautier had become involved in the decision-making, it is unlikely that Indosuez London would have been permitted to agree to the collapse of the NP agreement without her consent: see Sect 11.11. No other officers involved in the decision‑making were called to give evidence.
    4023 The plaintiffs assert that the banks did not adduce any evidence that shows any relevant decision-maker held the belief or assumption that the on‑loans were subordinated, or any evidence of the basis upon which the decision to collapse the NP agreement was made. The plaintiffs assert that Indosuez London caused the NP guarantee to be executed without detailed consideration of LMBL’s proposal and that Indosuez Paris was not properly consulted in the decision-making process.
    Conclusion
    4024 The plaintiffs’ argument that there was no detailed consideration of TBGL’s request to collapse the NP agreement does not, to my mind, fit with the evidence of the bank officers. I accept their evidence. The lack of written evidence concerning reliance on the representation of subordination does not demonstrate that subordination was not relied upon by the Indosuez officers. LMBL’s proposal was predicated on the bonds being subordinated and the request to collapse the NP agreements proceeded on this basis.
    4025 Because of its earlier involvement with the Lloyds syndicate facility, I am satisfied that Indosuez, and in particular Haman, would have had a good understanding of the facility and its premise of subordination of the bonds. Further, contemporaneous evidence shows that there was some consideration given to the proposal by Indosuez London. In particular, Lloyds Bank’s telex to Haman on 21 August 1987 reveals numerous handwritten markings concerning the amendments to the NP agreement.
    4026 I am satisfied that whether or not Haman remembers his involvement in the release of the indemnifying subsidiaries he, as representative of Indosuez London, did undertake detailed consideration of the request. I am further satisfied that had he understood that the bonds were not effectively subordinated, he would have passed this information to Gautier, who would have requested resolution of the issue or removal of Indosuez from the facility. I am persuaded, therefore, that the representation of subordination by TBGL caused Indosuez to lose an opportunity to decline to replace the NP agreement with an NP guarantee, and that this loss was to its detriment.
    17.13. BfG
    Participation in the facility
    4027 On 15 April 1986, TBGL and LMBL invited BfG to participate in the Lloyds syndicate facility and provided it with a copy of the Information Memorandum. On 23 April 1986, Jens Hagemann prepared a memorandum concerning the facility (the London memorandum) which was sent to the Syndicated Loans Department (SLD) and International Department. Kristina Laubrecht and Wolfgang Reischel of the SLD prepared a credit application dated 28 April 1986 to be submitted to the BfG board. The application included a memorandum from BfG’s Credit Risk Department dated 28 April 1987, which said that the department concurred with SLD and the International Department’s approval of the facility.
    4028 The members of the BfG board approved the bank’s participation in the facility in the amount of £5 million on 5 May 1986. On 19 May 1986, BfG entered into a loan agreement with BGF and BGUK and into an NP agreement with TBGL and the indemnifying subsidiaries.
    4029 In his evidence in chief, Hagemann said that he would have read the Information Memorandum at the time of entering into the facility and would have understood that treatment of the bonds as equity was a condition of participation in the loan. He said he would not have recommended treating the bonds as equity unless they had been subordinated, even if the bondholders had been likely to convert the bonds. If they were not subordinated, he would not have recommended participation in the Lloyds syndicate facility on the offered terms.
    4030 In cross‑examination Hagemann was taken through the London memorandum. He said that the treatment of the bonds as equity was not mentioned in the memorandum and emphasised that the London memorandum was not a final application to the BfG board. Hagemann agreed that the note in the attachment to the Information Memorandum did not mention subordination as a justification for treating the bonds as capital. He did state, however, that this note referred to page 23 of the Information Memorandum which expressly referred to the bonds as being ‘convertible subordinated bonds’.
    4031 Jürgen Herche, a co‑author of the London memorandum, gave evidence that he recalled thinking that the bonds were important to the financial structure of the Bell group. In his witness statement he said that the subordinated status of the bonds was the most important factor in deciding whether the bonds should or could properly be treated as equity. Herche said if he had understood that the bonds were not effectively subordinated he would have been concerned and he would have relayed this information to the SLD for them to consider. If the SLD had said that it was not worthwhile that the London office recommend BfG’s participation in the light of this information, he would not have made the recommendation.
    4032 In cross‑examination, Herche said that convertibility of the bonds was not the only justification for participation in the facility, given the context of the Information Memorandum. Herche said that for him, the most important justification for the treatment of the bonds as equity was that they were subordinated, but he agreed that subordination was not mentioned as a justification for participation.
    4033 Ulrich Mauersberg, another co‑author, gave evidence that had he believed the bonds were not subordinated to BfG’s lending, he would not have regarded it appropriate to treat them as equity for the purposes of the negative pledge ratios. He said that to treat the bonds as equity, where they ranked pari passu with BfG’s lending, would have been irrational. Further, had Mauersberg discovered that BfG had been misled by TBGL in relation to the subordinated status of the bonds, he would not have given the SLD his approval to participate in the Lloyds syndicate facility and he would have vetoed any proposal without it being sent to the head office. In cross‑examination, Mauersberg agreed the London memorandum did not say anything regarding the nature of the convertible bonds and that the decision to participate in the facility was made by BfG board.
    4034 Mauersberg also agreed that the convertible notes referred to in the attachment had been treated as liabilities in the overall accounts and said that there was nothing in the consolidated balance sheet which referred to the subordination of the bonds. He agreed that there was no reference in the attachment to the bonds being subordinated, but said this information was contained in the Information Memorandum. I made clear at the time that Mauersberg’s evidence on this point went no further than subordination not being mentioned in the very words of the attachment.
    4035 Kristina Laubrecht, member of the SLD, prepared a loan submission dated 28 April 1986 which stated that: ‘Due to the issue of subordinated convertible bonds in the amount of A$150 million and the issue of further ordinary shares, which contributed A$30 million to the group, the equity ratio has increased to over 40 per cent’. In her witness statement, Laubrecht said that had she been told that the bondholders were unsubordinated creditors she would not have viewed the bonds as subordinated and would not have recommended treating the bonds as equity. Any lack of subordination in the bonds or the on-lending from the bond issues would have caused her to be negative about recommending participation in the Lloyds syndicate facility and she would have wanted an explanation as to the unsubordinated loan arrangements. Without a sensible commercial explanation, she would have been less likely to have recommended participation in circumstances where she did not understand why the subordination had been reversed and (or) the company was not willing or able to fix the subordination. Given Laubrecht was a part of the SLD I am satisfied that, on the basis of her evidence, it is unlikely the SLD would have recommended BfG participate in the facility had she understood that the bonds were not effectively subordinated.
    4036 Matthias Hofmann‑Werther gave evidence that had he understood that the bonds were not effectively subordinated at the time the loan submission was before the BfG board he would not have agreed to treat them as equity for the purposes of calculating the ratios in the NP agreement, or for the purpose of credit analysis. Hoffman-Werther said that to treat the bonds as equity unless the bondholders were subordinated behind BfG’s lending made no commercial sense. Convertibility of the bonds was brought up in cross‑examination as another commercially sensible reason to treat the bonds as equity with which he disagreed:
    [F]or a lender it makes no difference whether a bond is to be – a convertible is to be or might be converted into equity and at which time it is. This is for a lender of not primary interest. For lender it is a primary interest who ranks first and a subordinated bond, whether it’s convertible or it is not convertible, ranks behind the senior debt of the lender and that is what the lender is looking for.
    4037 Laubrecht and Hoffman‑Werther were cross‑examined with reference to the consolidated balance sheet as at 31 December 1985 where the increase in the total share capital and reserves of TBGL was approximately 47 per cent. Hoffman-Werther gave evidence that he would not have made a positive decision in favour of the Lloyds syndicate facility if the capital ratio or equity ratio was below 40 per cent and it was his understanding that the equity ratio was above that figure by reason of the bonds being treated as equity. I am satisfied that Hofmann‑Werther’s evidence establishes that the facility would not have been approved at board level had the bonds been treated as liabilities.
    4038 Laubrecht gave evidence that in calculating the ratio, she may have assumed that the figure of $495 million of total share capital and reserves in the consolidated balance sheet as at 31 December 1985 included the bonds. I will not go into the ins and outs of the submissions delivered by the parties concerning the reliability of her evidence. I am satisfied that her evidence in cross-examination conveyed the same opinion as expressed in her loan submission to the BfG Board and her evidence‑in‑chief.
    4039 The plaintiffs assert that other factors, such as the banking relationship between BfG and TBGL (and RHaC), influenced BfG officers’ decision-making when entering into the facility. But I am not aware of much (if any) evidence of a prior banking relationship of any significance between BfG and the RHaC group. The plaintiffs also contend that Mauersberg and Herche did not read the Information Memorandum and that they would have supported the proposal to participate in the facility regardless of any alleged representation as their recommendation was unrelated to subordination of the on-loans.
    4040 Further, the plaintiffs say, as the BfG board did not read the Information Memorandum as part of the approval process, there was no reliance on any information in this document. The entire analysis of the credit risk regarding the proposal was based on the consolidated figures in which the bonds were treated as debt. The negative pledge ratio was not calculated and referred to at all in BfG’s assessment of the proposal. As a result, there could not have been reliance on the representation of subordination of the bonds as inducing BfG to enter into the facility.
    Conclusion
    4041 Officers of BfG were aware of, and had read, the Information Memorandum. They were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons set out in Sect 17.10.1, that subordination was a factor in the assessment process. I accept that Hagemann received and read the Information Memorandum at the time he prepared the memorandum to SLD, and that the requirement to treat the bonds as equity was drawn to the attention of Herche and Mauersberg. I am aware that other reasons were put forward in favour of the facility, and that subordination was not expressly one of them.
    4042 I do not accept the plaintiffs’ argument that the entire analysis of the credit risk regarding the proposal was based on figures in which the bonds were treated as debt. It does not accord, for example, with the credit application prepared by Laubrecht and her references to the issue of ‘convertible subordinated bonds’. I am satisfied that Laubrecht’s recommendation would not have been made but for her understanding and belief that the bonds ranked behind the bank debt which was communicated in her memorandum.
    4043 I am satisfied on the evidence of witnesses from the London branch that no proposal would have been sent to the BfG board in favour of participation in the facility had it been understood that the bonds created liabilities for the NP group. I accept Mauersberg’s evidence that he could have vetoed any proposal without it having to be sent to the board. If the proposal had been sent, it was unlikely that the SLD would have recommended BfG’s participation and I am satisfied that Hoffman‑Werther would not have approved it at board level.
    4044 Although there was reliance on other elements of the credit application, such as the convertibility of the bonds, subordination was also a part of the reliance. I accept that had the bank officers’ understood there to be a lack of subordination there was a real chance they would have taken different actions to manage the relationship between BfG and TBGL in a materially different lending environment. As a result, BfG lost the opportunity to decline to participate in the facility or to alter the terms of its participation to reflect the different lending environment.
    17.14. Crédit Agricole
    Participation in facility
    4045 On 8 April 1986, Nick Samuels of Crédit Agricole made a credit application to the LCC for a £5 million participation in the Lloyds syndicate facility. In the application, Samuels included a financial analysis in which he commented on the profitability of TBGL’s businesses and set out a number of gearing ratios from TBGL’s consolidated balance sheets. Samuels referred to pages 27 and 28 of the Information Memorandum and attached these pages to the application. Samuels also noted in the analysis that TBGL had raised $150 million in convertible subordinated bonds. On 8 April 1986, Alain de Truchis gave his support to the application and it was referred to the bank’s international division in Paris.
    4046 In a telex dated 15 April 1986, Olivier Gremont and Jacques de la Rochefoucauld of the Paris office declined the credit application because of a potential conflict with the bank’s relationship with Elders and TBGL. However, they noted that there was potential for the application to be studied again in the future. On 28 April 1986, Marc Brugière-Garde sent a telex to Gremont requesting an answer to London’s request that the Paris office consider silent participation in the syndicate. Gremont advised Brugière-Garde on 29 April 1986 that Paris did not approve this request.
    4047 On 17 November 1986, Brugière-Garde sent a telex to Arnaud requesting that the Paris office reconsider participation in the facility. On 23 November 1986 Bill Vickers sent a telex to Michel Arnaud for approval of the credit application to participate in the Lloyds syndicate facility. This was followed (on 25 November 1986) by copies of the Information Memorandum and attachment, the TBGL Annual Report 1985 and a preliminary stock exchange announcement of TBGL’s results for the period ending 30 June 1986. On 27 November 1987, de la Rochefoucauld wrote a memorandum to Francois Jouven outlining the history of the Lloyds syndicate facility proposal. This memorandum said that TBGL had a ‘sound financial structure’ and that:
    [T]he rate of total liabilities compared to shared capital improve markedly at the end of 1985, going from 1.9 to 1.5 as a result in particular of the issue of convertible subordinated bonds (A$150m) and a share issue (A$30m) to which substantial profits were added during the second half of 1985.
    4048 By telex of 4 December 1986, de la Rochefoucauld confirmed to Brugière-Garde that Jouven had approved the application. Christian de Sayve gave evidence that Jouven had authority to approve credits up to US$10 million. De Sayve said that in using this authority, Jouven was required to consult with the IEN (Credit Evaluation Department). De Sayve said Jouven did not make a credit decision without de Sayve’s concurrence and although Jouven did not have to, he invariably followed the IEN’s advice when making decisions under the authority.
    4049 Brugière-Garde gave evidence that had he been told at the time the original credit application was being considered that $75 million of the $150 million worth of bonds issued by the Bell Group were not effectively subordinated he would certainly not have agreed to treat the bonds as equity. Brugière-Garde asserted that had the bank not been required to treat the effectively unsubordinated bonds as equity he would have wanted to examine balance sheets of, for example, the NP group and the consolidated balance sheets as at 31 December 1985. Had he viewed these documents, he would have considered the proposal to be more leveraged than the one that was presented by LMBL and would likely have wanted further analysis before recommending participation.
    4050 Brugière-Garde said he did not believe he would have recommended to the Paris office that the transaction be done at 40 basis points above LIBOR if half the bonds issued ($75 million) were effectively unsubordinated and he would have wanted to see the liquidation value of the assets. He could not say he would not have recommended the deal at any price, but he would have viewed the transaction differently. Since it was not possible to amend the terms of the facility as it was already in place when Crédit Agricole first participated, Brugière-Garde said had he been informed of any lack of subordination, he would have endeavoured to put a subordination deed in place. If TBGL’s directors had been unable or unwilling to do so, he would not have recommended the bank’s participation in the Lloyds syndicate facility and the application would not have gone forward to Paris.
    4051 In cross‑examination, Brugière-Garde did not accept that a ratio of 54 per cent could have been accepted by Crédit Agricole as the reduction in equity would have greatly increased the leverage of the group, giving a different group consolidated picture. He disagreed with the suggestion that treating the bonds as a liability, which had a small effect on the overall leverage, would not have made a difference to his recommendations given the profitability of TBGL. He argued that the application of the bonds as a liability would have resulted in an even higher leverage and commanded a higher margin.
    4052 De Sayve gave evidence that had he been told of a lack of subordination when considering the credit application he would not, from the perspective of Crédit Agricole, have regarded the bonds as subordinated. De Sayve said he would not have understood TBGL’s commercial purpose and that he would not have treated the bonds as equity as this would not have made sense. On this basis, he would not have accepted the credit application. As a matter of practice, Jouven would have followed his advice and not approved the application.
    4053 De Sayve said that in his view, from reading the balance sheet, treating the bonds as equity would have caused the London office (CA London) to consider the gearing to be too high to proceed with the proposal. He said in his witness statement that the bank’s protection would have been insufficient as there would not be enough of a ‘cushion of true equity and subordinated debt’. If the bonds were treated as liabilities and this resulted in a ratio of 54 per cent, de Sayve gave evidence that CA London would have still considered the gearing to be too high. He said a small diminution in the value of TBGL’s portfolio could have a ‘scissor effect’, with very little room for an increase in indebtedness.
    4054 In cross‑examination, de Sayve was taken through the credit application. De Sayve said that, in relation to the conclusion that the facility would provide an opportunity to become associated with the United Kingdom operations of the Bell Group and achieve a high profile status in a major syndication, these were issues dealt with by the Paris Zone Department and persons responsible for commercial development. He believed such issues would not concern IEN to a major extent. He was questioned in relation to the suggestion that the costs of expansion had been reflected in the increased gearing of the company but that this was not excessive for ‘a company in such an expansionary phase’. De Sayve said that he would have taken this suggestion into consideration but ‘with a little bit of salt’ given that Bell group were ‘corporate [raiders]’. He also emphasised the importance of compliance by a company such as this with the balance sheet ratio.
    4055 De Sayve stated that he was not certain what CA London would have done but, in light of his past with that office, he thought it was likely, given the nature of the business and the activity of the borrower, that CA London would have found the gearing too high. The banks highlight the credit application in support of this contention, which stated that TBGL’s gearing had increased steadily throughout the five‑year period.
    4056 The plaintiffs assert that other factors, such as the banking relationship between Crédit Agricole and TBGL (and RHaC), influenced Crédit Agricole officers’ decision‑making when entering into the facility. The plaintiffs focus on the relationship between the bank and RHaC and assert that convertibility of the bonds was the justification for treating the bonds as equity. They say the witnesses did not have a recollection of the process of approving the bank’s participation in the facility and some, such as de Sayve, did not recall receiving Samuels’ credit application or the Information Memorandum.
    4057 The plaintiffs assert that Crédit Agricole decided to participate without considering the requirement in the Information Memorandum regarding equity treatment of the first BGNV bond issue. Further, the plaintiffs highlight that the contemporaneous documentation did not focus on the issue of subordination and that there is no evidence to show that the bank relied on the representation of subordination to determine its entry into the facility. As a result, the plaintiffs submit that subordination and treatment of the bonds as equity were not decisive considerations underpinning the decision by Crédit Agricole to participate in the Lloyds syndicate facility.
    Conclusion
    4058 Officers of Crédit Agricole were aware of, and had read, the Information Memorandum and were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I believe that subordination was a factor in the assessment process on the basis of the witnesses’ evidence and for the same reasons as I set out in Sect 17.10.1. While I accept that other reasons were put forward in favour of the facility, I am satisfied that recommendations by bank officers, in particular Brugière-Garde and de Sayve, were premised on the debt being subordinated and that the credit application was read and the facility accepted on the understanding that Crédit Agricole would rank above the debt of the NP group. I accept that if Brugière-Garde or de Sayve had understood the bonds were not effectively subordinated, they would not have agreed to participate in the facility. In particular, de Sayve gave a cogent explanation that supported why he thought the London office would have considered the gearing to be too high.
    4059 I am satisfied that the bank’s officers acted in the belief and on the assumption that all debt arising out of the bond issues was subordinated and ranked behind bank borrowing. As a result, Crédit Agricole lost the opportunity to conduct its banking relationship with TBGL on the basis that the bond proceeds were unsubordinated and in particular the opportunity to decline to participate in the facility.
    17.15. Crédit Lyonnais
    Participation in the facility
    4060 On 1 April 1986 LMBL sent a telex to Etienne Dufay and Jean Mackey, inviting the London office of Crédit Lyonnais to participate in the Lloyds syndicate facility. On 10 April 1986 Mackey prepared a credit application recommending participation for £5 million in the facility. This credit application contained an application signed by Mackey, Dufay, Ian Menage and Christian Menard and a financial spreadsheet. The application contained a copy of page 28 of the Information Memorandum. The application also stated the syndicate participants were required to treat ‘[$150 million] convertible subordinated bonds – issued December 85 as equity in calculating the liability ratios. The justification for this is that the Bell Group Ltd’s current share price is higher than the conversion price and conversion can now be exercised’. On 22 April 1986, the Paris office gave its approval to the £5 million participation in the Lloyds syndicate facility.
    4061 In his witness statement, Jean‑Claude Goubet said that he did not recall the loan or the approval, but as a member of the LCC, he may have looked at the loan and approved it being passed to the Paris office for approval. He said that if he had examined the credit application as part of his duties as a part of the LCC, he would have limited his examination of written material to the credit application and would have spoken to Menard or Menage about it. If he had been involved in any decisions about the loan, based on his recollection of how he worked, he gave evidence that he would have probably examined the balance sheet of the NP group. Given his experience at the bank, Goubet said that gearing was very carefully examined by bank officers. He asserted he would have been uncomfortable entering into a loan with a gearing significantly over one for a five‑year term.
    4062 Goubet said that if any of the bonds had been taken out of the capital and put in liabilities, it would have appeared to him as a quite different credit proposal. He would probably not have recommended that the bank participate in the Bell facility had any of the bonds been unsubordinated. He would not have consented to the treatment of any of the convertible subordinated bonds as equity for the financial ratios unless the bonds were subordinated to the debt of TBGL. He said that had he known or believed that the bonds were only subordinated at the issuer level, he would most definitely not have agreed to treat any such bonds as equity for ratio purposes.
    4063 Goubet was cross‑examined regarding the spreadsheet of the consolidated group as at 31 December 1985, which recorded a leverage ratio of 1.5. It was put to Goubet that he would have been concerned about this at the time had he seen it. Goubet said that the leverage ratio was not a negative pledge ratio but one of the ways that Crédit Lyonnais analysed a balance sheet. He said that he would not have expressed concern about the leverage ratio in writing.
    4064 Goubet was also cross‑examined on page 2 of the credit application and Mackey’s description of the basis upon which she understood the bonds to be treated as equity. Page 2 of the credit application states that ‘the syndicate participants are required to concur with current lenders under the [NP agreement] in treating A$150 M convertible subordinated bonds – issued December 85 as equity in calculating the liability ratios … [TBGL]’s current share price is higher than the conversion price and conversion can now be exercised’. Goubet stated that the likelihood of conversion was not the more relevant point concerning Crédit Lyonnais’ approval of the facility. He said that the fact that the bonds were convertible was ‘something additional’ but the main point was the fact that the debt was subordinated to the bank loans. Goubet described Mackey’s attention to the convertibility of the bonds as ‘not a key point in the risk analysis. That was a positive one which she found useful to put there’. Goubet said that the main reason the bonds were included in the analysis was the fact that they were subordinated.
    4065 I accept that Menard’s consent was required for the Lloyds syndicate facility to be sent to the Paris office for approval. In his witness statement, Menard said had he understood that the bonds were unsubordinated, he would have regarded the Information Memorandum, and the customer, as misleading and would not have regarded the bonds as ranking in practical effect behind the bank’s lending. He said in these circumstances he would not have done business with TBGL and would not have approved the credit application going forward to Paris. Menard said that he would not have agreed to treat the bonds as equity on this basis for the banking covenants as such an agreement was a requirement of participation in the facility.
    4066 Menard was cross‑examined about the spreadsheet analysis and gave evidence that the figure for leverage of total liabilities to net worth of 1.5 provided in that document was not a figure that he would have considered as satisfactory. He said that any ratio greater than one for leverage of total liabilities to net worth would require a lot of attention and that he could not now say if that document was relevant to the assessment of risk because they discussed a number of sets of figures.
    4067 Menard was also cross‑examined regarding the role of convertibility in the treatment of the bonds as equity. He said that convertibility was not a justification for treating the bonds as equity. In relation to Mackey’s attention to convertibility in the credit application he said:
    I would have understood that she understood that but I would not have agreed with it at all because for me what was important was not the convertibility. It was the subordination and the maturity. Convertibility may occur or not occur. Until it is converted it’s still a debt. It is likely to be converted if the company is going well. It will never be converted if the company is not going well or if the stock exchange has a problem so I would not have considered that this could be considered as equity for ratio calculation because it was convertible. The convertibility was only a plus but not the determinant cause of it.
    4068 Menard accepted that the maturity date and convertibility were factors that he would have taken into account but that they were not the most important factor. He rejected the proposition that, even if it was his view that the debt to equity ratio referred to in the consolidated analysis was not satisfactory, he would have been satisfied as a consequence of the potential to revalue assets. He said intangible and immaterial assets were ‘always extremely volatile’, and he would not have attributed much importance to them. I agree with the banks that Menard’s evidence showed he would not have proceeded with the Lloyds syndicate facility had be understood the on-loans were not subordinated.
    4069 The plaintiffs assert that other factors, such as the banking relationship between Crédit Lyonnais and TBGL (and RHaC), influenced the bank officers’ decision-making when entering into the facility. The plaintiffs focus on the relationship between the bank and RHaC and assert that convertibility of the bonds was the justification for treating the bonds as equity. They highlight that the contemporaneous documentation from bank officers, such as Mackey, did not focus on the issue of subordination and that there is no evidence to show that Crédit Lyonnais relied on the representation of subordination to determine their entry into the facility. The plaintiffs ask that I rely on the written reasons for agreeing to the equity treatment of the first BGNV bond issue, being factors relating to the convertibility of the bonds, as set out in the credit application rather than the evidence of the bank officers.
    Conclusion
    4070 Officers of Crédit Lyonnais had read the Information Memorandum and were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons as set out in Sect 17.10.1, that subordination was a factor in the assessment process.
    4071 I accept that had the bank officers understood the bonds to be unsubordinated, the proposal would not have been approved by the London office and forwarded to the Paris office. I am satisfied that, in such circumstances, there was a real chance they would have taken different actions to manage the relationship between Crédit Lyonnais and TBGL in a materially different lending environment. As a result, Crédit Lyonnais lost the opportunity to decline to participate in the facility or to alter the terms of its participation to reflect the different lending environment, and this loss was to its detriment.
    17.16. Creditanstalt
    Participation in the facility
    4072 John Crocker and Lloyd O’Harte prepared a credit application dated 10 April 1986, recommending that Creditanstalt participate in the Lloyds syndicate facility. This application contained an executive summary, a 10‑page summary of information concerning TBGL, an internal analysis of the consolidated Bell group balance sheet, an internal analysis of the BGUK balance sheet, copies of the balance sheet profit and loss statement for the NP group and a copy of the indemnity provisions to be included in the NP agreement.
    4073 Crocker gave evidence that O’Harte would have drafted the actual documents, but that Crocker would have signed them as he was the officer responsible for putting the application to the LCC. The executive summary emphasised the relationship benefits for Creditanstalt as the basis for their recommendation. The analysis of the consolidated balance sheet attached to the credit application treated the first BGNV bond issue as subordinated debt. There were no further requests for information made by the LCC or the bank’s head office and I accept that the decision to enter into the facility was based on this document. The 10‑page summary refers to the existence of the subordinated bonds numerous times, in particular, pages 11 and 13. It was also mentioned in the executive summary that the bank did not intend to increase its ‘direct, unsecured lending to the Bell group above the £10 million which will be reached in August 1986’.
    4074 The credit application was sent to the Filialbüro (the bank’s credit control department) which produced a summary of the application dated 15 April 1986. This summary primarily focussed on the risk assessment of the Bell group and no reference was made to the bonds or their equity treatment. The summary recommended participation in the Lloyds syndicate facility. On 21 April 1986, Nikolaus Palffy sent a fax to Crocker advising that the credit application had been approved by Alarich Fenyves and Guido Schmidt-Chiari. On 19 May 1986, Creditanstalt entered into a loan agreement with BGF and BGUK and the NP agreement with TBGL and the indemnifying subsidiaries.
    4075 Fenyves was the bank officer in charge of the Lloyds syndicate facility. He gave evidence that if he had not approved the application to enter into the facility the application would have been rejected. To reach Fenyves, the proposal would have needed a positive recommendation from John Crocker. If Crocker did not wish to recommend the loan, he would not have passed the business on to the LCC, and it would not have reached Vienna.
    4076 In his witness statement, Fenyves stated he would not have agreed to the treatment of the bonds as equity, and he would not have approved participation in the Lloyds syndicate facility on that basis, if the bonds had not been effectively subordinated to Creditanstalt’s debt. Fenyves asserted that ‘it was a cornerstone of the Bank’s participation in the [Lloyds syndicate facility] that the sizeable amount of bond debt ranked below the [Lloyds syndicate facility]’. In cross‑examination, Fenyves stated that if he had discovered the bonds were not subordinated, he would have ‘raised bloody hell … because this was an important part of our decision’.
    4077 This evidence was repeated by Fenyves a number of times during cross-examination. For example, in response to a question whether the convertibility and long-term maturity were reasons to treat the bonds as equity, Fenyves said that what mattered to him was the subordinated nature of the bonds. Further, he said that of the elements of convertibility, subordination, and long‑term maturity, he put almost exclusive value on the subordinated nature of the bonds as justification for their being treated a equity: ‘The conversion feature for us was absolutely secondary, because we could not foresee whether a conversion would ever happen … We looked at the unsubordinated nature of the bonds.’ The word ‘unsubordinated’ appears in the transcript but it is clear from the context that the witness meant ‘subordinated’.
    4078 Fenyves was also cross‑examined regarding a handwritten note next to the paragraph ‘The nature of the bonds is such that they may be considered as equity for the purposes of gearing calculations’ in the 10 April 1986 credit application. Fenyves has written ‘Explain!’ and gave evidence that he made this comment because he ‘wanted to ensure that the bonds were subordinated’. Fenyves said that he called the London office regarding his concern and that he was told the bonds were subordinated.
    4079 In Crocker’s evidence in chief, he said that that the Information Memorandum made it clear treatment of the bonds as equity for the negative pledge covenants was a prerequisite for entry into the Lloyds syndicate facility. When Creditanstalt entered into the facility in April 1986, he said the treatment of the bonds as equity was an essential feature of the credit. They were described in the Information Memorandum as subordinated which Crocker considered to be the most important characteristic of the bonds to enable Creditanstalt to treat them as equity. Further Crocker stated that conversion would not have been enough of a justification to treat the bonds as equity: ‘subordination was a permanent feature. Conversion might or might not happen’.
    4080 Crocker gave evidence that if he had become aware that the bonds had been on‑lent on an unsubordinated basis, he would have seen their status to be contrary to what he understood from reading the Information Memorandum and that the Information Memorandum was misleading. He would not have agreed to treat the bonds as equity, would have found the whole proposal unacceptable and would not have recommended the facility to the LCC or Creditanstalt’s head office. He doubted he would have viewed the credit as adequate in light of the leveraged state of TBGL and the levels of borrowing.
    4081 In cross‑examination Crocker stated that if he had thought there was a problem with the subordination of the bonds at the time of preparing the credit application, the bonds would not have been treated as part of net worth of the NP group which would be looked to in a liquidation scenario. They would have been treated as a debt as they were in the consolidated figures. Crocker also had little recollection of the events of the credit application. In his witness statement he said that he had deliberately incorporated phrases from the Information Memorandum in the credit application to support his assertion that he had a belief of subordination of the bonds. In cross‑examination, Crocker conceded that this was not the case and that the words may have been included by O’Harte.
    4082 Cunningham gave evidence that the author of the TBGL spreadsheet had extracted its figures from a balance sheet that was incorporated in the attachment to the Information Memorandum. He gave evidence that the conclusion he would have taken from the consolidated TBGL spreadsheet was that they were mechanical calculations with the preparer not exercising any judgment about one thing or another. Cunningham was cross‑examined on the Information Memorandum and the attachment. He accepted that the only information given in the Information Memorandum as to the nature of the bonds was that they were convertible subordinated bonds which matured in 1995 and which had raised $150 million by their issue.
    4083 Cunningham said he would have read paragraph 5 on page 23 of the Information Memorandum as talking about the negative pledge gearing calculations and gave evidence that he would have understood that the restated net worth of the consolidated Bell Group at page 23 was regarded by TBGL as being relevant to its gearing. He accepted that he would have understood the reference in the note to the attachment to the restated net worth of $650 million as a reference to the final paragraph on page 23 of the Information Memorandum. In reading that note, Cunningham said he would have understood that TBGL’s explanation why the bonds had been included in the consolidated restated net worth figure was because the share price was higher than the conversion price and so that the conversion of the bonds could then occur. Cunningham rejected the proposition that TBGL said in the attachment that the bonds could be treated as equity for gearing purposes because of the share price being higher than the conversion price.
    4084 The plaintiffs assert that Creditanstalt was motivated to enter into the facility to develop its business relationship with the RHaC group. They say there is ample evidence that the bank was motivated by commercial and relationship factors, as captured in the credit application prepared by Crocker and O’Harte. For example, both the credit application prepared in London and the summary prepared in Vienna noted that the gearing of the group was 1.90:1, and neither document contained any criticism of that gearing level.
    4085 The plaintiffs assert that no analysis was conducted on the requirement to treat the bonds as equity and no reason was provided for that treatment when the bank’s own calculations of its ratios treated the bonds as debt. There is no evidence that any documents other than the credit application of 10 April 1986 were sent to the Vienna office therefore, the plaintiffs say, there is no evidence to show that the representation of subordination was conveyed to the bank’s head office. No document was discovered that shows the basis upon which the final decision of the bank was made.
    4086 The plaintiffs criticised the extent of Crocker’s recollection of the credit application, in particular his decisions regarding knowledge of the subordination and the gearing of TBGL. The plaintiffs argue that Crocker was unable to give reliable evidence of the ‘recollection’ of his thoughts and views with regard to these issues and that as a result his evidence should be given no weight.
    4087 The plaintiffs say that Fenyves did not know why the bonds could be treated as equity and there is no evidence that he received any explanation from the London office prior to making that decision. The plaintiffs are also critical of Fenyves’ evidence concerning his reliance on subordination, particularly his handwritten note on the 10 April 1986 credit application, on the basis that Fenyves was enquiring into the specific nature of the bonds, rather than ensuring their subordinated status. The plaintiffs say that the fact that Fenyves was told that the bonds were subordinated is not sufficient evidence of subordination and that as a result there was no reliance. He said that he had no recollection of the credit application and referred only to the documents evidencing his role in the application.
    Conclusion
    4088 Officers of Creditanstalt were aware of, and had read, the Information Memorandum and understood that it was a condition of participation in the facility that they agree to treat the bonds as equity. I am satisfied, for the reasons set out in Sect 17.10.1, that subordination was a factor in Creditanstalt’s assessment process. I am also satisfied that Crocker’s and Fenyves’ recommendations were premised on the debt being subordinated as evidenced their use of the credit application and this document’s reference to ‘convertible subordinated bonds’.
    4089 Fenyves was the decision-maker with regard to the Lloyds syndicate facility and I accept on the basis of evidence of his usual practice, and his handwriting throughout the document, that he would have read the whole of the credit application. Overall I am satisfied that had Fenyves understood the bonds were not effectively subordinated, he would not have recommended participation in the facility. I am also satisfied that subordination was a vital part of his agreeing to recommend the facility and convertibility would not have been sufficient justification for his approval.
    4090 I accept that as Crocker was the person responsible for putting the application to the LCC, if he had not recommended the loan it would not have been passed to the LCC nor reached the Vienna office. The concession by Crocker that he may not have written the phrases referring to subordination does not undermine his evidence that he held a belief of subordination. I am satisfied that had Crocker understood the bonds were not subordinated, he would not have agreed to treat the bonds as equity and he could not have recommended the facility to the LCC or the bank’s head office. Therefore, as a result of the bank officers’ reliance on the representation of subordination, Creditanstalt lost the opportunity to conduct its banking relationship with TBGL on the basis that the bond proceeds were unsubordinated and, in particular, lost the opportunity to decline to participate in the facility.
    17.17. DG Bank
    Participation in facility
    4091 Before entering into discussion concerning DG Bank’s participation in the facility, it is important to first briefly discuss an analysis of TBGL conducted by DG Bank for the ‘introduction of business’ before the offer to participate in the Lloyds syndicate facility was made. On 20 December 1985, Hiltraud Dillman prepared the analysis for a possible bond issue of DM200 million over six to seven years as well as credit of DM50 million over five years. Dillman’s report provided an overview of TBGL’s business activity, including the operations of the individual divisions, its size and market presence. Her financial analysis focussed predominantly on operating revenues, operating profits and net earnings, value of assets, earnings potential and cash flow. She did not analyse the liabilities of the company, other than to note that the leverage was 1.9.
    4092 On 30 December 1985, Gert Schemmann sent a handwritten note to Dillman asking whether TBGL was listed on the stock exchange and, if it was, whether the share price movement had been analysed. Schemmann, also observed that the ‘company balance sheet presented contains an extraordinarily high proportion of shareholdings in different companies’ and queried why these had not been consolidated. Dillman responded on 19 January 1986, advising that TBGL was listed on the stock exchange. According to her note, she attached share price movement sheets, which are not in evidence. Dillman also explained that BRL ‘was not consolidated because the Bell Group holds only a 45.3 per cent share’ and that since 1983 the share price had risen markedly, with a sharp price fall in January 1986.
    4093 An invitation telex to participate in the Lloyds syndicate facility was sent by LMBL to DG London in July 1986. LMBL also provided the bank with a copy of the Information Memorandum containing the negative pledge report dated 31 October 1985 but it is not clear when these documents were provided. DG London forwarded the telex to DG Frankfurt on 23 July 1986, which was passed onto Stefan Ziffzer and Hans‑Otto Jesgarek the same day. Berud Dewald stated in the telex to Ziffzer and Jesgarek that ‘as we have no information about this group we would kindly ask whether you have any background information and also for your comments’. Ziffzer wrote at the top of the telex ‘we should do it’ and ‘Jesgarek’ and ‘Chew’. I accept that Ziffzer’s comment was directed at Jesgarek and Chew Chung Huang. The telex contains further handwritten notes which say ‘discussed with Mr Dewald’ and ‘Info from our end submitted to DG FF [DG Frankfurt]’.
    4094 On 25 July 1986, DG Frankfurt sent Jesgarek the analysis prepared by Dillman and dated 20 December 1985, the handwritten note from Schemmann to Dillman dated 30 December 1985, and Dillman’s response dated 19 January 1986. These documents were sent to Chew on 25 July 1986 with a cover note from Ziffzer. Ziffzer was forwarded the same bundle of documents from DG Frankfurt on 12 August 1986 which was forwarded to Yeo Li Ming, with a cover note from Ziffzer. Yeo prepared a basic information report on 11 August 1986 which contained information about TBGL and set out the financial covenants and composition of the NP group.
    4095 Yeo and Marianne Nai also prepared a 10‑page risk assessment report on 27 August 1986 focussing on the financial position of the group as at 30 June 1985. Yeo and Nai noted that the ratio at that time was not satisfactory but that it was mitigated by a strong cash flow from trading operations and a significant level of readily marketable securities classed as fixed and slow assets. On page nine of the report they stated: ‘At 31.12.86, we do not have all the information to ascertain the compliance of the ratios per the Negative Pledge agreement’. I accept this indicates that DG Bank had not received C&L’s report of 30 April 1986 at this time. Yeo and Nai also undertook a financial analysis of TBGL treating the bonds as debt not equity. Yeo and Nai overall stated that ‘the risk appeared acceptable thus approval is recommended’, noting that ‘our lending would be on a pari passu basis with all other unsecured lenders’.
    4096 On 14 August 1986 DG London sent Ziffzer a telex from LMBL containing details from TBGL’s preliminary final statement to elicit a positive response from the bank with regard to participation in the Lloyds syndicate facility. Ziffzer’s handwriting appears on the telex and I accept it shows he forwarded the telex to Chan and Yeo on 14 August 1986. In late August 1986, DG Singapore sought the opinion of a number of other banks in relation to TBGL. Standard Chartered Bank London, ANZ, NAB and Westpac replied to the effect that TBGL was ‘highly regarded’, was ‘controlled by [an] astute and honest directorate’, and was considered a ‘safe business risk for normal trade engagements’.
    4097 DG Singapore prepared a credit application dated 15 September 1986 for approval for a £3 million participation in the Lloyds syndicate facility. The application identified Chew as the relevant account officer and Günther Schmidt‑Weyland as the responsible board member. The credit application was signed by Jesgarek and Ziffzer and forwarded to DG Frankfurt. It was approved by Schemmann on 19 September 1986 and by Schlegel on 22 September 1986. The front page of the credit application was faxed to Jesgarek on 25 September 1986 containing Schemmann and Schlegal’s signatures.
    4098 Ziffzer gave evidence that he had to approve the application from DG Singapore branch to DG Frankfurt. Ziffzer said in his witness statement that he would not have accepted the treatment of the bonds as equity unless they were subordinated to, and matured after, DG Bank’s debt and he would not have treated the bonds as subordinated if the bondholders were effectively unsubordinated creditors of TBGL. Ziffzer also said that at the time of the credit application he understood that the bonds were subordinated to the bank’s proposed participation in the facility and that the subordinated status could not be changed without the bank’s express permission.
    4099 Ziffzer said that if $75 million of bonds were not subordinated, the balance sheet of the NP group would have been significantly changed and would have made his recommendation for participation in the facility less likely. Ziffzer said that had he understood the bonds were not effectively subordinated, he would have spoken to Björn Jonker about it. He said he would not have recommended the proposal without discussing it with Jonker and would have deferred to his view.
    4100 In cross‑examination, Ziffzer was taken through the 23 July 1986 telex. Ziffzer said his handwritten comment on the telex, ‘we should do it’, was ‘just a working procedure, nothing else’. It was established by Ziffzer’s evidence that the telex was a ‘sales memorandum’, that he would not have looked at it at the time in any detail and that he could not say one way or the other whether he read the passage which stated that the ‘market capitalisation excludes the convertible bonds listed in Europe’.
    4101 Ziffzer asserted that, for him, there was no necessary connection between whether the bonds were included in market capitalisation and whether they were subordinated or treated as equity for lenders’ purposes. Ziffzer said that if the telex did not include the bonds in equity or quasi‑equity, then he would have considered this to treatment to be significantly different from other statements made to DG Bank by TBGL. He agreed in cross-examination that this statement indicated that the convertible bonds were not considered as equity or quasi‑equity of TBGL.
    4102 Ziffzer was also cross‑examined concerning the basic information report prepared by Yeo on 11 August 1986. Ziffzer accepted in cross‑examination that the document referred to the negative pledge ratios given by the NP group and accepted that there was no reference to the treatment of the convertible bonds. Ziffzer asserted that the basic information report was for conveying ‘static’ information about the company with ‘no special relation to a specific deal’. He could not say whether he had read the report.
    4103 Ziffzer accepted that the credit application made no reference to other members of the Bell group providing a guarantee or indemnity in relation to the facility. Ziffzer also agreed that there was no reference to the treatment of the convertible bonds in the context of the ratios and that there was reference to the leverage of the consolidated Bell group improving following the issue of the bonds. He also accepted that there was no reference to the treating of the bonds as equity in the context of the negative pledge ratios. He did say that he understood that the improved leverage was the result of the credit analysis treating the bonds as junior debt and that he understood that the bonds were subordinated to the bank’s participation in the Lloyds syndicate facility.
    4104 Jonker gave evidence that if Ziffzer had sought his views as to whether to recommend entry into the Lloyds syndicate facility to the Frankfurt office, Jonker would have recommended an explanation be sought because he would not have understood the commercial justification for reversing the subordination. In his witness statement Jonker said that if the bonds could not be effectively subordinated, he would have advised Ziffzer to reject the loan as DG Bank would not rank pari passu with the bondholders. He would have advised Ziffzer against agreeing to treat the bonds as equity for the purposes of banking covenants and would have recommended against participating in the Bell facility if DG Bank was required to do so. He also would have advised against treating the $75 million or $150 million as unsubordinated debt rather than equity for the NP group at December 1985.
    4105 Jonker accepted in cross-examination that DG Bank’s initial credit application showed that the shareholders’ funds did not include the bonds and that they were treated as a liability. I accept this treatment was the same as that in the consolidated balance sheet for TBGL as at 31 December 1985 as circulated by TBGL. When asked about the improved leverage of the group, Jonker said that the leverage for the exercise would include the convertible subordinated bonds as bonds were always a liability and should be mentioned as a liability, but that for the NP agreement the banks had agreed to treat them as capital funds. He accepted that the bank treated the bonds as a liability in calculating the improved and consolidated leverage.
    4106 The plaintiffs assert that other factors, such as the banking relationship between DG Bank and TBGL (and RHaC), influenced the officers’ decision-making when entering into the facility. The plaintiffs assert that DG Bank did not place any reliance on subordination of the bonds, nor compliance with the financial covenants as at 31 December 1985. The plaintiffs assert that subordination was not a decisive factor in the bank’s decision to participate in the facility. Ziffzer lacked understanding as to how subordination was relevant to the creditors and he was not the ultimate decision-maker regarding the facility. Neither Schemmann or Schlegel were called to give evidence and there is no evidence that they received the Information Memorandum and therefore relied on it in making their decision.
    4107 The plaintiffs argue that the decision of DG Bank to participate in the Lloyds syndicate facility was made on the basis of the credit application alone. They say the credit application and basic information report omitted any reference to the requirement to treat the bonds as equity for the purpose of calculating liability ratios and based the financial analysis on the consolidated balance sheet for TBGL as at 31 December 1985 which treated the bonds as debts. The plaintiffs say that DG Bank did not have information to ascertain compliance of the ratios as at 31 December 1985 under the NP agreement and that it did not take any steps to obtain this information.
    4108 They further submit that it is not clear when the Information Memorandum and negative pledge report were provided to DG Bank and whether the bank had received this information at the time of entering into the facility. The plaintiffs say that DG bank did not take steps to obtain updated financial information despite the fact that Yeo and Nai’s report warned that the bank did not have all the information to assess compliance with the NP ratios as at 31 December 1985.
    4109 The plaintiffs say that in the credit application there was no mention of the requirement to treat the bonds as equity for the negative pledge covenants and that the financial analysis was based on the balance for TBGL as at 31 December 1985 which treated the bonds as debts. There is no evidence, they say, that the spreadsheet prepared by DG Bank on or about 11 August 1986 was included as part of the credit application. The plaintiffs say these omissions are relevant to the state of mind of the bank officers who approved the decision to enter into the facility.
    Conclusion
    4110 Officers of DG Bank were aware of, and had read, the Information Memorandum. They were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons as set out in Sect 17.10.1, that subordination was a factor in the assessment process. I accept that had the credit proceeded on the basis that the bonds were unsubordinated, Ziffzer and Jonker would not have treated the bonds as equity and Ziffzer would not have approved the application to go to DG Frankfurt.
    4111 I accept that the final decision to approve DG Bank’s participation in the facility would have been made on the basis of the credit application. However, this should not be taken to indicate that there was no reliance on the representation as to subordination of the bonds. The credit application was created from the Information Memorandum and the credit analysts would have been aware that TBGL issued convertible subordinated bonds and that the lenders under the NP agreement were required to treat them as equity. Yeo and Nai’s risk assessment report and Yeo’s basic information report both drew on information contained in the Information Memorandum and were fundamental to the preparation of the credit application. I accept Ziffzer’s evidence that he would not have approved the application to go forward for final decision had he thought the bonds were unsubordinated.
    4112 I am satisfied that had the bank officers thought the bonds were not subordinated, there was a real chance they would have taken actions to manage the relationship between DG Bank and TBGL in a materially different lending environment. As a result, DG Bank lost the opportunity to decline to participate in the facility or to alter the terms of its participation to reflect the different lending environment, and that loss was to its detriment. The failure to call Schemmann or Schlegal is not, I think, fatal to this conclusion as there is sufficient other evidence to satisfy me that TGBL’s representation of subordination was relied upon by DG Bank.
    17.18. Dresdner
    17.18.1. Arrangements prior to the Lloyds syndicate facility
    4113 An internal memorandum dated 26 November 1985 shows that Dresdner had been approached by the Bell group as to whether it would be interested in co-managing a $150 million convertible loan from TBGL and an international public share float of $50 million in the same group. SBCIL wrote to Dresdner on 2 December 1985 and invited it to join the selling group for the first BGNV bond issue of ‘guaranteed convertible subordinated bonds’. An internal memorandum from the Frankfurt office prepared on 3 December 1985 considered the co-management offer and noted that ‘the enterprise is viewed as extremely positive’. On 10 December 1985 Dresdner entered into a manager’s agreement with SBCIL.
    4114 On 29 January 1986, Dresdner wrote to Graham (TBGIL) offering TBGIL a £2 million facility to assist with general finance requirements. An internal memorandum dated 10 March 1986 referred to a meeting between Graham and Colin Bell (Dresdner) on 5 March 1986. The memorandum noted that the TBGIL facility had been agreed and signed, and that Graham and Bell had discussed a new banking facility. This anticipated facility was stated to be a five-year £50 million facility with BGUK as borrower and TBGL as guarantor. A further meeting was suggested with Newman (TBGL):
    The purpose of this meeting will enable us to familiarise ourselves further with the Group, and with it’s overall objectives, both operationally and financially, and to meet a key member of the Bell Group management team. We already know the group well in Australia, and as is known, Dresdner Bank were members of the underwriting group for the company’s A$75m 11% Guaranteed Convertible Subordinated Bonds due 1995 and the issue of 2,620,000 ordinary shares of The Bell Group Ltd. which was concluded in December last.
    4115 On 24 March 1986, Bell prepared a further memorandum in relation to a meeting attended by Newman, Graham, Bell and Stefan Dunderstadt. In the meeting, Newman admitted that TBGL’s gearing was high ‘but it is well managed’. Bell prepared another memorandum on 24 March 1986 concerning the TBGIL facility. Bell set out the terms of the facility and the fact that there would be an NP agreement incorporating an indemnity from TBGL. On 25 March 1986, an internal memorandum prepared by Bell noted that Graham had called to provide details of the half‑year results of TBGIL. Bell stated that ‘with shareholders’ funds increased by A$181 million (A$150 [million] convertible bonds and A$31 [million] equity), the gearing of the group is substantially changed’.
    4116 From all of this it is clear to me that, prior to May 1986, Dresdner knew that the bonds had been issued on a subordinated basis.
    17.18.2. Participation in the facility
    4117 Dresdner received the formal invitation to participate in the Lloyds syndicate facility by telex from LMBL on 1 April 1986. The telex noted the total company assets of TBGL and that ‘the market capitalisation of the company at 15 March, 1986 was A$1.2 billion making the 18th largest listed Australian corporation at that date. This market capitalisation excludes the convertible bonds listed in Europe’.
    4118 Shawyer (LMBL) sent Steven Bubb an undated letter which enclosed copies of the following:
    (a) the Information Memorandum and attachment;
    (b) TBGL’s half‑year balance sheet and profit and loss statement as at 31 December 1985;
    (c) a copy of the company’s announcement to the Perth stock exchange; and
    (d) the directors’ report and accounts of BGUK as at 30 June 1985.
    4119 Shawyer advised that the deadline for responses had been extended to 15 April 1986. I accept that Dresdner received this letter and the enclosed information some time between 1 April 1986 and 15 April 1986.
    4120 Gunter Ulbrich prepared a credit application for Heiko Wegener on 9 April 1986. Ulbrich noted Dresdner’s involvement in the TBGIL loan facility and its participation in the first BGNV bond issue. The credit application included a consolidated balance sheet and profit and loss statement for TBGL, detailing TBGL’s position as at 30 June 1984 and 30 June 1985. There was no reference to the half‑year position at 31 December 1985 and no reference of the subordinated bonds in the consolidated balance sheet. The credit application did state that:
    The Group issued A$150m of convertible secured subordinated 1995 bonds in December, which we are told lenders have agreed to regard as equity for the purposes of the NPA ratios.
    4121 Ulbrich also referred to BRL’s attempted takeover of BHP. The overall impression given of the Bell group was one of ‘an impressive record of growth by acquisition and cost cutting rationalisation, and profitable equity trading . Its activities are well spread, highly profitable and the financial position is good’.
    4122 On 14 April 1986, Peter Mick and Wegener submitted a credit application as a memorandum to the credit committee. Mick and Wegener focussed on the expansion strategy of TBGL and the takeover bid for BHP, identifying matters that the risk management division considered relevant to participation in the Lloyds syndicate facility. The memorandum did not refer to the fact the bonds were subordinated but noted convertible bonds in the summary comparison of the balance sheet figures for the consolidated Bell group and the NP group. There is a handwritten box around the short-term and long-term liabilities, with a separate box around the equity items being the convertible bonds, share capital and reserves.
    4123 The 14 April 1986 credit application was approved by the members of the credit committee between 18 and 24 April 1986. In a letter dated 14 April 1986, Grube Karste supported the bank’s participation on behalf of the Dresdner International Division. Grube Karste said that ‘we consider the group as being one of the best addresses in Australia, headed by a dynamic entrepreneurial personality’.
    4124 Colin Bell gave evidence that had he believed that the bonds were not subordinated, he would not have submitted the proposal to participate in the Lloyds syndicate facility. He did not have any actual recollection of reading the document and did not perform the credit assessment. Bell said in his witness statement that ‘it is likely that I read [the Information Memorandum]’ and that:
    Reading pages 23 and 28 of the Information Memorandum now I can say that I now read them as telling me that the bonds, in all aspects, were subordinated to the Bank’s proposed lending. I am not aware of any matter which would lead me to believe that I would have read them differently in 1986.
    4125 In cross‑examination, Bell was asked why he referred to only those two pages. He agreed that he had not marked them up in 1986 but that these pages specifically referred to the high gearing of TBGL: ‘I felt that this was something that needed to be addressed and those two pages specifically refer to the gearing in my opinion’. Bell later agreed that in 1986 he considered the gearing to be conservative.
    4126 Bell said in his evidence in chief that, in referring to TBGL’s change of gearing in the 25 March 1986 memorandum, the gearing was an important consideration:
    This was an important consideration to me because the gearing of the Bell Group was high and, in order to persuade the Bank to do business with the Bell Group, it was necessary for me to be satisfied that the gearing was not going to be increased by virtue of the bond issues. As I understood that they were subordinated to bank debt, I was satisfied in that respect.
    4127 In cross‑examination, Bell agreed that when he said the gearing of the group had substantially changed, he was referring not only to the issue of bonds and equity, but also to the extraordinary profit obtained through the sale of the music publishing division of TBGIL. Bell said that when he wrote the memorandum he had not calculated the gearing of TBGL and that he was happy with the gearing of 62 per cent as stated in the 9 April 1986 credit application.
    4128 In their reply, the banks assert that the context of Bell’s evidence shows that he was concerned about the gearing of the company and that he recalled the subordination of the bonds because they redressed the high gearing of TBGL.
    4129 Mick gave evidence in his witness statement that it would have been important to him to know that TBGL had additional liabilities to BGNV, which would rank equally with its liabilities to Dresdner because of the ratio covenant of 65 per cent. The information that BGNV bondholders would rank equally with the bank may have negatively influenced his decision to participate in the facility. He was not able to say whether that information, assuming that the NP group was still within its loan covenants as at 31 December 1986, would have lead him to recommend against Dresdner participating in the facility. In his supplementary statement, Mick said:
    I did not specifically consider whether it was appropriate to treat the bonds as equity for the purposes of the financial covenants in the Bell facility because I had no need to do so. That was because, from the documents I saw, I took the subordination of the bonds as a given and had no reason to doubt their subordination.
    4130 In his evidence in chief, Mick asserted that compliance with the negative pledge ratio was an important matter and that if he had been told at the time of considering Dresdner’s participation in the facility that TBGL would have been in breach of its covenants, he would not have recommended participation in the facility. Further, Mick stated that even if there had been only a minor breach of a ratio, he would have wanted some action to be taken. If TBGL had not been able to remedy the situation, Mick said he may have pushed Lloyds Bank to call an event of default.
    4131 In cross-examination on this issue Mick said that if he had been advised of a default by a branch of Dresdner, he would have expected that branch to give him a report as to what the default was and what TBGL planned to do about it. He would then have asked Lloyds Bank to clarify TBGL’s explanation and outline its plan to remedy the default. Whether he would have been prepared to give TBGL time to remedy a default would have depended on negotiations within the Lloyds syndicate and with Lloyds Bank itself.
    4132 If Mick had been told at the time he was to sign the credit recommendation that the on-loans were not subordinated, he would have wanted to have known whether adding the $75 million to liabilities would have put the NP group in breach of its financial covenants. In his witness statement, he said that if this act had put the NP group in breach of its covenants, he would have recommended against Dresdner’s participation in the Lloyds syndicate facility. Mick said that if he had not been in favour of a proposed credit, then a negative report would have been prepared by the Credit Department and sent to the credit committee. Mick said that, in his experience, he did not recall an occasion when the credit committee had approved a proposal after the Credit Department had recommended against it. He said he did not believe that the credit committee would have approved a proposed facility where there was a negative recommendation from the department, without the Credit Department being given an opportunity to reconsider its recommendation.
    4133 Mick was cross-examined regarding Dresdner’s relationships with companies associated with RHaC. These included relationships with RHaC group, TBGIL, BRL and TBGL. The cross-examination on these relationships was highly detailed but to my mind did not alter Mick’s evidence concerning the subordination or otherwise of the bonds and the decision-making of the credit committee. Mick said he had some concerns about TBGL as a borrower in April 1986 but despite those concerns he was generally in favour of the loan. He said that he took into account that participation in the loan could lead to further business opportunities for Dresdner, particularly in capital markets work.
    4134 In cross-examination, Mick rejected the proposition that he had not considered the extent of Dresdner’s overall commitments with TBGL in giving his evidence. He said that the RHaC group had a good relationship with the bank and that this relationship did not weigh heavily on the Credit Department’s mind when considering specific business transactions. He also rejected the proposition that he would not have made a decision to refuse RHaC without some discussion between senior officers at the bank.
    4135 Bernard Walter gave evidence that he would not have agreed to the treatment of the convertible bonds as equity had he understood the bonds were not subordinated. I accept that given the decision of the credit committee had to be made unanimously, this evidence meant that if the bonds were not subordinated, the credit committee would not have approved Dresdner’s entry into the facility. Walter said that:
    Reading that balance sheet now, I note that convertible bonds were included with equity. I understand now, from reading this entry, that the convertible bonds were subordinated to all other unsubordinated debt of The Bell Group Ltd and the negative pledge group. If the convertible bonds had not been subordinated in this way, I would have expected them to have been placed within liabilities. Accordingly, I understand the entry of the convertible bonds in equity in the balance sheet as telling me that those bonds were subordinated to the Bell facility. I know of no reason why I would have understood this differently in 1986. I would not have agreed to the treatment of those bonds as equity if I had known that they were not subordinated to the bank lending to the negative pledge group.
    4136 In cross‑examination, Walter accepted that the credit committee had to consider the commercial situation between Dresdner and TBGL but that the ultimate duty of the credit committee was to make a decision, disregarding and ignoring those commercial considerations. He agreed in cross‑examination that the International Division encouraged the intensifying of Dresdner’s business relationship with TBGL. Walter also said that the International Department’s recommendation was not mandatory and was not relevant for the decisions to be made by the credit committee. Walter agreed that he did not recall Dresdner’s participation in the Lloyds syndicate facility and would only have read the 14 April 1986 credit application prepared by Mick and Wegener.
    4137 The plaintiffs assert that factors other than subordination influenced Dresdner officers’ decision to enter into the facility. The plaintiffs argue that contemporaneous documentation did not focus on the issue of subordination and that there is no evidence to show that Dresdner relied on a representation of subordination to determine the bank’s entry into the facility.
    4138 The plaintiffs say that Walter’s evidence on behalf of the credit committee does not provide satisfactory evidence of reliance. Walter did not recall the facility or read the credit application. Further, the other members of the credit committee, Hugo Chill and Werner Hundt, were not called to give evidence on this point and no documents expressed the reasoning of the credit committee in approving the proposal.
    4139 The plaintiffs argue that while the credit application described the bonds as subordinated and noted that lenders had agreed to treat the bonds as equity for the purposes of the NP ratios, there is no evidence that Dresdner analysed the status of the bonds compared with bank lenders, nor did it rely on any representation to that effect in presenting the credit application.
    4140 The plaintiffs submit that Bell would have recommended participation in the Lloyds syndicate facility whether he understood the bonds were effectively unsubordinated or not. The plaintiffs say that Bell was only concerned with recommending the facility to the Credit Department and that he did not read the parts of the Information Memorandum that contained the representation of subordination. The plaintiffs assert that Mick and Walter would have recommended participation in the facility in light of the further opportunities participation would present for the development of Dresdner’s relationship with TBGL.
    Conclusion
    4141 Officers of Dresdner were aware of, and had read, the Information Memorandum. They were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons as set out in Sect 17.10.1, that subordination was a factor in the assessment process. I am satisfied that Mick and Bell’s recommendations were premised on the debt being subordinated and that Walter would have been aware of Dresdner’s dealings with TBGL to the extent that they were disclosed in the memorandum of 14 April 1986.
    4142 I also accept that other factors would have influenced Dresdner officers’ decision-making with regard to the facility, in particular the development of a relationship with TBGL. I am satisfied that had the bank officers thought the bonds were not subordinated, there was a real chance they would have taken actions to manage the relationship between Dresdner and TBGL in a materially different lending environment. As a result, Dresdner lost the opportunity to decline to participate in the facility or to alter the terms of its participation to reflect the different lending environment, and that loss was to its detriment. The failure to call Chill and Hundt is not, I think, fatal to this conclusion. There is sufficient other evidence to satisfy me that the proposal would have been considered according to usual practice and there is no basis for an adverse inference to the contrary.
    17.19. Gulf Bank
    Participation in the facility
    4143 A telex from Graham Pettit on 23 July 1986 showed that Gulf Bank’s Singapore office was contemplating lending to Australian companies. Pettit’s enquiries in London resulted in his identification of the Lloyds syndicate facility. In his memorandum, he quotes passages from the invitation telex from LMBL to prospective syndicate members. Robert Wilcox wrote on the front of the telex that the office should hold for the ‘eventual proposal’ from the Singapore office.
    4144 On 24 July 1986, Melvyn Mak sent a telex to Pettit requesting a copy of the Information Memorandum. The Singapore office received a copy on 31 July 1986. A copy was not kept on file in London as, according to Pettit, it was ‘a matter for Singapore and Kuwait [offices]’. Mak and Loh Soh Wah prepared a credit application dated 8 August 1986. The application attached an internal memorandum prepared by Mak and Loh and agreed by Hugh Brown, and a spreadsheet based on the consolidated TBGL accounts. Mak and Loh recommended the transaction on the following bases:
    (a) The Bell Group is a respectable name in Australia and owns a sizeable share of BHP, the largest company in Australia. The chairman, [RHaC] is a man of substantial means and recently he was one of the ‘white knights’ in helping Standard Chartered Bank defeat an acquisition bid by the Lloyds Bank. He is reputed through the Bell Group to hold a 7.4% in The Standard Chartered Bank.
    (b) The Group exhibited healthy financial ratios (1) and has a good track record for profitability. Its business are diversified and well spread to be able to cushion any adversities in any one industry.
    (c) Favourable bankers’ opinions.
    (d) The margin is quite attractive and commensurate with the risks.
    4145 The credit application was sent to the Kuwait office on 8 August 1986 where it was recommended by Wilcox and Ted Fenner. On 15 August 1986, Pettit forwarded a copy of the TBGL preliminary results for the year ending June 1986 to Wilcox in Kuwait. Wilcox informed the Singapore office on 19 August 1986 that the proposal would be considered at the next International Loans Committee (ILC) meeting on 24 August 1986 and, according to an internal memorandum from Celia Eldred on 19 August 1986, he said ‘the management was strongly supportive of the transaction’.
    4146 On 22 August 1986, Mak sent a fax to Wilcox which referred to a conversation they had had that day. In the fax, Mak reproduced the following from page 28 of the Information Memorandum:
    In December 1985 the Company issued 150 million of convertible subordinated bonds due in 1995. All current lenders under the NPA have agreed to treat these bonds as equity for the purpose of calculating liability ratios. Syndicate participants are also required to agree with this treatment.
    4147 The ILC approved Gulf Bank’s participation in the on 2 September 1986. On 11 September 1986, Gulf Bank entered into a £3 million participation in the Lloyds syndicate facility.
    4148 Robert Wilcox gave evidence that had he been aware the bonds were not subordinated to the bank’s lending, he would not have entered into the Lloyds syndicate facility. Wilcox said that the treatment of the bonds as equity was understood by him to be a ‘price of entry’ into the facility which the bank accepted as a part of its participation. He said he would not have been prepared to treat the bonds as equity for the ratios unless he had understood the bonds to be subordinated and that he would not have given consideration to the application without alerting LMBL as the agent bank. Further, without his recommendation the application would not have been presented to the ILC.
    4149 Wilcox gave evidence that he regarded financial ratios as an important safeguard once a facility was in place. ‘It was up to the branches to monitor compliance with such ratios. In my experience at Gulf Bank, Head Office only received information in relation to compliance with such covenants, if there was a breach.’ There is no evidence that head office, or Wilcox, was ever informed of a breach of ratios. Wilcox said that had he become aware that the bondholders were unsubordinated creditors, he would have reported the matter to LMBL and would have expected Lloyds, or any other bank, to have sought remedial action.
    4150 In cross‑examination, Wilcox agreed that according to the protocols of Gulf Bank, the information contained in the credit application and the attached memorandum and spreadsheet was what Singapore decided was important, and what Kuwait required, to report to the Kuwait office. Wilcox agreed that these would have been the only documents that were assessed by the institutional banking group. In the financials attached to the documents submitted by the Singapore office to the Kuwait office, the consolidated Bell group’s unsecured loans were shown as $389.9 million. In relation to this entry, Wilcox said that the figure for ‘unsecured loans’ in liabilities included the first BGNV bond issue and that they were not included in the row labelled ‘subordinated debt’.
    4151 Wilcox gave evidence that he thought the Singapore analysis had made a mistake in not putting the bonds into ‘subordinated debt’ when reporting to the Kuwait office and that such a mistake should have been picked up by Wilcox’s office. In his supplementary statement, Wilcox said, in reference to Mak’s 22 May 1986 memorandum and its quote from the Information Memorandum:
    Reading that paragraph now, I understand it to mean that the bonds were subordinated to bank lending. The bonds are described as subordinated and, as far as I am concerned, the only basis upon which current lenders under the NPA could have agreed to treat them as equity was if they were effectively subordinated to their lending into the negative pledge group.
    4152 In cross‑examination, he conceded that his understanding was limited to bank lending and that he did not turn his mind to bondholder debt being subordinated to bank debt in a liquidation scenario, as, he said, ‘you don’t enter into something thinking in terms of liquidation straightaway’.
    4153 Pettit said he believed that Wilcox would have consulted him about Gulf Bank’s proposed participation in the Lloyds syndicate facility. Pettit gave evidence that as a matter of practice, he and Wilcox discussed transactions that were introduced by the bank’s London office. Further, Pettit said he and Wilcox had a good working relationship and that ‘from time to time we discussed credits that were his responsibility. It was not unusual for Robert Wilcox to consult me and to use me as a “sounding board” on problems’. Pettit said that it is unlikely he read the Information Memorandum and attachments when they were sent from LMBL.
    4154 In his witness statement, Pettit gave evidence that had he been consulted prior to the bank taking participation in the Lloyds syndicate facility, and had he understood that the bonds were unsubordinated, he would have recommended against agreeing to treat any of the bonds as equity until it was clear and had been legally verified that the bonds were subordinated to the bank. If TBGL could not or would not subordinate the on-loans, he would have strongly advised against participating in the facility, irrespective of the credit analysis of the proposal. Further, if all the bonds had been treated as liabilities in the NP group balance sheet as at 31 December 1985, he would have been concerned about the level of total liabilities compared to shareholder funds.
    4155 The plaintiffs argue that other factors influenced Gulf Bank officers’ decision‑making when entering into the facility. The plaintiffs assert that no mention was made in the credit application or its attachments of the existence of the bonds or that they were subordinated. The information in the attachment, that TBGL considered the bonds could be justified because they were likely to be converted, was not conveyed to the head office.
    4156 The plaintiffs highlight that the contemporaneous documentation from Mak and Loh did not centre on the issue of subordination and that there is no evidence to show that Gulf Bank relied on the representation of subordination to determine its entry into the facility. They say that there is no evidence that Wilcox attended the ILC meeting or that the ILC took into consideration the subordinated status of the bonds. Further, the plaintiffs assert that other factors, such as the expansion of Gulf Bank’s business in Australia, influenced the decision to enter into the facility. Accordingly, the plaintiffs say, Gulf Bank would not have refused to participate in the Lloyds syndicate facility had it been told that the on‑loans were not subordinated.
    4157 The plaintiffs argue that Gulf Bank’s use of consolidated figures for the Bell Group leads to a conclusion that the bank was not interested in any aspect of the NP group. The plaintiffs point out from the TBGL consolidated spreadsheet and Wilcox’s evidence that there was no reliance on the subordination of the bonds as the question of subordination was not a priority for the consideration by the ILC of the credit application. The plaintiffs go through the financial aspects of the credit application in detail which I will not repeat here, aside to say that the issue of the bonds or their subordinated status was not mentioned. Further, none of the relevant decision makers were called to give evidence and no explanation was provided as to why they were not called.
    Conclusion
    4158 Officers of Gulf Bank were aware of, and had read, the Information Memorandum and were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons as set out in Sect 17.10.1, that subordination was a factor in Gulf Bank’s process of assessing entry into the facility. I am satisfied that Wilcox’s recommendations were premised on the debt being subordinated, as evidenced by the memoranda dated 24 July and 22 August 1986. Both documents expressly referred to the negative pledge ratios and quoted the Information Memorandum that the company had issued ‘convertible subordinated bonds’.
    4159 I accept that if Wilcox had understood the bonds were not effectively subordinated he would not have recommended the entry into the Lloyds syndicate facility and that the ratios were an important part of his recommendation of the facility. I am satisfied that without his recommendation the application would not have been presented to the ILC and that if he was aware the bondholders were unsubordinated creditors, he would have reported the matter to LMBL and sought remedial action. Further, I accept that had Wilcox consulted Pettit, and Pettit had understood the bonds were not effectively subordinated, Pettit would not have recommended entry into the facility.
    4160 In my view, if the bank officers had thought the bonds were not subordinated, there was a real chance they would have taken actions to manage the relationship between Gulf Bank and TBGL in a materially different lending environment. As a result of its reliance on the representations of subordination contained in the Information Memorandum, Gulf Bank lost the opportunity to decline to participate in the facility or to alter the terms of its participation to reflect the different lending environment, and that loss was to its detriment.
    17.20. Kredietbank
    Participation in the facility
    4161 The invitation from LMBL for Kredietbank to participate in the Lloyds syndicate facility was initially received by the London office. Kredietbank has not discovered a copy of the invitation from LMBL. On 9 April 1986, David Monahan prepared a credit application recommending a £5 million participation in the Lloyds syndicate facility. Monahan emphasised the growth of TBGL and the financial position of the group, and noted that TBGL appeared to be highly geared. Monahan said that the group had raised ‘150 million dollars in subordinated convertible bonds’.
    4162 I will outline some of the information in the credit application that I believe is valuable to this discussion. The credit application showed that Monahan calculated the consolidated net worth of $495.5 million by treating all of the bonds as debt. This resulted in a gearing of 99 per cent when treating the bonds as debt, and 56 per cent when treating the bonds as equity. Each of the gearing ratios for the period ended 31 December 1985 were calculated on the basis of all of the bonds being treated as debt. Monahan did not state that the banks were required to consent to the bonds being treated as equity for the purpose of calculating the NP ratio.
    4163 The credit application set out the relationship between TBGL and BRL, and BRL’s equity shareholding in BHP, and said that the ‘major unknown factor’ within the Bell group was BRL’s ‘future intentions with regards to this equity holding’. Monahan said:
    While the Bell Group generally has proved itself adept at managing such investments, the scale of the BHP undertaking is significant; however it must be remembered that this activity is taking place through a separate company, the funding for which is totally outside the Bell Group.
    4164 The London Credit Committee (LCC) decided in favour of participation on 17 April 1986. The Foreign credit department (CABUK) recommended that Kredietbank take a silent participation because of the bank’s existing relationship with BHP and the shareholding in BHP by BRL. Jean Souvereyns reviewed the credit application and prepared a CABUK advice for submission to the Foreign Credit Committee (FCC). The FCC declined to approve the participation on 24 April 1986. In late May 1986 Monahan and the LCC again recommended participation to the FCC on the basis that it would not be disclosed to BHP, but the FCC again declined to participate.
    4165 By memorandum dated 3 June 1986, the LCC submitted the application to the FCC for a third time. The LCC argued that there was no conflict of interest for Kredietbank as the facility was primarily to finance BGUK and because BRL had its own independent financing arrangements. On 5 June 1986 the FCC approved participation on the condition that Kredietbank’s Melbourne office agreed. I accept that it is inferred that the Melbourne office agreed to Kredietbank’s involvement despite the absence of any contemporaneous documentation to this effect.
    4166 In his witness statement, Monahan gave evidence that had he been told that the proceeds of the first BGNV bond issue had been on‑lent on an unsubordinated basis, he would have recommended that they not be treated as equity for the banking covenants and he would not have recommended participation on the terms offered by TBGL. He said that if the bonds had not been treated as equity, participation would have been riskier and this would have caused a lot of additional debate at LCC discussions. He would have been reluctant to recommend participation even if it was not a requirement that Kredietbank agree to treat the bonds as equity.
    4167 Monahan could not say with certainty so many years on what he would have recommended, but he would have found the reversal of the subordination most curious and would have wanted an explanation. If Bell group officers had said it had been done by mistake but could not be fixed, this would have shaken Monahan’s confidence in the Bell Group as being well managed. Monahan was cross-examined about the note in the attachment to the Information Memorandum. He agreed that the note gave likelihood of conversion as the justification for including the bonds as capital, and that Bell had a different view in the attachment in terms of the justification for treating the bonds as equity. It was not put to Monahan that he understood at the time that this was Bell’s justification or the only justification in the Information Memorandum, nor was it put to him that he agreed with this justification. Monahan said in cross‑examination that he understood that the LCC’s main reasons for pursuing the application were the improved performance of the Bell group, the opportunity to establish a new client relationship and an attractive rate of return.
    4168 In re‑examination, Monahan stated that the attachment would not have been relevant to his decision because it dealt with Bell’s treatment of the bonds for accounting and reporting purposes. He stated that:
    The relevant issue for me was that in the Information Memorandum I was being told that they were subordinated bonds and that was what was material and relevant as far as I was concerned, not the accounting treatment.
    4169 Monahan confirmed that there was a distinction drawn between how TBGL was required to treat the bonds under Australian accounting principles and how TBGL was asking Kredietbank to treat them. He also said that if there was anything in the attachment that was relevant to the credit application, it ‘likely, possibly, would have [featured] in the credit application’.
    4170 Monahan was also cross‑examined on the fact that in the credit application he focussed on the consolidated figures, worked out gearing ratios and treated the bonds alternatively as debt and equity. He was also cross‑examined about the positive features of the facility that he mentioned in the credit application, and the fact that he came up with a way of getting Kredietbank to participate despite its conflict with BHP. In the credit analysis, Monahan showed that TBGL’s high gearing had fallen by 31 December 1985 due to the sale of music and publishing interests, the issue of the bonds and the sale of BHP shares. Monahan asserted that:
    The net effect of these various moves was to generate a significant increase in the consolidated net worth of the company which, as at December 1985, stands at $495.5 million and consequently has a significant impact upon the gearing level in reducing it to 99% (treating the subordinated convertible bonds as Bank debt). Treating this convertible as equity, the gearing reduces to 56%.
    4171 Monahan gave evidence that as a matter of usual practice he reported to Marc Bernaert to discuss credit applications prepared by Monahan prior to LCC meetings. Bernaert said that he had no reason to believe that he did not adopt this practice with respect to the Lloyds syndicate facility credit application. Bernaert’s evidence was that he would not have agreed to treat the bonds as equity if they were not subordinated and that he would have treated them as a liability for the purposes of the negative pledge ratios. He said he would have viewed the Information Memorandum, in particular page 23, as being deliberately misleading or misstating an important matter and would not have wanted to do business with a company responsible for this. Bernaert stated that whether TBGL had misled Kredietbank deliberately or not, he would have recommended strongly against the loan and would have wanted TBGL’s financial position and compliance with banking covenants looked at carefully.
    4172 In cross‑examination, Bernaert stated that a company’s adherence to financial covenants was always looked at by Kredietbank but it was different from the bank’s own financial analysis of the company, which was carried out to determine what risk was acceptable to the bank. He made this distinction clear when asked about the note in the attachment and when asked about the treatment of the bonds as liabilities in the credit application. Bernaert said that he understood the bonds as constituting a ‘built-in protection’ in addition to the ‘gearing protection’ of the financial covenants: ‘we have a built-in protection because all these loans are subordinated. They are subordinated to us and should be calculated as part of equity’.
    4173 Bernaert was also cross‑examined on the assumption that the subordination representation in the Information Memorandum was a misstatement with no intention to deliberately mislead. He asserted that the use of the word ‘subordinated’ was ‘something very clear and not subject for discussion, especially as this is a publicly issued bond issue’. He said that if there had been no solution to the problem of subordination he would have recommended to get out of the relationship. He also would have wanted analysis of the bonds being treated as equity and as liabilities for the purpose of satisfying himself that Kredietbank should still enter into the facility. The lack of subordination would have been discussed amongst the bank officers in London and Brussels. Bernaert’s opinion was that they would have recommended Kredietbank’s removal from the facility.
    4174 Eugeen Cleemput attended both LCC meetings that considered the credit application. He gave evidence that if he had learned of a subordination problem before Kredietbank entered into the facility he would not have agreed to treat the bonds as equity, would have considered the gearing of TBGL to be unfavourable and would not have allowed the London office to enter into the facility. Cleemput agreed in cross‑examination that the LCC had a belief in the value of TBGL as a client and that there were a number of attractive aspects of the company as a credit. It was not put to him in cross-examination that any of these matters made him resile from his hypothetical evidence.
    4175 Cleemput was also cross-examined on the treatment of the bonds as liabilities in the calculations of the credit application. He said the bonds could be treated as liabilities for balance sheet purposes and as capital for gearing purposes since they were subordinated. The banks assert that Cleemput understood the different purposes for which the bonds might be treated as liabilities or equity. Further, that treatment of the bonds as liabilities in the credit application to recommend whether or not to participate in a facility was a different matter from treating them as equity for the purposes of the 65 per cent ratio as long as they were subordinated.
    4176 Pieter Heering was a member of the LCC and head of the London office in 1986. In his witness statement he said that if he had not thought that the first BGNV bond issue was subordinated he would not have agreed to treat the bonds as equity. Further, he said that if the bonds had been unsubordinated, he would not have wanted to participate in the lending if the lack of subordination could not be explained to him, or could not be fixed. Kredietbank would not have been in a position to take up a participation in the Lloyds syndicate facility with a requirement to treat the bonds as equity and there would have been no reason for him to agree to the FCC taking on the business. He thought it highly likely that his view would have been reflected in the ultimate decision due to his position in the London office and because of relationship issues between Kredietbank and BHP.
    4177 In cross-examination, Heering was taken through the credit application and his attention drawn to the statement ‘given the subordinated nature of the convertible bonds, it is appropriate to look at these as equity for the gearing calculation purposes’. He agreed that this was a different statement to the note in the attachment to the Information Memorandum and that it served to emphasise that the subordination of the bonds was important to the bank rather than just convertibility. When taken through the NP group balance sheet of 31 December 195, he agreed that treating $75 million as debt would have resulted in a ratio below the 65 per cent limit and that, on the basis of these figures, it would still have been possible to proceed with participation in the facility.
    4178 Heering confirmed that ‘in convertible bonds if the price is right you can always convert but for us the important aspect was the subordination’. When asked to assume that convertibility was justification for treating the bonds as capital, Heering said ‘that wouldn’t have been sufficient reason for me to accept [the bonds] as equity’. Heering was also asked how he would have reacted if he had thought the lack of subordination was a mistake rather than intentionally misleading. He said he would still have asked for the mistake to be remedied, being that the on‑lending was subordinated not just staying below the 65 per cent ratio, making sure that ‘the way that we were led to believe [was] that it was subordinated’.
    4179 The plaintiffs assert that other factors, such as the banking relationship between Kredietbank and TBGL (and RHaC) influenced the bank officers’ decision-making when entering into the facility. The plaintiffs focus on the significant lending relationship between Kredietbank and BHP and the bank’s participation in a syndicate standby credit facility to BR Holdings (UK). I accept that the pre‑existing relationship with BHP was the reason Kredietbank did not participate in the facility from the outset as there was concern about upsetting that relationship by lending to an RHaC company. The plaintiffs argue that the use of the bonds as debt and equity to calculate the gearing ratio, and that the gearing was acceptable when the bonds were treated as debt, means that equity treatment of the bonds was neither central nor critical to Monahan’s argument. The plaintiffs further argue that the contemporaneous documentation does not support the bank’s position that subordination of the bonds was a determining factor.
    4180 The plaintiffs argue that the bank would not have refused to participate in the Lloyds syndicate facility had the representation of subordination not been made. They say Kredietbank considered the facility to be an acceptable credit risk and that the Bell group was considered to have low gearing. Further, the bank was anxious to develop its banking relationships, as evidenced by the bank’s submission for participation in the facility to Brussels three times. The plaintiffs say that neither the LCC nor the FCC considered the Information Memorandum or the attachment and that they could not have been induced by a representation of subordination. Further, the plaintiffs say that as the members of the FCC, other than Heering, were not called to give evidence I should infer that their evidence would have contradicted the banks’ argument.
    Conclusion
    4181 Officers of Kredietbank were aware of, and had read, the Information Memorandum. They were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons as set out in Sect 17.10.1, that subordination was a factor in Kredietbank’s assessment of the proposed facility. I am satisfied that Monahan’s recommendations were premised on the debt being subordinated, as evidenced by the credit application of 9 April 1986, and that the members of the LCC read these recommendations on the understanding that Kredietbank would rank above other debt of the NP group.
    4182 In light of the evidence given by Monahan, Bernaert and Cleemput, I am satisfied that had any lack of subordination been known to the London office of Kredietbank, before the LCC decided in favour of participation, Monahan would not have recommended participation in the facility. Further, if Monahan had recommended participation, Bernaert would not have supported the credit application and both Bernaert and Cleemput would not have voted in favour of participation on the LCC. The Brussels office would have been informed of the LCC’s decision and, given that the London office had never participated in a facility that the LCC had declined, the matter would have gone no further. If the LCC’s decision was not unanimous, or was unanimous in favour of participation, the credit application would have been forwarded to the FCC. Given Heering’s evidence, he would have recommended against participation and the FCC would have followed his decision. I am not, therefore, persuaded that any adverse inference should be drawn on the basis that the other members of the FCC were not called to give evidence.
    4183 I am satisfied that Monahan regarded the subordinated nature of the bonds as important to justify the treatment of the bonds as equity. I am also satisfied that Monahan’s treating the bonds as debt for the calculation of the gearing level did not mean he considered the bonds were to be treated as debt and that if the bonds were not subordinated, the bank would have participated in the facility regardless. Monahan still used the term ‘subordinated convertible bonds’ therefore the reliance on subordination is, to my mind, intact and an important aspect of Monahan’s recommendation of the facility. Bernaert also said that the gearing protection was not the only relevant point justifying entering into the facility, and that he considered the subordinated nature of the bonds as ‘built in protection’ for the bank.
    4184 Again, I take the view that had the bank officers thought the bonds were not subordinated, there was a real chance they would have taken actions to manage the relationship between Kredietbank and TBGL in a materially different lending environment. As a result, Kredietbank lost the opportunity to conduct its banking relationship with TBGL on the basis that the bond proceeds were unsubordinated and, in particular, the opportunity to decline to participate in the facility.
    17.21. Gentra
    Participation in the facility
    4185 On 18 July 1876, LMBL invited Gentra to participate in the Lloyds syndicate facility. This invitation was received by Robert Sullivan, head of the commercial credit division (CCD) in London. On 22 August 1986, Martin Davies and Steven Cooke prepared a credit application which reported the debt and the gearing ratio of TBGL on the basis that the bonds were liabilities. Davies and Cooke recommended participation in the facility. Davies noted in the credit application that:
    The principal reason for recommending this loan facility is that the track record of [RHaC], acting through the Bell Group is undoubtedly first class … Accordingly, we regard a ₤3 million loan to this Group represents a satisfactory risk.
    4186 Gentra took up £3 million of the Lloyds syndicate facility on 28 August 1986. John Lovesey gave his approval of the bank’s participation on 3 September 1986.
    4187 Lovesey and Sullivan both gave evidence that had they understood that the bond issue proceeds had been on‑lent on an unsubordinated basis, they would not have approved participation in the facility and Gentra would have declined LMBL’s invitation. Lovesey and Sullivan said they treated the bond issues as liabilities as the analysis of the credit application was on the same basis as the accounts of the Bell group, which also treated the issues as liabilities. Sullivan said this analysis of the NP group allowed a comparative analysis between the consolidated accounts and the negative pledge account. He said that Gentra’s treatment of the issues as liabilities was because the analyst ‘would always choose the most conservative way of looking at the accounts, the figures. And the most conservative way of doing that is including it as debt’.
    4188 Lovesey said that the treatment of the convertible bonds as liabilities was ‘a standard form used by bank analysts for whatever credit happened to come their way’. He said: ‘The bonds had to be treated as equity because they were subordinated to bank debt. If they had not been subordinated to bank debt; the loan would not have been approved.’ Lovesey explained that the Lloyds facility was an unusual facility for Gentra at the time as syndicated loans were not a significant part of Gentra’s business and it had a policy of lending to small to medium size enterprises, not large corporate groups such as TBGL. He reiterated that evidence in cross‑examination: ‘It was a loan of such significant size that I would have given it more than a cursory glance. I would certainly have looked at the Information Memorandum’.
    4189 Lovesey gave evidence in his supplementary statement that, when considering an application for the provision of the new facility, as a part of Gentra’s usual practice he was provided with all documents, such as the Information Memorandum and attachment. He would have read through all the bank papers to ask any questions about the proposal that he may have of the preparer of the proposal. In the case of the Information Memorandum, he would have read the introductory section and focussed on matters that he considered merited attention such as safety, liquidation and remuneration.
    4190 In cross-examination, Sullivan was questioned on the ratio of 54 per cent existing as at 31 December 1985, the state of the bank’s loan book and the desire to attract further business from TBGL as reasons for Gentra’s participation in the facility. Sullivan said that the ratio’s possible extension up to 65 per cent did not impact his evidence. In his view, the loan book issue only had a limited impact on whether Gentra would have taken a different view of an application. Sullivan and Lovesey rejected the proposition that the desirability of further business with the Bell group was a relevant factor in the application. Sullivan said ‘[Gentra] would never be in the position to get business from the Bell Group … it would be too far down the food chain to expect to get any business.’
    4191 The plaintiffs say that the material used by Lovesey to approve Gentra’s participation was not a factor that underpinned the bank officers’ recommendation. The plaintiffs highlight that the assessment of the gearing ratios was conducted on the basis of both the BGNV bonds and the TBGL bonds being treated as debt. As a result, the creditworthiness of the NP group did not rely on the subordinated status of the bonds and their treatment as liabilities in the Bell group spreadsheets.
    4192 The plaintiffs state that the credit application did not reflect any reliance on the subordination of the bonds. More superior decision‑makers would have limited their consideration of the facility to what was contained in the credit application. As the credit application did not refer to the subordinated status of the bonds nor to the request for quasi-equity treatment, the plaintiffs say Lovesey and Sullivan did not have subordination in mind when accepting participation in the facility. The plaintiffs say that Lovesey did not read enough of the Information Memorandum to have knowledge of subordination and highlight that neither he nor Sullivan could recall the Lloyds syndicate facility. The plaintiffs argue that when Lovesey said that in reading the Introduction section of the Information Memorandum he ‘perused’ the balance, he meant ‘scanned’. Sullivan also gave evidence that he ‘perused’ the memorandum and the attachment ‘in a summary fashion’. The plaintiffs say that Sullivan’s evidence as to what he would have read constituted mere speculation and that his evidence did not show he knew of the subordination of the bonds.
    Conclusion
    4193 Officers of Gentra were aware of, and had read, the Information Memorandum and were aware, therefore, that it was a condition of participation that they agree to treat the bonds as equity. I am satisfied, for the same reasons as set out in Sect 17.10.1, that subordination was a factor in the assessment process. I am aware that reasons were put forward in favour of the facility and that subordination was not expressly one of them. But I am satisfied that in the event of the bonds not being subordinated, Lovesey and Sullivan would not have approved of the facility. I accept that Lovesey’s and Sullivan’s recommendations were premised on the debt being subordinated and that they read the credit application, which included pages from the Information Memorandum.
    4194 While Lovesey and Sullivan did not remember reading these documents, I accept the evidence of their ‘usual reading practices’ and, given the nature of the proposal, I accept they read the relevant portions of the memorandum that related to subordination. Again, I am satisfied that had the decision‑makers believed the bonds were not subordinated they would not have agreed to participate. As a result of its reliance on the representations of subordination contained in the Information Memorandum, Gentra lost the opportunity to decline to participate in the facility or to alter the terms of its participation to reflect the different lending environment, and that loss was to its detriment.
    17.22. Skopbank
    4195 Skopbank’s case on reliance and detriment is limited because of its late entry into the syndicate. The banks assert that because of its reliance on the representation of subordination, Skopbank lost the opportunity to:
    (a) decide to not to participate in the Lloyds syndicate facility; and
    (b) make or refuse to make decisions concerning the continued provision of the facility.
    17.22.1. Participation in the facility
    4196 The circumstances around Skopbank’s entry into the Lloyds syndicate facility are unclear. Sakari Simonen gave evidence that the bank’s involvement came about through a contact at LMBL, Simon Denton. Denton was not called to give evidence and there is no evidence that Denton raised the issue of equity treatment of the bonds with Simonen. Simonen testified that Denton had sent Skopbank ‘a very thick package’ of documents for its initial consideration; however, he could not remember the contents of the package.
    4197 Skopbank discovered Section A of the Information Memorandum, parts of which were underlined by Simonen. Simonen said in cross-examination that his practice was to underline information but that this did not indicate that he underlined every important aspect of the document. The parts of the document that are underlined relate to the financial aspects of TBGL. There is reference to the ‘convertible bond issue A$75 million’ which is not underlined and, in Section A, the bonds are not described as subordinated.
    4198 Simonen prepared a credit request dated 23 June 1988 which did not mention the request for equity treatment of the bonds nor the fact they were subordinated. On 23 June 1988, Kaarlo Sukselainen and Fred Sundwall approved a £2 million participation by Skopbank in the facility and Simonen sent a fax to LMBL on 27 June 1988 confirming Skopbank’s participation. It appears that, at this stage, Skopbank was not in possession of LSA No 1.
    4199 On 5 July 1988, Sukselainen and Wegelius gave approval for an increased participation in the facility to £3.5 million. Sukselainen could not recall what led to the increase in Skopbank’s participation. The credit request referred to the original credit request of 23 June 1988 and repeated the same details of the interest rate. There is no evidence that any other information was provided to Skopbank between 28 June 1988 and 5 July 1988. In a fax sent by Graham (TBGIL) to Griffiths (LMBL) on 6 July 1988, Graham noted that he had been telephoned by Skopbank:
    I had a call from Skopbank today saying that basically they want to do more! They have no problem with Bond, are undergeared and are keen to put on assets. They cannot fund A$ but are happy with US$, £ or giving guarantees etc. They are comfortable with BRL & TBGL.
    4200 This note was not put to any of the witnesses called on behalf of Skopbank. Nor is the bank officer who participated in the conversation. Nonetheless, the note stands for what it says.
    4201 Simonen gave evidence of his usual practices. He said that he would not have prepared and presented the credit application without reading the Information Memorandum if it were available. He said he recalled at the time he recommended participation, he believed that the bonds issued were subordinated to bank debt. Further, he said that at this time he was satisfied he had sufficient information to suggest participation in the facility to Sukselainen.
    4202 Simonen said he regarded the NP covenants as a very important aspect of facilities and that he would have carried out calculations and credit analysis based on the most up-to-date financial information available. He said his practice was to ask for all available negative pledge reports and that he would not have presented the credit application to Sukselainen for his consideration if the company had been in breach of its covenants.
    4203 In cross‑examination, Simonen said he would not have recommended participation in the facility if TBGL had ‘discovered’ the bonds were not subordinated, treated them as liabilities in the calculation of the ratio resulting in a breach, and TBGL had been returned to compliance with the ratio by 30 June 1988: ‘I would not have presented it because … if the bonds is subordinated, it’s ranked behind us. We don’t care anything else, so you don’t come in our basket’. Simonen said that treating the unsubordinated bond proceeds as liabilities would have affected the security position of the bank if TBGL went into liquidation. He agreed that he did not envisage TBGL going into liquidation but that if it were to happen, the subordinated status of the bond debt meant that it would be behind Skopbank.
    4204 Simonen said he could not recall what he had seen or read in giving his recommendation to participate in the facility. He had thrown out his summary papers when he moved offices in 1990. Neither Simonen nor Sukselainen could recall whether a summary paper was prepared for the Lloyds syndicate facility, but that their usual practice was to discuss various aspects of the proposed loan, based on the latest financial information and forecasts for the borrower, even if a summary paper had not been prepared.
    4205 Sukselainen said he would not have objected to treating bonds as equity for the financial covenants as long as they were subordinated and ranked behind Skopbank’s lending. He said if told the ratios were in excess of 65 per cent in 1988 he would not have approved participation in the Lloyds syndicate facility. As this was an international loan proposal, if he had been against participation the application would not have gone to the board for approval. Sukselainen said that he would have always acted on the statements such as those on page 23 of the Information Memorandum, or in the letter of 15 April 1987. He said that in his experience, a banker cannot avoid relying on the customer for important information if it is reputable, such as Lloyds Bank was considered to be, as it is not possible for a bank in an international syndicated transaction to check everything.
    4206 Sukselainen said that in order for him to treat the bonds as equity they needed to be both subordinated and convertible:
    If I give you a little background, subordination is necessary otherwise it would not even – nobody could put it into the equity side. If it’s not convertible and it’s not subordinated, it could not be in any kind of thinking equity.
    …
    If they weren’t convertible, you would not ever get to that consideration?—That’s correct.
    4207 In cross‑examination, he said the treatment of subordinated convertible debt by the bank depended on the commercial deal applicable between the banks and the borrower, not general matters such as whether the borrower was in financial difficulty. He said he took into account various matters in giving his evidence, including the fact that Australia was a target market for Skopbank and the bank’s confidence in Lloyds Bank as an agent. Sukselainen said he would still not have wanted to participate if there were features in the facility that he did not like or understand. Sukselainen also said that he had no recollection of any of the events regarding the decision to enter into the facility.
    4208 The plaintiffs submit that there is no evidence that Skopbank received any representation of subordination prior to its decision to enter into the Lloyds syndicate facility. Further, the plaintiffs submit that any representation that was received did not induce the belief and assumption of subordination in the mind Simonen, and Simonen did not communicate that belief and assumption to Sundwall, Sukselainen and Wegelius. The plaintiffs assert that Skopbank’s decision to enter into the Lloyds syndicate facility was made ‘wholly on the basis of the information in the terms sheet provided by LMBL, Skopbank’s desire to increase its exposure to Australian banks and the fact that Skopbank held LMBL in high regard’.
    4209 The plaintiffs put forward a number of arguments that relate to the documents used by Simonen in preparing the initial 23 June 1988 credit application. In particular, the plaintiffs point out that while Simonen gave evidence that it was his practice to read the relevant facility agreement before giving his recommendation on a proposal, this would not have been possible as he did not receive LSA No 1 until after he had prepared the 23 June 1988 credit application. The plaintiffs also point to the lack of evidence to show what information or documents was were considered by Sundwall and Sukselainen other than the credit application.
    4210 The credit application of 23 June 1988 contained no reference to the subordination of the on-loans, the negative pledge ratio or the treatment of the bonds as equity. There is no evidence to show that the bank considered the NP ratio of the status of the bonds prior to its decision. The plaintiffs assert that Skopbank did not enquire whether there was compliance with the financial covenants and did not take notice of the subordination of the bonds. As a result the bank was not concerned whether there was recalculation of the ratios and would not have enquired whether there was any breach.
    Conclusion
    4211 I am not persuaded that Skopbank relied on a representation of subordination in reaching the decision to participate. In this respect Skopbank is in a different position to the other banks. It is, I think, likely that the whole document would have been provided to Sukselainen, even though only Section A has been discovered. Section A refers to other parts of the document and it would not make sense that this section would have been separately sent to the bank, particularly as the document in its entirety had been sent to all other participating banks in the facility. But there are a number of points that count against Skopbank.
    4212 First, LSA No 1 was not received by the bank prior to the credit applications being written. It is clear that at 29 June 1988, the loan agreement and draft assignment documentation had not been provided the Skopbank as indicated by Denton’s letter to Simonen. Secondly, the Information Memorandum is the sole source of any information indicating that the bank officers had an understanding that the bonds were subordinated. Again, it may well be that Skopbank would have been provided with the Information Memorandum and the three‑year business plan of TBGL, together with the most recent financial statements of the group. But there is no contemporaneous written record of what the relevant decision‑maker made of this financial information and what that would have meant in regard to the equity treatment and subordination of the bonds.
    4213 I am therefore left without any contemporaneous record to show whether and if so to what extent the bank considered the equity treatment of the bonds, and the subordination of the bonds, to be factors in their decision to enter into the facility. In relation to other banks I have regarded the Information Memorandum as sufficient evidence of reliance of subordination because there has been some additional material to support it. But here there is a lack of contemporaneous documentation independently created by Skopbank that shows subordination and equity played a role in the bank officers’ decision-making.
    4214 It is common ground that under the NP guarantee there was no need for Skopbank to give specific consent to the equity treatment of the bonds as it was a part of the agreement. But it is difficult to ascertain whether the treatment of the bonds was a focus of the bank’s decision to enter into the facility given that there was no specific attention brought to the treatment of the bonds. I accept the fact that the equity treatment of the bonds was not discussed between LMBL and Skopbank due to the nature of the facility arrangement. I am not convinced that Simonen and Sukselainen discussed the subordinated status of the bonds as a reason for entering the facility. This is particularly of concern since Sukselainen did not indicate that he had an existing understanding of subordination in 1988.
    17.22.2. Later events
    4215 As I have found that there was no reliance on the subordination representation in the initial entry into the facility, a central plank of the reasoning process that I have applied to the other banks is absent. The banks say that if the non‑subordination of the on‑loans had been discovered after participation, Skopbank would probably have sought to call in the loan, and would have considered the possibility of curing the non-subordination by an acceptable method if that course was recommended by Lloyds Bank. The plaintiffs assert that even had Skopbank understood the bonds to be unsubordinated, it would have continued its involvement in the facility and would not have been concerned about the lack of subordination of the on-loans.
    4216 Neither party has provided much information regarding Skopbank’s involvement in the facility after July 1988. The testimony of Simonen and Sukselainen mirrors their earlier assertions had they had understood the bonds were not effectively subordinated. Simonen said that he would have discussed the matter with the agent and reported the matter to his immediate superior and to Skopbank’s legal department, credit committee and board. Sukselainen said he would have wanted an explanation from Lloyds Bank as to how this had come about and, if it was legally possible, he may have pushed for Skopbank to withdraw. He said that, in all likelihood, he would have ascertained what Lloyds Bank’s view was and, to an extent, would have been influenced by what Lloyds Bank wanted to do.
    4217 In my view there is insufficient evidence to establish there was reliance on a representation of subordination. The question of detriment falls away accordingly.
    17.23. Lloyds Bank
    17.23.1. Participation in the facility
    4218 The banks contend that had Lloyds Bank known that the bonds were not effectively subordinated prior to their accepting the role to underwrite and manage the Lloyds syndicate facility, they would not have participated in the facility, and would not have agreed to treat the first BGNV bond issue and TBGL bond issue as equity. The plaintiffs assert that the banks have not established subordination as a decisive consideration underpinning Lloyds Bank’s decision to participate in the Lloyds syndicate facility.
    4219 The details of Lloyds Bank’s decision to act as syndicate leader are outlined in Sect 4.2.8.1 and Sect 12.12.3. Lloyds Bank was well aware that the bonds were subordinated and of the requirement that the bonds be treated as equity. Further Lloyds Bank was aware that subordination was a factor in supporting the requirement to treat the bonds as equity. I am satisfied by the evidence of Eggleshaw particularly in pars 16 to 26 of his witness statement, to the effect that:
    (a) he was aware that the bonds were subordinated;
    (b) he arrived at that understanding by virtue of conversations with Graham (which Graham confirmed), the offering circular which refers to the ‘subordinated bonds’ and the information memorandum; and
    (c) while conversion was a factor justifying equity treatment, as mentioned by Eggleshaw in his letter of 2 April 1986 to Graham, it was not the only factor.
    4220 As a result, I am satisfied that Lloyds Bank relied on TBGL’s representation of the bonds as subordinated and lost the opportunity to take actions to manage the relationship between Lloyds Bank, TBGL and the Lloyds syndicate banks in a materially different lending environment and that this loss was to its detriment.
    17.23.2. Treating the bonds as equity for the NP rations
    4221 The banks argue that if Lloyds Bank had understood the bonds were not effectively subordinated after entering into the Lloyds syndicate facility, it would not have agreed to treat the second BGNV bond issue and BGF bond issue as equity. The plaintiffs assert that the banks have not shown that Lloyds Bank acted in reliance of a representation of subordination as they do not prove that any officer of Lloyds Bank or LMBL considered the request of 15 April 1987 and that Lloyds Bank gave its consent to the request.
    4222 TBGL’s original 15 April 1987 request was addressed to Eggleshaw. On 23 April 1987, Eggleshaw sent that letter and associated documents, including a copy of the offering circular, to the loans administration section of LMBL. This note included the offering circular of the second BGNV bond issue ‘in respect of A$175 million issue of guaranteed convertible subordinated bonds’. Further, Eggleshaw requested that the syndicate members’ authority be obtained ‘to agree and accept the treatment of the convertible subordinated bonds due May 1997’. On 8 May 1987, the Loans Administration Department sent a letter to DG Bank, enclosing the 15 April 1987 letter. This letter further refers to the second BGNV bond issue as ‘convertible subordinated bonds’.
    4223 Eggleshaw gave evidence that had he understood that the bondholders, through BGNV, ranked equally with the banks in a liquidation he would have considered TBGL’s letter of 15 April 1987 to be misleading, he would have had a serious problem with the proposal and would not have been willing to agree to treat the bond issues as equity. The banks submit that in these circumstances Eggleshaw would not have forwarded TBGL’s letter of 15 April 1987 and the offering circular to the loans administration section of LMBL and TBGL’s request of 15 April 1987 would not have gone to the Lloyds syndicate banks. If that inference is not drawn, the banks say, the situation would be that Eggleshaw would have allowed a misleading letter to be circulated proposing something that he would not have agreed to and something with which he would have had a serious problem.
    4224 Owen said that in relation to TBGL’s request of 15 April 1987, he was ‘absolutely confident’ that if he had been involved in the decision he would have only agreed to the treatment of the bonds as equity on the basis that they were subordinated and, so, ranked behind bank debt. If Lloyds Bank had agreed to treat the bonds as equity and he had later found out that they were not subordinated to the bank’s debt, he would have immediately taken steps to recover the loan.
    4225 Tinsley gave evidence that he understood that subordination was one of the fundamentals of the deal:
    It is my understanding that that the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes … It’s a recognition that if subordination debt was included in total liabilities, that either the headroom the banks had expected would be there or the ratio itself would have breached, or may have breached … It’s fundamental to the treatment of the bonds and their proceeds in the transaction as a whole.
    4226 Tinsley said that this understanding came from the letters of 15 April 1987 and 14 May 1987 and conversations with Eggleshaw and Chris Shawyer.
    4227 The plaintiffs contend that the letter of 15 April 1987 did not induce any belief of subordination. They say that Eggleshaw thought it was not his or LMBL’s responsibility to consider the request and form a view about whether it was justified. They say that Eggleshaw simply passed the letter on to the loans department of LMBL for distribution to the Lloyds syndicate banks and that there is no evidence that any officer from Lloyds or LMBL considered whether Lloyds Banks needed or should have consented to the request as well. But Lloyds Bank was not mentioned in an internal memorandum from Eggleshaw to Shaw on 27 May 1987, which outlined the syndicate banks who had not yet responded to LMBL regarding TBGL’s request. This suggests to me that Lloyds Bank had already considered, and agreed to, the request.
    4228 I am satisfied that Lloyds Bank and its officers relied on the representation of subordination in their decision‑making regarding the decision to treat the bonds as equity. The letter of 23 April 1987 clearly defined the bonds as subordinated. Further, the Information Memorandum had already established the connection between the treatment of the first BGNV bond issue as equity and their subordinated status. I accept that the same reasoning would have been present in the agreement to treat the second BGNV bond issue as equity. I am also satisfied that the bank officers would not have recommended the treatment of the bonds as equity to the other Lloyds syndicate banks had they understood the bonds to be unsubordinated. Accordingly, Lloyds Bank lost the opportunity to refuse TBGL’s request or the chance to refuse to distribute TBGL’s request to the other members of the Lloyds syndicate facility.
    17.23.3. Replacing the NP agreement with an NP guarantee
    4229 The banks argue that if Lloyds Bank had understood the bonds were not effectively subordinated after entering into the Lloyds syndicate facility, it would not have agreed to TBGL’s request to collapse the NP agreement into an NP guarantee. The plaintiffs assert that Lloyds Bank did not rely on a belief of subordination in deciding to replace the NP agreement with an NP guarantee.
    4230 Prior to committing to the collapse of the NP agreement, there were significant discussions between Graham (TBGIL) and Lloyds Bank regarding the banking structure of TBGL and its impact in international markets. I will not go into these discussions here as they do not add to my consideration of reliance and detriment. Williams (LMBL) noted the differences between the NP agreement and the draft NP guarantee in a memorandum of 9 April 1987. He pointed out that the ‘liability ratios in cl 12 have been weakened … non current Subordinated Debt is excluded from ‘Total Liabilities”.
    4231 On 7 May 1987 Eggleshaw prepared an application for limits to underwrite 50 per cent of a mandate to arrange a £60 million syndication. The application was signed by Eggleshaw and Shawyer. There was a financial analysis attached to the application for limits. In the summary the author notes that ‘[TBGL] regard their convertibles as equity … there is some justification for this approach as the bonds are subordinated’. On 14 May 1987, Wilson (TBGL) sent a letter to Eggleshaw regarding the alterations of the borrowing structure. This document states that:
    You will note that non current Subordinated Debt has been excluded in the definition of Total Liabilities. The reason for this is to exclude from Total Liabilities subordinated debt such as the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes.
    4232 On 23 July 1987, LMBL informed the Lloyds syndicate banks about the guarantee proposal which enclosed a draft of the LSA No. 1.
    4233 Tinsley said in cross‑examination that the definition of subordinated debts in the current draft of the guarantee was: ‘that the loans had to be expressly defined as subordinated loans and expressed in their terms to rank after all unsecured and unsubordinated debt of the guarantor and/or the Australian subsidiaries’. Tinsley said that he would have understood that Wilson was saying that the ‘subordinated convertible bonds generally would fall within that definition’ and that he would have understood the reference to the bonds in par 2(a) of the 14 May 1987 letter to be a reference to ‘the BGNV bond issues and the subordinated structure, not just the bond on its own’.
    4234 Owen gave evidence that he had no recollection of the collapse of the NP agreement. In his witness statement he said if it had been recognised within LMBL that the restatement of the facility via the collapse of the NP agreement resulted in a major change in the nature of the protection or security provided to LMBL, he would or should have been consulted.
    4235 Tinsley gave evidence that had he understood the bondholders were effectively unsubordinated creditors, he would have told those associated with the Bell facility, including Mitchell, Eggleshaw and Shawyer, and informed the Lloyds Syndicate that the bonds were not subordinated to the banks’ debt. In cross‑examination, Tinsley said the reason he would have had notified the syndicate if he suspected that the on‑lending was not subordinated was: ‘Because it had changed the understanding which the facility had been lent on … which is that the whole – the bonds and the proceeds of the bonds were all subordinated’.
    4236 He said he would not have sent the negotiated guarantee on behalf of LMBL under cover of a letter (such as that of 23 July 1987). He said he would have recognised the question of any possibility of the NP group as central and very important and that any requests to change the arrangement would have stopped until there was resolution of the subordination issue.
    4237 Stiven gave evidence that had he understood that the on-loans were not subordinated, and that the ratio covenants had been breached as a consequence of treating those issues as liabilities, he would have reacted very strongly. He said it would have undermined his understanding of the rationale for considering that TBGL was creditworthy because the subordinated bonds could be considered as ranking with equity the NP group could be considered as possessing an adequate capital base to support its borrowings.
    4238 The plaintiffs assert that Lloyds Bank agreed to the collapse of the NP agreement because they were concerned about maintaining a relationship with the Bell group and that the change of structure would assist in their financial concerns. Subordination was not a factor in the negotiation of the NP guarantee and not considered by LMBL’s officers when they decided to recommend the NP guarantee to the Lloyds syndicate banks.
    4239 However, as I have already established, discussion took place on the foundation of subordination. Further there was enough recognition of the existence of the subordinated bonds for it to form a part of the central plank of the reasoning behind Lloyds Bank’s actions. I accept that there were other reasons in existence for the bank officers to agree to recommend the change in agreement to the Lloyds syndicate banks, such as a desire to retain the business of TBGL. This does not mean that subordination was not a factor of the banks decision‑making. Subordination was not the reason that the NP agreement was collapsed but the change in agreement would not have occurred had it been known there was a lack of subordination.
    4240 I am satisfied that had Owen understood that the bonds were not subordinated he would have been concerned as the collapse of the NP agreement would have resulted in a major change in the nature of security provided to Lloyds Bank. I accept that had Tinsley understood that the bonds were not subordinated he would not have forwarded the letter of 23 July 1987 to the Lloyds syndicate banks as he considered subordination a fundamental premise of Lloyd’s entry into the facility. I also accept that had Stiven understood the lack of subordination he would also have not recommended Lloyds agreement to the change in banking structure.
    4241 In my view, the representation of subordination by TBGL caused Lloyds Bank to lose an opportunity to decline to replace the NP agreement with an NP guarantee. Further, the bank missed an opportunity to refuse to recommend such an action to the Lloyds syndicate banks.
44. The subordination issue: conclusions
    4242 I am reminded of the tag line to the 1948 film The Naked City: ‘There are eight million stories in the Naked City … this has been one of them’. There are literally hundreds of ‘stories’ (individual issues and disputes) raised within 10,000 or so pages of written closing submissions on the subordination issue. I have tried to cover as many of the material issues relating to the bond issues, the on‑loan contracts and other aspects of the subordination question as I could identify. Hidden away somewhere in the submissions there might be one or two (or eight million) ‘stories’ that I have missed. I have done my best.
    4243 I have spent a long time examining this issue. The reason will be obvious from what I have said in Sect 6.5. But towards the end of these reasons, after I have completed the analysis of the events of late 1989 and 1990, it will become apparent that relief concerning status of the on‑loans may not depend on the events of this earlier period. Why, then, have I gone to such lengths? The answer lies in the spider’s web analogy. I have mentioned some aspects in the final paragraphs of Sect 13.4. In addition, had the banks not established the subordinated status of the on‑loans as at 26 January 1990, the case concerning the prejudicial and detrimental effects of the Transactions and the Scheme, a critical element in the plaintiffs’ causes of action, would have been unanswerable.
    4244 There is a further reason why I have felt it necessary to set out the factual material in detail. In Sect 30 I will examine the state of knowledge that the banks had concerning the affairs of the Bell group in the period leading up to the refinancing in January 1990. This is, of course, directly relevant to the causes of action asserted by the plaintiffs under Barnes v Addy, equitable fraud and the bankruptcy legislation. In Sect 17.3.9.2 I mentioned that, in relation to the reliance and detriment argument, it was not possible to divorce the events of 1988 and beyond from the history of the relationship between the banks and the Bell group in an earlier period. The same applies to the relationship as it existed in 1989 and 1990. It did not arise in a vacuum. Accordingly, the long recitation of factual material in this section is relevant to what is contained in Sect 30.
    4245 This is a civil case and all findings fall to be determined according to the balance of probabilities. Nonetheless, it is common experience that a trier of fact may feel differing levels of conviction or confidence on particular issues. Indeed a trier of fact may be required to do so under the Briginshaw principles. While Briginshaw did not play much of a part in my approach to the subordination question I did reach varying levels of persuasion (all on the balance of probabilities) on individual matters. The findings that subordination representations were made, and that the on‑loans were intended to be subordinated and were so regarded by the banks, are ones that I have reached with complete conviction. In other areas, for example, some aspects of reliance and detriment, I have made a decision based more squarely on the balance of probabilities.
    18.1. Bond issues, on‑loans and subordination: a final analysis
    4246 The whole idea of the bond issues was to raise funds for the NP group. Central to the project was injecting funds into the group by a mechanism that would allow them to be counted as equity rather than debt. There were two reasons for this. First, to do otherwise may have jeopardised the ability of the companies to comply with the NP ratios. Secondly, under the ‘double whammy’ effect, it presented the group with the opportunity to borrow additional funds and keep within the ratios.
    4247 The issue of convertible bonds carried with it a threat to RHaC’s proportionate shareholding level and thus to control of the group. To avoid this problem a decision was taken that RHaC would subscribe for half of the issue. But this, too, carried problems. Another ‘given’ in the bond issue project was that it should be tax effective. It was therefore necessary to ensure that the interest payable by the issuer of the bonds would be deductible to the Australian Bell group companies and that the European‑based bondholders would not have to pay Australian withholding tax on the interest they received.
    4248 There was a serious risk that the bond issue structure, as originally envisaged, would not achieve these taxation objectives. It was therefore decided to have two separate issues of equal amounts; one to the European bondholders and one to RHaC interests. Further, the issue to the European bondholders was to be made by an offshore entity. This eliminated the taxation risks (if any taxpayer can ever be certain of that outcome). With some nominated exceptions (that are not material to the outcome) the two issues were to be on the same terms and conditions. As between the BGNV (as issuer) and the European bondholders, and as between TBGL (as issuer) and the domestic bondholder, the bonds were to be subordinated.
    4249 This was the background to the first BGNV bond issue and the TBGL bond issue and it carried through into the second BGNV bond issue and the BGF bond issue. It also carried through to the third BGNV bond issue, except for the corresponding domestic issue. This background is an essential component of the factual matrix from which I have developed my conclusions.
    4250 Before the first BGNV bond issue was effected, the Bell group companies sought the approval of the banks to equity treatment of the bonds. In support of their case they put forward three reasons: that there was a likelihood of conversion; that the bonds were subordinated; and that the maturity date was beyond the term of the banks’ facilities. The banks gave their approval.
    4251 The necessity to make the on‑loans arose from, and only from, the decision to interpose the offshore issuing entity. That decision came about because, and only because, of the taxation considerations.
    4252 I am in no doubt that the officers of the Bell group companies responsible for the bond issue project intended that the on‑loans would be made on a subordinated basis. When I say ‘intended’ it is actually a presumed intention because there is no evidence that any officer actually turned his or her mind to the precise question. Be that as it may, there is, in my view, a firm evidentiary basis for such a finding.
    4253 The gravamen of the plaintiffs’ case here is that a distinction must be drawn between the bonds per se and the proceeds from the bonds. While the former were subordinated, the latter were not. I do not accept that proposition. If it were the case, the BGNV bondholders would not, in reality and effect, be subordinated (although the domestic bondholder would be) and the commercial purpose of the project (injecting funds into the NP group as equity rather than as debt) would be at risk. To my mind, that is illogical and lacking in commercial reality and effect.
    4254 The ‘bonds and proceeds’ thesis does not fit with the evidence. For example, the negative pledge reports, despite their imperfections and the confusion evident in some of them, do not support such a distinction. The contemporaneous documentary material looked at in its entirety and the oral testimony of people such as Griffiths, compel me to find that the on‑loans were intended to be, and were, subordinated. This applies to the first BGNV bond issue (and the on‑loan) and the TBGL bond issue. The same result ensues for the second BGNV bond issue (and the applicable on‑loan) and the BGF bond issue. Even without an accompanying domestic issue, the same result must, in my view, flow through to the third BGNV bond issue and the relevant on‑loan.
    4255 I am therefore satisfied that the on‑loans arose as contracts between BGNV and (or) BGF and that those contracts contained a subordination term. The contracts are informal and were not reduced to writing. The subordination terms are, therefore, not to be found in any precise piece of writing that is, itself, a contractual document. In my view the parties intended that the subordination terms would mirror, so far as was possible, the terms set out in the bond issue documentation.
    4256 It follows, therefore, that I am satisfied as to the existence of contracts inter se as contended for by the banks. But they were not contracts to which the banks were a party and, on the view that I take of the doctrine of privity (even as relaxed by Property Law Act s 11(2)), the banks lack standing to enforce them.
    4257 I am in no doubt that the communications by the Bell group officers to the banks seeking approval to equity treatment of the bonds were intended to be, and were, representational in character. I am also satisfied that the representations reflected the state of affairs within the companies. But I do not believe that the representations were intended to have contractual force and effect as between the relevant Bell group companies and the banks. Accordingly, I am not persuaded that contracts inter partes came into existence.
    4258 The findings that the banks lack standing to enforce the contracts inter se and that there were no contracts inter partes render it necessary to consider the banks’ estoppel claims. The estoppels, too, are advanced as being inter se and inter partes. My finding that there were contracts inter se makes it unnecessary to consider whether TBGL and (or) BGF could have asserted an estoppel against BGNV had the latter attempted to take action on the basis that the on‑loans were unsubordinated. I can concentrate on estoppels said to arise between the banks, on the one hand, and TBGL and (or) BGF and (or ) BGNV on the other.
    4259 Put simply, the banks say that the companies represented to them that the on‑loans were subordinated and that they relied on those representations. If the on‑loans were not subordinated, the representations would be false and the banks relied on them to their detriment. There is, of course, an element of unreality in this discussion because I have found that the on‑loans were subordinated. Hence, the representations were not false. Nonetheless, for the reasons already outlined, I have to examine this issue.
    4260 The basic factual matrix is the same as for the contractual arguments. The background to the bond issue project is equally as important for the estoppel claims as it was in contract. I have no doubt that the relevant Bell group officers made representations to the banks to the effect that the bonds, and therefore the on‑loans, were subordinated. I have no doubt that they did so intending the banks to act on the representation by agreeing to treat the bonds as equity rather than according to its true character, namely, debt. I acknowledge that subordination was not the only basis put forward in order to persuade the banks to this view. I do not shy away from the proposition that convertibility was a major reason. But in my view, subordination was an essential component of the package put forward in order to achieve the commercial purpose of the bond issue project.
    4261 There is ample evidence to support the conclusion that relevant decision‑makers within each of the banks believed the bonds, and therefore the on‑loans, were subordinated. The plaintiffs pressed me to find to the contrary on several scores. One of them, which only affected CBA, was a memorandum prepared by Sim in December 1985 and the other, affecting all banks, was the reaction in December 1989 (and thereafter) to Aspinall’s assertion that the bondholders might rank equally with the banks in a liquidation. In other parts of these reasons I have explained why I am not prepared to find against the banks on those grounds.
    4262 Because of the representational character of the statements made to the banks and the ongoing nature of the relationship, I believe that the estoppels to which the matters give rise (assuming all other elements are present) are promissory in character. I think, therefore, that the focus of attention should be on equitable estoppel rather than on estoppel by convention. It could also be an estoppel by representation but that would not detract from its character as a promissory estoppel. This may seem a little odd given my finding that the representations were not intended to have contractual effect sufficient to ground the formation of contracts inter partes. But the authorities suggest there is room for a promissory representation that does not, for other reasons, sound in contract. In my view, this is such a case.
    4263 This finding makes it unnecessary to deal with what would otherwise be quite complex issues of timing, namely, whether the representations were of existing fact, or as to the future, or a combination of those things. This would be a greater problem in relation to the 1985 representations than it would for the latter statements. They were of the same character as, and confirmed, the 1985 statements.
    4264 In my view, the banks relied on the subordination representation. This is particularly so in four areas:
    (a) the Australian banks (other than SCBAL) agreeing to treat the first BGNV bond issue and the TBGL bond issue as equity;
    (b) the Lloyds syndicate banks (other than Skopbank) agreeing to participate in the Lloyd syndicate facility;
    (c) all banks (other than SCBAL and Skopbank) agreeing to treat the second BGNV bond issue and the BGF bond issue as equity;
    (d) all banks (other than SCBAL and Skopbank) agreeing to collapse the NP agreements and replace them with NP guarantees.
    4265 The exclusion of Skopbank in (b) arises from a finding of fact. In relation to (c) and (d) it is a matter of timing because Skopbank did not take up its participation until July 1988.
    4266 I have also found that most of the banks relied on the representations in some of their dealings with the Bell group in and after the stock market crash in October 1987. I accept that this is more problematic than the four items I have listed. The business world was much changed in the months following October 1987 and I can see that commercial reality might well have dictated a softer approach by the banks to ailing customers in the immediate aftermath. In so doing, the effect of the subordination representations on decision‑making might have been less compelling or apparent. Nonetheless, by then the equity treatment of the bonds was an established part of the banking relationship and there is nothing in the evidence that suggested to me that the banks had eliminated it from, or devalued it in any marked way in, their decision‑making processes.
    4267 The banks carried on their commercial relationships with the Bell group companies on the assumption that the on‑loans were subordinated. In my view, if the on‑loans were not, in fact, subordinated, the banks would have lost the opportunity to change the basis on which they dealt with the group. They lost the opportunity to, for example, recalculate the ratios on the basis that the bonds were debt and, if that resulted in breach of the NP ratios, take remedial action. These opportunities, it seems to me, constitute real or material chances to avoid detriment. It is more than just a speculative possibility. Accordingly, it qualifies as detriment occasioned by reliance on a representation.
    4268 In my view, save in the case of SCBAL and Skopbank, all of the necessary elements of a promissory or equitable estoppel have been established. This is an estoppel that, immediately prior to entering into the Transactions on 26 January 1990, the banks could have asserted against TBGL and (or) BGF and (or) BNGV had any or all of them taken or threatened to take action based on the on‑loans being unsubordinated. The case advanced by SCBAL and Skopbank fails because there was no relevant reliance on the subordination representation.
    4269 Of course, that did not happen. The events of December 1989, when Aspinall made his assertion about the ranking of the bondholders, did not amount to the relevant companies resiling from the representations. In any event, the main refinancing documents dealt with the position in a way that was not inconsistent with the representations, namely, that TBGL would use best endeavours to cause BGNV to execute a subordination deed.
    4270 The Transactions themselves, in particular the provision I have just mentioned and the BGNV Subordination Deed executed in July 1990, create problems for the banks in asserting in this litigation that they are entitled to the benefit of the estoppel. I will return to that question in the context of remedies. For the present, it is sufficient for me to say that such an estoppel could have been asserted, if need be, immediately prior to 26 January 1990.
    18.2. Claims under the Trade Practices Act and in restitution
    4271 I said in Sect 6.5 that there are four surviving bases on which the banks advanced their case concerning subordination of the on‑loans. They are: the on‑loan contracts, the estoppels, the Trade Practices Act and restitution based on mistake. In the preceding section I have dealt with first two of them. I can deal with the other two in short order.
    18.2.1. The Trade Practices Act claims
    4272 The banks allege in their counterclaim that if the on‑loans were not subordinated, then the banks are entitled to relief pursuant to the Trade Practices Act s 80 or s 87 to prevent loss by misleading and deceptive conduct. The banks say I should dismiss or stay any otherwise available remedy and restrain the plaintiffs from enforcing any relief that might otherwise be available except relief predicated upon the subordination of the on‑loans.
    4273 The Trade Practices Act claims are effectively put in the alternative to the banks’ main case; that is, subordination by way of contract or estoppel, or disentitlement in the plaintiffs to the equitable relief sought, due to their representations and conduct in relation to subordination of the proceeds of the bond issues. They only arise if, for some reason, the other bases fail.
    4274 The Trade Practices Act claims are put on two bases. First, that each of the plaintiff Bell companies engaged in conduct that was misleading and deceptive or likely to mislead or deceive. Secondly, that TBGL engaged in similar conduct and the other plaintiff Bell companies were directly, indirectly or knowingly concerned in or party to that conduct. The impugned conduct is, of course, the making of representations that the on‑loans were subordinated. If they were not, in fact, subordinated, the representations were misleading and deceptive.
    4275 The essential factual matrix is the same as for the claims arising in contract and as estoppels. I am satisfied that the representations were made as alleged by the banks. I do not think there is much doubt that they were made in the course of trade or commerce. If it turns out that the on‑loans were not subordinated, the threshold elements of a claim under Trade Practices Act s 52 will have been made out. But that is not an end to the matter. The question is what, if any, consequences flow from the contravention of the statute.
    4276 There is, for me, an obvious dilemma here. I have found, positively, that representations were made to the effect that the on‑loans were subordinated. I have also found that the on‑loans were, in fact, subordinated. It follows that the representations were neither misleading nor deceptive. Accordingly, the essential factual matrix on which a Trade Practices Act claim would be based is missing. Whatever else might be said about the reasoning process and conclusions that follow from those two findings, they are ones that I have reached with a strong degree of conviction. I cannot see, at the moment, where the flaws in those two findings might lie.
    4277 In litigation, relief does not exist in, or emerge from, a vacuum. It depends on the circumstances of the case: Wenpac Pty Ltd v Allied Westralian Finance Pty Ltd (Unreported, WASCA, Library No 920452, 28 August 1992) 7 (Ipp J). For example, whether a misrepresentation was made innocently or fraudulently may be significant in deciding what relief should be granted: Munchies Management Pty Ltd v Belperio (1989) 84 ALR 700, 708 – 711. In this instance it is difficult for me to say how relief would play out without knowing precisely:
    (a) what representations are said to have been made;
    (b) why they are said to have been misleading and (or) deceptive; and
    (c) the circumstances in which the misleading and deceptive elements of the conduct are said to have arisen.
    4278 For this reason I am not convinced (assuming the claims were to be made out) that I would or should grant the banks relief or, if relief were in contemplation, what shape it would take. Accordingly, I see little point in developing the arguments and ruling on the substantive question of a contravention of the legislation. If at another time a different view is taken, I think the factual material necessary to revisit the matter will be evident from these reasons.
    4279 There is another issue. It will become apparent later in these reasons that, notwithstanding the conclusions in Sect 18.1, there are difficulties in determining what relief should apply. These difficulties relate more to what happened in 1990 (the Transactions and the Scheme) than to the events of 1985 and 1987 (the creation of the on‑loans). In my view, if they are problems in relation to the estoppels, they would give rise to similar impediments in the context of the Trade Practices Act claims.
    18.2.2. The claim in restitution for mistake
    4280 The banks’ restitution and mistake claim is based on the proposition that if TBGL and BGF were unsubordinated creditors of BGNV, that state of affairs was not one intended by TBGL, BGF, BGNV or the directors and officers of those companies. It therefore arose by, or was a consequence of, an oversight or mistake by TBGL and BGF or, alternatively, TBGL, BGF and BGNV. If there was such a mistake or oversight, and the companies and their officers had intended the contrary position, namely, a subordinated on‑loan, any rights resting with BGNV by virtue of the unsubordinated loans were granted by mistake.
    4281 The consequence of such a mistake, the banks say, is that BGNV was always obliged to hand back or restore to TBGL and BGF, or to give restitution to them, in respect of the rights given to BGNV by mistake or oversight. In turn, the consequence flows that BGNV was obliged, or obliged if called upon, from the dates of the on‑loans to execute enforceable legal documents giving back, in effect, or restoring to TBGL and BGF the position intended by all of the companies, namely, that there be an unsubordinated on‑loan.
    4282 In my view, the position is the same as mentioned in relation to the Trade Practices Act claims. I have not identified any mistake and the essential factual matrix for this claim is missing. The nature of the mistake, how it arose and the precise consequences that flow from it would have to be known in order to fashion appropriate equitable relief. It is trite law that equity intervenes only to the extent necessary to do justice in the particular circumstances of a case: Verwayen (437, 442) (Deane J). Again, the mistake (if there was one) and the relief (if there is an entitlement) ought not be viewed in the rarefied atmosphere of 1985 and 1987 divorced from what happened in 1990.
45. The effect of the Scheme and the Transactions
    19.1. Introduction
    4283 The prejudicial and detrimental effect of the Scheme and the Transactions is central to the plaintiffs’ case. Had I found that the on‑loans were unsubordinated and that the banks could not advance an estoppel, the plaintiffs’ case would have been overwhelming. But that is not what I have found and I have to look elsewhere for the requisite detriment.
    4284 Although the prejudicial effect of the Transactions is a critical part of the case, this section will be relatively brief. This is because the theme of prejudice and detriment keeps recurring and is best dealt with in the various evidentiary contexts in which it arises. Nonetheless, I do need to remind the reader of the general import of the allegations.
    4285 In 8ASC par 19A the plaintiffs plead that the Transactions covered all worthwhile assets of the Bell group. By reason of the Transactions those assets were made available to the banks for repayment of the debts owed to the banks by BGF and BGUK in priority to the claims of all other creditors and future creditors of Bell Participants. In 8ASC par 33C the plaintiffs set out the effect of the Transactions. In its application to the plaintiff Bell companies, being the entities seeking relief, the effect can be summarised by reference to eight broad propositions.
46. The assets, surpluses or moneys of the relevant entities would no longer be available to those entities for the payment of debts of those entities or otherwise for distribution according to interlocking shareholding relationships. Accordingly, there was prejudice to the existing and future creditors of each of the plaintiff Bell companies (except for Maradolf, Belcap Enterprises, W&J and Ambassador Nominees because they had no creditors to prejudice).
47. The prejudice to these creditors and future creditors corresponded with the advantage conferred on the banks. The banks had the advantage of the assets, surpluses or moneys that would have otherwise been available to be realised and applied for the benefit of other creditors or shareholders.
48. Save for W&J, Ambassador Nominees and Maradolf (which are not alleged to have been insolvent), 18 of the remaining plaintiff Bell companies were insolvent, nearly insolvent, of doubtful insolvency or would inevitably become insolvent prior to entering into their Transactions.
49. Upon or as a consequence of entering into their Transactions, the 18 plaintiff Bell companies remained or were rendered insolvent or inevitably would become insolvent, as did a further three plaintiff Bell companies, namely, BPG, Western Interstate and Wanstead.
50. The prejudice was contributed to by the fact that the company concerned and, where the prejudice related to the collection of debts, the relevant direct or indirect debtor of the company concerned was or became insolvent, nearly insolvent or of doubtful solvency.
51. The terms and conditions of the Transactions and the financial predicament of the companies meant that by May 1990, at the latest, the banks would have become entitled to obtain control over the Bell group companies and their assets.
52. But for the execution of the Transactions, TBGL, BGF and BGUK and many others would have been wound up in or about January 1990 or February 1990 or shortly thereafter and other Bell Participants would then have suffered a similar fate.
53. There was no prospect or probable prospect of benefit, but the probable prospect of loss, to the plaintiff Bell companies and their creditors. In particular:
    (a) liabilities would increase;
    (b) there would not be a material increase in the realisable value of assets to restore the other creditors to the position they would have been in had the instruments not been executed; and
    (c) there would be a forced sale of assets and probable diminution in their realisable value of such of the assets as could be realised.
    4286 A significant aspect of this plea is that some of the Bell Participants incurred liabilities (namely, exposure to the banks) that they did not previously have. It exposed them to the probable prospect of an increase in their liabilities. It provided the creditors and shareholders with no probable prospect of benefit and a probable prospect of loss. In short, the effect of the Transactions was that the Bell Participants charged their assets, incurred new liabilities to the banks and gave up their entitlements to recover inter‑company debts, in a way that ceded to the banks control over the method by which they could recover their loans. In part this was achieved by preventing TBGL and BGF from accessing their assets to meet the claims of external creditors.
    4287 I am sure the meaning of the phrase a ‘back of the envelope’ calculation is well known. It was used from time to time during the hearing. I will set out my own back of the envelope calculation based on findings I have made and other evidence. This exercise fails the group heresy test. It assumes that the trade creditors would be paid from (or pass to the purchaser of) the publishing businesses. It ignores the bondholders. For want of any other measure, it assumes that the BRL shares (which were then suspended from trading) were worth the price for which they were eventually sold.
    Table 35
    Amount Totals Reference
    Assets
    Publishing assets $269 million Sect 9.17.9
    BRL shares $60 million $329 million Sect 4.8.2
    Liabilities
    Banks $260 million Sect 9.5.1
    External creditors $35 million Sect 10.6.4
    Provisions $38 million $333 million Sect 30.19
    Surplus/(deficit) ($4 million)

4288 This table demonstrates why I say that, had the findings on the on‑loan subordination case been different, the plaintiffs’ case would have been overwhelming. It is clear that the Bell group companies were in a precarious financial condition. Had the banks taken security and thus obtained a clear priority over creditors – who were previously of equal ranking and whose debts totalled about $346 million – the prejudice to those creditors would be palpable. If, by reason of taking security, the banks had first bite at the cherry to recoup the $260 million owing to them, it would have left about $69 million to be shared between the remaining $419 million of creditors who, prior to the Transactions, had ranked equally with the banks.
4289 I do not advance this rough and ready calculation to support a finding that there was, as matter of objective fact, a deficit of group assets over group liabilities as at 26 January 1990. That is not the purpose of the exercise. The question is not whether, had the companies been forced into liquidation, there would have been a shortfall. Rather, the issue is whether the effect of the Transactions was to expose the Bell group companies to a probable prospect of loss and no probable prospect of gain.
4290 I wish to turn now to a number of questions that are related, in one way or another, to the prejudicial and detrimental effect of the Transactions.
19.2. Pleading disputes
4291 It will probably come as no surprise to the reader to learn that I love pleading disputes. The prospect of a day’s argument about pleadings is the thing most likely to cause me to spring out of bed in the morning and say: ‘I can’t wait to get to work’. The prejudicial and detrimental effect of the Scheme and the Transactions spawned more than its fair share of pleading controversies.
4292 I do not intend to deal with the myriad pleading objections. Once it is recognised that the plaintiffs seek to set aside the Transactions rather than a single commercial event, the Scheme concept has greater relevance to the equitable fraud case than to the other causes of action. The equitable fraud case fails on the facts, not on the pleadings. Nonetheless, I will mention a couple of the areas of controversy because they are a convenient way of leading into this discussion.
4293 The banks contend that the Scheme argument is outside the pleaded case because it inevitably raises the concept of a binding legal agreement; that is, that the Scheme, as opposed to the individual Transactions, is a contract. The banks say that, as pleaded, the Scheme is an arrangement that is binding and continues in operation as a ‘bargain’ that requires each plaintiff to make available its assets to the banks, and that each plaintiff remains bound by ‘the Scheme’. I do not think this is correct. The plaintiffs plead the Scheme as being constituted by a series of Transactions. As it is put in PR par 158(i)(ii), ‘the Transactions and the Scheme constituted one commercial event, each Transaction entered into by a Bell Participant being a constituent element thereof’. The plaintiffs do not seek to set aside the commercial event. Rather they attack individual Transactions constituting contracts, agreements or deeds that form part of the series of transactions constituting the Scheme.
4294 The banks also submit that the Scheme is, in reality, an allegation of a conspiracy but it is not pleaded as such. I acknowledge that in the way I have viewed the Scheme concept in the context of the equitable fraud case, it has some of the indicia of conspiracy. I took the view that, on the facts, it would be necessary to establish a resolve on the part of the banks deliberately to conceal information from the creditors if it were to constitute an imposition and deceit. But a conspiracy involves a meeting of minds between two or more persons to bring about the impugned result. The plaintiffs have not satisfied me of the existence of that resolve, or of a meeting of minds between the banks and the directors in that respect. This finding is made on the facts and not because of any perceived deficiency in the pleadings.
19.3. The need for a financial restructure
4295 The banks do not contend that the Transactions were a panacea for all of the Bell group’s ills. They were a first step in a process by which the finances of the group companies would be restructured. The real import of the Transactions was to afford the directors time to devise and implement such a restructure. The plaintiffs agree, but only in part. On the plaintiffs’ case, without a valid and effective restructuring the companies would have gone into liquidation. But the Transactions were not a valid and effective restructuring, nor were they a ‘first step’ along that path and nor did they afford the directors time to put a proper plan in place.
4296 Hundreds of pages of written closing submissions were devoted to attack and counter attack on the concept of the valid and effective restructure. At the risk of oversimplification, I think it comes down to this. According to the banks, basic commercial experience demonstrates that, in the circumstances of this case, there were only two alternatives: the refinancing (that is, the Transactions) or liquidation. The Transactions were the only rational means to avoid an immediate liquidation of the companies. This is because the Australian banks’ facilities were all at call. Had one bank made a call the others would have followed suit. The demands would not have been met. This would have caused cross‑defaults into the Lloyds syndicate facility and the bonds. In those circumstances winding up was inevitable.
4297 Not so, say the plaintiffs. They agree that without a restructure of the finances, the companies would have collapsed. But they say that the Transactions were the antithesis of rational means, and most certainly were not the only rational means, to restructure the finances and thus avoid immediate liquidation. A fundamental premise of the plaintiffs’ case is that the Bell Participants were or became insolvent upon or as a consequence of entering into their Transactions. The banks’ premise that avoidance of liquidation per se is of benefit to a company, and is itself to be pursued for and in the interests of that company, is not correct.
4298 I think there is merit in the plaintiffs’ approach. It does not necessarily follow that the avoidance of immediate liquidation will result in the preservation of the existing or potential value of an asset. This may well be so but, equally, the prolongation of life might have the opposite effect. Honey and Woodings were in general agreement that the appointment of a liquidator could bring about negative factors relating to the realisation of assets. But it is, I think, too simplistic to say that liquidation will necessarily bring about disposal of assets at a minimum value without looking at the entire situation. The point is illustrated in the cross‑examination of Jeffrey Hall. He, it will be remembered, gave expert evidence about the value of the BRL shares. This exchange occurred:
[T]he view was expressed … by Mr Aspinall that on a liquidation sale liquidators are not interested in getting the best price possible or possibly obtainable. His view was they don’t have the interests of an owner of an asset, they take whatever price they can get and the sale price by liquidators is always a very low price, far below what the asset is worth. …[W]ould you agree, Mr Aspinall is expressing a view to your knowledge prevalent in the commercial community in 1990?—In a general sense you mean?
Yes?—Yes. When you say a view that’s prevalent, I mean that’s a view that people had and probably the same people – but it doesn’t mean that it’s automatically going to be the result.
No, but it was a prevalent view, wasn’t it, as you understand it, in 1990 amongst business people about the effect of a sale by a liquidator?—A prevalent view of one possibility of sale by a liquidator but not necessarily an automatic outcome of sale by a liquidator.
4299 The thesis that there is an automatic benefit in avoiding an immediate liquidation, that benefit being seen in the preservation of the value of assets, does not necessarily and invariably hold true. It will depend on the circumstances and, in particular, what plans are put in place once the threat of imminent liquidation has been avoided. This is one of the difficulties that I perceive in this aspect of the banks’ case. There was no developed or discernible plan for the future of the Bell group companies: see Sect 29.2.1.
4300 It follows that I do not accept the broad assertion by the banks that there were only two alternatives: the Transactions or liquidation. It ignores the impact of the terms of the Transactions on the assets and affairs of the individual Bell group companies. This, in turn, brings into play the plaintiffs’ concept of the valid and effective restructuring.
4301 But it raises another problem, one on which the banks seized during the hearing. The banks submitted that the plaintiffs bore the burden of defining and proving the ‘valid and effective restructuring’ that was a rational and realistic alternative to liquidation. The banks also contend that ‘the plaintiffs have not proved what valid and effectual restructure could have been achieved which was better than the opportunity which was provided through the refinancing’.
4302 The plaintiffs’ case is that there is no such impediment. They say their case is expressed in the negative, namely, that unless there was a valid and effective restructuring of their financial position, the companies would have been wound up or their assets liquidated. Further, the Bell group companies had assets capable of being considered for the purposes of a financial restructuring.
4303 There were provisions in the Companies (Western Australia) Code for appointment of a provisional liquidator and for schemes of arrangement with independent scheme managers. It is always open to directors to put forward an informal scheme of arrangement for consideration by those (such as creditors) with interests that might be affected. Speaking generally, the evidence establishes that the Bell group companies had an asset and debt structure capable of being considered for a reconstruction, including:
(a) a profitable business but a recurrent debt burden greater than the profit generated by the relevant business activities;
(b) no secured creditors and a limited number of unsecured creditors;
(c) assets such as the BRL shares that could be held for the medium‑ to long‑term to obtain the benefit of any potential restoration of value; and
(d) cash coming in from asset sales to provide the financial capacity to consider and seek to implement such a restructuring if they chose to do so.
4304 The problems associated with the lack of definition of the ‘valid and effective restructure’ were aired in the main amendment application. I see no reason to depart from what I said in Bell (No 1) [160]:
[I]t was not part of the plaintiffs’ case that steps should have been taken to effect a valid reconstruction … The plaintiffs do not assert that any particular steps should have been taken. Rather, the directors ought not to have done what they did … The plaintiffs are not required to say, and do not say, what the directors ought to have done. The case is simply that in doing what they did, they breached their fiduciary duties to the companies concerned.
4305 It seems to me that prejudice and detriment is to be determined by looking at what the directors did. The Transactions are not some theoretical construct. The instruments are not standard form documents taken from the precedent collection of a firm of lawyers (or a bank). The Transactions are commercial dealings entered into on precise and comprehensive terms and conditions. The directors caused the Bell Participants to enter into the Transactions on these precise and comprehensive terms. It is those Transactions, entered into on those terms, to which attention must be directed.
4306 It seems to me that there was a range of other possible transactions that might have been available to the directors. But it does not follow that prejudice and detriment is to be assessed by looking at what the directors might have done and what might have been acceptable to the banks. The question is whether these Transactions visited prejudice, in the relevant sense, on the Bell Participants and their creditors. In my view the answer is yes. This arises not because of the generality of the dealings but because of the particularity of the Transactions and their terms.
4307 The plaintiffs contend, and I accept, that these Transactions were not in the interests of the Bell Participants by reason of their terms and the financial position in which the Bell Participants found themselves. The effect of those Transactions flows from that factual base. The plaintiffs have established that there were legal means available by which a financial restructuring could occur. But they do not have to specify which of those alternatives should have been pursued in order to show that those Transactions had a prejudicial and detrimental effect.
4308 The banks’ case is that no restructuring would have been possible without the Australian banks’ facilities first being converted from current to non‑current liabilities and that the only means of achieving this was the Transactions. But in my view, it does not necessarily follow that the full range of terms and conditions of each Transaction was essential to a restructure. There is no evidence establishing that proposition. And, as the plaintiffs pointed out in their closing submissions, when the Transactions are considered in their entirety the real potential for prejudice becomes apparent. The following are matters that, in my view, when taken together demonstrate the potential for prejudice:
(a) the banks were established as a separate class of creditors with full security;
(b) the banks obtained rights over many companies, including immediate control over the ability of the Bell group companies to pay their debts;
(c) upon entering into them, or as their consequence, the plaintiff Bell companies became insolvent or inevitably would become insolvent;
(d) the then inevitable liquidation was delayed and could only be avoided, if at all, if there was a financial reconstruction;
(e) the directors were able to delay approaching other creditors for the necessary and inevitable debt restructuring, without which liquidation would be delayed but not prevented;
(f) the effect of the Transactions was to transfer to other creditors the risk of the inevitable compromise of debts required to avoid liquidation;
(g) the banks, as a class, were put in a position where they did not share these risks;
(h) the banks, as a class, were put in a position whereby they had rights of control over any reconstruction that might be devised and sought to be implemented; and
(i) because an immediate liquidation was avoided, consideration of a financial restructure (or a valid and effective restructure) involving other creditors was delayed.
4309 It seems to me that this is where one of the critical features of the banks’ analysis falls down. It is, I think, implicit in the banks’ contention that the Transactions were the only rational alternative open to the directors, that the refinancing gave the directors time to implement a restructure. But if, as I think is the case, the effect of the Transactions was as outlined, the argument about time is, at best, nebulous. Real control over vital elements of the capacity to devise and implement a restructure were ceded to the banks. The companies were placed in a position where they were immediately at the mercy of the banks and unable, without the consent of the banks (all of them, not just a majority), to meet their known commitments. The commitments I have in mind are the costs and fees of the refinancing, the interest due to the banks at the end of February 1990 and each following month and the bondholder interest due in May 1990. Unless they could satisfy their immediate obligations any restructure plans would be academic.
19.4. Prospect of loss; no prospect of gain
4310 A lynchpin of the plaintiffs’ case is that the effect of the Transactions was to impose on the Bell Participants, their creditors and future creditors a probable prospect of loss and no probable prospect of benefit.
4311 I should say at the outset that I do not think the reference to future creditors adds much to the case. I am not suggesting that future creditors are irrelevant or that, for example, an attempt to put assets beyond the reach of future creditors is not actionable. But the evidence led in this case was to the effect that future creditors were most likely to emerge as trade creditors of the publishing businesses. They were profitable operations and it was anticipated that the trade creditors would be met either from the income of the businesses or from the sale of the assets as a going concern. I will continue to refer to ‘creditors and future creditors’ when I am describing the various causes of action advanced by the plaintiffs. But when considering prejudice to creditors I will be concentrating on liabilities existing at the time or those that were then in contemplation.
4312 The Bell group companies were in a precarious financial position. They were either insolvent, nearly insolvent or of doubtful solvency. One effect of the Transactions was to cause companies that did not have a pre‑existing indebtedness to the banks to undertake such an obligation: see Bell Table P188A. Further, the terms of the Transactions bringing that situation about were such that those companies placed their assets in jeopardy in the interests of borrowers and guarantors that were themselves insolvent, nearly insolvent or of doubtful solvency. This brings into play the notion that the companies would themselves, if not already insolvent, become so or would inevitably become so. That, to my mind, is a serious mischief that reflects in a real potential for prejudice. Put in the language used by the plaintiffs, it presented those companies with a probable prospect of loss and no probable prospect of benefit.
4313 The position has to be viewed as at 26 January 1990. At that time the Bell group companies were, objectively speaking, insolvent. The Transactions did nothing to change that situation. The finding of insolvency comes not because there was $130 million due to the Australian banks but from the inability of the companies to pay their debts as those debts fell due. Those debts included the interest commitments on the Australian banks’ facilities but not the principal of the facilities. The fact that an effect of the Transactions was to permit the companies to transfer the indebtedness to the Australian banks from current to non‑current liabilities is, therefore, irrelevant to this argument. So, too, is the fact that between February 1990 and May 1990 the banks agreed to release the Bell Press proceeds to be applied against current debts of the companies.
4314 The Transactions did not change the status of the companies from insolvent to solvent and they did not afford the companies time to devise and implement a restructure leading to that result. They transferred to the banks control over the very means by which the companies could satisfy this critical aspect of their operations.
4315 Because of the way the companies ceded control over the means of meeting their commitments, the Transactions had the immediate effect of putting the banks in a position where, at any time, they could exercise their rights over the assets. In those circumstances there was a probable prospect of loss and no probable prospect of gain to BGF in assuming an obligation to the Lloyds syndicate banks and subordinating its inter‑company debts. The same can be said for BGUK when it assumed an obligation to the Australian banks and agreed to subordinate the debt it owed to BIIL. Similar results accrue when considering TBGL’s actions in securing all of its assets and subordinating the debts owed to it by the BRL shareholders. One consequence of this is that there was inevitable prejudice and detriment to each other Bell Participant, as each entered into Transactions in which it incurred liabilities to the banks.
4316 The banks argued that it was inapposite for the plaintiffs to assert the prejudicial and detrimental effect of the Transactions on Bell Participants that were not plaintiff Bell companies. I do not think this is correct. Because of the inter‑locking shareholding and debtor–creditor relationships it is necessary to trace the effect from one company to another. It seems to me to be appropriate for, say, BGF to assert that Belcap Investments (a Bell Participant but not a plaintiff) was prejudiced by its Transactions (the Principal Subordination Deed) and that it, BGF, suffered prejudice as a consequence. It would not be possible to understand the full import of the argument unless that were the case. But it does not mean that Belcap Investments must be before the court as a party before the issues can be canvassed. Of course, Belcap Investments could not claim relief but that is a different matter and raises other issues.
4317 Because of the importance of the arguments about the prejudicial and detrimental effect of the Scheme, I am reluctant to say that I accept a particular written submission in which the position is analysed. But in this instance I do not believe I have much choice. The plaintiffs’ written submissions entitled ‘the Effect of the Scheme and the Transactions’ are long and complex. They contain several charts or diagrams illustrating the points made and tying them in to the pleadings. They also identify the various Bell tables in which relevant information is summarised. It would be difficult to reproduce the charts in a convenient form. I have considered the material in the plaintiffs’ submissions (and in the banks’ responsive submissions) carefully. I can say that in general terms, and subject to obvious exceptions where the submissions proceed on a footing different from findings I have made (such as the status of the on‑loans), I accept the plaintiffs’ arguments.
4318 The plaintiffs set out the effects of the Transactions on each of the Bell Participants in PP par 33C(h)(vi)(A) to (W). The analysis of the effects, approached on a company‑by‑company basis, is the subject of an exegesis in the written closing submissions. It is almost impossible to describe the approach in a comprehensible way without an understanding of the tables and charts that are part of the analysis. This is why I have had to content myself with a general adoption of the plaintiffs’ line of reasoning. The banks also provided a company‑by‑company analysis of the Transactions. Not surprisingly, it disclosed a different result. The banks’ analysis identifies the Transactions but it does not deal in the same way with effect of those Transactions on the individual companies to which they relate. Nor does it deal with the premise that the relevant companies were insolvent or became so as a consequence of entering into the Transactions. In my view this premise has been established on the facts. For these reasons I prefer the analysis advanced by the plaintiffs.
4319 To illustrate the arguments about prejudice to individual Bell Participants, the plaintiffs have used Bell Equity (a BRL shareholder) as an example. In a later responsive submission, the plaintiffs provided this summary of the position. Bell Equity incurred obligations as a principal obligor for the banks’ debts (albeit limited to the value of its gross assets) and secured its assets (BRL shares) for that liability. Bell Equity entered into its Transactions in respect of the obligations of BGF and BGUK at a time when they were insolvent. Further, in so doing, Bell Equity rendered itself insolvent. There could be no benefit, but only detriment and prejudice, which was immediate and inevitable to Bell Equity in so doing.
4320 The plaintiffs go on to illustrate how BGF was affected by what occurred in relation to Bell Equity. Bell Equity became a principal obligor for the liabilities of BGF and BGUK to the banks and it secured its BRL shares to discharge that obligation. Bell Equity’s BRL shares were no longer available to be realised and applied for the benefit of BGF, as the sole creditor of Bell Equity, until the debts owed to the banks by BGF and BGUK were repaid in full. But for Bell Equity entering into its Transactions, its BRL shares would have been available to be realised and applied in reduction of Bell Equity’s indebtedness to BGF by a distribution to BGF as Bell Equity’s sole creditor.
4321 Those indirect creditors of BGF that would have benefited from BGF’s receipt of the distribution from Bell Equity included the DCT. Other external creditors of Bell group companies (even though not direct creditors of Bell Equity) could also have benefited. External creditors of Albany Broadcasters and Bell Bros Holdings are examples. In addition, by entering into the Principal Subordination Deed, BGF subordinated the debt owed to it by Bell Equity. This receivable was no longer available to BGF for the benefit of BGF’s creditors equally. Until the liabilities to the banks were repaid in full, that debt was exclusively available to the banks.
4322 The plaintiffs bore the burden of establishing that each plaintiff Bell company and each relevant Bell Participant suffered prejudice. In relation to Bell Participants generally the purpose was to demonstrate the flow‑on effect of prejudice filtering back to plaintiff Bell companies seeking. It was not directed to establishing a wrong against non‑plaintiff companies as a qualification for direct relief attributable to those entities. In my view, the plaintiffs have satisfied that burden and the ‘no probable prospect of gain but a probable prospect of loss’ thesis is a critical element in that finding.
19.5. Prejudice to external creditors: DCT
4323 The prejudicial and detrimental effect of the Transactions on external creditors can be illustrated by the position of the DCT. It is common ground that, as at January 1990, there were outstanding income tax assessments against Bell Bros ($30 million), Bell Bros Holdings ($2.9 million) Maranoa Transport ($1.3 million). All assessments were then under objection. In Sect 10.6.1 I found that the DCT was, relevantly, a creditor for these amounts (and accruing interest charges) even though the objection processes had not been completed. According to the plaintiffs’ SNAs there was a prospect that on a realisation of the assets of each of those companies, the DCT could receive a distribution of funds.
4324 Bell Bros is a plaintiff Bell company. It had two main assets, a debt due from BGF of $253.8 million and an investment in Western Interstate. Its liabilities were to the DCT, BGUK ($3.3 million) and Bell Properties ($1.5 million). Bell Bros owned all of the ordinary shares on issue in Western Interstate. But BGUK held a parcel of preference shares. The distribution of funds on a liquidation of Western Interstate is a matter of controversy: see Sect 10.7.
4325 By reason of Bell Bros’ shareholding there was a prospect that any surplus in Western Interstate would flow to Bell Bros. Bell Bros executed a share mortgage by which it charged its interest in Western Interstate in favour of the banks. Bell Bros was also a party to the Principal Subordination Deed. In this instrument Bell Bros agreed not to call in its debt due from BGF and not to pay BGUK any debt owed to it.
4326 Through these Transactions control over the surplus (if any) moving from Western Interstate to Bell Bros passed to the banks. Western Interstate’s main asset was a loan due from BGF. If BGF were to be wound up, any distribution by BGF to Western Interstate would contribute to the surplus that, in turn, could flow to Bell Bros. This surplus would be captured by the share mortgage over the Western Interstate shares or the guarantee executed by Bell Bros in favour of the banks. By reason of the Principal Subordination Deed, any liquidator appointed to Bell Bros by the DCT could not move to wind up BGF without the consent of the banks. The Transactions provided no benefit to Bell Bros and its creditors.
4327 Bell Bros Holdings is not a plaintiff. Its major assets were an investment in Bell Bros (book value $17 million) and an investment in Wigmores Tractors (book value $13.3 million). It also had property, plant and equipment (book value $1.8 million). It was owed just over $1 million by BGUK: see Sect 10.3.2. Bell Bros Holdings’ major liabilities were to BGF ($118.2 million) and the DCT ($2.9 million). There were other liabilities, such as a bank overdraft, trade and other creditors. The valuation column of the SNA reveals a substantial deficiency of assets over liabilities of $87 million.
4328 Bell Bros Holdings executed the Principal Subordination Deed, thus preventing it from calling in or receiving any distribution from Bell Bros. It was also prevented from calling in the debt due by BGUK. The Transactions provided no benefit to Bell Bros and its creditors.
4329 Maranoa Transport is a plaintiff Bell company. It had one main asset, namely, an interest in BRL shares with a book value of $140 million. These shares were held on trust for it by TBGL. In addition to the DCT’s claim, Maranoa Transport owed $168.3 million to TBGL and $1.6 million to Maradolf. It had a substantial deficiency of assets compared to liabilities. It executed a direction and authorisation to TBGL requesting that TBGL execute a share mortgage over the BRL shares. It also executed the Principal Subordination Deed, thus preventing it from calling for the BRL shares or their proceeds.
4330 By these Transactions Maranoa Transport’s only asset was charged in favour of the banks. No proceeds were available to meet the DCT’s claim. By virtue of the Principal Subordination Deed, Maranoa Transport could not press any claim against TBGL (as its trustee) to hand over any proceeds from the sale of the BRL shares. Maranoa Transport could not move against TBGL and TBGL’s securities were thereby protected. The Transactions provided no benefit to Maranoa Transport and its creditors.
4331 In this way the plaintiffs contend, and I accept, that the Transactions imposed a real detriment upon the DCT as a creditor of these companies, without any benefit. Prior to the Transactions neither the Australian banks nor the Lloyds syndicate banks were creditors of those companies. The effect of the Transactions was that the DCT received no benefit (that is, no time was provided to increase the value of the group’s assets and the repayment or payment of inter‑company debt or equity flows) but rather, it was left with the probable prospect of loss.
19.6. Prejudice to the bondholders
4332 The question of prejudice to the bondholders has been of constant concern to me throughout the trial. Having decided that the on‑loans were, from inception, subordinated, and that the bonds per se were of similar status, the pure economic argument for prejudice became difficult to sustain.
4333 The simplistic way to look at it is to say the bondholders ranked behind the banks (and behind the other external creditors) and the Transactions made not one jot of difference to that situation. Had the companies been liquidated, the bondholders would have been forced to wait patiently to see whether there would be anything left over after the banks (and the other external creditors) had been paid. After the Transactions the bondholders, vis a vis the banks, would have been in an identical position, unaffected by the elevation of the banks to secured status. But I do not think it is as simple as that. If the bondholders ranked behind the banks in any event, how were they prejudiced by the taking of security? The answer, I think, lies in looking beyond the purely economic argument.
4334 The evidence is clear. There was no prospect of the free cash flow from the publishing assets and everyone (the directors and the banks) knew it. Debt levels had to be reduced. Leaving the banks to one side, the biggest single item in the liabilities column of the balance sheet was the commitment to the bondholders. It was inevitable, therefore, that a restructure of the finances of the Bell group (the banks’ terminology) or a valid and effective restructure (as the plaintiffs put it) would involve the bondholders taking a hit. Indeed, the particulars to ADC par 33C(d)(1) advance the proposition that the Transactions gave the directors time to, among other things, ‘restructure liabilities’ and to ‘purchase debt at a discount to face value’. Both of these are clear references to dealings with the bondholders.
4335 In other words, it is highly likely that a restructure of the Bell group’s finances or a valid and effective restructure, call it what you will, would have involved buying back part or all of the bonds at less than face value. This would involve the bondholders agreeing to compromise their contractual rights. This was not some theoretical possibility. It was a probability. When it happened, the bondholders would have contractual and economic rights forming part of the background against which the compromise negotiations would have been conducted. But the background would also have involved the status of the companies and their assets and the range of interests capable of affecting the outcome. The legitimate interests of the bondholders could conceivably have been affected by whether or not the companies were able to approach them with free and unfettered access to their assets. The Transactions removed that free and unfettered access and placed the banks in a dominant position to direct and control the restructure negotiations. In this way there is a potential prejudice to the interests of bondholders.
4336 The issue I have raised is different from one with which I will deal later, namely, whether there was some rule or standard of practice that meant no dealings between the banks and the companies were possible without the participation of the bondholders: see Sect 30.23. It is not a question whether the banks are liable because they were party to Transactions that could not properly have been entered into without the position of the bondholders being resolved at the same time. The question is whether, in the entirety of the circumstances then confronting the Bell group companies, the precise and comprehensive terms and conditions of the Transactions that were entered into had a real prospect of prejudice to the legitimate interest of bondholders.
4337 There may be another argument that is more closely related to the pure economic interests of the bondholders. The ‘back of the envelope’ calculation in Sect 19.1 does not take into account the question of bondholder interest. The bond issue trust deeds provide for a liquidation subordination. If the issuer were to go into liquidation, the subordination provisions would come into effect, thus depriving the bondholders of their remedies unless and until all unsubordinated creditors had been repaid. But while the issuer continued as a going concern, the bondholders remained as creditors and were entitled to be treated as such.
4338 The most obvious manifestation of this statement relates to interest. The bondholders had a contractual entitlement to interest, payable annually, and it was not deferred behind the banks outside a liquidation. Interest instalments of $25 million, $8 million and $15 million were due in May 1990, July 1990 and December 1990 respectively. They were known commitments and they had to be met. It was also known that the free cash flow from the publishing assets (the only available source of recurrent income) was insufficient to service the banks’ debt. The only source of funds from which the interest commitments could be met was asset sale proceeds and by force of the Transactions those proceeds were placed under the control of the banks.
4339 No doubt the banks would argue that there was no prejudice: just look at what happened; the interest instalments due in May 1990 and July 1990 were paid. I think there are two answers to this. First, the issue of prejudice falls to be determined as at 26 January 1990 and events occurring after that date are of limited utility in deciding that question. Secondly, the instalment due in December 1990 (which falls within the insolvency assessment period mentioned in Sect 9.2.6.2) was not met.
4340 The bond issues were a complicated form of capital, or more accurately, fund raising. The questions raised in this area are not easy to formulate and nor are they easy to answer. I am left with the concern that has been with me from an early stage in the trial. But whatever may be the position in respect of the bondholders, I have reached the view that the Transactions visited prejudice and detriment on the Bell Participants and their creditors.

20. Breach of duties by directors: some general legal principles
    20.1. Directors’ duties and Barnes v Addy: structure of the reasons
    4341 Conventional wisdom in relation to judgment writing suggests that a trial judge should determine the facts before moving to the law. But I propose to depart from the recommended course. In this section I will discuss some general legal principles in relation to the duties that a director owes to companies of which she or he is a director. In the next section (Sect 21) I intend to canvass relevant principles governing a Barnes v Addy claim based on a breach of those duties. Then in Sect 22 I will outline the equitable fraud case and some of the relevant principles on which the doctrine is based. I am doing so because the ambit of the disputed legal principles will determine the approach to, and range of, the factual issues with which I must grapple.
    4342 Before identifying and dealing with these principles I will describe in more detail than I have done thus far the ambit of the directors’ duties relied on in this litigation. It is necessary to do so because the parties are in dispute as to the precise nature and scope of the pleaded duties and of the powers, the exercise of which is challenged. Another issue on which the parties are miles apart is whether the pleaded duties are truly fiduciary in character. In order to understand these issues it is necessary to appreciate the concept of corporate existence, what directors do and how their conduct has been, and is, regulated. This explains why I intend to start this section with a short peregrination through some basic corporate governance concepts and through the historical development of directors’ duties.
    4343 The next task will be to describe some of the general legal principles that govern the application of the three duties and to give some preliminary consideration to particular questions that have arisen in relation to them. I will then move to consider two significant issues that impinge on the duty to act in the interests of the company and the duty to exercise powers properly. The first of those questions is whether the duties are properly characterised as fiduciary or whether they are equitable but not fiduciary. The second is this: is the validity of the impugned actions to be determined solely by objective considerations or is it necessary to examine the subjective state of mind of the directors?
    4344 The principles concerning both the knowing receipt and knowing assistance aspects of the Barnes v Addy principles have been described as ‘in considerable flux’. It has also been said that resolution of ‘the uncertainties [that] surround the conceptual basis of the claim’ requires a judge ‘to plunge into … murky waters’: Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286, [57] – [58]. I doubt that what I propose do in Sect 21 could be characterised as a ‘plunge’, but I will certainly dip my toe into the shallows of those fuliginous waters in the course of analysing some of the legal issues that have emerged in this case.
    4345 Having destroyed a forest or two (plantation timber of course) on those topics I will then embark on a cathexis to identify and analyse the factual matrix of the impugned conduct from which breaches of duty (and Barnes v Addy liability) are said to have arisen.
    4346 At the end of Sect 1 I adverted to the fact that many of the citations from previous court decisions and statutes were very long. Nowhere is this more so than in these sections. The reader will just have to grin and bear it.
    20.2. The relevant duties of the directors
    20.2.1. Some introductory comments
    4347 In Re North Australian Territory Co (Archer’s Case) (1892) 1 Ch 322 the fundamental principles underlying the duties of a director were articulated by Bowen LJ in a way that is both neat and (unusually for the law) entertaining. A promoter of a company had induced X to become a director by indemnifying him against any loss on shares that X was required, by the Articles of association, to take up as a qualification for holding office. The existence of the indemnity was not disclosed to the company. X resigned as a director and called on the indemnity. Even though the payment had been made by the indemnifier (not the company), the liquidator of the company succeeded in an action to recover the amount paid. Bowen LJ said, at 341:
    [T]he promoter who is promoting the company indemnifies the director against any loss on those shares; that is to say, he destroys by such an agreement an important element which guarantees the company the vigilance of their director. The director of the company is placed on the board in order that he may, among other duties, as it appears to me, watch the proceedings of the promoter …. The director is really a watch‑dog, and the watch‑dog has no right, without the knowledge of his master, to take sop from a possible wolf.
    4348 The essence of the plaintiffs’ case is that the watchdog did more than take sop with the wolf. It surrendered in meek obeisance and allowed the wolf into the master’s domain to forage and feast to its heart’s content. Not so, is the retort. The wolf was benign. In any event, the watchdog bravely kept the wolf at bay, indeed prevailed on the wolf to assist, in order to provide his ailing master with the opportunity to recover and (hopefully) live happily ever after.
    4349 There is nothing novel in the general description of the duties relied on by the plaintiffs in this case. But the depth of the controversy generated in relation to them brings to mind the old saying that familiarity breeds contempt. It behoves all concerned with businesses conducted through corporate entities, be they directors, managers or professional advisers, to return from time to time to basic principles. This is so even in relation to concepts with which such persons deal every day, and which they think they can recite in their sleep.
    20.2.2. The duties (and breaches) relied on in this litigation
    20.2.2.1. The duties as pleaded
    4350 The starting point is, of course, the pleadings. There are three pleaded duties, all set out in 8ASC par 37.
    4351 First, a duty to act bona fide in the best interests of the company as a whole, including, with respect to each Bell Participant that was in an insolvency context, to act in the best interests of all its creditors including future creditors. I will refer to this by the shortened phrase ‘the duty to act in the interests of the company’.
    4352 The phrase ‘corporate benefit’ is peppered throughout the documentation and correspondence produced by the parties in 1989 and 1990. As used at the time, it is a shorthand way of describing the principles encompassed within the directors’ duty to act bona fide in the best interests of the company as a whole. In this sense, it incorporates much of what I am about to say concerning the nature and the reach of this duty. When I use the phrase ‘corporate benefit’ in these reasons, it is to be understood accordingly.
    4353 Secondly, a duty to exercise powers properly. This is often referred to as a duty to exercise powers only for a proper purpose or not to exercise powers for an improper purpose. The context will often oblige me to resort to that formulation.
    4354 The third duty concerns conflicts of interest. It is pleaded as a duty, where there existed a conflict or potential conflict of interest between the interests of the director or others and those of the company, not to exercise powers in the interests of himself or others or to the disadvantage of the company. Wherever it is possible I will refer to this duty by the short phrase ‘a duty to avoid conflicts of interest’.
    4355 The same duties are pleaded in relation to the Australian directors, the UK directors, the BIIL directors and Equity Trust, although a breach of the duty to avoid conflicts of interest is alleged only against the Australian directors and against two of the four UK directors. The plaintiffs contend that the three nominated duties are fiduciary in character. The banks say that neither the duty to act in the interests of the company nor the duty to exercise powers properly is of a fiduciary nature.
    4356 Another primary duty of a director (both at general law and under the relevant statutes) is to exercise care, skill and diligence in carrying out his or her functions. It is not a part of the plaintiffs’ case that there was a breach of a duty of this nature.
    20.2.2.2. The breaches of duty as particularised
    4357 The nature of the breaches of duty alleged against the directors is best understood by reference to the particulars, PP par 39A and following. The gist of the allegation that the directors failed to act in the interests of the companies is that the relevant directors:
    (a) failed to have regard to the effect, on each company as a whole, including all of its creditors, future creditors or shareholders, of that company’s Transactions and the Scheme;
    (b) caused each company to enter into its Transactions and the Scheme and thus rendered that company liable for the debts of BGF and (or) BGUK, (both of which were in an insolvency context) and exposed the assets of that company so as to make them available exclusively to the banks for repayment of the debts owed by BGF and BGUK to the banks;
    (c) did not hold a genuine belief, and no honest and intelligent director could have reasonably formed the view, that its Transactions and the Scheme were in the best interests of that company as a whole, including all of its creditors, future creditors and shareholders;
    (d) knew, believed, suspected or ought to have known or recklessly disregarded the prejudicial effect of its Transactions and the Scheme on the creditors (other than the banks), future creditors and shareholders of that company (there being no, or no probable prospect, of benefit, but rather the probable prospect of loss, for that company);
    (e) exercised their powers in a way that was not reasonably incidental to, and within the scope of, carrying on that company’s business for the reasons particularised in the preceding paragraphs;
    (f) did not hold a genuine belief, and no intelligent and honest director of that company could have reasonably formed the view, that it was a proper exercise of their powers to cause that company to enter into its Transactions and give effect to the Scheme;
    (g) in circumstances where a company observed or acted upon the ratification or consent by that company’s shareholders to that company entering into its Transactions and giving effect to the Scheme, caused the company to do so.
    4358 The allegations that the directors exercised their powers for improper purposes and failed to avoid a conflict of interest are effectively merged in PP par 39A(k) to (p). In summary, it is said that the directors:
    (a) exercised their powers for an improper purpose, namely, to cause each company to enter into its Transactions and give effect to the Scheme, where the Transactions of that company and the Scheme were a means of the banks dealing with the existing or inevitable insolvency of their debtors, BGF and BGUK, and their guarantor, TBGL;
    (b) in circumstances where a company observed or acted on a ratification or consent by that company’s shareholders to that company entering into the Transactions and giving effect to the Scheme, caused that company to do so;
    (c) exercised their powers for an improper purpose, namely:
    (i) to delay approaching the BGNV bondholders or LDTC on their behalf as part of a restructure of the financial position of the Bell Participants;
    (ii) to protect BCHL by removing a threat to its continuing survival, namely, the winding up or liquidation of assets of the Bell Participants;
    (iii) to take a step towards a restructuring or possible restructuring of the financial position of BCHL, which had as an element the buying back at a discount the bonds the subject of the three BGNV bond issues; and
    (iv) to protect the directors’ position of control of TBGL and the directors’ financial interests in BCHL and other Bond companies;
    (d) acted in the interests of himself or themselves and acted in the interests of BCHL and other Bond group companies.
    4359 There are additional specific matters raised in relation to TBGL, BGF, BGUK, Equity Trust and other nominated companies but I think it is unnecessary to catalogue them because the summary of PP pars 39A (a) to (p) does justice to the nature of the attack mounted by the plaintiffs. They are additional factors why, in relation to those companies, the directors were said to have failed to give attention to the interests of that company as a whole and failed to exercise powers for a proper purpose.
    20.2.2.3. The duties: a summary
    4360 There is some overlap between the three duties that are the subject of controversy in this case, especially between the first two. The overlap (insofar as it appears in this case) is demonstrated by the identification of the purpose said by the plaintiffs to have driven the directors to act as they did. It is neatly summarised in the plaintiffs’ closing submissions in these terms:
    (a) The entry into the Transactions was not reasonably incidental to or within the scope of carrying on the business of each Australian Bell Company Participant and therefore, the decision to enter into the Transactions was not made bona fide in the best interests of each company and was made for an improper purpose.
    (b) Further, or alternatively, each director made the decision for a collateral or improper purpose of protecting or assisting the interest of [BCHL].
    4361 There can also be an overlap between those duties and the duty to avoid conflicts of interest. The plaintiffs’ case in relation to a breach of the duty to avoid conflicts of interest is summarised in this passage from their closing submissions:
    In the circumstances of the present case for each director there existed, at least, a clear conflict between the director’s duty to each Bell Participant and an extraneous loyalty either to [BCHL] or to the director’s personal interests or to both blurred together and each director took advantage of it and failed to bring the position of conflict to an end by not proceeding with the Transactions.
    20.2.3. Corporate governance and the role of directors
    4362 It may seem odd that I should digress into a discourse on corporate governance as a general notion. I do so because it is germane to a central theme of this litigation, namely, that directors are in control of the assets of a corporation but they do not own those assets. They control the assets on behalf of the corporation and, through the corporation, others having an interest in the wellbeing of the entity. There are no hard and fast rules that constitute ‘corporate governance’. But there are some basic underlying principles that help to explain the guidelines and legal principles that have developed over time and now dictate how a director is expected to carry out her or his responsibilities.
    4363 A corporation that conducts a commercial business ‘acts’ in the sense that it ‘does deals’, it buys and sells assets, it employs people, and it seeks to make a profit. Some deals are better than others. Some work, others do not. All of this involves, in varying degrees, matters of judgment. I mentioned earlier (Sect 7.5.1) the almost orphic concept of the state of mind of a corporation. Nonetheless, we are accustomed in modern commerce to speak of a corporation as if it had cerebral capacity. For example, s 51AC of the Trade Practices Act says that a corporation must not, in nominated aspects of trade or commerce, engage in conduct that is unconscionable. But a corporation does not have a conscience. As has already been noted, a corporation has no cerebral capacity and it can only act through individuals: most importantly through its directors.
    4364 One of the ‘in’ phrases in modern commercial life is corporate governance. At the risk of appearing thrasonical, it will be convenient to repeat some of what I said about corporate governance in The Failure of HIH Insurance, Report of the Royal Commission, (2003), Ch 6. At its broadest, the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It includes the practices by which that exercise and control of authority is in fact effected.
    4365 There are various organs that influence the decision‑making processes of a corporation and which are involved in corporate governance. But primary governance responsibility lies with the board of directors. In formal terms the directors are appointed by, and are accountable to, the body of shareholders. As a general rule it is the directors who are ‘the directing mind and will of the corporation, the very ego and centre of the personality of the corporation’: Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd, at 713. The power to manage the business of the company has been delegated to the directors. The delegation arises as part of, or by virtue of, the contract between the shareholders and the company represented by the Articles of association.
    4366 With the power to manage a business comes (necessarily) an element of control over the assets that are employed in the operation. When a corporation that conducts a business acquires assets, those assets belong to it. They do not belong to those (such as directors) who manage the corporation. Yet the individuals who manage the corporation have effective control over those assets and can affect the interests of the corporation by the way in which they use the assets. The individuals who manage the corporation are, in a real sense, stewards of those assets on behalf of the corporation and, in an indirect sense, other persons or entities (such as shareholders) who have a legitimate interest in the affairs of the corporation.
    4367 In my view the notion of stewardship is a key factor in understanding the role of directors. This is borne out by what was said in the Cadbury Report, produced by a specialist corporate committee in the United Kingdom during the early 1990s. It emphasised the trinity of ‘openness, integrity and accountability’ as prerequisites for sound financial reporting. In my view, those principles are not confined to financial reporting. They apply to corporate governance generally and, consequently, to the role of directors.
    4368 The fundamental notion of directorial responsibility was the subject of comment in an article by Graw SB, ‘Directors’ Duties’ (1983), The Australian Accountant 417:
    [Companies] can be hurt by fines or liquidation but then the punishment does not hurt so much the miscreant responsible as the shareholders and, possibly, the creditors. Responsibility, and thus liability, must lie with some human agency and it is over the entrances to boardrooms that Statute has rightly painted:
    ‘The buck stops here’.
    4369 As will appear shortly, I think the general law has been at least equal with statute at wielding the paintbrush. But the statement of principle holds generally true.
    20.2.4. Directors’ duties: historical development
    4370 As I have already indicated, there are two particular areas of controversy that bedevil this aspect of the litigation. The first of them concerns the precise nature and scope of the pleaded duties and of the powers the exercise of which is challenged. The second is the question whether the pleaded duties are truly fiduciary in character. In order to deal with these controversies it is necessary to appreciate the way in which the regulation of directorial conduct has developed over time.
    4371 Under modern systems of commercial regulation, companies are legal entities incorporated under the umbrella of a general statute. The assets of a company are just that: they belong to the company and not to the directors or others who manage the business. This was not always the case. In the 18th and early 19th centuries, there were three main types of ‘companies’: those incorporated by Royal Charter, those created by special Acts of Parliament and, finally, ‘deed of settlement companies’. Despite some significant differences, the last‑mentioned of those types is the closest progenitor of the modern incorporated commercial corporation. Deed of settlement companies were unincorporated associations by which the shareholders and trustees with whom they covenanted agreed to observe the provisions of the deed. They did not enjoy the privilege of limited liability until it was introduced by legislation in 1855. Powers of management were settled on a committee of directors and the property of the company was vested in the directors as trustees.
    4372 The modern legislative framework began in the United Kingdom with the Joint Stock Companies Acts of 1844 and 1856; the latter, in particular, allowing for the relatively simple creation and operation of limited liability corporations. The first relevant legislation in the Colony of Western Australia was the Joint Stock Companies Ordinance 1858. It was followed by the Mining Companies Act 1888 and by Companies Acts in 1893 and 1943.
    4373 The position of directors under the old deed of settlement companies (where the property of the company was often vested in them as trustees) probably explains why the courts sometimes described directors as trustees: see, for example, Re German Mining Co; ex parte Chippendale (1853) 4 De GM & G 19. The term ‘trustee’ is not apt to describe the relationship between a director and the company and it is used more by analogy. That having been said, the law has long characterised the relationship between a director and the corporation as fiduciary: see, for example, Aberdeen Rail Co v Blaikie Bros [1854] All ER 249, 252. In Re City Equitable Fire Insurance Co [1925] Ch 407, Romer J explained these notions at 426:
    It has sometimes been said that directors are trustees. If this means no more than that the directors in the performance of their duties stand in a fiduciary relationship with the company the statement is true enough. But if the statement is meant to be an indication by way of analogy of what those duties are, it appears to me to be wholly misleading. I can see but little resemblance between the duties of a director and the duties of a trustee of a will or of a marriage settlement.
    4374 Given the nature of the relationship it is not surprising that the law has intervened to define standards of conduct to which directors must adhere in carrying out their management functions. But it was the courts, rather than the legislature, that initially did so. The general law (by which I mean both the common law and equity) recognised a number of duties applying to directors:
    • To act in good faith.
    • To exercise powers for a proper purpose.
    • To avoid conflicts of interest.
    • To retain discretions.
    • To exercise care, skill and diligence.
    4375 Broadly speaking, the first four of those duties stemmed from the fiduciary nature of the relationship between the director and the corporation, although whether they are all (or in all circumstances) ‘fiduciary duties’ is a question to which I will return later. The duty to exercise care, skill and diligence is different. It arose primarily from the common law of contract (an express or implied term in a contract of service) or tort (applying conventional principles of the law of negligence). While there is also a duty of care recognised in equity, it is not fiduciary in character. See Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260, 287 ‑ 288; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 237-240.
    4376 The general law duty to act in good faith was often referred to simply as a duty to act honestly and it soon came to be regarded as encompassing a responsibility to act for the benefit of the company: Richard Brady Franks Ltd v Price (1937) 58 CLR 112, 138 (Rich J); Mills v Mills (1938) 60 CLR 150, 188 (Dixon J). Those cases also demonstrate the close relationship between the duty to exercise powers properly and the duty to act in the interests of the company: see Richard Brady Franks (142); Mills v Mills (185).
    4377 The legislature was relatively slow to impose general standards of conduct for company directors. In the early legislation, from the Joint Stock Companies Acts through to the Mining Companies Act 1888 and to the Companies Acts of 1893 and 1943, there were no general prescriptions governing directorial behaviour. There had, of course, been restrictions on specific types of behaviour. For example, the Companies Act 1943 (WA) s 151 prohibited directors from receiving fees without the approval of the company in general meeting. It was not until the second half of the 20th century that the legislature intervened to decree general standards. It seems that the first attempt to enact a general provision was in the Companies Act 1958 (Vic) s 107 (repeated in s 124 of the uniform Companies Acts 1961) to this effect:
    A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office.
    4378 It was said at the time that this was intended to be declaratory of the existing law. But that must be a reference to the civil consequences of a breach by a director of his or her obligations because s 124(3) rendered a breach of the provision an offence against the Act. It was not an offence under the existing law. When the uniform Companies Codes were introduced in 1981, the formulation was effectively the same, except that the relevant duties were separated into different subsections:
    229(1) An officer of a corporation shall at all times act honestly in the exercise of his powers and discharge of the duties of his office …
    229(2) An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties …
    4379 The drafting of these subsections had not changed by January 1990. And it was carried though into the Corporations Law s 232, when it was enacted in 1991. Major amendments to the Corporations Law were made by the Corporate Law Economic Reform Programme Act 1999 (Cth) (CLERP). The drafting of the duty of honesty returned to something closer to the earlier general law formulation:
    181(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
    (a) in good faith in the best interests of the corporation; and
    (b) for a proper purpose.
    4380 When the Corporations Act 2001 (Cth) was introduced, the relevant section mirrored s 181(1) of the Corporations Law and this remains so in the current version of the legislation. CLERP also separated the civil and criminal consequences of a breach of the provision, with a new subsection, s 184(1), dealing with the latter. I should also mention in passing that CLERP introduced for the first time a statutory business judgment rule: s 180(2) and s 190. I will discuss the business judgment rule in its general law guise a little later.
    4381 The explanatory memorandum to CLERP said that the ‘substantive duties of directors [would] remain unchanged’: see par 6.4 under the heading ‘Business Judgment Rule’. In par 6.6 and par 6.7, under the heading ‘Good Faith’, reference is made to the difficulties encountered in the use of the word ‘honesty’ in Corporations Law s 232(2). The author then says:
    The draft provisions overcome these difficulties by rewriting s 232(2) to mirror the fiduciary duty of a director to act in what they believe to be in the best interests of the corporation and for proper purposes.
    4382 Those words ‘in what they believe to be in the best interests of the corporation’ are controversial in the context of this case. The CLERP Bill, as drafted at the time when The Explanatory Memorandum was released, contained those words. But the Bill was amended during the parliamentary debates and the words ‘in what they believe to be’ were omitted. This, too, is an issue to which I will have to return. For present purposes I refer to par 6.7 of The Explanatory Memorandum only to illustrate that the legislature, in enacting, s 181(1), intended to mirror the general law duties of directors.
    4383 This case is about alleged breaches of general law duties. The plaintiffs do not advance a cause of action based on the consequences of a breach of a statutory duty. The reason for tracing the legislative history is to show that the legislature has recognised, and not abrogated, the underlying principles on which directors’ general law duties are based. It is important to bear this in mind because many of the authorities arise from alleged breaches of the statutory duties.
    20.3. The duty to act in the interests of the company
    20.3.1. The duty described
    4384 In its early general law formulations, the duty to act bona fide in the best interests of the company was sometimes enunciated as a duty to act bona fide for the benefit of the company or in the interests of the company as a whole. The formulation appears to derive from the judgment of Lord Lindley MR in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, 671. Although Allen concerns the use of voting power by a shareholder majority, it was referred to as authority for the same proposition in relation to directors in Richard Brady Franks per Latham CJ at 135. So far as I can see there is no material difference, for present purposes, between the phrases ‘benefit of the company’, ‘best interests of the company’ and ‘interests of the company’. In the authorities they are often used interchangeably and, in my view, are all to the same broad effect. In some of the early cases the phrase ‘bona fide and for the benefit of the company’ was used (see, for example, Mills v Mills per Starke J at 175) but, again, I do not think the difference is significant. The ‘and’ is conjunctive. The phrase, read as a whole, means one thing, not two.
    4385 In Re Smith and Fawcett [1942] Ch 304, 306, Lord Greene MR explained the duty in these terms:
    [Directors] must exercise their discretion bona fide in what they consider – not what a Court may consider – is in the interests of the company, and not for any collateral purpose.
    4386 In Marchesi v Barnes [1970] VR 434, 437 ‑ 438, Gowans J cited this statement (among others) as being the genesis of the language used in s 124 of the Companies Act 1961 to describe the statutory obligation to act honestly in the discharge of duties of office. This, together with the use of the phrase ‘bona fide’ in the formulation of the general law duty, suggests a close connection between the constituent elements of the duty and the concept of honesty.
    4387 There are two aspects of the duty that have arisen as matters of particular controversy. One is whether the duty is owed solely to the corporation or whether, in some circumstances, it is owed to others, particularly shareholders and creditors. The other is whether the decision as to the interests of the company is wholly subjective, wholly objective or a combination of the two. I will deal with the first of those questions now. I will defer consideration of the second aspect because it arises in a similar fashion in relation to the duty to exercise powers properly.
    20.3.2. The duty is owed to the company
    4388 It is important to differentiate between two concepts: the identity of the entity to which a duty is owed and the content of the duty. A failure to make that distinction goes some way towards explaining the confusion that has developed in this area.
    4389 A director’s fiduciary duties are owed to the company, not to the shareholders (or to creditors): Esplanade Developments Ltd v Divine Holdings Pty Ltd (1980) WAR 151, 157. While the corporate veil may now appear threadbare (largely as a result of legislative intervention), the doctrine of separate legal personality survives. For example, in Bell v Lever Bros Ltd [1932] AC 161, Lord Atkin, at 228, indicated that this was so even in relation to a shareholder who owned 99 per cent of the issued capital. The principle has been confirmed by the High Court in Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165, 178 ‑ 179 where, in a joint judgment, McHugh, Gummow, Hayne and Callinan JJ said:
    It may be readily accepted that directors and other officers of a company must act in the interests of the company as a whole and that this will usually require those persons to have close regard to how their actions will affect shareholders. It may also be readily accepted that shareholders, as a group, can be said to own the company. But the company is a separate legal entity and the question … is what damage (if any) did it suffer … The question is not whether the shareholders … were adversely affected.
    4390 A consequence of this (leaving to one side the statutory derivative action) is that the right of action for breach of duty lies with the company, not with the shareholders (or creditors): Blakeley v Cook [2001] WASCA 208, [19]. In Blakeley the Full Court recognised, at [21], that there may be circumstances in which an officer of a company owes fiduciary duties to shareholders. But, if so, the duties arise because of the particular circumstances existing between that officer and those shareholders, not from the position that the officer holds vis a vis the company.
    4391 That is a sufficient exposition of the first part of the question I posed: to whom the duty is owed. The second part, namely, the content of the duty, is a different issue and needs to be considered separately. What is often overlooked in the writings on this subject is that while the fundamental nature of the duty is a constant, its content may vary from case to case depending on the circumstances of the company and on the type of decisions that the directors are called upon to make.
    4392 It does no damage to the doctrine of separate corporate personality to recognise that a reflection of the interests of the company may be seen in the interest of shareholders. In Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, 281 Lord Evershed MR drew a distinction between ‘the company as a commercial entity distinct from the corporators’ and ‘the corporators as a general body’. His Lordship opined that the phrase ‘the company as a whole’ meant the latter rather than the former. The term ‘corporators’ is a synonym for shareholders: Provident International Corporation v International Leasing Corporation [1969] 1 NSWLR 424, 437.
    4393 This does not mean that the general body of shareholders is always and for all purposes the embodiment of ‘the company as a whole’. It will depend on the context, including the type of company and the nature of the impugned activity or decision. And it may also depend on whether the company is a thriving ongoing entity or whether its continued existence is problematic. In my view the interests of shareholders and the interests of the company may be seen as correlative not because the shareholders are the company but, rather, because the interests of the company and the interests of the shareholders intersect. This, it seems to me, is consistent with what was said in authorities such as Ngurli Ltd v McCann (1953) 90 CLR 425, 438 – 440 and Ashburton Oil NL v Alpha Minerals NL (1971) 123 CLR 614, 620. I think this is the sense in which the well‑known statement by Street CJ in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, 730 is to be understood:
    In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise.
    4394 Modern theories of corporate governance rest (at least in part) on the proposition that an objective of the corporation is to increase shareholder value. But especially in large corporations with many shareholders ranging from experienced investor institutions to ‘mums and dads’, there may be practical difficulties in identifying the ‘interests of shareholders’ as the fixing point against which to identify a duty. Sectional interest may have to be taken into account and balanced. In this respect I adopt the comment in Heydon JD, ‘Directors’ Duties and the Company’s Interests’ in Finn P, ‘Equity and Commercial Relationships’ (1987), 134 ‑ 135:
    The duty which is owed to the company is not to be limited to, or to be regarded as operating alongside, a duty to advance the interests of shareholders. There is no superadded duty to shareholders … And the directors’ duty to the company is not to be limited to the duty to consider shareholders, because, for example, businessmen in their daily talk reveal that they are constantly considering, without impropriety, interests other than those of the shareholders. To consider only the short-term interests of the present shareholders would mean that every dollar available for dividend should be paid out; that no attempt to re-invest funds or expand the company’s market by price cutting could be allowed.
    The law prevents directors from exercising their powers merely to maintain control, or otherwise advance their self interest, or to advance third party interests, or to effectuate some bye motive. But the law permits many interests and purposes to be advantaged by company directors, as long as there is a purpose of gaining in that way a benefit to the company. (footnotes omitted)
    4395 This is where the relevant distinction arises. It is, in my view, incorrect to read the phrases ‘acting in the best interests of the company’ and ‘acting in the best interests of the shareholders’ as if they meant exactly the same thing. To do so is to misconceive the true nature of the fiduciary relationship between a director and the company. And it ignores the range of other interests that might (again, depending on the circumstances of the company and the nature of the power to be exercised) legitimately be considered. On the other hand, it is almost axiomatic to say that that the content of the duty may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored.
    20.3.3. The position of creditors
    20.3.3.1. The seminal authorities
    4396 The nature and content of the duty, insofar as it affects creditors, has been a matter of controversy in Australia for many years. The controversy stems, at least in part, from dicta of Mason J in Walker v Wimborne (1976) 137 CLR 1. One of the issues aired in Walker v Wimborne concerned the payment by one company (which was at the time insolvent) to another company in the same group, the latter not having the means to make repayment. The liquidator of the payer company sued the directors to recover the payment alleging breach of duty or breach of trust. The trial judge dismissed the claim, finding that the transactions had been undertaken for the benefit of the group. The High Court overturned the decision and found that the payment involved a breach of duty. Mason J (with the concurrence of Barwick CJ) said, at 6 ‑ 7:
    Indeed, the emphasis given by the primary judge to the circumstances that the group derived a benefit from the transactions tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of [the payer company] to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.
    4397 That dicta has been the subject of consideration in a large number of cases. But most of the later judgments quote only the second and third sentences and few, if any, include reference to the opening words. I will explain why I have included the first sentence a little later. In some of the cases in which Mason J’s dicta has been considered, (for example, Grove v Flavel (1986) 43 SASR 410 and Jeffree v NCSC [1990] WAR 183), the courts appear to have taken it as suggesting the existence of an independent duty owed directly to creditors. In other cases, for example Kinsela, the courts have followed the more traditional line, eschewing the notion of an independent duty of that nature.
    4398 I do not need to revisit that controversy because, in my view, the High Court in Spies v R [2000] HCA 43; (2000) 201 CLR 603 has determined authoritatively that there is no such independent duty. In this regard I agree, in general terms, with the analysis of the earlier controversy and of the effect of Spies undertaken by Heenan J in Geneva Finance Ltd (Receiver and Manager Appointed) v Resource & Industry Ltd [2002] WASC 121; (2002) 169 FLR 152, 162 ‑ 165.
    4399 But as the submissions of the respective parties in this case show, there is still some confusion as to the exact nature of the relationship between the directors of a company and creditors of that company. For this reason I need to look at the way in which the issue was raised in Spies and to examine closely the language used in the judgment. Spies involved a charge under s 176A of the Crimes Act 1900 (NSW) alleging that a director had defrauded the creditors of a company in their dealings with the company by causing it to acquire shares in another body that he controlled. There was an alternative charge under s 229(4) of the Companies Code that the director had made improper use of his position as a director and gained an advantage for himself by virtue of the transaction. He was convicted of the charge under s 176A and no verdict was taken on the alternative charge. The Court of Criminal Appeal overturned the conviction under s 176A but substituted a conviction under s 229(4).
    4400 The High Court agreed that the case under s 176A was misconceived. The highest the prosecution case could be put was that, so far as creditors were concerned, the transaction made it less likely that the company could pay the debts due to them. But it would be a large step to hold that the director defrauded creditors (with whom he had no legal relationship) because his dishonest conduct towards the company made it less likely that the company would be able to pay the creditors. However, the High Court found that the substitution of a conviction under s 229(4) was inapposite and sent the matter back for retrial.
    4401 The relevant passage (for present purposes) appears in the joint judgment of Gaudron, McHugh, Gummow and Hayne JJ at 635 ‑ 637. Although the passage is a long one, I need to set it out in full:
    It is true that there are statements in the authorities, beginning with that of Mason J in Walker v Wimborne, which would suggest that because of the insolvency of Sterling Nicholas, the appellant, as one of its directors, owed a duty to that company to consider the interests of the creditors and potential creditors of the company in entering into transactions on behalf of the company. Walker v Wimborne was an appeal by a liquidator against the dismissal of his misfeasance summons brought against former directors under s 367B of the Companies Act 1961 (NSW). Statements in this and other cases came within Professor Sealy’s description of: ‘words of censure directed at conduct which anyway comes within some well‑established rule of law, such as the law imposing liability for misfeasance, the expropriation of corporate assets or fraudulent preference.’
    Hence the view that it is ‘extremely doubtful’ whether Mason J ‘intended to suggest that directors owe an independent duty directly to creditors.’ To give some unsecured creditors remedies in an insolvency which are denied to others would undermine the basic principle of pari passu participation by creditors.
    In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler, Gummow J pointed out:
    ‘It is clear that the duty to take into account the interests of creditors is merely a restriction on the right of shareholders to ratify breaches of the duty owed to the company. The restriction is similar to that found in cases involving fraud on the minority. Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders. This restriction does not, in the absence of any conferral of such a right by statute, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors … the result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator.’
    In so far as remarks in Grove v Flavel suggest that the directors owe an independent duty to, and enforceable by, the creditors by reason of their position as directors, they are contrary to principle and later authority and do not correctly state the law. (footnotes omitted)
    4402 As so often happens in the law, the content of that statement raises as many questions as it answers.
    20.3.3.2. The duty entails an obligation to creditors
    4403 In their written submissions on this point the banks analysed many, perhaps most, of the authorities since Walker v Wimborne. I hope I do not do the banks’ submissions (which are lengthy) a disservice by summarising them as effectively saying that interests of creditors are essentially irrelevant. The obligations of the directors to act bona fide in what they regard as the best interests of the company and to exercise their management powers for proper purposes (namely to further the interests of the company and its business) continue notwithstanding that the company’s financial position may be deteriorating. Provided that these obligations are not seen as obligations to act in the interests of, and to further the interests of, the shareholders, they are entirely adequate to protect the company. Directors have no obligation to protect third parties dealing with the company. The banks also contend that the assertion of duties to act in the interests of, or to have regard to the interests of, creditors are unnecessary. Further, they involve significant difficulties in terms of juridical theory and practical workability.
    4404 The banks submit that the following points can be made in reliance on Spies. First, directors owe no independent duty to, and enforceable by, the creditors by reason of their position as directors. The directors simply owe the company an obligation to act bona fide in what they regard as the best interests of the company. Where they perform that duty by making a decision bona fide in what they consider to be the interests of the company, the obligation has been satisfied.
    4405 Secondly, the relevance of the position of creditors is that where the directors breach that duty, shareholders may only ratify that breach where the shareholders (and not creditors) are the only persons whose interests are affected by the action. Beyond that, the assertion of ‘a duty to act in the interests of creditors’ is no more than an expression of censure marking the opprobrium of the court to conduct for which the law already imposes liability.
    4406 The banks’ contention that the recognition of any such duty to creditors would offend juridical theory has to be taken seriously. They submit that the alleged duty to take account of the interests of creditors (or the alleged duty to act in the interests of creditors in one of the other permutations suggested in the cases) is a duty that involves undesirable attributes. The duty is one that is unnecessary; insofar as creditors have ‘interests’, those interests relate to their entitlement to be paid. Their entitlement to be paid is protected by the fact that directors already owe a range of duties to the company to ensure that the company’s property is preserved for legitimate business purposes, including payment of creditors. This range of duties includes the duty to act bona fide in the best interests of the company, the duty to exercise powers for proper purposes, the duty of care, statutory duties, and proscriptive fiduciary duties. In the event of a winding up, preferences to creditors and transfers of property to defeat creditors are set aside to the extent that the legislature deems desirable.
    4407 The banks submit that when a company is not in the process of being wound up, a creditor has no recognisable legal or beneficial interest in the property of the company. When a company is ordered to be wound up, a creditor has (among other things) a right to prove for its debt and a right to have the company administered by the liquidator for the purpose of liquidating assets to be distributed in accordance with statutory priorities. The law recognises no middle state between these two positions. A company cannot be in a position of ‘semi‑liquidation’.
    4408 The banks also argue that even if a company is in a serious financial position, liquidation will not necessarily follow. The court always retains the discretion whether or not to make a winding up order. A company which is continuing to operate may trade out of insolvency whether through good management, good fortune, obtaining access to liquidity, raising capital or otherwise. If a winding up is required, an order will be made and the usual consequences will follow. If a winding up is not required, the company will continue to trade and it will not be subject to a ‘notional’ winding up. To confuse the two different states would lead to inappropriate consequences. Winding up gives creditors an entitlement to pari passu treatment but carries with it consequences that can be negative for creditors. For example, creditors are not able to sue, legal proceedings are stayed and liquidators may disclaim onerous contracts. If the theory of the obligation to consider interests of creditors is based upon the creditor’s prospective entitlement to a share of the assets in a winding up, the company would similarly be entitled prospectively to stay its performance of contracts with the creditor or to stay prospectively any legal proceedings which the creditor may be prosecuting.
    4409 The banks place heavy reliance on Richard Brady Franks, which they say unequivocally rejects the notion of a directors’ obligation to creditors. They say that this is a binding decision of the High Court that has not been overruled or adversely commented on in any subsequent decisions. They point, in particular to what Dixon J said, at 143:
    Those impeaching the transaction must sustain the burden of proving that the directors acted in their own interests and were not in fact exercising their powers in supposed furtherance of any purpose or advantage of the company. In considering such a question, it is important to ascertain what are the purposes for which powers are given and to remember that the fiduciary duty of the directors is to the company and the shareholders. It is not enough that they preferred their own interests or those of some other persons to the interests of strangers to the company, as, for instance, to those of the creditors of the company. (emphasis added)
    4410 Richard Brady Franks warrants close investigation because factually it has some similarities (the banks would say it is almost on all fours) with this case. For example, at 136, Latham CJ noted that the company was ‘in a difficult position’ and the directors had to take action ‘to prevent creditors descending upon it with the not improbable result that the company would have been forced into liquidation’.
    4411 I will leave a closer examination of the decision until later, when I come to consider the business judgment rule. I mention it here because it is advanced as support for the proposition that Spies rejected the notion of an obligation to consider the interests of creditors. I do not read anything in the judgment as compelling that conclusion. What Dixon J said was that the directors preferring their own interests to those of creditors ‘would not be enough’. But this does not of itself mean that there is no obligation to consider the interests of creditors as part of the duty to act in the best interests of the company.
    4412 I am not able to accept the position urged on me by the banks if, as I have broadly interpreted it, it means relegating the position of creditors to virtual insignificance (save on questions of ratification).
    4413 In their analysis of the authorities, the banks lay much of the blame for the unsatisfactory state of the law (prior to Spies) on the dicta of Cooke J in Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242. Cooke J said, at 249:
    The duties of directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance, creditors are entitled to consideration, in my opinion, if the company is insolvent, or near-insolvent, or of doubtful solvency, or if a contemplated payment or include other course of action would jeopardize its solvency.
    But as a matter of business ethics it is appropriate for directors to consider also whether what they do will prejudice their company’s practical ability to discharge promptly debts owed to current and likely continuing trade creditors.
    To translate this into a legal obligation accords with the now pervasive concepts of duty to neighbour and the linking of power with obligation.
    In a situation of marginal commercial solvency such creditors may fairly be seen as interested in the company or contingently so.
    4414 The criticism the banks make of this dicta is summarised in this extract from their written submissions:
    In truth, the origin of the doctrine [asserting the existence of directors’ obligations in relation to creditors] is the judgment of Cooke J [in Permakraft] … In that judgment, the nature and basis of the obligation to creditors was simply asserted … Many of these assertions are confused and without juridical basis. Yet the judgment formed the basis of the subsequent authorities.
    4415 One of the authorities which the banks say proceeded from an uncritical adoption of Cooke J’s dicta is Russell Kinsela. Street CJ (with whom Hope and McHugh JJA agreed) quoted the dicta that I have set out from Permakraft and said, at 733: ‘I reiterate my own respectful agreement with the passage in the judgment of Cooke J to which I have already referred’. I am about to quote two passages from Street CJ’s judgment in Russell Kinsela. They are lengthy but I need to set them out in full because I will be returning to them in a number of different contexts. The first extract appears at 730:
    In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.
    4416 A little later in the judgment, at 732 ‑ 733, his Honour referred to the dicta of Mason J in Walker v Wimborne and then said:
    It is, to my mind, legally and logically acceptable to recognise that, where directors are involved in a breach of their duty to the company affecting the interests of shareholders, then shareholders can either authorise that breach in prospect or ratify it in retrospect. Where, however, the interests at risk are those of creditors I can see no reason in law or logic to recognise that shareholders can ratify the breach. Once it is accepted, as in my view it must be, that the directors’ duty to a company as a whole extends in an insolvency context to not prejudicing the interests of creditors (Nicholson v Permakraft (NZ) Ltd and Walker v Wimborne) the shareholders do not have the power or authority to absolve the directors from that breach.
    I hesitate to attempt to formulate a general test of the degree of financial instability which would impose upon directors an obligation to consider the interests of creditors. For present purposes, it is not necessary to draw upon Nicholson v Permakraft as authority for any more than the proposition that the duty arises when a company is insolvent inasmuch as it is the creditors’ money which is at risk, in contrast to the shareholders’ proprietary interests. It needs to be borne in mind that to some extent the degree of financial instability and the degree of risk to the creditors are inter‑related. Courts have traditionally and properly been cautious indeed in entering boardrooms and pronouncing upon the commercial justification of particular executive decisions. Wholly differing value considerations might enter into an adjudication upon the justification for a particular decision by a speculative mining company of doubtful stability on the one hand, and, on the other hand, by a company engaged in a more conservative business in a state of comparable financial instability. Moreover, the plainer it is that it is the creditors’ money that is at risk, the lower may be the risk to which the directors, regardless of the unanimous support of all of the shareholders, can justifiably expose the company.
    4417 The next important decision in this line is Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (No. 2) (1994) 51 FCR 425. It was decided by one of the participants in the Spies judgment and a passage from it was cited with approval in Spies. In New World Alliance, at 444, Gummow J said that the authorities in the area were unsatisfactory and that ‘statements in some of the cases appear to have resulted from a misreading of comments of Mason J in Walker v Wimborne’. Having quoted Mason J’s dicta his Honour noted that the comments of Mason J ’emphasised that the duty is owed to the company, not to third parties’. He continued: ‘The circumstances in which the duty to the company includes an obligation to take account of the interests of third parties appears from the decision in [Russell Kinsela]’. His Honour then summarised Russell Kinsela and set out the passage from the first paragraph of the quote at 732 ‑ 733 referred to above. What then follows is the passage adopted by the High Court in Spies commencing with the words: ‘It is clear that the duty to take into account the interests of creditors is merely a restriction on the right of shareholders to ratify breaches of duty owed to the company’.
    4418 In my view the true state of the law is this. A director has a duty to act in the best interests of the company. The duty is owed to the company and not to any third parties (including creditors). But in an insolvency context (and I will narrow that concept shortly) the duty entails or includes an obligation on the directors to take into account the interests of creditors. Why should this be so? The answer is, as Mason J said in Walker v Wimborne, any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for the creditors. What are those consequences? They are many, but they include threats to the very existence of the company: to its ability to continue as a going concern.
    4419 Statements in some of the cases explain the rationale as if the creditors of a financially vulnerable company had some form of contingent proprietary interest in the assets of the company. That is not language with which I am comfortable. Nor am I am comfortable with statements suggesting that in an insolvency administration the company’s assets become the creditors’ assets even if qualified by ‘in a practical sense’. But in my view Street CJ was right when he pointed out that the degree of financial instability and the degree of risk to the creditors are interrelated. This ties back into the ability of the company to continue its existence. The same can be said for the statement that the plainer it is that the creditors’ money (not any perceived interest of the creditors directly in the assets of the company) is at risk, the lower may be the level of risk to which the directors can justifiably expose the company.
    4420 Another way of looking at this problem is to apply basic accounting concepts. The balance sheet of a company is divided into two parts: shareholders’ funds (or owners’ equity) and assets and liabilities. Put at its simplest, the basic accounting equation (in the narrative form of balance sheet required under the Corporations Act) is that assets minus liabilities equals shareholders’ funds. The shareholders’ claims against the assets of the business represent their investment. The total assets of a business are therefore subject to two sets of claims: those made by creditors in respect of liabilities and those made by the owners representing their investment. Generally speaking, creditors’ claims take precedence over shareholders’ claims. Accordingly, the shareholders’ investment can appropriately be considered as a residual claim on the fund that those assets represent.
    4421 In a practical commercial sense, when the company is a thriving going concern, the focus of attention is the size and compilation of the shareholders’ funds. The categorisation of the shareholders’ investment as ‘residual’ will be of theoretical significance only. It will be in positive territory and the main concern will be its magnitude. But as the financial situation deteriorates, the focus of attention will shift to the other aspect of the balance sheet. The residual nature of the shareholders’ investment becomes of practical significance because its worth will depend on whether assets are sufficient to cover liabilities. Indeed, the investment may have no monetary worth. Again, in a practical commercial sense, if the company is facing insolvency, the damage may already have been done to the value of the shareholders’ investment. The question will then be whether and to what extent value can be salvaged for creditors. This is how the interests of creditors emerge as a real consideration.
    4422 There is one final point to be made on this issue. If the actions of the directors expose the company to the real prospect of the appointment of a liquidator, the whole scene changes. A liquidator is an agent of the company and that agency carries with it some obligations of a fiduciary character, not only to the company but also to the general body of creditors (and, it may be said, also to the shareholders). In my view, that prospect strengthens the argument that the creditors are entitled to have their interests considered within (and not in addition to) the confines of the duty of the directors to act in the interests of the company.
    20.3.3.3. Obligation extends beyond questions of ratification
    4423 The banks place great reliance on the phrase from New World Alliance: ‘It is clear that the duty to take into account the interests of creditors is merely a restriction on the right of shareholders to ratify breaches of duty owed to the company’. As I understand their argument, it comes close to saying that the sole relevance of the position of creditors lies in the issue of ratification. If the directors have breached their duty and the company is solvent, the shareholders can ratify the breach. But if the company is insolvent then, for the reasons enunciated in Russell Kinsela and in New World Alliance, the interests of creditors intrude and any attempt by the shareholders to ratify the breach will be invalid.
    4424 I have difficulty with that argument. I do not believe that I am compelled to that position either by the authorities or as a matter of juridical principle.
    4425 In no case has it been held that what Mason J said in Walker v Wimborne was wrong. There are comments to the effect that his Honour has been misunderstood and misquoted, but I am not aware of any case in which a judicial officer has said the dicta was in error. Certainly, neither Gummow J in New World Alliance nor the authors of the joint judgment in Spies indicated a view that Mason J had erred when he said directors of a company in discharging their duty to the company ‘must take account of the interest of … its creditors’. And nor did their Honours indicate that anything said in Russell Kinsela was wrong.
    4426 Walker v Wimborne was not a ratification case. Earlier in this section I cited the oft‑quoted dicta of Mason J but I included the sentence that preceded it. And that sentence sets the context, namely the question whether, in engaging in the conduct they did, the directors carried out the duties that they owed to the company. In deciding that question, it was relevant for the directors to take into consideration the interests of the creditors of the company. If the creditors’ interests have no relevance unless and until a breach of duty has occurred, the comments of Mason J are rendered meaningless.
    4427 I also note that in New World Alliance, Gummow J did not say there was no duty at all. He said it was a ‘duty of imperfect obligation’. As I understand that phrase it applies to a duty in respect of which the law does not provide a sanction in the event it is not performed: Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 171, 180.
    4428 This is all relatively standard fare. Ratification can occur in different ways. But here we are concerned only with ratification by the shareholders. Where shareholder ratification is under consideration, the directors may have to make two decisions: first, whether to enter into the contemplated transaction and, secondly, whether to convene a meeting of shareholders to have the transaction ratified. Ratification itself is a matter for the shareholders, not the directors. The obligation of the directors in relation to ratification is to ensure that the shareholders are given sufficient information to make an informed decision whether or not to give consent. Spies and Russell Kinsela make it clear that ratification cannot occur if the company is insolvent. If the company is in financial difficulty then unless the directors disclose the financial position it is doubtful that the shareholders could make an informed decision. On that reasoning, the directors have to take the position of creditors into account in deciding whether or not to submit the matter to the shareholders for ratification because it is a necessary component of full and frank disclosure. And yet on the strict reading contended for by the banks, the directors do not have to consider the position of creditors in deciding whether or not to enter into the transaction. I do not find the argument attractive.
    4429 Business decisions are not made in a vacuum. For example, the directors of the largest industrial conglomerate in Australia might be deciding whether to launch a takeover bid for a multi‑billion dollar iron ore miner with whom it is in competition. Alternatively, it might be the sole proprietor of the local corner delicatessen (sadly, almost a thing of the past) musing over the prospect of adding a new type of ice cream to the stock lines. Or it might be a parent investing a bequest from a relative’s estate in shares as a ‘nest egg’ for the children. The principle is basically the same. The decision‑making process goes beyond mere considerations of price and product. All sorts of factors relating to the surrounding conditions or environment may influence the decision. One of these (but not the only one) will be the commercial context. And one aspect of the commercial context is solvency.
    4430 It follows that in carrying out their duties to act in the interests of a company, directors must recognise the commercial context in which the decision falls to be made. Sometimes this will call for no comment but on other occasions it will. There is support in recent authority for the propositions that commercial context is relevant and that it is not confined to issues of ratification.
    4431 In Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507 a director had borrowed money from a bank and a company that he controlled gave a mortgage over property it owned to secure the director’s obligation. The company was solvent at the time of the transaction, although it later went into liquidation. The liquidator brought an action against the director alleging that the transaction involved a breach by the director of his duties under s 229 of the Companies Code to exercise care and diligence and not to make improper use of his position. One of the issues in the case was the circumstances in which shareholders could ratify conduct of directors that was an abuse of power. The Full Court had found that the mortgage transaction did not involve a breach of s 229. The Full Court suggested that informed consent by the shareholders to the mortgage transaction would have been sufficient to prevent the company from complaining that the transaction had involved a breach of the director’s duty to the company. In that respect the High Court noted (among other things) that the company was not insolvent at the time, no‑one else claimed an interest in the property and there were no other shareholders. Gleeson CJ and Heydon J, at [29], said:
    Insofar as the pleading alleged that the mortgage transaction itself involved a contravention by the respondents … of s 229, the considerations mentioned by [the Full Court] were relevant, not to any question of ratification, but to whether the provisions of subs (2) or subs (4) of s 229 applied. In particular, they were relevant to whether [the directors] exercised a reasonable degree of care and diligence, and whether they made improper use of their position … The question whether corporate transactions of guarantee or third party mortgages involve breaches of directors’ duties, or the particular kinds of breach referred to in s 229(2) or s 229(4), usually turn upon a close examination of the commercial context in which they occur.
    4432 Their Honours cited Walker v Wimborne and ANZ Executors & Trustee Company Limited v Qintex Australia Limited (Receivers and Managers Appointed) [1991] 2 Qd R 360 as support for the last of those propositions. I note in passing that in ANZ v Qintex, McPherson J cited with approval the first of the extracts that I have set out above from Russell Kinsela. Given the historical development that I outlined in Sect 20.2.4 I see no reason why the same principles should not apply to a breach of the general law duty to act in the interests of the company.
    4433 In Angas Law Services, Gummow and Hayne JJ also mentioned context. They were dealing with a submission that had been put by the liquidator to the effect that the director had ‘appropriated’ company property as his own and that any such act of appropriation would infringe the requisite standards of propriety. At [67] (and immediately before citing the first of the Russell Kinsela extracts) their Honours said:
    This proposition concerning ‘appropriation’ is too broad. It insufficiently allows for the significance from case to case of the commercial context, and assumes a standard of conduct that is inflexible. The starting point must be the general duty of a director to act in the best interests of the company. The best interests of the company will depend on various factors including solvency.
    20.3.3.4. The banks’ alternative submission
    4434 The banks made an alternative submission to cover the possibility that I might find (contrary to their primary contention) that Spies had not rejected an obligation regarding the interests of creditors. The alternative submission involves five propositions. First, the obligation is limited to including the matter as a factor in exercising a discretion. Secondly, the obligation is activated only if the company is insolvent (and not some less precise financial state such as ‘of doubtful solvency’). Thirdly, it only arises where the directors know the company is insolvent. Fourthly, it only applies to direct creditors of the company concerned (and not to indirect creditors). Fifthly, the obligation regarding the interests of creditors is not a fiduciary duty that is susceptible to the principles in Barnes v Addy.
    4435 I do not want to say much about the fourth and fifth of those propositions in this section of the reasons. Whether the obligation applies to indirect creditors is essentially a question that arises on the facts of this case and does not import any peculiar legal principles. It will be covered in the section in which I deal with the evidence about the directors’ conduct. As to the fifth, I accept unreservedly that the obligation regarding the interests of creditors is not an independent duty owed to creditors. It is part of the content of the duty owed to the company to act in the interests of the company. It is the duty itself (not individual elements or components that may differ from instance to instance) that either is, or is not, fiduciary. This is a question to which I will come in due course.
    20.3.3.5. Obligation to creditors not necessarily paramount
    4436 I think there is much to be said for the first of the propositions set out above. What Mason J said in Walker v Wimborne is that ‘the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors’ (emphasis added). He went on to say why this was so in relation to creditors, namely, that a failure to take their interests into account could have adverse consequences for the company as well as for the creditors. But he did not say that the interests of creditors supplanted those of shareholders. Regardless of the financial situation of a company (short of a winding up and dissolution), the shareholders retain their interest. The relative degrees to which their interests (and the interests of third parties) intersect with those of the company may wax and wane. But it must always come back, ultimately, to the interests of the company.
    4437 What, then, is to be made of some of the comments in Permakraft and in Russell Kinsela on this issue? In Permakraft, at 249 ‑ 250, Cooke J said that it was appropriate for directors to consider whether the transaction would prejudice the company’s practical ability to pay its debts. He also said that a payment made to the prejudice of creditors was capable of constituting misfeasance. The emphasis in the preceding sentences is mine. In Russell Kinsela, at 732, Street CJ did say that a directors’ duty to a company extends in an insolvency context to not prejudicing the interests of creditors’. But in the next sentence, at 733, he reverted to the terminology ‘an obligation to consider the interests of creditors’. His Honour noted that wholly differing considerations might come to the fore depending on the nature of the company and the degree of financial instability. And he spoke (later at 733) of the undesirability of enunciating principles in wide‑ranging terms.
    4438 I do not read any of these statements as demanding that the interests of creditors be treated as paramount. They emphasise the importance of treating the position of creditors with due deference and are a reminder to directors of the folly of a failure to do so.
    4439 In my view the law is exactly as stated by Mason J: when a company is in an insolvency context, the directors must ‘take into account’ the interests of creditors. It does not necessarily follow from this that the interests of creditors are determinative. When directors are deciding what is in the best interests of the company one of the things that they must consider is the interests of creditors. But it would be going too far to state, as a general and all‑embracing principle, that when a company is in straitened financial circumstances, the directors must act in the interests of creditors, or they must treat the creditors’ interests as paramount, to the exclusion of other interests. To do so would come perilously close to substituting for the duty to act in the interests of the company, a duty to act in the interests of creditors.
    4440 I have previously mentioned that circumstances will wax and wane. It may be, therefore, that in particular circumstances the only reasonable conclusion to draw, once the interests of creditors have been taken into account, is that a contemplated transaction will be so prejudicial to creditors that it could not be in the interests of the company as a whole. But that will be because of the particular circumstances and not because a general principle has mandated that the treatment of the creditors’ interests is paramount.
    20.3.3.6. Obligation may arise other than in actual insolvency
    4441 In view of the finding that I have made that the major companies in the group were insolvent at the time of the Transactions it is not strictly necessary for me to answer this point. Nonetheless, I will proffer my views to complete the analysis.
    4442 The banks contend that the obligation to take into account the interests of creditors arises only if the company is insolvent and not when it is ‘nearly insolvent’ or ‘of doubtful solvency’ or ‘would inevitably become insolvent’. It is true that in both Spies and Angas Law Services the High Court spoke only of ‘solvency’. In Walker v Wimborne (5) (Mason J) there was a finding that the payer company was insolvent. In Russell Kinsela, Street CJ found, at 733, that at the time of the transaction the company was ‘plainly insolvent’. He indicated that there might be degrees of financial instability that could give rise to the obligation to consider the interests of creditors but declined to formulate a general test. His Honour also noted that ‘the degree of financial instability and the degree of risk to creditors are interrelated’. Speaking about a similar context, Cooke J in Permakraft, at 249, referred to a company being ‘near‑insolvent or of doubtful solvency’.
    4443 There are other cases in which a financial state short of actual insolvency has been mentioned. In ANZ v Qintex, McPherson J spoke of ‘insolvent or verging on insolvency’ and of a company being ‘confronted by insolvency’. In New World Alliance, Gummow J (in the passage adopted in Spies) spoke of a company that was ‘insolvent’ or ‘nearing insolvency’. In Geneva Finance, Heenan J spoke of a company ‘approaching insolvency’ and of impending in solvency. And in Linton v Telnet Pty Ltd [1999] NSWCA 33; (1999) 30 ACSR 465, 473, Giles JA (in a discussion about Permakraft and Russell Kinsela) said: ‘When directors should have paid regard to the interests of creditors can be difficult to decide, and depends on the particular facts’.
    4444 Finally, I should refer to a decision handed down in August 2007, Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 25 ACLC 1094. I mention in passing that I gave the parties an opportunity to put in additional submissions on this decision. They did so but the submissions failed to deal with the real substance of the case, were partisan and unhelpful, and did little more than repeat what had already been said. At [162] Giles JA (with whom Ipp and Basten JJA agreed) said:
    At least where the company is facing insolvency as well as considering the company’s interests the directors must consider the interests of its creditors: Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. In Grove v Flavel (1986) 43 SASR 410 the Court said at 421 that the interests of creditors must be considered where to the knowledge of the directors there is a real and not remote risk of insolvency, and of course the risk includes the effect of the dealing in question. (Grove v Flavel was disapproved in Spies v The Queen (2000) 201 CLR 603 at [95] so far as it suggested a direct duty owed to and enforceable by creditors, but not as to this matter.) It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question.
    4445 In my view these statements all suggest that a financial state short of actual solvency could be sufficient to trigger the obligation to take into account the interests of creditors. Again, in my view, this approach accords with principle. The basic principle is that a decision that has adverse consequences for creditors might also be adverse to the interests of the company. Adversity might strike short of actual insolvency and might propel the company towards an insolvency administration. And that is where the interests of creditors come to the fore.
    4446 The banks argued that the duties sought to be imposed are duties that are supposed to govern responsibility for the actions of business people in the real world, in a multitude of different types of company in a multitude of different circumstances. Directors do not have the opportunity in which to determine and categorise a series of variables in the financial position of the company at any given time. In the every day world of commerce, companies’ fortunes commonly fluctuate in a significant and rapid way. It is one thing to impose an obligation where a director forms a belief that a company is insolvent. It is quite another thing to impose an obligation where the company is in a financial state that is less than commercially desirable but does not amount to insolvency.
    4447 The banks also submitted that rules, particularly rules in relation to obligations of good faith in connection with the operations of day‑to‑day commerce, cannot be imposed by reference to concepts that, as a practical matter, are very difficult, if not impossible to determine. It is impractical for directors, in the course of day‑to‑day activities, to form views as to whether the ever‑changing financial position of the company is ‘of doubtful solvency’. There are no terms of art here. The varying degrees of financial position discussed in the cases are not concepts that business people think about. They are concepts that judges have devised, in a theoretical way, in describing the alleged duty to creditors.
    4448 I acknowledge those arguments. But the law does not shy away from concepts simply because they are difficult. And nor do business people. Men and women in commerce make decisions every day. They bring to bear their experiences, expertise and commonsense to assess advice they receive and to make decisions that they believe to be in the best interests of the business. They often do so in situations of great complexity, both in a conceptual and practical sense. Look, for example, at the phrases ‘misleading and deceptive conduct’, ‘a market’ and ‘information that is price sensitive’. I have not heard it suggested that it is beyond the capacity of people of commerce to assess a particular opportunity, prospect or decision against the prospect that it might infringe a statutory or general law obligation in which those phrases are relevant. The myriad case law that has been generated by those phrases belies the notion that they are other than difficult to determine in the course of the day‑to‑day activities of a business.
    4449 The same applies to decisions that are sensitive to the financial position of a business. On the surface, the definition of ‘insolvency’ seems clear enough. But the intense debate that raged throughout this case about whether the Bell group companies were or were not insolvent at the relevant time (a debate that is mirrored in countless other court decisions) shows how difficult those assessments can be. I am not convinced that the consideration of other financial states, short of actual insolvency, as a practical test of directors’ actions would necessarily cross the line from difficult to impossible, as the banks seem to contend.
    4450 I am not suggesting that it is always easy to decide when the obligation to consider the interests of creditors is triggered. But the law (both general law and statute) prescribes codes of conduct. Company directors have to comply with the codes to which they are subject and the courts have to ensure that they do. As a general rule, the simpler a code is the better it is. But simplicity is a relative term. Judges are paid to make difficult decisions. So too are company directors. But there is a wealth of difference between an assessment that is difficult and one that can be resolved only by thaumaturgy. When confronted by difficult decisions I often bring to mind the comment of Samuel Johnson: ‘Difficult do you call it, Sir? I wish it were impossible’.
    20.3.4. The board as a conglomerate of individuals
    4451 There is a small issue that I want to canvass here. It will apply in the same way to the discussion about the duty to exercise powers properly and the duty to avoid conflicts of interest.
    4452 The Australian Bell group companies had three directors: Aspinall, Oates and Mitchell. The board of BGUK and TBGIL had four members: Edwards, Birchmore, Mitchell and Alan Bond. BIIL had two: Edward and Whitechurch. Equity Trust was the sole director of BGNV. The question is whether, to be actionable, a breach must be committed by all members or a majority of them or whether the misfeasance of an individual director will be sufficient.
    4453 The plaintiffs plead that ‘the directors’ breached their duties. In the glossary the directors are named individually with an ‘and’ between the penultimate and last names in the list. I do not need to decide whether the ‘and’ is conjunctive or disjunctive but I will make some general comments about this issue
    4454 To establish that a decision was infected by an improper purpose it is not necessary to show that all of the directors had that purpose. It is enough to establish that the majority of directors were acting improperly: Harlowe’s Nominees. In my view the same principle applies to the duty to act in the best interests of the company. The reference to a majority indicates that the actions of an errant fiduciary have to be causative of a breach before it can be said that ‘the directors’ breached their duties.
    4455 Farrow Finance (619 ‑ 620) is authority for the proposition that the acts of an individual director can be the basis of a finding that there was a relevant breach of duty. But a close reading of the decision suggest that it may be confined to its peculiar facts. There, an individual director took certain actions but they were done ‘in the foreseeable anticipation of the other directors [and were] advised to and approved or ratified by the [board]’. Hansen J held that ‘in appropriate circumstances’ this might constitute an actionable breach. In my view, this is consistent with the general approach that the misfeasance must be causative of a breach.
    20.4. The duty to exercise powers properly
    20.4.1. The duty described
    4456 The close connection between the duties to exercise powers only for a proper purpose and to act in good faith in the interests of the company as a whole has long been recognised: see, for example, Isaacs J in Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199, 217; Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co Ltd (1968) 121 CLR 483. While, in a given case, it may be difficult to separate considerations that go to each of them they remain, conceptually, separate duties.
    4457 The board of directors is one of the constitutional organs of a body corporate. The directors are invested with powers that stem from the constitution of the body corporate (for example, the memorandum and articles) and from the relevant statutes. Since the abandonment of the doctrine of ultra vires in 1984 (at least in relation to companies incorporated under the Companies Codes and succeeding legislation) companies have had almost unqualified capacity to act. But a director (as a constitutional organ in the management and administration of a company) is nonetheless required to avoid a use of her or his fiduciary powers that goes beyond the constitutional authority of the corporation or that is otherwise an abuse of those powers. It is in this sense that directors are said to be donees of a limited power. This is a question of authority rather than of capacity.
    4458 The limited powers of directors can only be exercised for the purpose for which they are granted. Any exercise of a power for an extraneous purpose is a fraud on the power. The concept of fraud on a power was explained by Lord Parker in Vatcher v Paull [1915] AC 372, 378. It does not necessarily denote conduct on the part of the appointor amounting to fraud in the common law meaning of the word or any conduct that could properly be termed dishonest or immoral. It simply means that the power has been exercised for a purpose, or with an intention, beyond the scope of, or not justified by, the instrument creating the power.
    4459 The first task of the court is to construe the power and to determine the limits within which it may be exercised. This is a question of law. Having done that, the court turns to a question of fact; namely whether, in all of the circumstances, the purported exercise goes beyond the constitutional powers of corporation or is otherwise an abuse of the power so construed. Put simply, the court must identify the nature and scope of the power and the purpose for which it was exercised and then decide whether the purpose was permissible or impermissible. In order to make those assessments, the starting point will often be the Memorandum and Articles of association of the company: Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246, 286 ‑ 296 (Slade LJ).
    4460 The tasks that a court is required to perform were described in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 835 in these terms:
    [I]t is necessary to start with a consideration of the power whose exercise is in question … Having ascertained, on a fair view, the nature of this power, and having decided as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is to be challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.
    4461 Earlier, in Mills v Mills, Dixon J had put it this way, at 186:
    [If the substantial object of the accomplishment of the power] which formed the real ground of the board’s action … is within the scope of the power, then the power has been validly exercised. But if, except for some ulterior and illegitimate object, the power would not have been exercised, that which has been attempted as an ostensible exercise of the power will be void, notwithstanding that the directors may incidentally bring about a result which is within the purpose of the power and which they consider desirable.
    4462 In Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 294 the court opined that Dixon J’s reference in Mills to the ostensible exercise of the power being ‘void’ was apparently inadvertent. The correct view is that it is voidable.
    4463 In Whitehouse, at 294, Mason, Deane and Dawson JJ also proffered the view (obiter) that, where there were several actuating purposes (some proper, some not), it might be preferable to substitute a causative test rather than to search for a dominant or substantial object for the exercise of the power. Their Honours said:
    In such cases of competing purposes, practical considerations have prevented the law from treating the mere existence of the impermissible purpose as sufficient to render voidable the exercise of the fiduciary power … As a matter of logic and principle, the preferable view would seem to be that regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the [exercise of the power] will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, ‘the power would not have been exercised’: per Dixon J, Mills v Mills.
    4464 In some cases decided after Whitehouse, the ‘substantial object’ terminology has been used: see, for example, Kirby P in Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260, 281 and in Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478, 491 ‑ 492 and Sheller JA in Hannes v MJH Pty Ltd (1992) 10 ACLC 400, 409. In some other cases, the language used in Whitehouse has been adopted: see, for example, Mahoney JA and Clarke JA in Darvall, at 330 and 335, (respectively); Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1107, 1111 ‑ 1112. I think I probably applied the causative test in Woonda Nominees Pty Ltd v Chng [2000] WASC 173; (2000) 18 ACLC 627, [19].
    4465 This might be seen as an example of something involving a distinction without a practical difference: a peculiarity often found in legal argument. In their written submissions both parties seem to have accepted the ‘substantial object’ terminology. In any event, in the context of this case, it is unlikely to make a difference whether the search is for a ‘significantly contributing cause … but for which’ the power would not have been exercised or for a ‘substantial object’ that is causative in the same sense.
    4466 I will conclude this general discussion of the duty to exercise powers properly by adopting (with one caveat) what was said by Ipp J (with whom Malcolm CJ and Seaman J agreed) in Permanent Building Society (in liq) v Wheeler, at 218:
    The principles applicable to determining whether directors have acted for an improper purpose and in abuse of their powers are well settled. Relevantly, as regards the issues that arise in this case, it may be said that those principles are:
    (a) Fiduciary powers and duties of directors may be exercised only for the purpose for which they were conferred and not for any collateral or improper purposes.
    (b) It must be shown that the substantial purpose of directors was improper or collateral to their duties as directors of the company. The issue is not whether business decisions were good or bad; it is whether the directors have acted in breach of their fiduciary duties.
    (c) Honest or altruistic behaviour will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose. Whether acts were performed in good faith and in the interests of the company is to be objectively determined, although statements by directors about their subjective intentions or beliefs will be relevant to that inquiry.
    (d) The court must determine whether but for the improper or collateral purpose the directors would have performed the act impugned.
    4467 I said that my adoption of Ipp J’s summary of the law was subject to one caveat. It arises from the passage in par (c) in which his Honour says ‘whether acts were performed in good faith and in the interests of the company is to be objectively determined’. The banks submit that this does not represent the law as the test is subjective. This is something to which I will return in a later section of the reasons.
    20.4.2. Nature and scope of the power
    20.4.2.1. Introduction
    4468 In the factual circumstances of this case, the nature and scope of the power utilised in the impugned Transactions is important for at least two reasons. It is relevant to the ascertainment of the purpose for which the power was exercised. It is important also for the interrelated question whether there was a corporate benefit to the company concerned in entering into the transactions in which it was involved. I will discuss each of TBGL, BGF, BPG, BGUK and BGNV in some detail. I have no wish to repeat the exercise with each of the other 20 corporate plaintiffs or the other 46 Bell Participants that are not plaintiffs. I will, however, take a couple of companies from that category and describe them by way of example.
    4469 It is important to bear in mind the ‘power’ that the directors exercised and which is challenged in this litigation. It is a power that arises from the provisions in the articles of association (which vest in the directors the power to manage the business of the relevant companies) and the more specific provisions of the memorandum and articles of association that relate to the giving of guarantees and securities for debts, liabilities or obligations. It is, in essence, the power to cause a company to provide securities and guarantees and indemnities for debts which that company or associated companies owed to third parties.
    20.4.2.2. The main Australian companies
    4470 In Sect 4.1.1 I have described the commercial activities conducted by TBGL over the course of its history. TBGL was incorporated in 1923 and the objects clause in its memorandum of association spells out in specific terms the types of businesses in which the company then proposed to engage. They are set out in cl 2(i) and cl 2(ii). Generally speaking these activities centred on the woollen mills and associated textile, agricultural and other similar manufacturing endeavours. The clause goes on to provide that the objects for which the company was established include the following:
    to carry on any other business whether manufacturing or otherwise which may seem to the company capable of being conveniently carried on in connection with the businesses mentioned above or any of them or calculated directly or indirectly to enhance the value of or render profitable any of the company’s property or rights. [cl 2(iv)]
    to lend money to such persons or company and on such terms as may seem expedient … and to guarantee the performance of contracts by any person or company. [cl 2(xi)]
    to raise or borrow money in such manner as the Company may think fit and in particular by … mortgage … or other charge of … the property of the Company … [cl 2(xii)]
    to do all such other things as are incidental or conducive to the attainment of the above objects or any of them. [cl 2(xxxi)]
    4471 There are three provisions in the articles of association that have particular relevance to these questions:
21. The management and control of the business and affairs of the Company shall be vested in the Directors who (in addition to the powers and authorities by these Articles expressly conferred upon them) may exercise all such powers and do all such acts and things as are within the scope of the Memorandum and are not hereby or by statute expressly directed or required to be exercised or done by the Company in general meeting …
    9l. The Board from time to time at their discretion may raise or borrow any sum or sums of money for the purposes of the Company.
22. The Board may raise or secure the repayment of such moneys or any debts liabilities contracts or obligations undertaken or incurred by the Company in such manner and upon such terms and conditions in all respects as they think fit.
    4472 It follows from the objects clause in the memorandum that TBGL has the capacity to borrow, to grant securities and to give guarantees. But these things are not ends in themselves and they should not be regarded as independent business objects. A company (other than one that is primarily a finance provider) does not borrow money or give guarantees as a business in itself but it may do so as a part of an operating commercial enterprise. These are effectively management functions and the authority to carry them out resides in the directors by virtue of article 87. But in terms of authority, the power to do so is tied back to the memorandum and is not a power at large. It is circumscribed by the needs of the business in which the company is engaged and it must relate in a real way to that business. Another way of putting this is that it must be reasonably incidental to, and within the scope of, the business of the company. In my view this is the import and effect of the phrases ‘enhance the value of or render profitable any of the company’s property or rights’ and ‘conducive to the attainment of the [objects]’. It is also consistent with the import of Article 91.
    4473 The next question is: what is the ‘business’ of TBGL? This question raises one of the curious features of modern commercial life: the ubiquitous ‘group’. A rough count of the list of TBGL’s subsidiaries in the 1989 Annual Report shows over 180 companies in the group. Quite why it is necessary for industrial conglomerates to operate through so many different entities can be a mystery to the uninitiated. But large corporate groups are a fact of the market economy. The management and conceptual difficulties they create are part of the rich fabric of commerce and an unending source of litigation.
    4474 In the narrative sections of the annual reports for TBGL there is little (if any) mention of a ‘business’ carried on by TBGL. Rather, they speak of the ‘group’ having operating divisions: publishing, industrial, media and entertainment, and real estate. The profit and loss account and the balance sheet have (as they are required by law to do) two sets of figures: one for the holding company and one for the ‘group’. In the annual report for TBGL for 1989, for example, the ‘holding company’ column has none of the trappings of a ‘business’: no trade debtors or creditors, and no stock‑in‑trade or work in progress. But more than 80 per cent of its total assets are represented by ‘investments’, being shares in and net advances to subsidiaries. The assets and liabilities of the operating businesses are to be found in the ‘group’ column of the balance sheet.
    4475 In the end it may not matter a great deal whether the ‘business’ of TBGL is identified as the business of investing in the shares of, and lending moneys to (and receiving moneys from) subsidiaries, or as the various businesses (such as churning out a daily newspaper) conducted by individual subsidiaries or sub‑groups of subsidiaries. I want to make it clear that at this point I am doing no more than identifying the ‘business’ of TBGL, the advancement of which comes within the scope of the memorandum and is hence amenable to the management powers residing in the directors under article 87. This is not to be confused with the separate question whether, in the context of a group of companies, the directors of individual companies can look solely at the interests of the group and ignore the interests of individual entities within the group.
    4476 The circumstances in which BGF came to be incorporated in 1985 are set out in Sect 4.1.1.1. The objects clause in the memorandum of association contains the following:
    to provide finance for [TBGL] and its subsidiary companies. [cl 2(a)]
    to raise and borrow money … [cl 2(e)]
    to mortgage or charge all or any part of the property and rights of the Company … including its uncalled capital. [cl 2(i)]
    to advance and lend money on assets of all kinds upon such terms as may seem expedient. [cl 2(j)]
    to guarantee the performance of contracts, debts and obligations of all kinds to any person … or corporation and to mortgage or charge the real and personal property, present and future, of the Company in support of such guarantee. [cl 2(m)]
    to carry on either in connection with or separately from the businesses authorised to be carried on by the preceding paragraphs, or any of them, or any businesses or business which, in the opinion of the Directors, may be conveniently carried on by the Company or which promote, assist or are incidental or conducive to the attainment of the objects or any of them. [cl 2(p)]
    4477 The following provisions are to be found in BGF’s articles of association:
    68(1) Subject to the Code and to any other provision of these Articles, the business of the Company shall be managed by the Directors, who may … exercise all such powers of the Company as are not, by the Code or by these Articles, required to be exercised by the Company in general meeting.
    (2) Without limiting the generality of sub‑Article (1), the Directors may exercise all the powers of the Company to raise or borrow money, to charge any property or business of the Company … or give any other security for a debt, liability or obligation of the Company or of any other person.
    4478 As I understand it, it was common in the mid‑1980s (and remains common) for large corporate groups to centralise some or all of their treasury management functions. Again as I understand it, this is seen as facilitating the relationships between the group and outside financiers and as simplifying and making more efficient the control of what are often large volumes of intra‑group financial transactions. Treasury management includes (among other things) day‑to‑day control of cash and bank accounts, raising finance and investing liquid funds. This accords with my understanding of the evidence concerning the operations of BGF and, in particular, the intra‑group transactions reflected in the general ledgers. John Cahill described the role of BGF as follows:
    Basically [it] was a special purpose vehicle that was responsible for borrowing for the group and then lending into the group.
    4479 The things I said in relation to TBGL about capacity and authority and the circumscribing of powers in accordance with the scope of the memorandum apply equally to BGF. It is true that article 68 does not refer specifically to the memorandum but I think it is implicit in the reference to the ‘powers of the company’. The management powers to borrow, secure and guarantee must be utilised for the needs of the business in which the company is engaged and it must relate in a real way to that business. The business of BGF is as I have described in the preceding paragraph.
    4480 BPG started life as Odin Foods Pty Ltd. Not surprisingly, the specification of its primary businesses in the objects clause of its memorandum is not particularly helpful. But it has provisions of similar effect to those set out above for BGF (save for cl 2(a)). Clause 2(p), for example, is in almost identical terms. The articles of association of BPG contain a provision that is in exactly the same terms as article 68(1) and 68(2) for BGF. BPG was at the apex of the publishing sub‑group. It owned all of the shares in several companies, including Harlesden Investments Pty Ltd, which, in turn, held the shares in several other companies that operated businesses in or associated with the publishing venture. In the three‑year business plan (prepared by officers of TBGL and distributed to the banks in the first half of 1988) the following is said about ‘Bell Publishing’:
    Bell Publishing Group publishes ‘The West Australian’, the only daily newspaper in Perth, and several regional publications in WA. The division also operates a substantial commercial printing business and owns a small travel agency.
    4481 This, I think, is a sufficient description of the business conducted by BPG. That having been said, BPG suffers from a similar, though numerically smaller, conceptual problem once (and if) it becomes necessary to distinguish between a business of investing in subsidiaries and the businesses actually operated by those subsidiaries.
    20.4.2.3. Examples of other Australian companies
    4482 I will take as examples Belcap Enterprises Pty Ltd and Bell Equity Management Pty Ltd. Both are plaintiffs: the former is mentioned in 8ASC par 48(a) and the latter is a BRL shareholder.
    4483 Both were incorporated after the abandonment of the ultra vires doctrine in 1984 and neither memorandum of association includes an objects clause. In both instances the articles of association contains a provision in identical terms to Article 68 for BGF.
    4484 All of the other plaintiff companies have an article corresponding with article 68. The memoranda of association of some of them indicate the principal businesses for which they were incorporated. For example, Great Western Transport was formed to ‘carry on the business of makers or dealers in articles of any description made or prepared with indiarubber’ and ‘to promote race meetings and speed and trial tests for aviators, motorists and cyclists’. The term ‘indiarubber’ is now familiar only to those of us with an acute long‑term memory. The latter, somewhat surprisingly, given the Western Australian context (circa 1964), overlooks Donald Campbell and Lake Dumbleyung.
    4485 It seems that by 1989 and 1990, whatever may have been the original purpose for their creation, none of the other plaintiff companies were conducting substantive businesses. They were reduced to interlocking relationships with other group companies through shareholdings and loans.
    20.4.2.4. BGUK
    4486 BGUK was incorporated under the UK companies legislation. The objects clause in the memorandum of association of BGUK contains the following:
    to carry on any other trade or business which can, in the opinion of the Board of Directors, be advantageously carried on by the Company. [cl 3(B)]
    to borrow or receive money on deposit either without security or secured by … mortgage or other security charged on … any of the assets of the Company … and generally to act as bankers. [cl 3(F)]
    to guarantee support and/or secure either with or without consideration the payment of any … obligations, interest, … monies or shares or the performance of contracts or engagements of any company or person and in particular (but without prejudice to the generality of the foregoing) of any company which is, for the time being, the company’s holding company as defined by Section 154 of the Companies Act 1948 or another subsidiary, as defined by the said section of the company’s holding company or otherwise associated with the company in business and to give indemnities and guarantees of all kinds and by way of security as aforesaid either with or without consideration to mortgage and charge the undertaking and all or any … assets … [cl 3(G)]
    to lend money with or without security … [cl 3(H)]
    to do all such other things as are incidental to or which the Company may think conducive with the above objects or any of them. [cl 3(X)]
    4487 The articles of association contain similar provisions to those that govern the powers of the directors in the constitutions of BGF and BPG:
23. The Directors may exercise all the powers of the Company to borrow money … and to mortgage or charge its undertaking … whether outright or as a security for any debt, liability or obligation of the Company or of any third party.
24. The Directors shall manage the business of the Company, and all the powers of the Company which are not by the statutes, these Articles or the Regulations of Table A which apply to the Company required to be exercised by the Company in general meeting shall be exercised by the Directors.
    4488 Like BPG, BGUK was at the apex of a sub‑group, in this instance the UK operations. In the three‑year business plan there is a description of the activities of ‘Bell Group International’, which I understand to be the UK sub‑group. It mentions film production and distribution, the operation of theatres and theatrical productions, the insurance activities of Bryanston and the UK property portfolio. Again, I think that is sufficient to appreciate the business endeavours of BGUK and its sub‑group.
    20.4.2.5. BGNV
    4489 BGNV was incorporated under Netherlands Antilles law. The constitutional document is called Articles of Incorporation. Article 2 is as follows:
25. The purpose of the company is to finance directly or indirectly the activities of the companies belonging to the concern of Bell Group Limited … to obtain the funds required thereto by floating public loans and placing private loans, to invest its equity and borrowed assets in the debt obligations of one or more companies of the concern, and in connection therewith and generally to invest its assets in securities, including shares and other certificates of participation and bonds, as well as other claims for interest bearing debts however denominated and in any and all forms, as well as the borrowing and lending of monies.
26. The company is entitled to do all that may be useful or necessary for the attainment of its object or that is connected therewith in the widest sense, including to participate in any other venture or company.
    4490 Article 6 (under the heading ‘Management’) contains the simple statement in cl 1 that ‘the management of the company is commissioned to a managing board, consisting of one or more managing directors’.
    4491 In Sect 4.3.4 I discussed the circumstances that led to the interposition of BGNV in the bond issue structures. The banks contend that BGNV was a special purpose vehicle (in the sense that it was established for taxation reasons and its only role was to make the bond issues and on‑lend the proceeds to companies in the Bell group). This is not admitted by the plaintiffs. They contend that there was no restriction on the manner in which BGNV could raise funds from the market. The articles themselves contemplate not only the fact that BGNV might raise funds from different sectors within the capital markets, but that it might choose to on‑lend those funds in a variety of ways. They go on to submit that the simple fact that BGNV did raise funds on particular occasions in a particular fashion cannot be construed as some sort of limitation of the terms of the company’s articles of incorporation.
    4492 I accept the proposition that BGNV was set up as a special purpose vehicle to make the bond issues and on‑lend the proceeds. There is ample evidence to support that conclusion: see Sect 12.11. There was some resistance to the idea until a late stage. The final decision was taken after advice from taxation consultants that it would secure a deduction for the interest payments and avoid withholding tax. The latter was seen as being likely to reduce the attractiveness of the issue to investors. That, for example, was the import of the evidence of Cahill, Griffiths, Graham and Williams.
    4493 I have accepted the proposition that BGNV was incorporated as a special purpose vehicle to make the bond issues and deal with the proceeds. But as I said in Sect 13.2.6.3, it does not follow that BGNV was restricted by force of its Articles of Incorporation to on‑lend in any particular manner. The finding that it on‑lent on a subordinated basis flows as a matter of fact from what actually happened rather than from the dictates of the constitutional documents.
    4494 Nor does it follow that BGNV was a mere puppet of TBGL to do the latter’s bidding or that the directors were entitled to take the view that they had no obligations to BGNV or that the role of BGNV ceased once the issue had been launched and the funds received and passed through to TBGL. BGNV had ongoing responsibilities to the bondholders and to the trustee of the issue.
    4495 These are all questions that I have mentioned in the discussion about subordination and to which I will return in due course. Meanwhile, I think that what I have set out is a sufficient description of the business of BGNV as a step in ascertaining the legitimacy of the purposes for which directorial powers were exercised.
    20.5. The duty to avoid conflicts of interest
    20.5.1. The duty described
    4496 In the work by Austin, Ford and Ramsay, Company Directors, Principles of Law and Corporate Governance (2005), the authors identify five closely related rules administered by equity and which have an application to conflicts of interest on the part of company directors and senior officers. They can overlap extensively with one another. The five rules are:
    (a) the conflict of interest rule: the director or officer must not, in any matter falling within the scope of his or her office, have an interest that conflicts or may possibly conflict with his or her duty to the company, except with the company’s fully informed consent;
    (b) the conflict of duties rule: the director or officer must not, in any matter falling within the scope of his or her office, have an inconsistent engagement with a third party except with the company’s fully informed consent;
    (c) the misappropriation rule: the director or officer must not misappropriate the company’s property for their own, or for a third party’s benefit;
    (d) the profit rule: the director or officer must not misuse his or her position for personal or a third party’s possible advantage, except with the company’s fully informed consent and, therefore, he or she must account to the company for any gain which they make in connection with the fiduciary office;
    (e) the business opportunity rule: the director or officer (at least if engaged full time in the service of the company) must not divert any profit making opportunity in the same line of business as the company’s present or prospective business, to himself or herself or to some other person, except with the company’s fully informed consent.
    4497 In this case we are concerned primarily with the conflict of interest rule but the conflict of duty rule and the profit rule also require attention. I should say immediately that there is no suggestion that the directors made a personal profit (in a monetary sense) from the Transactions and for which they should now account. The reason I mention this is because of the debate (referred to later) as to whether the conflict of interest rule and the profit rule are distinct or allied.
    4498 Moving away from companies for the moment and concentrating on wider fiduciary relationships, these obligations are often referred to as ‘conflicts of duty and interest’ and ‘conflicts of duty and duty’. The former encompasses (among other things) both the conflict of interest rule and the profit rule. In a broad law of trusts context, the conflict of interest rule directs that a trustee, like other fiduciaries, must not place himself in a position where his personal interest, or interest in another fiduciary capacity, conflicts or may possibly conflict with his duty as a trustee. Under the profit rule, a trustee, like other fiduciaries, is not in general allowed to retain a benefit acquired or profit made by him from the use of the trust property or in the course of or by virtue of his trusteeship: see Mowbray WJ, Lewin on Trusts, (17th ed, 2000), [20‑01].
    20.5.2. The duty: a more detailed analysis
    20.5.2.1. Statement of the duty and its rationale
    4499 A convenient starting point for any discussion about conflicts of interest is the time‑honoured dictum of Lord Herschell in Bray v Ford [1896] AC 44, 51 – 52:
    It is an inflexible rule of a Court of Equity that a person in a fiduciary position is not; unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded on principles of morality. I regard it rather as based on the consideration that human nature being what it is, there is danger, in such circumstances, of the person holding the fiduciary position being swayed by interest rather than duty, and thus prejudicing those he is bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.
    4500 This passage was quoted with approval by Gaudron and McHugh JJ in Breen v Williams (108). Their Honours went on to say that the law of fiduciary duty rests ‘not so much on morality or conscience as on the acceptance of the implications of the biblical injunction that ‘no man can serve two masters’ [Matthew 6:24]’.
    4501 There is authority for the proposition that the conflict of interest rule and the profit rule may be two themes within a single fundamental principle, rather than two separate doctrines. The objective of the principle is to preclude the fiduciary from being swayed by considerations of personal interest (the first theme) and from actually misusing his or her position for personal advantage (the second theme): Chan v Zacharia (1984) 154 CLR 178, 198 ‑ 199 (Deane J). The tendency to regard the profit rule as little more than a corollary of the conflict rule was criticised in Hospital Products Ltd (103) where Mason J said:
    And a recognition of its shortcomings induced Sir Frederick Jordan in his Chapters on Equity, 6th ed. (1947), p. 115, to describe the conflict rule as a ‘counsel of prudence’ rather than a rule of equity. Accordingly, the fiduciary’s duty may be more accurately expressed by saying that he is under an obligation not to promote his personal interest by making or pursuing a gain in circumstances in which there is a conflict or a real or substantial possibility of a conflict between his personal interest and those of the person whom he is bound to protect: Aberdeen Railway Co. v. Blaikie Brothers [(1854) 1 Macq 461 at 471].
    4502 In Chan v Zacharia (198) Deane J also cited Sir Frederick Jordan’s observations. This necessitates some comment. What Sir Frederick said is this:
    It has often been said that the person who occupies a fiduciary position ought to avoid placing himself in a position in which his duty and his interest, or two different fiduciary duties, conflict. This is rather a counsel of prudence than a rule of equity; the rule being that a fiduciary must not take advantage of such a conflict if it arises.
    4503 The statements in Bray v Ford (accepted in Breen v Williams) and in Lewin on Trusts that a fiduciary must not ‘put himself’ or ‘place himself’ in a position of conflict has to be seen in the light of Mason J’s formulation in Hospital Products. It is the promotion of the personal interest that equity finds abhorrent.
    20.5.2.2. The basis for liability
    4504 Generally speaking, liability arises not from the mere existence of a conflict of interest but from the pursuit of personal interest by, for example, actually entering into a transaction in which the relevant conflict exists, or the actual receipt of personal benefit in circumstances of such conflict: Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239, 255; Fitzsimmons v R (1997) 23 ACSR 355, 357 ‑ 359. The mischief is not so much being in a position of conflict but rather in pursuing that conflict.
    4505 In relation to companies, the fact that a director derives a benefit from the exercise of the fiduciary power is not of itself proof of a breach of fiduciary duty. Directors perform their functions subject to many influences and courts have not expected directors to approach their tasks with a mind free from concern for other interests: Mills v Mills, 163 ‑ 164 (Latham CJ). Similarly, a breach of duty may occur even though the company does not sustain a loss: Gemstone Corporation (245).
    20.5.2.3. Approach to a possibility of conflict
    4506 The courts have developed a pragmatic, commonsense approach to the scope of the conflict of interest rule by requiring a real sensible possibility of conflict before finding that a conflict of interest exists. In Boardman v Phipps [1967] 2 AC 46, 124 Lord Upjohn said:
    In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you can imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.
    4507 This passage was cited with approval by the Privy Council in Queensland Mines Ltd v Hudson (1978) 18 ALR 1, 3. The force of Lord Upjohn’s remarks (with subtle variations of terminology) has been recognised in a succession of Australian authorities, for example:
    (a) Chan v Zacharia (‘a conflict … or significant possibility of such conflict’ per Deane J at 198);
    (b) Hospital Products (‘a conflict or real or substantial possibility of conflict’ per Mason J at 103);
    (c) Green and Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 (‘in which, in a real and sensible way, his duty may possibly conflict with his interest’ per Burt CJ at 5);
    (d) Clay v Clay [2001] HCA 9; (2001) 202 CLR 410 (‘sensible, real or substantial possibility of conflict’ at 436); and
    (e) Southern Real Estate Pty Ltd v Dellow [2003] SASC 318; (2003) 87 SASR 1 (‘a conflict or a real or substantial possibility of a conflict’ per Debelle J at 8).
    4508 The test for ascertaining a possible conflict is objective. It is not necessary to establish fraud, dishonesty or bad faith: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 137. In order to assess whether or not there is a real or substantial possibility of conflict the court must adopt the position of the reasonable person looking at the relevant facts and circumstances of the particular case. Nonetheless, in the case of a company, a director may act with a personal interest even though the director has not freed his or her mind of that personal interest when so acting, provided that his personal interest was not the actuating motive. Rather, the actuating motive must be some bona fide concern for the benefit of the company as a whole or for fairness as between members: ASIC v Adler, 735.
    20.5.2.4. The concept of a personal interest
    4509 The last point I want to raise in this review of general legal principles concerning conflicts of interest relates to the phrase ‘personal interests’. I think it is common ground that the phrase is not confined to pecuniary interests. It extends to non‑pecuniary and indirect interests. In Baker v Palm Bay Island Resort Pty Ltd (No 2) [1970] Qd R 210, 221 ‑ 222, WB Campbell J said that the interest must be direct and certain and not contingent or remote. As a matter of principle I cannot see why it needs to be direct or of a contractual nature. It would be appropriate to adapt the test for a possible conflict (‘real and substantial’) and apply it to the identification of the interest. Mason J in Hospital Products excluded the ground of relief ‘when the interest of the fiduciary is remote or insubstantial’. Some care needs to be taken to ensure the word ‘substantial’ is not seen purely in quantitative terms relative to, for example, the subject matter of the transaction to which the impugned conduct relates.
    4510 This approach accords with the statement by Judge Learned Hand in Phelan v Middle States Oil Corporation (1955) 220 F 2d 593, 602, indicating that the doctrine is applied with regard to the particular circumstances. His Honour went on to say that the rule does not apply when the putative interest, though in itself strong enough to be an inducement, is too remote, or when, though not too remote, it was too feeble an inducement to be a determining motive. These comments were cited with approval by the Mason J in Hospital Products (104) and by McHugh, Gummow, Hayne and Callinan JJ in Pilmer v The Duke Group Ltd (in liq) (199).
    4511 Some assistance might also be gained by analogy to s 191 of the Corporations Act 2001, which provides that a director who has a ‘material personal interest’ in a matter that relates to the affairs of the company must give the other directors notice of the interest. The word ‘material’ in the context of s 191 has been held to mean that the interest could be seen to have a capacity to influence the vote of the director upon the decision to be made: McGellin v Mount King Mining NL [1998] WASC 96, 29 (Murray J).
    4512 One way of ascertaining whether the interest of the fiduciary is remote or insubstantial is to ask whether the interest is such that a reasonable person would think there was a real or substantial possibility of the fiduciary being swayed by it. In this way, tests for the identification of the ‘interest’ and for the ‘possibility of a conflict’ would be applied bearing in mind a similar rationale.
    20.5.3. Some observations on the pleaded case
    4513 The conflict of interest problem arises in this case because of the relationship between the BCHL group and the Bell group. Oates and Mitchell were appointed to the board of TBGL in August 1988, during the course of the BCHL takeover. At that time they were directors of BCHL but were obliged to resign from the board because of the cross‑media ownership rules then in place. Aspinall became a director of TBGL in October 1988. He was not a director of BCHL. Each of Mitchell, Oates and Aspinall continued as directors of various subsidiaries of BCHL. They were senior executives or employees of BCHL. Each of Aspinall, Oates and Mitchell held shares or options in BCHL and BML. In the main, the banks admit these matters, save for the characterisation of the directors’ shareholding interests in BCHL and BML as ‘significant’.
    4514 There is a species of corporate officer described in the literature as a ‘nominee director’. In a paper entitled ‘Nominee Directors and Alternate Directors’, Companies and Securities Law Review Committee, Discussion Paper No 7 (1987) the term ‘nominee directors’ is defined in par 101 as follows:
    [Persons] who, independent of the method of their appointment, but in the performance of their office, act in accordance with some understanding, arrangement or status which gives rise to an obligation (in the wide sense) to the appointor.
    4515 Levin v Clark [1962] NSWR 686, Re Broadcasting Station 2GB Pty Ltd [1964-65] NSWR 1648 and Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (NSW) 307 are examples of cases in which difficulties associated with the position of ‘nominee directors’ were considered. It is common ground that Aspinall, Mitchell and Oates were appointed to the board of TBGL at the request of BCHL. The plaintiffs allege that they were also appointed as ‘representatives’ of BCHL, an allegation denied by the banks. While it is not difficult to reach the conclusion that they were ‘representatives’ of BCHL, the case was not fought on the basis that they were ‘nominee directors’ in the technical sense. The phrase ‘nominee director’ was used in evidence with only one of the witnesses (Klaus Borig of DG Bank) and (save for a comment on that evidence) does not appear in closing submissions.
    4516 Much heat was generated in the closing submissions by what the banks described as an attempt to advance, in the guise of a case based on the conflict of duty rule, a case that had not been pleaded. There is some elasticity in the language used by the plaintiffs in their closing submissions but that is not surprising as similar confusion arises from the myriad authorities in the area.
    4517 The breaches of duty pleaded, for example in 8ASC par 39A, arise from the conduct of the directors in causing the Bell Participants to enter into the Transactions and to enter into and give effect to the Scheme. In a temporal sense the focus of attention must therefore be on January 1990 and following. At that time, none of the Australian directors was a director of BCHL, although they were directors of BCHL subsidiaries. Oates and Mitchell were ‘senior executives’ of BCHL but by that time Aspinall was an employee of WAN. A senior executive or employee can stand in a fiduciary relationship with his or her employer and may owe duties of a fiduciary nature to the employer: Green v Bestobell per Kennedy J at 16.
    4518 If the import of the plaintiffs’ case is that there was a conflict between the duties owed by the Australian directors to the Bell Participants of which they were directors and the duties owed by them to BCHL or to subsidiaries of BCHL arising from their respective engagements with those companies then, in my view, it is beyond the pleaded case. One reason for this is that there is nothing in either 8ASC par 37(c) and, for example, par 39A(f), or in the particulars, for example, PP par 39A(o) and par 39A(p), to identify the relevant duty or duties owed to BCHL or other BCHL companies arising from the respective engagements.
    4519 That having been said, in the context of this case, the limitation of the argument to an alleged breach of the conflict of interest rule (seen under the broader description ‘conflict of duty and interest’) does not do much damage to the plaintiffs’ position. The real question that arises in this aspect of the plaintiffs’ case emerges from a fair reading of the plea as particularised. It can be described generally in these terms: was there a conflict or possible conflict between the personal interests held by the directors of Bell group companies in Bond group companies (on the one hand) and interests of the Bell Participants (on the other), given the duties that the directors owed to the Bell Participants?
    4520 Another question that arises is whether the plaintiffs’ case inappositely alleges a breach of the conflict of interest rule by reason of the directors preferring the interests of BCHL. The banks submitted that the rule concerns the conflict between the interests of the fiduciary and those of the principal. A transaction that benefits a third party is not prohibited by the conflicts rule unless, coincidentally, the fiduciary’s interest lies in benefiting the third party. But in this case, the relevant conflict is between the fiduciary’s interest (in benefiting the third party) and the principal’s interest. In the absence of a case where the directors’ interests lie in benefiting a third party, the action of a director in benefiting a third party is dealt with under one or both of the duty to act in the interests of the company and the duty to exercise powers properly.
    4521 I accept this submission. If the directors’ intention and purpose is to confer a benefit on a third party, they may be in breach of duties that they owe to the company. Nevertheless, the question is not essentially one of conflict. Rather, it raises the question whether the director, in benefiting the third party, bona fide considered the transaction to be in the interests of the company or whether the director’s substantial purpose in entering into the transactions (which benefited the third party) was a proper one. If the director bona fide considered the transaction to be in the interests of the company and acted for the purpose of furthering the company’s business, then the fact that the transaction benefits a third party would not, of itself, give rise to breach of the conflict of interest rule.
    4522 This assumes of course the absence of extraneous circumstances, such as where the director’s own personal interest would be advanced by benefiting the third party. I will give a hypothetical example to explain what I see as the essential difference. Suppose the directors of company X decided on a course of action that was inimical to the economic interests of X but highly favourable to the commercial future of company Y. In the first scenario, assume that the directors of X had no association of any kind with Y but their motivation for assisting Y was that Y’s business was in an area that the directors thought beneficial to the ecology of the region in which it operated but which was expressly forbidden to X under X’s constitution. In the second scenario, assume X’s directors had no present association of any kind (and there were no constitutional limitations) with Y but were motivated by the thought that Y had enormous prospects and they wished to ingratiate themselves with Y, with the thought that if at some time in the future they might leave X and, if they did so, they might be offered jobs with Y. I find it difficult to fit the first scenario into the conflict rule. But it would certainly raise questions of constitutional capacity and could be a breach of either or both of the duty to act in the interests of the company and (or) the duty to exercise powers properly. The second scenario is, I think, a breach of the conflict rule. This is so not so much because the impugned conduct was to the benefit of Y but, rather, because by benefiting Y the directors were advancing their own interests.
    4523 Finally, there is an issue about the nature of the impugned conduct. The banks submit that the plaintiffs’ plea is, in reality, about the exercise by a director of his powers and that this is not the matter to which the conduct rule is addressed. The banks say that the exercise of powers is governed by the requirement to act bona fide in what the director regards as the interests of the company and for proper purposes. The prohibition on a fiduciary promoting his interests where they conflict with those of the principal applies to whatever actions the director undertakes in promoting those interests, whether in exercising his powers or otherwise. The rule relating to conflict is a fiduciary obligation that is independent of the principles which control the exercise of a director’s powers. The rule limits a fiduciary’s actions in relation to the area of conflict. It does not have a general effect on the fiduciary’s ability to act in any way.
    4524 I do not read the pleading as being deficient in the way that the banks suggest. There are problems with 8ASC par 37(c) because it does roll‑up a series of different contentions. It pleads duties owed by the directors to the companies of which they were directors:
    Where there existed a conflict or potential conflict of interest between the interests of the director or others and those of the company, not to exercise his or its powers in the interests of himself, itself or others and/or to the disadvantage of the company.
    4525 It will be apparent from what I have already said that I have a difficulty with that plea if it is read as meaning that where there is a conflict between the interests of others and those of the company the director could not exercise his powers in the interests of others. But what remains of the paragraph can fairly be read as meaning that where there is a conflict or potential conflict between the interests of the director and those of the company, the director could not exercise his or its powers in the interests of himself or of others (if his interests intersected with the interests of the others). In my view this does set out a cause of action recognised by equity. The reference to the exercise of powers is another way of saying the director is promoting his personal interests by pursuing a gain. The first clause in the paragraph alleges the existence of circumstances in which there is a conflict or a real or substantial possibility of a conflict between his personal interest and those of the entity that it is duty to protect.
    4526 In this respect it is akin to the situation alluded to by Anderson J in Permanent Building Society (in liq) v McGee. His Honour noted that there may be circumstances in which there arises a positive duty to protect the interests of the company by, for example, preventing the transaction from going ahead. In the light of the discussion in the next section, I would prefer to describe it in this way: in some circumstances, part of the duty to protect the interests of the company may require the directors to prevent the company from entering into the transaction or to ensure that it is not followed through to completion.
    20.6. The fiduciary nature of the duties
    4527 I now turn to two significant issues that permeate the arguments about breaches of directors’ duties. The first, which I will deal with in this section, is whether the pleaded duties are properly characterised as fiduciary or whether they are equitable but not fiduciary. In the next section I will deal generally with the question whether the validity of the directors’ conduct is to be determined by objective or subjective considerations.
    4528 Another pleading dispute arose in relation to this question. In 8ASC par 37 the plaintiffs plead expressly that the duties are fiduciary. In ADC par 37 the banks admit that the directors owed fiduciary duties to act in the best interests of the company as a whole and to exercise powers properly but otherwise deny each and every allegation in the paragraph. The plaintiffs contend that in the face of that admission the banks are not now entitled to raise an issue, generally, whether the duties are fiduciary. I can answer that proposition in short order. The question whether the proper characterisation of an obligation is or is not fiduciary is a question of law or, at very least, a mixed question of law and fact. That being so, an admission in the pleadings does not resolve the issue and nor does it absolve the trial judge from the responsibility to ascertain the true state of the law and to apply it in accordance with findings that she or he has made.
    20.6.1. The fiduciary problem described
    4529 There is something of ‘the chicken and the egg’ in these arguments. It is often said that fiduciary obligations are the consequences of a person having an obligation to act in the interests of another; but they are not the source of the duties. But not every instance of a person having an obligation to act in the interests of another will result in fiduciary duties. A person may stand in a fiduciary relationship because the former must act in the latter’s interests. But the constitution of the relationship as fiduciary does not mean that everything that happens in the course of the relationship is fiduciary in nature.
    4530 The first task is to ascertain whether there is a fiduciary relationship. Different fiduciary relationships may entail different consequences. The duties and obligations that arise in the relationship will differ according to the circumstances. So it is, then, that a person may stand in a fiduciary relationship to another person for some, but not all, of the activities in respect of which they are associated. The mere fact that there is a fiduciary relationship does not mean that all of the duties and obligations attendant on the relationship are fiduciary in nature.
    4531 It is common ground that the relationship between a director and the company of which he or she is a director is a fiduciary one. But it does not follow that each and every duty owed by the director to the company is fiduciary. I have already mentioned the example of the duty to exercise care, skill and diligence that arises in the course of a fiduciary relationship. That is not a fiduciary duty: Permanent Building Society v Wheeler (158).
    4532 What is the essence of a fiduciary relationship that compels the conclusion that a duty attendant on it is itself fiduciary in character? The courts have come up with many different formulations in trying to capture the essence of the fiduciary relationship, usually with the cautionary note that it is either unwise or impossible to do so and that the categories are not closed. Take Hospital Products as an example. The New South Wales Court of Appeal (US Surgical Corporation v Hospital Products International Pty Ltd, 208) had said that a fiduciary relationship exists where the facts of the case established that in a particular matter a person has undertaken to act in the interests of another and not in his own interests. In the High Court, Gibbs CJ, at 69, noted that some formulations emphasise the existence of a relation of confidence (that one person subjectively trusts another); others, that there is an inequality of bargaining power. But his Honour said that the presence of these things was neither a necessary nor a conclusive element of a fiduciary relationship, although he thought that the Court of Appeal’s formulation was appropriate to the facts of the instant case.
    4533 In Hospital Products (96 ‑ 97), Mason J said the ‘essence or the characteristics of the relationship’ was sometimes described in terms of ‘relationships of trust and confidence or confidential relations’, epitomised in the types of association commonly understood as fiduciary: trustee and beneficiary, agent and principal, solicitor and client, employer and employee, director and company, and a partnership. He noted that the critical feature was that ‘the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense’ giving the fiduciary ‘a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position’. His Honour went on to say this:
    The expressions ‘for’ or ‘on behalf of’ or ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.
    4534 Dawson J, at 142, opined that there is a notion underlying all cases of fiduciary obligations, namely, that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him or her to place reliance upon the conscience of that other.
    4535 Mason J’s statement of the ‘representative character’ of the fiduciary office was adopted by Gaudron and McHugh JJ in Breen v Williams (107). The question in Breen was whether a medical practitioner was under a fiduciary duty to grant access to the medical records of the patient. Their Honours used the ‘representative character’ concept as an argument against recognising the relationship between a doctor and patient as a fiduciary one because ‘a doctor is not generally or even primarily a representative of his patient’. This is interesting. A solicitor who takes instructions from a client to draft a will would not usually be thought of as a ‘representative’ of the client in that sense. But a solicitor who acts in real property transaction or in litigation could be so described. Yet in both instances the solicitor would, I think, be seen as standing in a fiduciary relationship with the client. This just highlights the difficulties of finding an all‑embracing definition.
    4536 The facts of this case do not raise a definitional problem because there is no doubt that the relationship between a director and the company of which she or he is a director is a fiduciary one. But, as has been said many times, a person may stand in a fiduciary relationship with another for one purpose but not for others. The reason why I have sought to analyse the relationship is not to aspire to the unattainable (namely, to formulate an all‑embracing definition) but to see if it assists in deciding whether individual facets or aspects of the role of a director involve duties that are fiduciary.
    4537 Another way of approaching this problem is to look at what equity demands of a person who is a fiduciary rather than to define the fiduciary relationship. At the risk of oversimplifying the position, the answer seems to lie in a single word, loyalty; or, perhaps two words, loyalty and fidelity. As Gaudron and McHugh JJ said in Breen (108), equity insists that fiduciaries give undivided loyalty to the persons whom they serve.
    4538 In Bristol and West Building Society v Mothew [1998] Ch 1, 18, Millett LJ put the matter this way:
    The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of a fiduciary.
    20.6.2. The proscriptive: prescriptive dichotomy
    4539 The next question is whether obligations imposed by equity and which are truly fiduciary (rather than being obligations that are equitable but not fiduciary) are limited to those that are proscriptive in character or whether they also cover prescriptive dictates. The submission of the banks is that Australian law only recognises as fiduciary duties those that are proscriptive. They say that the proscriptive obligations of a fiduciary prohibit disloyalty by informing a fiduciary what he or she must not do. Fiduciary obligations do not prescribe standards of performance or impose affirmative obligations to act beyond the exaction of loyalty. They do not prescribe conduct that must be undertaken in a particular situation. Equity strives to promote loyalty by prohibiting disloyalty and activities that might lead to disloyalty.
    4540 In relation to fiduciaries generally, there are academic writings supporting the view that equity imposes proscriptive, not prescriptive, duties. Such duties arise from the obligation that the fiduciary has to be loyal to the beneficiary. In an article entitled ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, Lord Millett said, at 222 – 223:
    There is a common thread to the fiduciary obligations to which these different fiduciary relationships [trust and confidence; influence; confidentiality] give rise. It is the principle that a man must not exploit the relationship for his own benefit. This is what distinguishes a fiduciary relationship from a commercial one. What distinguishes the role of equity from that of the common law is that equity is proscriptive not prescriptive [Breen v Williams; Bristol & West Building Society v Mothew], It forbids the fiduciary to act for himself. It does not tell him what to do for his principal. And if, in breach of his fiduciary duty, he does act for himself, he is treated as if he had acted for his principal.
    4541 Comments to similar effect are to be found in Nolan, ‘A Fiduciary Duty to Disclose?’ (1997) 113 LQR 220, 222 and in Dempsey and Greinke, ‘Proscriptive Fiduciary Duties in Australia’ (2004) 25 ABR 1, 13.
    4542 That this represents the law in Australia (in relation to fiduciaries generally) cannot be doubted. In Breen Gaudron and McHugh JJ noted, but firmly rejected, the trend in Canadian decisions to impose on fiduciaries some positive duties and to classify those duties as fiduciary. Gummow J, at 137 ‑ 138, expressed agreement with the rejection of the Canadian approach and went on to say:
    Equitable remedies are available where the fiduciary places interest in conflict with duty or derives an unauthorised profit from abuse of duty. It would be to stand established principle on its head to reason that because equity considers the defendant to be a fiduciary, therefore the defendant has a legal obligation to act in the interests of the plaintiff so that failure to fulfil that positive obligation represents a breach of fiduciary duty.
    4543 In Pilmer v Duke Group Ltd, McHugh, Gummow, Hayne and Callinan JJ approved this approach and said, at [74]:
    In Breen v Williams, the point was made, by way of contrast to what is said in some of the Canadian judgments, that fiduciary obligations are proscriptive rather than prescriptive in nature; there is not imposed upon fiduciaries a quasi‑tortious duty to act solely in the best interests of their principals. In Breen v Williams, Gaudron and McHugh JJ said:
    ‘In this country, fiduciary obligations arise because a person has come under an obligation to act in another’s interests. As a result, equity imposes on the fiduciary proscriptive obligations – not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed’. (emphasis added)
    4544 In Pilmer, Kirby J dissented. But, while questioning ‘the viability of this supposed dichotomy (because omissions quite frequently shade into commissions)’, his Honour accepted, at [127 ‑ 128], that Breen embraced the distinction and went on to explain why the claim in Breen based on the existence of a fiduciary duty had failed:
    Ms Breen’s claim failed because it would have involved imposing on the suggested fiduciary positive obligations to act. It would have burdened him with an affirmative obligation to grant access to his notes to a patient (‘prescriptive’ duties). It would thus have gone further than the conventional (‘proscriptive’) duties of loyalty, of avoiding conflicts of interest or of misusing one’s power, such as fiduciary duties have traditionally upheld.’ (emphasis added)
    4545 The reason I have drawn attention to some specific phrases from the dicta of the both the majority and of Kirby J will become clear in the discussion about the characterisation of the duties of company directors that have been advanced in this case as proscriptive or prescriptive. This is the question to which I will now turn.
    20.6.3. The proscriptive: prescriptive dichotomy and directors’ duties
    4546 The argument mounted by the banks is that the only fiduciary duties recognised in Australian law are proscriptive duties. The banks argue that it is necessary to focus on the fiduciary element of a director’s duties and that the fiduciary element is restricted to the obligation on a fiduciary not to profit and not to place himself or herself in a position of conflict. They are the only truly proscriptive (and thus fiduciary) duties imposed on company directors. The banks contend that the duty to act in the interests of the company and the duty to exercise powers properly are prescriptive, not proscriptive and, accordingly, are not fiduciary.
    4547 The banks go on to point out that the duties of directors are multi‑layered (statutory, equitable and common law) and, in the normal case, there may be little need to differentiate between the characteristics of the various layers. But in this case the plaintiffs seek to rely only upon fiduciary duties in an attempt to access advantageous relief through the principles in Barnes v Addy. The banks say that the other layers of directorial obligation provide ample duties and remedies against directors and that there is no justification for broadening the remit of the fiduciary duties.
    4548 Some of the academic writings appear to support the banks’ position. In the article by Dempsey and Greinke cited in Sect 20.6.2 the authors say that it is wrong to treat every failure by a fiduciary as a breach of a fiduciary duty. They give, as examples of duties that do not appear to be fiduciary, ‘the duties on company directors to act in good faith for the benefit of the company or to exercise reasonable care and skill’: at 13. Similar views are expressed by Professor Worthington in an article, ‘Corporate Governance: Remedying and Ratifying Directors’ Breaches’, (2000) 116 LQR 638, 641, which builds on general notions stated in an earlier article ‘Fiduciary Obligations: When is Self‑Denial Obligatory?’ [1999] LQR 500. In the latter article, at 502, the author says: ‘a breach of confidence is not a breach of a fiduciary obligation, nor is a failure to act in good faith in the interests of the beneficiary and for proper purposes’.
    4549 The authorities cited in support of that proposition are Sidaway v The Board of Governors of Bethlehem Royal Hospital [1985] AC 871, 884 (and in the Court of Appeal, Sidaway v The Board of Governors of Bethlehem Royal Hospital [1984] QB 493, 519) and Breen at 111 ‑ 114. While I can see, in the latter, support for the proposition that the duty to act in the interests of another is not fiduciary, I do not see any mention in that case of a duty to exercise powers for proper purposes. In Sidaway I can see no express reference to either duty. It was, in essence, a negligence case concerning a doctor and patient relationship. An attempt to bring duty of care concepts within the fiduciary principle failed.
    4550 In my view it is necessary to look closely at the facts of each individual case so as to identify the relationship between the parties, the functions that are to be performed within the relationship and the powers and duties attendant on the carrying out of the functions. This is why I commenced the discussion in Sect 20.6.1 as I did. It is necessary to ask what binds the parties together: has one person undertaken to act in the interests of another and what obligations has the former accepted in the course of that assignment? And even if the answer to those questions results in the conclusion that the relationship between them is fiduciary, is it so for all aspects of the association between them?
    4551 It is one thing to describe a relationship as fiduciary. But it does not follow from that simple description that there are myriad duties and obligations which, invariably and without more, attach to it. For example, there are duties and obligations that a trustee has towards the beneficiaries of the trust (clearly a fiduciary relationship) that may not attend the relationship between partners (also clearly a fiduciary one). It seems to me that that is the context in which Breen and Pilmer have to be read. Their Honours identified the core fiduciary obligations: not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. They then said that Australian law does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed. This recognises the principle that fiduciary obligations flow from the duty to act in another person’s interests. But it does not follow that there is a positive duty to act in another’s interests arising simply because the relationship is fiduciary.
    4552 In my view the state of the law is this. Where a person has undertaken to act in the interests of another and where the nature of that relationship, its surrounding circumstances and the obligations attaching to it so require, it will be held to be fiduciary. But the fact that it is categorised as fiduciary does not mean that all of the obligations arising from it are themselves fiduciary. Unless there are some special circumstances in the relationship, the duties that equity demands from the fiduciary will be limited to what I have described as the core obligations: not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. They stem from the fundamental obligation of loyalty.
    4553 This brings me back to the relationship between directors and the company. Prior to Breen and Pilmer, the High Court considered the validity of the exercise of powers by directors in a number of cases. In many of them dicta can be found that suggests that judges concerned felt that the duty to act in the interests of the company and the duty to exercise powers properly were fiduciary in character. In many of the judgments it is difficult to disentangle considerations of the two duties and I will not endeavour to do so here.
    (a) Mills v Mills:
    Directors in the exercise of their powers are in a fiduciary position and must exercise those powers for the benefit of the company. (per Starke J at 175)
    Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power. (per Dixon J at 185)
    (b) Richard Brady Franks, at 142 ‑ 143 per Dixon J:
    Directors are fiduciary agents and their powers must be exercised honestly in furtherance of the purposes for which they are given … It follows that a transaction carried out by directors for their own or some other persons’ benefit and not to further any purpose of the company is voidable but not void … Those impeaching the transaction must sustain the burden of proving that the directors acted in their own interests and were not in fact exercising their powers in supposed furtherance of any purpose or advantage of the company. (per Dixon J at 142 – 143)
    (c) Ngurli v McCann, per the Court:
    The powers entrusted to the directors by the articles of association to be exercised on behalf of the company are fiduciary powers … In the present case we are concerned with the exercise … of fiduciary power as a director to issue new shares … The power must be used bona fide for the purpose for which it was conferred, that is to say, to raise sufficient capital for the benefit of the company as a whole. (439 – 440)
    With such advisers [the director] could hardly fail to misconceive the nature of his fiduciary duty. It was almost inevitable that he would consider that he could do anything for his own benefit that was authorized by a literal reading of the articles of association, and that he would regard the holding companies as his own property and have regard solely to his own interests and disregard those of the [company]. (444)
    Although [the director] had pre‑emptive rights over the new issue he was bound, in deciding to issue the new shares and the terms upon which they were to be issued, to take the interests of [other parties] into account and in failing to do so he committed a breach of his fiduciary duty to consider the interests of the companies as a whole. (447)
    (d) Harlowe’s Nominees Pty Ltd, at 492 per the Court:
    At the threshold of the argument for Harlowe on the appeal was a submission of law which was put in the form of a corollary upon the undoubted general proposition that a power vested in directors to issue new shares is a fiduciary power which the directors are not entitled to exercise otherwise than bona fide for the benefit of the company as a whole. (492)
    (e) Whitehouse v Carlton:
    The consideration of the issue of improper purpose must begin with the general proposition that the power to allot shares is a fiduciary power which must be exercised bona fide for the benefit of the company as a whole. This is a broad statement of principle which is not to be confined within narrow criteria. (per Wilson J at 300)
    [A]n exercise by directors of their power to issue shares for a purpose foreign to that for which the power is conferred is a breach of their fiduciary duty to the company and a ground for avoiding the exercise of the power. (per Brennan J at 310)
    4554 In all of these cases, except Richard Brady Franks, the fiduciary power under consideration was the power to allot shares (in Mills v Mills coupled with a declaration of a dividend out of reserves). But I do not think that this alters the principle or requires that it be kept in narrow confines. In Richard Brady Franks, for example, the power that the directors exercised arose from an article that read: ‘To execute in the name and on behalf of the company in favour of any director or other person who may incur or be about to incur any personal liability whether as principal or surety for the benefit of the company such mortgages of the company’s property (present and future) as they may think fit’. It should also be noted that in Whitehouse v Carlton both Wilson J and Brennan J dissented on the facts. But this does not affect the statements of principle that their Honours enunciated.
    4555 There are decisions by single judges and intermediate appellate courts before Breen that seem to regard the relevant duties as fiduciary in nature. I mention them here because, in my view, they support the contention that, properly understood, the earlier High Court decisions treated the relevant duties as fiduciary.
    4556 In Australian Growth Resources Corp Pty Ltd (Recs and Mgrs apptd) v Van Reesema (1988) 13 ACLR 261, assets were transferred by the company to one of its directors for nominal consideration. Breaches of the duty to act in the best interests of the company and the duty to act for proper purposes were pleaded and there was an implicit treatment of the duties as being fiduciary. Having noted that the director is in a fiduciary relationship with the company, King CJ, with whom Cox J agreed, said at 268 that the primary consequence of this principle is that directors must exercise powers bona fide in the interests of the company as a whole. His Honour then said that the ‘exercise of a fiduciary power for a purpose beyond the legitimate scope of the power is invalid’ and the validity of an exercise of powers ‘therefore depends upon … the exercise being for the benefit of the company as a whole’.
    4557 That case was cited with approval in Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 56 SASR 455, a case which looked solely at the duty to act for proper purposes. The court concluded that there had been a breach of both fiduciary and statutory duties.
    4558 In Linter Group v Goldberg the directors were found to be in breach of their fiduciary duties to the companies. Much of the discussion at 619 ‑ 622 leading up to the finding of a breach concerned the ‘group benefit’ argument. This, it seems to me, does relate to a breach of duty to act bona fide in the interests of the company and the duty to act for a proper purpose. The plaintiffs were successful in obtaining a declaration of a constructive trust.
    4559 In Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, the issue was whether a decision by directors to sue liquidity reserves of three companies in a group to discharge the liabilities of another company in the group was a breach of fiduciary duty. The plaintiff failed but it is apparent that the members of the court approached the matter on the basis that a failure to act for the benefit of the companies could be a breach of a fiduciary duty. At 140, Clarke and Cripps JJA noted the submission that no consideration had been given by those responsible to the interests of payer companies and as a result the companies were deprived of their liquidity reserves for what were perceived to be the interests of the group as a whole. Their Honours went on to say: ‘If that was the correct conclusion it necessarily followed that there had been a breach of the fiduciary duty owed by the responsible officers to [the payer companies]’.
    4560 In Bishopsgate Investment Management Ltd (in liq) v Maxwell (No 2) [1994] 1 All ER 261, Hoffman LJ held, at 265, that an exercise of a power for an extraneous purpose was a breach of fiduciary duty.
    4561 The cases decided since Breen give no clear guidance whether the two duties in question in this litigation are or are not fiduciary. This is not to cavil with the clear statement of principle for which Breen stands. But the question remains how that statement of general principle applies to a breach by a director of the duty to act in the interests of the company and the duty to act for proper purposes. It is for this reason that in the analysis that follows I will mention only cases that deal with the relationship between a director and the company. Many other cases were cited in argument that stem from other types of fiduciary relationships. They are not germane for present purposes.
    4562 The duty to act in the best interests of the company and the duty to act for proper purposes were found to be capable of sustaining a Barnes v Addy claim in Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) [1999] 1 VR 584. The duty to act in the best interests of the company is described as fiduciary, at 621 and 625, and similar statements are made in relation to the duty to act for proper purposes at 626. Farrow was discussed by the New South Wales Court of Appeal in Robins v Incentive Dynamics, at 300 ‑ 301, where it was acknowledged as being a case involving a breach of fiduciary duty to act in the best interests of the company.
    4563 There are other decisions (mainly focussing on the ‘group benefit’ problem) that proceed on an assumption that failure to attend to the interests of an individual company within a group could be a breach of a fiduciary duty to act in the interests of the company or to act for proper purposes. Examples are Hancock Family Memorial Foundation Limited v Porteous [1999] WASC 55; (1999) 151 FLR 191, [59] (under a heading ‘loan accounts – breach of fiduciary duty’) and [80], Linton v Telnet Pty Ltd (471 ‑ 473), Maronis Holding Ltd v Nippon Credit Australia Pty Ltd [2001] NSWSC 448; (2001) 38 ACSR 404, [173] and following.
    4564 There are some decisions that lean the other way. In Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, Brereton J noted that shareholders can ratify the actions of directors notwithstanding that they involve a ‘breach of fiduciary duty or the exercise of the directors’ powers for an improper purpose’, thus implying some difference between the two. P & V Industries Pty Ltd v Porto [2006] VSC 131; (2006) 14 VR 1 concerned a director but the duty he was alleged to have breached was a duty of disclosure of past wrongdoing. Hollingsworth J decided that under Australian law there was no positive fiduciary duty to disclose. That is not at all surprising as it is exactly what Breen says. But at [21] Hollingsworth J noted that the statements of fiduciary principle in that case ‘were cast in very general terms and were not limited to the doctor–patient relationship’. And her Honour went on, at [27] and following, to reject, as being contrary to Australian authority, dicta in Item Software (UK) Ltd v Fassihi [2004] IRLR 928. In that case, Arden LJ said at [41] that there could be a duty of disclosure arising from a fundamental fiduciary duty of loyalty that included what the director ‘in good faith considers to be in the interest of his company’.
    4565 P & V Industries to one side, in very few of these cases is Breen v Williams mentioned. One exception to that statement is O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262. Breen was referred to in the context of causation and the availability of equitable compensation. But immediately after that reference, at 273, Spigelman CJ characterised at least one of the powers exercised (improperly as found) as ‘a fiduciary power which could not be exercised for an improper purpose’.
    4566 In Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWSC 395; [2002] 44 ACSR 21, [323] ‑ [325], Young CJ in Equity mentioned this problem without reaching a conclusion. I note in passing his Honour’s comment that in Pilmer the members of the High Court applied the Breen dicta to directors’ duties (citing pages 1082 ‑ 1083 of the ALJR report). I am not sure that this is correct as the claim in Pilmer was against accountants who had acted as valuers, not against the directors. The problem was also recognised by Moore J in Loxias Technologies Pty Ltd v Curacel International Pty Ltd [2002] FCA 53, [12] ‑ [14]. But once again the duty in question was one of disclosure and the pleaded duty was supported on the ground that it was a common law duty.
    4567 I should also mention Aequitas v Sparad No 100 Ltd [2001] NSWSC 14; (2001) 19 ACLC 1006. Some of the defendants were directors and the duties they were found to have breached arose from them placing their personal interests ahead of their duties. It is true that against some other defendants, who were financial advisers, Austin J found, at [278] ‑ [288], that the duty to act in the best interests of another was not a fiduciary duty. His Honour applied the reasoning in Breen. But it seems, especially from [276] ‑ [277], that Austin J was focussing on the position of a financial adviser rather than that of a director.
    4568 In Kalls Enterprises the Court of Appeal in New South Wales also appears to have regarded the duties to act in good faith and for proper purposes as fiduciary in nature. Giles JA (with whom Ipp and Basten JJA agreed) said:
    Directors are in a fiduciary relationship to the company. They must act in good faith for the benefit of the company, and ‘a power conferred on them cannot be exercised in order to obtain some private advantage or for a purpose foreign to the power’: Mills v Mills (1938) 60 CLR 150 at 195 per Dixon J. A person who occupies a fiduciary position ‘may not use that position to gain a profit or advantage for himself … without the informed consent of the person to whom he owes the duty’: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 67 per Gibbs CJ.
    4569 I do not read Breen or Pilmer as having overruled the earlier High Court authorities to which I have referred. How, then, can they be reconciled? One possible answer is that the principles enunciated in the later cases apply to fiduciary relationships generally and to the particular relationships with which their Honours were then dealing. In other words, absent something particular in the relationship, there is no positive duty of disclosure applying to all fiduciary relationships (because equity only recognises proscriptive duties) and there is nothing in the nature of the doctor–patient relationship giving rise to such a duty. But it remains necessary, as I said a little earlier, to look at each individual situation in which a person has undertaken to act in the interests of another and identify the nature of that relationship, its surrounding circumstances and the obligations attaching to it. And it may well be that different considerations apply to company directors than those attaching to other species of relationship. It can be put another way. Breen stands for the proposition that Australian law only recognises as fiduciary those duties that stem from the fundamental obligation of loyalty and which are proscriptive. It does not necessarily follow that their Honours intended to suggest that the duties to avoid conflicts and not to profit were, in every species of fiduciary relationship (the categories for which are not closed), the only duties that could possibly qualify.
    4570 I refer again to the passage from Pilmer that I have quoted above and which adopts the dicta from Breen. Leaving to one side for the moment the word ‘positive’, the fact is that Australian law does impose on company directors ‘legal duties … to act in the interests of the person to whom the duty is owed’. The duty is phrased more specifically but it is an obligation of the same genre. Equity has imposed such duties for eons and the statutes have followed suit since around 1958. It may be different in the case of a doctor and patient or a valuer and a company commissioning an expert valuation or between parties negotiating to enter into a joint venture. But this only goes to show that the incidents attaching to one fiduciary relationship may be quite different to those in another.
    4571 I find support for this last proposition (if any is needed) in an example given by Gummow J in Breen, at 137. His Honour advised caution in translating into fiduciary law in general principles developed in the administration of trusts. Trustee obligations do not supply any proper foundation for the imposition on fiduciaries in general of a quasi‑tortious duty to act solely in the best interests of their principals. The emphasis in the preceding sentences is mine. That is common fare in the law of fiduciary obligations. It is necessary to assess each situation according to its own factual and legal circumstances.
    4572 Gaudron and McHugh JJ in Breen and the majority in Pilmer did not mention the duty to exercise powers properly. If it is seen as an obligation that (though often related) is distinct from the duty to act in the interests of the company (as I think it should) then it must be examined separately. And I note that in the italicised portion of the citation from the judgment of Kirby J in Pilmer set out above his Honour spoke of ‘avoiding … misusing one’s power’ as an example of a fiduciary duty.
    4573 The next question is whether, as a matter of principle, either or both of the duty to act in the interests of the company and the duty to exercise powers properly qualify as fiduciary duties in accordance with the dictates of Breen as I have understood them. This raises two questions. First, do those duties stem from the insistence of equity that one party to a relationship must give undivided loyalty to another party to that relationship, evincing the desire of equity to promote loyalty and to discourage disloyalty? Secondly, are those duties properly to be characterised as proscriptive or prescriptive? To answer these questions it is necessary to look to the role that directors play in the life of a commercial entity. In doing so it will be important to bear in mind the general comments I made in Sect 20.2.3 on corporate governance and the role of directors.
    4574 In my view the duty to act in the interests of the company and the duty to exercise powers properly stem from a fundamental requirement for loyalty. Directors undertake to act on behalf of the company and to manage the business of the company. A company does not exist other than by virtue of a legal fiction. In this respect the company is in a similar position to a beneficiary who is an infant or a person with a mental disability: it simply cannot exercise its own powers and must do so through the good graces of the persons who have undertaken to act on its behalf. All (or at least most) of the classic indicia of the fiduciary relationship are present. The directors act in a representative capacity. There is a dependency of the company on its directors. And there is scope for the directors to exercise a discretion or power that may affect the rights or interests of the company. If, as I believe is the case, loyalty is the keystone of a fiduciary relationship, it applies in abundance to the association between a director and the company.
    4575 These are the background circumstances in which the directors undertake to manage the business on behalf of the company. When the company bestows powers on the directors to enable them to do so, issues of loyalty arise immediately. What does it mean to be loyal? According to the Oxford Dictionary the word ‘loyal’ means faithful or steadfast in allegiance. If the powers are conferred for a limited purpose, and they are used for a purpose that lies outside the ambit of the limited purpose for which they were conferred, the situation seems to me to be redolent with disloyalty. And if the company bestows powers on the directors to be exercised in the best interests of that company, an exercise of the powers that is in the interests of someone other than that company and (or) is not in the best interests of that company is, once again, redolent with disloyalty. There is a lack of fidelity to the allegiance that underpins the relationship between the director and the company. The duty to act in the interests of the company is one that involves honesty. And honesty is a component of bona fides. To exercise powers in a way that is not in the interests of the company betrays a fundamental part of that obligation. In my view, such conduct can be regarded as antithetical to the maintenance of a steadfast and faithful allegiance and thus as disloyal.
    4576 There is an interesting passage in the judgment of the majority in Pilmer that bears upon this question. The High Court upheld the conclusion of the trial judge that there was no fiduciary relationship between the accountants and the company. Their Honours said, at [75]:
    In particular [the accountants] were not agents of [the company], there was no relationship of ascendancy or influence by the appellants over [the company], nor one of dependence or trust on the part of [the company] in the relevant sense. It was to be expected that [the company] relied on [the accountants] to do their work competently and independently but they were not guiding or influencing [the company] in the sense discussed in the cases dealing with fiduciary relationships.
    4577 Most, if not all, of the reasons there set out that counted against the existence of a fiduciary relationship between the accountants and the company are present in the association between a director and the company. I accept that the fact of the relationship between the director and the company being characterised as a fiduciary one does not mean that all duties attaching to the director are fiduciary. I have previously indicated that it is necessary to examine the nature of the relationship, its surrounding circumstances and the obligations attaching to it. Those matters include notions of stewardship, openness, integrity and accountability that I mentioned as key components of corporate governance and all of which demand steadfast and faithful allegiance. This seems to me to support the view that the duties with which we are concerned in this case stem from a requirement for loyalty and thus could justify the description fiduciary.
    4578 The final question is whether they are proscriptive. It is as well to bear in mind one of the twelve aphorisms that are known as the maxims of equity: ‘equity looks to the intent, rather than to the form’. In other words, equity draws a distinction between matters of substance and matters of form and (generally though not universally) will protect the integrity of the former. In my view, a close analysis of the substance of the three duties that are in issue in this case reveals that they are proscriptive. They do not prescribe what a director must do. They indicate that the director cannot act otherwise than bona fide and in the best interests of the company and for a proper purpose and cannot, when in a situation of conflict of interest exercise his, her or its powers in the interests of himself, herself, itself or another and (or) to the disadvantage of the company.
    4579 I did not understand anyone to argue that the duty to avoid conflicts of interest was not a fiduciary duty. The banks certainly objected to the plaintiffs’ formulation of the duty in the pleadings and to its application to the facts of the case. But their objection did not extend to saying that the duty itself was not fiduciary.
    4580 It is relatively easy to justify this conclusion in relation to the duty to exercise powers properly because phrasing it in the negative does no damage to the language. Under this formulation directors are prohibited from exercising powers for an improper or collateral purpose or for an ulterior or illegitimate object or (put in a slightly different way) they cannot exercise powers other than in a spirit of fidelity to the purpose for which the powers were given. It is, in reality, a proscriptive dictate. To adapt what Dixon J said in Mills v Mills, one way of approaching the issue is to pose this question: but for some ulterior or illegitimate object, would the power have been exercised? Or, as the members of the Court said in Harlowe’s Nominees Pty Ltd, were the directors actuated by an impermissible purpose? I acknowledge that an ulterior or illegitimate object cannot be identified unless the legitimate purpose is known. Nonetheless, that formulation concentrates on the negative rather than the positive. And it is consistent with what Ipp J said in Permanent Building Society v Wheeler: ‘fiduciary powers and duties of directors may be exercised only for the purpose for which they were conferred and not for collateral purposes’ (emphasis added).
    4581 I acknowledge that it is not as easy to justify the reformulation of the duty to act in the interests of the company. Care needs to be taken because it is often possible to twist and torture language to suit an argument. But returning to the phraseology I used in an earlier paragraph, the company has bestowed powers on the directors to be exercised in the best interests of the company. In substance it means that the powers cannot be exercised in the interests of someone other than the company and (or) in a way that is not in the best interests of the company. The integrity of the language emerges relatively unscathed.
    4582 In my view, the power residing in the directors to cause a company to provide securities and guarantees and indemnities for debts owed by that company or associated companies to third parties is a fiduciary power. It must not be exercised other than bona fide in furtherance of the purposes for which it is given and for the benefit of the company. Nor can the powers be exercised other than in accordance with the conflict rule. The exercise of a fiduciary power contrary to those strictures is a breach of a fiduciary duty. In reaching this conclusion I have not overlooked strong judicial warnings about over enthusiastic extensions of broad principles of equity or about the tendency to superimpose fiduciary duties on common law duties to improve the nature and extent of the remedy: Chan v Zacharia (205); Breen (110). I believe that both authority and principle justify the conclusion to which I have come. Generally speaking, it is contract and tort that provide a remedy for breach of a positive duty arising in a fiduciary relationship. But the fiduciary principle steps in where loyalty prohibits particular conduct.
    20.7. Subjective and objective assessment of directorial conduct
    4583 I am turning now to a different question. It is this. When a power has been exercised and it is challenged, does the assessment of validity of the exercise focus solely on what the directors believed to be in the best interests of the company or the purpose espoused by them or are more objective considerations brought to bear?
    4584 Once again there is a pleading issue about this aspect of the case. The banks contend that the plaintiffs’ case, as advanced during closing submissions, is that the breach of the duty to act in the interests of the companies lies in the directors concentrating on the interests of ‘the group’ rather than on the interests of individual companies. They interpret the plaintiffs’ allegation as being that the directors failed to draw a distinction between the Bell group as a whole and its individual members and that they did not give individual consideration to the separate interests of individual companies. The banks submit that this is not the pleaded case and that it cannot now be maintained. The plaintiffs’ position is summarised in this passage from their closing submissions:
    In breach of his duty to act bona fide in the best interests of each [company], each of the directors did not draw a distinction between the Bell Group as a whole and its individual members and did not give any consideration to the separate interests of each [plaintiff company], in deciding to cause each company to enter into the Transactions and the Scheme.
    4585 The banks are correct in their characterisation of the plaintiffs’ case. But I do not accept their contention that it is a ‘new’ case or that it does not emerge from the pleadings. The pleadings are littered with references to ‘each’ ‘Bell Participant’ or ‘Bell group company’ and to ‘that company’. The answer to this problem seems to me to lie in the pleading of the ‘Scheme’ in 8ASC par 19A. The Scheme is, by its very nature a ‘group thing’. It is made up of a series of Transactions entered into by individual companies that have individual consequences, but which also come together to have a composite effect. This was one of the many objections that the banks took when the plaintiffs applied to amend the statement of claim to introduce the Scheme concept: see Bell (No 1), [163].
    4586 The breach of duty pleaded in (for example) 8ASC par 39A(b) falls to be considered accordingly: ‘In causing each Bell Participant of which the directors were respectively directors … to enter into and give effect to the Scheme … the directors, as directors of that company [breached their duties]’. The emphasis is mine.
    4587 I note in passing that this is the way the plaintiffs approached the matter in opening. In view of the fact that the issue agitated at some length in the main amendment application and in the light of the way in which the case was opened and conducted, the banks cannot have been taken by surprise.
    4588 This is an area in which the language used in the authorities tends to slip between the duty to act in the interests of the company and the duty to exercise powers properly. In relation to whether the test is essentially subjective or objective or a combination, I do not think the principles differ significantly between the two duties. My analysis of the various authorities proceeds on that understanding.
    20.7.1. The problem described
    4589 In essence, the plaintiffs contend that although acting in good faith is a subjective mental state, the standard by which the law determines whether a person was acting in good faith is objective. If by the standards of an honest and reasonable director, a director’s act would not be regarded as an act undertaken in good faith in the interests of the company, it is irrelevant that the director judges it by different standards. It follows that a court is not precluded from finding a lack of good faith merely because a director subjectively believes he or she was acting in good faith. Nor will the court need to find conscious dishonesty to establish a breach of the duty.
    4590 The plaintiffs also submit that this approach does not offend in any way the business judgment rule. That rule has some application when it is established that the directors were acting in good faith. It is not part of the business judgment rule that the court is precluded from determining the threshold issue in accordance with the usual approach that applies to a fiduciary obligation.
    4591 The banks’ position is that the duty is a duty to act in what the directors, not the court, think is the best interests of the company. It is a subjective test and the court will not substitute its own view as to the question of the interests of the company. The question for the court relates to the subjective state of mind of the directors, that is, whether, as a matter of fact, the directors bona fide believed that the transaction was in the interests of the company. The courts are not, however, obliged to accept the say-so of the directors in this regard and can have regard to all admissible evidence to determine the directors’ state of mind. If the transaction is one that no reasonable director could have regarded as being in the interests of the company, then the court may infer that the directors could not have formed a bona fide belief. To this extent, the powers of directors are not uncontrolled and the court exercises control and jurisdiction over directors.
    4592 The banks submit that this is in accordance with the business judgment rule. It would totally subvert the rule if, in order for it to apply, it was necessary first to establish that the director was acting bona fide in the interests of the company. The business judgment rule is an element in the test of bona fides. The director passes the test if he or she acts bona fides in what he or she regards as the interests of the company. It is inapposite first to determine on some objective basis whether a director is bona fides, without regard to the business judgment rule.
    20.7.2. The authorities
    4593 The traditional formulation of the test is found in the judgment of Lord Greene MR in Re Smith & Fawcett Ltd (306), that directors ‘must exercise their discretion bona fide in what they consider – not what a court may consider – is in the best interests of the company’.
    4594 The issue is of course tied closely to the business judgment rule, which limits the capacity for judicial intervention in business management decisions. One of the most commonly cited Australian authorities for the non‑statutory business judgment rule is Harlowe’s Nominees (493):
    Directors in whom are vested the right and duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.
    4595 The Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd (832) came to a similar view:
    There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.
    4596 The onus of showing that the directors did not act bona fide in the best interests of the company is on the party challenging the impugned decision. The court does not begin by assuming impropriety. The High Court laid down this principle in Australian Metropolitan Life Assurance Co Ltd v Ure. There, it was said that a prima facie case of impropriety must be made out before the court would draw any inference of impropriety on the directors’ part (see Knox CJ at 220 and Isaacs J at 221). The argument that a person impugning an exercise of power bears the burden of demonstrating that the directors did not act bona fide for the benefit of the company finds further support in Richard Brady Franks v Price. In that case, the directors were said to have acted in their own interests rather than in the interest of the company. Latham CJ judged the directors’ conduct by a subjective standard, at 136, saying: ‘it is not for a court to determine whether or not the action of the directors was wise. The question is whether it is shown that they did not honestly act for what they regarded as the benefit of the company’.
    4597 Rich J came to a similar view, although he qualified the state of mind of the directors by introducing the word ‘reasonably’. Rich J, at 138, quoted the Earl of Selborne in Hirsche v Sims [1894] AC 654, 660 – 661:
    [I]f … the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus malus or breach of trust merely because in promoting the interest of the company they were also promoting their own.
    4598 These cases lend support to the banks’ argument that the initial issue for the court is the factual question of the directors’ state of mind. Unless the party challenging the conduct in question can demonstrate a justifiable basis for asserting that the directors did not believe bona fide that the transactions were in the interest of the companies there is no breach of this duty. If the challenging party can show that there are no reasonable grounds on which the decision could have been made or the conduct undertaken, then an element of objectivity is introduced into the equation. But it seems to me that the objective considerations relate back to the question whether the directors honestly believed the transaction to be in the best interests of the company, not to whether (regardless of what the directors believed) it did not benefit the company. This emerges clearly from the judgment of Scrutton LJ in Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9, 23 – 24:
    The important words are ‘exercised bona fide for the benefit of the company.’ I do not read those words as importing two conditions, (1) that the alteration must be found to be bona fide, and (2) that, whether bona fide or not, it must be in the opinion of the Court for the benefit of the company. I read them as meaning that the shareholders must act honestly having regard to and endeavouring to act for the benefit of the company … Now when persons, honestly endeavouring to decide what will be for the benefit of the company and to act accordingly, decide upon a particular course, then, provided there are grounds on which reasonable men could come to the same decision, it does not matter whether the Court would or would not come to the same decision or a different decision. It is not the business of the Court to manage the affairs of the company. That is for the shareholders and the directors. The absence of any reasonable ground for deciding that a certain course of action is conducive to the benefit of the company may be a ground for finding a lack of good faith or for finding that the shareholders, with the best motives, have not considered the matters which they ought to have considered. On either of these findings their decision might be set aside. But I should be sorry to see the Court go beyond this.
    4599 There are many cases which have come before the High Court in which the Court has declined to interfere with decisions grounded in the directors’ own honest beliefs. Some examples are Ashburton Oil NL v Alpha Minerals NL, per Barwick CJ at 620 and Menzies J at 627; Harlowe’s Nominees, per the Court at 493; Wayde v NSW Rugby League Ltd (1985) 180 CLR 459; per Mason ACJ, Wilson, Deane and Dawson JJ at 466 ‑ 467 and Brennan J at 469.
    4600 There is English authority supporting the view that the threshold test is subjective. A recent example is Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80, in which Jonathon Parker J placed particular emphasis on the subjective nature of the duty, and indicated that the court can draw inferences about the directors’ state of mind by reference to witness statements and circumstantial evidence. According to Jonathon Parker J, at 105:
    The duty imposed on directors to act bona fide in the interests of the company is a subjective one … The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind.
    4601 The statement that the threshold test is of a subjective nature does not mean that objective considerations are irrelevant. Not does it follow that, while the courts are reluctant to second‑guess directors’ business management decisions, what happens in the boardroom is beyond challenge. In Wayde, the High Court had regard to the state of mind of the directors and to more objective matters. For example, Brennan J (at 468) commented that it had not been shown that the impugned decisions of the board were such that no board acting reasonably could have made them.
    4602 The principles found in Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 and Hutton v West Cork Railway Co (1883) 23 Ch D 654 also reflect this concern. In Hutton v West Cork Railway Co there appears the well‑known statement of Bowen LJ, at 671:
    Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational.
    4603 It follows that to regard the test as being solely subjective would be wrong. But it is important to bear in mind the critical task with which the court is confronted. The court must ascertain whether the directors have breached their duties by, for example, committing the company to a particular transaction. It is not part of the court’s function to decide whether the transaction was commercially good, bad or indifferent, although (and this is similar to what I said in Sect 7.2.3 in relation to insolvency) it may be necessary to look at that question as part of the reasoning process by which a court carries out its critical task and arrives at a conclusion in relation to it. The enquiry cannot be entirely subjective. What part, then, do objective considerations play?
    4604 I think some of the problems stem from the dicta of Lord Wilberforce in Howard Smith v Ampol. Immediately after the warning that there is no appeal on the merits of management decisions and that the courts are not supervisory boards, his Lordship said this, at 832:
    But accepting all of this, when a dispute arises whether directors of a company made a particular decision for one purpose or another … the court … is entitled to look at the situation objectively in order to estimate how critical or pressing or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement though real, was not urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme. (emphasis added)
    4605 A little later, at 835, his Lordship cited a passage from the judgment of Viscount Finlay in Hindle v John Cotton Ltd (1919) 56 Sc LR 625, 630 ‑ 631. There, Viscount Finlay indicated that in abuse of power cases it is necessary to assess state of mind and in doing so the court ‘may … [collect] from the surrounding circumstances all the materials which genuinely throw light upon the question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company’.
    4606 The phrase from Howard Smith v Ampol that ‘the court is entitled to look at the situation objectively’ was echoed by Kirby P in Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464, 485 and in Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260, 281 ‑ 282 (citing Wayde and Howard Smith v Ampol, among others). In Permanent Building Society v Wheeler, Ipp J (in the passage reproduced earlier) said that the question whether acts were performed in good faith and in the interests of the company is to be objectively determined. He too cited Howard Smith v Ampol (among others) for the propositions that he outlined.
    4607 In Wayde, Brennan J referred to each of Shuttleworth, Harlowe’s Nominees Pty Ltd and Howard Smith v Ampol in the course of reasoning in which this statement appears, at 469 – 470:
    [I]n the absence of statutory authority, the court may not intervene and hold the decision invalid on the ground that the court thinks the decision unreasonable. If the decision is such that no reasonable board of directors could think the decision to be substantially for a purpose for which the power was conferred, the court may infer that the directors did not make the decision in good faith for a purpose within the power and intervene on that ground.
    4608 In my view when, in the later cases (including Permanent Building Society v Wheeler), reference is made to objective considerations, their Honours should be taken as using the phrase ‘objective’ in the sense that it is used in Howard Smith v Ampol, which in turn draws from Hindle v John Cotton. I think this preserves the integrity of the numerous judicial pronouncements to the effect that it is for the directors, not the courts, to make management decisions. Yet it leaves open an avenue for judicial intervention if, on consideration of the surrounding circumstances (objectively viewed), the assertion of directors that their conduct was bona fide in the best interests of the company and for proper purposes should be doubted, discounted or not accepted.
    4609 I need to spend a little time on Charterbridge because its possible application was raised from time to time during the hearing. The plaintiffs expressed concern that it was not clear on the pleadings whether the banks were raising a ‘Charterbridge defence’. The banks announced that they were not doing so but went further in closing submissions by submitting that reference to a ‘Charterbridge defence’ was misconceived. I think that is right.
    4610 In Charterbridge, Pennycuick J had to decide whether or not directors had considered the interests of the company. Pennycuick J held that the position was to be dealt with by considering whether ‘an intelligent and honest man’ in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company. But it appears from the decision that this approach was designed to elicit how a plaintiff could establish a cause of action against the directors, not what the directors had to show in order to defend themselves. His Honour held that in order to establish that the directors did not act in the interests of the company, it was necessary for the plaintiffs to do more than simply show that there had been no actual consideration of the interests. His Honour held that it was necessary, in addition, for the plaintiffs to prove whether an intelligent and honest person in the position of a director could, in the whole of the circumstances, have reasonably believed that the transactions were for the benefit of the company.
    4611 The Charterbridge test has been applied in Australia in numerous cases. Some examples are: Reid Murray Holdings Ltd (in liq) v David Murray Holdings Pty Ltd (1972) 5 SASR 386; Australian National Industries Ltd v Greater Pacific Investments Pty Ltd (in liq) (No 3) (1992) 7 ACSR 176; Linter Group v Goldberg; Linton v Telnet Pty Ltd; Farrow Finance Co Ltd v Farrow Properties Pty Ltd.
    4612 It is interesting to note, however, that reservations have been expressed about the indiscriminate application of the Charterbridge test. In Equiticorp Finance Ltd v Bank of New Zealand, Clarke and Cripps JJA, at 147 ‑ 148, said of the test:
    That was the test which was applied by [the trial judge] and all parties have advised this Court that the same test should be applied on the appeal. Although we are content to deal with the issues in the case upon the basis put by counsel we should indicate that we have reservations about the test proposed by Pennycuick J. The directors are bound to exercise their powers, bona fide, in what they consider is in the interests of the company and not for any collateral purpose. Whether they did so or not is a question of fact.
    4613 After noting that the traditional approach was as set out in Hindle v John Cotton and Howard Smith v Ampol their Honours questioned whether there was any room for an objective test in deciding that question of fact. They proffered the view that Pennycuick J was not purporting to substitute an objective test for a subjective test but simply proposing a test to avoid what he regarded as an absurd situation. The absurd situation would arise where a director could be held liable simply because he did not consider the interests of the company, even though an honest and intelligent director could have considered the transaction as in the interests of the company. But Clarke and Cripps JJA questioned whether the Charterbridge test was appropriate. They said, at 148:
    A preferable view may be that where the directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. If, however, the transaction was, objectively viewed, in the interests of the company, then no consequences would flow from the breach. Such an inquiry would not require the court to consider how the hypothetical honest and intelligent director would have acted. On the contrary it would accept that a finding of breach of duty flows from a failure to consider the interests of the company and would then direct attention at the consequences of the breach. However the approach adopted by the parties in this case both before [the trial judge] and this Court requires that the Charterbridge test be applied and absolves the Court from further considering this tantalising question.
    The last sentence indicates that the remarks were obiter. Nonetheless, they were adopted by Bryson J in Maronis Holdings Ltd v Nippon Credit [185].
    4614 The approach advocated in Equiticorp is not without its difficulties. It must be borne in mind that the real question is whether the directors have been at fault in failing to act in the best interests of the company. The issue is not whether the transaction was commercially sound. To say, as their Honours did, that the enquiry (if the circumstances require such an investigation) should be whether ‘the transaction was, objectively viewed, in the interests of the company’ may pose a danger that the court is placed in the position where it is standing in the shoes of the board members and assessing the commercial soundness of the deal. If that situation were to occur it would be difficult to reconcile with the admonitions in the authorities against the court asking what it would have done had it been in the position of the director at the relevant time and against entertaining appeals on merits from management decisions. On the other hand (as I have previously said) it may be necessary to make some value judgment of an objective nature about the transaction in order to decide whether, for example, it was one that no reasonable director could have regarded as being in the interests of the company.
    4615 There is another difficulty. In Equiticorp, their Honours said that Pennycuick J was addressing a situation where ‘it was clear that the directors had not considered the interests of the relevant company at all’ (emphasis added). This, in a way, reflects a distinction drawn by the plaintiffs in their closing submissions between cases in which ‘no consideration’ was given to the interests of the company and those in which ‘some consideration’ was given. What does that actually mean? Pennycuick J did not say ‘no consideration at all’. He spoke of ‘an absence of actual separate consideration’ (emphasis added). And I repeat (with some adaptation) the language used by Rich J in Richard Brady Franks: did the directors truly and reasonably believe the transaction was in the best interests of the company. Again, the emphasis is mine. This requires an assessment of what the directors did (not limited to what they say they did) and what they believed (not just what they say they believed). To my mind ‘no consideration at all’ means no actual and real consideration. That is an enquiry that the court must make. It does not make that enquiry simply on the say‑so of the directors and nor, in making it, does it ignore what the directors have said. And the court will not accept tokenism. To do so would not fit with the requirement that the belief be true and reasonable.
    4616 Notwithstanding the difficulties that I have mentioned, there is much to be said for the approach advocated in Equiticorp. The relationship between the objective and the subjective produces tensions in many areas of the law. This one is no exception. The Charterbridge approach is to say that if no consideration is given to the interests of the individual company the court applies an objective test (‘the honest and reasonable person in the position of the director’) to decide whether a director could reasonably have believed the transaction to be for the benefit of the company. If the answer is in the affirmative, there is no breach. If in the negative, there is a breach. The Equiticorp approach is to say that if no consideration is given to the interests of the individual company there is a breach. The court then applies an objective test to decide whether the transaction was for the benefit of the individual company. If the answer is in the affirmative, it is a breach without consequences. If in the negative, consequences flow.
    4617 I acknowledge the differences between the two approaches. It is conceivable that when the objective consideration of the transaction is made a court might decide that the transaction was not in the interests of the company, but that the deleterious considerations are not so infamous as to demand a conclusion that no reasonable director could have come to a contrary view. But whether that is characterised as not being a breach at all or as a breach from which no consequences flow may not, in most instances, be of great moment.
    4618 No doubt the ‘tantalising questions’ will have to be resolved one day. It is sufficient for me, for the purposes of this case, to say that I should focus on the state of mind of the directors and the need for real and actual consideration by them of the best interests of the company. In so doing I will take account of surrounding circumstances and this may involve objective considerations. But I will not be substituting my view of the commercial worthiness of the transactions for that of the directors. In approaching the matter this way, I believe that I am following, in a faithful way, the guidance given by Ipp J in Permanent Building Society v Wheeler: see Sect 20.4.1.
    20.7.3. The law: a summary
    4619 I will try now to summarise what I see as the relevant legal principles that must be brought to bear in deciding these questions:
27. The test whether directors acted bona fide in the interests of the company as a whole is largely (though by no means entirely) subjective. It is a factual question that focuses on the state of mind of the directors. The question is whether the directors (not the court) consider that the exercise of power is in the best interests of the company.
28. Similar principles apply in ascertaining the real purpose for which a power has been exercised.
29. It is the directors who make business decisions and courts have traditionally not pronounced on the commercial justification for those decisions. The courts do not substitute their own views about the commercial merits for the views of the directors on that subject.
30. Statements by the directors about their subjective intention or belief are relevant but not conclusive of the bona fides of the directors.
31. In ascertaining the state of mind of the directors the court is entitled to look at the surrounding circumstances and other materials that genuinely throw light upon the directors’ state of mind so as to show whether they were honestly acting in discharge of their powers in the interests of the company and the real purpose primarily motivating their actions.
32. The directors must give real and actual consideration to the interests of the company. The degree of consideration that must be given will depend on the individual circumstances. But the consideration must be more than a mere token: it must actually occur.
33. The court can look objectively at the surrounding circumstances and at the impugned transaction or exercise of power. But it does so not for the purpose of deciding whether or not the there was commercial justification for the decision. Rather, the objective enquiry is done to assist the court in deciding whether to accept or discount the assertions that the directors make about their subjective intentions and beliefs.
34. In that event a court may intervene if the decision is such that no reasonable board of directors could think the decision to be in the interests of the company.
    20.7.4. A related issue: group considerations
    4620 The real thrust of the plaintiffs’ case in this area is whether the directors confined their attention to the group or whether they genuinely turned their minds to the interests of individual companies.
    4621 The law does not require directors of a group of companies to ignore the interests of the wider group. But it does demand that where one or more companies in a group enter into a transaction or transactions, consideration must be given to the interests of that company or those companies. Most commercial transactions involve both benefits and detriments and, in considering the interests of the participants and those affected by the transaction, it will usually be a case of balancing the two.
    4622 In Lewis v Doran, the New South Wales Court of Appeal, at 587 ‑ 588, recognised that a transaction benefiting one company in a group may have derivative benefits for another company in the group, even if the companies are not parent and subsidiary. Giles JA (with whom Hodgson and McColl JJA agreed) cited, among others, the following examples:
    In Linton v Telnet Pty Ltd … it was said … that a loan to a director from the funds of company A, in order to secure his services for company A and company B, could be seen as for the benefit of company A ‘both directly and derivatively to the extent to which [the director’s] services to [company B] ensured the supply of computers and otherwise the successful conduct of [company A’s] retailing business’. In [Equiticorp] it was held that use of the funds of company A to discharge the debt of the wholly-owned subsidiary of related company B was in the interests of company A, essentially because it was necessary to retain the support of the bank the loss of which would be detrimental to, among others in the group, company A.
    Clarke and Cripps JJA noted … the necessity for consideration of the interests of [company] A as distinct from the group as a whole, so that company A [was] not ‘sacrificed for the good of the other companies in the group’, but accepted that the protection of the group as a whole was for the benefit of company A.
    4623 I mention this here because of the impact of what was said in Charterbridge. In that case the submission had been put that in the absence of separate consideration directors must, ipso facto, be treated as not having acted with a view to the benefit of the individual company within the group. Pennycuick J regarded that proposition as ‘unduly stringent’ and it was this that led him to formulate the ‘honest and intelligent man’ test. And, in turn, it was this that led Clarke and Cripps JJA in Equiticorp to express reservations about the Charterbridge test. As their Honours pointed out, directors are bound to exercise their powers bona fide in what they consider is in the interests of the company and not for any collateral purpose. Whether they did so or not is a question of fact.
    4624 This is the question of fact that falls to be considered in this case. That the transactions were for the benefit of the group (if that be the case) is one thing. But it does not necessarily answer the factual question whether the directors considered that the transactions into which an individual was about to enter were in the interests of that company.
    20.7.5. Another related issue: conscious wrongdoing
    4625 As I have previously said, problems associated with the pleading (or lack of pleading) of conscious wrongdoing recur throughout the case. This is particularly so in relation to the breach of duty by directors, the banks’ knowledge, participation and receipt of proceeds for the Barnes v Addy allegations and the statutory claims. The banks submit that the absence of a pleading of conscious wrongdoing is fatal to the plaintiffs’ causes of action in all three of those instances. I have had difficulty with this question in relation to the Barnes v Addy and statutory claims. But I have found it relatively easy to resolve the question as it applies to breaches of duty by directors.
    4626 The law is that honest or altruistic behaviour will not prevent a finding of improper conduct by directors if that conduct was carried out for an improper or collateral purpose: Whitehouse (293); Advance Bank (485); Permanent Building Society v Wheeler (218). It must follow that dishonesty or conscious wrongdoing is not a necessary element of the breach of a relevant fiduciary duty. Accordingly, an election not to plead conscious wrongdoing is not fatal to this aspect of a cause of action based on breach of fiduciary duty. Whether it creates a problem in relation to other elements of the same cause of action is, of course, another matter.
35. The Barnes v Addy claim: some general legal principles
    21.1. Introduction
    4627 In this case we are concerned with causes of action based on the principles enunciated in Barnes v Addy (1874) 9 Ch App 244. Shortly stated, the principles stem from the notion that a person who has been knowingly concerned in a breach of trust, or who receives trust property transferred in breach of trust, may be personally liable to the beneficiaries of the trust. It is convenient to refer to a ‘Barnes v Addy claim’ but in reality it is an aspect of a broad principle governing the circumstances in which a stranger can become liable in equity for the consequences of maladministration in the affairs of a trust or of a fiduciary relationship. There are bases other than those expressed in Barnes v Addy under which a third party can be made liable because of involvement in a breach of trust. Examples are where the third party induces or procures the breach of trust (as to which see Sect 21.2.2.4) or where s 65 of the Trustees Act 1962 (WA) applies. But in this case consideration can be confined to what has become known as the two limbs of Barnes v Addy.
    4628 The plaintiffs’ pleaded Barnes v Addy case relies on both limbs. They allege that the banks knowingly participated and assisted in breaches of duty by the directors of the Bell Participants. They also allege that the banks received and became chargeable with the property of the plaintiff Bell companies or its traceable product.
    4629 The jurisprudence surrounding the Barnes v Addy principle is disparate and complex. Commentators have described the design of the forms of liability as being the subject of perennial difficulty and debate: see, for example, ‘Knowing Assistance and Knowing Receipt: Taking Stock’, S Gardner, [1996] 112 LQR 56. Some of these difficulties and debates were aired during this hearing and I am compelled to confront them. But it is beyond the scope of this judgment to attempt the architectonic task of resolving all of the difficulties and debates surrounding Barnes v Addy. In that respect I share the sentiment expressed by Sir Robert Megarry VC in In re Montagu’s Settlement Trusts [1987] 1 Ch 264,  285 where his Lordship said:
    I shall attempt to summarise my conclusions. In doing this, I make no attempt to reconcile all the authorities and dicta, for such a task is beyond me; and in this I suspect I am not alone … All I need do is to find a path through the wood that will suffice for the determination of the case before me, and to assist those who have to read this judgment.
    4630 On 24 May 2007 (that is, some months after the conclusion of the hearings in this case) the High Court handed down its decision in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107. I gave the parties the opportunity to make further written submissions on the impact of the decision. Not surprisingly the parties declined the invitations. I say this without a hint of criticism – only a person who has completely lost his or her grip on reality would, by choice, want to be reminded of the torture that this case represents. I proffered a similar invitation after the handing down of the New South Wales Court of Appeal decision in Kalls Enterprises in August 2007. To my surprise, the invitation was accepted. But, as I remarked in Sect 20.3.3.6, the additional submissions were unhelpful. In particular, they did not engage in any meaningful way with the decision in Farah Constructions. In my view this is a necessary step in understanding Kalls Enterprises.
    4631 The unanimous judgment in Farah Constructions has answered, albeit in some instances in obiter comment, some (but not all) of the most contentious legal issues raised in the Barnes v Addy causes of action in this case. In relation to the obiter guidance contained in the judgment I intend to apply it as I understand the force and import of the dicta. For a first instance judge to do otherwise and to attempt the fatidic exercise of predicting what the High Court might do on another occasion would be (with apologies to the fictional character Sir Humphrey Appleby) ‘courageous’. Some of what I am about to say may therefore appear otiose. But it had already been written as at May 2007 and in any event I think it is appropriate to leave it in the reasons to place in context the comments concerning Farah Constructions and to do justice to the extensive submissions made by the parties about Barnes v Addy.
    21.2. Barnes v Addy: relevant legal principles
    21.2.1. Barnes v Addy generally
    4632 I propose to start by going to Barnes v Addy. The trustees of conventional trust funds had entered into a transaction that was in breach of trust and losses had accrued. The beneficiaries of the trust sued both the surviving trustee and the solicitors who had advised the trustees on the impugned transaction. The appeal concerned only the claim against the solicitors. The solicitors had no knowledge of, or reason to suspect, a dishonest design in the transaction and no funds had passed into their hands. The claim against them failed.
    4633 The issue in the case was, in essence, whether persons who were not themselves trustees should be made responsible as constructive trustees for the breaches of trust that were committed by trustees. Lord Selborne LC said, at 251 ‑ 252:
    Now in this case we have to deal with certain persons who are trustees, and with certain other persons who are not trustees. That is a distinction to be borne in mind throughout the case. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees … If those principles were disregarded, I know not how anyone could, in transactions admitting of doubt as to the view which a Court of Equity might take of them, safely discharge the office of solicitor, of banker, or of agent of any sort to trustees. But, on the other hand, if persons dealing honestly as agents are at liberty to rely on the legal power of the trustees, and are not to have the character of trustees constructively imposed upon them, then the transactions of mankind can safely be carried through; and I apprehend those who create trusts do expressly intend in the absence of fraud and dishonesty, to exonerate such agents of all classes from the responsibilities which are expressly incumbent, by reason of the fiduciary relation, upon the trustees.
    4634 It is common to refer to Lord Selborne’s dictum as containing two ‘limbs’. First, his Lordship referred to an agent of the trustee who receives and becomes chargeable with some part of the trust property. This is concerned with the liability of a person as a recipient of trust property. Secondly, his Lordship referred to an agent of the trustee assisting with knowledge in a dishonest and fraudulent design on the part of the trustee. This limb is concerned with the liability of a person as an accessory to a trustee’s breach of trust. It is now common to refer to the first limb by the shorthand phrase ‘knowing receipt’ or ‘receipt liability’ or ‘recipient liability’ and to the second limb as ‘knowing participation’ or ‘knowing assistance’. The phrase ‘accessory liability’ is also used in Barnes v Addy cases and commentary. It is most often applied to second limb situations but is sometimes used to describe third party liability under the rule generally.
    4635 The issue that has produced the most litigation as the Barnes v Addy principles have developed relates to the level and type of ‘knowledge’ that has to be established before a third party will be held liable. Doubts about that issue probably explain the tendency in modern cases and publications to describe the limbs by the phrases ‘receipt liability’ and ‘accessory liability’ rather than ‘knowing receipt’ and ‘knowing participation’. That having been said, the latest pronouncement of the High Court (to which I will refer in some detail shortly) cautions against straying too far from the formulation of the second limb in Barnes v Addy.
    4636 Lord Selborne’s formulation has come in for its share of criticism. In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 Lord Nicholls referred to it (at 385) as a ‘straitjacket’ for the accessory liability principle. In delivering the opinion of the House his Lordship bemoaned the restrictions that had grown up in relation to one aspect of accessory liability. He said, at 386:
    What has gone wrong? Their Lordships venture to think that the reason is that, ever since the Selangor case ([1968] 1 WLR 155) highlighted the potential uses of equitable remedies in connection with misapplied company funds, there has been a tendency to cite and interpret and apply Lord Selborne LC’s formulation in Barnes v Addy … as though it were a statute. This has particularly been so with the accessory limb of Lord Selborne LC’s apothegm. This approach has been inimical to analysis of the underlying concept.
    4637 These sentiments are consistent with the approach taken by equity over the past few decades, particularly as it has extended its reach into disputes that are essentially commercial in nature. The historical development of equity was (at least in part) a response to the perceived rigidity of common law principles. It was a means of tempering an injustice that had been brought about by strict adherence to a common law rule, whether substantive or procedural. Therein lay the seeds of a tension that was to last for centuries: how to balance the need for certainty of outcome (the perceived strength of the common law) with the need to provide a remedy where the justice of the case so dictated but where no remedy was otherwise available (the raison d’etre of equity).
    4638 Equity has generally spoken in terms of remedies, maxims and principles rather than rules. It has always been concerned with substance rather than form. It is not surprising then that equity stems from underlying principles and so‑called ‘rules’ are, in reality, no more than guidelines. In an extra‑judicial publication, ‘Equity’s Role in the Twentieth Century’, (1997) 8 King’s College LJ 1, Sir Anthony Mason said: ‘equitable principles were shaped with a view to inhibiting unconscionable conduct and providing relief against it’. In the same article he described the principles as incorporating ‘broad standards which, in borderline cases at least, call for an exercise of value judgment’.
    4639 The so‑called rules are not mandatory prescriptions to be applied rigidly. They are there to guide the proper application of accepted principles to the facts of an individual case. But the emphasis has always been on the identification and application of established principle. This approach is exemplified by the well‑known dictum of Deane J in Muschinski v Dodds (1985) 160 CLR 583, 615:
    [A constructive trust is not] a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundation of such principles.
    4640 Nonetheless, Lord Selborne’s dichotomy is still generally accepted, certainly in Australia: see, for example, Tableau Holdings Pty Ltd v Joyce [1999] WASCA 49, [31] and, more recently, Farah Constructions. It is important to see it as the starting point from which the juridical exercise proceeds.
    4641 The jurisprudence that has developed since Barnes v Addy was decided permits the following observations to be made concerning the liability of a third party. I do not think any of these points are contentious. First, the underlying principles apply in Australia: Consul Developments Pty Ltd v DPC Estates Pty Ltd (1974) 132 CLR 373, 408 (Stephen J). Secondly, the reference to ‘an agent’ in Lord Selborne’s apothegm (or is it apophthegm?) is not confined to agents in the strict sense. It can extend to third parties who have dealings with the trustee on their own behalf rather than as agent for the trustee: see, for example, In re Montagu’s Settlement Trusts. The banking cases are a good example of a relationship operating in two spheres. In its dealings with a customer, a bank acts sometimes as an agent (for example, when it does no more than collect a cheque on behalf of the customer) and sometimes in its own right (for example, when it takes money from the customer to reduce an overdraft balance). Thirdly, at least in relation to accessory liability, the principles that are applicable to trustees in the strict sense have been extended to other fiduciaries in some circumstances: Consul Developments (396 – 397) (Gibbs J). Fourthly, the accessory liability principle can apply even though no trust property has passed to the third party: Baden Delvaux (572).
    4642 The arguments advanced in this case have raised issues as to the state of the law in a number of areas and, in the analysis that follows, I will concentrate on them. In this general discussion of the law I will revert to the word ‘dishonesty’ because it is shorter than the phrase ‘conscious wrongdoing’ and because it is the word most commonly occurring in the authorities. The contentious matters that I have identified include those that follow.
    4643 First, before a third party can be held liable, is it necessary to establish that the fiduciary was dishonest? Is it necessary to establish that the third party was dishonest? Secondly, what is entailed in the concept of ‘knowledge’ for ‘knowing receipt’ and ‘knowing participation’? For example, must the knowledge be ‘actual’ or can it be ‘constructive’ and does the answer differ depending on whether the question is asked in relation to receipt liability or accessory liability? And where liability stems from involvement in a breach of trust or breach of a fiduciary duty, what must the stranger ‘know’? Does there have to be knowledge of the precise breach? Thirdly, in relation to receipt liability, must the third party have received ‘trust property’ (in the strict sense) before liability can be established?
    4644 There is a further question. Where a third party knowingly participates in a breach of duty by the fiduciary, can a claim be maintained against the third party where the claimant (a corporation) concedes that it also knowingly participated in the breach by the fiduciary (the directors) of duties owed to individual corporations? Because this question depends on the corporate group structure and the way the transaction documents were framed, I will deal with it in a later section in which the factual elements are discussed rather than in this section, which is devoted to an analysis of general legal principles.
    4645 Before I come to those specific questions I will examine the leading modern authorities in which the jurisprudence is outlined. In doing so I wish only to paint a broad picture of how the principles have developed. I will have to come back to a more detailed consideration of some of the authorities in relation to specific issues, particularly what is meant by a ‘dishonest and fraudulent design’ and what is entailed in the concept of ‘knowing’ about such a design.
    21.2.2. Barnes v Addy: the modern authorities
    21.2.2.1. The Consul Developments litigation
    4646 A solicitor (Walton) owned and controlled a group of companies that was engaged in the purchase, renovation and resale of old houses. The companies, including the plaintiff company (DPC), employed a manager (Grey) whose duties included finding properties for DPC and other group companies. Walton employed a clerk (Clowes) in his legal practice. Clowes was managing director of his own property investment company (Consul) and decided that Consul should enter the same field as DPC. Grey told Clowes that certain properties were available but that neither DPC nor any other company in Walton’s group of companies could afford to acquire them. Clowes had other information suggesting that Walton’s companies were in financial difficulty. Clowes and Grey agreed that they would share equally in any profits and losses from the project. Consul then acquired the properties but Grey did not advise Walton.
    4647 DPC complained that Grey’s conduct in arranging for the purchase by the defendant of the properties in circumstances in which he (Grey) could profit from the acquisition was a breach of the fiduciary duties Grey owed to DPC. At trial DPC sought a declaration that the properties were held on trust for it, as well as an account of profits earned by Consul as a result of the purchase and holding of those properties. As Consul (through Clowes) owed no fiduciary duties to Walton or to DPC, DPC pursued the claim under the Barnes v Addy principles. The claim was brought against both Grey and Consul. Grey did not defend the suit.
    4648 The trial judge dismissed the claims by DPC on the basis that it had no standing to prosecute because any duty of a fiduciary nature that may have been owed or breached by Grey was not owed to DPC. The appeal from that decision to the New South Wales Court of Appeal is reported as DPC Estates Pty Ltd v Grey & Consul Developments Pty Ltd [1974] 1 NSWLR 443. By a majority, the court reversed the decision of the trial judge. All members found that DPC had standing to claim breach of a fiduciary duty owed to it. Once the issue of standing had been resolved it was clear Grey had breached his fiduciary duty to the plaintiff. The remaining question was whether Consul was also accountable.
    4649 The court considered the level of knowledge required for the plaintiff to succeed against the third party. The plaintiff argued that constructive notice was sufficient, and that the circumstances put Clowes on enquiry. Although he may not have known of the breach of fiduciary duty, he ought to have known of it. Clowes’ behaviour was said to show he had refrained from making appropriate enquiries. Jacobs P, who dissented, held that if Clowes had deliberately refrained from making enquiries, he would be infected with a guilty state of mind. However in Jacobs P’s view, this was contrary to the finding of the trial judge: that Clowes had not deliberately refrained from making enquiries, and thus did not have the requisite knowledge. Hardie and Hutley JJA found that Clowes did have sufficient knowledge of Grey’s fraudulent design to render Consul liable.
    4650 According to Jacobs P, the case failed to attract the doctrine of constructive notice, because there had been no receipt of trust property. At 457 ‑ 458 his Honour observed of the Barnes v Addy principle:
    [A] distinction must be drawn between a person who receives trust property for his own benefit, as a volunteer or otherwise, and others who deal with a fiduciary, but do not actually receive trust property. In the latter case a person is not to be held responsible as a constructive trustee unless, even though no trust property passes into his hands, he is cognisant of a dishonest design on the part of the trustee.
    4651 Jacobs P considered case authority including Selangor United Rubber Estates Ltd v Cradock (No 2) [1968] 1 WLR 319 and Karak Rubber Co Ltd v Burden [1972] 1 WLR 602, which suggested that actual or constructive notice could impose constructive trusteeship on a third party in a case of knowing assistance. His Honour ruled that Lord Selborne’s dicta in Barnes v Addy could not be extended in this way. In his view, something more than constructive knowledge was required. There must be ‘actual knowledge of the fraudulent or dishonest design, so that the person concerned can truly be described as a participant in that fraudulent or dishonest activity’. Actual knowledge could be acquired ‘either through knowing or purposely refraining from finding out’.
    4652 Jacobs P distinguished the circumstances of the case from one where it is alleged that confidential information had come into the hands of a person and been put to use in breach of its confidential nature. In such a case, the confidential information would itself be property. In that situation, it would be a case of knowing receipt and constructive notice would be sufficient. The plaintiffs had unsuccessfully applied to amend their pleadings to include such a claim in the appeal suit.
    4653 Hardie JA said that it was significant that Consul entered into a joint venture with the manager. This meant that Clowes and Grey were acting ‘in concert to use for their respective profits the knowledge, information and opportunities which [Consul] had acquired’ (at 462). Grey used Consul to implement his fraudulent scheme, and Consul was a participant in the scheme by reason of the knowledge and circumstances of its managing director, Clowes, who took advantage of his position as a clerk in Walton’s employ to exploit opportunities which he knew belonged to the Walton’s companies.
    4654 Hutley JA seemed to view the circumstances differently to Hardie JA, though he arrived at the same result; namely, that Clowes had sufficient knowledge of Grey’s fraudulent and dishonest design to fall within Lord Selborne’s principle: see, for example, at 470. His Honour’s analysis of the findings of fact seemed to indicate that he thought Clowes had an idea that something was wrong with Grey’s behaviour, rather than actual knowledge of the breach. However, Hutley JA concluded that Clowes, knowing that Grey had obligations to DPC, had been put on enquiry to seek out information concerning the nature of the obligations. Clowes was therefore, at 469, ‘[to] be regarded as a party to an arrangement which he knew was wrong and was calculated to encourage Grey to proceed with his plan to profit personally from his position of trust’.
    4655 In Consul Developments the High Court dealt with the resulting appeal. By a majority (Barwick CJ, Gibbs and Stephen JJ, McTiernan J dissenting), Consul’s appeal was allowed and the decision of the trial judge was reinstated.
    4656 Gibbs J reviewed the case law relating to the knowledge requirements. His Honour indicated that the decisions in Selangor and Karak Rubber Co could not resolve this case, because no trust property was received by Consul. The plaintiffs had argued that the information that Grey had concerning the subject properties was confidential information in which DPC had a relevant interest. That argument was rejected. Gibbs J looked at the purpose underpinning the rules about conflict of interest and knowing participation. He noted two alternative purposes, both leading him to conclude that a knowing assistant should be made to account for profits resulting from a breach in which he or she participated.
    4657 First, the conflict rule operated as a deterrent, to discourage people in a position of confidence from being swayed by interest rather than duty. Other persons should similarly be deterred from knowingly assisting in a violation of that duty. Secondly, it was contrary to equitable principle to allow a person to retain a benefit that he or she had gained from a breach of fiduciary duty. On the same principle it was unacceptable to allow other persons who knowingly took part in the breach to benefit from it.
    4658 In Gibbs J’s view, following Selangor, the meaning of ‘dishonest and fraudulent’ was to be understood by reference to equitable principles and encompassed a breach of trust or a breach of fiduciary duty. While Gibbs J assumed that Selangor was correct (without finally deciding the point), it seems that he viewed the test as being neither wholly objective nor wholly subjective. His Honour said, at 398:
    It may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger’s failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man.
    4659 Had it been proved that Clowes knew, or that an honest and reasonable person with knowledge of the facts known to Clowes would have known, that Grey was breaching his duties in arranging for Consul to buy the properties, Consul would have been held accountable. However, on the findings of fact made by the trial judge, Clowes believed that Grey was not acting in breach of his fiduciary duty in participating in the purchase. Clowes did not ‘actually’ know, or have reason to believe, that Grey was in breach of his duty, and in the circumstances an honest and reasonable man would not have thought it necessary to enquire further. It was not shown that Clowes was attempting to persuade Grey to act contrary to his duty. The plaintiffs therefore failed to establish that Consul had knowledge in the wide sense accepted by Selangor.
    4660 Stephen J (with whom Barwick CJ agreed) looked at the trial judge’s reasons at length. His Honour considered whether the findings supported a conclusion of actual knowledge, in particular whether Clowes’ concealment of the purchase, and whether his feeling that it was ‘somehow wrong’ for Clowes and Grey to collude in commercial ventures similar to those undertaken by Walton, was evidence that Clowes had actual knowledge. Stephen J concluded that they did not: the requisite knowledge had to relate specifically to a breach of fiduciary duty. His Honour said, at 407:
    This further reason is, then, the only evidence from which the plaintiff could hope to show that Clowes had actual knowledge of Grey’s breach of duty. To my mind it shows no such thing; the sense of wrongdoing [if] attributed to Clowes is quite unrelated to an awareness that Grey’s scheme involved breach of fiduciary duty.
    4661 Stephen J considered that the plaintiff had also failed to establish that Clowes had wilfully shut his eyes to the truth. Clowes’ failure to make enquiries of Walton was due to reasons other than a suspicion of Grey’s fraud. Clowes thought that Walton did not want to purchase the properties and he had reason to believe that Walton could not afford the properties in any event.
    4662 Having reviewed the authorities, Stephen J noted the difficulty in reconciling the English authorities. In Carl Zeiss Stiftung v Herbert Smith & Co [No 2] [1969] 2 Ch 276 it had been held that constructive notice would only render the assistant a constructive trustee if trust property had been received. But this seemed contrary to the conclusions reached in Selangor and Karak Rubber Co. Stephen J was critical of the development in those cases, which he considered, at 411:
    [C]ontain[ed] statements of principle certainly not expressed as confining constructive notice to cases in which the defendant has received trust property but which instead speak of it as sufficing to establish knowledge, where knowledge is necessary ‘to hold a stranger liable as constructive trustee in a dishonest and fraudulent design’ (Selangor).
    4663 His Honour noted that, in both cases, trust property had passed through the defendants’ hands and where the plaintiff succeeded it was because the defendant had been shown to have actual knowledge of the relevant breach. In Stephen J’s view, the line of authorities before Selangor did not support the notion that, in cases where there had been no receipt of trust property, constructive notice of breach could impose a constructive trust on a defendant. It seems that Stephen J was not prepared to extend the doctrine of constructive notice any further in cases of accessory liability (see 413). In the case before the High Court, Consul had not received any trust property and could not be held to account for the purchased properties. Stephen J expressed his conclusion on the knowledge question in these terms, at 412:
    In my view the state of the authorities as they existed before Selangor did not go so far, at least in cases where the defendant had neither received nor dealt in property impressed with any trust, as to apply to them that species of constructive notice which serves to expose a party to liability because of negligence in failing to make inquiry. If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from enquiry for fear lest he learn of fraud. But to go further is, I think, to disregard equity’s concern for the state of conscience of the defendant.
    4664 In his dissenting judgment, McTiernan J found that the arrangements between Grey and Consul, entered into before the properties were purchased, provided a strong incentive for Grey to prefer the interests of Consul to those of the Walton group. His Honour went on to observe that the deals were improper, and that however little Clowes knew of the duty owed by Grey to the group, Clowes was aware that Grey was acting improperly. Clowes’ participation in concealing the purchases from Walton was participation in Grey’s improper conduct. It seems that McTiernan J might have been prepared to accept the extension of the Barnes v Addy principle found in the Selangor and Karak Rubber cases but did not find it necessary to express a concluded view given his findings on the knowledge question.
    21.2.2.2. Recent developments in the English courts
    4665 Two recent decisions from the highest levels of authority in the English courts seem to reflect a shift away from the ascertainment of facts known by the third party (that is, ‘knowledge’) to an enquiry about whether the third party acted dishonestly.
    4666 In 1995, in Royal Brunei Airlines, the Privy Council dealt with a specific aspect of the accessory liability principle, namely, the requirement that there must be a ‘dishonest and fraudulent design on the part of the trustees’.
    4667 In Royal Brunei Airlines, a company had acted as the agent of the plaintiff airline in respect of the sale of passenger and cargo transportation. The defendant was the managing director and principal shareholder of the company. The company was required to hold the proceeds of sales on trust for the airline, until the moneys were paid over. The money was instead paid into a separate account and used for the company’s own purposes, with the knowledge and participation of the defendant. The company became insolvent and the airline sought to recover from the defendant personally. It could not be shown that the company’s breach of trust was dishonest.
    4668 The trial judge found for the airline but the Court of Appeal of Brunei Darussalam allowed the appeal on that basis that, at 383 – 384:
    As long standing and high authority shows, conduct which may amount to a breach of trust, however morally reprehensible, will not render a person who has knowingly assisted in the breach of trust liable as a constructive trustee if that conduct falls short of dishonesty.
    4669 The ‘long standing and high authority’ included, most notably, Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 1) [1979] Ch 250, where Goff LJ (at 274) cautioned against departing from the ‘safe path of the principle as stated by Lord Selborne LC to the uncharted sea of something not innocent … but still short of dishonesty’.
    4670 The Privy Council differed from the Court of Appeal and, as the passage that I have set out earlier in this section demonstrates, approached the problem not as if Lord Selborne’s had prescribed an all‑encompassing rule, but by bearing in mind the principles that underpin the liability in equity of strangers to a trust. This is aptly illustrated by Lord Nicholls’ example, at 384:
    Take a case where a dishonest solicitor persuades a trustee to apply trust property in a way the trustee honestly believes is permissible but which the solicitor knows full well is a clear breach of trust … It cannot be right that in such a case the accessory liability principle would be inapplicable because of the innocence of the trustee … Indeed, if anything, the case for liability of the dishonest third party seems stronger where the trustee is innocent, because in such a case the third party alone was dishonest and that was the cause of the subsequent misapplication of the trust property.
    4671 Lord Nicholls went on to note that the position would be the same if, instead of procuring the breach, the third party dishonestly assisted in the breach. The example his Lordship gave is where the trustee himself proposed to deal with the trust property in good faith, but in a manner which the solicitor knew to be a breach of trust.
    4672 The Privy Council concluded that the liability of the third party should not depend on the state of mind of another, namely, the trustee. It was held that dishonesty was a necessary element of accessory liability, but it was dishonesty on the part of the accessory, not the trustee, that was essential to such a claim.
    4673 Their Lordships also remarked on the meaning of ‘dishonesty’ in the context of the accessory’s state of mind. It was held to be an objective standard, that is, ‘not acting as an honest person would in the circumstances’ (at 389).
    4674 The House of Lords had occasion to consider some aspects of the Barnes v Addy principles and the Royal Brunei case in Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164. A solicitor (Leach) was acting for Yardley to negotiate a loan of £1 million from Twinsectra Ltd. Leach did not deal directly with Twinsectra. Another firm of solicitors (Sims) represented themselves to Twinsectra as acting on Yardley’s behalf. Sims received the loan money having undertaken that the money would only be applied to the purchase of property by Yardley. Contrary to the undertaking and following assurances by Yardley, Sims turned the money over to Leach. Leach did not ensure that the money was used solely for the acquisition of property and £357,720 was used for other purposes.
    4675 The loan was not repaid. Twinsectra sued Yardley, Sims and Leach. The claim against Leach was for the £357,720 that was used for purposes other than buying property. Twinsectra argued that the payment by Sims to Leach was a breach of trust; Leach was therefore said to be liable for dishonestly assisting in the breach of trust in accordance with Royal Brunei. The case led to consideration of the standards of honesty and knowledge required to establish accessory liability under the second limb of Barnes v Addy.
    4676 The trial judge held that there was no trust, because the terms of the undertaking were too vague, and Twinsectra did not intend to create a trust. The trial judge also held that Leach, in receiving the money and paying it to Yardley without concerning himself about its application, had been misguided but not dishonest. He had shut his eyes to some problems, but thought he held the money for Yardley without restriction. The Court of Appeal reversed this finding and held that Leach had been dishonest. The Court of Appeal justified overturning the trial judge’s decision on dishonesty because the trial judge had only considered conscious dishonesty and not ‘Nelsonian blindness’, which they said was relevant in the circumstances of the case.
    4677 The House of Lords agreed with the Court of Appeal in the conclusion that there was a trust. Though unusual, it was not void for uncertainty. The undertaking given by Sims meant that the money was not to be at Yardley’s free disposal; it was for the sole purpose of acquiring property. Sims was only to turn the money over to enable the acquisition of property. This meant that while the money was in Sims’ client account, it remained Twinsectra’s money until it was applied for the acquisition of property in accordance with the undertaking.
    4678 The question for the House of Lords was whether Leach, in receiving the money and paying it to Yardley without concerning himself about its application, could be said to have acted dishonestly. Leach had testified that, in paying out the money, he was simply acting in accordance with his client’s instructions. This was inconsistent with the pleaded defence that was to the effect that Leach believed the money would be used for the purpose set out in the undertaking.
    4679 The House of Lords found that Leach had been aware of all of the facts and therefore could not be said to have been dishonest by deliberately failing to make enquiries for fear of finding out something he did not want to know. On that basis, the Court of Appeal should not have overturned the trial judge’s finding concerning dishonesty and should not have substituted its own finding.
    4680 Lord Millett opined that accessory liability did not depend on dishonesty in the normal sense: it was sufficient that Leach knew all the facts that made it wrongful for him to participate in the way in which he did. Lord Hoffmann disagreed, seeing this view as a departure from Royal Brunei. On his Lordship’s analysis of Royal Brunei, for the conduct to be wrongful, more than mere knowledge of the facts is required. There must be ‘a dishonest state of mind … consciousness that one is transgressing ordinary standards of honest behaviour’ (at 170). Here, there were no relevant facts of which Leach could be unaware: Leach believed that the money was at Yardley’s disposal. If this was Leach’s honest belief, he had not been dishonest.
    4681 Lord Hoffmann qualified the scope of his statement, noting that a person might dishonestly assist in the commission of a breach of trust without a full appreciation of the legal meaning of the arrangement. A relevantly dishonest state of mind might result if the defendant knew that he was helping to deal with money to which the recipient was not entitled. But that was not the instant case.
    4682 Lord Hutton considered the standard that should be applied to determine whether a person has acted dishonestly. In his Lordship’s opinion, there were three possible standards:
    • purely subjective: the person is only regarded as dishonest if he or she transgresses his or her own standard of honesty, even if that standard is contrary to that of reasonable and honest people;
    • purely objective: if the person’s conduct is dishonest by the ordinary standards of reasonable and honest people, even if he or she does not realise it, he or she is judged as dishonest; or
    • combined standard: to establish dishonesty, the defendant’s conduct must be dishonest by the ordinary standards of reasonable and honest people, and he himself or she herself must also realise that by those standards his or her conduct was dishonest.
    4683 Having noted that the courts have rejected the ‘purely subjective’ standard, Lord Hutton differed from Lord Millett’s interpretation of what Lord Nicholls had said in Royal Brunei. Lord Millett, it is to be remembered, found that liability depended on knowledge rather than dishonesty. In Lord Hutton’s analysis of Royal Brunei, at 173, it was a statement of general principle that ‘dishonesty is a necessary ingredient of accessory liability and knowledge is not an appropriate test’. Lord Hutton opined that an objective standard should be added, and the ‘combined’ test should be characterised thus, at 174:
    [D]ishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.
    4684 Lord Millett, in his dissent on the question of whether Leach’s conduct had been dishonest, said that liability for knowing receipt is restitutionary and based on the receipt itself rather than fault. His Lordship then contrasted this position with the doctrine of knowing assistance. He advocated an approach where the condition of liability is intentional wrongdoing, and not conscious dishonesty. Thus, according to Lord Millett, at 194:
    There is no basis for requiring actual knowledge of the breach of trust, let alone dishonesty, as a condition of [recipient] liability. Constructive notice is sufficient and may not even be necessary. There is powerful academic support for the proposition that the liability of the recipient is the same as in other cases of restitution, that is to say strict but subject to a change of position defence.
    …
    The accessory’s liability for having assisted in a breach of trust is quite different. It is fault-based, not receipt-based. The defendant is not charged with having received trust moneys for his own benefit, but with having acted as an accessory to a breach of trust. The action is not restitutionary; the claimant seeks compensation for wrongdoing. The cause of action is concerned with attributing liability for misdirected funds. Liability is not restricted to the person whose breach of trust or fiduciary duty caused their original diversion. His liability is strict. Nor is it limited to those who assist him in the original breach. It extends to everyone who consciously assists in the continuing diversion of the money.
    4685 Lord Millett then summarised the position of knowing assistance in the English courts leading up to Royal Brunei and thereafter, at 195:
    Prior to the decision in Royal Brunei Airlines Sdn Bhd v Tan the equitable claim was described as ‘knowing assistance’. It gave a remedy against third parties who knowingly assisted in the misdirection of funds. The accessory was liable if he knew all the relevant facts, in particular the fact that the principal was not entitled to deal with the funds entrusted to him as he had done or was proposing to do. Unfortunately, the distinction between this form of fault-based liability and the liability to make restitution for trust money received in breach of trust was not always observed, and it was even suggested from time to time that the requirements of liability should be the same in the two cases …
    Behind the confusion there lay a critical issue: whether negligence alone was sufficient to impose liability on the accessory. If so then it was unnecessary to show that he possessed actual knowledge of the relevant facts. Despite a divergence of judicial opinion, by 1995 the tide was flowing strongly in favour of rejecting negligence. It was widely thought that the accessory should be liable only if he actually knew the relevant facts. It should not be sufficient that he ought to have known them or had the means of knowledge if he did not in fact know them.
    There was a gloss on this. It is dishonest for a man deliberately to shut his eyes to facts which he would prefer not to know. If he does so, he is taken to have actual knowledge of the facts to which he shut his eyes.
    4686 It seems that Lord Millett, also, considered the applicable standard of ‘dishonesty’ to contain both subjective and objective elements, but leaned towards the objective approach. He considered the question that the House had to answer was not whether Lord Nicholls in Royal Brunei was using the word ‘dishonesty’ in a subjective or objective sense, but rather whether the plaintiff must establish that an accessory had a dishonest state of mind. In Lord Millett’s opinion, while subjective elements of tests previously applied by the courts related to the defendant’s knowledge, experience and attributes, these factors could only be interpreted in light of the standard of honesty and the recognition of wrongdoing. His Lordship said, at 199:
    The question is whether an honest person would appreciate that what he was doing was wrong or improper, not whether the defendant himself actually appreciated this …. Neither an honest motive nor an innocent state of mind will save a defendant whose conduct is objectively dishonest … equity looks to man’s conduct, not to his state of mind.
    4687 As to the knowledge required to establish accessory liability, Lord Millett considered that it was sufficient that the defendant knew that the money was not at the free disposal of the principal, or that he knew that he was assisting in a dishonest scheme. He characterised the relationship between the breaching principal and the accessory in this way, at 202:
    The gravamen of the charge against the principal is not that he has broken his word, but that having been entrusted with the control of a fund with limited powers of disposal he has betrayed the confidence placed in him by disposing of the money in an unauthorised manner. The gravamen of the charge against the accessory is not that he is handling stolen property, but that he is assisting a person who has been entrusted with the control of a fund to dispose of the fund in an unauthorised manner. He should be liable if he knows of the arrangements by which that person obtained control of the money and that his authority to deal with the money was limited, and participates in dealing with the money in a manner which he knows is unauthorised.
    4688 In the result, Lord Millett found it unnecessary to consider whether Leach realised that honest people would regard his conduct as dishonest. His knowledge that he was assisting Sims to default in the latter’s undertaking to Twinsectra was sufficient to establish accessory liability.
    4689 I have spent some time discussing Lord Millett’s dissenting opinion in Twinsectra because some commentators have suggested it is closer to the Australian position as disclosed in Consul Developments: see, for example, McDermott, ‘The Twinsectra Case (Knowing Assistance; Quistclose)’ (2003) 77 ALJ 290 at 291.
    4690 The Privy Council returned to these issues in Barlow Clowes International Ltd (In Liq) v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 All ER 333. In that case a submission had been made (citing what Lord Hutton had said in Twinsectra) that the requisite state of mind for accessory liability was conscious dishonesty; namely, that the person concerned must be aware that the conduct would, by ordinary standards, be regarded as dishonest. At trial, the judge had found that by normal standards the defendant had been dishonest but that his own standard was different and that this, it was submitted, was not enough to ground accessory liability. The Privy Council said, at [15] – [16]:
    [15] Their Lordships accept that there is an element of ambiguity in these remarks which may have encouraged a belief, expressed in some academic writing, that the Twinsectra case had departed from the law as previously understood and invited inquiry not merely into the defendant’s mental state about the nature of the transaction in which he was participating but also into his views about generally acceptable standards of honesty. But they do not consider that this is what Lord Hutton meant. The reference to ‘what he knows would offend normally accepted standards of honest conduct’ meant only that his knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. It did not require that he should have had reflections about what those normally acceptable standards were.
    [16] Similarly in the speech of Lord Hoffmann, the statement (at [20]) that a dishonest state of mind meant ‘consciousness that one is transgressing ordinary standards of honest behaviour’ was in their Lordships’ view intended to require consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour. It did not also require him to have thought about what those standards were.
    4691 At [17] their Lordships dealt with the facts of Twinsectra. The defendant, a solicitor, had received on behalf of his client a payment from another solicitor whom he knew had given an undertaking to pay it to the client only for a particular use. The defendant believed that the undertaking did not apply to him and that he held the money unconditionally. That being so, he was bound to pay it upon his client’s instructions without restriction on its use. The defendant was acquitted of dishonesty.
    4692 Neither the trial judge nor the House had undertaken any enquiry into the views of the defendant about ordinary standards of honest behaviour. The defendant had taken a particular view of the law and had acted in accordance with that view. The majority in the House of Lords considered that a solicitor who held this view of the law, even though he knew all the facts, was not by normal standards dishonest. Having thus explained Twinsectra, their Lordships continued, at [18]:
    [18] Their Lordships therefore reject [the] submission that the judge failed to apply the principles of liability for dishonest assistance which had been laid down in the Twinsectra case. In their opinion they were no different from the principles stated in Royal Brunei Airlines Sdn Bhd v Tan … which were correctly summarised by the judge.
    21.2.2.3. The Australian position following Royal Brunei
    4693 There are some Australian decisions in the years after 1995 in which Lord Nicholls’ formulation in Royal Brunei has been adopted: see, for example, News Ltd v Australian Rugby Football League Ltd (1996) 58 FCR 447, 546 ‑ 547 (reversed on appeal but on the basis that there had been no breach of a relevant fiduciary duty); Pascoe Ltd (In Liq) v Lucas [1999] SASC 519; (1999) 75 SASR 246,  272 (interestingly, a case involving some of the companies in the BCHL and JNTH groups); Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1, 87 ‑ 88. Some judicial officers and academic commentators have expressed the view that there is little difference in the approaches contained in Consul Developments and Royal Brunei: see, for example, Sixty‑Fourth Throne Pty Ltd v Macquarie Bank Ltd (1996) 130 FLR 411,  477; Ford and Lee, Principles of the Law of Trusts (3rd ed, 1996), [22690]. But in Farah Constructions (which I will come to shortly) at [164], the High Court classified the suggestion discounting any difference between the traditional approach (that is, the approach in Consul Developments) and that adopted in Royal Brunei as ‘not soundly based’.
    4694 In other Australian authorities, the judicial officers concerned have cautioned against moving away from what was said in Consul Developments: see, for example, Cadwallader v Bajco Pty Ltd [2002] NSWCA 328, 199. In NCR Australia Pty Ltd v Credit Connection Pty Ltd (In Liq) [2004] NSWCA 1, Austin J, in relation to accessory liability, was referred to ‘a substantial number of authorities’ including Royal Brunei. However, his Honour said that the current Australian law was to be found in Consul Developments and that it he would be guided by the judgments in that case.
    4695 Austin J discussed the majority judgments in Consul Developments at some length. He referred to the passage in the reasons of Stephen J (at 407 – 8) to the effect that the plaintiff had not only failed to establish actual knowledge against the relevant defendant, but had also failed to establish that the defendant wilfully shut his eyes to the truth for fear that he should learn of the fiduciary’s dishonesty. Both actual knowledge and calculated ‘abstention from enquiry’ were missing. As Austin J pointed out, Stephen J:
    (a) rejected the view that liability for knowing assistance would arise in cases of ‘that species of constructive notice which serves to expose a party to liability because of negligence in failing to make inquiry’; and
    (b) said that it would be different if ‘the defendant has consciously refrained from inquiry for fear lest he learn of fraud’; but
    (c) cautioned that, to go further would be to disregard equity’s concern for the state of conscience of the defendant.
    4696 Austin J also noted the observation of Stephen J (at 413) that the defendant was in a situation in which a reasonable and honest man would not have had knowledge of circumstances telling of a breach of duty. That, he said, was the furthest extent to which any possible doctrine of constructive notice may go in such a case. His Honour also referred to the passage from the reasons of Gibbs J (at 398) that I have set out in Sect 21.2.2.1. Against the background of those observations concerning Consul Developments, Austin J said, at [168] – [169]:
    [168] What seems to emerge from these observations is that liability arises where the defendant has assisted in the trustee’s dishonest and fraudulent design and:
    (a) has actual knowledge of the dishonest and fraudulent design; or
    (b) has deliberately shut his or her eyes to such a design; or
    (c) has abstained in a calculated way from making such inquiries as an honest and reasonable person would make, where such inquiries would have led to discovery of the dishonest and fraudulent design; or
    (d) has actual knowledge of facts which to a reasonable person would suggest a dishonest and fraudulent design.
    [169] But there is no liability if the defendant merely knows facts that would have been investigated by a reasonable person acting diligently, thereby discovering the truth, where the defendant has innocently but carelessly failed to make the appropriate investigations.
    4697 Many of the cases involving recipient liability concern real property. This often brings into question the concept of indefeasibility of title under the Torrens system. In relation to issues such as dishonesty, this requires that attention be given to the fraud exception in statutory provisions such as s 68 of the Transfer of Land Act 1893 (WA): see, for example, Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133; LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291; (2002) WAR 517; Tara Shire Council v Garner [2002] QCA 232; [2003] 1 Qd R 556. The indefeasibility principles were not called in aid in this case. I mention this because some of the Transactions were registered mortgages of Torrens system land.
    4698 A leading authority concerning recipient liability is Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Limited [1998] 3 VR 16. The plaintiff was a trustee company and the second defendant, Jeffries, was its managing director. Jeffries’ own businesses were in financial difficulties and owed money to ANZ. Jeffries informed ANZ that the plaintiff was the trustee of a non‑active trust and consequently security was taken over the trust property. But the bank had notice that this was not correct; the plaintiff was the trustee of merged family estates and held the property on trust for the beneficiaries. Hansen J found that the banks had actual knowledge that the property was trust property and were wilfully blind to the question whether the trust property had been misapplied (which therefore also constituted actual knowledge).
    4699 But his Honour nevertheless undertook a lengthy and detailed analysis of the conflicting English and Australian case law on the question whether constructive knowledge on the part of the recipient would suffice to establish liability under the first limb of Barnes v Addy. His Honour’s conclusions were, I think, shaped by his view that recipient liability is predicated on the notion of restitution. For this reason he concluded that there is a fundamental distinction between accessory liability and recipient liability. His Honour said, at 105: ‘the former being a claim that a third party acted as an accessory to a principal wrongdoer and thereby committed a wrong himself, the latter being a restitution‑based claim that the defendant has been unjustly enriched at the expense of a trust beneficiary’.
    4700 Therefore, given that the first limb is a doctrine designed to restore misapplied trust property, it was not necessary to establish dishonesty or a want of probity. It was sufficient for a plaintiff to establish that the defendant, at the time of receipt, had the requisite knowledge that the relevant property was (a) trust property and (b) that it had been misapplied. The requisite knowledge was taken to include any of the first four categories as expressed in Baden.
    4701 Hansen J also expressed a tentative view that, on the presumption that recipient liability is restitutionary‑based, liability should be strict, subject only to defences of bona fide purchase and change of position. But since the parties had not argued the case in that manner, he declined to rule on that basis.
    21.2.2.4. The Farah Constructions litigation
    4702 This brings me to the most recent pronouncements by the High Court about the Barnes v Addy principles, namely Farah Constructions.
    4703 Mr Farah Elias was involved in real estate developments and controlled several defendant companies, including Farah Constructions Pty Ltd. Farah Constructions and Say‑Dee entered into a joint venture agreement where they were to acquire a nominated property. They planned to refurbish some units and rent them, while they sought redevelopment approval from the local council. Say‑Dee was to contribute a majority of the funds; Mr Elias was (among other things) responsible for managing the progress of the development application as well as the ultimate construction and sale of the development. Upon completion of the joint venture, the profits were to be distributed equally between Say‑Dee and Farah Constructions.
    4704 The council declined to approve the redevelopment on the basis that the land area was too small, but indicated that it might be inclined to support a redevelopment if neighbouring properties were amalgamated. Mr Elias used this knowledge to acquire some of the neighbouring properties through another company controlled by him, through his wife and two daughters. There was an issue about whether Mr Elias had disclosed to Say‑Dee the knowledge he had received from the council, as well as whether the subsequent acquisitions of the neighbouring properties had been disclosed.
    4705 A Barnes v Addy claim was made against Mrs Elias and her daughters. The only knowledge imputed to them was the fact that Mr Elias acted as their agent and thus they were taken to be fixed with his knowledge. The claim against them was dependent on there being a breach of fiduciary duty by Mr Elias. It was common ground that Mr Elias owed fiduciary duties to Say‑Dee, but it was disputed whether the scope of these duties covered the acts in question. Another contentious issue was whether there had been adequate disclosure by Mr Elias.
    4706 The trial judge found for the defendants on both these threshold issues, and so did not go on to consider the Barnes v Addy claim. In Say‑Dee v Farah Constructions Pty Ltd [2005] NSWCA 309 the New South Wales Court of Appeal ruled that there had been a breach of fiduciary duty, and also found Mrs Elias and her daughters liable as recipients of trust property, using a traditional approach to the first limb of Barnes v Addy. It was held that the constructive knowledge imputed to Mrs Elias and her daughters was sufficient to satisfy the knowledge test under this limb, despite the fact that the recipients were ‘innocent’ or at least not dishonest.
    4707 Tobias JA, with whom Mason P and Giles JA agreed, also endorsed what he described as an ‘alternate’ basis for relief under a ‘restitutionary approach’ to the first limb of Barnes v Addy, following the view to which Hansen J had inclined in Koorootang. The court held that the respondents (Mr Elias and others) were strictly liable and the knowledge (actual or otherwise) of the recipient was irrelevant. A plaintiff need only prove that there was an enrichment of the defendant at the expense of the plaintiff such that it was unjust to retain the trust property (subject of course to the exception where there had been a bona fide purchase in good faith or where a person had changed their position as a result).
    4708 In a joint judgment the High Court allowed the appeal and restored the trial judge’s original orders. The claim under the first limb of Barnes v Addy failed because there was no receipt of property, no agency and insufficient notice or knowledge to give rise to recipient liability.
    4709 The High Court noted at [113] that in recent times it has been assumed, ‘but rarely if at all decided’, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with other types of fiduciaries. Footnote 54 (which refers to that paragraph of the reasons) states:
    For example, in DPC Estates Pty Ltd v Grey and Consul Development Pty Ltd [1974] 1 NSWLR 443 at 459‑460, Jacobs P assumed that if property were received by a stranger from a fiduciary in breach of fiduciary duty, the first limb applied. See also El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 700 per Hoffmann LJ.
    4710 The High Court declined to proffer any further views on this issue, since the case was conducted on a mutual assumption that the first limb applied in the circumstances.
    4711 In relation to recipient liability, the traditional formulation, as I understand it to have been expressed by Lord Selborne, is that there must be receipt of ‘trust property’. In dealing with this issue the High Court asked ‘[d]id the Court of Appeal establish that Mrs Elias and her daughters received property to which a fiduciary obligation attached?’ This is a slightly broader formulation than Lord Selborne’s and could conceivably apply to company property, to which a director’s fiduciary obligations would attach. But later the High Court noted that the acquisition of the land was not sufficient to satisfy the first limb because the three units were not ‘trust property or the traceable proceeds of trust property’ [119]. This appears to be a reversion to the more traditional formulation of what constitutes receivable property.
    4712 The other ‘property’ which Mrs Elias and her daughters had arguably received was the information obtained by Mr Elias that the land would be the subject of an alternate redevelopment approval. The High Court found that his was not confidential information, and even if it was, it did not have the requisite proprietary character. Nor had this information been passed to Mrs Elias and her daughters.
    4713 In relation to notice, the High Court held that, because there was no agency established on the facts, there could be no notice to Mrs Elias and her daughters. Because there was therefore no question of those defendants having knowledge the High Court did not discuss the level of knowledge required under the first limb.
    4714 But their Honours said that it was a ‘grave error’ for the Court of Appeal to endorse the restitutionary theory for recipient liability. It was unjust because it had not been argued by the parties, and it was confusing because the Court of Appeal had in effect endorsed Hansen J’s imposition of strict liability, without actually abandoning the notice test traditionally required under the first limb of Barnes v Addy. This, the High Court said, flew in the face of the received view of Barnes v Addy and of the ‘seriously considered dicta’ of a majority of the High Court in Consul Developments.
    4715 The second limb of Barnes v Addy was not considered by the Court of Appeal but arose in the High Court, where it was held that no accessorial liability arose on the facts. But the comments of the court at [160] ‑ [164] on the divergence between the traditional test in Australia and the Privy Council decision in Royal Brunei Airlines v Tan are worth repeating:
    [160] As conventionally understood in Australia, the second limb makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary.
    [161] Several points of a general nature should be made here. The first concerns the scope of the second limb. This was not expressed by Lord Selborne LC as an exhaustive statement of the circumstances in which a third party who has not received trust property and who has not acted as a trustee de son tort nevertheless may be accountable as a constructive trustee. Before Barnes v Addy, there was a line of cases in which it was accepted that a third party might be treated as a participant in a breach of trust where the third party had knowingly induced or immediately procured breaches of duty by a trustee where the trustee had acted with no improper purpose; these were not cases of a third party assisting the trustee in any dishonest and fraudulent design on the part of the trustee.
    [162] Secondly, the distinction has been recognised in the Australian case law but, on one reading of Royal Brunei Airlines Sdn Bhd v Tan, may have been displaced by the Privy Council in favour of a general principle of ‘accessory liability’ expressed as follows:
    ‘A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. ‘Knowingly’ is better avoided as a defining ingredient of the principle’.
    [163] Thirdly, whilst the different formulations of principle may lead to the same result in particular circumstances, there is a distinction between rendering liable a defendant participating with knowledge in a dishonest and fraudulent design, and rendering liable a defendant who dishonestly procures or assists in a breach of trust or fiduciary obligation where the trustee or fiduciary need not have engaged in a dishonest or fraudulent design. The decision in Royal Brunei has been referred to in this Court several times but not in terms foreclosing further consideration of the subject in this Court, in particular, further consideration of the apparent necessity to displace the acceptance in Consul Development Pty Ltd v DPC Estates Pty Ltd of the formulation of the second limb of Barnes v Addy were Royal Brunei to be adopted in this country. Until such an occasion arises in this Court, Australian courts should continue to observe the distinction mentioned above and, in particular, apply the formulation in the second limb of Barnes v Addy.
    [164] On the present appeal, specific reliance was not placed by Say-Dee upon Royal Brunei, although there was a suggestion, not soundly based, discounting any difference between what might be called the traditional approach and that adopted in Royal Brunei. The changes to the law in Australia which were sought by Say-Dee did not include any adoption of a cause of action of the kind expressed in the passage in Royal Brunei set out above. Accordingly, it is unnecessary to decide now how far Royal Brunei, and subsequent decisions in the House of Lords and Privy Council, have modified the second limb of Barnes v Addy or, rather, restated the form of liability operating antecedently to and independently of Barnes v Addy, and if so, whether these changes should be adopted in Australia. (footnotes omitted)
    4716 In explaining the ‘distinction’ referred to in [162] ‑ [163], the High Court cited an article by Harpum, ‘The Stranger as Constructive Trustee (Part 1)’ (1986) 102 LQR 114. In it the author describes knowing inducement (as opposed to knowing assistance) in this way at 115 ‑ 116:
    A stranger who knowingly induces a trustee to commit a breach of trust will be liable as a constructive trustee. The motive for the inducement is irrelevant. It is also immaterial whether the trustee commits the breach of trust innocently or for some ulterior purpose.
    4717 The author went on, at 116, to express the following summary of the knowing assistance principle:
    A stranger will be liable as a constructive trustee if he knowingly assists a trustee to commit a dishonest and fraudulent breach of trust. This residual category of liability covers the case of a stranger who renders significant assistance in the commission of a breach of trust short of inducing it, and who may never have received any part of the trust property. The foundation of his liability is his implication in a fraud by the trustee. If that fraudulent element is lacking, the stranger will not be accountable.
    4718 Apart from its interest as a commentary on juridical method and the relationship between an intermediate and an ultimate appellate court, Farah Constructions is significant in at least four respects that are relevant to this litigation. First, the distinction between knowing assistance and knowing inducement is important. The two causes of action exist side by side, but they are different, having some elements that are common and others that are not.
    4719 Secondly, the comment of Lord Nicholls in Royal Brunei (at 392) that, in relation to the accessory liability principle, the Baden scale of knowledge is ‘best forgotten’ does not represent the law in Australia. On the contrary, the High Court indicated that while Consul provides authoritative guidance on the question of knowledge for the second limb of Barnes v Addy, the five categories found in Baden assist in an analysis of those principles.
    4720 Thirdly, liability for knowing receipt depends on receipt of trust property and on notice of the requisite kind. Liability does not depend on the doctrine of restitution‑based on the unjust enrichment of the third party at the expense of the entity to whom the duties were owed. This is not to say that there could not, in some circumstances, be a restitutionary cause of action. But it would be independent of the Barnes v Addy principle and would have to be applied in accordance with conventional restitution law concepts.
    4721 Fourthly, the High Court noted, at [113], that recent authorities assumed (although it had rarely if at all been decided) that the first limb of Barnes v Addy applied not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary. The appellants had not contended to the contrary and, accordingly, the High Court saw no need to examine the correctness of that assumption. In this respect I note that in Kalls Enterprises the Court of Appeal, at [152] ‑ [158], examined the authorities in which the first limb of Barnes v Addy has been applied to breach of fiduciary duty by a director of a company. Giles JA said, at [159] that this represented a ‘line of authority [which] should be followed until the High Court says otherwise’. That is what I propose to do.
    21.2.3. Barnes v Addy and the dishonest fiduciary
    4722 In relation to accessory liability, Lord Selborne spoke of assisting in a ‘dishonest and fraudulent design’ on the part of the trustees. The question arises whether that is to be taken literally, that is, as involving actual dishonesty or fraud (as in fraudulent design) in a pejorative sense. An alternative construction is that the phrase is broad enough to incorporate other activity involving infractions of generally accepted conduct but of a type that would attract a lesser degree of opprobrium. A third possibility is that it applies (in the case of a trustee) to any breach of a trust obligation.
    4723 In Royal Brunei, the Privy Council moved away from the phrase ‘dishonest and fraudulent design on the part of the trustees’ almost entirely. Their Lordships opined that what was relevant was the state of mind of the third party assisting in a breach of trust, not that of the trustee who perpetrated the breach. Lord Nicholls said, at 385:
    [The trustee’s] state of mind is essentially irrelevant to the question whether the third party should be made liable to the beneficiaries for the breach of trust … In this regard dishonesty on the part of the third party would seem to be a sufficient basis for his liability, irrespective of the state of mind of the trustee who is in breach of trust. It is difficult to see why, if the third party dishonestly assisted in a breach, there should be a further prerequisite to his liability, namely that the trustee must also have been acting dishonestly. The alternative view would mean that a dishonest third party is liable if the trustee is dishonest, but if the trustee did not act dishonestly that of itself would excuse a dishonest third party from liability. That would make no sense.
    4724 Similar views have been expressed (both before and after Royal Brunei) in academic commentary on the direction of Australian law.
    4725 The members of the High Court who decided Farah Constructions appear not to share Lord Nicholls’ incredulity at such an outcome. The High Court, at [179] – [185], went back to Lord Selborne’s formulation of the principle in Barnes v Addy itself and to what was said in Consul Developments. Their Honours said that Say‑Dee’s submission involved an abandonment of ‘the “dishonest and fraudulent design” integer’ and a reformulation of the second limb so that liability would attach to a third party who had not received a direct financial benefit but who had ‘participated in a significant way in a significant breach of duty/trust with actual knowledge of the essential facts which constituted the breach’. That submission was rejected and the conclusion announced in this way, at [179]:
    The relevant passages in Consul establish for Australia that ‘dishonest and fraudulent designs’ can include not only breaches of trust but also breaches of fiduciary duty; but any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent. (emphasis added)
    4726 Their Honours had little to say about the meaning of the phrase ‘dishonest and fraudulent design’, although they did comment, at [173], that a person can act dishonestly, judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest by those standards. Admittedly, that was in the context of a discussion concerning the requirement of ‘knowledge’ expressed in the second limb and was probably directed more at the state of mind of the third party than it was at the erring fiduciary. Nonetheless, as a matter of principle it is difficult to see why a similar approach should not be taken in relation to dishonesty on the part of the fiduciary. In other words, the test has objective elements so that, like the ‘morally obtuse’ third party, a fiduciary cannot escape liability by failing to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such a person: Farah Constructions [177].
    4727 In its common usage ‘dishonest’ is the antonym of ‘honest’. And honesty means marked by uprightness or probity, being fundamentally sincere and truthful. As it is used in relation to accessory liability, I doubt it goes as far as dishonesty in, for example, a criminal law context or actual fraud in a common law sense. As the High Court pointed out in Farah Constructions, at [183], Gibbs J in Consul Developments did not categorise all breaches of fiduciary duty as ‘dishonest and fraudulent’ and said that this phrase is to be judged ‘according to the plain principles of a court of equity’. It seems, therefore, that the impugned conduct must be attended by circumstances that would attract a degree of opprobrium raising it above the level of a simple breach of trust or breach of a fiduciary duty. This is consistent with the discussion in Farah Constructions on the facts of that case, especially at [181] ‑ [186]. It is implicit in what is said at [184], for example, that a breach of fiduciary duty by a company officer that may be excused under Corporations Act 2001 (Cth) s 1318 would not be regarded as part of a ‘dishonest and fraudulent design’ and thus would not ground an accessory liability claim.
    4728 In any event, if the mere fact of a breach were sufficient to ground liability, the cautionary note in Farah Constructions that ‘any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent’ would be robbed of meaning. So too would the strongly worded rejection of what the High Court described at [180] as an attempt to abandon ‘the “dishonest and fraudulent design” integer’. Unless some real meaning is given to the phrase ‘dishonest and fraudulent design’, there would be no significant difference from the approach advocated in Royal Brunei. And the High Court also referred to an ‘imputation of commercial dishonesty’ (admittedly made against the third party rather than the errant fiduciary) which, their Honours noted, was a serious allegation that ought to have been pleaded and particularised and assessed in the way mentioned in Briginshaw v Briginshaw (1938) 60 CLR 336.
    4729 Briginshaw, it will be remembered, is the case in which Dixon J (at 362) noted that the seriousness of an allegation or the gravity of the consequences flowing from a particular finding affect the answer to the question whether an issue has been proved to the reasonable satisfaction of a tribunal. In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170, at 170‑172, the High Court affirmed the Briginshaw principle but reminded tribunals that the standard of proof remains the same.
    4730 Allegations of dishonesty and fraud are necessarily serious. This explains why the rules of pleading demand that such an assertion be pleaded distinctly and with particularity. It also explains the professional conduct requirement that lawyers responsible for a pleading that alleges fraud must have before them material that provides a reasonable basis for the allegation. The standard of proof for fraud in a civil trial is the balance of probabilities. But the seriousness of such an allegation can have an impact on the level of persuasion that must be reached before a finding will be made. By ‘level of persuasion’ I do not mean the standard of proof. I am referring to the process by which the trier of fact reaches a state of reasonable satisfaction in relation to the issue under consideration.
    4731 The reference in Farah Constructions to Briginshaw is, itself, indicative of an issue to which there attaches a level of seriousness greater than the norm. Briginshaw concerned an allegation of adultery, which, in the 1930s, was regarded as a matter of ‘grave moral delinquency’. In G v H (1994) 181 CLR 387, 399, Deane, Dawson and Gaudron JJ used ‘moral wrongdoing’ as one of the touchstones attracting the principle for which Briginshaw stands. In relation to a breach of a fiduciary duty, where equity is called upon to attach the conscience of those concerned in the breach, the term ‘moral wrongdoing’ is apt.
    4732 Another case decided after the close of the hearing in this matter was Benzlaw & Associates Pty Ltd v Medi-Aid Centre Foundation Ltd [2007] QSC 233. This was decided on 3 September 2007 and the parties drew it to my attention shortly thereafter but without making submissions. It is unnecessary to go into the facts. It is difficult to glean from the reasons the exact nature of the plaintiffs’ pleaded Barnes v Addy case, presumably because the way in which it was pleaded was vague. At [111] Muir J referred to the part of the pleading alleging that the defendant ‘knowingly obtained benefit’ from the breach of fiduciary duty. It appears from the judgment (though this is by no means certain) that this was a blanket pleading which encompassed both limbs of Barnes v Addy. It seems that the lack of particularity in the pleading was a contributing factor to the plaintiffs’ case being rejected in reasonably short order.
    4733 In relation to the second limb, Muir J held that there was no breach of fiduciary duty. But his Honour said at [111] that it was arguable that the pleading of ‘knowingly obtaining benefit’ was insufficient because it did not allege a dishonest and fraudulent design on the part of the fiduciary. While I accept that this is not part of the ratio, it lends support to the view that I have taken from Farah Constructions that pleading and establishing a dishonest and fraudulent design on the part of the fiduciary is a necessary element of a second limb Barnes v Addy cause of action.
    4734 In my view, the position in relation to recipient liability is different. The grammatical structure of the relevant passage from Lord Selborne’s dicta appears to relate the phrase ‘dishonest and fraudulent design’ to knowing assistance, rather than to knowing receipt; or more correctly, to receiving and becoming chargeable with trust property. And in the discussion in Farah Constructions of the first limb, at [110] ‑ [158], there is no mention of dishonesty or fraud on the part of the fiduciary or trustee, save for the reference in [144] ‑ [145] to dicta from Tara Shire Council [61] and NIML Ltd v MAN Financial Australia Ltd [2004] VSC 449, [53]. In the former case, the reference to dishonesty was to the conduct of the third party (rather than the fiduciary); while in the latter, the trial judge’s reference to the fiduciary’s dishonesty has to be seen in the light of his Honour’s earlier characterisation of the conduct, at [9], as both tortious and criminal.
    4735 There is English authority to the effect that ‘the “dishonest and fraudulent design” integer’ does not apply to recipient liability. In Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769 (which pre‑dated Royal Brunei) Scott LJ cited, with approval, dicta from an earlier decision saying that ‘a stranger cannot be made liable for knowing assistance in a fraudulent breach of trust unless knowledge of the fraudulent design can be imputed to him’ (emphasis added). But in relation to recipient liability, his Lordship went on to say, at 777:
    Liability as a constructive trustee in a ‘knowing receipt’ case does not require that the misapplication of the trust funds should be fraudulent. It does require that the [third party] have knowledge that the funds were trust funds and that they were being misapplied.
    4736 The second sentence in that passage is similar to what Gibbs J said concerning recipient liability in Consul Developments. Having set out the relevant passage from Barnes v Addy, his Honour said (at 396):
    Although in this passage Lord Selborne speaks of dishonesty and fraud, it is clear that the principle extends to the case ‘where a person received trust property and dealt with it in a manner inconsistent with trusts of which he was cognizant’: Soar v Ashwell; Lee v Sankey; and In re Blundell, Blundell v Blundell. (footnotes omitted)
    4737 I do not read anything in Farah Constructions as bearing directly on this point. One significant difference between the two limbs is that a stranger can only be liable for knowing receipt if property has come into his or her hands; while a knowing assistance case does not necessarily involve a transfer of property to the stranger, who might, accordingly, be called to account even though she or he has not enjoyed a personal benefit. This distinction may explain why knowing assistance requires malappropriation on the part of the fiduciary whereas misapplication might suffice in the case of knowing receipt. Another possible explanation is that the rationale for equity intervening differs between the limbs. In Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 the High Court said, at [121]:
    Intervention against a third party who obtains trust property from a trustee in breach of trust is based on the need to protect the proprietary interests of the beneficiaries. Intervention against a third party who obtains some other advantage as a result of a trustee’s breach of trust is based on the need to ensure that the trust receives property which, if it were to be acquired at all, should have been acquired for the trust. Intervention against persons who knowingly assist other fiduciaries to breach their duty is based on the need to deter conduct that directly undermines the ‘high standard’ required of fiduciaries, and on the inequitable character of permitting those persons to retain benefits resulting from their conduct. (footnotes omitted)
    4738 This conclusion is, I concede, not without difficulty. It might be seen as coming perilously close to imposing a form of strict liability, a possibility that seems to have been a factor in the rejection by the High Court in Farah Constructions of the notion of an unjust enrichment base for the first limb of Barnes v Addy. But as will appear from the next section of these reasons, a third party will only be held liable under the first limb if he or she had notice of the trust and of the misapplication of the trust property. That is not strict liability.
    4739 A further difficulty is that it entrenches differing approaches (arising under the same element) to liability under the two limbs. Suppose the primary breach was one that would be excused under Corporations Act s 1318? Apart from the possibility that accessory liability does not require receipt of property, why, in those circumstances, should the third party not be liable for knowingly assisting in that breach and yet be liable if he or she received property transferred per medium of the same breach? None of the pleadings present such a case here and I do not need to consider it further.
    21.2.4. Barnes v Addy and degrees of knowledge
    4740 The question of what a stranger, implicated in a breach of trust, must ‘know’ before liability can attach has created significant controversy in various parts of the common law world over a long period. Particular controversy has attended the question whether (and if so to what extent) constructive knowledge would suffice. It seems to me that, in relation to the second limb, this aspect of the controversy has been authoritatively settled in Australia by Farah Constructions and, accordingly, I am spared the stygian task of examining the earlier decisions.
    4741 I have already mentioned the adoption in Farah Constructions of the five categories of knowledge enunciated by Peter Gibson J in Baden. This is what the High Court said on the knowledge issue, [171] – [178]:
    [171] What is required by the requirement of ‘knowledge’ expressed in the second limb?
    [172] In the passage in which Lord Selborne formulated the second limb in terms of assisting with knowledge in a dishonest and fraudulent design on the part of the trustees, he contrasted those ‘actually participating in any fraudulent conduct of the trustee’ and those ‘dealing honestly as agents’.
    [173] As a matter of ordinary understanding, and as reflected in the criminal law in Australia, a person may have acted dishonestly, judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest by those standards. Further, as early as 1801, Sir William Grant MR stigmatised those who ‘shut their eyes’ against the receipt of unwelcome information.
    [174] Against this background, it has been customary to analyse the requirement of knowledge in the second limb of Barnes v Addy by reference to the five categories agreed between counsel in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l’Industrie en France SA:
    ‘(i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.’
    In Bank of Credit and Commerce International (Overseas) Ltd v Akindele (‘BCCI’), Nourse LJ observed that the first three categories have generally been taken to involve ‘actual knowledge’, as understood both at common law and in equity, and the last two as instances of ‘constructive knowledge’ as developed in equity, particularly in disputes respecting old system conveyancing. After noting that in Royal Brunei the Privy Council had discounted the utility of the Baden categorisation, Nourse LJ in BCCI went on to express his own view that the categorisation was often helpful in identifying the different states of knowledge for the purposes of a knowing assistance case.
    [175] Although Baden post-dated the decision in Consul, the five categories found in Baden assist in an analysis of that for which Consul provides authoritative guidance on the question of knowledge for the second limb of Barnes v Addy.
    [176] Thus, support in Consul can be found for categories (i), (ii) and (iii). Further, Consul also indicates that category (iv) suffices. However, in Consul, Stephen J held that knowledge of circumstances which would put an honest and reasonable man on inquiry, later identified as the fifth category in Baden, would not suffice. Gibbs J left open the possibility that constructive notice of this description would suffice. Barwick CJ agreed with Stephen J.
    [177] The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.
    [178] These conclusions in Consul as to what is involved in ‘knowledge’ for the second limb represent the law in Australia. They should be followed by Australian courts, unless and until departed from by decision of this Court. (footnotes omitted)
    4742 This is the reason that in Sect 21.2.2.3 I discussed at some length the judgment of Austin J in NCR Australia [168]. His Honour has there encapsulated the practical effect of what has to be established before a third party will be held liable for knowing assistance in a breach of duty. And there is also clear recognition in that passage that the threshold for second limb liability is a ‘dishonest and fraudulent design’ on the part of the fiduciary.
    4743 It seems to me, however, that the answer to the question is less clear in relation to recipient liability. As Giles JA pointed out in Kalls Enterprises Pty Ltd [112], Lord Selborne did not refer to knowledge in connection with the first limb. The High Court in Farah Constructions [112] defined the first limb in this way: ‘persons who receive trust property become chargeable if it is established that they have received it with notice of the trust’. The question that arises is what (in terms of knowledge) constitutes ‘notice of the trust’ for these purposes.
    4744 In Kalls Enterprises Pty Ltd [176], Giles JA implicitly accepted (at least in relation to recipient liability) the correctness of what was said by Anderson J in Hancock Family Memorial Foundation on this issue. Anderson J commenced (at 209) by looking at accessory liability and concluded that, in order to succeed, a plaintiff must establish that the third party’s conduct was dishonest, that is, lacking in probity. Whether the third party had so acted was to be judged by objective standards, that is, that the third party had not acted as an honest person would in the circumstances. The extent to which, following Farah Constructions and its exhortation to adhere strictly to the dicta in Consul Developments, it is necessary to focus on whether the third party was ‘dishonest’ rather than on what the third party ‘knew’, is something that I do not need to examine further. I am relying on Hancock Family Memorial Foundation insofar as it relates to knowing receipt rather than knowing assistance. Turning his attention to the first limb, Anderson J said, again at 209:
    As to recipient liability, there is less certainty about what must be proved to sheet home liability to the non-trustee but I adopt, with respect, the reasoning and conclusions of Hansen J in Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd … on the question. In the first place, it is not necessary to establish that a recipient of trust property acted dishonestly or with want of probity. Recipient liability may be established if the defendant had actual or constructive knowledge at the time he received the relevant property that: (a) it was trust property; and (b) it was being misapplied. The defendant will be taken to have constructive knowledge if it is proved that he wilfully shut his eyes to the obvious; that he wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make in the circumstances; and that he knew of circumstances which would indicate the true facts to an honest and reasonable man. If all that is proved is that the defendant had knowledge of circumstances which would put an honest and reasonable man on inquiry, that is not enough: see Koorootang (at 85 and 105).
    4745 This, then, seems to cover actual knowledge in one or more of the first three categories in Baden and constructive knowledge coming within the fourth category but it eschews the fifth category. If this is correct, then at least in this respect the test for knowledge in relation to accessory liability (as explained in Farah Constructions) and the test for recipient liability (as outlined in Hancock Family Memorial Foundation and Koorootang) seem to have come together. This is probably more by accident than design and, given the history of Barnes v Addy jurisprudence, the confluence of thinking is likely to be short-lived.
    4746 What is it that the third part must ‘know’ before liability can attach? In Hancock Family Memorial Foundation, Anderson J held that the third party must know, at the time he received the relevant property, that it was trust property and that it was being misapplied. The same basic principle has been put in various ways in other cases. For example, in Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025; (2003) 47 ACSR 285 Finkelstein J observed, at [55], that a plaintiff must prove that the defendant was in receipt of trust property and had knowledge that the property received was trust property, and of circumstances attendant on the transfer of that property that made the transfer a breach of trust. His Honour went on to say, at [58], that ‘knowledge means a third party’s knowledge that the relevant property was trust property being misapplied or transferred pursuant to a breach of fiduciary duty or trust’.
    4747 It is important to go back to what was said by Stephen J in Consul Developments (which I have reproduced in Sect 21.2.2.1) about constructive knowledge. It is not necessary for a plaintiff to establish something along these lines: ‘The recipient turned his mind to the question whether the proposed transfer of property was a breach of fiduciary duty, decided it was, but opted to go ahead anyway’. Using the language of Stephen J, it may be sufficient (all other elements being satisfied) if ‘a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust’.
    4748 The resulting law, as I apprehend it, is that for a third party to be held liable for knowing receipt:
    (a) there must be a ‘trust’;
    (b) the trustee must have misapplied ‘trust property’;
    (c) the third party must have received trust property;
    (d) at the time of receiving the trust property, the third party must have known of the trust and of the misapplication of the trust property; and
    (e) the third party will be taken to have ‘known’ in the relevant sense if the third party:
    (i) has actual knowledge of the trust and the misapplication of trust property; or
    (ii) has deliberately shut his or her eyes to those things; or
    (iii) has abstained in a calculated way from making such enquiries as an honest and reasonable person would make, about the trust and the application of the trust property; or
    (iv) knows of facts which to an honest and reasonable person would indicate the existence of the trusts and the fact of misapplication.
    4749 In Sect 20.3.4 I mentioned that the actions of a majority (not necessarily the whole) of the board would be sufficient to establish a breach of fiduciary duty by the directors. But in my view it does not follow that a plaintiff must prove that the third party knew each and every member of the board had so acted. The correct focus is on the quality of the third parties’ knowledge overall rather than on a strict analysis on a ‘director by director’ basis. It will be a question of fact whether the third party knew that ‘the directors’ had breached their duties.
    21.2.5. Recipient liability and trust property
    21.2.5.1. The concept of trust property
    4750 The next question that I wish to address is the meaning of ‘trust property’ in these circumstances. By ‘these circumstances’ I mean where a director of a company deals with assets of the company in a way that constitutes a breach of a fiduciary duty that the director owes to the company. It is in this section that the discussion of the somewhat peculiar nature of the trust property is developed. It must be remembered that one of the reasons why the claim under the first limb of Barnes v Addy failed in Farah Constructions was that the claimants did not establish that the third party had received trust property. Similarly, in Rogers v Kabriel [1999] NSWSC 368 [173], Young J noted that under the first limb, liability is imposed ‘only in respect of trust property in a strict sense’. His Honour found that the moneys paid over in that case were not ‘trust property in a strict sense, or at all’.
    4751 In a detailed and considered submission the banks contend that in this respect (among myriad others) there was a fatal flaw in the plaintiffs’ case. They submit that trust property is unique because it involves the recognition of two separate proprietary interests, not present in the case of property owned absolutely (as in the case of property owned by a company in its own right). In the case of trust property there is both a beneficial interest and a legal interest, ownership of the former residing in the beneficiary, ownership of the latter being vested in the trustee. Beneficial ownership is, in itself, a proprietary interest, capable of assignment.
    4752 According to this line of reasoning, a company director has no interest − legal or beneficial − in the property of the company. A company (unlike a trust) has legal personality and the company is the absolute owner of its own property. There are no separate legal and beneficial estates involved: see Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) [2005] HCA 20; (2005) 220 CLR 592, 606. Such property is assigned, transferred and paid away on a daily basis without any issues of beneficial interests intervening. No person other than the company has any beneficial interest in that property and (unlike the case of a trust) there is no reason for a third party to consider whether or not other beneficial interests exist.
    4753 The banks also submit that the whole thesis of liability for knowing receipt is that the transferor (the trustee) is no more than the legal owner of the property. Thus, when a stranger receives trust property, prima facie he receives property that is not beneficially owned by the transferor. A recipient of trust property who knows he is dealing with a trustee is immediately on notice that the property is not owned absolutely by the trustee. A recipient of company property, on the other hand, knows that the company is the absolute owner of the property. According to this submission, the concept that the same principle governs knowing receipt of trust property and bargains negotiated at arm’s length between major corporate entities is specious.
    4754 As a matter of basic principle, there is a certain attraction in that line of reasoning. But, in my view, the weight of authority suggests that the phrase ‘trust property’ in modern Barnes v Addy jurisprudence has a broader meaning than ‘trust property in the strict sense’. The difficulties are well illustrated by dicta in Farah Constructions itself. The High Court gave clear direction that the law is to be understood in the way described in Barnes v Addy and Consul Developments. Their Honours concluded, at [115], that the claim under the first limb failed because (as well as the absence of a requisite level of notice), there was ‘no relevant receipt of trust property’. But in the following paragraph they posed the question (and later answered it, in the negative): ‘Did the Court of Appeal establish that Mrs Elias and her daughters received property to which a fiduciary obligation attached?’ (emphasis added). This is not the first time that such language has appeared in a judgment. In Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82; (2004) 61 NSWLR 75 [160], Spigelman CJ (with whom the other members of the court agreed) said: ‘In my opinion, it is an essential aspect of accessorial liability for “knowing receipt” that the act of transfer of the property … must be in breach of a fiduciary obligation’.
    4755 Spigelman CJ went on [161] to extract various formulations of this proposition from the authorities. One such formulation is ‘a disposal of his assets in breach of fiduciary duty’: El Ajou (700); Bank of Credit & Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, 448.
    4756 Regard should also be had in this respect to the reasons of Gibbs J in Consul Developments. At 396, his Honour noted that although Lord Selborne spoke of dishonesty and fraud it was clear that the principle extended to the case where a person received trust property and dealt with it in a manner inconsistent with trusts of which he was cognizant. Gibbs J posed the question whether the principle applied to impose liability on strangers who knowingly participated in a breach of fiduciary duty committed by a person who was not a trustee or was at most a constructive trustee. His Honour went on to say, at 396 – 397, that ‘the principle under discussion extends to the case where a stranger has knowingly participated in a breach of fiduciary duty committed by a person who is not a trustee even though nothing that might properly be regarded as trust property − even property stamped with a constructive trust − has been received’.
    4757 In Farah Constructions the High Court assumed (leaving it open to re‑visitation on a future occasion) that the first limb applies not only to persons dealing with trustees, but also to persons dealing with some other types of fiduciaries. If that is the case, then the broadening of the phrase ‘trust property’, as used by Lord Selborne, to property to which a fiduciary obligation attaches, is not a particularly large step. I accept that ‘trust property’ and ‘property to which a fiduciary obligation attaches’, are not the same thing. It is difficult to imagine a species of ‘trust property’ that is not also ‘property to which a fiduciary obligation attaches’ but the reverse does not necessarily apply. Nonetheless, I need to examine the authorities from which the more expansive thesis has emerged.
    4758 A convenient starting point is Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393. Dicta in Belmont suggests that the assertion that recipient liability extends beyond trust property per se may originate from a comparison between the positions of directors and trustees. Buckley LJ said, at 405:
    A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust …
    4759 See also Goff LJ at 410. The authority cited by Buckley LJ was Re Land Allotment Co [1894] 1 Ch 616, where Lindley LJ said (at 631): ‘Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of moneys which come to their hands or which is actually under their control …’ Kay LJ expressed a similar view at 638. See also Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474, 479 (Jessell MR); Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073, 1093 ‑ 1094.
    4760 The situation is relatively simple where company property actually comes into the hands of the director through a breach of fiduciary duty (such as embezzlement or an unauthorised or unjustified payment) because the director in that situation would be a constructive trustee of the property. If the money were then to be paid away by the director to a third party (assuming the third party has requisite knowledge of the breach of fiduciary duty), there would be receipt of trust property. But it is less simple where the property is under the control of (but never comes into the hands of) the director, who then pays it away in breach of a fiduciary duty. This circumstance is still covered by the dicta in Belmont Finance and the question arises whether, under Australian law, it can ground a claim under the first limb.
    4761 There are Australian authorities in which a general approach that equates directors with trustees has been doubted: see Re International Vending Machines Pty Ltd & the Companies Act [1962] NSWR 1408, 1419 ‑ 1420 and Mulkana Corporation NL (In Liq) v Bank of New South Wales (1983) 8 ACLR 278, 283 ‑ 285 and Maronis (524). The High Court confirmed these doubts in Clay (430): ‘It is to be recalled that in the past, the term “trustee” sometimes was used to describe the position of a director in relation to the company in question. Such a use of the term “trustee” could at best be metaphorical because property of the company was not vested in the directors’. See also Federal Commissioner of Taxation v Linter Textiles [26]; Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 81 ALJR 525, 37.
    4762 In Barker v The Duke Group Ltd (In Liq) [2005] SASC 81; (2005) 91 SASR 167, the Full Court of the Supreme Court of South Australia dealt with an argument that a second limb Barnes v Addy claim that involved a breach of fiduciary duties by directors was a claim against ‘trustees’ for the purposes of a statute governing limitation of actions. Perry J (with whom the other members of the court agreed on this point) said at [75] ‑ [78] that the contemporary understanding is that a company director is not a trustee. His Honour went on to say that it was possible a director of a company may become a constructive trustee of money or property that comes into the director’s possession, when to retain it would be in breach of the fiduciary duty owed to the company. But even if there were a breach by the directors of the directors’ fiduciary duties, it did not follow that they should be treated as trustees for the purposes of the relevant legislation.
    4763 Clay was not mentioned in Farah Constructions. But it must be remembered that Clay was not a case concerning breach of fiduciary duties by company directors. There, the fiduciary was a guardian of infant children. The cautionary note about the inapposite nature of the ‘metaphor’ may not, therefore, have been intended to be taken as saying that in no way and in no circumstances can a director of a company be regarded, by analogy, as somewhat akin to a trustee. Similarly, neither was Federal Commissioner of Taxation v Linter Textiles or Sons of Gwalia concerned with the position of a director. The point in issue in the former was the nature of the interest of a company in its assets after a winding up order had been made. The latter concerned provisions of the Corporations Act about provable claims by ‘creditors’ in a deed of company arrangement.
    4764 If the question was whether, either generally or for these purposes, company directors are trustees, it could be answered in short order (and in the negative). But that is not what is said in Belmont Finance, or the Australian authorities that have followed it.
    4765 Save for Barker and Maronis, none of the Australian decisions involved a Barnes v Addy claim. But there are some Australian decisions that have applied Belmont Finance as authority for the proposition that a knowing receipt claim may arise out of a breach of directors’ duty: see, for example, Linter Group v Goldberg (623); Beach Petroleum NL v Johnson (1993) 43 FCR 1, 50; Robins v Incentive Dynamics [60] ‑ [61]; Ninety-Five Pty Ltd (In liq) v Banque Nationale de Paris [1988] WAR 132, 174 ‑ 175; Hancock Family Memorial Foundation [72]. I need only refer to the relevant portion of the judgment of Anderson J in the last‑mentioned case:
    For the purposes of a general statement of the relevant principles, I take the starting point to be that the directors of a company should be regarded as holding on trust any property or money of the company under their control. In re Lands Allotment Co; Selangor United Rubber Estates Ltd; Belmont Finance; Consul Developments; Russell v Wakefield Waterworks. A director who misapplies the money or property of a company by causing the assets to be used for purposes which are not the purposes of the company acts in breach of trust: Re Lands Allotment Co; Belmont Finance (No. 2). In the sense in which the word ‘fraud’ is used in equity, he is regarded as having acted fraudulently. (citations omitted)
    4766 It will be apparent from what I have said in Sect 21.2.3 that I do not read the last sentence of that quote as meaning that any breach of a fiduciary duty by a director constitutes a ‘dishonest and fraudulent design’ for the purposes of the second limb. But I do rely on the remainder of the quote.
    4767 In a considered submission the banks contend that Belmont Finance and the cases that preceded it were wrong in principle and ought not to be followed. They also submitted that the Australian cases that I have mentioned simply apply Belmont Finance without any meaningful consideration of the underlying principles, that those cases are infected with the same deficiencies that infect Belmont Finance and should not be followed. In any event, the banks contend, these decisions were inconsistent with what the High Court said in Clay and therefore should not be followed.
    4768 In Maronis, Bryson J was critical of the reasoning in Belmont Finance. Bryson J was dealing with the question whether constructive notice of a breach was sufficient to ground recipient liability. In the course of his analysis of that proposition, Bryson J, at [468], noted that the recipient of funds of the company was being treated as if it were the recipient of trust funds. But the development of that proposition had taken place without any exposition of why persons dealing with a company through its directors, that is, in practically the only possible manner, were to be assimilated with persons dealing with trustees. His Honour went on to remark that ‘the sheer impracticality of the imposed uncertainties on dealings with companies is not addressed, although they are almost the universal vehicles of commerce and can only function through their directors’.
    4769 While I can appreciate some of these difficulties, I am not sure that the reasoning in Belmont Finance is as offensive to principle as the banks contend. The application of the principles in Barnes v Addy to circumstances that are not strictly a trust (such as to companies and directors) has come about by way of analogy. And it is only an analogy. The application (or extension) of the principles has occurred because of some similarity (not uniformity) of principle that exists in those relationships. It is not because directors are trustees of company property. The analogy does not mean that every indicia of the trust relationship can be translated to the circumstances of a director. Barker v The Duke Group is an example. There it was held that a claim against a director for breach of a fiduciary duty is not a claim against a trustee under a specific legislative provision dealing with limitation of actions.
    4770 In neither Clay nor Federal Commissioner of Taxation v Linter Textiles is there any reference to Belmont Finance. But in Farah Constructions, the High Court appeared to approve the reasoning in Belmont Finance, at least in relation to the notice test under the first limb: Farah Constructions, at [134]. From the relevant footnote it seems that the passage from Belmont Finance that their Honours had in mind is the passage that I have set out above. If that is correct, I cannot see any indication that their Honours were expressing agreement with the part of the relevant passage dealing with notice while disagreeing with other parts of the same passage that contained interconnected reasoning.
    4771 This brings me to Kalls Enterprises. Giles JA (with whom Ipp and Basten JJA agreed) noted that Farah Constructions was a case of breach of a partner’s fiduciary duty. The Court of Appeal was not concerned with breach of a director’s fiduciary duty owed to the company, and any questioning of liability for knowing receipt from a non‑trustee fiduciary was not directed to that situation at [153]. His Honour went on to identify a number of cases that had applied the first limb to persons receiving property with knowledge of breach of a director’s fiduciary duty at [157] – [158]. I have mentioned most of them and I will not repeat the list. Importantly, Giles JA referred to what was said by Mason P in Robins v Incentive Dynamics at [64] where, after setting out the relevant dicta from Belmont Finance, his Honour said:
    These passages show how the Barnes v Addy principle can be applied to money which is not trust money in the strict sense at the time of its misapplication by directors acting in breach of their duties.
    4772 This dicta is part of the line of authority which Giles JA in Kalls Enterprises declared ‘should be followed until the High Court says otherwise’. Both Robins and Kalls Enterprises must be taken to be considered decisions. I have in mind the admonition of the High Court that a trial judge should not depart from a pronouncement of an intermediate appellate court on a principle of the common law of Australia unless he or she is convinced it is ‘plainly wrong’: Farah Constructions [135]. Even if there are shades of the restitution argument behind the decision in Robins, this aspect of the law has been confirmed in Kalls Enterprises. I propose to follow what was there said.
    4773 I have not overlooked the detailed and careful submission advanced by the banks about why Belmont Finance was wrong in this respect. After close consideration of the issues raised, I am unable to say that the Australian decisions that have followed Belmont Finance, and in particular Kalls Enterprises, are plainly wrong. In fact, I find the analysis in Kalls Enterprises compelling. I should not, therefore, depart from those decisions.
    4774 I have previously mentioned Benzlaw, a case decided on 3 September 2007. The first limb Barnes v Addy case failed because the pleading had not identified any ‘trust property’ coming into the hands of the defendants. Like Farah Constructions, the property sought to be characterised as trust property was information. Muir J noted, at [106], that the conventional view is that trust property does not include information, whether confidential or not. His Honour went on to say that to come within the rule, the property in question must be trust property as opposed to property the subject of a fiduciary obligation. In support of that proposition he cited the dicta from Farah Constructions at [120]: ‘But it does not follow under the law as it stands that the information which third parties obtain from a fiduciary is trust property, or that land bought by using that information is trust property’.
    4775 As the argument in Benzlaw focussed on information as property, the approach taken by Muir J is obviously correct. But I note that his Honour did not mention the heading to [116] (‘Non‑application of the first limb: no receipt of property to which a fiduciary obligation attached’) or the question posed immediately thereafter: ‘Did the Court of Appeal establish that Mrs Elias and her daughters received property to which a fiduciary obligation attached?’ Again, the emphasis in the preceding sentences is mine. Nor is there any discussion of cases such as Kalls Enterprises and Robins. In relation to the understanding of the concept of trust property for the first limb of Barnes v Addy I take a different view from that which appears to have commended itself to Muir J in Benzlaw.
    4776 In my view first limb Barnes v Addy jurisprudence can extend beyond trust property in the strict sense and may include property to which a fiduciary duty attaches. Fortunately I do not have to examine in any detail what other ramifications this might have.
    4777 It is not easy to explain with complete precision why this is so. It can be looked at in at least two ways. One way is a direct application of the trustee analogy. As Anderson J described it in Hancock Family Memorial Foundation, the directors of a company should be regarded as holding on trust any property or money of the company under their control. A director who misapplies the money or property of a company by causing the assets to be used for purposes which are not the purposes of the company acts in breach of trust.
    4778 A slightly different approach is to adopt what was said by Mason P in Robins [64], by Spigelman CJ in Robb Evans [160] and by Hoffman LJ in El Anjou (700), all of which are set out above. The focus of attention is on the disposal, or act of transfer, of property to which the fiduciary obligation attaches. This does not necessarily involve the characterisation of the asset (before the disposal or transfer) as trust property. So far as directors are concerned company property is property to which a fiduciary duty attaches. If they dispose of, or transfer, that property to a third party in breach of those obligations it may be ‘trust property’ within the extended understanding of that phrase.
    4779 My preference is for the latter analysis but, in the end, I do not think it affects the outcome. The important consideration is the extent to which the principles in Barnes v Addy are pertinent in relation to corporate activity of the type under scrutiny in this case. I will have a little more to say about the trustee analogy shortly.
    21.2.5.2. ‘Trust property’ and a voidable transaction
    4780 The banks made an alternative submission, namely, that Belmont Finance is only correct insofar as it can be interpreted as saying that a director is to be regarded as a trustee in a situation where a transaction is void ab initio. In such a case, in effect, the director is taking possession of property in his or her own right, as a trustee, and passing them on to a third party. It is as if the property is stolen. Stolen money ‘is trust money in the hands of the thief’: Black v S Freedman & Co (1910) 12 CLR 105, 110.
    4781 In Belmont Finance, the transaction involved the unlawful paying away of company funds to finance the purchase of its own shares in breach of statute. Such a transaction is void as against the company, and it can be said that, in a sense, the directors took control of company property, not as an agent for the company, but in their own right. In this respect it may be said that a trust arose, not by virtue of the breach of fiduciary duty, but because the director had taken the company’s funds into his or her own hands pursuant to a void transaction.
    4782 The banks made a further submission. They contend that the Transactions in this case were, when entered into, binding on the companies. The plaintiff’s case is that the Transactions were brought about by a breach of director’s duty. If that is made good they are voidable, not void. In such circumstances there is never any scope for a trust, constructive or otherwise, to arise as between director and company and thus there can have been no ‘receipt of trust property’ by the banks.
    4783 One of the difficulties that I have with this submission again lies with Robins and Kalls Enterprises. In both of those cases the impugned transaction was voidable, not void: see Robins, [73]; Kalls Enterprises, [4]. But as the banks’ submissions in this respect rely heavily on a decision of the Full Court of this Court (a decision by which I am bound if it is applicable), I will need to analyse the underlying principles. The decision is Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198, which I will call Hancock (No 2) to avoid confusion with the first instance decision of the same name. I should also say that I was a member of the court that decided Hancock (No 2) and I joined with Ipp and McKechnie JJ in a unanimous judgment.
    4784 The facts of the case were as follows. Hancock had received payments from the companies controlled by him. These moneys were used to acquire certain properties for the respondent. The plaintiff argued that Hancock had caused the companies to pay moneys to the respondents for use by the respondent in acquiring properties and that in doing so he had breached fiduciary duties owed to the companies. The defence was that the impugned payments were either loans to Hancock or payments in discharge of pre‑existing debts owed to him and that there was no breach of fiduciary duty. Anderson J found that this was indeed the case – the payments were loans and had been discharged (in the main by debiting them to loan accounts that had credit balances) − and that no breach of fiduciary duty had taken place. Accordingly, no constructive trust could arise. But Anderson J went further and concluded (based on Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371) that even if there had there been a breach of fiduciary duty, no equitable remedy could be granted. The contracts would then have been voidable, but had not been rescinded and in fact had been discharged.
    4785 The Full Court upheld the findings of Anderson J that the payments were loans and that there had been no breach of fiduciary duty. The Full Court, too, went on to consider whether, in the circumstances where the loans had been discharged and the transactions had not been set aside, Daly was a complete answer to the plaintiffs’ claims. This question was decided in the affirmative and the appeal was dismissed. The appellant, in arguing that Daly did not pose a barrier to their claim, relied on Belmont Finance and Rolled Steel Products, and on the adoption of the reasoning in those cases by the court in Linter Group v Goldberg (a case involving a voidable transaction).
    4786 The facts in Daly were as follows. Daly wished to invest some money and sought advice from a firm of stockbrokers, Patricks, about shares in which the money might be invested. At the time Patricks, although apparently a large and prosperous firm, was in a precarious financial situation. An employee of the firm told Daly that it was not a good time to buy shares and recommended that in the interim the money be placed on deposit with the firm. The partners of the firm were well aware of its financial problems. Daly lent money to the firm at a high rate of interest and assigned the deposits to his wife, the appellant. Thereafter, Patricks ceased trading, became insolvent and was unable to repay the appellant the amounts advanced on deposit. The appellant applied to recover compensation from a fidelity fund. But it was not pleaded or proved that the loan contracts had been avoided.
    4787 Gibbs CJ (with whom Wilson and Dawson JJ agreed) held that Patricks owed a fiduciary duty to Daly and acted in breach of that duty. It was, however, not enough for the appellant to establish the fiduciary relationship. To fix the fidelity fund with liability it was necessary to show that the moneys were received by Patricks for or on behalf of Daly, or as trustee for Daly. The appellant sought to do that by establishing that the moneys, when received by Patricks, were the subject of a constructive trust in favour of Daly. The appellant’s argument was that, when a person who breaches a fiduciary duty to make full disclosure to another receives money from the person who has placed confidence in him, the money is impressed with a constructive trust. Gibbs CJ said, at 377, that this was ‘too sweeping an assumption’. He observed, at 379, that the benefit that the firm obtained in consequence of its breach of fiduciary duty was a loan of money, and the firm, as a debtor, was bound to repay the debt to the creditor, the appellant.
    4788 The gravamen of the reasoning of Gibbs CJ was that the ordinary legal remedies of a creditor would have been adequate to prevent the firm benefiting at the expense of the appellant. To recognise the existence of a constructive trust was on the one hand unnecessary to protect the legitimate rights of the lender, and on the other hand could lead to consequences unjust both to the creditors of the borrower and the borrower itself. As the Full Court in Hancock (No 2) observed, at [177]:
    It follows from the reasoning of Gibbs CJ that a constructive trust is not automatically imposed upon money being lent in circumstances which give rise to a breach of fiduciary duty. It is apparent that the learned Chief Justice considered that in such circumstances, the imposition of a constructive trust was remedial and a matter of discretion. In Daly it was not necessary to find that a constructive trust existed in order to ensure that Patrick Partners was not unjustly enriched. That is because the benefit that Patricks received in consequence of its breach of fiduciary duty was a loan of money, and as a debtor of Dr Daly it was bound to repay that debt to him.
    4789 Brennan J (with whom Wilson J agreed) observed that Daly lent the money to Patricks. As the borrower, Patricks received the money on its own account, not on behalf of Daly or as trustee. Patricks was Daly’s debtor and, on assignment, became the appellants’ debtors. A loan contract does not itself create a relationship of trustee and beneficiary.
    4790 In dealing with the argument that the funds were held on a constructive trust, Brennan J noted that if a fiduciary receives property from a person in relation to whom he stands in a fiduciary relationship, in circumstances where the transfer of property is a breach of fiduciary duty, the transfer is voidable, not void. If the transfer is set aside the fiduciary holds the property on a constructive trust for the transferor. The transferor may elect to avoid the contract and to assert title to the property or trace it. Brennan J said that in such a case the transferor cannot at once leave the contract on foot and deny the borrowers the title to the money which the contract confers. If the borrower acquires title to money paid to him under and pursuant to a contract of loan, the borrower cannot be made a trustee of the money without his consent so long as the contract stands. Importantly, his Honour remarked, at 390:
    In equity, Patrick Partners’ title to the money lent was imperfect from the beginning by reason of their failure to discharge their duty as a fiduciary … and, had the contract of loan been avoided, the [appellant’s] rights as against Patrick Partners might have been determined as though the firm had from the beginning held the money lent on a constructive trust for Dr Daly and then for [the appellant].
    4791 In Hancock (No 2) the Full Court commented, at [183] ‑ [184]:
    In Daly, the breach of fiduciary duty was committed by the borrower and not the lender. In the present case, it is said that Mr Hancock, as a director and shadow director of the lenders … committed breaches of his fiduciary duty when he caused them to lend money to himself. This distinction has no bearing on the principles enunciated by Gibbs CJ and Brennan J in Daly. The critical point is that the contracts of loan made in consequence of any breach of fiduciary duty by Hancock are voidable and not void: Transvaal Lands Co Ltd v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488, Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.
    It is the fact that the contracts are not nullities and are merely voidable that governs the rule. It stands to reason that a party who lends money to another under a voidable contract of loan must avoid the contract before asserting equitable title to the money lent and before seeking relief against third parties by way of tracing. Were that not to be so, the lender would notionally be able to claim repayment of the moneys due as a debt under the contract, and at the same time recover, by equitable remedies, from the borrower, or third parties with knowledge or volunteers, property acquired through the moneys lent. Such a situation, as Gibbs CJ recognised in Daly (at 380), would give rise to consequences unjust to the borrower and would unfairly benefit the lender.
    4792 While the approaches of Gibbs CJ and Brennan J in Daly differ, there is no inconsistency in matters of principle. Gibbs CJ did not deal with the question of avoidance of the loan contract. His Honour’s approach was predicated on the existence of ordinary legal remedies of a creditor that would have been adequate to protect the legitimate rights of the lender. As a matter of logic, had the loan contracts been set aside, the ordinary legal remedies would have been different. On the other hand, Brennan J did consider what might have been the position had the loan contracts been set aside.
    4793 The absence of a finding that the impugned transactions had been avoided was a part of the reasoning in Hancock (No 2) for rejecting the approach taken in Linter Group v Goldberg. At [199] the Full Court noted that one of the arguments in the latter case centred on the proposition advanced by counsel for Linter that there was no need to claim a declaration avoiding the contract and that Linter had not done so.
    4794 It must be borne in mind that the factual situation with which the Full Court was dealing in Hancock (No 2) had, as one of its fundamental planks, that the loans had not been set side. It is, I think, impossible to divorce that consideration from the chain of reasoning leading to the ultimate conclusion that Daly was a complete answer to the plaintiffs’ claims. As the Full Court said, in announcing its conclusion, at [206]:
    In our opinion, Anderson J was, with respect, correct in holding that Daly … was determinative of this case. The impugned payments were made pursuant to voidable contracts of loan. Not only have the contracts of loan not been rescinded, they have, in fact, been discharged. Adopting the approach of Gibbs CJ in Daly … there is no need to declare a constructive trust, as such a trust is entirely unnecessary to protect the legitimate rights of the lender. Further, as mentioned, such a trust would lead to unjust consequences to the borrower and to third parties. Adopting the approach of Brennan J, the payments were made pursuant to voidable contracts of loan. The lenders did not elect to avoid the contracts. In the circumstances, the lenders cannot assert an equitable title to the money lent. They cannot leave the contracts on foot and at the same time deny the borrowers the title to the money which the contracts confer.
    4795 I need to make one (hopefully last) comment about Kalls Enterprises. It was the subject of an unsuccessful application to the High Court for special leave to appeal: Baloglow v Kalls Enterprises Pty Ltd (in Liq) [2008] HCA Trans 132 (7 March 2008). In advancing the application, counsel referred to what Giles JA said in Kalls Enterprises, [154] – [159]. Counsel submitted that if what his Honour there said was correct, then in a case where the breaches that are at issue relate to breaches of fiduciary duty by directors of a corporation, the second limb of Barnes v Addy was redundant. It would be necessary only to rely on the first limb. That, he said, ‘would be a brand new departure for the law’. Counsel for the applicant also referred to what he submitted was a clash between Hancock (No 2), in which reliance was placed on Daly, on the one hand, and Kalls Enterprises, which stood firmly on the dicta in Belmont Finance, on the other.
    4796 In refusing leave, Gleeson CJ and Heydon J noted that, in addition to the Barnes v Addy claim, there was a claim under the Corporations Act and that the applicant would have to overturn both in order to succeed. Having made that comment their Honours said no more than that the case had insufficient prospects of success to justify a grant. I do not see the same tension between Hancock (No 2) and Kalls Enterprises as apparently commended itself to counsel at the special leave hearing and I think the two can stand together. The former is a decision that is binding on me and the latter stands as a decision of an intermediate appellate court to which I must (and am happy to) pay great respect.
    4797 What, then, is the situation where a claimant has sought to set aside a transaction that it argues was effected in breach of a fiduciary duty? If the impugned transaction is avoided and the circumstances are otherwise such that a constructive trust arises, when has the equity recognised by the imposition of the trust first attached to the property? Has the property been subject to that equity:
    (a) since the time the transaction was entered into;
    (b) from the date of the avoidance;
    (c) from the date the court declares the existence of the trust; or
    (d) from some other date?
    4798 This raises some vexed questions concerning the remedial nature of a constructive trust. As the authors of Jacobs’ Law of Trusts in Australia (7th ed, 2006) [1311] remark: ‘[I]t does not follow that the constructive trust is ‘remedial’ in the sense that it first has existence and effect only upon the court making its decree … the better view is that the decree recognises and enforces the trust, but does not create it; the trust arises immediately the circumstances exist in respect of which equity would construe a trust’. A distinction is sometimes drawn between cases where the impugned conduct is such that it can be predicted with some confidence that a court would, if asked, decree a constructive trust and other cases that are not so clear‑cut and where an alternative remedy might be deemed more appropriate. In cases in the former category, the likelihood of a decree eventuating renders the constructive trust applicable from the time of the impugned conduct and the beneficiary of the trust has a beneficial interest in the trust property from that time.
    4799 While it is not directly on point, Greater Pacific Investments Pty Ltd (In Liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 illustrates what I believe to be the correct approach to the problem. McLelland JA (with whom Priestley and Meagher JJA agreed) said, at 153:
    In general, where there is a contract for the sale of property by A to B made in breach of fiduciary duty owed to A by B (or by C in whose breach B knowing participated) pursuant to which the legal title to the property has been transferred from A to B, the transaction is in equity voidable at the instance of A, who may (if necessary) obtain an order for rescission setting it aside. Unless and until A effectively avoids the transaction and (if necessary) obtains an order for rescission, B’s property rights as a result of the transaction remain unaffected. However if A does effectively avoid the transaction and (if necessary) obtain an order for rescission, the parties will be treated in equity as if the transaction had never been effected; in other words, equity will treat B as if he had held the property in trust for A, that is, as a constructive trustee ab initio. A constructive trust arises in such circumstances as a consequence of the effective avoidance or rescission of the transaction. Where, for whatever reason, the transaction has not been and cannot be effectively avoided and rescission is unavailable, it remains effective and no constructive trust can arise …
    4800 In this case, the plaintiffs plead that on various dates prior to the commencement of the action, they have avoided the Transactions or, alternatively, they are entitled in the suit to declarations and orders setting them aside. Accordingly, the problems that beset Daly and Hancock (No 2) do not arise.
    4801 This is not an easy area of the law and, in many respects, it remains in a state of flux. A case in which, for example, a director steals money from a company and pays it across to a third party, who receives it with the requisite notice, would raise few problems. The money remains property of the company and is trust property in the hands of the director. But if the misfeasance by the director in dealing with company property under her or his control is no more than a breach of fiduciary duty, the conceptual basis under which that property comes to be regarded as trust property is more difficult to discern.
    4802 One way of looking at it is to say that company property with which a director deals in breach of fiduciary duty is property to which a fiduciary obligation attaches (which is the language used in Farah Constructions [166]). If the third party receives it with the requisite knowledge the conscience of the third party is sufficiently affected to justify the intervention of equity. The previous sentence is a paraphrase of In re Montagu’s Settlement, at 285. In those circumstances, equity might be disposed to treat property received under those circumstances either as a species analogous to trust property or as property coming within a broadened understanding of the concept referred to by Lord Selborne. The justification for broadening the concept lies in the more recent authorities that have extended the principle to include some classes of non‑trustee fiduciaries. Under this view, it is not necessary to rely on the doctrine of the constructive trust in order to characterise the property transferred away in breach of a fiduciary duty as trust property. This is not to say that, in such cases, the constructive trust is irrelevant. The intervention of the court will still be necessary to seal and fashion the remedy.
    4803 On the other hand, it may be that the phrase ‘trust property’, when applied to an errant company director, is wide enough to cover dealings with trust property (strictly so‑called) and also dealings with property subject to a fiduciary obligation and in respect of which it is likely that a court would eventually decree (and does eventually decree) a constructive trust. If it is other than trust property strictly so‑called, avoidance of the transaction will be necessary before the court will make such a declaration. In this way, setting aside the impugned transaction becomes a constituent element of a successful cause of action.
    4804 On either approach, assuming that the plaintiffs establish that in causing the Bell group companies to give the securities the directors breached fiduciary duties, the acceptance by the banks of the securities could constitute receipt of trust property. It follows that I do not accept the banks’ broad submission that, as a matter of law, the plaintiffs cannot bring a cause of action based on recipient liability because, on any view of it, there was no receipt of ‘trust property’. Whether the plaintiffs have made out this and the other elements of the cause of action is, of course, another matter.
    21.2.6. The Barnes v Addy pleadings in this case
    21.2.6.1. The pleading arguments as a longueur
    4805 The word ‘tendentious’ was used frequently (at least 22 times to my knowledge) during the hearing and in the parties’ written closing submissions. Hyperbole, and worse, its repetition, may appeal to some but in my case it is more likely to bring on a state of oscitancy than to attract attention. Shades, once again, of the Bard: ‘The lady doth protest too much, methinks’.
    4806 Nowhere was this more so than in relation to the Barnes v Addy causes of action. The banks described the allegations as ‘based upon a distorted and tendentious view of the law and the facts’. In their response, the plaintiffs observed that ‘the repeated remarks about pleadings should be recognized as an endeavour by the [banks] to convert tendentious submissions as to the [banks’] views on the legal tests that supposedly apply into artificial pleading complaints and should be ignored’. As usual, I found the hyperbole unhelpful and did my best to approach the problem in a more measured way.
    4807 I do not have the energy for the jejune task of dealing with each and every complaint about the pleadings. I will mention only those that I think require further analysis to ensure that they are in accord with the general legal principles that I have been discussing.
    4808 There is an initial point that I need to make about the case generally. It is another manifestation of the ‘group’ problem. The banks submit that there is no such thing as a joint, or ‘group’, Barnes v Addy cause of action and that each plaintiff Bell company must plead its claim against each bank. Additionally, the plaintiffs must plead an individual claim against a bank, based upon a breach of a specific duty owed by directors to that plaintiff. There can be no mixing of breach of duty and participation or receipt. Thus, if a plaintiff seeks to prove breach of one duty by directors (for example, breach of a duty to act bona fide in the best interests of the company), accessorial liability against a bank can only be established by reason of that bank having participated in that breach of duty with knowledge of that breach.
    4809 Leaving to one side the agency argument, I accept these contentions. And they apply with equal force to the claims based on recipient liability. Just as there is no such thing as ‘group insolvency’ there can be no such thing as liability for assisting or receiving in relation to a ‘group’. One reason for this is that Barnes v Addy liability is (relevantly) based on breach of a fiduciary duty and directors owe fiduciary duties to an individual company, not to a group formed by a combination of several entities.
    4810 In this respect the pleading has to be teased out, but I think it is possible to do so. I will describe aspects of the pleaded case in more detail shortly but I would not (and do not) rule that the plaintiffs’ pleading of the Barnes v Addy causes of action is fatally flawed because it fails to articulate sufficiently the way in which individual plaintiffs seek to hold the individual banks liable.
    4811 It is true that the relevant paragraphs concentrate on duties owed by the directors to ‘Bell Participants’ and not (save for 8ASC par 65I) to plaintiff Bell companies. But it must be remembered that all ‘plaintiff Bell companies’ are Bell Participants and the statement of claim, taken in its entirety, goes to some length to spell out differences between various of the group companies.
    4812 Insofar as the case has to be made good against individual banks, I note, for example, that the knowledge case is particularised in relation to each of the defendant banks.
    21.2.6.2. Pleading a dishonest and fraudulent design
    4813 The case is pleaded in reliance on the principles of Barnes v Addy. In relation to the second limb, the case is about knowing assistance rather than knowing inducement. This is apparent from the wording of 8ASC par 65H, 65I and 65J: ‘[T]he banks, or alternatively, Westpac as trustee and agent for the banks, knowingly participated and assisted in the breaches of duty by the directors …’ I do not understand the plaintiffs to have contended that they were relying on knowing inducement. It would have been incumbent on them to have pleaded such a case clearly had they wished to do so. And as I have already said (see Sect 7.5.2.2) the plaintiffs expressly disavowed any allegation of dishonesty or conscious wrongdoing by the directors. Accordingly, the allegation is that the directors breached their fiduciary duties to the companies but there is no allegation that they did so dishonestly. These are the breaches in which the banks are said to have knowingly participated and which they are said to have knowingly assisted.
    4814 The case on knowing receipt, as pleaded in 8ASC par 65K, applies some of the language used by Lord Selborne in Barnes v Addy: ‘[T]he banks or, alternatively, Westpac as trustee and agent for the banks, received and became chargeable with the property … or its traceable product’. Counsel for the plaintiffs said, in opening, that 8ASC par 65H also included ‘aspects of receipt’. I presume this is a reference to the phrase ‘obtained rights under the instruments … and made the gains pleaded … as a consequence of the exercise of certain such rights …’ There is a similar phrase in 8ASC par 65J.
    4815 I do not wish to overstate the disavowal by the plaintiffs of dishonesty. In fairness, I should go back to what was said by senior counsel on 26 October 2000 in the course of argument on the amendment application:
    [I]n an action for breach of fiduciary duty it is unnecessary to plead and establish that the directors acted dishonestly, it’s unnecessary to plead and establish that they were conscious that what they were doing was not in the interests of the company, and it’s not necessary to plead and establish that they deliberately went ahead with the conduct in disregard of that knowledge.
    4816 The plaintiffs confirmed this approach in written submissions dated 30 November 2000. They made it clear that they did not allege, and there was no need for them to allege, ‘actual dishonesty’ or ‘conscious impropriety’ by the directors. This was put in the context of an argument by the banks that expressions in the pleading such as ‘no genuine belief’ and ‘improper regard’ carried with them insinuations of dishonest conduct by the directors of which the banks were aware. In this respect, I refer also to what I said in Bell (No 1) [127].
    4817 This, then, is a disavowal of a case based on the fact that, for example, the directors consciously acted in their own interests and consciously not in the best interests of the company. It will be apparent from what I have already said that I accept that ‘conscious wrongdoing’ of this genre is not a necessary element of a breach of fiduciary duty (either alone or as a gateway to an accessory liability claim). Nonetheless, if I am to find in favour of the plaintiffs on the knowing assistance cause of action, I am compelled to find that the directors engaged in a ‘dishonest and fraudulent design’. There is no way of finessing it: that is the path a trial judge must traverse in accordance with the directions given in Farah Constructions. I will not repeat what I said in Sect 21.2.3 about the meaning of the phrase a ‘dishonest and fraudulent design’ other than to stress that (in my view) it involves more than a mere breach of duty and that it involves an allegation of some gravity.
    4818 I return now to the structure of the pleaded Barnes v Addy case on knowing assistance, with particular emphasis on the conduct of the fiduciaries; that is, of the directors of the various companies. The easiest way for me to deal with this is to express it (in a summary way) in propositional form.
    4819 First, the Australian directors, the UK directors, the BIIL directors and Equity Trust owed fiduciary duties to the companies of which they were directors, namely, duties to act in the best interests of the company, to exercise powers properly and (in relation to the Australian directors and the UK directors) to avoid conflicts of interest: 8ASC par 37. It will be apparent from what I have already said that I accept the proposition that these duties are of a fiduciary character.
    4820 Secondly, by causing the companies to enter into the Transactions and to enter into and give effect to the Scheme, the directors breached those fiduciary duties: 8ASC par 39A, 39C, 39D and 39E.
    4821 Thirdly, the banks knowingly participated and assisted in those breaches of duty: 8ASC pars 65H, 65I and 65J. I will leave to one side, for the moment, the basis upon which the knowledge case is advanced against the banks.
    4822 It is worth repeating the succinct encapsulation of the breaches as contended for by the plaintiffs in their written closing submissions:
    The entry into the Transactions was not reasonably incidental to or within the scope of carrying on the business of each Australian Bell Company Participant and therefore, the decision to enter into the Transactions was not made bona fide in the best interests of each company and was made for an improper purpose.
    Further, or alternatively, each director made the decision for a collateral or improper purpose of protecting or assisting the interest of [BCHL].
    In the circumstances of the present case for each director there existed, at least, a clear conflict between the director’s duty to each Bell Participant and an extraneous loyalty either to [BCHL] or to the director’s personal interests or to both blurred together and each director took advantage of it and failed to bring the position of conflict to an end by not proceeding with the Transactions.
    4823 It is not clear to me from the statement of claim and the particulars what it is that the plaintiffs contend takes this out of the realm of a simple breach of fiduciary duty and gives it the character of something that is, in the relevant sense, part of a ‘dishonest and fraudulent design’. I do not shy away from the position that something can be relevantly ‘dishonest and fraudulent’ without involving conscious and deliberate wrongdoing, such as would apply in the criminal law or Derry v Peek fraud. As I said in Bell (No 5), at [37], the principle that fraud must be pleaded and particularised with clarity and precision applies just as much to dishonesty that sounds ‘according to the plain principles of a court of equity’ as it does to actual fraud.
    4824 It appears from their written closing submissions that the plaintiffs believed they did not need to establish a ‘dishonest and fraudulent design’ by the directors in order to succeed in the Barnes v Addy claim. I think the pleadings have to be understood and applied in that way. The plaintiffs were responding to a submission by the banks that in an assistance case it is necessary to establish ‘a dishonest breach of trust on the part of the trustee’, ‘participation or assistance in that breach of trust’ and ‘dishonest knowledge on the part of the participant’. This, the plaintiffs complained, ‘like much of the defendants’ submissions, seems to be some sort of ambit claim’. In their submission the plaintiffs went on to contend that there is no requirement of a ‘dishonest breach of trust’, citing Consul Developments per Gibbs J at 396 – 398, and per Stephen J at 412, Warman International Ltd v Dwyer (1995) 182 CLR 544, 557 and Royal Brunei (392). The plaintiffs also contend, on this aspect, that the logic for liability in the second limb is not the conduct of the errant fiduciary. It is the state of mind of the third party.
    4825 The approach encapsulated in those submissions, while it may have been perfectly respectable at the time it was made, cannot survive the relevant pronouncements in Farah Constructions: a touchstone for accessory liability is a ‘dishonest and fraudulent design’ on the part of the fiduciary.
    4826 Some of those written submissions are couched in terms that might be read as seeking to meet a contention that for the second limb there must be a breach of trust rather than a breach of fiduciary duty. I do not think that can have been the import because, whatever may be the position in relation to the first limb, it has been clear since Consul Developments that the second limb applies to an errant fiduciary as well as to a trustee, strictly so‑called.
    4827 There is a danger of allegations of dishonesty coming in by a side‑wind. An example is the plaintiffs’ written closing submissions in reply on the issue of failure to enquire. In its original form the plaintiffs said, at par 6(a): ‘It is perfectly clear from the pleadings that the plaintiffs do allege that the banks were dishonest in failing to make inquiries’. In oral closing submissions, that paragraph was withdrawn and replaced by this formulation: ‘It is perfectly clear from the pleadings that the plaintiffs do allege that inquiries would have been made by honest and reasonable persons in the position of the banks as alleged in [the particulars]’. I am not suggesting that the plaintiffs acted in any way inappropriately in framing the submission in its original form but it demonstrates how sensitive these issues are.
    4828 I am conscious of the dangers of reading the pleadings too strictly, especially in litigation such as this. But the case was fought on a basis that eschewed allegations of dishonesty. I spoke earlier of ‘finessing’ the problem. In the way the trial was conducted, it would, in my view, amount to finesse if I were (for example) to characterise the impugned conduct as ‘dishonest and fraudulent’ judged by the standards of ordinary, decent people. I say this because it is not alleged the directors appreciated that the acts in question were dishonest and fraudulent and the indicia of dishonesty and fraud does not emerge clearly from the pleadings.
    4829 In this instance I feel compelled to hold the plaintiffs to the pleaded case (as explained in closing submissions) and to rule that they cannot succeed (on the pleadings) in a cause of action advanced under the second limb of Barnes v Addy.
    4830 In the view that I take of the state of the law, I am not compelled to the same conclusion in relation to the first limb. The breaches of fiduciary duty, as pleaded and if made out on the evidence, could ground a claim for knowing receipt of trust property.
    21.2.6.3. The knowing receipt claim
    4831 The knowing receipt claim is pleaded shortly and without particulars in 8ASC par 65K. As I have already said, there are some aspects of a receipt plea in 8ASC pars 65H and 65J but, in the main, the case stands on par 65K.
    4832 One of the complaints is that the plaintiffs have failed to plead receipt of ‘trust property’. What the plaintiffs say is that the banks received and became chargeable with ‘the property of the Plaintiff Bell companies or its traceable product … and are liable [for] the gains made as pleaded in pars 63A to 65G and the rights obtained under the instruments pleaded in pars 16 to 19’.
    4833 In my view, as a pleading point, this exposes to a sufficient degree the area of controversy. It is not fatal to the plaintiffs’ claim that they have not described it as trust property. The can be no real uncertainty about the identification of the ‘property of the plaintiff Bell companies’ that is said to have been received. It is (expressed in broad general terms) the property the subject of the security interests created by the instruments identified in 8ASC pars 16 to 19 and which were (eventually) the subject of the ‘gains’ identified in 8ASC pars 63A to 65G.
    4834 And the combination of the additional phrases in 8ASC pars 65H and 65J and the main pleading in 8ASC par 65K (incorporating, as it does, the pleas on bank knowledge in 8ASC pars 50 to 59U) make it clear that the plaintiffs are alleging knowing receipt. What the banks are said to have known is pleaded out in 8ASC pars 50 to 59A, with amplification in 8ASC pars 59B to 59T and 59U. Paragraph 58 contains an express allegation of a ‘calculated abstention from inquiry’. The plaintiffs also plead, in 8ASC par 59TA, that with the knowledge, belief or suspicion alleged, the banks refrained from seeking additional information. These pleas are supported by extensive particulars. In PP 58 the plaintiffs say (among other things):
    (e) The enquiries … would have been made by honest and reasonable persons in the position of the Banks who did not already have the information which such enquiries would have yielded or who did not already know or believe that the financial position of Bell Participants was as pleaded …
    (f) It is to be inferred from the matters above that the Banks abstained from such enquiries because they believed, or suspected, as was the fact, that the Bell Participants as pleaded were in the financial position as pleaded … and that the results of such enquiries would have confirmed that.
    4835 The banks complain that there is no pleading of actual knowledge of breach and actual knowledge of receipt of trust property and misapplication and there is no pleading of any form of constructive knowledge of those matters, within the Baden categories. The banks contend that the forms of knowledge pleaded are limited in that:
    (a) there is a pleading of category (1) actual knowledge (but only of specific facts, not of breach);
    (b) there is a pleading akin to category (2), described as ‘calculated abstention’, although it is not a proper pleading of wilful blindness and it does not relate to wilful blindness as to breach but as to specific financial information;
    (c) there is no pleading of category (3) of ‘reckless disregard’;
    (d) there is no pleading of category (4); and
    (e) there is no allegation of category (5).
    4836 I refer to what I said towards the end of Sect 21.2.4 about the legal requirements of ‘knowledge’. The absence of a plea to bring in knowledge under Baden category (5) is of no consequence. In my view, the pleading is sufficient to bring out what it is that the plaintiffs allege satisfies the knowledge requirement in relation to the banks. It is necessary to plead material facts (properly particularised) from which inferences of the requisite knowledge can be drawn. It is not necessary to go as far as the banks contend. It could not have come as any surprise to the banks that the plaintiffs were alleging the banks knew of the misapplication and receipt of trust property.
    4837 The plaintiffs either make out the knowledge case against individual banks or they do not. They either make out knowledge in one of the relevant Baden categories or they do not. I will decide this on the evidence adduced during the trial and I believe the pleadings are a sufficient basis on which to do so.
    4838 I make the same point about a related issue raised by the banks, namely, that in a recipient liability case, aggregation of knowledge is not possible. What is needed is knowledge on the part of a real mind of the facts or of matters that would suggest the facts to a reasonable person: ACCC v Radio Rentals, [176] ‑ [179]; NIML Ltd, [70]. The question is not whether fact A, known to bank officer 1, and fact B, known to bank officer 2 (neither fact being known to the other officer) when taken together, constitute knowledge of the bank. The question is whether, on the evidence, it has been established that an officer or officers of the bank have the requisite knowledge and that they are persons ‘so closely and relevantly connected with the [bank] that the state of mind of that person or those persons can be treated as being the state of mind of the [bank]’: Bell (No 5) [48].
36. Equitable fraud: some general legal principles
    22.1. The equitable fraud claims: an outline
    4839 The second broad head under which the plaintiffs’ causes of actions fall is equitable fraud. There are four bases on which the claims are advanced.
37. The banks’ conduct in entering into the Transactions and the Scheme constituted an imposition and deceit (and therefore an equitable fraud) on the non‑bank creditors of the Bell group generally, including LDTC.
38. Because that conduct involved events of default under the bond issue trust deeds of which LDTC was, to the knowledge of the banks, ignorant, it also constituted an imposition and deceit on LDTC and the bondholders.
39. The Transactions and the Scheme constituted an imposition on the Bell Participants themselves because each Bell Participant was (to the knowledge of the banks) effectively without anyone looking after its interests.
40. The Transactions and the Scheme constituted an inequitable and unconscientious bargain, and therefore an equitable fraud, on each Bell Participant.
    4840 There are two significant differences between the equitable fraud claims and the Barnes v Addy claims. First, not all of the four bases outlined above depend on a finding that the directors breached their duties to the companies. Secondly, the complaint is directed at the Transactions and the Scheme in terms of their effect upon the non‑bank creditors and (or) the Bell Participants, with the Transactions considered as one commercial event rather than individual Transactions.
    4841 There is another possible difference that I will develop a little later. As a general statement, and unlike common law fraud, equitable fraud does not depend on a finding of actual intent to deceive or reckless indifference. It is a moot point whether the absence of a requirement to establish an actual intent to deceive applies to all species of equitable fraud or to some only of them. If it is the former, this aspect of the litigation is not affected in the same way as the Barnes v Addy claims by the disavowal of allegations of conscious wrongdoing. But if it is the latter, similar problems arise.
    4842 In the remainder of this section I want to outline some general legal principles relating to the doctrine of equitable fraud and, in particular, to the species of fraud that are raised in this case. In Sect 32 I will return to the facts of the case and analyse these concepts in the light of the factual findings.
    22.2. The juridical nature of equitable fraud
    22.2.1. Equitable fraud generally
    22.2.1.1. What is an equitable fraud?
    4843 Equitable fraud is one of those compendious phrases that slips easily off the tongue. Yet its simplicity masks conceptual difficulties of significant proportions. It is one of those ‘black box’ descriptions into which disparate situations − many and varied and without a unifying theme − can be grouped. It is a good example of the tension between the expansive and principled approaches to the development of equitable doctrines. Lord Hardwicke, speaking extra‑judicially in 1759, said:
    As to relief against frauds, no invariable rules can be established. Fraud is infinite, and were a court of equity once to lay down rules, how far they would go, and no farther, in extending their relief against it, or to define strictly the species or evidence of it, the jurisdiction would be cramped, and perpetually eluded by new schemes, which the fertility of man’s invention would contrive.
    4844 That statement was quoted with approval by Gummow J in Fardon v Attorney‑General (Qld) [2004] HCA 46; (2004) 223 CLR 575 [105]. On the other hand, as pointed out by Deane J in Muschinski v Dodd, care needs to be taken to ensure that equitable doctrines and remedies develop from recognised underlying principles and not according to idiosyncratic notions of fairness and justice.
    4845 The doctrine of equitable fraud is broad and, like many equitable principles, cannot easily be defined. It cannot be confined to a strict set of elements or identified according to criteria that can be set out in an exhaustive and all‑embracing list. Fundamentally, fraud is abhorrent to the good conscience on which the principles of equity are based. The principles that underpin the doctrine of equitable fraud deal with the control of legal rights where their exercise would be so prejudicial to other parties as to amount to an act of fraud. The equitable jurisdiction in fraud encompasses all grounds for equitable relief except for accident or breach of trust. The arguments advanced in this case (of imposition and deceit, breach of fiduciary duty and unconscientious bargain) could, if made out, be characterised as a species of equitable fraud.
    4846 Historically, equitable fraud was known as ‘constructive’ fraud. It differs primarily from actual fraud (the common law action for deceit) in that, generally speaking, it does not require a complainant to establish an intent to deceive or reckless indifference on the defendant’s part. In Nocton v Lord Ashburton [1914] AC 932, Viscount Haldane LC acknowledged the common law position and went on to say, at 954:
    [I]t is a mistake to suppose that an actual intention to cheat must always be proved. A man may misconceive the extent of the obligation which a Court of Equity imposes on him. His fault is that he has violated, however innocently because of his innocence, an obligation which he must be taken by the Court to have known, and his conduct has in that sense always been called fraudulent, even in such a case as a technical fraud on a power. It was thus that the expression ‘constructive fraud’ came into existence … What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court which from the beginning regarded itself as a Court of conscience.
    4847 This is also the case in modern Australian law. In Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 467, Mason J said: ‘The concept of fraud in equity is not limited to common law deceit’. Similar sentiments were expressed by Mahoney JA, albeit in dissent in the result, in Logue v Shoalhaven Shire Council [1979] 1 NSWLR 537, 555. His Honour noted that equitable fraud is not limited to conscious wrongdoing or over‑reaching. He then remarked that the fraud depends on whether what has happened, in the context in which it has happened, appears to the judicial conscience as so unconscientious that it should not be allowed to stand.
    4848 The getting of bargains by taking surreptitious advantage of persons at a special disability by reason of weakness, necessity or ignorance, is recognised as a species of equitable fraud. Courts of equity can set aside or relieve against an unconscionable transaction where one party has been exploited by another in a way which is over-reaching and oppressive: see, for example, Blomley v Ryan (1956) 99 CLR 362.
    4849 One of the leading Australian texts on equitable principles is R Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (4th ed 2002). When I refer to this text from time to time in these reasons I will do so by the shortened phrase ‘Meagher, Gummow and Lehane’. At [12-050] the authors set out a non‑exhaustive list of factual and legal situations that have traditionally been treated as species of equitable fraud. They include:
    (a) misrepresentation by persons under an obligation to exercise skill and discharge reliance and trust (for example in fiduciary relationships), and inducements to contract or otherwise for the representee to act to his detriment in reliance on the representation;
    (b) the use of power to procure a bargain or gift, resulting in disadvantage to the other party;
    (c) conflict of interest against a duty arising from a fiduciary relationship; and
    (d) agreements which are bona fide between the parties but in fraud of third persons.
    4850 All of these categories can be seen, to varying degrees, in the claims brought by the plaintiffs in the equitable fraud causes of action. The last category is of particular interest because it encompasses the imposition and deceit species referred to as the Earl of Chesterfield fourth limb. I will come to that doctrine shortly.
    22.2.1.2. Equitable fraud and common law fraud compared
    4851 The term common law fraud is often used to describe the tort of deceit, or the making of fraudulent misrepresentations. The tort of deceit is said to encompass cases where the defendant knowingly or recklessly makes a false statement, with the intention that another will rely on it to his or her detriment.
    4852 Derry v Peek (1889) 14 App Cas 337 illustrates the principle that honesty is a duty of universal obligation, existing independently of contract or fiduciary obligations. In Derry v Peek, the House of Lords rejected the argument that a claim of negligence would support an action for fraudulent misrepresentation. In so doing, their Lordships set the standard for common law fraud. Lord Herschell said, at 374, that to succeed, a plaintiff must prove ‘that a false representation has been made (1) knowingly, or (2) without belief in its truth or (3) recklessly, careless whether it be true or false’. In other words, there must be a lack of an honest belief in the truth of the representation. In Armitage v Nurse [1998] Ch 241; [1997] 3 WLR 1046, Millett LJ discussed the meaning of ‘actual fraud’ in the context of an exemption clause. At 1053, his Lordship described actual fraud as connoting, at least, ‘an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not’.
    4853 This, then, marks out a significant difference between common law fraud and equitable fraud. The latter does not require proof of an actual intention to deceive.
    4854 In Sect 21.2.3, I discussed the principles emerging from Briginshaw concerning the standard of proof and level of persuasion necessary to sustain a finding where the issue is one of enhanced seriousness. When the issue involved is fraud, is there any difference between the common law and equity in this regard?
    4855 Courts generally require strong evidence to support a finding of ‘actual fraud’, although still on the balance of probabilities: Helton v Allen (1940) 63 CLR 691. As equitable fraud does not have the same mental element, it might be thought the evidentiary requirements for a finding of equitable fraud are less stringent. I do not think this is correct. The tort of deceit requires that an actual intention to cheat be demonstrated. But this refers to what has to be established, not to the level of persuasion required. If equity is to attach a sanction, it is because the impugned conduct violates notions of good conscience. In many cases there will be an element that can be described, in varying degrees, as ‘moral wrongdoing’. In my view, the allegations in this case are sufficiently grave, even in the guise of equitable fraud, to attract the Briginshaw doctrine.
    22.2.2. Imposition and deceit: fourth limb of Earl of Chesterfield
    22.2.2.1. Earl of Chesterfield v Janssen
    4856 Historically, courts of equity intervened to set aside as unconscionable not only transactions where a weak party needed protection, but also transactions that were a fraud on third parties or the public generally. Some of the categories identified in the texts are quaint: payments to a parent for the consent to the marriage of his child; marriage brokerage contracts; and loans to a woman to swell her dowry and thus deceive her husband. Others, such as contracts in restraint of trade, are more familiar in contemporary society.
    4857 The plaintiff’s contention that LDTC and other non‑bank creditors (not parties to the impugned Transactions) have suffered an equitable fraud by imposition and deceit is based on what has come to be known as the fourth limb of the Earl of Chesterfield v Janssen.
    4858 The case involved a man of privilege whose fortunes were in decline. He had a wealthy grandmother from whom, on her eventual death, he expected to inherit a large sum. In describing the plight of the man, in contrast to his grandmother, the statement of case presents a grim warning that carries forward 250 years: ‘He was above 30; originally of hale constitution, but impaired; and although afterwards he lived more regular, yet he was addicted to several habits prejudicial to his health, which he could not leave off. She was 78; of a good disposition for her age; and careful of her health’.
    4859 The man was being pressed by his creditors. He entered into a bond to borrow £5000 but to repay £10,000 once he had inherited his grandmother’s fortune. He did inherit, but found difficulty making the payment. He entered into a further bond confirming the bargain and agreeing to a penalty of £20,000 if there were further default. By the time of his own death he had only repaid £5000 of the £10,000 debt. The executors of his estate sought relief from payment of the balance. The Court rules that the executors should pay the balance of £5000 but were relieved of the obligation in relation to the penalty.
    4860 Lord Hardwicke posed the question (which he did not need to answer but on which he felt compelled to say something) whether the original bond contract, assuming it to be valid in law, was ‘contrary to conscience, and to be relieved against … upon any principle of equity’. His Lordship said that equity had an undoubted jurisdiction to relieve against every species of fraud. He then identified three species: actual fraud arising from facts and circumstances of imposition; inequitable and unconscientious bargains; and fraud which can be presumed from the circumstances of the contracting parties. His Lordship then moved to the fourth species; the one that is relied on by the plaintiffs in this aspect of the litigation. The relevant passage appears at 100 – 101:
    A fourth kind of fraud may be collected or inferred in the consideration of this court from the nature and circumstances of the transaction, as being an imposition and deceit on the other persons not parties to the fraudulent agreement. It may sound odd, that an agreement may be infected by being a deceit on others not parties: but such there are, against such there has been relief … In most of these cases it is done with their eyes open, and knowing what they do: but if there is fraud therein, the court holds it infected thereby, and relieves. So where a debtor enters into a deed of composition with his creditors for 10s in the pound, or any other rate, attended with a proviso that all creditors executed this within a certain period, if the debtor privately agrees with one creditor to induce him to sign this deed, that he will pay or secure a greater sum in respect of his particular debt: in this there can be no particular deceit on the debtor, who is party thereto: but it tends to deceit of the other creditors, who relied on an equal composition, and did it out of compassion to the debtor. This court therefore relieves against all such underhand bargains … These cases show what courts of equity mean, when they profess to go on reasons drawn from public utility … Particular persons in contracts shall not only transact bona fide between themselves, but shall not transact mala fide in respect of other persons who stand in such a relation to either as to be affected by the contract or the consequences of it; and as the rest of mankind beside the parties contracting are concerned, it is properly said to be governed on public utility.
    4861 To reduce the length of the quote, I have omitted the parts in which his Lordship gave three other examples of situations falling foul of the principle: marriage brokerage, secret payments to a parent to consent to the marriage of a child and premiums paid to gain public office. The effect of the imposition on the third party is the key to the equitable right arising. And the rationale for the intervention of equity under the fourth limb lies in the demands of public utility.
    4862 The principle that equitable fraud can lie in an imposition and deceit on other persons not parties to a fraudulent agreement, in accordance with Earl of Chesterfield, has been recognised by the High Court: Pilmer v Duke Group (187).
    4863 The plaintiffs contend that it is the effect of the Transactions on property held by LDTC or rights held by Bell Participants and non‑bank creditors that creates the equitable right. The plaintiffs do not say that this is a composition case. But they say that Earl of Chesterfield sets down a broad principle, based on public utility. They say that, by analogy to the composition cases, the circumstances of this case fit within the broad principle.
    4864 No authority was cited in which the fourth limb has been applied in the same (or similar) circumstances to those that are present in this litigation. This is not to say, of course, that the absence of myriad previous decisions means the principle does not exist or that it cannot apply here. Equity’s power to act as a court of conscience is not spent. When unconscionable situations exist in modern society, judges do not shrug their shoulders and say that because no historical example can be identified as a precedent, the court will not intervene: Lincoln Hunt Australia Pty Ltd v Willesee (1986) 4 NSWLR 457, 463 (Young J).
    4865 I think the plaintiffs are correct when they say that that the fourth limb of Earl of Chesterfield is not limited to cases regarding deeds of composition. Historically, the fourth limb exemplified equity’s role in preventing a person from taking advantage of the weakness or necessity of another. Case law developed on the fourth limb’s classifications of ‘imposition and deceit’ to facilitate this role. The concept of public utility has been a critical factor in equity’s development of the fourth limb.
    4866 As Earl of Aylesford v Morris (1873) LR 8 Ch App 484 demonstrates, in ‘catching bargains’ cases, equity required purchasers of reversions to prove that they had paid a fair price. If not, equity compelled them to undo their bargains. In Earl of Aylesford, the plaintiff entered transactions without competent or independent advice and without accurate information about his own means and circumstances. This situation was said to cast an onus on the defendant to ensure the plaintiff was fully informed. However, the defendant deliberately abstained from making the enquiries that might be expected in a business transaction where one person was not trying to take advantage of another’s weakness.
    4867 This case also echoes the spirit of the law of unconscientious bargains, revolving as it did around a presumption of fraud in circumstances where there was weakness on one side of a bargain and usury on another, or advantage taken of the weakness. The court ruled that such a fraud did not arise by deceit or circumvention, but rather was an unconscientious use of the power arising from a set of factual circumstances. This imbalance or misuse of power might be said to be the common thread amongst the imposition and deceit cases.
    4868 Lord Hardwicke, in his speech in Earl of Chesterfield, voiced equity’s concern about the risk of fraud arising from marriage brokerage cases. While marriage brokerage might be irrelevant in modern society, the underlying equitable principles still have meaning. In particular, the marriage brokerage cases demonstrate equity’s role in deterring unconscionable behaviour and illustrates the ‘public utility’ argument. For example, it was said by the Lord Chancellor in Turton v Benson (1718) 1 P Wms 496; 24 ER 488 that private agreements obtained from an intended husband without the privity of his parent were ‘highly to be discouraged’, and thus entitled the parties to relief. And in Hermann v Charlesworth [1905] 2 KB 123, Lord Collins MR noted that in marriage brokerage contracts, it mattered not whether the particular ‘match’ was good or bad. The reason equity would set it aside was not for the sake of the particular instance or person, but for the sake of the public and to protect the proper foundation of marriage.
    4869 The rationale for the intervention of equity in the procurement of employment cases was described in Law v Law (1735) 3 P Wms 391. The Lord Chancellor said that such contracts were ‘highly to be discouraged’. They were considered to be a fraud on the public because they would open the door for the sale of offices and lead to corruption and extortion in public office.
    4870 The composition cases, about which I will have more to say shortly, are also rooted in the idea of public utility. The rationale is described in Story J, Commentaries on Equity Jurisprudence (3rd ed, 1920) [379]:
    There is great wisdom and deep policy in the doctrine, and it is founded in the best of all protective policy, that which acts by way of precaution rather than by mere remedial justice; for it has a strong tendency to suppress all frauds upon the general creditors by making the cunning contrivers the victims of their own illicit and clandestine agreement.
    4871 That the principle rests on public policy was affirmed in ET Fisher & Co Pty Ltd v English, Scottish and Australian Bank Ltd (1940) 64 CLR 84, 103 (Williams J).
    22.2.2.2. The fourth limb: ‘mala fide’
    4872 I need now to consider the moot point that I mentioned in Sect 22.1: does the principle that it is not necessary to establish an actual intent to deceive apply to all species of equitable fraud or to some only of them? The question arises here because of the last sentence in the passage quoted from Lord Hardwicke’s: persons in contracts shall not only transact bona fide between themselves, but shall not transact mala fide in respect of other persons who would be affected by the contract (my emphasis). The difficulty is the reference to the parties to the agreement acting in bad faith in respect of the third parties.
    4873 The plaintiffs submit that because equitable fraud need not involve an intention to cheat or conscious wrongdoing, the reference by Lord Hardwicke to transacting ‘mala fide in respect of other persons’ is not a reference to an actual intention to cheat or conscious wrongdoing. Rather, that is a reference to possessing such a set of subjective knowledge, belief and (or) notice that the way in which the person has acted appears objectively to a judicial conscience as being so unconscientious that it should not be allowed to stand. The first sentence is an application of Nocton v Lord Ashburton. The last phrase comes from the reasons of Mahoney JA in Logue.
    4874 The plaintiffs referred to authority characterising the term ‘good faith’ (or ‘bona fide’) as a protean one having longstanding usage in a variety of statutory and common law contexts: Department of Education, Employment, Training and Youth Affairs v Prince (1997) 152 ALR 127, 130 (Finn J). It follows, according to the plaintiffs, that its antonym, ‘bad faith’ or ‘mala fide’, is also a protean one. Its use by Lord Hardwicke takes its context from the general principles about state of mind and equitable fraud discussed in cases such as Nocton v Lord Ashburton. Such a use is comparable with, for example, the existence of knowledge or suspicion of insolvency negativing good faith in the context of s 122 of the Bankruptcy Act.
    4875 Further, the plaintiffs contend, the fraud by ‘imposition and deceit’ may, in Lord Hardwicke’s language, be ‘collected or inferred in the consideration of this Court from the nature and circumstances of the transaction’. To the extent that subjective state of mind is relevant, that is consistent with the general proposition that what a person does is the best evidence of the purpose he had in mind. This is a principle associated with the presumption that a person intends the natural and probable consequences of her or his actions. This presumption is discussed in detail in Sect 33.3.1.3.
    4876 The banks say, in short, that the phrase ‘mala fide’ has its ordinary and natural meaning and cannot be ignored. It imports a mental element that is consistent only with a requirement to establish an actual intent to deceive.
    4877 I do not think there is much doubt that ‘bad faith’ is a reasonably literal translation of the Latin phrase ‘mala fide’. Nor do I think there is much doubt that, in its ordinary and natural meaning, ‘bad faith’ means lacking in honesty. Bad faith is the term generally used in the common law to describe intentional wrongdoing, corrupt purposes and dishonest motivation. It marks the boundary between honest error and dishonest motivation. When used in this context, the law recognises that allegations of bad faith are a serious matter ‘involving personal fault’: SBAP v Refugee Review Tribunal [2002] FCA 590 49.
    4878 But this still begs the question whether the use of the phrase ‘mala fide’ in Earl of Chesterfield in the context of equitable fraud, and considered in the light of Nocton v Lord Ashburton, necessarily imports this ordinary and natural meaning.
    4879 The phrase used by Viscount Haldane in Nocton v Lord Ashburton namely, that ‘it is a mistake to suppose that an actual intention to cheat must always be proved’, has been picked up and applied in some Australian cases, including:
    (a) ‘The concept of fraud in equity is not limited to common law deceit’: Commercial Bank of Australia v Amadio (467) (Mason J);
    (b) ‘Equitable fraud is not limited to conscious wrongdoing or over reaching’: Logue (555) (Mahoney JA); and
    (c) ‘Equitable fraud … does not require that an actual intention to cheat must always be proved’: Polyaire Pty Ltd v K‑Aire Pty Ltd [2005] HCA 32; (2005) 221 CLR 287 [35] (McHugh, Gummow, Hayne, Callinan and Heydon JJ).
    4880 In my view, there is much to be said for the protean view of bad faith in this context. Nocton v Lord Ashburton lays down an important principle that applies to equitable fraud generally. I think it is fair to say that if conduct amounts to a common law fraud it will also be a fraud in equity, provided that there is something in the circumstances to attract the jurisdiction of equity. But the contrary is not the case; there are some equitable frauds that would not be a fraud at law. In my view, this is the way to read the phrases in the cases to the effect that it is ‘not always’ necessary to establish an actual intention to cheat. I do not read what Viscount Haldane (and the other judges who have used similar language) said as meaning something like this: ‘there are myriad species of equitable fraud; for some, an actual intention to cheat is needed (as it always is at law): for others, it is not’.
    4881 This is where the protean view comes in. The reference to ‘bad faith’ will take its meaning from the context in which it appears. Much will depend on nature of the impugned conduct and the underlying rationale for the intervention of equity in the circumstances said to amount to a fraud.
    4882 There are two things to be said about the use of the phrase ‘mala fide’ in Earl of Chesterfield, associated, as it is, with the phrase ‘underhand bargain’. First, the words were written 250 years ago. The principle for which the case stands can be understood and honoured without necessarily focussing on individual words used in a long passage in which the principle is described. I can hear the criticism already: why did he not say the same thing about the phrase ‘dishonest and fraudulent design’ in Barnes v Addy? The answer is that those very words were repeated and confirmed in Farah Constructions in 2007.
    4883 Secondly, the principle that underlies the fourth limb is public utility. Is the conduct of such a nature that it ought to attract the intervention of equity to protect some aspect of the proper functioning of society? This may involve a lack of honesty, deception or other moral vice on the part of the perpetrators. An example is Drury v Hooke (1686) 1 Vern 412; 22 ER 553. There, a marriage without the consent of a young bride’s parents was brought about by a brokerage contract. The Lord Chancellor described it as a ‘sort of kidnapping’. But the proper functioning of society might still be imperilled even though there is no moral vice. For example, in Hall v Potter (1695) Shower 76; 1 ER 52, a marriage brokerage contract was set aside notwithstanding a finding that the ‘match’ was a proper one.
    4884 The same can be said of the composition cases. The decision to involve some only of the creditors may be made out of the basest of motives. It might equally have come about through other undisclosed conduct that could not be described as base, but is nonetheless offensive to conscience and thus prone to attract equity’s attention.
    4885 Unlike the dishonest and fraudulent design integer in Barnes v Addy, I am satisfied that the use of the terms ‘underhand bargain’ and ‘mala fide’ in Earl of Chesterfield does not import an actual intention to deceive in a fourth limb case. But the circumstances must still be so offensive to public utility as to demand the intervention of equity.
    22.2.2.3. The fourth limb: composition cases and public utility
    4886 There is an obvious distinction between the composition cases and the factual situation in this litigation. In the composition cases, creditors generally (including the disappointed creditors) have entered into an arrangement. But the disappointed creditors have done so on a false assumption. The underlying assumption is one of equality among creditors. If there is a secret bargain that rewards some only of them, it will be a fraud on the disappointed faction. The first aspect of this summary is missing from the factual situation in this litigation. Indeed, a central feature of the complaints made by the plaintiffs is that the non‑bank creditors (including, perhaps especially, LDTC) were excluded from the arrangement. This makes it difficult to carry the analogy through and to identify the public utility aspect involved in the facts of this case.
    4887 This brings to mind the statement in Browne D, Ashburner’s Principles of Equity (2nd ed 1933) 295, that the doctrine does not apply unless the creditors are ‘dealing on a common basis’. The authors cite Smith v Salzmann (1854) 9 Ex 535, 543 as an example of this qualification. Baron Parke stressed the importance of the collateral arrangement being made independently and not so as to influence other creditors to enter into the composition.
    4888 ET Fisher & Co is a similar case. All creditors (including the ES&A Bank) agreed to a composition with a debtor company. Two years later, the company obtained a further advance from the bank to enable it to pay the composition. A term of the advance was that the company pay the bank the full amount of the original debt. The High Court ruled that the later arrangement was not a fraud on the creditors and that the bank was entitled to payment. The transaction was not entered into at the same time as the composition and there had been no misrepresentation of the bank’s position made by the bank to the other creditors when the composition was effected. The transaction was not inconsistent with the obligation of good faith between the bank and the other creditors which arose from the composition arrangement.
    4889 Starke J explained that under a composition, the creditors act on the faith and understanding that they are all coming in on equal terms, and if a deed is prepared to carry out an equal distribution, every creditor who executes it does so on faith that there is no private bargain with any of the other creditors that will destroy the equality. Any private dealing in favour of a particular creditor contemporaneously with a composition for the general body of creditors is inconsistent with good faith, and is illegal. But after a composition has been fully and finally worked out, a debtor can lawfully make a separate agreement for valuable consideration to pay in full the original debt of a particular creditor. Thus an agreement with the bank to make advances to ET Fisher & Co and in consideration to pay in full the original debt would be lawful, even if the borrowed moneys were repaid from the bank’s advances. Starke J rejected any argument based on public utility, saying that public policy affords no satisfactory basis for invalidating a business arrangement, the carrying out of which is beneficial to all who were interested in the company’s affairs.
    4890 I am not suggesting that the fact situation in ET Fisher & Co has much in common with the facts in this case. But ET Fisher & Co, and much of the other case law on this issue, concerns common dealing and equality among creditors. This might reflect the context of insolvency situations and the influence of the Bankruptcy Act and its predecessors. The common dealing basis creates an obligation to tell all creditors of the private arrangement to avoid a breach of good faith and the consequences of misrepresentation. But it also suggests that where the parties are not dealing collectively, there is a need for some additional element to render the situation actionable in equity. This will depend on the particular circumstances of the case.
    4891 This is why I have come to the view that it is not possible, in this general section on legal principles and divorced from the peculiar circumstances of this litigation, to rule whether arrangements of type under consideration are capable (as a matter of law) of being regarded as equitable frauds under the fourth limb. A final ruling on that issue will have to await detailed consideration of the facts and of the elements advanced by the plaintiffs in their imposition and deceit case. Nonetheless, it is instructive to look at some of the more recent authorities in this area.
    4892 I will commence with a word of warning. As Hamilton J pointed out in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510 [237], it is not only as a matter of equitable principle that compositions derived by promising special benefits to certain creditors can be struck down. They are vulnerable to attack under principles of the common law and directly under the corporations legislation. It is sometimes difficult to see from the reports whether the decision was based, wholly or in part, on equitable principles and, in particular, on the fourth limb of Earl of Chesterfield.
    4893 The question was dealt with briefly by French J in Re La Rosa; Ex parte Norgard v Rocom Pty Ltd (1990) 21 FCR 270, 287 ‑ 288. The primary claim (which failed) was raised under Bankruptcy Act s 120. In dealing with the alternative claim under the fourth limb (which also failed), French J remarked that the evidence did not establish any relationship between the transactions and the position of actual or prospective creditors such that the other party could, in equity, be called to account for the benefit obtained. This will bring into play the whole question of the prejudicial effects of the Scheme, a central feature of the plaintiffs’ case. French J characterised the impugned payments as ‘improvident’, but went on to say that ‘improvidence which benefits another will not of itself give rise to rights of recovery outside the framework of statutory provisions or some other legal or equitable basis for recovery’. This raises the question, to which I will return at the end of this section, about whether the true basis of the plaintiffs’ claims is a fraud on the bankruptcy laws rather than a cause of action analogous to the composition cases.
    4894 Paton v Campbell Capital Ltd (1993) 46 FCR 30 contains an analysis of the line of composition cases. The court extracted three themes from the cases. First, there is a need for creditors to be treated equally. Secondly, there is a reference to the execution by a creditor being obtained by bribery; that is, the execution being obtained by some inducement or reward special to the person who is to receive it. Thirdly, there is in the cases a reference to the secrecy of the bargain between the debtor and the creditors who obtain a special advantage. Their Honours went on to comment that subsequent cases have tended to focus on the inequalities among creditors or the secrecy of the arrangement. But the court ruled that secrecy, of itself, is not an essential ingredient in treating an arrangement or composition as being void. The view that secrecy is not a necessary ingredient was also arrived at in Bidald Consulting Pty Ltd [247].
    4895 I think that the last point has to be understood in the light of the facts of the case. In this instance, one of the collateral arrangements said to infect the composition was known to the creditors. In any event, the plaintiffs’ case here relies heavily on the non‑bank creditors not being aware of the arrangements between the Bell group companies and the banks.
    4896 Passing reference was made to the fourth limb of Earl of Chesterfield in Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189. The creditors of a company had resolved to accept the administrator’s recommendation that the company enter into a deed of company arrangement rather than proceed to liquidation. The DCT moved to have the deed of company arrangement set aside and the company liquidated. It did so on broad public policy grounds based on the trading history of the company and other companies in which the directors had been involved. Prior to the meeting, the directors had approached some creditors and obtained proxies in return for a promise to pay additional to that which was available to them under the proposed deed.
    4897 Wallwork J regarded the approach to creditors as one (but not the major) reason why the deed should be set aside. His Honour said, at 198, that had the administrator known of the full history of the directors and the companies, he would not have made the recommendation that the creditors accept the deed. I do not think the decision gives much guidance except to show that the fourth limb has been considered in the context of a corporate insolvency arrangement and that it reinforces the equality argument. Because it relates to a formal deed of company arrangement, it is necessarily a common dealing case.
    4898 Wood v Laser Holdings Pty Ltd (1996) 19 ACSR 245 also concerned a deed of company arrangement. Eleven of the 22 creditors who voted in favour of executing a deed of company arrangement had, prior to the meeting, sold their debts and given their proxies to a person who had been negotiating with the directors to take control of the company. This was not disclosed to the other creditors at the meeting, or to the administrator. The court set aside the deed. Hansen J, at 267, said that what the third party achieved might fairly be described as an ‘underhand bargain’. It was selective among the creditors to achieve his own ends and not for the purpose of advancing the best interests of the creditors as a whole. When the votes were taken neither the administrator nor the creditors (other than those who had sold their debts) knew that such sales had occurred, and nor did the administrator. Again, this centres on equality of treatment and is also a common dealing case.
    4899 I confess to concerns about the extension of the imposition and deceit cause of action, by analogy to the composition cases, much beyond the situation of common dealing. Arrangements between a debtor and an individual creditor concerning a debt are everyday occurrences in commerce. These dealings will often occur when the debtor is under stress. Arrangements between a debtor and its creditors as a body, other than by resort to a statutory administration, are not unheard of, but they are rare. Where it is sought to extend the reach of the arrangement to all creditors, the binding effect comes either from contract (in an informal arrangement) or by force of the statute, where applicable. In both instances, there is an element of common dealing. Where necessary, equity will come to the aid of the parties to ensure a ‘level playing field’ in the circumstances that I have mentioned.
    4900 The plaintiffs’ argument is grounded in the notion that innocent creditors are acting in ignorance of the full range of facts underlying the Transactions, and that, even though they did not know of those facts, they might suffer adverse consequences. My concern is the extension of that result, as a matter of general legal principle, to a situation that falls outside the common dealing concept. To my mind, the importance of the common dealing principle is that it creates a nexus between the creditors in relation to the rights they have against the debtor. To adopt the language of Ex parte Milner; In re Milner (1885) 15 QBD 605, all the creditors who come in under the common dealing ‘oblige themselves to each other’ and the debtor ‘obliges himself to every one of them’. It is because of that nexus that the obligations spoken of in Earl of Chesterfield of good faith come into play.
    4901 To ignore the nexus is perilously close to anticipating that a common dealing situation might, perhaps would, arise and that the arrangement is therefore (from inception) a fraud on the bankruptcy laws. In Bell (No 1), I rejected an application to amend the statement of claim to add, as one of the bases of the equitable fraud cause of action, a fraud on the bankruptcy laws. I did so for the simple reason that the Transactions either are, or are not, caught under the nominated provisions of the Bankruptcy Act.
    4902 The idea of a fraud on the bankruptcy laws, at least in these circumstances, suggests an equitable principle of the ilk of s 260 of the ITAA (as it stood up until the 1970s). That provision rendered void as against the Commissioner arrangements by which an entity arranged its affairs to produce the effect of defeating, evading or avoiding tax. If a party seeks a remedy outside a statutory framework, it must identify a legal or equitable principle on which recovery can be based.
    4903 Many of the cases in which the concept of a fraud on the bankruptcy laws has been invoked relate to attempts, in a formal administration, to extract an additional benefit: Hall v Dyson (1852) 17 QB 785 (a payment to induce a creditor to withdraw a notice of opposition to a discharge from bankruptcy); Nerot v Walker (1789) 3 TR 18 (a payment in exchange for an undertaking not to conduct an examination of the bankrupt). These cases bear a direct relationship to the common dealing situation.
    4904 There are other cases in which a fraud on the bankruptcy laws has been raised in relation to arrangements entered into outside a formal administration but with an eye to the potential for a later insolvency: Re Apex Supply Co Ltd [1941] 3 All ER 473 (a clause in a contract requiring payment of an additional amount in the event of bankruptcy); Caboche v Ramsay (a clause in a superannuation deed by which benefits would be forfeited on commission of an act of bankruptcy). The connection of these cases, too, to the common dealing concept will be readily apparent. It seems, therefore, that this is where the focus of attention of the relevant jurisprudence lies.
    4905 Of course, one way of looking at the plaintiffs’ case is to say that it is a common dealing situation. The financial predicament of the Bell group companies was so precarious that an obligation arose to bring all creditors in to the arrangements. They did not do so, but the obligation was nonetheless there and the consequences of dealing solely with the banks and without telling the other creditors are the same. As I said at the commencement of this section, I am reluctant to give a definitive ruling in the abstract about whether the fourth limb extends to cases of this type. I will return to the analysis in the course of dealing with the factual matrix.
    22.2.2.4. The fourth limb: miscellaneous matters
    4906 For the sake of completeness, I will deal briefly with some miscellaneous matters that were raised in the submissions.
    4907 The banks submit that plaintiffs’ equitable fraud case is based upon the proposition a person can fail in a knowing assistance case under the second limb in Barnes v Addy, but succeed on the basis of loss or detriment caused to a third party by breach of fiduciary duty by a director to a company that merely takes place in a context or in circumstances (which fall short of knowing assistance) involving a third party. They also say that this would render the Barnes v Addy jurisprudence superfluous.
    4908 I do not accept this submission. An equitable fraud claim based upon the fourth limb of Earl of Chesterfield might succeed where a knowing assistance case and the second limb of Barnes v Addy might fail (or vice versa) because they are separate claims with separate ingredients. In Farah Constructions, the High Court recognised the existence of a (possible) alternative cause of action to Barnes v Addy based on a third party knowingly inducing or immediately procuring of a breach of trust. I see no difference (in terms of its impact on Barnes v Addy) between that situation and the existence of a (possible) cause of action under Earl of Chesterfield.
    4909 As the plaintiffs pointed out in their response, a claim under the second limb of Barnes v Addy involves there having been a breach of a duty which the directors owed to the company. An equitable fraud under the fourth limb, in contrast, may involve no breach of fiduciary duty owed by a director to a company at all. The gravamen of a cause of action under the fourth limb is the effect on other persons not party to the transaction, rather than any breach of fiduciary duty to anyone (including to someone who is a party to that contract).
    4910 One of the grounds on which the banks dispute the ‘public utility’ argument is by saying that that the legislature has taken care of any such doctrine by enacting protective provisions within the Corporations Law and the Bankruptcy Act. The banks say that the plaintiffs ‘invite the Court to recognise an equitable cause of action to strike down commercial contracts … for an ill‑defined public policy reason’, without citing any precedent or principle in support of the invitation. I do not accept that argument. Just because the legislature has prohibited certain types of conduct does not mean that there is no room for equity. Public policy has long been a touchstone of the supervisory jurisdiction of the courts. If the legislature wished to oust that jurisdiction it could only do so by very clear language. I do not detect such language in those statutes.
    4911 There is a divergence of views between the parties about the relevance (if any) of causation in the context of equitable fraud. The plaintiffs contend that under the doctrine of equitable fraud by imposition and deceit a transaction can be set aside because of equitable fraud, without enquiring whether the ‘innocent’ third party would have acted in the same way had it known of the deceit. Alternatively, a transaction can be set aside because of equitable fraud if the innocent third party could (that is, may well) have acted differently, without the need to show that it would have acted differently.
    4912 The banks say there is a fundamental flaw in this argument. The plaintiffs, and particularly LDTC, do not allege that the imposition and deceit exist apart from the effect of the Transactions said to create that equitable wrong. The effect of the Transactions (that is, their causative effect) is at the heart of the prejudice said to enliven the equitable fraud. Further, in relation to LDTC, the very prejudice to the property held by LDTC only arises because of a posited action that it would have taken, or could have taken, had its ‘ignorance’ not existed. Therefore, it is not to the point to assert that, in the abstract, there may be cases of equitable fraud that do not involve a causative enquiry. The banks also say that the plaintiffs rely on cases relating to breaches of fiduciary duty, but not all aspects of their cases on imposition and deceit rely on such a breach.
    4913 The nature of the banks’ approach renders it inutile to analyse the state of the law in the abstract. The answer to the question whether, and if so to what extent, causation plays a part in an equitable fraud claim may depend on the type of fraud found to have been perpetrated, the nature of the duties breached and the relief that a court is prepared to award. For this reason, further discussion of the legal position is best left to the factual discussion on the equitable fraud claim.
    4914 A separate question is whether there is a defence of contributory responsibility to a claim for relief based on equitable fraud. In my view, the answer is no. Such a defence does not diminish awards of equitable compensation for breach of trust or fiduciary duty: Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; (2003) 216 CLR 109, 126 – 127 [44]. This principle applies more broadly to other kinds of relief in respect of equitable fraud. Writing extra‑judicially in Finn P (ed) Essays on Damages (1992) 127, Handley JA said: ‘Contributory negligence has never been a defence to an action for legal or equitable fraud. A plaintiff is entitled to relief if the fraud was “a cause” of the loss, even there were other more weighty causes for in this field the court does not allow an examination into the relative importance of contributory causes [citing Barton v Armstrong [1976] AC 104 , 118]. The same principle also applies to breaches of fiduciary duty’.
    4915 Finally, the banks argued that the instances described by Lord Hardwicke in the fourth limb were ‘particular manifestations of wrongs in the social environment of 18th century England’. The common factor was ‘the protection of the interests of landed gentry and aristocratic wealth from undermining by those who would take advantage of their position to work on the weakness, passions, affections and human frailties of members of those upper classes’. The practice of paying for a recommendation for public office was ‘another class of arrangement of then contemporary relevance’.
    4916 According to the banks, this social context explains why courts employed public utility to classify these sorts of agreements as illegal. But they also point out that the instances mentioned in the fourth limb caused or were productive of causing a misrepresentation or deceit on an innocent third party. This may be so. But it does not mean the concept of public utility has been left behind in the 18th century. It remains a touchstone for equitable intervention in the 21st century if and when intervention is required and subject to overriding stricture that equity is not a loose cannon: it develops and operates according to established and recognised principles.
    22.2.3. An inequitable and unconscientious bargain
    4917 The second broad head under which the equitable fraud claim is advanced is that the Transactions and the Scheme constituted an inequitable and unconscientious bargain on each Bell Participant. I should remind the reader that this head does not form part of LDTC’s cause of action. It should also be remembered that the essence of this aspect of the case is twofold. First, that the companies were in a position of special disability; namely, that they did not have the benefit of an independent and free guiding mind when considering whether or not to enter into the Transactions. Secondly, that the banks knew of, and took advantage of, this special disability.
    22.2.3.1. Unconscionability; unconscionable dealing
    4918 In Verwayen (444), Deane J said that he preferred the term ‘unconscientious’ to ‘unconscionable’, regarding the former word as more accurate. However, his Honour acknowledged that the generally accepted usage favoured the term ‘unconscionable’ and he adopted that use in the remainder of his judgment. In the pleading, the plaintiffs use the word ‘unconscientious’ rather than ‘unconscionable’ but I do not think anything turns on the difference
    4919 It has been said that unconscionability is better described than defined. As a broad general statement, the term ‘unconscionable’ is to be understood as referring to what one party ought not, in conscience as between the parties, be allowed to do. Conduct which is ‘unconscionable’ will commonly involve the use of, or insistence on, strict legal entitlements. Equity regards such conduct as abhorrent where it allows one person to take advantage of another’s special vulnerability or misadventure in a way that is so unreasonable and oppressive that it is an affront ordinary minimum standards of fair dealing: Verwayen (440 ‑ 441) (Deane J).
    4920 The broad import of the doctrine of unconscionable dealing is encapsulated in the well‑known passage from the reasons of Mason J in Amadio (462). His Honour described unconscionable conduct as an underlying general principle that may be invoked whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis a vis another, and unfair or unconscientious advantage is then taken of the opportunity thereby created. In Amadio (474) Deane J described the long‑established jurisdiction that extended generally to circumstances in which:
    (a) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them; and
    (b) that disability was sufficiently evident to the stronger party to make it prima facie unfair or ‘unconscientious’ that he procure, or accept, the weaker party’s assent to the impugned transaction in the circumstances in which he procured or accepted it.
    4921 Deane J went on to say that where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable.
    4922 Further, the jurisdiction is based on three things. First, a relationship between the parties which, to the knowledge of the donee, places the donor at a special disadvantage vis a vis the donee. Secondly, the donee’s unconscientious exploitation of the donor’s disadvantage. Thirdly, the consequent overbearing of the will of the donor whereby the donor is unable to make a worthwhile judgment as to what is in his or her best interest: Louth v Diprose (1992) 175 CLR 621, 626 (Brennan J). Although this uses the language of gifts, I can see no reason why it should not apply equally to a commercial transaction.
    4923 Unconscionable dealing is a species of the broader doctrine of unconscionable conduct. And it is unconscionable dealing with which I am concerned in this case. The words ‘dealing’ and ‘bargain’ are used interchangeably in the authorities but, again, I can see no material difference in the language. Unconscionability is a term that has various shades of meaning according to its context.
    4924 It is possible to distil from the reasons of the Full Court in Tranchita v Retravision (WA) Pty Ltd [2001] WASCA 265 [61] ‑ [65] a number of general principles relevant to the doctrine of unconscionable dealing.
41. The starting point is the general description of the doctrine given by Deane J in Amadio, referred to above.
42. The doctrine enables consideration to be given to the extent that unconscionable conduct in contract negotiations may be used as a basis for having that contract set aside.
43. It focuses on the conduct of the stronger party, rather than (as in, for example, undue influence) the position, quality and consent of the weaker party.
44. Unconscionable conduct justifies intervention by the court because the contract arises from a combination of the disadvantageous position in which the party seeking relief is placed and the fact that the stronger party unconscionably takes advantage of that position.
45. The plaintiff has to prove that he was at a special disadvantage prior to entering into the contract.
46. There are many factors from which a special disadvantage can be inferred. Often a combination of factors will be present. Without attempting an exhaustive definition, there are three general categories of disadvantage relevant to unconscionable conduct: physical incapability, intellectual or emotional deficiencies, and lack of endowments (such as education).
47. The stronger party must know of the disadvantage in the sense described in Amadio; namely, disability was sufficiently evident to the stronger party to make it prima facie unfair or ‘unconscientious’ that he procure, or accept to procure, the weaker party’s assent to the impugned transaction.
48. It is not enough that the parties are of unequal bargaining power. The conduct of the stronger party has to be exploitative or oppressive.
    22.2.3.2. Special disadvantage
    4925 In Amadio, in the course of describing the broad import of the doctrine of unconscionable dealing, Mason J referred to a party being placed at a ‘special disadvantage’ vis a vis the other party. His Honour made some further comments about ‘special disadvantage’ by adding, at 462:
    I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow any suggestion that the principle applies whenever there is some difference in bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.
    4926 In the authorities, the words ‘disadvantage” and ‘disability’ are used interchangeably. But it seems that there is no difference in meaning intended by the use of alternative descriptions: Micarone v Perpetual Trustees Australia Ltd [1999] SASC 265; (1999) 75 SASR 1 [586].
    4927 In Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [200] FCA 2; (2000) FCR 491, the Full Court indicated that the categories of special disadvantage extend to ‘situational disadvantage’ (from particular features of a relationship between actors in the transaction) as well as the constitutional (or inherent) disadvantages engendered by such disabilities as illiteracy or lack of education, illness or infirmity.
    4928 When that case came before the High Court (Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51) Gleeson CJ, at [9] ‑ [10], accepted the distinction between situational and constitutional disadvantage, on the proviso that such descriptions do not take on a life of their own in substitution for the content of the law to which they refer. His Honour also affirmed that mere inequality of bargaining power, without more, does not create special disadvantage. He went on to say: ‘Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests’. Gleeson CJ also noted, at [16], that parties to commercial arrangements frequently use their bargaining power to ‘extract’ concessions from other parties, saying ‘that is the stuff of ordinary commercial dealing’.
    4929 While relevant, it is unnecessary to show that the will of the weaker party has been so overborne as to prevent that party from acting independently and voluntarily: ACCC v CG Berbatis 171. Equity intervenes not necessarily because the complainant has been deprived of an independent judgment and voluntary will, but because that party has been unable to make a worthwhile judgment about what was in the best interests of that party: ACCC v CG Berbatis [46] (Gummow and Hayne JJ). While often important, it is unnecessary to show that there has been an inadequacy of consideration moving from the stronger party: Blomley v Ryan (405) (Fullagar J).
    4930 In Bell (No 1) I noted that, from time to time, doubts had been expressed about the reach of this doctrine where both parties are large commercial organisations operating at arm’s length and in receipt of expert advice. I proffered the view that there is no hard and fast rule that denies the reach of unconscionability in those circumstances. As a general statement, I think that holds true. So far as it can be deciphered, the general trend of authority has been to broaden the scope of equitable principles in relation to commercial transactions: Hospital Products (100) (Mason J). That having been said, there is a dearth of authority applying the unconscionable conduct doctrine to dealings between substantial industrial (or financial) conglomerates acting with a welter of legal advice. Nonetheless, in Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37 [55], Wheeler J accepted that a corporation (admittedly a small family trustee company) may suffer from a ‘special disadvantage’. Her Honour also said that a desperate financial situation from which the company was attempting to escape might, in some circumstances, constitute special disadvantage.
    4931 But it will still be necessary for the plaintiffs to demonstrate the existence of special disadvantage. The classification of the participants as ‘substantial industrial (or financial) conglomerates acting with a welter of legal advice’ will be a factor in deciding whether or not there is, in fact, a special disadvantage. So, too, will be the financial predicament in which one of the participants found itself at the time and, if it exists, any economic duress exercised by the stronger party: Australia and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344 [57], [66].
    4932 I suspect that the existence (or otherwise) of special disadvantage will be the single most important (but by no means the only) factor in deciding this aspect of the equitable fraud case. In making that decision, I will pay due regard to the admonition delivered by Kirby J in Austotel v Franklins Selfserve (586), in the context of equitable estoppel. His Honour warned that courts should not distort the relationships of substantial, well-advised corporations in commercial transactions by subjecting them to the overly tender consciences of judges.
    22.2.3.3. Knowledge of the special disadvantage
    4933 In their closing submissions, the parties entered into a debate about whether actual knowledge of the special disability was a necessary element of an unconscionable dealing claim or whether constructive knowledge would suffice. For example, the plaintiffs said: ‘Actual or constructive knowledge on the part of the “stronger party” of the existence and breach of a fiduciary duty owed by a fiduciary to the “weaker party” can mean that the weaker party was operating under a special disadvantage to the knowledge of the stronger party’. In their response, the banks said: ‘The plaintiffs attempt to create liability on something short of actual knowledge of a special disability. However, for the reasons set out in the main submissions, there is no room for constructive knowledge of the type discussed in Baden’. In fact, when closely read, the banks’ main submission did not advocate the position that actual knowledge, and only actual knowledge, would suffice. Their response has to be seen in that light.
    4934 I think I can deal with this issue in relatively short order. In my view, it is not helpful to focus on the juridical or conceptual differences between actual and constructive knowledge. Nor is it necessary or desirable to hark back to the five categories of knowledge in Baden. There is, in my opinion, no need to go beyond what was said in Amadio:
    (a) is it a situation ‘where the [stronger] party knows or ought to know of the existence of [the disabling] condition or circumstance and of its effect on the [weaker] party?: Mason J (462);
    (b) if A has actual knowledge that B is under a special disadvantage so that B cannot make a judgment about what is in his own interests, and A takes unfair advantage of A’s superior bargaining power, his conduct in so doing is unconscionable. ‘And if, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same’; Mason J (467); and
    (c) whether the disability was ‘sufficiently evident to the stronger party to make it prima facie unfair or “unconscientious” that he procure, or accept, the weaker party’s assent to the impugned transaction’: Deane J, (474).
    4935 In each case, the emphasis is mine. To my mind, it is clear that something short of actual knowledge will suffice. But there is no need to examine the entrails of the long‑suffering doctrine of constructive notice. The boundaries are well and truly marked.
    4936 I intend only to mention two recent decisions in which the dicta in (a), (b) and (c) above has been explained and which support the points I have just made. In ACCC v Radio Rentals, Finn J said, at [21]:
    [What is required] is knowledge of a particular state of affairs which itself embodies a judgment as to the disabled party’s ability to conserve his or her own affairs in the parties’ dealing. It is that state of affairs which is to be ‘sufficiently evident’ to the stronger party. If that person does not actually know of that state of affairs and is not ‘wilfully ignorant’ of it (in the sense that he or she is intent on not knowing it despite what is evident to him or her… that person must at least be aware of circumstances that would cause him or her or a reasonable person in his or her position to suspect from what is evident that that state of affairs may exist.
    4937 In Morcos v Advantage Credit Union Ltd [2003] WASCA 15 [18], Murray, Anderson and Steytler JJ observed:
    It is an element of the defence that the party seeking to rely upon the unconscientious bargain made knows or ought to know of the particular circumstance or condition which will make it unfair or unconscientious to rely on the bargain. That is not a duty to inquire whether there may be any such circumstance or condition, but the defence may operate in reliance upon what is known or ought to be known by the plaintiff having regard to the way in which the parties have in fact dealt with each other.
    4938 The question, therefore, is whether the person knew or ought to have known of the particular state of affairs or, put in a slightly different way, whether the state of affairs was sufficiently evident.
    4939 This is all I propose to say about equitable fraud for the moment. I will now turn to the factual basis concerning the conduct and state of mind of the directors of the Bell group companies and of the banks, through their relevant officers. From there I will move to a consideration whether the necessary elements of the several causes of action have been satisfied.
49. Factual determinations of breaches of duty: a first look
    23.1. Introduction
    4940 Because no relief is sought against the directors it is easy to lose sight of the fact that, at its heart, this case is about conduct of individuals (namely, the directors) that is alleged to have been in breach of duty. Unless the directors breached their duties, there could be no question of liability attaching to the banks under Barnes v Addy. The factual base of all three limbs of the equitable fraud claim stem from, although they are not limited to, the conduct of the directors. The same can be said for the statutory claims. With that in mind, I will, in Sect 24 to Sect 29, deal with an area that underpins all of the causes of action in this litigation: what did the critical players in the Transactions (the directors) actually do and what did they know, suspect or believe?
    4941 In these sections, I wish to do a number of things. In the remainder of this section, I will deal with matters that are of general application. In particular, I will remind the reader who the directors are and summarise the duties they are alleged to have breached. With respect to matters that the directors are said to have known, I outline, generally, areas that are common ground and others that are not. In the final part of this section, I describe the pool or sources of information to which the directors had access. In the next three sections I turn to the knowledge and conduct of the Australian directors, the directors of companies in the BGUK group and Equity Trust, as director of BGNV. Having completed those tasks, I examine whether all or any of the directors breached their respective duties.
    4942 Before I leave this introduction, I wish to add two notes that are, in all probability, matters of historical interest only. Apart from a slight annoyance factor, they are of no significance in the litigation.
    4943 In the initial version of the statement of claim, the Australian directors were said to have been de facto directors of BGNV and, in that capacity, were implicated (along with Equity Trust) in the breaches of duties owed to BGNV. The de facto director allegation was retained in all versions up to, and including, the ‘further amended seventh amended statement of claim’. By the ‘third amended statement of claim’, the claim that Equity Trust had breached its duties had been deleted. Between the seventh amended statement of claim and the version of 8ASC that came before me in October 2000 (which was not the first, or last, version of 8ASC) the allegation that the Australian directors were de facto directors had disappeared. However, Equity Trust was again a target, albeit without a claim for relief against it.
    4944 I am not suggesting that the de facto director allegation should have been retained. On the evidence led in this action I doubt such a case would have succeeded. In saying this, I acknowledge the case may have been presented in a different way if that were a live issue.
    4945 Another feature of the initial version of the statement of claim is that it did not contain any allegation that the UK directors breached their duty to BGUK. This allegation was added at a reasonably early stage. The claim that there was a breach of duty by the directors of BIIL came into the litigation through 8ASC.
    23.2. The directors and their duties: the context
    23.2.1. Identifying the directors
    4946 It is convenient to repeat the information given earlier about the several persons who formed groups defined as the Australian directors, the UK directors and the BIIL directors. I should also remind the reader about the directors, from time to time, of BGNV.
    4947 The Australian directors were David Aspinall, Peter Mitchell, and Antony Oates. Of the three directors, only Aspinall and Mitchell gave evidence. I have been asked to draw conclusions about the failure of the banks to call Oates.
    4948 Another person of interest is Colin Simpson. As I explained in Sect 4.1.5.1, Simpson was Aspinall’s executive assistant and they worked closely together from July 1989. Simpson became a director of TBGL in August 1990 and remained so in April 1991. There is no pleaded allegation that Simpson was a de facto or shadow director or that he owed fiduciary duties that were breached. He did not give evidence and I have also been asked to draw conclusions about the failure to call Simpson.
    4949 I will deal with the issues regarding the failure to call these individuals in the appropriate place. In these sections I will consider only the evidence of the two who were called. But I will also deal with the position of Oates and Simpson to the extent that it can be gleaned from contemporaneous documents.
    4950 The group described as the UK directors are Michael Edwards, Peter Mitchell, Alan Birchmore and Alan Bond. They were directors of BGUK and TBGIL. None of those people (other than Mitchell) were called to give evidence and, again, I am asked to draw adverse inferences. Michael Edwards and Peter Whitechurch were directors of BIIL, a subsidiary of TBGIL. Whitechurch was also the company secretary of the relevant BGUK group companies. He gave evidence.
    4951 Oliver Graham, Derek Williams, Katherine Burghard and Curacao Corporation Company NV were the original directors of BGNV. The latter ceased to be a director on 10 March 1988 and was replaced by Equity Trust, a Netherlands Antilles company. Pim Ruoff was the sole director of Equity Trust throughout the relevant period. By 26 August 1988, Graham, Williams and Burghard (who were all employees of Bell group companies) had resigned from the board of BGNV. Thereafter, and until its resignation in June 1991, Equity Trust was the sole director.
    4952 In these sections I am concerned, primarily, with events occurring after 26 August 1988. Accordingly, the focus of attention will be on Equity Trust, rather than the original directors. The plaintiffs allege that Equity Trust breached its duties to BGNV but no relief is claimed against it. Ruoff was not called to give evidence and nor was anyone else on behalf of Equity Trust.
    23.2.2. A summary of the alleged breaches
    4953 The breaches of duty alleged against each of the Australian directors lie in one or more, or a combination of, the following matters, all of which are said to have been done (or not done) when the directors knew, believed, suspected or ought to have known or recklessly disregarded that the companies were in an insolvency context.
50. They failed to draw a distinction between the Bell group as a whole and its individual members and did not give any consideration to the separate interests of each Australian plaintiff Bell company, in deciding to cause each company to enter into the Transactions and the Scheme.
51. If they did give consideration to, and formed a view that it was in the best interests of each Australian Bell Participant, the view was not a bona fide view.
52. They did not truly and reasonably believe that they were acting bona fide in the best interests of the company.
53. The entry into the Transactions was not reasonably incidental to or within the scope of carrying on the business of each Australian Bell Participant and therefore, the decision to enter into the Transactions was not made bona fide in the best interests of each company and was made for an improper purpose.
54. They made the decision for a collateral or improper purpose of protecting or assisting the interest of BCHL.
55. They exercised their powers in the interests of BCHL to the disadvantage of each plaintiff Bell company where there existed a conflict or potential conflict of interest between the interests of BCHL and those of each Australian Bell Participant.
    4954 There is a broad proposition lying at the heart of the plaintiffs’ allegations that the directors failed to act in the best interests of the companies and acted failed to exercise their powers properly. The plaintiffs say that the directors caused the companies to enter into the Transactions knowing that the instruments prejudiced creditors, other than the banks. The prejudice lay in the fact that there was a probable prospect of loss, and no prospect of benefit, to the other creditors. The contentions concerning the prejudicial effect of the Transactions and the Scheme are inextricably linked to those concerning breaches of duty.
    4955 Another proposition (seemingly not, in itself, contentious) is that the directors knew that some of the Bell group companies might be wound up and to avoid a winding up it was necessary to consider and implement a restructuring of the financial position of each company in the group. But the consequences are highly contentious.
    4956 The gravamen of the plaintiffs’ submissions on this point lies in the proposition that the Transactions did not provide time to consider and implement a restructuring of the financial position of each of the Bell group companies. There are several reasons for this. First, the plaintiffs say that immediately after the Transactions were entered into the companies could not observe and perform the terms of the Transactions because of the financial condition of each Australian plaintiff Bell company. In support of this contention the plaintiffs say:
    (a) the companies were unable to pay their debts as they fell due;
    (b) the cash flow of the Bell group was insufficient to enable the companies to pay interest and other expenses payable to the banks in February 1990 and interest to bondholders by May 1990;
    (c) the terms of the Transactions prevented the companies from using the proceeds of asset sales to meet their debts as they fell due without the consent of all the banks;
    (d) the consent of all the banks to the use of asset sale proceeds had not been sought or given;
    (e) effectively the banks would be entitled to enforce the securities immediately after the Transactions were entered into;
    (f) the Transactions involved the probable prospect of loss to the non‑bank creditors because under the Transactions the banks received security over all the significant and worthwhile assets of the Bell group and the other creditors were relegated to participating in any restructuring or liquidation after the banks had the security satisfied.
    4957 Secondly, one of the consequences of the Transactions is that the directors gave up effective control of the companies in favour of the banks who thereafter could, and according to the plaintiffs did, control the affairs and future of the Bell group in their own interests and irrespective of the interests of the companies or their creditors. I have previously referred to this as ‘the cl 17.12 issue’.
    4958 Thirdly, and in any event, irrespective of the position immediately after the Transactions were entered into, the Transactions were unlikely to provide sufficient time to enable the Bell group successfully to consider and implement a restructuring of the financial position of each company to enable each of them to pay their debts as they fell due. This was because of the extent of the disconformity between recurrent income and expenses, the scale of the restructuring that would be necessary and the time it would take to put it in place and the fact that the banks would be or were likely to be entitled to enforce the securities before any such plan could be implemented.
    4959 Fourthly, any such restructuring was likely to require the cooperation of creditors (including the banks) and in the case of the non‑bank creditors their acceptance of a significant compromise or reduction of their entitlements due to the endemic illiquidity position and asset and liability position. In fact, the non‑bank creditors, including the bondholders, were likely to be worse off by reason of the Transactions.
    4960 Finally, the directors caused the Bell Participants to enter into the Transactions as a means of dealing with the insolvency or inevitable insolvency of the Bell group companies and as a way to delay approaching creditors in the vague or speculative hope that something might turn up. They did so at a time when they knew, believed or suspected or ought to have known or recklessly disregarded the likely adverse effect on the non‑bank creditors.
    4961 The banks contentions can be quite shortly stated. The directors believed, and were reasonably entitled to believe, that the companies had valuable assets that could be preserved and that it was possible to restructure the financial position. The companies would be able to meet their commitments while the restructuring was put in place and, once in place, the restructure would permit the companies to continue as a going concern.
    4962 The breaches of duty alleged against the UK directors are pleaded in the same way as those concerning the Australian directors, save that the conflict of interest allegation is limited to Mitchell and Bond. The breaches are separately particularised. However, I think it is fair to say that the broad thrust is the same. For example, the allegation that the instruments prejudiced creditors, other than the banks, in that there was a probable prospect of loss, and no prospect of benefit, to the other creditors, appears in PP 39A(u)(ii)(A)(II).
    4963 There is a discrete issue that affects the UK directors. They insisted on, and obtained, a letter of comfort from TBGL to the effect that the latter would fund BGUK’s ongoing requirements. A question arises as to what, if any, effect this has on the allegation that the UK directors breached their duties.
    4964 Equity Trust is in much the same position. The breaches of duty are the same as those alleged against the Australian directors, save for the conflict of interest point. Although they are separately particularised, the broad thrust is the same. In PP par 39E, the plaintiffs allege that Equity Trust knew BGNV was in an insolvency context, that it had creditors and that it was not previously liable for the debts of BGF and BGUK to the banks. In causing BGNV to enter into the Transactions, Equity Trust breached its duties:
    (a) to act in the interests of BGNV because it knew the instruments prejudiced creditors, other than the banks, in that there was a probable prospect of loss, and no prospect of benefit, to the other creditors; and
    (b) to exercise its powers properly because the instruments conferred rights on the banks, which prejudiced creditors other than the banks (as described above), and thus the instruments were not within the interests of BGNV as a whole, including all its creditors.
    23.2.3. Knowledge and belief: some common ground
    4965 There is some common ground about what the directors knew or believed. For example, it is not contentious that the directors knew that the debts of BGF and TBGL to the Australian banks were previously unsecured, as were BGUK’s and TBGL’s obligations to the Lloyds syndicate banks. They also knew that save for BGF and BGUK and TBGL, none of the Bell Participants were previously liable to any of the banks for those debts, although there is a dispute about BGF’s liability to the Lloyds syndicate banks. They knew that some of the Bell group companies had various external creditors. It is also said that the directors knew or ought to have known that prior to the Transactions, BGF and TBGL stood to benefit from the realisation of assets in the Bell group by reason of the inter‑company flow of funds via the debt and equity structure.
    4966 The banks deny that the directors knew of the insolvency of the relevant Bell Participants. But there are some matters concerning the directors’ beliefs about the financial condition of the Bell group in relation to which there is little dispute. For example, the directors knew that the income derived by the companies in the Bell group was not sufficient to discharge the current liabilities of the companies as and when accruing, although there is a dispute about whether the deficiency could be met from the sale of assets. They knew that if either TBGL or BGF were wound up, each other company in the Bell group would be or might have been wound up and if any one company within the Bell group was wound up, the likely result would be that other companies in the group would also be wound up.
    4967 This brings me back to the critical issue of a restructuring of the financial position. At the heart of this litigation is the allegation that the directors knew that in order to avoid a winding up of the Bell group it was necessary to consider and implement a restructuring of the financial position of each company in the group. This much is common ground. The plaintiffs contend that this was a result of the endemic illiquidity position of each relevant company. The banks deny that that is a proper characterisation of the financial position. They contend that it is more apt to call it a cash flow problem that was capable of being managed so that the companies would be able to meet their obligations as they fell due.
    23.2.4. Knowledge and belief: disputed matters
    4968 Just as the Scholastics were never able to decide how many angels could fit on the head of a pin, I am unable to count all of the matters in dispute concerning the directors’ knowledge and beliefs. But I can list some critical areas that will have to be resolved.
    4969 One is whether the directors knew the companies were insolvent. Another is whether the directors believed there was a ‘valid and effective restructuring’ that could be put in place and, if there was, how long it would take to do so. Yet another is whether, prior to 26 January 1990, the directors had considered plans for the restructuring of the Bell group companies. A further question is what the directors knew or believed about the underlying value and prospects for increase in value of the two major assets, namely, the publishing assets and the BRL shares.
    23.3. Sources of financial information available to directors
    4970 It is to be remembered that Mitchell and Oates were directors of TBGL, BGF, BPG and other Australian Bell group companies from August 1988. Aspinall had been involved in the management of the publishing assets since October 1988. He took part in wider TBGL activities from about July 1989 and became its managing director in October 1989. On 31 December 1989 he was appointed Chief Executive Officer and Chief Operating Officer of BPG and its subsidiaries.
    4971 The Bell group was a large commercial operation with a listed entity as its ultimate holding company. In such a group the directors would normally be expected to have access to a range of financial information about the group companies. This is consonant with their statutory and general law duties. In particular, for each company of which she or he was a board member, a director would have access to all financial information contained in the company’s audited and consolidated accounts, the company’s cash flow forecasts (insofar as they had access to them as noted above), the company’s management accounts and the draft consolidation accounts.
    4972 There is no evidence to suggest other than that this pertained in the Bell group. In other words, there is nothing to suggest that this type of financial information was not available to the directors in relation to the Bell Participants.
    4973 I have mentioned a number of cash flows prepared in January 1990. According to David Winstanley, cash flows were being prepared practically every day by Brenton Walkemeyer or Bernie New, who reported directly to Tom Garven. It was, he said, a standard activity in the Bell group. Winstanley also said that, as at 26 January 1990, he could, if asked, have extracted from the general ledgers a trial balance for each company. He could also have provided a rough update of the consolidated balance sheet detail as at 30 June 1989 sufficient to identify all external assets and liabilities of the group. So far as he could recall, no‑one asked him to do so.
    4974 The plaintiffs placed some store on the availability of ratings reports concerning the companies. I will have more to say about the ratings reports in relation to knowledge by the banks of information that was in the public domain. All I want to say here is that I place little weight on the ratings reports in relation to the state of knowledge of the directors concerning the financial position of the companies.
    4975 The plaintiffs called evidence from Duncan Andrews, a founder of Australian Ratings Ltd. Its business was the compilation of credit ratings reports on major Australian corporations and the provision of those reports to clients for a fee. It collected publicly available information (including financial reports of the company) and conducted interviews with the subject company’s officers on questions arising from the available information. After researching the information, a draft report was prepared and sent to the company. In the ordinary course, officers of the subject company were provided with an opportunity to comment on the facts and opinions expressed in the report.
    4976 During 1989 Australian Ratings Ltd prepared reports on TBGL, BCHL and BRL. Andrews testified that he had some meetings with Oates but (not surprisingly given the passage of time) did not condescend to detail about what was discussed or whether there were any discussions about TBGL. He did not say that he held discussions with either Aspinall or Mitchell.
    4977 So far as I can see, nothing concerning ratings was said by Aspinall in his evidence in chief and nor was anything put to him on that subject in cross‑examination. Mitchell was not asked about ratings reports for TBGL. In cross‑examination he recalled that the credit ratings for BCHL were ‘reduced’ but could not recall when this occurred. He said that as he was not involved in the treasury function of the group he ‘would not have paid as much attention to them as you might have thought’. He disagreed with the proposition the reports would affect the environment in which he was then trying to effect affect sales.
    4978 Ratings reports are compiled largely from publicly available information. They then place an interpretation on the state of company. Given that, and the paucity of the evidence concerning discussions between the ratings agency and the directors, I do not think they add much to the store of knowledge that can be sheeted home to the directors. No doubt directors of listed companies would normally take notice of the ratings code if for no other reason than that it could affect the share price. But I am not sure how far that takes the matter.
56. Australian directors knowledge and conduct
    24.1. David Aspinall
    24.1.1. Aspinall: an opening comment
    4979 Aspinall gave lengthy evidence at trial. He was in the witness box for four days (including three days of cross‑examination) and his witness statement was in excess of 122 pages. There was a short supplementary witness statement of approximately 10 pages. While the events about which Aspinall was required to give evidence took place many years before his time in the witness box, he did have the benefit of his diaries for the three critical years 1988 – 1991 in the preparation of his statement. In his witness statement he referred to many hundreds of documents. There were 3260 pages of contemporaneous documents, cash flows and correspondence put to him during his cross‑examination.
    4980 Generally speaking, I found Aspinall to be an honest witness. Certain details of his evidence suffered from the lapse of time and complexity of the events involved. But I had no cause to feel that Aspinall did not believe the things he was telling me. He gave a coherent account of his involvement. With some exceptions, I generally accept the evidence he gave. His evidence was frequently supported by contemporaneous documents.
    4981 I will identify and deal with the exceptions in due course. It has to be said that the exceptions to which I will refer are significant. Additionally, it is one thing to say that a person held certain beliefs. But it does not necessarily follow that the decisions implemented on the basis of those beliefs were legally apposite.
    24.1.2. Personal history
    4982 Some information concerning Aspinall’s association with the Bell group and BRL is contained in Sect 4.1.5. Aspinall was appointed Chief Executive of TBGL on 3 October 1988. In late October 1988 he was appointed a director of BRL and also a director of Freefold.
    4983 On 13 October 1989 he was made a director and managing director of TBGL and remained as such until December 1991. For the same period he was a director of most, if not all, of TBGL’s subsidiaries (the Bell group). On 31 December 1989, Aspinall was formally appointed Chief Executive Officer and Chief Operating Officer of BPG and its subsidiaries (including WAN) pursuant to a restructuring of the management of those companies.
    4984 From 1969, Aspinall had been employed by Swan Television and Radio Broadcasters Ltd (Swan TV). He progressed through the management of the company and by 1983 was general manager. Swan TV was taken over by the Bond group in 1983. Aspinall remained with Swan TV and in 1984 was appointed managing director. Through various acquisitions made by the Bond group he occupied senior positions in media companies, in particular the Nine Network and HKTV Ltd. Aspinall’s business history showed a significant commercial background at a high‑level, particularly in the media. As he said in his witness statement:
    Throughout my working life, I have been involved in the management and understanding of the running of businesses, the assessment of financial and management planning and forecasting for businesses, the requirements for financial planning; negotiation of banking facilities for businesses, the handling of employee relations and negotiations with employees; commercial negotiations with competitors, clients and buyers and sellers of goods, materials and assets and, particularly, issues relating to the impact of marketing and advertising on the revenues and earnings of media related businesses.
    4985 The evidence that I am most concerned with is that given by Aspinall covering the period July 1989 to 26 January 1990, to the end of May 1990 and then to the end of 1990. However, it is first necessary to step back to October 1988 and trace Aspinall’s role in TBGL.
    4986 At the time of his appointment as a director in October 1988, Aspinall said he was told by Beckwith that assets of TBGL other than the publishing and media assets would be sold off by Mitchell’s Corporate Planning and Development Department (CPDD). The publishing and media assets were to remain in TBGL as its core business. He said he was told that he was to get things in order and to run a strong and profitable publishing group. He said that he became heavily involved in the structural and management changes that were being implemented with respect to the publishing business, in particular The West Australian, and generally he was attempting to improve the poor performance of BPG.
    4987 In late 1988 and in 1989 his involvement in dealing with the Finance and Administration division increased. This was brought about by the necessity to obtain cash to pay large financial obligations of the newspaper group. In this capacity he received weekly reviews of the performance and cash forecasts for the publishing division. He had regular reviews of the budgets and projections for the whole of the publishing operations. The work involved in this area was considerable and there was no doubt, I concluded from his evidence, that Aspinall had undertaken considerable responsibilities in this area. His efforts and energies were focussed on the publishing assets in which he saw the opportunity to maximise potential worth.
    4988 That is not to say that the publishing business was his sole area of responsibility. He was, for example, heavily involved in the negotiations for the sale of the Wigmores Tractors land and business. I will have more to say about that in due course.
    24.1.3. The period July 1989 to end of January 1990
    24.1.3.1. Finance and Administration
    4989 Aspinall’s view (formed as early as July 1989) that the only way for the Bell group to survive was to ‘de‑Bond it’, in other words to disassociate the Bell group from BCHL ‘and untangle the web’ is, in my view, an important element in understanding the directors’ conduct. I propose to spend a short time outlining the way that the relationship between Aspinall and the accounting staff within the BCHL Treasury developed in the context of his determination to effect the ‘de‑Bonding’. I asked Aspinall about the use of this phrase:
    You have used several times the phrase ‘de-Bonding’. Is that a phrase that you used at the time? —Yes. That’s what I keep saying. It’s my terminology, your Honour. You know, I had a view commencing in July 1989 that the only way for this group to survive was to de-Bond it; in other words disassociate itself from Bond and untangle the web so to speak.
    I understand the concept but I am just asking you about the phrase. Is that a phrase you used at the time? —My word. Yes.
    4990 Aspinall said that in the first half of 1989 he relied on Oates, Farrell and Noonan to provide him with any information about the Bell group’s financial position or funds required. He accepted the accuracy of the information that they supplied to him. In particular he said that there were a number of professionals – lawyers and accountants – working in Finance and Administration, and he assumed these people were doing their jobs diligently and properly. He did not check every detail of the information supplied to him. He was extremely busy with the publishing matters for which he was almost solely responsible.
    4991 From October 1988 and during 1989 TBGL had regular board meetings that coincided with board meetings of the other Bond group companies. The practice was that the operating divisions of BCHL would have all their meetings on the same days that the BCHL board would meet. Aspinall was responsible for providing the report on the publishing division of TBGL. He also prepared the papers for other matters in which he was involved. These reports were prepared by the fifteenth of each month. Many examples of his reports were tendered. It was clear to me that his focus was the publishing assets. He left matters dealing with other aspects of the group’s operations to the persons responsible for those areas. From time to time, as Chief Executive Officer, he was required to give presentations to groups of bankers about the publishing operations but these were not one-on-one meetings with bankers about any particular facilities. Ultimately, however, it was in the context of the operation of the publishing assets that he became concerned about the way Bell group was operating generally.
    4992 He gave evidence that WAN’s overdraft funds were sufficient for its normal operating expenses but not for large expenses, particularly newsprint. These funds had to come from the Finance and Administration division of BCHL. They were provided from pooled funds generated by the sweeping mechanism to which I have already referred. Aspinall said that it was his understanding that the ‘swept’ funds were excess funds over and above the cash forecasts that were necessary for trade creditors. He said that the other operating entities within the Bell group worked in a similar manner. WAN’s chief executive and its finance director, would deal with the Finance and Administration division when these funds were required. It was only when funds were not released that they called on Aspinall to intervene. He said he found it difficult to operate this way.
    4993 In January or February 1989 Aspinall went to see Oates and explained the difficulties, and some changes were made in an effort to overcome the problems. Then, in July 1989, he approached Beckwith and discussed the then current practice of cash management in the Bell group. He said that, in substance, he told Beckwith that the problems obtaining finance from Treasury were making it very difficult to run the WAN operations effectively. He wanted control of the Bell group finances, and particularly its cash, if he was to continue to be responsible for it and threatened to resign if the problem was not fixed. According to Aspinall, Beckwith said in substance:
    I have been getting consolidated Bell group cash forecasts and I’ve got my own concerns about Bell’s finances. I think the Bell group should stand on its own two feet and operate independently from the Bond group, but it will take some time to unwind the current position.
    4994 Aspinall testified that until he started direct negotiations with the banks regarding finance, he found the financial reporting to Oates and Mitchell a one way flow. He was unable to obtain cash flow statements from Finance and Administration. Aspinall said that on various occasions he asked Noonan to give him cash flow information. She did not do so. He described his relationship with Noonan as ‘strained … she didn’t send me too many Christmas cards’. The matter apparently came to a head in August 1989. Aspinall telephoned Noonan and asked her to explain what had happened to the cash from BPG’s newspaper publishing operations for the past 12 months. He said her response was that all the information was contained in a group cash flow. He said when he asked for a copy he was told that she was not authorised to give it to him, she said he would have to ask Oates.
    4995 Aspinall spoke to Oates and on 18 August 1989 he received a memorandum from Noonan. The tenor of the memorandum indicates that it is in response to complaints made by Aspinall about the lack of financial information he was receiving. This supports his evidence that he was concerned about the way Finance and Administration was dealing with information and the manner in which it was deferring payments to creditors.
    4996 It seems that the problems obtaining information persisted. Aspinall continued to complain about the way Finance and Administration required him to do business. About 23 August 1989 he received a copy of a memorandum from Peter Dennis to Noonan entitled ‘Bell Publishing cash flow – 18/8/89’. This memorandum refers to corrections in the BPG cash flows and additional costs that had not been approved by Aspinall. On 30 August 1989, Noonan sent a further memorandum headed ‘Bell Group Cash flows’. Then on 27 October 1989 another memorandum, entitled ‘Bell Publishing Group Cash flow Management’, was sent by Noonan and copied to Beckwith. It is worth quoting part of this memorandum:
    Bell cash flows are managed on a joint basis, partly by Bell Publishing staff and partly by Sydney Treasury. Whilst it has enabled the level of control and precision necessary, it is proving difficult for all concerned the longer it goes on without clear understanding by Bell Publishing of the framework we are working within and a single officer of BPG coordinating their activities. Bell Publishing flows must be massaged to enable Bell Group commitments to be met.
    4997 Noonan also commented that once ‘the Bell Publishing facility is in place’, BPG would have bank debt of about $230 million and that the Bell group would have to service public debt of $550 million. She also described BPG as ‘an isolated division’, the officers of which had no concept of adhering to budgeted outlays. She said: ‘In olden days they were part of the Bell group offset and it would not have mattered as Bell group had plenty of cash’. I find these statements a little odd. By this time (October 1989) there was no ‘Bell Publishing facility’ being negotiated. The reference to the $550 million is presumably to the convertible bonds. It is probably another example of the woolly and imprecise financial management that seems to have been a hallmark of the BCHL group, at least in the late 1980s.
    4998 In cross‑examination, Aspinall agreed that the 27 October 1989 memorandum could be described as a ‘pep talk’, but it was one he did not need. In any event, this exchange occurred:
    It was true, was it not, that the assumption of responsibility for Bell group’s cash flows meant that Bell group would have to look to its own resources to meet its own liabilities?—Yes, that is correct. It had to look to its own resources but it had to recover from, if I could put it this way, Bond group companies funds that were due to it, as well as … selling-down assets, et cetera, but, yes, ostensibly reliance on its own resources.
    4999 This is a concise description of the ‘de‑Bonding’ process and an acknowledgement by Aspinall that the Bell group would have to look after its own liabilities – and all of them at that. The tenor of the documentary exchanges between Aspinall and Finance and Administration indicates that they were responses to complaints being made that smooth running cash flow management was absent.
    5000 It should be recalled that by this time (late October 1989) the negotiations between the Bell group and the banks for the refinancing were progressing. Each of the banks had received the September cash flow and was working from it. Aspinall said that this was the first cash flow of which he had a clear recollection. The banks had also received the 1 July cash flow but I do not think Aspinall was asked questions about that version. However, I think he must have seen it at the time because it was part of the information discussed when Aspinall saw officers of CBA on 13 July 1989.
    5001 On 27 October 1989, Simpson sent a memorandum headed ‘The Bell Group Ltd – Banks’ to Beckwith, copied to Aspinall, in which he said:
    In our response to the banks we have indicated that we do not believe it is in their best interests or ours that the Bryanston money be used by the banks to pay down the debt pro rata. The cash flow that [Noonan] has shown me would indicate that this is not a wise course of action. Her cash flow differs markedly in some areas from the cash flow the banks are working from and I would like to clear with you as soon as possible a new cash flow for presentation to them.
    5002 In cross‑examination, Aspinall agreed that the BCHL Treasury division was in effect controlling the information that was made available to the banks through the Bell group. He pointed out that the Noonan cash flow referred to in the Simpson memorandum was a generated by central Treasury, not the Bell group. Although it contained Bell group cash flow information, the cash flows were not then controlled by Aspinall. He agreed that the Noonan cash flow was not provided to the banks, nor were any other such documents after the September cash flow.
    5003 I note here that Aspinall said that these memoranda gave rise to a flurry of discussions and further memoranda with, and to, Oates, Noonan and Simpson. These communications concerned cash flows generally, difficulties dealing with the Finance and Administration division and how to ensure that the Bell group’s cash forecasts were made available to the Bell group.
    5004 On 3 November 1989, Aspinall received a memorandum headed ‘Cash Flows’ from Reynolds, BPG’s chief executive. Reynolds complained to Aspinall that the cash flows were effectively controlled through Treasury. He wanted Aspinall to be aware that the lateness in paying newsprint accounts for both BPG and Bell Press was ‘causing concern with suppliers and affecting discounts’.
    5005 Aspinall maintained in his evidence that despite these problems there was no question in his mind that the Bell group would continue to pay its rent and other obligations arising out of its trading activities. His view was that the businesses would continue indefinitely and their trade creditors were always going to be paid. He said it was his belief that:
    Whatever was done in relation to the refinancing or reconstruction of the Bell group of companies, those creditors were always going to be paid.
    5006 I have no difficulty accepting Aspinall’s evidence that he thought that the debts arising from trading obligations would be paid. In this respect, the ‘trading obligations’ were those of the publishing assets. As I said in Sect 10.6.3 the directors would have been entitled to believe those businesses would continue and that their recurrent operating debts would be met. In other parts of Sect 10.6 I have found that there were other external creditors. But here it is important to bear in mind two distinctions:
    (a) between recurrent trading debts and other external credits such as the bondholders, the DCT and Godine Developments (or BRL); and
    (b) between subjective and objective insolvency: see Sect 7.2.3.
    5007 Aspinall believed that the problems being experienced by the Bell group were attributable to the Finance and Administration division. He blamed the personalities involved and the way the division was doing business as the source of the difficulties. I note in particular a memorandum dated 27 December 1989 from Aspinall to Oates and Noonan entitled ‘SGIC – Arrears in Rental’. In it Aspinall said it was his belief that the rental arrears resulted not from inadequate cash collection by the Bell group but from difficulty in extracting money from the Finance and Administration division.
    5008 In his evidence Aspinall asserted several times that he had faith in the quality of the core assets, for which he was responsible, to meet any cash or capital difficulties.
    5009 Aspinall said that on 2 January 1990 he and Simpson physically relocated TBGL’s offices from BCHL’s office to WAN’s offices in Perth. He said that simultaneously they commenced the separation of the financial links between the Bond group and the Bell group. This is what he called ‘de-Bonding’.
    5010 Illustrating the problem that he saw with the connections with the Bond group was his evidence that on 3 January 1990 he was told by someone (whose name he could not recall) that NAB would not sign the refinancing documents until the outcome of the receivership it had initiated against BBHL was known. I have referred to the problems associated with the BBHL receivership in, among others, Sect 9.16.3.1 and Sect 30.6.8. Ultimately, NAB did join in the refinancing.
    5011 Aspinall said that it was his belief at this point that he would have to refinance the bank debt again before May 1991 but that his expectation was that the performance of the Bell group would have improved and then the Bell group debt could be restructured. He said he believed that it was normal commercial practice for the group to utilise some form of bank finance in the running of its business. By this I understood him to mean that the Bell group would not be debt free. He said that he believed that the banks knew this as well. He believed that Simpson had informed the banks of this belief and that it was his view that the Bell group borrowings would be renegotiated at the end of the term facility. On several occasions during his evidence, Aspinall said that he believed he had 12 months in which he could fix the finance problems.
    5012 It was not until January 1990 that responsibility for the Bell group cash flows and the attendant accounting was transferred from BCHL to TBGL. This was a part of the ‘de‑Bonding’ process, but it was only a part. I am satisfied that Aspinall was determined to effect that process and that he was aware that TBGL would have to cover its liabilities (all of them) from its own resources (including asset sales and inter‑group debt recoveries).
    24.1.3.2. The need for refinancing
    5013 Aspinall said that in early 1989 he was not aware of the precise nature of the Bell group’s banking arrangements. At this time Oates, Farrell and the Finance and Administration division were responsible for all dealings with the banks. In Sect 4.5.1 I dealt with the negotiations conducted in the first half of 1989 for the BPG club facility. I do not think Aspinall was heavily involved in those negotiations but he was aware of them.
    5014 Aspinall recalled a conversation in July 1989 with Beckwith, after the failure of the BPG club facility negotiations, during which he said he was told in substance: ‘You are going to have to get involved with the banks. You are going to have to get on top of it’. He said he was told by Beckwith that he would receive information from Oates and that he would be assisted by Simpson, who was already assisting Aspinall in the publishing area. He worked closely with Simpson from July 1989 until the liquidations and receiverships of the Bell group companies in 1991.
    5015 Aspinall said that his practice at the time was to discuss developments with and correspondence to and from the banks with Simpson as they were sent and received. He said that he was aware that Simpson sent financial and other information in relation to the Bell group, its future and his plans for its commercial development to the banks’ representatives. He said that he discussed all these matters with Simpson and that he read all incoming and outgoing correspondence, including those dealt with by Simpson, as soon as he could.
    5016 In the second half of 1989 he familiarised himself with the nature of the banking arrangements of the Bell group. From that process he understood the financial structure, including that all the facilities were held by BGF, acting as the Australian Treasury, and by BGUK, acting as the UK Treasury. He understood that BGF’s banking arrangements comprised separate facilities secured by way of a negative pledge agreement held with each of the Australian banks in a total amount of $130 million. BGUK’s facilities comprised a syndicated facility in the amount of approximately £60 million also secured by a negative pledge agreement held by the Lloyds syndicate banks.
    5017 In particular he knew that BGF’s and BGUK’s debts to the banks were guaranteed by TBGL by means of the negative pledge guarantees. In the case of the Australian banks, the facilities were repayable on demand and, in the case of the Lloyds syndicate banks’ facility, on 19 May 1991 or earlier if there was default in any one of the Australian banks’ facilities.
    5018 Against this background, having regard to the financial material that was made available to him, and even though Aspinall did not identify with precision the date upon which he formed the views that I set out below, he said in his statement that he believed and understood the following:
    • Without an extension of its banking facilities the Bell group would not be able to repay the Australian banks the $130 million which at that stage was on call to those banks in the various sums if demand was made.
    • If the extension was not obtained one or more of the Australian banks would probably demand payment of the debts owed to it.
    • If demand by one or more of the Australian banks was made and none of the other banks would take over that debt then the Bell group would have to pay out the bank making the demand.
    • If one of the Australian banks was paid out before any other then the other banks would have taken the same position anyway, which would have led to a domino effect with the Bell group unable to pay out all the Australian banks demanding immediate payment of their share of the total Australian banks’ facilities.
    • Default under any of the Australian banks’ facilities would have led to a default in the Lloyds syndicate banks’ facility and under the terms of the convertible bond borrowings.
    • The possibility was that demands in total of up to $800 million could have been made on TBGL, BGF, and BGUK.
    • If demands of that magnitude had been made then all the companies in the Bell group would have been liquidated.
    • A liquidator at the level of TBGL, BGF or BGUK would have been able to collect the inter‑company debts and sell inter‑company shareholdings and by doing so, any liquidator would obtain access to the hard assets of the Bell group, such as the publishing assets and the BRL shares owned by other companies.
    • Any such action by a liquidator would result in a ‘fire sale’ of the BPG assets and the BRL shares. By ‘fire sale’, he meant a very low price, well below the real value of the asset.
    • While the BRL shares owned by the Bell group had been suspended from trading on the ASX and a receiver appointed to BBHL, there were still significant commercial negotiations proceeding between the representatives of the Bond group and the board of BRL on the transfer of the brewing assets. He thought given time these negotiations would result in significant value being restored to the Bell group’s 39 per cent holding in BRL. If a liquidator was appointed, then he thought that these shares too would be subject to a fire sale.
    • The way to avoid such a liquidation required the refinancing with the Australian banks and for the Bell group to continue its business operations centred upon its publishing assets.
    • He believed that the Bell group had a surplus of assets over liabilities, particularly the value of the publishing assets and the BRL shares once the brewing deal was completed. However, he did not believe its assets would exceed liabilities if liquidators were appointed and the assets were sold in fire sales.
    • If there was a failure to renegotiate the Bell group’s banking facilities there would be losses to the Bell group’s shareholders and creditors in substantial amounts.
    5019 After the July 1989 conversation with Beckwith, Aspinall said he was aware that Simpson had met with the banks. This was part of the attempt to establish new banking arrangements, also involving the Lloyds syndicate banks, and to ‘stabilise and extend’ the Bell group’s existing banking arrangements. About 20 July 1989 Aspinall received and read a memorandum from Simpson on the outcome of his meetings with the Australian banks. He then talked to Simpson who told him he had been sent by Beckwith to ask the Australian banks to defer their rights to demand repayment of the facilities until 30 June 1991. Simpson said he had been told (by Beckwith) not to offer any security. Simpson told him that the banks’ reaction was hostile. Simpson believed that Oates and Farrell had annoyed the banks and that certain undertakings said by the banks to have been given by Oates and Farrell, to reduce debt to the banks from sale of capital assets, had not been honoured.
    5020 Aspinall said that after this conversation with Simpson he formed the view that if new arrangements were to be achieved, security would have to be offered in return.
    5021 On 21 July 1989 Aspinall went with Simpson to see Westpac in Perth (Weir and Youens) to ask if a ‘club arrangement’ could be considered as a means of extending the Australian banks’ facilities. This is a single facility with several banks participating in it. According to Aspinall, the bank officers were not receptive to such an idea and, furthermore, their attitude and manner was hostile. He said this was the first time that he became personally aware of the extent of the problems with the Australian banks. He said he did not understand why they were so aggressive. He had no knowledge of the matters about which the banks were complaining. He said that he thought that they were angry about unfulfilled promises regarding the reduction of the Bell group’s outstanding debts from the sale of some of the non‑core assets, such as Wigmores Tractors. I will return to the so-called non-core assets in Sect 24.1.8.
    5022 On the same date as the Westpac meeting, the chief manager for Corporate Banking of SCBAL Sydney (Harrison) wrote to Simpson. Aspinall said that he understood this letter to mean that SCBAL would not become involved in an extension of its facility to the Bell group. Aspinall’s evidence was that he knew that he would have to change their minds. He said he also believed that security would have to be offered to the banks in order to change their minds.
    24.1.3.3. Negotiations with the Australian banks
    5023 On 25 July 1989 Simpson sent Aspinall a memorandum that, in brief terms, outlined two possible scenarios (as they were described), for refinancing arrangements. Aspinall preferred ‘Scenario 1’; in essence, this proposal was that TBGL would provide guarantees for BGF and BGUK through a secured equitable charge by deposit over all the issued shares in BPG. In return, the banks would release the negative pledge guarantees. There would be certain restrictions on BPG, including:
    (a) no debt being incurred other than working capital;
    (b) no security being granted other than for its working capital; and
    (c) no ‘upstream lending’ that exceeded an interest cover ratio of 1:1.
    5024 This scenario contemplated a balloon repayment in 1991 but no amount was mentioned. There was reference to applicable interest rates and agents’ fees. The passing of funds through to BCHL or other BCHL group companies was often called, in the contemporaneous documents, ‘upstreaming’. The word does not appear in the Oxford Dictionary and I discouraged its use during the hearing. Nonetheless, it may appear from time to time in the reasons as a quote from the documents. If anyone finds an instance where the word appears in the text of my reasoning (other than in italics or quotation marks, and thus as a description taken from a contemporaneous document) I will be mortified.
    5025 The second scenario had a much broader range of securities, including a charge over the Bryanston receivable, share mortgages over the shares in BRL and JNTH and an equitable charge over Bell Press.
    5026 Aspinall said that his reasons for preferring Scenario 1 to the alternate proposal were that he wanted the BRL and JNTH shares and the Bryanston proceeds to remain unencumbered ‘to be dealt with in the course of business of the Bell group as may have been required from time to time’. It follows, then, that by this time (and contrary to Beckwith’s wishes) Aspinall realised that securities would have to be offered to the banks to induce them to participate in the refinancing but that they (the Bell group) should try to restrict the range of securities.
    5027 According to Aspinall’s witness statement, he immediately commenced a round of meetings with bank representatives. On 26 July 1989 he held separate meetings with Westpac (Deer) and CBA (Poulter and Latimer). On 27 July 1989, in Sydney, he held separate meetings with HKBA (Davis and McGregor) and, together with Beckwith, Soc Gen (Denis and Edward).
    5028 His recollection of the meeting with the CBA bankers was reasonably clear and his account was supported by a file note of the meeting taken by Latimer. According to Aspinall, the bank officers adopted a hard line approach and said: ‘If the facility is not repaid then we may proceed to issue a notice of demand’. He said that this was when he developed a clear view of the issues. Aspinall’s description of the attitude of the CBA officers as hard line is supported by Latimer’s note. He recorded Poulter as indicating that CBA wanted to quit its exposure on 31 July 1989 and, should it be unable to do so, Bell group would have to face up to being in a default situation. As Latimer put it: ‘This clearly did not please Aspinall but he was left in no doubt that CBA’s position was irreversible’.
    5029 While Aspinall said he could not recall the precise words he used, the substance of his response to the CBA bankers was that it was not possible for the Bell group to repay the facility at that time. He explained that his strategy for the Bell group was to concentrate on the newspaper and publishing assets. He explained the need to bed down borrowings for, say, two years on a secured basis. He said that at the end of that period they would renegotiate or refinance the existing bank facilities in an environment where the banks had confidence in the performance of the Bell group. He said that he told them the newspaper and publishing business would have grown and would show profitability. He said that he told them that there was a realistic basis for refinancing the Bell group based on the publishing assets in a secured facility quite separate from the Bond group.
    5030 Aspinall said in his statement that as he dealt with the banks he came to believe that what was being said to him (by the bankers) was that there was a great concern about the independence of the Bell group from the Bond group. Because of this factor he felt that the banks had no confidence in the Bell group. He felt that the banks did not trust what they were being told. He decided that it was very important that he convince the banks that the Bell group had a strong future independent of BCHL. He said that he wanted them to realise they could have confidence in him and that was why they should extend their facilities. He said in his witness statement that:
    [I]t was also necessary for the banks to regard themselves as effectively guarding the assets of the Bell Group from any interference by Bond Corporation by ultimately having security over those assets and by having very strict covenants on the lending documents.
    5031 He went on to say that he conveyed the same message to HKBA and SocGen. In particular he recalled asking SocGen if it would consider extending its lending to the group to pay out any of the Australian banks that did not want to participate in the refinancing. His recollection was that Edward and Denis said they would think about it.
    5032 The proposal for refinancing that Aspinall called Scenario 1 was fleshed out in what he called a borrowing terms sheet, encapsulating the proposal for the refinancing. This was sent by Aspinall to CBA and NAB. It included the Lloyds syndicate banks, as well as the Australian banks, as lenders and the recipients of the securities. He said in his evidence that, while he had no personal dealings with the Lloyds syndicate banks, he knew that their permission and consent would have to be obtained before any grant of security because of the terms of the NP agreements. He believed that the Lloyds syndicate banks would not consent unless they shared equally in any security. His belief regarding this position would, he said, have arisen from what he was told by Oates or Simpson and his own commonsense. Simpson was primarily responsible for dealing with the banks and collecting the information that they were requesting throughout the latter part of 1989.
    5033 CBA was clearly reluctant to participate in the refinancing proposal. So Aspinall wrote to SocGen on 28 July 1989. He wanted to know if the bank would assume CBA’s part of the lending in any refinancing. In the letter he said: ‘the group is going through a period of major rationalisation’. Aspinall said by this he meant the BCHL group and that ‘rationalisation’ was his description of the major asset sale programme being implemented by the whole of the Bond group.
    5034 Accompanied by Simpson, Aspinall went back to Westpac. Spring of Westpac told them, in substance, that the bank did not want to participate in the proposed refinancing because it wanted to reduce its lending to the Bond group. This meeting was followed by another with Weir and Youens of Westpac. He said that he delivered to them the same speech that he had made two days before to the CBA bankers. Aspinall felt that they were more receptive to the refinancing proposal. But he recalled Weir saying to him, in effect, that he needed to get onto Warren Jones and have the BML exposure cleared. He recalled Weir saying ‘that will help your cause’. His recollection was that thereafter he spoke to Warren Jones. He believed that Jones dealt with Westpac and that there was resolution of the BML issues with that bank.
    5035 Meanwhile, Aspinall was still corresponding, or having meetings, with the various bankers. He met with Walsh and Love of SCBAL in Sydney on 31 July 1989. He said he continued to give the same message that he had been giving to the other banks but they declined to confirm participation in the refinancing. In a further meeting with Edward of SocGen, he again asked that the bank consider extending its facility to cover the CBA loan of $12.5 million then due by BGF. He kept CBA informed of these approaches. Aspinall believed that the discussions with SocGen were positive. He realised that neither CBA nor SCBAL was keen to participate but he hoped that they could be persuaded to do so if:
    (a) they were offered satisfactory security;
    (b) they were satisfied that the Bell group was independent of the BCHL group; and
    (c) he could convince them that the publishing assets of the Bell group had very good potential.
    5036 Much of Aspinall’s recollection, as I have said previously, is supported by contemporaneous correspondence and notes that were tendered in evidence.
    5037 Between 1 August 1989 and the end of September 1989, negotiations between Aspinall and Simpson and several of the banks continued. CBA continued to be a stumbling block; it wanted to be paid out. SocGen would not increase its exposure. Various ways of dealing with the problem were canvassed by Aspinall and Simpson. A diary note made by Latimer (CBA) was put to Aspinall in cross‑examination. It referred to a meeting with Simpson in which the difficulty with SocGen was raised. Simpson put other proposals, including paying out CBA with proceeds from the Wigmore’s land sale, the Bryanston sale proceeds, sale of the Bell Publishing ‘printery’ or asking the continuing banks to increase their lending proportionally. Aspinall said that the contents of this note were not inconsistent with his recollection of events at that time.
    5038 I note here that while Aspinall and Simpson were dealing with the Australian banks, correspondence at that time between Lloyds Bank (Keith Evans) as the agent bank for the syndicate and Oates indicated that questions coming from the Lloyds syndicate were being answered in similar terms. But the Lloyds syndicate was pressing for more supporting details and Aspinall believed that this detail was being provided by Simpson. By the end of August 1989 Aspinall himself met with Tinsley, Evans and Latham of Lloyds Bank.
    5039 Aspinall said that while he could not recall some of the correspondence or documents received by Lloyds syndicate, or various of the banks, it was his practice to view all the correspondence and the supporting documents, such as the cash flows, being sent by Simpson to the banks. He said that he conducted his negotiations with the banks on the basis of the matters set out in those documents. The basis was the same as that being put to the Australian banks.
    5040 In the light of that general statement, I think it can be assumed that Aspinall saw the various versions of the terms sheets that were exchanged in the second half of 1989.
    24.1.3.4. The CBA demand
    5041 On 6 September 1989 CBA sent to Aspinall a fax enclosing a notice of demand for payment of the $12.8 million owed by BGF. The date for repayment was 13 September 1989 at 4.00 pm. On 7 September 1989, Simpson sent a letter, which Aspinall said he would have discussed with him, requesting CBA to withdraw its demand as the arrangements for refinancing were being pursued. A note made by Latimer (CBA) on 13 September 1989 was put to Aspinall, who said it accorded with his recollection. He told Latimer that progress had been made on the refinancing with the Lloyds syndicate and with Westpac; that the other banks would be very concerned if CBA was paid out ahead of the others; and that progress was being made in the proposed sale of the BPG ‘printery’ assets to Murdoch. Latimer records that he told Aspinall that CBA was not interested in deferring its demand and that if the demand was not met that day then CBA would make demand of TBGL, as guarantor of BGF’s liability to CBA of the $12.8 million to be paid by 4.00 pm on 21 September 1989. That notice was issued on 14 September 1989.
    5042 On 14 September 1989 Aspinall met with Weir (Westpac). On the same day, a letter was received by Aspinall from Westpac agreeing to the refinancing proposal on terms which included, for the first time, the appointment of Westpac as the Security Agent for the collective lending by the participants. CBA was included in the list of participants. On 19 September 1989 a further letter was received by Aspinall from Westpac. It further extended the term of the facility from 12 months to 30 April 1991, added a clause specifying Westpac’s fee for acting as the Security Agent and attached more details of the conditions of lending.
    5043 On 20 September 1989 CBA withdrew its demand against BGF and by separate notice its demand against TBGL. By 26 September 1989 Aspinall had signed the confirmations requested in the Westpac correspondence, including agreement to the appointment of Westpac as Security Agent.
    24.1.3.5. Revised lending terms
    5044 The structure and conditions attaching to the refinancing were the subject of many terms sheets prepared and exchanged in the second half of 1989: see Sect 30.9. As I indicated a little earlier, it can be assumed that Aspinall was aware of the terms sheets and their contents.
    5045 On 9 October 1989, Weir (Westpac) wrote to Aspinall changing the terms of the proposed lending facility. In essence, the revised terms required security of a greater extent over the Bell group assets. Simpson wrote the reply to this request on 23 October 1989. While Aspinall did not recall the letter, he said he had no reason to doubt that he did see it at the time; he said he would have discussed it with Simpson. There was another memorandum dated 11 October 1989 to Beckwith from Simpson addressing various aspects of this letter. Aspinall said he would have seen this memorandum as well but was not certain precisely when. In any event, the content of Simpson’s reply accorded with what Aspinall said were his views at the time. He considered that the banks wanted this security because of the BCHL group’s link to the Bell group. He believed that the banks did not trust the Bond group not to, as he described it, ‘leak’ funds out of the Bell group.
    5046 It is clear from Aspinall’s evidence and the various copies of correspondence tendered in this regard that the implementation of the refinancing arrangements was slow and problematic. This was a matter of frustration for several of the banks. The problems related to the revision of the security terms and the extent of the security sought.
    5047 On 24 November 1989 Aspinall received a fax from Willis (NAB) saying that NAB reserved its right to withdraw from involvement in the refinancing arrangements unless the documents were all in place by 30 November 1989. A welter of other correspondence was exchanged. Simpson was writing the responses that Aspinall said, in accordance with his usual practice, he was reading.
    24.1.3.6. The SCBAL crisis and the subordination issue
    5048 On 4 December 1989, SCBAL sent BGF a notice of termination and demand. Aspinall and Simpson went to Sydney to see Love and Walsh: see Sect 30.18.3. At this meeting, the bankers told them that SCBAL had reappraised its involvement in the Scheme because of its overall exposure to the BCHL group. Aspinall said that he expressed his surprise at what he regarded as a complete turnaround from the position of the previous week, and said that this action was taken without prior consultation with him and that SCBAL had not viewed the Bell group as separate from the BCHL group. He also said that it was his intention to sell Bell Press but that he needed time to extract the highest price.
    5049 The SCBAL officers told Aspinall that if he wanted to discuss the matter he should contact Nick Minogue in London. That is what Aspinall did. He was told by Minogue (and this was confirmed in a subsequent letter) that SCBAL had on ‘broad policy grounds’ taken action to demand repayment of the borrowing by BGF. Those ‘policy grounds’ were to call for repayment of facilities extended to any company in or associated with the BCHL group. A notice of demand was in fact issued by SCBAL on 7 December 1989. On 8 December 1989 a demand was also served on TBGL as guarantor of the debt owed by BGF to SCBAL. On 11 December 1989 a s 364 notice was served on TBGL seeking payment of $15.04 million within three weeks.
    5050 This is one area where demeanour plays a part in the fact-finding exercise. Having heard his evidence, I have no doubt that Aspinall was deeply troubled by this turn of events and appreciated the urgency of the situation that was upon him at this point. At the same time, the relationship between Adsteam and BRL was deteriorating. Aspinall said that he discussed the SCBAL issues with Simpson. In general terms, his recollection was that Simpson was obtaining legal advice as to whether or not BGF had any rights against SCBAL on the basis that it had agreed to proceed with the proposed restructured facility. He could not recall the advice.
    5051 Aspinall wrote to Owen at SCBAL in Perth on 14 December 1989. In that letter he expressed his disappointment at the actions of SCBAL and pointed out that the notices, unless withdrawn, would constitute events of default under the NP guarantees with the Lloyds syndicate banks and the Australian banks and under the private convertible bond issue. In the letter he referred to the ‘other’ Bell group convertible bond issue of $450 million and the possibility that all lenders would require repayment. He wrote: ‘Obviously events of this kind will seriously jeopardise your bank’s position as an unsecured lender to [BGF]’. Aspinall received a terse reply from Ron Altringham, an executive director of SCB in London, saying, in effect, that the bank would do whatever needed to be done.
    5052 In cross‑examination, a letter dated 15 December 1989 from Farmer of SCB to Love of SCBAL was put to Aspinall. The letter referred to a conversation between Aspinall and Farmer in which Farmer says that Aspinall:
    Claimed these assets included the Bell Group Press that the subordinated debt would either share in any receivership or liquidation on the same level as the existing bank debt or would rank ahead of the existing bank debt.
    5053 Aspinall said that he could not recall having a conversation with Farmer but he was certain that he had a conversation with Altringham. He disputed the comments attributed to him. A letter signed by Aspinall and dated 18 December 1989 and addressed to Altringham is in evidence. The letter raised issues regarding the possibility that a liquidator might look at the rights of ‘all creditors including the bondholders before any decision was taken as to creditor entitlement’. It went on to say that one of the purposes for the extension of the existing facilities was to enable the banks to become secured creditors, ‘a position all view as more preferable’.
    5054 Aspinall said that he did not draft this letter. He cannot remember who did, but thought it might be one of the legal people advising him. He acknowledged having signed it. His evidence is that while he did not turn his mind specifically to the issues covered in the letter, he had no doubt that when it was written, and when he read it and signed it, he would have agreed with the content of the letter as a commercial bargaining position. He said that he wanted these banks to think about what might happen if they held out. As he put it, if ‘the house of cards came down, the fight would begin’. He said that the situation was one of ‘extreme urgency for the Bell group’. He said he thought that in taking such a stand he was dealing with the interests of all those stakeholders in the Bell group against the interest of one bank.
    5055 In his evidence Aspinall said he thought that this bank was acting irrationally and for reasons unconnected with the Bell group; that SCBAL’s problem was a dislike of the BCHL group or something that some BCHL group executive had said or done. He believed that TBGL had sought advice on the notice because it was such a serious matter. He said he believed that there had not been any event of default to trigger the notice. He said that he believed that unless he could get SCBAL to withdraw the notice of demand, the refinancing would not proceed and the Bell group was doomed. On 19 December 1989 a letter received from MSJA confirmed that default and winding up notices had been withdrawn.
    5056 In cross‑examination, Aspinall was shown a letter dated 20 December 1989 written by Michael Ferrier (SCB) to Love in Sydney in which a conversation with Aspinall is mentioned. In particular, it states that Aspinall made the point that while, in the past, the Bell group had operated as part of the BCHL central treasury system, it would within weeks operate its own Treasury. While he could not remember the particular conversation, Aspinall said that the contents of the letter were correct: he intended to sever the financial connection between the Bond group and the Bell group, which seemed to him to be of concern to the banks.
    5057 Other correspondence was put to Aspinall regarding the questions raised about the subordination of the on‑loans by SCBAL and in correspondence from TBGL to Equity Trust. Aspinall could not recall the documents, nor could he recall ever discussing them with Simpson or anyone else coming back to him about the subordination issue. He said in his evidence that he always believed that the bonds were subordinated. I note, in particular, that when Aspinall was asked to summarise the evidence he had given in respect to the subordination issue, he said:
    As at 26 January 1990 my view was that the bonds were subordinated and I entered into the transaction on that basis. I didn’t have any knowledge that I can now recall that said there was any view that they weren’t subordinated. They were subordinated and always were subordinated in my view on 26 January 1990.
    5058 This is an important issue. The whole question of knowledge of the subordination problem will be dealt with in detail in Sect 30.18. I have little doubt that Aspinall did raise with SCBAL the possibility that the convertible bonds might not be fully subordinated and that they might, therefore, rank equally with the banks in a liquidation. Leaving to one side a cryptic comment in Ferrier’s letter to Love of 20 December 1989 that, apparently, the issue had been ‘on the back burner with the lawyers for some months’, this seem to have been the first time that anyone raised, in direct language, the possibility that the on‑loans might not be subordinated. It caused a flurry of activity as the news spread from bank to bank and the lawyers were asked about it. But that raises different issues. I am here concerned only with what Aspinall knew or believed about the status of the bonds and the on‑loans.
    5059 Moral philosophers and ethicists would no doubt have interesting perspectives to bring to bear on the question whether and to what extent it is acceptable for a person to advance a proposition in which he or she does not believe for the purpose of defending or buttressing an argument in which the person is involved. I do not have to delve into that interesting area. The fact is that, like it or not, ambit claims and propositions that are lacking in substance are often raised in commercial negotiations.
    5060 Aspinall was, so to speak, under the pump. Had SCBAL carried out its threat to file a winding up petition, it would, in all probability, have brought the refinancing negotiations to an end and brought the entire group down. Aspinall played a card. To resort to the vernacular, he wanted to put the wind up SCBAL. I have no reason to disbelieve his evidence in this respect. He was using the argument as part of the commercial dispute and he had no information to cause him to think, nor did he think, that the bonds or the on‑loans were unsubordinated.
    5061 There is no evidence from any of the Bell group officers who were involved with the companies when RHaC had control that they believed the on‑loans were unsubordinated. Nor is there evidence that any such officers knew of information or passed on any information to their successors in office to that effect. Similarly, there is no evidence from any of the BCHL affiliated officers that they formed that view prior to 26 January 1990 and nor (save for the communications with SCBAL) is there any contemporaneous documentation to that effect.
    24.1.3.7. Documents are signed
    5062 Aspinall’s evidence is that Simpson was arranging all the details of the refinancing. S&W were preparing documents and providing legal advice on the documents required for the refinancing. He said that in mid‑January 1990 Simpson told him that all the banks had agreed to the refinancing. He went on to say that he had meetings with Oates and Mitchell to resolve that all the Bell group companies involved would participate in the arrangements. While he could not recall the precise dates of the meetings, he said that they all agreed that it was in the interests of the Bell group to refinance.
    5063 The main refinancing documents to which Bell Participants were parties were signed on 26 January 1990, 1 February 1990, 15 February 1990, 15 March 1990 and 31 July 1990: see Sect 4.6.3 to Sect 4.6.5. Aspinall was involved in the process by which final authorisation was given for the execution of documents by the Australian Bell Participants.
    5064 There are minutes of directors meetings (or extracts of minutes) for the companies entering into the Transactions. I propose to deal separately with the many questions that are raised in relation to the meetings, the preparation of the minutes (and the allied issue of the recitals to the financing documents) and the issue of corporate benefit. At this stage, it is sufficient to say that on 25 January 1990, 31 January 1990 and 12 February 1990 about 72 meetings are recorded as having been held. I have attached as Schedule 38.16, a list of the various meetings. I have also attached, as Annexures (see Schedules 38.24 ‘R’, ‘S’ and ‘T’ respectively), three minutes which are representative samples of the various documents.
    5065 Aspinall is recorded as having been present at some, but not all, of the meetings. There are minutes dated 25 January 1990 of meetings of directors of BGF, TBGL and WAN. Aspinall is recorded as having been present at the meetings of TBGL and WAN. There is a problem with the minutes of BGF, which I will describe later. The minutes are in similar form. They all state that the body of security documents tabled at the meetings were explained, as was the background to and the circumstances leading up to the Transactions. Resolutions by each of the companies to execute the security documents were recorded on the basis that it was:
    (a) in the best interests of the company as a whole after taking into account its members’ and creditors’ interests; and
    (b) something of real and substantial value to the company.
    5066 Aspinall said in evidence that these meetings accurately reflected his view at the time that the refinancing was in the best interests of each of the companies in the Bell group. In other parts of these reasons I consider in more detail the issue of corporate benefit arising out of the Transactions. But here, in regard to whether or not Aspinall discharged this aspect of his duty as a director of various companies within the Bell group by entering into the Transactions, I formed the view that his evidence was not credible. First, I am not at all sure that Aspinall knew precisely what the legal test of corporate benefit entailed and nor am I sure that he turned his mind to it. Secondly, an exchange between Aspinall and counsel in cross‑examination suggests to me that he was confused about the concept.
    5067 Aspinall was referred by counsel to the terms of a fax dated 24 January 1990, sent by S&W to Simpson just before the Transaction documents were signed. This is the exchange:
    You realised, did you not, that one of the issues you had to take into account was whether there was any what’s called corporate benefit – any benefit to the company in entering into the transactions, the particular company?—Absolutely.
    You understood, did you not, that that task may involve considering the interests of the creditors of that particular company?—Yes, absolutely.
    Could I take you to another document? It’s a fax dated 24 January 1990 from Mr Ian Morison to Mr Colin Simpson?
    Sly and Weigall were assisting the Australian Bell companies, were they not?—They were actually drawing the documents, yes.
    Do you recall this document being received by The Bell Group? —I can’t say that I did, but I was working closely with Colin Simpson and he probably drew it to my attention.
    Yes. In your witness statement you say it was his practice to do that?—Yes. He would draw it to my attention, yes.
    This document confirms, does it not, that Sly and Weigall had not been asked to advise on the presence or extent of any corporate benefit arising out of the execution of the documents?—Yes, I can see that.
    Didn’t the receipt of this document raise alarm bells for you when you could see the solicitors were protecting their backside by putting this document on the record?
    Didn’t this document ring alarm bells with you?—No, it did not ring alarm bells because this is a matter that had been under constant discussion between myself and my fellow directors and solicitors do write these sorts of things to cover themselves quite regularly.
    After certain objections were dealt with counsel continued:
    The Sly and Weigall facsimile notes, does it not, that the directors’ resolutions set out provisions which seek to confirm that the execution of the document concerned will be in the best interests of the company and take into account its members’ and creditors’ interests and will be something of real and substantial benefit to the company. They identify that, don’t they?—In this 24 January facsimile, yes, and as I have previously said it was something that was in the forefront of the directors’ minds at all time.
    What they are confirming is that they hadn’t even been asked to advise on the presence or the extent of corporate benefit. Isn’t that correct?—They say that, yes.
    Yes. You understood, did you not, that the issue of corporate benefit was an important issue that the directors had to address for each particular company?—Yes, as a group.
    As a group?—Yes, each company within the group as a group.
    Weren’t you concerned by the fact that the solicitors pointed to the resolutions which asserted that the execution would be in the best interests of the company and then went on to say: We haven’t been asked to advise on the presence or extent of that corporate benefit.
    Weren’t you concerned by that?—No, because I have already answered the question by saying that at all material times we were concerned about each individual company and the benefits for those companies within the total group.
    5068 As I have already said, his answers suggest to me that he did not properly understand the legal concept of corporate benefit. His repeated reference to the benefits for ‘the group’ emphasised this. There was no supporting evidence from any other director that the issue had been under ‘constant discussion’. And, there was no evidence that anyone had properly addressed the legal test of corporate benefit with him. In fact, the fax from his own lawyers confirmed they had not done so. I will come back to the role of S&W in Sect 25.6.12 and Sect 25.8.
    24.1.3.8. Bell and Bond
    5069 Some time was spent in cross‑examination on the connection Aspinall had with the BCHL group. He came to the BCHL group as an employee in 1983. When BCHL took over the Nine Network in 1987 he became Chief Executive (International Media & Communications Director) and held that position until March 1990. From late 1987 he was based in Hong Kong where he negotiated the acquisition of Hong Kong Television Broadcasters Ltd (HKTV). He did the due diligence for that purchase and he became a board member. He was a non‑executive director but was involved in some operational matters.
    5070 From the middle of 1987 he was a director of BCIL and a director of British Satellite Broadcasting Ltd (BSB), a satellite broadcaster. As a director of BCIL he was involved in the purchase of Chile Telephone. He was involved in the sale of that entity in February 1990. From October 1988 to April 1989 he was involved in the tribunal hearings to determine whether Alan Bond was a fit and proper person to hold a television broadcasting licence. Aspinall said that he was not involved in the decision by BCHL to take over TBGL.
    5071 Aspinall said that Alan Bond was chair of BCHL and Beckwith, Oates and Mitchell were the senior executives. He said he called them ‘the kitchen cabinet’. As Chief Executive Officer of Swan TV he reported to the board of that company and to Beckwith. Aspinall was not a director. It was a similar situation with QTV 9. He reported to the board of BCIL on any activity in which he was particularly involved, such as HKTV and Chile Telephone. In respect to BCHL he reported to Beckwith on investments of that company for which he (Aspinall) was responsible. He said in answer to a direct question in cross‑examination that he was never privy to the BCHL cash forecasts. Oates administered the Finance and Administration division of BCHL from October 1988. Aspinall thought that the appointment of Oates was a formalisation or pulling together of the finance and administration of the group.
    5072 Aspinall testified that when he was appointed managing director of TBGL he was told by Beckwith that his role was to become involved in the day‑to‑day operations of the publishing business of the group. Beckwith told him that assets other than publishing and media would be sold off. At this point Aspinall said that he was not even a signatory of the TBGL bank account. As described in Sect 24.1.3.1, his relationship with Finance and Administration personnel was poor and he had difficulty getting the group cash flow information that he needed.
    5073 Aspinall explained in his evidence that after he was directed by Beckwith to ‘get involved with the banks’ in July 1989 he formed a view that he needed to review what Oates told him ‘more carefully’. At various places in his evidence, Aspinall made comments from which I gained the impression that his relationship with Oates was cordial but without the unreserved degree of trust that is desirable between directors. He also said in evidence that he needed to review what Farrell and Noonan told him ‘very carefully’.
    5074 I am satisfied from the totality of the evidence that Aspinall did not pursue a conflict of interest in that he did not prefer the interest of the BCHL group to the interests of the Bell group. Once he assumed the responsibilities as managing director of TBGL he was determined to confront that group’s problems and in particular he was intent on securing its survival. I gained this impression very clearly from the way Aspinall responded to the questions put to him on the ‘divided loyalties’ issue in the witness box. This is one of the areas in which I have relied, to some extent on demeanour. In particular Aspinall’s demeanour in answering the direct question put to him about possible conflict was telling. This is an example:
    Isn’t it the case that as at 26 January 1990 you understood that if The Bell Group or the companies in it went into liquidation, that would constitute a threat to the survival of the Bond Corporation?—No.
    You understood that though, didn’t you? It presented a threat to Bond Corporation?—As at 26 January I couldn’t have cared less.
    On 26 January you were still employed within the Bond group, weren’t you?—So be it. I couldn’t have cared less about BCH on 26 January 1990. I was over it by then, Bond Corporation. I can assure you of that.
    I won’t say anything?—You are most welcome to say it, but I was over it.
    I put it to you, Mr Aspinall, that your purpose in entering into the transactions was to remove such a threat to the survival of BCH and the Bond group?—No, I have just answered that.
    I understand?—I entered into the transaction for The Bell Group and what happened to the Bond group, I didn’t care.
    5075 In the responses to this direct questioning on the conflict issue the demeanour of this witness mattered. The answer ‘as at 26 January I couldn’t have cared less’ looks bland. I have mentioned this exchange in Sect 8.10. I detected a hint that had we been in more relaxed surroundings, the response might have been more colourful. While the transcript records what was said, it was my impression from the way that it was delivered in the witness box that Aspinall was telling the truth. I accept his evidence.
    24.1.3.9. Dealing with the UK directors and insolvency generally
    5076 On 23 January 1990, immediately before the signing of the Transaction documents by the directors of TBGL in Perth, Simpson forwarded to Aspinall a memorandum sent by fax from Edwards in London. The fax, which I note was copied to Thornhill at S&M in London (from whom the UK directors were taking advice), advised that the directors of BGUK needed certain information about TBGL before those directors would approve the additional security that was sought by the banks. Edwards explained that to approve the granting of additional security by BGUK its directors had to satisfy themselves that BGUK was solvent and that the interests of BGUK’s shareholders ‘and more particularly its creditors will not be prejudiced by the security that is sought by the banks’. They required a letter of comfort from TBGL, together with another letter to cover what Edwards described as ‘the question of solvency’. They also requested a letter dealing with the future strategy of TBGL. The fax stated:
    The question of the interests of creditors is more complex and requires an assessment to be made of whether BGUK’S creditors are better served by TBGL’s continued operation as a going concern or, alternatively, by action by the banks resulting in the appointment of a Receiver. In this context it should be noted that BGUK’s only significant asset is its investment in Western Interstate, the value of which is ultimately dependent on the value of TBGL, and that TBGL is the only source of funds available to BGUK in order for it to meet its creditors, including the Lloyds loan.
    The directors of BGUK need therefore to understand, in outline, what strategy is to be adopted by TBGL in the foreseeable future to support the conclusion that if the security is granted, with the result that TBGL is able to continue as a going concern, BGUK’s investment in Western Interstate has greater value and it is more likely that funds will be available from TBGL to meet BGUK’s creditors. Some of what is envisaged by TBGL was communicated to me orally by David Aspinall last week, but I consider that the position should be stated briefly in writing for the record to support the view reached by BGUK directors. This approach is consistent with the advice from Counsel that we obtained recently. Any letter from TBGL to the directors of BGUK may also need to be seen by the directors of Bell Group International Ltd (‘BGI’) and the directors of Bell International investments, but will otherwise remain entirely confidential and is not for disclosure to the banks or anyone else.
    The directors of BGUK also need to know the extent to which the financial position of TBGL is linked to the financial position of Bond Corporation since this may be a factor in their assessment of whether the granting of security prejudices BGUK’s creditors.
    I trust this is helpful. You will, of course, appreciate the legal reasons that require the directors of BGUK to give due consideration to these matters from the perspective of the company, rather than from the perspective of the Group as a whole. However, the issues are, I would imagine, similar to the questions that the Board of TBGL have to themselves consider for the purpose of that company granting the additional security that is sought.
    5077 This request was met by the provision of several letters addressed to BGUK and TBGIL. I will describe these letters in more detail when I come to deal with the UK directors. The first of them was a letter of comfort from TBGL to BGUK and TBGIL containing a contractual undertaking to ensure that TBGL would ‘procure that each of you has sufficient financial resources in order to enable you to pay your debts as they fall due whether by way of provision of loans or the subscription of share capital or otherwise howsoever’.
    5078 The second communication was a letter of solvency to confirm that TBGL was solvent; that no material adverse change in its financial position had occurred since 30 June 1989; that it was able to pay its liabilities as they fell due; and that it intended to refinance TBGL prior to May 1991. The latter would enable repayment to all lenders to the Bell group including BGUK.
    5079 The third document was a letter providing information with ‘respect to the strategy to be adopted by The Bell Group in the foreseeable future’. It said that the directors intended to rationalise the business and operations of BPG and sell off Bell Press to News Ltd. It also expressed confidence in the value to be returned to BRL shareholding. And, responding to the requirement to provide information concerning the extent to which the financial position of the Bell group was linked to the financial position of BCHL, it said that the total exposure was $25 million.
    5080 In his evidence before me Aspinall was pressed by counsel to confirm that he was aware that the UK directors had raised concerns about the implications of the financing agreements, the solvency of the company (TBGL) and the implications for the directors personally. Further, that these matters were of ‘great importance’ to the directors. Aspinall acknowledged that he recognised this. He was then pressed about whether or not he took advice on the solvency of TBGL. His response was that he did take advice on all the points raised in the letters before he signed them. He said he took his accounting advice from Garven. In cross‑examination this exchange occurred:
    Did you take any legal advice as to what the concept of solvency at law entailed?—Tony Oates was a lawyer and I was sitting with him at the time so I would imagine that he would have provided some advice, comfort in relation to that issue.
    5081 Pressed further about his intentions by counsel Aspinall repeated the consistent theme of his evidence that, as at 23 January 1990, he intended that the refinancing of TBGL would be completed prior to May 1991 and he had a ‘number of tools’ to achieve that objective. Aspinall indicated that the bondholders were not of immediate concern to him in the restructure. The first lot of bonds were not due for repayment until 1995. The only immediate concern regarding the bondholders was to pay the interest.
    24.1.3.10. The Bell group at the beginning of 1990
    5082 Aspinall’s evidence is that by January 1990 he believed that he had achieved the following:
    • A medium-term banking facility that had brought all 20 bankers to the Bell group together in one facility which now had the same maturity date, May 1991, and common terms and conditions. This facility, he believed, also had the benefit of individual banks not being able to act unilaterally. He understood that a majority of the banks would have to agree on any action that could be taken in relation to the facility.
    • The Australian banks and the Lloyds syndicate banks agreeing to share security on common terms which had not been possible under the NP agreements prior to 1990.
    • The security given together with the stringent terms and conditions of the refinancing documents gave the banks comfort that there were strict controls in place to prevent leakage of money or assets to the Bond group.
    • An opportunity to prove to the banks, over the term of the extended facility, that the publishing assets could improve profitability and demonstrate independence of the Bell group from the Bond group and thereby develop a relationship of trust and confidence with the banks for the long‑term benefit of the Bell group.
    • The ability to concentrate on running the business of the Bell group without having to deal with the potential for a multitude of individual positions to be taken by any of the 20 banks.
    24.1.3.11. A 12‑month window
    5083 Aspinall said in his witness statement that he realised that he would have to renegotiate the Bell group’s financing arrangements some time before May 1991. He believed that the banks would either want to be paid out or would want to renegotiate a term facility. He said that he believed that the key to any renegotiation would be the strength of the publishing assets of the Bell group. He said several times in his evidence that he saw these assets as having great value and potential. I understand that this is what he referred to as ‘the tools’ at his disposal. The assets could be used to raise equity and the potential for cash flow improvement could be managed so as to improve the capability of the Bell group to sustain a level of debt for longer term bank financing. This, he believed, would secure its long‑term future. In his evidence Aspinall said he believed he had a 12‑month period in which he could achieve this. He said:
    [B]y January 1990 I believed that the Bell Group had non core assets which could be sold which gave me about 12 months to organise a restructuring of the Bell Group. I took the view that I should not sacrifice the assets of the Bell Group to a liquidator’s fire sale but work rather hard to restructure the Bell Group in the interests of all stakeholders.
    5084 In Aspinall’s managing director’s report at the beginning of the TBGL annual report published on 13 November 1989 under the heading ‘Future Prospects’ he stated:
    The Group’s current borrowings are on a negative pledge basis with a combination of domestic and foreign lenders. The Group has been negotiating the refinancing of its facilities on a secured basis and expects a medium term facility to be in place shortly. This will enable the Directors to plan ahead with greater confidence knowing the financing base of the Group is sound, and that there is defined capacity to undertake new projects.
    5085 In evidence Aspinall said that statement was his belief as to the purpose of the refinancing at that time.
    24.1.3.12. Aspinall’s plans for restructure
    5086 In both his witness statement and in the evidence given in cross‑examination, Aspinall gave evidence of what he saw as the way he could restructure the Bell group after the refinancing was in place. He said that he realised he had to manage and improve the revenue and profitability of the publishing business. This would require extracting the best results from the new plant facilities. He said he needed to increase revenue and where possible control and cut costs. He said that he considered selling any assets not required for the publishing business. He said in cross‑examination that these assets included Bell Press, the regional newspapers, and the metropolitan newspapers as well. Included in this possibility were the BRL shares, which he believed would have value restored to them by what he called the ‘brewing deal’. Or, if those shares were kept, they could become a source of revenue through dividend payments.
    5087 He also said that he believed there was the possibility of an equity injection from an investor and the reduction of external debt of the Bell group by the purchase of public bonds at discounts to face value. Aspinall said that the renegotiation of the Bell group’s bank facilities gave him the opportunity to avoid having to sell the publishing business in its entirety but if he did have to sell it, or an interest in it, in the course of restructuring the Bell group he could conduct a sale on a going concern basis free of the consequences of a forced sale. This, he maintained, was advantageous to the Bell group, its creditors and shareholders.
    5088 In the course of cross‑examination Aspinall made it clear that his views on restructuring were not in his mind at 26 January:
    At that point we weren’t sitting down looking at a restructuring. We were sitting down looking at a refinancing. The restructuring was looked at earlier and later.
    Following this evidence counsel for the plaintiffs asked for clarification:
    First of all just to clarify something, I thought your view was that entering into the transactions and giving the banks security in order to obtain time was the first step in the necessary restructuring that you envisaged for the Bell Group?—Absolutely, absolutely. It gave me certainty through to May 1991.
    5089 At various times in cross‑examination Aspinall was pressed about his plans for restructuring. He consistently said that he believed that the Bell group had non-core assets that could be sold and that he had about 12 months to organise a restructure of the group to ensure its long‑term viability. He said that he believed that there were reasonable prospects of both developing a plan for restructure and implementing it. This is an area in which I have a concern about the evidence. It is one thing to say ‘I have a plan’. But the question arises whether and to what extent the plan had been considered and formulated at the relevant time.
    5090 I consider it necessary to examine Aspinall’s views on this ability to restructure by paying close attention to his evidence in respect to two particular assets: the publishing assets and the BRL shares. Then I will look at the sale of Bell Press. In the section dealing with the period from January 1990 to the end of May 1990 I will look at other aspects of what Aspinall said were part of a proposed restructure; these included a possible equity injection and the proposed purchase of the subordinated bonds at a discount.
    24.1.4. The publishing assets
    24.1.4.1. Aspinall’s views about these assets
    5091 I have no doubt, having heard his evidence, that Aspinall had enthusiasm for, and great confidence in, the publishing assets and the newspapers in particular. He was first and foremost a media executive. That is where his training and experience lay.
    5092 Aspinall said in his evidence that at the beginning of 1990 he thought that the newspaper assets of the Bell group could be sold for $500 million or $600 million. He was clear in stating his belief that while he did not think that this price could be achieved in a matter of days, or even weeks, it was an attainable price. He based his belief, he said in his witness statement, on various factors:
    • A Whitlam Turnbull valuation of the newspaper assets of BPG as at 17 March 1989 at $626 million. This document is in evidence.
    • His understanding that the newspaper moguls Maxwell, O’Reilly, Stokes and Murdoch had expressed interest in acquiring the publishing assets in 1989.
    • His own negotiation of the possible sale of a 50 per cent interest in the Herdsman plant and equipment to News Corporation Ltd at $100 million to $150 million at the end of 1989.
    • A C&L auditors’ report in 1989.
    • No indication that the monopoly of The West Australian newspaper was to be challenged.
    • His belief that the profitability of the newspaper was well ahead of budget and in line with the Bell group’s internal forecasting that Aspinall was monitoring on a weekly and monthly basis.
    • Circulation of The West Australian was increasing.
    • Efficiency at the Herdsman plant was continuing to improve.
    5093 This evidence from Aspinall was tested in cross‑examination by reference to sundry contemporaneous documents. I will deal with these in some detail below.
    24.1.4.2. Whitlam Turnbull valuation
    5094 Aspinall detailed in his evidence the process by which the Whitlam Turnbull valuation was made. Between December 1988 and March 1989 he had numerous meetings with representatives from Whitlam Turnbull to provide assistance with the preparation of this document. Aspinall’s purpose was to provide both historical and operational information and to provide some predictive financial information. He said that he recognised the information that he supplied was set out in the report.
    5095 The published valuation ascribed a value of $626 million to the newspaper assets of BPG. This was based on a formula based on earnings before interest and tax (EBIT) of $41.3 million and a rate of capitalisation of approximately 15 times EBIT. The valuation shows that $38 million was the value of the mastheads of BPG. Aspinall said that this valuation accorded with his opinion of the publishing assets because the resulting EBIT multiple was in line with equivalent multiples that had been applied for the acquisition of media assets on a worldwide basis. He knew about these matters because of his long‑term involvement in the media industry and because he kept up with this information. In addition, any entry into the market by a competitor would have been very difficult. Aspinall said that was well illustrated by the lack of profitability of The Western Mail newspaper published in competition with The West Australian from 1980 to 1988.
    24.1.4.3. Expressions of interest in purchasing
    5096 In Sect 9.17.7 I have outlined various expressions of interest that had been received from outside parties in relation to the publishing assets. Foremost among them were communications from the Mirror Publishing Group (Robert Maxwell), Australian Capital Equity Pty Ltd (Kerry Stokes), News Corporation Ltd (Rupert Murdoch) and Hambros (on behalf of Tony O’Reilly). Aspinall gave evidence of his dealings with the newspaper interests that he said had expressed interest in the possible purchase of all or part of the publishing assets. The plaintiffs’ questions in respect to this evidence centred on the differences in the indicative purchase prices mentioned in some of this correspondence. In particular there was a letter from the Maxwell publishing group indicating that it would be interested in purchasing at a price of $450 million, and that the purchase would have to be on a debt‑free basis. There was an invitation in this letter to contact Robert Maxwell on his boat to discuss the proposal. It was put to Aspinall in cross‑examination that if an allowance was made at that time for the liabilities of BPG (which were $100 million), then this put a value of only $350 million on the assets. He agreed.
    5097 In August 1989 Hambros Securities wrote to Aspinall. The letter detailed a proposal on behalf of Haswell Pty Ltd, a company associated with Tony O’Reilly, and the price proffered was $480 million to $576 million, on a debt‑free basis. They used a formula based on maintainable cash flow. This is arrived at by adding to future maintainable earnings forecast depreciation charges less adjustments.
    5098 Aspinall was shown in evidence a fax from Hambros referring to a figure of $550 million said to be a minimum negotiating figure put by Aspinall to Hambros in earlier correspondence. Aspinall said that this figure was based on the future maintainable earnings forecast of $33.9 million, adding depreciation of $18.8 million, deducting newsprint of $4.6 million to arrive at a future maintainable cash flow of $48.2 million. Multiply this figure 10 to 12 times and the resulting figure is $481 million to $578 million, which he believed was consistent with the Whitlam Turnbull valuation. He said that at that time he considered it reasonable to value WAN’s publishing assets at a multiple of 10 to 12 times maintainable cash flow.
    5099 This exchange occurred between counsel and Aspinall:
    Let me ask you this. Do you understand the difference between EBIT and maintainable cash flow?—Yes, I do.
    What is the difference?—Maintainable cash flow is looking forward and backward and making some estimates as to what the business will do in the future. EBIT is done on a similar basis. It’s earnings before interest and tax and it’s a little bit different insofar as depending on how people operate their businesses and what tax they pay it can affect the EBIT that they would use so to speak. So maintainable cash flow for the base business in my view is a good way of looking at as opposed to getting involved in other calculations which may or may not come to pass. They are very similar but there are differences in my view.
    How did you come to a multiple of 10 to 12 times?—I’d been in the business for a long while and that was a view that I had based on what other assets had been sold by others and purchased by others. I mean, there were some very high multiples paid for assets. I can remember the TV magazine group in America, I think News Corporation paid something like 15 times the earnings. But that’s a function of negotiation and I just had a view that 10 to 12 times maintainable cash flow was a reasonable proposition to put forward.
    With the greatest of respect, you’d had no experience at all in buying and selling newspapers, had you?—No, but a newspaper is just a business. I mean. I’ve bought and sold other businesses and media businesses all have similar multiples.
    5100 These responses, the manner in which they were given and his unshakable demeanour of this witness generally confirmed my view that Aspinall was sincere in his belief regarding the value of the business.
    5101 Aspinall said in his witness statement that he was being very cautious in his the dealings with the various interested parties because he was most reluctant to release the confidential, internal financial information of the newspaper business. He said he needed to know that he had genuine buyers willing to negotiate and that this was not just a means of publishing or ‘hawking’ this information around the commercial community.
    5102 A Wardley James Capel internal memorandum put to Aspinall indicated that Stokes was interested in the publishing assets at $300 million to $325 million. The document did not indicate whether the price he was prepared to look at would be free of debt. Again, Aspinall was pressed about what he maintained was the potential sale price of the newspaper assets at around $500 million to $600 million:
    Is that the price you expected a buyer to pay if the [buyer] took over the debts of Bell Publishing Group?—Yes, that is a gross figure. In other words, it’s a figure they would pay to us and they would not be assuming any debt.
    I see. So it’s net of debt and so if they did, in fact, take some debt over you would adjust the price?—Absolutely. That’s what happens in negotiations sir.
    5103 On 11 December 1989, in a letter addressed to Beckwith, Schroders made an enquiry on behalf of Rural Press Limited about the possibility of a sale of The Countryman and the other regional newspapers of the Bell group. The response came from Aspinall on 9 January 1990 and in it he said that these assets were not for sale. He said that he believed that at the time the price that would have been achieved for those particular assets alone was less than the value that they contributed to the value of the total non-metropolitan newspaper publishing assets of which they were a part. In his witness statement Aspinall said that the enquiry gave him confidence that there was particular interest in the regional publishing assets of the Bell group on their own.
    24.1.4.4. The News Corporation negotiations
    5104 In August 1989 Aspinall initiated negotiations with Ken Cowley and other News Corporation representatives in relation to a proposal for BPG to print and distribute all News Corporation products, including The Australian and The Sunday Times newspapers at the Herdsman facility. The proposal was that this would be for a 10‑year period. In addition, the proposed transaction would give to News Corporation an option to extend the contract for another 10 years. Aspinall said that he was motivated in this proposal first, by the knowledge that News Corporation would need to replace its presses at The Sunday Times newspaper in Perth in the near future. Secondly, he wanted to sell BPG because it was not profitable.
    5105 The proposal for the print contract was developed in documents to which I was referred in evidence. Cowley did not agree. Aspinall then proposed a sale of a 49 per cent interest in the Herdsman facility by WAN to News Corporation, together with a joint venture arrangement between WAN and News Corporation to print the News Corporation papers. Aspinall said that he saw such a venture as being in the long‑term strategic interests of the Bell group. He said his intention was to:
    • Generate income from the printing of the News Corporation publications.
    • Realise between $100 million and $150 million from the proposed sale of a 49 per cent interest in the plant and equipment.
    • Use the proceeds to earn more income for the Bell group so it would reduce its bank debt or buy-out bondholder debt.
    • Reduce competition for WAN by ensuring (a) its major competitor could only print a Sunday local newspaper for a period of five years, because Herdsman’s facility was only able to print one local daily newspaper, and (b) having a long‑term contract to print its newspapers, or having spent up to $150 million on the purchase of a 49 per cent interest in the Herdsman facility, News Corporation would be unlikely to build its own printing plant.
    • Maintain cash flow from the Bell group publishing activities.
    5106 All of this, I understood, gave Aspinall additional comfort in the worth of the assets and the long‑term use of them even though the proposed sale and joint venture did not proceed. Aspinall believed that this was because Murdoch would not purchase anything less than a 51 per cent interest in the Herdsman facility and he, Aspinall, would not agree to relinquish control. Ultimately, however, these negotiations did lead to a sale of Bell Press at Canning Vale to News Corporation.
    24.1.4.5. C&L audit report
    5107 On 19 July 1989 Bennett, Bond Corporations’ group chief accountant, sent to the auditors C&L a letter in relation to the valuation of the newspaper’s mastheads. This letter was put to Aspinall in evidence. The letter referred to the practice of BCHL directors of valuing the acquired assets of the Bell group as consolidated by Bond group at cost, not valuation. Aspinall said that while he was sent a copy of this letter he was not required to act in relation to it because at that time he was dealing with other issues. On 14 August 1989 he received a memorandum from Barnes in Finance and Administration referring to the request by C&L for audit information in particular, regarding the ‘revaluing’ of the mastheads. The auditors’ concerns were contained in an attached letter. The letter said that the revaluation of the mastheads with the Bell publishing group was based on the Whitlam Turnbull report and that the auditors’ view was that this valuation was ‘somewhat on the high side’. The auditors held a view that the mastheads were overvalued by $100 million to $150 million.
    5108 On 15 September 1990 Aspinall met with the C&L auditors. A file note of that meeting, produced by C&L, is in evidence. The meeting discussed the Whitlam Turnbull valuation. Also discussed was the Hambros valuation (referred to in Sect 24.1.4.3). There was other correspondence and further meetings. The contemporaneous notes, documents and correspondence indicate clearly that there was vigorous debate about this issue between Aspinall and the auditors. Ultimately, C&L qualified their audit report. The qualification in the annual report for 1989 referred to the opinion held by the auditors as to the overstatement of the value but it went on to refer to unsolicited interest being shown in the purchase of the publishing assets, including the mastheads, at prices approximating the revalued amounts.
    Accordingly, considerable uncertainty exists as to the appropriate carrying value of the newspaper mastheads.
    5109 Aspinall described the qualification as ‘very soft’. He said that the differences between he and C&L on this issue were simply ‘a different point of view’. One of the particular areas of disagreement was the exchange rate used by Whitlam Turnbull for the cost of acquiring newsprint. Another was the view by C&L that there should be different multiples used for the operations of the Bell publishing group, not a common multiple. Aspinall said that in his opinion C&L was wrong. He said that it was his opinion that the assets were worth more. He believed that because of his intimate knowledge of the Bell group at the time he was in a position to be able to rely on his own judgment in reaching an opinion on the value of the publishing assets and he did so. He also said that the C&L audit occurred some time after the Whitlam Turnbull valuation (effective as at December 1988) and the newspaper assets had grown in value. He said that he believed that the directors could form a reasonable view as to the valuation of the newspaper assets. Ultimately he said that taking into account the comments by C&L, and looking at their calculations based first on an EBIT of between $28.2 million and $31.2 million for The West Australian at a multiple between 13 and 15, and secondly of between $4 million and $5 million at a multiple of 10 for the regional publications, he thought that the newspaper assets were valued by C&L at least at $500 million at 30 June 1989.
    24.1.4.6. The monopoly position of The West Australian
    5110 In the witness box Aspinall was asked if he thought that at 26 January 1990 BPG, with WAN as its major asset, had effectively a monopoly position in Western Australia. His answer was no. He said that The West Australian was published on Monday to Saturday, but The Daily News was an afternoon daily newspaper and it competed for advertising. The Sunday Times competed aggressively for the valuable classified advertising revenue. He said:
    We did have a true competitor in some areas of our business; a very true competitor.
    5111 In his witness statement, Aspinall made it clear that his view was that The Sunday Times was not a daily competitor of The West Australian newspaper and The Sunday Times’ presses were old. The West Australian had a state of the art colour printer and insertion facilities that gave it a significant advantage. The Community Newspapers was owned jointly by United Media and West Australian Newspapers Pty Ltd with United Media having only ‘C’ class shares which meant that effective control was in the West Australian Newspapers Pty Ltd. The Daily News was making losses. He said it even owed BPG $5 million for printing. Aspinall said that it was his intention to have WAN buy The Daily News.
    5112 I understood that what Aspinall described as a ‘monopoly position’ was that The West Australian was the only daily newspaper in the State. It had a very long history. Eastern state papers could not be easily transported across the desert to compete with The West Australian because of distance, time differences and the cost of transport. As he said in his witness statement:
    A combination of the historic readership of The West Australian in Western Australia and the physical barriers to entry make it unlikely, in my view, that a competitor of The West Australian would succeed. That was also my view in January 1990.
    24.1.4.7. Profitability of the newspaper
    5113 What Aspinall described as the maintainable earning capacity of the publishing assets was the revenue generated by the operating entities, the published newspapers and the EBIT derived from that revenue. Some of his evidence of his views on potential revenue in his witness statement was controversial. I do not wish to revisit the myriad objections raised to parts of the evidence. I dealt with it in September 2005. I made rulings then. In considering Aspinall’s evidence in some detail now, and the weight I give to it, I am mindful of those rulings. The purpose of this close consideration of his evidence is to elicit his state of mind, the knowledge he had and the beliefs he held at the relevant time.
    5114 Aspinall’s evidence (which was not challenged) was that, as a basic proposition, revenue is largely determined by the advertising revenue and cover price. EBIT is dependent upon revenue and costs. These affect what he termed the yield of a newspaper. That yield is affected again by the balance between editorial content and advertising content. Advertising pays but editorial or news stories do not. Decreasing the editorial content improves the yield of a newspaper. The savings are achieved in the cost of ink and paper.
    5115 A table attached to Aspinall’s evidence set out the estimated, budgeted and actual revenue figures and the EBIT figures for the Bell group publishing assets for 1987 to 1991. The figures were taken from source documents identified in that table. I have no reason to doubt their accuracy. The banks submit that the position demonstrated in this table was that there was an increase in revenue from 1987, 1988 to 1989 of 23.4 per cent, with a 20.3 per cent increase in EBIT. The 1988 – 1989 year was, Aspinall said, a year of significant change for the Bell group’s publishing assets. The Western Mail had closed, thus removing a competitor. This increased the circulation and advertising market of The West Australian. The new facilities at Herdsman were completed and advertising rates and the cover price were increasing. He described 1987 – 1988 as ‘generally a buoyant year’. But while the budget for the 1989 – 1990 year showed that the move to the Herdsman facility would have a positive impact on the financial performance of the publishing assets, the projected benefits would be offset by increasing costs and lower adverting volumes associated with a predicted downturn in the Australian economy.
    5116 Aspinall said that in order to combat the negative budget projections he, and the management of the Bell group, were involved during 1989 and 1990 in a drive to increase revenue by attracting more advertising, reducing costs wherever possible and trying to increase the efficiency of the operations in order to maintain the yield of the published newspapers. He said that throughout this period he was receiving weekly and monthly management reports prepared under the direction of Garven, the director of finance of the Bell group. These reports were the 1989 – 1990 budget re-forecast on this weekly or monthly basis.
    5117 The reports were discussed at the management meetings on Fridays, which Aspinall said he attended when he was in Perth. The reports identified areas of change and enabled management decisions to be made to compensate for changes in financial performance. He said that this monitoring, in an effort to increase efficiency and profitability, was a constant management exercise. He said that by the second half of 1989 he believed that the negative economic conditions were not as significant as had been predicted in the budget. He said that by January 1990, referring to the tables attached to his evidence, that the actual revenue was in line with the forecasts but EBIT was above budget forecast. He said that he believed that the tighter economic conditions in 1989 – 1990 were not affecting the profitability of the Bell group’s newspaper assets. Aspinall said that on these factors:
    In January 1990 I believed that the profitability of the publishing assets would continue to increase as the benefits from the modernisation of those businesses, the move to the Herdsman facility and the continuous management of those changes continued to improve the efficiency of the Bell group’s publishing business.
    5118 He went on to refer to the seven‑year and five-year forecasts for the Bell group. He said the seven‑year forecast for BPG was prepared under Garven’s direction in April 1989. It predicted EBIT for The West Australian, regional newspapers and the travel service, being the publishing assets of the Bell group excluding BGP, The Community Newspapers and The Daily News, for the year 1989 ‑ 1990 of $33 million. The 1989 ‑ 1990 budget for the same assets predicted EBIT of $30.6 million. The five‑year forecast for BPG prepared on or about 18 September 1989 by Garven predicted EBIT at $32.1 million. The monthly management forecasts could vary from week to week and month to month depending on management projections. The monthly management forecast for August 1989 revised the EBIT to $31.59 million, September to $34.06 million, October to $34.2 million and January 1990 to $34.3 million. He said:
    The actual performance figures and the continual reforecast in the weekly and monthly management report exceeded the 1989/90 budget, the 7 year forecast and the 5 year forecast for 1989/90. My belief at the end of 1989 and at the beginning of 1990 was that the 5 year and 7 year financial forecasting for the Bell Publishing Group was, to the extent possible, bearing in mind that the exercise was a forecasting exercise, accurate if not a little conservative.
    Aspinall included in his witness statement a table setting out the movements in the figures. He went on to say:
    By the time I entered into the refinancing with the Banks in January/February 1990, the projected forecasts for the publishing group showing an increase in EBIT were on track. I was aware of that improving performance and it confirmed my view of the potential of the newspaper assets and their value.
    5119 Aspinall referred to the management report for the week ending 20 January 1990. In that report it showed that for a 29‑week period prior to that date the newsprint costs had decreased by $2.6 million. Total wages and salaries were down by $1.15 million against budget. Those were major costs in the production of the newspaper, and the decrease in these costs, without lowering the quality of the newspaper, affirmed his view on the increased profitability. He said:
    By January 1990, the profitability of the newspaper business was not suffering by any decline in advertising or any increase in costs. In fact, the contrary was true. I believed that the increasing profit of the publishing assets of the Bell Group would continue and I believed that I could maintain the performance of the newspaper business and exceed budget.
    24.1.4.8. Increasing readership
    5120 There is in evidence a document described as The Audit Bureau of Circulation figures for 1988 ‑ 1990. It showed that in September 1989 and March 1990 circulation figures for the newspaper were increasing. Aspinall said that he saw these figures at the time they were published. He said he believed that this steady circulation increase, particularly for the Saturday newspaper, would continue. He believed there was scope for increasing the younger readers of the newspaper and the increased readership in that demographic would increase advertising.
    24.1.4.9. Efficiencies at the Herdsman plant
    5121 As a result of the move to the Herdsman plant and the benefit of the increased technology Aspinall said that he believed that the profitability of the newspaper would substantially increase. He said that it was going to take some to for this benefit to performance to emerge. New management skills had to be implemented, and further technological innovations were required. He believed that the newspaper was well placed to move to fully automated production facilities and the plant and technology that was in place by the beginning of 1990 was ‘a step in that direction’. He said that his views on this were passed on to the banks. He said this was reflected in notes made by various bankers at a meeting on 23 February 1990. He said that these were his views when the refinancing was undertaken with the banks:
    I had a very firm view at the end of 1989 and the beginning of 1990 that the maintainable earnings for the newspaper should have been regarded as $40 million.
    On the basis of a going concern business and with the advantages that applied to the Bell Publishing business; that is, a monopoly position, very high barriers to entry, new modern plant and equipment, new management structure, new editorial direction and the opportunity to sell for the first time in Australia ROP colour; I believed that a price earnings multiple of between 13 and 15 was appropriate to apply to a maintainable earnings figure of $40 million. I believed that the newspaper could be sold at the time for between $500 million and $600 million at the beginning of 1990.
    5122 He said, in concluding this part of his evidence, that it was not until about October 1990 that it became apparent to him that the economic conditions that then applied would reduce the revenue and the profitability of the publishing assets. In Sect 9.17.5 I indicated that I was not confident about the evidence led from the expert valuers about the timing and extent of the downturn of the Western Australian economy in 1989 and 1990. However, I note that as early as May 1990, Aspinall reported to officers of LDTC on the decline in the Australian economy and the budgeted decrease in advertising revenue. There is no indication in the evidence what, if any effect, this change in circumstances had on Aspinall’s thinking about the price, manner and timing of a dealing with the publishing assets. It is difficult to accept that these factors would have been neutral.
    5123 I am tempted to note that in all of the evidence about factors that could improve the value of the newspaper, no‑one mentioned lifting the standard of the editorial content. I will resist the temptation.
    5124 I accept that Aspinall held the view that the newspaper could be sold for between $500 million and $600 million. But two things have to be said about it. First, it is based on an optimistic view with everything working to plan. It does not seem to contain any discounts or reservations for adverse factors or events. In this respect, his approach differs from that taken by Weir (Westpac) when he came to look at the value of the publishing assets in January 1990: see Sect 30.12.2.
    5125 Secondly, Aspinall did not give any evidence as to the time it would take to achieve a sale at that price. I do not think Aspinall could have believed that funds of that amount would come in by, for example, May 1990. Nor did he give evidence as to what effect an outright sale at that price would have had on the plans to restructure the finances.
    24.1.5. BRL shares
    5126 Elsewhere in these reasons, in particular in Sect 9.16, I have dealt with the effect of the brewery transactions on the cash flow insolvency issues. In this section I wish to deal with the evidence Aspinall gave in respect to this transaction and his view that the BRL shares were just one of the ‘tools’ available to him in the intended restructure of TBGL.
    5127 In 1989 TBGL held 240 million shares in BRL. This was made up of 216.7 million fully paid ordinary shares (39 per cent) and 23.141 million (43.6 per cent) convertible preference shares. Aspinall became a director of BRL on about 21 October 1988 shortly after his appointment as a director of TBGL. I have described earlier how BRL had large cash resources resulting from the sale of shares in BHP. A significant part of the cash held by BRL, about $700 million, had been the subject of a loan to BCHL. This loan was termed the Freefold facility. Aspinall was also a director of Freefold. In May 1989, BCHL and certain subsidiaries entered into an agreement with a subsidiary of BRL, Manchar, to sell all of the BCHL group’s worldwide brewing operations. Aspinall said that he was not involved at all in the sale agreement. He said that the deal was complex and it was changed several times in the course of 1989. He said that he obtained updates from Mitchell, who was involved in the transaction. He could not recall when and where these updates were given to him.
    5128 However, he said that based on these reports he believed that the sale of the brewery assets would proceed and BRL’s shares had the potential to be restored to something in the order of $430 million. He said this was at $1.80 a share which was the value attributed to them in the TBGL audit report at 30 June 1989. He said he made this view clear to the banks. That this was a view expressed to the banks by Aspinall at that time is supported by notes made by several of the bankers involved in the Transactions. On the other hand in January 1990 this could only be described as an exceptionally optimistic view given that:
    (a) in December 1989 the shares had traded as low as 40 cents and never above 65 cents (see Sect 9.16.4);
    (b) the shares had been suspended from trading on 29 December 1989; and
    (c) BBHL was in court-appointed receivership.
    5129 In cross‑examination Aspinall was questioned closely about his knowledge of the brewing transaction and his view on the worth of the BRL shares. As part of that cross‑examination a statement made by Aspinall in 1995 was put to him in the witness box The statement, which he said contained statements and opinions that were honestly held and he believed were broadly correct at the time he made them, provided some useful background to the involvement of Aspinall in the BRL transactions and the view he said he held about the worth of the shares as at 26 January 1990.
    5130 He said that he was unaware at the time of his appointment as a director of BRL that it had lent money to BCHL. He said in evidence that at some point, probably around middle of April 1989, he became aware of the size of the loan and that it was for a fixed period. He had previously thought it was a come and go facility. He also found out that the loan was unsecured and that it had exceeded its limits.
    5131 He said in his statement that he raised the security issue with Beckwith and he said he was told that there was not much security to be had. He said he told Beckwith that if there was no security then the loan should be repaid. The response, Aspinall says, was that Beckwith told him that BCHL could not raise the money to repay the facility. And he said he was told by Beckwith that if there was any security it would not be ‘first class’ or ‘first ranking’. Aspinall’s view was that any security was better than no security.
    5132 He went on to say that a couple of days later (around 13 April) he raised the matter with Oates in Sydney. Aspinall said that he told Oates that he thought he (Oates) had lied to him. He said that Oates told him he was ‘out of order’ by questioning him in this way. He went on to say that on the same day, or the next day, he had a conversation with Alan Bond and Beckwith.
    5133 The meeting took place at the Sydney offices of BCHL. Aspinall said he walked into a meeting between Alan Bond and Beckwith. He said that he told them he felt that he had been lied to about the facility and that there was a necessity to put some security in place. He said that Alan Bond told Beckwith to do something about it. Aspinall said he recalled Beckwith repeating what he had already told Aspinall: there was very little security available. Nor would any security provide commercial cover in the sense of 1.6 times or 1.7 times the ratio or quantum of the facility.
    5134 On 28 April 1989 Aspinall was staying at the Intercontinental Hotel in Sydney. He received by fax a letter offer and a document from Nizzola at BCHL. The documents were intended to effect an increase in the Freefold facility to $1 billion and extension of the time for repayment. He said that he returned to his room, read the documents and then spoke to Nizzola, who was with Chandler of P&P, on the telephone. He says they had quite a discussion about this increase in the facility. Nizzola told him that the value of the security was about $300 million to $400 million.
    5135 Eventually, later that same evening, he was telephoned by Beckwith. He said that Beckwith told him there was a resolution of directors authorising the signing of the documents. He said he complained to Beckwith that the security offered was far less than would be necessary. He said in his evidence:
    Beckwith became angry at this point. When I asked him why I had to sign the letter of offer, he yelled at me, ‘Well, you’re the one who kicked up the fuss about the security. You sign the documents’. That was effectively the end of the conversation.
    5136 In evidence Aspinall said that he signed the documents because they had no security and even though what was now being provided did not approach commercial levels, at least there was some security. Something was better than nothing was his belief. He said:
    The fact of the matter was I did sign the document and I signed it on the basis that right now Bell Resources had nothing. They lent a sum of money. They had no security. On balance, from my point of view, I believed that whilst it wasn’t what you would describe as a commercial piece of security for the amount of money lent, it was better than nothing, so that should there be a problem at least the shareholders and the creditors at least had something to rely on. Right now before me executing that document they had nothing, and I took that view and I still hold that view.
    Counsel, in cross‑examination pressed Aspinall about this view:
    You formed the view at that time, didn’t you, that the Bond group must have been under severe financial pressure to embark on the transaction that it had, taking the unsecured loans from Bell Resources Ltd?—I would have formed the view that the Bond group were under pressure. However, they had a very valuable brewing asset that they were dealing with and they were trying to sell that asset and that would have then strengthened the position of the group and therefore, yes, whilst they were under pressure, companies quite often come under pressure and they have to take actions and this was an action that they had been working on for some time.
    It’s correct, is it not, when you found out about the Freefold facility that there was no suggestion at that stage of the loan being converted into a deposit on the sale of the breweries? —At that particular moment in time, I don’t believe so. I think that occurred sometime later.
    5137 As I have already said, in his witness statement Aspinall only touched upon the contractual arrangement made in May 1989 between BCHL, and some of its subsidiaries, and Manchar, to sell all of the Bond group’s brewing assets. Aspinall was a director of BRL and a director of Manchar. Despite this, it was Aspinall’s evidence that he was not involved in any of these negotiations for the sale and purchase. He attended very few of the BRL board meetings. He said he relied on Mitchell for information. The brewery transaction was renegotiated in September 1989 and again in December 1989. Aspinall was pressed about these renegotiations in cross‑examination. He maintained the position that he was not involved. On 18 December, after the Adsteam court action, and as part of the change in the constitution of the board of BRL, Aspinall resigned as a director of BRL.
    5138 The basis on which Aspinall said he held to his belief that value would be restored to the BRL shares was as follows:
    • He believed that the directors of BCHL wanted to complete the brewery deal.
    • Spalvins, from Adsteam, appeared to Aspinall concerned to restore the value to BRL so that this was reflected in Adsteam’s holding of BRL shares. Aspinall held this belief from comments he had read in the press.
    • The new board of BRL appointed on 18 December 1989 included representatives of Adsteam and appeared to Aspinall to be concerned to ensure that the brewing deal was done.
    • He believed that the sale of the breweries would be concluded and this would be beneficial to BRL. He believed that the sale would result in BRL owning a very substantial operating business and assets.
    • He believed the deal would be done on commercial terms and that the assets purchased by BRL would generate a substantial cash flow and profits for BRL.
    • He thought that once a sale took place, with the attributes described, the public perception of BRL would change with more positive views towards the company and its share price would increase. He believed that this would move towards restoring a price equivalent to the net tangible asset backing of those shares.
    • He believed that once the above events occurred then BRL would be restored to the position that was reflected in its annual report and audit for the year ended 30 June 1989. That report did not qualify the $1.2 billion deposit paid for the breweries.
    • Prior to the appointment of Adsteam representatives to the board of BRL on 18 December 1989, he thought that the completion of the brewery deal was imminent. He thought it would be completed within two or three months. After the appointment of the Adsteam representatives and before the appointment of a receiver to BBHL in late December 1989, he thought the new board would still want to complete the sale but that it would be completed with about the first six months of 1990.
    • He understood that Hill, in his chairman’s address on 21 December 1989, had said that the brewery deal would be completed. He also understood from discussions with Mitchell that a great deal of pressure was being applied by the Adsteam representatives on the BRL board to the BCHL representatives on the board (Mitchell being one of them) to make progress with the completion of the deal.
    • When the receiver was appointed to BBHL on 29 December 1989 Aspinall still thought that the brewing deal would be done. He said he believed that it would be done whether or not the receiver was removed. His belief was that it made general commercial sense for the receiver to sell the assets to a buyer that already existed. He thought that would be encouraged by the two major creditors: BRL and the BBHL banks. He thought the appointment of the receiver added a complication to the completion of the brewery deal because an extra party was involved but that it would still not take any longer than about six months or so to do the deal.
    • When the receiver was removed on 9 February 1990 and the proceedings in the High Court subsequent to that were finalised in March 1990 he still thought the brewing deal would be done shortly after the end of the 1989-1990 financial year.
    5139 His concluded view, based on all of the foregoing, was:
    The net asset backing of the shares of BRL owned by TBGL would have to approximate something like the net asset backing at the time referred to in the 1989 TBGL annual report as $456 million. It may have taken some time for the shares to reach a value on the market reflecting that asset backing, but my view was that once the Brewery Sale Agreement was concluded the shares would gradually rise to a value on the market at least in excess of $200 million, if not more, bearing in mind that they would have had a net asset backing of approximately $456 million.
    5140 When Aspinall was in the witness box counsel put to him that his views on what he thought the listed price of the shares would be in 12 months time was speculative in nature. He said in response:
    I don’t agree with that, sir. The breweries themselves were very successful breweries, were well run – run by others, other than Bond Corporation – and I believed that once the receiver was removed, once the sale took place, that value would be restored. I’m saying in my paragraph 355 (reference is to his witness statement) that it may take some time. It’s not like a light switch. Then again, sometimes it is like a light switch but not necessarily all the time. What I’m saying is that it would take some time. Now, I don’t say in 355 how long it would take but certainly I was hopeful that it would rise in value, sufficient value, by the end of 1990, yes.
    5141 By his own admission, Aspinall had little personal knowledge of the brewery transaction. But from what he did know he must have appreciated its innate complexity. He must also have understood that this would have an effect both on the extent and timing of any return to value in the BRL shares. The last exchange referred to above indicates that Aspinall could not have had any realistic expectation (in January 1990) that the BRL shares would be returned to value in time to assist in the payment of the bondholder interest in May and July 1990. Nor could he have had any realistic expectation that, from a cash flow perspective, BRL would be a source of management fees or dividends within that time.
    24.1.6. Bell Group Press
    5142 In Sect 24.1.4.4 I dealt with Aspinall’s evidence in respect to various proposals put to News Corporation. Ultimately, as he explained, none of those proposals eventuated in agreement. But he said these negotiations and discussions eventually led to the sale of the heatset part of Bell Group Press’ printing business to News Corporation, which already owned Progress Press. It also printed in colour. On Aspinall’s view there was insufficient business in Perth to make both these colour printing operations profitable.
    5143 A proposal for the sale of Bell Group Press’s heatset business was put to Cowley of News Corporation in about July or August 1989. He said that he negotiated the sale from about September 1989. He said that there was no doubt in his mind that this asset would be sold: by 22 January 1990 News Corporation was doing its due diligence on the proposed purchase. He recalled attending a meeting at WAN’s office with Catlow from News Corporation. He said that he was there to negotiate, as part of the sale, that News Corporation as purchaser would print the colour supplement published with The West Australian for the next 10 years.
    5144 The contract for the sale of the heatset business of Bell Group Press was executed on 12 February 1990: the sale price was $25.6 million. In conjunction with the sale of that part of Bell Group Press, WAN entered into a 10‑year contract with Pacific Magazines to print The West Australian newspaper’s colour supplement on the press at Canning Vale. Aspinall concluded his evidence on this point by saying that the long‑term printing arrangement was on what he considered very good commercial terms. As it turned out, the proceeds of the sale of the heatset business were critical to the continuing operations of TBGL after January 1990.
    24.1.7. Financial information available to Aspinall to 26 January 1990
    24.1.7.1. Cash flows and income sources
    5145 In Sect 9 (the cash flow insolvency case) I have dealt in some detail with the preparation and content of the cash flows. I noted Aspinall’s evidence in relation to several of the matters raised by the cash flows; in particular, various items that he maintained were receivables. I drew conclusions in respect to several of these items and whether or not, realistically, they were available. In considering Aspinall’s evidence I am looking only at what he said in evidence were his expectations, beliefs and concerns in relation to this financial information which was available to him at that time.
    5146 I think it is important here to recall that when Aspinall was appointed first as chief executive, then as a director and then managing director of TBGL in October 1988 he was told by Beckwith that he was to concentrate on the publishing and media assets. These were to remain the core business of TBGL and everything else would be sold off. Aspinall said in his evidence that Beckwith told him:
    All of Bell Group’s assets, other than its publishing and media assets were to be sold under the guidance of Mitchell’s Corporate Planning and Development Division, and that TBGL would then become solely a newspaper and publishing company. He said to me words to the effect that Mitchell would be assisted by Corr and Williamson and that I need not become involved in the non-core asset sale programme.
    5147 This intention to sell all the none-core assets was part of the published corporate plan for the Bell group as set out it in its annual report dated 21 October 1988. At the same time as he took on the new roles, Aspinall was heavily involved in other matters for the Bond group including BSB, HKTV and Chile Telephone. At that time Oates was chairman of TBGL and Mitchell was the other director. The separation of these areas of responsibility continued until Aspinall was told by Beckwith in July 1989 about the need to get involved with the banks. I have dealt with this in Sect 24.1.3.2. However, this structural division helps to explain why the financial information Aspinall received was at first rather limited: his concern initially was with the publishing assets only, his need for group cash forecasts came later.
    24.1.7.2. BPG cash forecasts
    5148 In his witness statement Aspinall said that from 1989, every Friday, the accounting staff at BPG (under the director of finance for WAN, Garven) prepared weekly cash forecasts. These forecasts were submitted to the Finance and Administration division, which prepared the consolidated cash forecasts.
    5149 The weekly cash flows (of which there were many) were used by Aspinall to identify in particular when BPG would require cash from the Finance and Administration division for extraordinary items of expenditure, such as the newsprint. I have dealt at some length with his explanation about how he relied on this information to manage operations in Sect 24.1.7. These were cash flows over which he had more particular knowledge, input and control. These were documents that he could rely on because of his closeness to the business from which they were derived. The TBGL group forecasts were not quite in that category. The publishing assets had solid positive cash flows. On the information available to him, Aspinall believed that the actual performance figures at the end of December 1989 and the beginning of January 1990 were all in excess of budget. He went further in his evidence to say that the forecast, budget and actual figures for the next five and the next seven years were all exceeded by the actual performance figures.
    5150 His views on the profitability of the publishing assets appeared to be part of the difficulties that he had with Finance and Administration that I have described earlier. The publishing assets generated a cash flow that Aspinall considered was sufficient to meet liabilities and to make payments to recurrent trade creditors in a timely way. The tension between Aspinall and those in Finance and Administration appeared to be a result, in part, of the way he wished to conduct business, as contrasted with the way Finance and Administration required him to do business. That was well illustrated by Noonan’s memorandum dated 27 October 1989 to which I have already referred in Sect 24.1.3.
    24.1.7.3. TBGL cash forecasts
    5151 I explained in Sect 24.1.3 that initially Aspinall did not receive the consolidated group accounts or cash forecasts; he did not start receiving them until August 1989.
    5152 He said in his evidence that the cash forecasts were prepared by people whom he believed to be competent trained accountants within the Bell group. He said he understood that the cash forecasts were based upon assessments of the details of ordinary business income and expenditure for the entities within the group that were available at the time of their preparation. He said that this information could change very quickly; that was the nature of the operational entities concerned. He also said that he understood why so many were produced and why there were so many changes; he did not regard them as projections that would never change. When circumstances changed, or the cash flow predictions changed, he said there were a number of options open to him to manage those changes. These included reducing capital expenditure and other expenses of the business; increasing revenue by the various means discussed in Sect 24.1.4.7 negotiating with suppliers and creditors to obtain lower rates or extend payment terms; and seeking moratoria or reduction in interest payments. The effect of his evidence was that it was his view that variations in the predicted cash flows were not unusual or insurmountable. He said in his witness statement:
    By the very nature of operational entities and because in my experience, the information upon which such forecasts are based can, and did in the Bell group in 1989 and 1990, change very quickly after the cash forecasts were produced, these cash forecasts were continually evolving forecasts. In 1989 and 1990, I understood that that was why cash forecasts were produced repeatedly and that was why they changed over time.
    Whilst I understood that they represented the projected picture at the point in time at which they were produced, they were not regarded by me as projections which would never change but rather, were utilised by me as a method of predicting and managing the future course of the Bell group of companies at a point in time and were then used to review that future course as predictions changed for a variety of reasons.
    5153 The cash forecasts for 4 September 1989, 4 January 1990, 19 January 1990 and 26 January 1990 demonstrate some very significant variations or changes in respect to the following items:
    (a) BRL management fees: these were included in the September cash forecast at $10.8 million but not in the January forecasts. Aspinall’s explanation was that when the board of BRL changed in mid-December 1989 and the new chairman announced that BRL would operate independently of the Bond group he (Aspinall) did not think that management fees would be paid by BRL to TBGL. This was why the January cash forecasts omitted these fees.
    (b) JNTH management fees: monthly management fees of $100,000 paid quarterly were included in the September cash forecasts. These fees did not appear in the January forecasts. Aspinall said that from 2 January 1990 he separated the Bell group from the Bond group and no management fees were charged thereafter. This did not affect the outstanding debt that I refer to in Sect 24.1.8.6.
    (c) BRL share dividends: the September cash forecasts provided for dividends from ordinary and preference share dividends to be paid in the 1989 ‑ 1990 financial year. The January cash forecasts did not provide for ordinary share dividends. That was because on 13 November 1989 the BRL audited accounts confirmed that no ordinary dividends would be paid. The January cash forecasts projected an annual amount of $10,300,000 for BRL preference dividends. Aspinall said that until 28 February 1990, when the BRL half‑yearly report was published and a stock exchange announcement made, he did not realise that BRL would not pay dividends on the preference shares; the item was not removed from the cash forecasts until Friday 9 March 1990. But from what he did know about the affairs of BRL he must at least have questioned the ability of BRL to pay a dividend when it was not obliged to do so.
    5154 Aspinall’s view (expressed consistently in his evidence) was that, even given these significant variations in cash flow items, the strength of the revenue stream from the publishing assets gave him confidence in being able to meet the recurrent expenses. However he said that it was his view at 26 January 1990 that if the Bell group was to survive on this income stream it would be necessary to reduce the amount of debt. He said several times in his evidence that he believed he had enough ‘tools’, more than $80 million worth, to sustain the operation of Bell group to enable the restructure to occur post 26 January 1990.
    5155 By the end of this period (January 1990) Aspinall said that he believed that prudent management would improve the cash position of the Bell group generally. He told the banks this.
    24.1.7.4. TBGL balance sheets
    5156 Considerable time was spent cross-examining Aspinall on various aspects of the annual report of TBGL for 30 June 1989 and, in particular, the operating losses of the group. This line of questioning was designed to elicit from Aspinall a concession that certain aspects of the balance sheet of the company should have caused him to be concerned about TBGL’s solvency. This is illustrated by the following exchange with counsel:
    The accounts disclose, do they not, that on a consolidated basis Bell Group had made a loss for the year ended 30 June 1989 of 271.8 million?—That is the group. That is correct. 271.8, that’s correct.
    The previous year it made a loss of $76.5 million. Is that correct?—If you’re looking at after income tax as opposed to after extraordinary items, yes, I would agree with that, 76.5.
    That’s up in the middle of that little table. Yes?—Yes.
    As at 30 June 1989, if we could go to the balance sheet on page 25, we can see that it had a surplus of current liabilities over current assets; that is, a deficiency of working capital. Is that correct?—This is at page 25?
    Yes?—And your point is?
    That the total current liabilities of $524 million exceeded the total current assets by approximately $177 million?—The total assets including current assets and non‑current assets are shown as $1.605 million.
    I was asking you about the working capital?—Yes, I understand what you’re saying. I’m just going through and I’m trying to follow your logic. It has current liabilities of 524, total liabilities of 1.145 million, leaving net assets of 459 million.
    Judge: Did you ask Mr Aspinall what he understands by the term ‘working capital ratio’, Mr … ?—I thought I had before with the Bond group, but I’ll ask again.
    Do you understand how you calculate the working capital?—Not really, no, but I’m trying to pick up your point because when one reads the balance sheet, in my view, my net assets exceed my liabilities by 459 million. Now, they mightn’t all be current, but they exceed it.
    You understand, do you not, that current liabilities fall due within 12 months?—Yes.
    And that current assets are assets that can be readily realised?—That is correct. And that one measure of assessing the ability of a company to pay its debts as they fall due is to compare the current liabilities to current assets.
    You’re aware of that?—I can see the point you’re making but I would argue that that point is not necessarily the way that I would read the balance sheet in relation to a company moving forward because you’ve got to look at your non‑current assets. You can’t just wipe them off.
    My question was a limited question, which was were you aware?—I understand what your question was, and the answer to your question is you’re saying – and I’ll have to do the calculation to prove up your number. What number did you give me? No, the question I asked you was this: were you aware that one way of assessing whether a company was able to pay its debts as they fell due was to compare its current liabilities to its current assets?—One of many ways.
    You were aware of that?—One of many ways.
    Yes. Thank you. In this instance there was a deficiency, was there not, of current assets to current liabilities of some $177 million?—I’m just checking your numbers. 177.3 if you accept your proposition, which I don’t.
    24.1.7.5. The tax issue
    5157 Aspinall’s evidence is that he was aware of the income tax assessments that had been received for Bell Bros, Bell Bros Holdings and Maranoa Transport. He said he was unable to recall the assessments in any detail or when they were issued. He recalled receiving advice on the disputed tax liabilities but not the precise terms, or even the date of the advice. As he said, tax was not an area in which he had any expertise. He said his usual practice, before signing accounts in relation to such a specialised area, was to speak to an expert and satisfy himself as to the entries in the account. In 1988, 1989 and 1990 the tax expert was Pepper. Aspinall’s evidence is that, even though he could not recall precisely when he discussed these disputed liabilities with Pepper, he did recall that Pepper conveyed to him his confidence that there would be no liability in relation to these issues.
    5158 Aspinall signed annual accounts for TBGL, Bell Bros, Maranoa and Bell Bros Holdings as at 30 June 1989 and 5 October 1990. In each of those accounts there was a statement to the effect that the directors were confident that objections to income tax assessments would be successful.
    5159 This confidence was also expressed in a letter written by Simpson, to Evans at Lloyd’s Bank on 30 August 1989. Aspinall’s evidence, as I have previously said, is that he saw all the correspondence that came to, or was written by, Simpson. In the letter Simpson says:
    In the 1988 accounts the following note was made: ‘In 1982, certain group companies received income tax assessments which are still subject to objection. The assessments and the accrued interest are in the order of $26 million. However, no provisions have been made in this respect as the directors are confident that the objection will be successful.’
    It is proposed that a similar note be inserted in this year’s consolidated accounts.
    5160 I note here that this was the theme of a response in an earlier letter, dated 7 August 1989, written by Oates to Evans at Lloyds when asked by Lloyds Bank to provide details of any material litigation, proceedings or dispute pending. The letter was copied to Aspinall and Simpson. Oates had said:
    The only relevant item is a dispute with [DCT] in respect of the 1982 year of income. The assessments and the accrued interest thereon are in the order of AUD26 [million]. The directors of [TBGL] have sought legal advice and are confident that the dispute will be resolved in favour of [TBGL].
    5161 I am not sure these references advance the case to any great extent. I am in no doubt that the directors knew of the existence of the tax disputes. The notes to the 1989 accounts simply mirror the notes to the accounts for earlier years. The two letters do not provide any further detail about the disputes, nor do they suggest that any particular consideration was given to them at the time. What seems to be missing is evidence of any real consideration of these matters by the directors after they took office in 1988 and especially in the period from November 1989 to January 1990. After all, that is the time when the proposal was made to grant to the banks securities over assets that would otherwise be available to satisfy the claims of all creditors of equal ranking. And as I pointed out in Sect 10.6.1.3 there was quite a bit of activity in relation to the tax appeals in late 1989 and many of the problems of proof were beginning to emerge.
    5162 The comment by Oates in the 7 August 1989 letter to Lloyds Bank that the directors had taken legal advice on the tax claims is not supported by the evidence of Dean, the solicitor in charge of the review proceedings: see Sect 10.6.1.1.
    24.1.8. Other asset sales and the clause 17.12 regime
    24.1.8.1. Some introductory comments
    5163 Aspinall said in evidence that in late 1989 or early January 1990 he was aware that the sale of assets would enable ordinary business activities to be continued for a limited period. These assets were non-core assets, which he described as part of the ‘other tools’ he had in mind to give him the 12‑month window he needed to restructure. Several times in his evidence he said that he also saw certain assets as available sources of cash to be used in the continuing operation of TBGL. Specifically, he gave evidence that in late January or early February 1990 he was aware of the additional sources of cash, as summarised in Table 36 below:
    Table 36
    ADDITIONAL CASH SOURCES
    Bell Group Press proceeds: $24,300,000
    Q‑Net proceeds: $ 7,500,000
    Recovery of Bond Corporation Finance loan: $14,400,000
    Recovery of JN Taylor loan: $14,300,000
    Recovery of JN Taylor management fees: $ 1,800,000
    Recovery of Bell Resources Finance Loan $ 200,000
    ITC contract payment: $17,000,000
    New York Apartment A$ 1,239,000
    TOTAL: $80,739,000

5164 In his evidence he said that he believed he had at his disposal these assets that would make up the difference in cash flow difficulties when required while he worked to get everything else on track. It was put to Aspinall by counsel that:
It’s correct, is it not, that as at 26 January you had formed the view that The Bell Group would require access to the proceeds of asset sales in order to survive through the year 1990?—Yes.
5165 In Sect 9.14.1 and following I describe the problems raised by the restriction on asset sales in the refinancing documents. I set out the terms applicable to certain categories of assets: specific and non‑specific. For the category of non-specific asset sales there was no consent in advance; approval had to be obtained for each and every transaction. The resulting regime was restricted and not without its difficulties. Many of the cash proceeds listed in Aspinall’s table above all fell within this non‑specific regime. It is necessary to examine Aspinall’s evidence about the restrictions.
5166 For the background factual material to the various additional sources of cash referred to in this section the reader should refer back to the following sections:
(a) Bell Press proceeds: Sect 4.6.7.6;
(b) Q-Net proceeds: Sect 9.8;
(c) BCF receivables: Sect 9.12;
(d) JNTH receivables: Sect 9.9; and
(e) ITC contract payment: Sect 9.7.
24.1.8.2. Clause 17.12: an expectation
5167 Aspinall gave his view of the cl 17.12 regime. He said he believed that the provisions in the Transaction documents were not intended to prevent the Bell group from utilising the proceeds of asset sales for its own purposes. He said that he understood at the time that these provisions were intended to prevent leakage of funds to the Bond group. He said:
Although I cannot recall the details of the conversations, I do recall that my impression from speaking to bank officers in 1989 was the banks were concerned that the Bell Group money and assets be used for Bell Group purposes, particularly reduction of external debt. The banks were concerned that Bell Group assets not be used for wider Bond group purposes.
Counsel pressed Aspinall on this issue:
It’s correct, is it not, that you didn’t expressly inform each of the banks of your belief about that matter?—I spoke with the instructing banks, yes, but as the banks were well secured under this facility I believed, and I had reason to believe which proved to be correct in the end, that the banks would release funds to enable us to either pay bondholder interest or indeed I had a view that if I took a business plan to them that made sense for the business that they would release the funds. They were asset sales that we were undertaking and they, I am sure in my own mind, would have acted in a proper manner.
As you have said in your own statement, you appreciated and understood however that some of the banks may have wanted their debts repaid?—They may have, yes, but I believed that they would act in a normal and proper manner once they understood what the issue was.
Even though you had formed the view as at 26 January that you would need access to asset sales for The Bell Group to survive through 1990 you didn’t seek to get the consent, the ‘all consent’, in advance of entering into the transactions, did you?—No. Because I didn’t know exactly what I required the funds for and when at that point of time but as it turned out, as I have already stated just a moment ago, when we did require the funds and we did make the necessary if you call it application or request the funds were forthcoming. Yes, there were some impediments but the funds were forthcoming.
5168 Aspinall’s expectation at 26 January 1990 was that the cl 17.12 regime would not operate in such a restrictive way that it would be an impediment to the continuing operations of the Bell group. This expectation is not supported by any contemporaneous documents or any other evidence.
5169 In Sect 9.14.6 I have described the regime that was imposed by the banks. Throughout the period of the negotiation of the terms sheets there were letters written by Simpson protesting about the strictness of the regime contemplated by the refinancing documents. No doubt, in accordance with what Aspinall said was the usual practice, Simpson kept Aspinall informed about his efforts. Aspinall was certainly correct in his belief that the restrictions in the documents were designed to stop the ‘upstream lending’ to the Bond group. But either he, or perhaps Simpson (who then conveyed his impressions to Aspinall) miscalculated the strength of the views held by the banks on this issue. As Latham said:
The directors did not seem to appreciate the banks perspective. As I saw it, the banks’ concern was to restrict the Bell group’s ability to deal with assets and asset disposal proceeds because of the danger posed by Bond Group seeking to obtain access to those assets or proceeds. As a result of this concern, clauses controlling the use of assets and proceeds from the disposal of assets were incorporated in the loan documentation.
5170 There was a meeting in London on 6 November 1989 attended by Aspinall and Simpson. I refer to this meeting in Sect 9.14.6. At this meeting Simpson and Aspinall’s protests about this restriction were recorded. There is a reference in the note of the meeting made by Latham (Lloyds Bank) that the banks would be ‘reasonable’. Curiously, Aspinall did not give evidence about this meeting.
5171 After this meeting it was clear that the extent of the reasonableness that the banks were prepared to exercise was limited to allowing TBGL to retain the proceeds of certain asset sales up to a specified amount. At Weir’s suggestion, the terms sheets (after 7 November 1989) were amended to provided that sale proceeds in excess of a certain amount would be paid into an escrow account and retained for future asset purchases or applied as a pre‑payment of bank debt. This allowed for some flexibility, but nonetheless the banks maintained control. As I have said, after this concession there is no evidence of any other concessions or promises made by the banks.
5172 After November 1989 there was considerable pressure on all parties to have the refinancing documents executed in a tight time frame, and when they were signed in January 1990 they included the restrictions on asset sales. The argument with the banks had been lost. Aspinall’s letter written on 7 May 1990 to Armstrong (Lloyds Bank) acknowledges that the argument was lost prior to the execution of the documents. He says in that letter, referring to the situation that had arisen with the ‘difficult’ banks that:
Of concern to me is the fact that the situation could possibly have been avoided had the documentation reflected an ‘instructing banks’ only clause.
Colin has advised me that he argued vehemently against the ‘all banks’ clause because of the difficulties we had experienced during our negotiations with a couple of the banks. Colin was reassured by the fact that you were of the opinion that all your banks were ‘reasonable’ and would act in an appropriate manner if a serious dispute ever arose. Quite clearly we now have a serious dispute and we must exhaust all avenues to remedy it.
5173 There is nothing before me that indicates that after the meeting of 6 November 1989 Latham or Armstrong discussed necessary being ‘reasonable’ with any of the syndicate banks. Nor is there any evidence that they bound the syndicate in any way to some promise to release funds. I also note here that when in April 1990 Aspinall ran into severe difficulties with the banks regarding the release of the Bell Group Press proceeds of sale, it was not only the ‘band of four’ difficult banks that caused problems; NAB was also being difficult. Aspinall’s memorandum to Simpson and Garven acknowledges the problem:
As far as the NAB are concerned, it may well require us to meet with the NAB to explain the facts of life to them. They are still insisting that other assets are sold to solve our problems in relation to the May interest payment. They clearly do not accept or understand that:
(a) there are no other assets to sell; and
(b) that any funds generated from the sale of those assets would flow to the banks in any case. In other words, we would be in exactly the same situation.
5174 The situation as I have explained it in Sect 9.14.6 was that the Bell group could do little more than make the request and hope that all the banks would agree to it. And that, as events unfolded, proved to be very difficult.
5175 Had there been any real meeting of minds between the directors and the banks that BGF, BGUK, BGNV and TBGL could use the Bell Press sale proceeds (and other moneys paid into the escrow account) to meet their immediate liabilities, it would have been openly negotiated between the parties. Had that occurred it would have been made the subject of express provisions in ABFA and RLFA No 2 in the same way that express provision was made for the £5 million Bryanston sale proceeds to be set aside to meet specific debts falling due to specific creditors. The purpose of this provision, it will be recalled, was to ensure that TBGIL had the ability to pay its debts. That is not what happened and, in my view, it supports the conclusion that there was nothing more than a hope and certainly nothing approaching a contract, understanding or even a reasonable expectation on the part of the directors.
5176 So far as the banks are concerned, their state of mind is demonstrated by what occurred in the period between February and May 1990 period as part of the waivers: see Sect 24.1.9 and Sect 24.1.10. If arrangements had been as mentioned by Aspinall and Latham the moneys would simply have been made available as part of a pre‑existing agreement, arrangement or commercial expectation. But that is not what happened. It cannot be said that, as a matter of commercial reality, as at 26 January 1990 those moneys were funds that the Bell group companies could command so that they had ability to pay their debts. Nor can it be said that the directors were entitled to hold a reasonable expectation in that regard.
5177 Following on from these problems with the cl 17.12 regime I turn to an examination of how realistic were Aspinall’s views about the sources of cash available to keep the Bell Group operating over the 12 months following 26 January 1990. It is important to note in this examination of Aspinall’s evidence whether the amount of cash realisable falls within the exception to the cl 17.12 regime, or outside it.
5178 24.1.8.3. Bell Group Press proceeds
5179 Aspinall said in his evidence that by early January 1990 he was confident that the sale of the Bell Group Press asset would take place and he thought that the proceeds of the sale $25.6 million would be released by the banks. But the sale proceeds exceeded the concessional amount and that meant that a request would have to be made to all the banks to release the proceeds. No such request was made prior to 26 January 1990.
5180 I do not consider that Aspinall’s view as at the 26 January 1990 (that the banks would agree to release the proceeds) was realistic. Aspinall must have realised that if the banks were to agree to this request for such a substantial sum, he was going to have to really work at securing this concession from the banks. These were the same banks that had just come through the difficult and protracted negotiation process to secure the refinancing; some of them with considerable reluctance. There was a problem, and Aspinall must have known that he had to embark on a significant exercise in selling this proposal to the banks.
5181 That is why on 2 February 1990 Aspinall invited the banks to come to Perth. That is why he commenced the process of persuading the banks that I refer to in Sect 24.1.9.2. That is why on 19 February 1990 he told Oates and Mitchell that he intended to ‘introduce’ the subject of the retention of the proceeds to the banks. And in his memorandum to Beckwith and Oates dated 2 March 1990 he referred to the presentation he had made to the banks in Perth on 23 February and said:
During this presentation we requested that a waiver be given in relation to the distribution of the proceeds ($25.6 million) that we received from the sale of Bell Group Press. That waiver was required by close of business last Tuesday otherwise all proceeds would have been automatically distributed to banks to reduce our debt.
5182 In the same memorandum, he told Beckwith and Oates, that a waiver ‘has been granted’ but this is a partial waiver only. The banks had conceded the release of $7.7 million to enable TBGL to pay interest and other creditors due on 28 February 1990. The balance was still held by Westpac in the escrow account. In the same memorandum he stated that:
Two Australian banks and one European bank, that we are aware of, were certainly not in favour of the waiver, nor the distribution of $7.7 million to The Bell Group.
5183 Aspinall informed Beckwith and Oates that he was going to London on 13 March 1990 to address the meeting of the Lloyds syndicate. If he could not secure a further waiver, the remaining moneys held by Westpac would be distributed to all banks at the end of March 1990. I describe the considerable efforts that were put in to the persuade the banks to release the proceeds of this sale in Sect 24.1.9.2. And while it is a fact that the balance of the proceeds were made available to the Bell group in May 1990, this was as a result of much persuasion and difficult negotiations. The view that Aspinall said he had on 26 January 1990 that as a matter of commercial reality the proceeds of sale of Bell Press would be released to TBGL was not a realistic view.
24.1.8.3. Q-Net proceeds
5184 Aspinall’s evidence is that in January 1990 he believed that Q‑Net, purchased from BML through a subsidiary of the Bell group (Belcap) on 17 October 1989, had a good cash flow. He understood that this resulted from contracts that Q‑Net had with the Queensland government to provide certain communications services. He said that at the time he believed that the Commonwealth government was to deregulate the communications industry and the prospects for the future of Q‑Net were ‘extremely good’. The contract to purchase Q‑Net included a series of complicated conditions precedent. Aspinall said that at the time he had no reason to believe that the contract would not be completed. Prior to the fulfilment of the conditions in the contract, TBGL was involved in attempting to sell Q‑Net to various parties. A memorandum from Stack to Aspinall dated 12 January 1990 outlined potential purchasers and a strategy for the proposed sale. An information memorandum for those potential purchasers was also compiled. OTC and Hutchinson were potential purchasers. While Aspinall could not recall with precision the date at which the sum of $7.5 million (being the expected net proceeds of such a sale) was settled upon, that figure appears in Garven’s cash flow of 21 February, and in Latham’s note of a bank meeting in Perth on 23 February. Aspinall said that the figure would have been given by him to Garven in late January or early February.
5185 Ultimately the conditions of the contract between BML and Belcap were not fulfilled and the purchase was rescinded. In cross‑examination Aspinall gave evidence that he was unaware of various conditions in the original agreement between the Queensland government and BML that would have made a sale difficult to achieve. He maintained the position that in January 1990 he thought the availability of the net proceeds as a source of cash to TBGL was realistic and achievable.
5186 In Sect 9.8 I have described, in more detail, the impediments to successful completion of the Q‑Net transaction. The impediments were serious. If the directors did not know about them they should have. But in assessing Aspinall’s state of mind I am not prepared to find against him on this issue.
24.1.8.4. BCF loan
5187 The BCHL group, specifically BCF, owed the Bell group $14.4 million. This amount was shown in the Garven cash flow of 21 February 1990. Aspinall said that he took steps to have that debt repaid at the same time he was making efforts to have the banks release the proceeds of the sale of Bell Press. He said that he had many discussions with Oates about the loan. Aspinall said that the first repayment of the debt of $6.8 million was recovered prior to February 1990; in fact, the notes to the Garven cash flow of 21 February show that there had been a partial repayment and the balance then owing was $7,588,098. A memorandum from Aspinall to Beckwith and Oates makes it clear that in Aspinall’s dealings with the banks regarding the waiver over the Bell Press sale proceeds he had been told by Weir on behalf of the banks that:
The general attitude of the banks is that why should they continue to help us when Bell is owed money from Bond and in particular they were very concerned that $A14.0 million odd flowed from The Bell group to Bond in December after the Academy Investments sale when Bell knew of its tight cash flow situation.
5188 Of the balance then owing, $2 million was paid between 29 March and 6 April 1990. The cash flow for the week ending 4 May 1990 showed that the balance of $5.9 million (including interest) had been paid in full.
24.1.8.5. JNTH loan
5189 Aspinall said in his witness statement that he was aware of the obligations of JNTH to the Bell group, at least by September 1989. This is supported by a reference in his letter to Rees (SGIC) of 5 September 1989 to an attachment; namely, a letter written on behalf of TBGL on 5 July 1989 to the stock exchange referring to inter‑company loans. One of those loans was the BCF loan and the other was the JNTH loan. He said that in January 1990 he fully expected these loans to be repaid. He said:
I believed that this money would be repaid by JN Taylor, particularly if pressure was brought to bear because the Bond group, in my view, would not have wanted demand to be made for those monies.
5190 In cross‑examination Aspinall was asked by counsel if he realised that by January 1990 JNTH was not operating any business and that its assets consisted of loans to, or investments in, the Bond group companies and loans to Dallhold. He said that he made no enquiries as to what its operating business was, nor did he make any enquiries about the financial standing of that company. He said that his enquiries were made of Oates. He said that he was relying on those running the treasury operations to bring information to him. He was aware of the relationship between JNTH and the Bond group: he believed that it was within the power of the central treasury operations of the Bond group to ensure the loans were repaid, and he understood that the Bond Treasury administered the JNTH moneys. The basis of his belief that the JNTH debts would be repaid was that he had many discussions with Oates who had told him they would be: he said he accepted what Oates had told him.
24.1.8.6. JNTH management fees
5191 Earlier I referred to the evidence from Aspinall that he isolated the Bell group from the Bond group from 2 January 1990; from that date no further management fees were charged by TBGL to JNTH. This was reflected in the cash flows prepared subsequent to 2 January. But the amount of unpaid management fees for the period 1 July 1988 to 31 December 1989 was $1.8 million.
5192 These management fees were a circular arrangement between the companies. According to Aspinall, BCHL through its central Treasury (Oates) and CPDD (Mitchell), provided management services to TBGL, JNTH and BRL. For the year 1988 – 1989 TBGL charged JNTH and BRL a management fee: this fee was recovered by BCHL charging TBGL the same amount as a management fee. From 1 July 1988 to 31 December 1989 Aspinall believed that TBGL charged JNTH the management fee, which was not paid. BCHL continued to charge TBGL management fees that were paid. Aspinall said that on the same assurances he had received from Oates he believed that the outstanding management fees would be repaid.
24.1.8.7. BRF loan
5193 An amount of $200,000 was referred to in Garven’s cash flow of February 1990 as a loan to BRF. Aspinall said he had no reason to believe that the amount would not be recovered.
5194 Pressed by counsel in cross‑examination, Aspinall said that that he knew that BRF was controlled by BRL and that by January 1990 there was an independent board of that company. He was then referred by counsel to a letter dated 11 January 1990 (written on behalf of BRF) demanding $540,000 for what was claimed to be unauthorised forgiveness of loans to employees of related companies: the loans were to ‘J. Reynolds and T. Garvin [sic]’. It was put to Aspinall that if this demand was a ‘good’ demand it would extinguish the loan to BRF. Aspinall did agree that if the transactions were taken in isolation that is what would happen; however, I understood that the import of his evidence is that he did not turn his mind to this possibility at that time. His evidence is that at the end of January 1990 he believed the loan was owed by BRF and it would be repaid.
24.1.8.8. ITC contract payment
5195 I have referred to the ITC contract payment in Sect 9.7. Here I am only concerned with the evidence this witness gave regarding this payment as a source of cash for TBGL as at 26 January 1990.
5196 Aspinall said in his witness statement that to the best of his recollection the ITC contract payment of $17 million was known to him in late January or early February 1990. On the other hand, he conceded in cross‑examination that it was possible that it was first mentioned by Oates at a meeting on 7 February 1990. In any event, he said that he would have discussed this item with Garven before the cash forecast of 21 February 1990 was prepared. He said on several occasions in his evidence that was his usual practice in respect to the cash flow preparation. He said that he was generally aware that it was an amount owed under a management buy-out of ITC, although he did not know how the amount was derived and he was unaware of the details of the contractual conditions attached to the contract. Aspinall said that he was aware that the contract payments were to be collected by BGUK, but he was not aware of any involvement of Campania or the tax liability issues, and he said he had not heard of Martin Brown. He did not recall any issues regarding the possibility that Campania may have disputed its obligation to pay.
5197 This amount did not appear in the 19 January 1990 cash flow nor did it appear in the 26 January 1990 cash flow. Aspinall said that he knew there were moneys due and payable under the ITC contract because he had been told they were. He said that this contractual matter would have been handled by Bond Treasury people. He was pressed by counsel to say whether or not having knowledge of the way Garven worked, Garven would, if he had know of the existence of this receivable at 19 or 26 January 1990, include it in those cash forecasts. The answer was as follows:
If there was certainty, he would have included it … If there was not certainty, he wouldn’t have included it. He is a Scottish gentleman and was very conservative.
Aspinall was pressed by counsel in this way:
Was it your suggestion that Mr Garven include the sum in the cash flow? It ultimately appears, does it not, on the 21 February cash flow, but was it your suggestion he put it in?—No, I didn’t make suggestions of what went in or out of the cash flow. They were his cash flows presented to me and to the board.
What I’m trying to find out was that when you spoke to him about it, did he know about it already? Did he know what you were talking about?—I cannot now recall the conversation I had with him, but we had been asked by the board on the 7th to produce a cash flow and all I know is that I would have had a discussion and I did have a discussion with him about all the elements that we were dealing with in relation to TBGL and its receivables. I would have given him no instruction to put anything in or out. He may have made inquiries; he may not have made inquiries. I don’t know what he actually did, but he produced a cash flow dated 21 February.
5198 My conclusion on this part of Aspinall’s evidence is that it was likely he did discuss the inclusion of the ITC payment with Garven but he did not do so until after the board meeting of 7 February 1990. Accordingly, he could not, as at 26 January 1990, have had a reasonable expectation that those funds would be forthcoming. However, Aspinall’s poor recollection of these events did not detract from the truthfulness of his evidence generally.
24.1.8.9. New York apartment
5199 ITC had owned an apartment in New York that was not sold as part of the management buy‑out of that group; the sale proceeds are shown in the Garven cash flow dated 21 February 1990. Aspinall said that he was aware of the proceeds of sale of this asset being available for use by TBGL and he would have discussed this with Garven in late January before that cash flow was produced. The cash flow showed the proceeds from sale at US$950,000, which at the then current exchange rate was $1,239,076 Australian dollars. These funds ultimately came into the TBGL accounts in July 1990.
24.1.9. The period end of January 1990 to end of 1990
24.1.9.1. The immediate cash crisis
5200 In cross‑examination Aspinall was taken through the details of various cash flows prepared between 4 September 1989 and 26 January 1990. Some of the cash flows were prepared by Finance and Administration, but certainly by 19 January 1990 TBGL personnel prepared the cash flow statements. The 19 January cash flow reflected some significant changes in cash forecasting. That cash flow did not show any proceeds from the Bryanston sale, nor management fees from BRL or management fees from JNTH and no dividends from the JNTH preference shares. In the absence of these proceeds Aspinall said he realised that the Bell group would not have sufficient cash flow to survive indefinitely. In addition they had incurred significant legal expenses associated with the Transaction costs: TBGL was required to pay the banks’ legal costs of nearly $6 million and it had to bear stamp duty on the Transaction documents, both payments were due in February. Most significantly there was a payment for the convertible bond interest due in May and a further payment in July 1990.
5201 Aspinall said that he knew that there was an immediate cash requirement for $25 million. He said in his witness statement that these issues were being ‘actively considered’ by him, but in ‘general terms’ prior to the finalisation of the Transaction documents.
5202 On 7 February 1990 a meeting of the directors of TBGL was held. The minutes record that Oates said that the deficit would be covered by certain tax refunds due to UK subsidiaries and on that basis the directors concluded that there was a reasonable expectation that the company would be able to pay its debts as and when they fell due. However, the minutes also recorded that bearing in mind their obligations under s 556 of the Companies (Western Australia) Code the directors resolved to (a) have Garven prepare a more detailed cash flow for the group through to the end of June 1990; and (b) instruct Simpson to obtain advice on that provision in the code (the insolvent trading provision). Aspinall said that while he did not recall the meeting he had no reason to doubt the accuracy of the minutes.
5203 I am not sure what eventuated in relation to the direction to obtain advice. I am not aware of the existence of any written advice until late in 1990 when Corrs was approached. The minutes of the March meeting of TBGL’s board makes no reference to this issue. A concern at the March meeting, according to the minutes, was the carrying value of the BRL shares post the release by BRL of its note to the ASX on its revaluation of the shares. The company secretary, Graeme Baker, at the board’s direction, wrote to Argyle (P&P) on 29 March 1990 to seek urgent advice on the position of the TBGL directors and their valuation of the investment. Argyle attended the April meeting of TBGL. It may be that some advice on this issue was given by Argyle, who attended the meeting, but the advice, if any, is not recorded.
24.1.9.2. Persuading the banks
5204 Aspinall said in his evidence that he was anxious for the banks to come to Perth and see the newspaper in operation. In Weir’s note of 2 February 1990 he referred to an invitation from Aspinall to all the banks to attend a meeting in Perth and inspect the Herdsman facilities. This invitation was formalised in a letter from Simpson dated 13 February 1990. An agenda for the meeting with the banks was prepared by Weir and sent to Aspinall on 19 February 1990; it refers specifically to a financial presentation to be given by Aspinall, Simpson and Garven to the banks during their time in Perth.
5205 On 19 February 1990 Aspinall wrote to Oates and Mitchell and referred to the briefing of the Australian banks and a representative of the Lloyds syndicate banks in relation to the operation of WAN:
During this presentation we will be introducing the subject to the bankers that we wish to retain the $A25.0 million that we received for the sale of the assets of Bell Group Press.
5206 The Garven cash flow forecast of 20 February was prepared in response to the direction given by the board at the 7 February 1990 meeting. On 20 February 1990 Garven sent the cash flow to Aspinall under cover of a memorandum that said:
If we retain all proceeds from asset sales and are fully paid our loan balances by Bond Corp and JN Taylor we will have enough cash to last until 31/12/90.
5207 Aspinall said in his evidence that based on Garven’s memorandum, and subject to the proviso that the group could retain the proceeds of assets and be repaid the loans, he believed they would have enough cash to last until the end of December 1990.
24.1.9.3. February meeting with the banks in Perth
5208 In Sect 30.11.3.1 I discuss the February 1990 meetings between TBGL officers and representatives of the banks in more detail. Here, I am concerned with Aspinall’s evidence about the meetings.
5209 On 23 February 1990 Aspinall addressed the meeting of bankers. He said that while he could not remember precisely what he said, various notes made by the bankers at that meeting accorded with his general recollection: all of the notes were consistent. I will use Latham’s note as a good contemporaneous account. The note indicated that Aspinall had spoken to the bankers of the following:
• A continuing programme by TBGL of asset disposals.
• In essence, the bankers learned that TBGL was intending to sell Q‑Net with expected proceeds of $7.5 million within two or six weeks and that the cash flow would then be slightly better.
• The apartment in New York had been identified as being an available asset of TBGL and it was expected to bring in $1.25 million on‑sale.
• There was land in Perth connected with the former TVW operations that might bring in $2 million if sold as residential property.
• There was the possibility of a windfall gain for TBGIL in contractual payment related to tax from the ITC business that had been sold. This was possibly £7.6 million but it was not certain. The ability of the debtor to pay ‘remains to be tested’.
• A review of the progress made in asset reduction and debt repayments by Bell group.
• That few ‘non-core’ assets remained to be disposed of and the liabilities were confined to bank debt, public debt and certain leases.
• The problems of disposing of the seven leased floors in the Forrest Centre were a result of ‘little demand’ existing in Perth as a result of company failures.
• That The West Australian itself may take up one and a half floors in the adjacent building to ‘ease its own space shortage’.
• The bankers were assured that other drains on cash have been eliminated.
• Based on the information available to them, the directors of the Bell group have taken the view that value will be restored to their holding in BRL and they expected this to occur, or at least the situation to be clarified, within three months.
• That the directors of the Bell group wished to repay the bank debt as soon as possible and they had resolved to sell the BRL shares as soon as they achieved what they considered optimal value. This would mean either that the brewing assets were sold to BRL, or that the $1.2 billion dollar deposit (subject to confirmation of the exact amount) would be repaid or realised.
• The directors of the Bell group had no close knowledge of what might occur in respect to BRL and were awaiting the BRL financial information to 31 December 1989, which was then due.
• To continue servicing the Bell group’s total debt at its present level the income stream from the shares was essential.
• Two demand letters served on the Bell group by BRL were mentioned. The first was in respect to the Academy Investments No 2 sale to BCHL. Aspinall told the bankers that he had not been involved in the transaction and only learnt of the details in late December, he was not party to the decision but he had received an undertaking from BCHL to indemnify the Bell group if any proceedings were taken against them by BRL. The second was, in respect to the forgiveness of debt to two employees of Bell Press. Aspinall explained that these employees had exchanged forgiving their redundancy rights for forgiveness of debt related to the share purchases. Again, Aspinall said that BCHL would have to be responsible for arriving at a settlement of the issue with BRF.
• Cash control since 28 January 1990 was now in the hands of Aspinall, Simpson, Garven and a small group of other cheque signatories. Controls were being put in place to conserve cash.
• Aspinall’s own role in the company was changing so he could now concentrate more on the Bell group, having finalised the sale of Chile Telephone.
• The publishing group’s results for the present financial year were ‘encouraging’ and the trading performance was running well above budget. Cost controls including ‘tight manning levels’ were contributing to this result and the renegotiation of the paper supply contracts would have a ‘valuable impact’.
• Bell Press had been a problem, which its sale had resolved.
• The company was still ‘alive’ to the possible threat by RHaC, in the newspaper field.
• Management structure within the group was changing so as to ‘streamline’ it and to give managers control over particular business groupings.
5210 The note went on to say that the cash flows and their ‘portent’ were then reviewed by Aspinall. These included:
• Significant changes identified, being the absence of the BRL dividends and management fees.
• The new cash flows showed a requirement for $53.9 million as necessary in order to keep Bell group from collapse.
• It was of primary importance for the Bell group to retain, instead of repay to the banks, the proceeds of the sale of Bell Press and Q‑Net rather than have these directed as required under the new facility agreement towards mandatory pre‑payment.
• While the cash flows made mention of other possible sources of income from asset realisations, the company took the view that it would be possible for it to survive until December 1990 if they were able to retain the proceeds of the sales mentioned.
• Other sources of cash were clearly ‘less certain’.
5211 Finally, Latham’s note records that:
In conclusion Bell Group expressed willingness to accept an arrangement whereby the proceeds of the sale of Bell Group Press would be held in a special account. They pointed out that there could be an increased preference risk for the banks were these funds immediately to be applied in prepayment.
5212 On 26 February 1990, Aspinall wrote to Oates with a report about the meeting. He expressed the view that he was confident that the waiver in respect to the Bell Press sale proceeds would be forthcoming, but not in time to meet the interest payment due on 28 February. There was therefore an immediate and pressing need to find $5 million, and it would have to come from moneys owed by the BCHL group to the Bell group.
5213 By 28 February 1990 it appeared from Aspinall’s evidence, supported by various contemporaneous documents, that part of the Bell Press sale proceeds would be released to TBGL (about $7.4 million), but not the entire proceeds. A memorandum written by Aspinall to Oates and Beckwith on 2 March 1990 indicates that two of the Australian banks and at least one of the Lloyds syndicate banks were against the waiver and partial distribution. As a consequence of this, Aspinall intended to go to London to address a meeting of all the Lloyds syndicate banks with the intention of securing the agreement of the banks to release the remaining $17.9 million of the proceeds of the press sale. In the memorandum Aspinall warns that the banks would not make the balance available to the Bell group unless the inter‑company debt between Bond and the Bell group was extinguished by 20 March 1990. In evidence, Aspinall said that this memorandum correctly reflected the discussions that he was having with Weir (Westpac) at that time.
24.1.9.4. March meeting with the banks in London
5214 The meeting with the banks in London occurred on 12 March 1990. In Aspinall’s witness statement he referred to a memorandum written to Beckwith, Bond and Oates immediately following the meeting; in it he reported that all the questions at the meeting with the Lloyds syndicate banks related to the BRL situation. The concern was the value, if any, TBGL would receive from the BRL shares to enable TBGL to reduce its debt. The inter‑company debts were also an issue and he said he had made it clear that the JNTH debt repayment could not be expected before Christmas. This memorandum also records that there was ‘a genuine concern about the ability of ITC to pay us the most [sic] of approximately $17 million tax grouping’. He said in the memorandum that he had received a good hearing from the banks.
5215 In evidence Aspinall said that he recalled that at this meeting it was obvious to him that some of the Lloyds syndicate banks were angry because of the non‑payment of the BCHL group debt to the Bell group. Although he could not recall the precise words used at the meeting, the notes of the various bankers present that he was shown in evidence accorded with his recollection. It was clear from these notes that he had given the European bankers the same message that he had delivered in Perth on 23 February 1990. But scepticism is evident in the notes. Anton from Crédit Agricole made this observation:
Despite the overwhelming odds facing the Bell Group Ltd, David Aspinall maintained a confident and direct tone. However comments like ‘Bond’s rationalisation of Bell Group has almost been completed’ would have been funny were the group not seriously only remaining in business by the seat of its pants.
5216 The negotiations were difficult. There were numerous items of correspondence, memoranda and notes in evidence that indicated the banks were imposing tight conditions and had many requirements in relation to the possible release of the press sale proceeds.
24.1.9.5. Updated cash flow at 27 March 1990
5217 By 27 March 1990 a cash flow prepared by Garven was given to Aspinall. It showed a decrease in the cash requirements for the Bell group. Aspinall said that he understood the position at this time was that the Bell group needed $3 million to fund its commitments at the end of March 1990. It had to have the waiver from the banks in relation to their entitlement to take the balance of the Bell Press sale proceeds and to use these funds for bondholder interest payments due in May 1990. He said that he was confident he would obtain the $3 million from the Bond group. Oates had informed him on 23 March 1990 that $7 million was scheduled for repayment on 20 April 1990. He said that he was confident that the banks would ultimately agree to allow the Bell group to use the proceeds of the sale. Garven advised Aspinall on 26 March 1990 that this repayment schedule had been conveyed to the banks.
5218 Aspinall said that he was given additional confidence by the press release issued by BCHL on 28 March 1990 to the effect that NAB had failed in its special leave application to the High Court to appeal the removal of the receiver appointed to BBHL. Aspinall said this news was significant to his thinking that the brewing deal between BRL and the BCHL group would not be delayed any further and that it would be completed.
5219 However, on 29 March 1990 Garven sent Aspinall another memorandum, it said that Oates and Guihot (from BCHL) were again ‘running us down to the wire claiming that they do not have the funds available to give us our $3.0 million’. In the memorandum Garven states that he had been required to approach Weir to obtain funds from Bell Press to proceed:
Weir says that if we ask the Banks to pay the interest out of the Bell Group Press proceeds we can ‘shut up shop’ because the ball game finishes tomorrow. Your assistance tomorrow to ensure we get the funds from Bond Corp. would be appreciated. We have just got to get the message through to Tony that if Bond Corp. do not pay up tomorrow then it is all over.
5220 Aspinall said in evidence that this memorandum reflected the view that he had at that time that cash flow requirements had to be very carefully monitored from day-to-day. If there was any prospect that the necessary funds would not be forthcoming the directors of the Bell group would have to put the group into liquidation. He went on to say:
Until that time arrived, it was not, in my view, appropriate to take such steps, bearing in mind that the ultimate financial success of the Bell Group was something that, in my view, could still be achieved if the brewery deal proceeded or if a successful debt restructuring could be achieved. For reasons I have explained above, in March 1990 I believed that both could be achieved.
5221 Through the last weeks of March 1990 Aspinall said that he was kept informed in relation to the progress with obtaining consents from the banks regarding the use of the Bell Press proceeds. The contemporaneous documents show that it was generally Garven (who was dealing with Weir) who passed the information on to Aspinall. By 30 March 1990, a letter of waiver had been prepared. I note that it was to take effect upon the date of signing by all the instructing banks. The waiver in effect removed the automatic application of the asset sales proceeds to the banks debt. But consents by the banks for release of funds still had to be obtained.
24.1.9.6. April and the waiver crisis
5222 While part of the Bell Press sale proceeds had been released, the problem for Aspinall at this time was that he still needed to secure the release of the balance of those moneys and the proceeds of other asset sales. TBGL was clearly being pressed by Westpac, as the Security Agent, to provide more information to enable the banks to make a decision regarding release of the funds. A memorandum dated 6 April 1990 from Aspinall to Simpson and Garven referred to his discussion with Weir about the $17 million required to meet the interest payments due in the first week of May 1990. Two particular issues were referred to in the memorandum: the progress of the Q‑Net sale and the recovery of the ITC tax funds. Aspinall said in the memorandum:
The reason they are querying these two particular matters [is] that they see that the next problem that Bell Group has is July and without those two matters being resolved then there is probably not much point in going forward at the end of April because in July a further crisis would be reached, which would be insolvable unless those two amounts are received by the Bell group.
5223 The memorandum referred to other questions being asked by several of the banks; more details were to be provided by Weir in response to those queries. But Aspinall refers particularly to the NAB in these terms:
As far as the NAB is concerned, it may well require us to meet with the NAB to explain the facts of life to them. They are still insisting that other assets are sold to solve our problems in relation to the May interest payment. They clearly do not accept or understand that:
(a) there are no other assets to sell; and
(b) that any funds generated from the sale of those assets would flow to the banks in any case. In other words, we would be in exactly the same situation.
5224 I regard this as an important communication in at least two respects. First, the comment that ‘there are no other assets to sell’ detracts somewhat from the more general explanation given by Aspinall that he had ample ‘tools’, by which he meant non‑core assets, to deal with the cash flow problems. Secondly, it is a frank expression of the terms of the refinancing documentation and, in particular, the cl 17.12 regime.
5225 Aspinall referred in his evidence to a memorandum from Pepper dated 10 April 1990, which explained the progress in respect to the ITC contract and the tax issue that was to result in a payment to TBGL. As a consequence of this advice Aspinall said that he believed that a payment of £7.6 million would be received by the middle of May or at the latest by 30 June 1990. His evidence is that he was still pressing Oates for the repayment of the BCF loan. A memorandum written by him to Oates on 10 April 1990 says clearly that he has a major problem with a delay in repayment of the inter‑company debt. He explained to Oates that unless the Bond group debt was repaid prior to 20 April 1990 the banks would not give further waivers or allow the funds ‘to flow back to the Bell group’. There is clearly a pleading tone to the note. He says that all the banks were focussing their attention on receipt of the Q‑Net sale and any funds that flowed from the ITC tax payment. The banks were still concerned about the company’s ability to meet the July interest on the convertible bonds, even if the May interest payment could be met. The memorandum evinces his desperation:
I do not know what we would tell the banks to convince them that they should flow the funds required for our May payment if I cannot tell them categorically that the inter company debt has been extinguished by 20 April.
5226 According to Aspinall’s evidence on that same date a directors’ meeting of TBGL was held. That meeting was to discus the TBGL half‑yearly report, which showed the BRL investment at $1.80 per share. Aspinall said he was concerned to ensure that the board could justify the value it attributed to the shares. Argyle (P&P) had been invited to attend to give legal advice in respect to the shares. While Aspinall said he could not remember precisely what was said by Oates, who was an executive of BCHL and who Aspinall believed had the carriage of the negotiations with BRL in respect to the brewery sale, he was convinced that the brewing transaction would proceed. The meeting resolved to carry the investment at $1.80 per share. Aspinall said that value reflected his belief at the time of the worth of the shares. In addition, the notes of the meeting record that:
The meeting was advised that preliminary work done by the Corporate Planning & Development department of Bond Corporation, suggests that a proposal can be developed offering the holders of the company’s convertible debt an instrument which would enable them to exchange that debt for shares in Bell Resources Ltd. At a figure giving a value of $1.80 per share or more.
There was a further resolution recorded:
It was resolved to carry the J.N. Taylor Holdings limited investment at $3.13 per share in the belief that both Dallhold Investment Pty Ltd and Bond Corporation Holdings Limited will repay their indebtedness to J.N. Taylor Holdings Limited.
5227 Aspinall maintained in his evidence that these resolutions reflected his belief at the time. The Bell group’s results for the six months to 31 December 1989 were released the next day.
5228 Into April 1990, several of the banks, particularly Lloyds Bank, continued to press for more information on the financial position of the company and certain anticipated transactions. At this point in his evidence Aspinall referred to correspondence between Simpson and Weir (Westpac), Simpson and Latham and correspondence received from Latham (Lloyds Bank). He said he believed he saw this correspondence at the time and it accorded with his general recollection of his understanding and beliefs at that time. Of particular concern to the banks was the balance of the inter‑company loan due from BCF to TBGL; as at 20 April 1990 it had still not been received as promised by Oates. Aspinall said he was reminded by Youens (Westpac) on 23 April 1990 that:
As you would be aware from our discussions, the lenders to the Bell Group will not sign the waiver for release of security proceeds unless this $7,000,000 is paid to the Bell Group.
5229 On 24 April 1990 Aspinall received a letter from Latham that referred to the failure of the Bond group to repay the debt due by the date for repayment and said:
In view of this uncertainty the waiver which is to be put before the banks will now only provide for the Security Agent to hold the residual proceeds of the sale of Bell Group Press assets (rather than apply them as a mandatory prepayment) and will not cater for the use of those funds in payment of interest on bonds.
5230 Aspinall’s correspondence at the time shows that he was advising the banks that Oates was telling him that the outstanding amount would be repaid and was only held up because there had been a delay in settling transactions between BCHL and outside parties. Aspinall says in his letter to Westpac for example:
Let me assure you that Bond Corporation Holdings Limited is fully aware of the consequences of non repayment of the loan account.
5231 A board meeting of TBGL directors was held on 1 May 1990. Despite the immediate financial difficulties the board minutes are optimistic and there is a general discussion of, among other things, the following matters:
• Mitchell’s report on the position of the brewery sale to BRL.
• The New York apartment had been sold and proceeds would be used to pay current TBGL creditors.
• The steps being taken to lease the unused floor space at the R&I Tower and the Forrest Centre.
• BPG was doing ‘well’ and management was still identifying areas where costs savings can continue to be made.
• A proposed review of accounting procedures in the group.
• Cash flows were reviewed which still showed the $17 million currently held by Westpac being required. Three banks were identified as ‘holding out’ on the release of the funds.
• Cash or advertising donations of substantial amounts had been made for which the company was seeking appropriate recognition.
• ‘Other business’ included a report on the application being made to the Trade Practices Commission by WAN to reacquire the interest in The Daily News. It also noted that the Community Newspapers group had purchased The Hills Gazette (to be funded from the cash flow of the Community Newspapers group); that the Community Newspapers group would like to purchase The Subiaco Post, and its management was continuing to pursue this possible purchase.
• The Q‑Net negotiations were ‘going forward’ and AUSSAT may purchase it if they could find sufficient cash; or, there was the possibility of a negotiated terms of payment over 12 months.
• That negotiations were going ahead for the possible sale or part sale of WAN. The primary interested parties were identified as the Chicago Tribune and Maxwell.
• Under the heading ‘Public Debt defeasance’ it was reported that Mitchell presented some thoughts on the possible methods of achieving this, either by ‘straight cash deals or some form of exchangeables’.
• Significantly, at the end of the minutes there is a report by Aspinall on the purchase of TBGL shares made on his behalf on 27 April 1990; he had become the owner of 54,047,346 ordinary shares. He reported that after legal advice he sold, at no profit to himself, 48,594,966 of these shares to Maxwell.
5232 On 1 May 1990 Aspinall wrote to Youens about the release of the balance of the Bell Press funds; he states that it is a formal request. He explains that the company has to meet its interest payments of $25 million on its convertible public bonds and the convertible private bonds. The payments were due on 4 May and 7 May 1990. He proposes that the funds will come from the $17.4 held by Westpac, the $5.9 million from BCF and $1.7 million from internal cash flow. He says in the letter that he is confident that the BCF funds will be released from Hong Kong; however, as Aspinall was informed the next day by Edwards, four banks had not yet agreed to the release of the Bell Press proceeds.
24.1.10. May 1990 and the band of four
24.1.10.1. Continuing opposition to the waiver
5233 The four banks that were showing a reluctance to release the Bell Press proceeds were Gulf Bank, Gentra (Royal Trust Bank), Creditanstalt and BoS. I will deal with this issue in more detail in various parts of Sect 30. Here, I am only interested in the evidence given by Aspinall regarding his response to certain conditions that these four banks sought to impose. The conditions related to these four banks taking the view that the bondholders should bear some of the burden of the refinancing arrangements. Aspinall said in evidence that his view was that the dissenting banks were concerned primarily about the plans the Bell group had for restructuring and in particular:
What plans were in place to bring the convertible bondholders to the negotiating table to agree to some sort of interest deferment or debt for equity swap, which would relieve the Bell Group of its obligations to pay interest to the bondholders.
24.1.10.2. Gulf Bank
5234 There is a letter in evidence from Gulf Bank to Latham (Lloyds Bank) dated 1 May 1990. That letter refers to the request for ‘the Balance of Proceeds’ and expresses that Gulf Bank’s view:
[T]hat the request to access these funds to pay the interest due to the holders of certain of its guaranteed convertible subordinated bonds, is both inequitable and not in the best interests of those companies comprising the Bell Group.
…
We have expressed to you our grave concerns that the Group seems to be facing future cash flow uncertainties in the coming months which have been effectively notified to the syndicate banks since February through the provision by subject of their cash flow forecasts, the Group’s proposal does not address such situation.
We therefore consider that the present situation needs to be addressed not simply by the lending banks but also by the Bell Group in conjunction with its other major creditors, namely the bondholders, and a more reasonable, balanced and equitable solution sought by which all parties are seen to contribute tangibly to the Group’s rehabilitation in the short and medium term.
5235 The rest of the letter identified seven key matters that Gulf Bank considered should be addressed before the proposal could be considered further. These included a request for written plans and supporting financial information on how the company intended to deal with its longer term cash flow shortfalls. Significantly the letter said the bank would like information on the proposed contribution from the bondholders. It gave as an example that the bondholders might be approached to consider a ‘temporary deferment or rollup’ of their interest claims as quid pro quo for the syndicate banks releasing the Bell Press proceeds as ‘new monies advanced’ to the operating subsidiaries of the group for future working capital requirements. This, it was suggested in the letter, would ‘ultimately enhance the value and viability of the ongoing Group for its corporate benefit as well as that of its creditors and shareholders’.
5236 Aspinall said that the reply to this letter dated 3 May 1990, drafted by Simpson but which he saw, reflected his views at that time. That response is rather testy. It points out that ‘the history of this matter has been repeated ad nauseam’. It asserts that there was provision in the facility agreements to allow certain asset sales to take place, and for the money from those asset sales to flow to the banks. It said:
At the time the initial discussions took place the circumstances in relation to the Bell Group, and in particular the position in relation to Bell Resources was entirely different to where it is now, and for that matter where it was two months ago.
The response continues:
The company insisted on the ability to claw back money from the banks if circumstances dictated and we have made a presentation which, in our view, gave a full and frank disclosure of the company’s position and the necessity to claw back some of the asset sale proceeds.
We have appreciated the support of the majority of the banks lending to The Bell Group and find it almost inconceivable that the Gulf Bank are prepared to put at risk the possibility of receiving slightly under £200,000 as their alleged entitlement to the disposal proceeds against the possibility of receiving absolutely nothing for some considerable period of time while the matter is debated in a Court. I suspect this is a position that the majority of the other banks with far greater exposure would find totally unacceptable.
And pointedly:
Gulf Bank’s and Creditanstalt’s suggestion that a more reasonable and balanced and equitable solution be sought by all parties, including the bond holders, may have some merit, but I wonder whether it is intended that the bond holders will share in the security which the banks have.
5237 In evidence Aspinall said that this letter reflected his understanding of the situation at that time. He said that he understood that the company had received the support of the majority of the banks to the request regarding the Bell Press proceeds of sale. The ongoing viability of the Bell group was being put at risk by the four banks that refused to release the funds. He was of the view that this refusal was not being exercised bona fide in accordance with the provisions of the refinancing agreement.
5238 Aspinall’s views on the concerns of the other three banks is best gleaned from the contemporaneous memorandum dated 7 May 1990 that he wrote to Oates and Mitchell. This memorandum, Aspinall said in evidence, accurately recorded his understanding and beliefs at the time. The memorandum was stated to be for the purpose of informing them of the difficulties that the company was having releasing these funds. He refers to each of the banks in turn.
24.1.10.3. Gentra
5239 Aspinall records in his memorandum conversations that he had with Barr and Jenkins. He says that Gentra had ‘determined not to allow us to use the $17.0 million’. The bank’s two main concerns were:
(a) that the unsecured bondholders were not involved in the restructuring of the Bell group and they firmly believed that both the banks and the bondholders should be working together; and
(b) the reliability of the group’s latest cash flow projections.
5240 Aspinall records that he had discussed the situation at length with the two bank representatives and he said that he considered that they did understand the position that the company faced through non‑payment of the interest. He noted that the bankers said they were going to contact Lloyds Bank with a view to meeting with them.
5241 In the memorandum, Aspinall said he had asked the banks (Gentra, Creditanstalt and BoS) what advantage they would receive by putting the group in a position whereby it was insolvent. He expressed surprise at the response of Gentra and BoS; namely, that they were ‘prepared to wait for whatever funds they could get from the group even if it took two or three years’. It seems to me to follow that officers from these banks had told Aspinall they were not afraid of the prospect of the Bell group companies going into liquidation, presumably at the behest of the bondholders due to non-payment of the interest instalment.
24.1.10.4. Creditanstalt
5242 The memorandum records that Aspinall said he had discussions with Steinbichler from Creditanstalt. He says that the bank believed that the bondholders should not be paid but they should be requested to capitalise the interest as part of the restructuring programme. Aspinall records in the memorandum that he had pointed out to Creditanstalt that even if the company believed that this idea had some chance of success there was insufficient time to approach the trustee and to organise a meeting of the bondholders to discuss this proposal. I understood him to be referring to the time at which the interest payment was due, which was only a few days away.
5243 The position of Creditanstalt seems to have been similar to that of Gentra, although Aspinall said the former was more accommodating in the sense that they wanted to help did not want to wait for their funds. The import of Aspinall’s note reflects a concentration on the mechanics of a plan involving the bondholders rather than of a threat of action by those creditors. He said that Creditanstalt believed Bell group should not pay the interest but should ask the bondholders to capitalise it as part of the restructuring program. He told the bank that even he we believed this idea had some chance of success there was not time to put it to the bondholders before the interest payment date. Creditanstalt apparently reiterated its belief that Bell group should negotiate, causing Aspinall to make this note:
I pointed out that SGIC would be most uncooperative and that even if the other bondholders were able to be convinced to agree to a moratorium I advised that SGIC would create an insurmountable [sic] by disagreeing.
5244 This evidence is significant for a number of reasons. I will return to it, for instance, in the context of the equitable fraud claim as I think it has an impact of the plaintiffs’ allegations that the banks’ objective was to keep LDTC in the dark. It suggests to me that the banks, certainly the band of four, were anxious to see the bondholders share some of the pain that they believed they were then suffering. It is not easy to explain the expressed approach of these banks with the thesis that the banks wanted to Bell group officers to deprive LDTC of information until their securities had hardened.
24.1.10.5. BoS
5245 According to Aspinall’s memorandum BoS was the most difficult. His discussion had been with Logie; he said in the memorandum:
To put it shortly they basically are saying that the cash flows that the group have supplied ever since this facility went in place have been deceptive and that in their opinion the group should not have been allowed to continue trading and therefore they have taken the decision not to support the use of the $17.0 million to pay the bond holders.
They are not even prepared to discuss restructuring, or what our aims are in relation to the long term future of the group.
5246 In the same memorandum under the heading ‘General Comment’ Aspinall went on to say:
I asked the banks what advantage they would receive by putting the group in a position whereby it was insolvent.
Surprisingly enough [Gentra] and [BoS] both said that they were prepared to wait for whatever funds they could get from the group even if it took two or three years.
Creditanstalt’s position was one of ‘we want to help in whatever way we can-we do not want to wait for our funds we simply want to co-operate, but the bond holders must share in the restructuring’.
As far as the Gulf Bank is concerned. No contact has been made with Graham Pettit as Lloyds advice is that we will have to contact Alan Beauregard in Kuwait and as they are the smallest bank in the syndicate they should be left until last.
24.1.10.6. LDTC
5247 While Aspinall was still dealing with the ‘band of four’, on 4 May 1990 he wrote to LDTC to advise the trustee for the bondholders that the interest due on that day would not be deposited. The letter said that he would have the paying agent contact LDTC ‘on Monday with regard to the timing of this payment’. He immediately received a reply from Duffett referring to the guaranteed convertible subordinated bonds due 1997, it said:
In view of our recent receipt of certificates confirming the solvency of Bell Group Ltd as at 31st March, 1990 and the fact that you have not given us any prior indication of difficulty in meeting this obligation we were surprised to hear that payment had not been made.
You should be aware that under the terms of the Paying Agency Agreement the Company is required to transfer cleared funds to the Principal Paying Agent in sufficient time to enable it and the Paying Agents to make payment to the Bondholders on the due date and we do not expect companies to rely on the grace periods provided by the trust deeds.
We require by return a full explanation of the reason for the delay and your confirmation of the date on which the interest payment will be made.
Please also confirm that interest in respect of the A$75,000,000 10% Guaranteed Convertible Subordinated Bonds due 1997 of the Bell Group Finance Pty Ltd. will be paid on 7th May.
5248 Aspinall’s memorandum to Oates and Mitchell described in Sect 24.1.10.7 attaches this letter and he says that they will need to discuss it at the board meeting. He also notes that the reference to the payment due on 7 May 1990 is a direct reference to SGIC. He goes on to say that ‘in view of the above situation’ he had decided to go to London and take Simpson with him. He says it will probably necessary to go to Scotland to see the principals of BoS and possibly to Austria where Creditanstalt had its headquarters.
24.1.10.7. TBGL board meeting of 7 May 1990
5249 The minutes of the meeting of the directors of TBGL held on 7 May 1990 record the memorandum sent by Aspinall and that he reported on various telephone conversations that he had with the band of four banks, Lloyds Bank and LDTC. The minutes record a view that ‘Lloyds appear to have been less than diligent in disseminating to the participant banks information which has been provided by the company’. Also recorded is a suggestion said to have been made by Aspinall that these banks appear to be ill-informed and that it was agreed that Simpson and Aspinall would prepare of a summary of information which had been provided to Lloyds Bank over the last six months to distribute to the syndicate members.
5250 The resolutions record that Aspinall and Simpson would fly to London immediately to discuss the situation with each of LDTC, Lloyds Bank and the four banks. Aspinall said in evidence that the minutes correctly record his understanding and belief at the time. He says he remembers the meeting because he and Simpson left for London that afternoon. Several other matters were discussed at the board meeting:

1. Putting pressure on Lloyds Bank to try and resolve the position, given that the company had earlier received assurances from Lloyds Bank that all syndicate members would ‘fall into line’.
2. A proposal to be put to Lloyds Bank requesting that it fund the company to the extent of £1 million to enable the four banks to be repaid their pro rata share of the $17.4 Bell Press sale proceeds.
3. It was noted that BCHL had repaid in full its loan account in the sum of $5.8 million on 4 May 1990.
4. SGIC was owed $7.5 million in interest on the convertible bonds and this was unlikely to be the subject of a commercial settlement or a moratorium on payment.
5. Argyle (P&P) was present and he advised the directors that LDTC was the trustee for both the convertible bond issues and that they have cross‑default provisions. If the interest was paid to only one group of bondholders the default would still arise under both deeds.
6. Argyle advised that if the directors do not have an ‘expectation’ of meeting the interest payments then they should ‘close up shop’.
7. Having considered Argyle’s advice, the resolution of the directors was that a commercial settlement or arrangement either with Lloyds Bank and (or) the four banks was still likely, and until the grace period under the bond arrangements had expired the company could continue to operate.
8. Argyle advised that the directors were not exposed under s 556 of the Companies (Western Australia) Code given that the company was not ‘incurring any new debts’ and until such time as LDTC ‘called’ the company under its guarantee that would remain the position.
   5251 In his witness statement Aspinall summarised his view as to the position the Bell group found itself in and the alternatives facing the directors:
   [T]hat every attempt had to be made to secure the agreement of the Banks to the release of these funds for the ongoing benefit of all of the companies in the Bell Group their shareholders and creditors. To liquidate those companies at that stage would, I believed, have meant that a fire sale value would have been attributed to the newspaper assets on the sale by a liquidator and that the BRL shares would not have had time to have value restored to them consequent upon the brewing transaction. It was not appropriate, in my view, as a director of the company, to simply down tools and say that things were too difficult and I should just give up. Accordingly I went to London with Simpson to try to convince the Banks to agree to the release of the BGP proceeds … I believed at this time that I would be successful.
   24.1.10.8. London meeting with the banks
   5252 Aspinall addressed a meeting of the Lloyds syndicate banks on 8 May 1990. He gave evidence, which was supported by a contemporaneous note made by Anton (Crédit Agricole), about what he said:
   Our bondholder interest was due on 7 May 1990. If we do not obtain funds by Friday 11 May then we will not be able to make payment before the expiry of the grace period of 7 days on Monday 14 May. In order to make the payment, we need the $17m held by the Banks to be released and if it isn’t released I will recommend the liquidation of the Group. I have met with Law Debenture Trust Corporation this morning. They advise me that the SGIC are already asking for payment of interest. I am hopeful that within a few weeks I can present plans to the Banks for reducing the Group’s debt. These will include selling BRL shares to buy back bonds and repaying debt, exchanging BRL shares for bonds or selling some of The West Australian Newspaper.
   5253 Anton’s note also records that Aspinall had made it clear that SGIC (with a history of claims against the Bond group) would certainly ‘call default’ on the Bell group. At this point Anton’s note records:
   Aspinall had been hoping that the syndicate would agree to the waiver and had intended in a few weeks to come and present plans for reducing our debt. These could include selling some BRL shares to buy back bonds and repay some debt, exchange BRL shares for bonds, or sell some of The West Australian newspaper.
   24.1.10.9. The four banks and the conditions
   5254 A fax from Aspinall in London to Mitchell and Oates in Perth dated 9 May 1990 noted his progress with the ‘difficult’ banks following the meetings in London. It reports that Creditanstalt had signed the waiver and Gentra was still expressing its concerns but had agreed to reconsider the position and would advise on the 10th of its decision. BoS had invited them to speak the next day to senior management in Edinburgh and Gulf Bank was said to be ‘weakening’ its position and would advise, again on the 10th, of its decision. Each of the banks did respond positively the next day: all agreed to release the funds. This occurred on 11 May 1990; however, each of those banks imposed particular conditions on the consent. Aspinall’s evidence in respect to two of those conditions is important.
   24.1.10.10. The LDTC condition
   5255 These first of the conditions was common to both Creditanstalt and Gentra. It is best illustrated in the terms of the Creditanstalt letter dated 10 May 1990. It said:
   This agreement is conditional upon Bell Group Limited agreeing to meet with the Law Debenture Trust Corporation Plc and the holders of its guaranteed convertible subordinated bonds as soon as possible and, in any case, well before the next interest payment is due on these bond issues (i.e. before 14th July 1990). At these meetings, Bell Group Limited will discuss what concessions the convertible subordinated bondholders will make to support the on-going operations of Bell Group Limited. We understand that this has already been verbally agreed by Bell Group Limited.
   5256 In the Gentra letter of the same date the condition is similar but it specifies a requirement that TBGL:
   Will use its best endeavours to negotiate concessions (which may include a moratorium acceptable to the Banks) with the guaranteed convertible subordinated bondholders.
   5257 Aspinall responded to both banks immediately but in qualified terms. He said:
   We confirm our agreement to your request that the company meet with the Law Debenture Trust Corporation Plc and the holders of its guaranteed convertible subordinated bonds, subject only to any conditions contained in the Trust Deeds which may prevent such a meeting taking place with the bond holders.
   5258 Aspinall said in the witness box that this condition was only agreed after a process ‘where we didn’t agree, then we did agree’. The effect of Aspinall’s evidence on this condition was that he saw no point in it, he said:
   [I]f we were going to go to the bondholders and ask for an interest moratorium, the bondholders would naturally ask the banks for a moratorium, and we didn’t see that that really served any great purpose to the banks or the bondholders for that matter because by the banks releasing the money the bondholders got paid their interest.
   5259 He said that is the argument he put to the banks at the time. In cross‑examination this exchange occurred:
   You understood at the time, did you not, that it would be necessary for The Bell Group Ltd to disclose pretty fully its financial position if it was going to ask for concessions from the Law Debenture Trust Corporation and the holders of the convertible bonds. Isn’t that the case?—Not only its financial position but what the restructuring plan was and at that point of time there were very good reasons why the precise details of the restructuring plan could not be discussed fully with the Law Debenture Trust. It was not in the best interests of the company to do so.
   5260 On 14 May 1990 Gentra wrote to Armstrong (Lloyds Bank). Aspinall said in his witness statement that this letter had then been given to him. The letter refers to a telephone call from Armstrong to Jenkins apparently advising Gentra that TBGL was to meet with LDTC on 15 May 1990. The letter said that this ‘intention to negotiate such a moratorium’ was the company’s idea. The letter went on to say it would be ‘premature for the company’ to enter into negotiations with the trustee prior to the banks reviewing and approving their overall plan. And, further:
   Indeed, it may be detrimental to the banks’ position to have a meeting with the Law Debenture Trust Corporation Plc, prior to BGL submitting its plans to the banks (by 14th June 1990).
   5261 Aspinall responded in a letter dated 15 May 1990 vigorously denying that the suggestion to meet with the bondholders had come from him. His letter refers to the fact that it was Creditanstalt that first raised the issue. He states that the company has insisted on numerous occasions that they did not think it was appropriate to seek a moratorium from the bondholders. He said that such a request would require a full presentation of ‘the company’s plans for the future which, of course, would involve the question of discounting the bonds’. And further:
   It is our view that the bond holders would be unlikely to support an interest moratorium with the knowledge that their bonds will subsequently be repurchased at a substantial discount.
   However, we were prepared to go to the Trustees and the bond holders when it became apparent it was one of the stumbling blocks in our discussions last week.
   5262 In other words his position was that the company would only approach the bondholders because of the insistence of the banks that it do so as a condition of releasing the funds. As Aspinall explained in his evidence:
   My purpose in writing that letter was to correct what I believed were inaccurate statements made by Royal Trust Bank (now Gentra) in its letter. One of the matters which I was at pains to emphasise was that the reason why I did not initially wish to agree to Creditanstalt’s condition of its waiver of the BGP proceeds, that I approach LDTC and ask for a moratorium on bond interest, was that I believed that such an approach would necessitate a full presentation of the Bell Group’s plans for the future, which would, of course, involve the issue of ultimately purchasing the bonds at discount. I did not think that such an approach would be palatable to the bondholders at the time nor in the interests of the Bell Group. I have commented on this above. Nevertheless, I wished to point out that because it was made a condition of the waiver of the Banks’ entitlement to the funds and because that was a priority issue for the Bell Group, I had agreed to the proposal.
   5263 He goes on to say in his letter he arranged the meeting to take place on 15 May 1990 to fulfil the undertaking the company had given to the banks on 10 May 1990 ‘notwithstanding our reluctance to do so’. He continued:
   I do take exception to the current position we find ourselves in. We do not make statements lightly or glibly to you and your colleagues. Before making the comment that it would be wrong to ask for an interest moratorium, careful thought and consideration was given to the proposal. It did appear to us that the bond holders’ agreement to such a proposal may be conditional on the banks agreeing to an interest moratorium, something which probably would not appeal to your syndicate members. It appears that at least two of your banks took advantage of the situation to try and force the company to take some steps which were/are not necessarily in the interest of the company or its more supportive banks.
   5264 The meeting as arranged took place between Aspinall, Simpson and Potter, Duffett and Bicket of LDTC on 15 May 1990. Potter’s note is in evidence; when it was shown to Aspinall, he said that it accorded with his general recollection of his discussions with LDTC. Aspinall said that he explained the difficulties he was having with the banks regarding the retaining of the proceeds of the sale of Bell Press under the terms of the banks’ securities. This had led to the non‑payment of the bondholder interest in May. He spoke generally about asset sales and said that the company had previously relied on asset sales to service the interest payments, but he would not be relying on such sales in the future. Aspinall noted that only the New York apartment was to be sold, and then the company only had its WAN and BRL interests left. He spoke of the decline in the Australian economy and the budgeted decrease in advertising revenue, and said that he recognised that he had to look to a restructuring in the long-term. He also said that he was looking for a buyer for the BRL interest as the company believed that ‘it is in the newspaper business, not in any other’.
   5265 Aspinall acknowledged in his evidence that he did not discuss his plans for purchasing subordinated bonds at discount. He says that he did not think it was in the interests of the Bell group to do so at that time. This led to this exchange with counsel in cross‑examination:
   As you say in your witness statement you didn’t discuss the plans in relation to purchasing subordinated bonds and I put it to you that you didn’t discuss with them the fact that the company needed to restructure in order to avoid going into liquidation? You didn’t discuss that with them?—The answer to the first part of your question is, no, I didn’t discuss repurchasing the bonds for the reasons that I have set out in my statement.
   Yes?—I did not believe that the company was going to go into liquidation and that’s why I didn’t discuss it with them.
   5266 That answer is a little curious. I say this because it is highly unlikely that there could have been a rational and reasonable restructure that did not include some element of defeasance in the Bell group’s long-term bond paper. This seems to have been the import of Aspinall’s report to the Lloyds syndicate banks on 8 May 1990.
   24.1.10.11. The BGNV subordination deed condition
   5267 Another condition for the release of the Bell Press funds was that imposed by three of the banks: Gulf Bank, BoS and Gentra. It was a requirement best expressed in the letter dated 10 May 1990 from Gentra:
   All indebtedness due to Bell Group N.V. by other Bell Group Companies, including Bell Group Limited and Bell Group Finance Pty Limited to be legally subordinated to the debts due to the Banks. This subordination to be legally perfected by May 31st 1990, at least in the format provided to you by the Australian Banks and opined on by the Netherland Antilles lawyers Messrs Promes Trenite Van Doorne in their letter to you dated May 9, 1990.
   Aspinall was asked about this in cross‑examination.
   What I want to ask you is that you became aware at least at this time that the banks were concerned that the indebtedness between Bell Group NV and other Bell Group companies may not have been legally subordinated?—By reading this letter and receiving this letter, yes.
   Counsel then asked:
   At this point did this clarify what the issue was about the on loans or were you still uncertain about what the issue about the on loans was?—I am uncertain but I know that at some point of time we did try and undertake to get that subordination deed signed. I’m not sure exactly when.
   5268 I will return to this issue in discussion of the period June 1990 to end of December 1990 in Sect 24.1.13.
   24.1.11. The May–June plans for debt restructure
   5269 Several times in his evidence Aspinall referred to his plans for restructuring the debt of the Bell group. I first referred to this part of his evidence in Sect 24.1.3.12. I have looked already at his restructuring plans at an earlier stage (July 1989 and up to January 1990), particularly in respect to the publishing assets. I will pay particular attention to the ideas for restructuring generally below in Sect 24.1.18. In what follows here I need to look at his evidence in respect to these plans to restructure debt after the refinancing in January 1990 and in and around the waiver crisis in May and into June 1990.
   24.1.11.1. The bond price rise
   5270 At the same time that the difficulties with the band of four were being addressed, Aspinall said that Simpson (on his instructions) was investigating the possibility of purchasing the bearer bonds at a discount.
   5271 When Aspinall addressed the meeting of the Lloyds syndicate banks on 8 May 1990 in London he said that he told the banks that he hoped ‘within a few weeks’ to present plans for the debt reduction. He said in evidence, again supported by contemporaneous notes of several bankers, that he told the banks his plans included the following:
   • selling BRL shares to buy-back subordinated bonds at discount;
   • exchanging BRL shares for bonds; and
   • selling some of The West Australian newspaper – a possible equity injection.
   5272 In the week between this meeting and 17 May 1990 the price of the Bell group convertible bonds had risen. This caused Aspinall some concern, particularly as he said the company was contemplating buying back the bonds at a discount. He wrote to Armstrong on 17 May 1990:
   Obviously, the significant rise in our bond price is of grave concern to us in relation to our program of restructuring our group. I am arranging for a graph to be prepared from our computer system so that you can see that the substantial increase in the price of our bonds has only occurred since our bank presentation.
   5273 He said that he was suspicious and thought that one of the banks had passed on the sensitive commercial information about the company’s intentions either to another part of the bank, or a client, that held bonds. He said that he tried at the time to find out which of the banks had passed on the information because such a leak was not in the interests of the company.
   5274 A letter from Lloyds Bank dated 25 May 1990 informed Aspinall that:
   Our syndicate was asked at a recent meeting at the request of (two unnamed banks) to acknowledge around the table that none of us holds any bonds. All banks (apart from Skopbank who were not present) confirmed that they have no holding.
   5275 Then, on 25 May 1990, Farrell sent Aspinall a fax. It said in part:
   I am in the embarrassing position of having to confirm to you that the mortgagee of the Bell Group Ltd (‘BGL’) convertibles is in fact Manchar Holding Pty Limited, a subsidiary of Bell Resources Ltd (‘BRL’), and not the HongkongBank as I previously advised. The HongkongBank is in fact mortgagee over all the Group’s BRL convertibles.
   Peter Mitchell is presently negotiating with Geoff Hill, Chairman of BRL, to have the interest payment returned to BGL and Tony Oates has agreed to that amount being utilised in reducing inter‑company indebtedness.
   I sincerely hope that your position with your banks has not been overly prejudiced with this mistaken information.
   5276 Aspinall said that in his view this payment should have been retained by the BCHL group and passed on to the Bell group in reduction of the former’s debt. However, at that time he believed what he was told about Mitchell’s attempts to retrieve the payment.
   5277 Meanwhile, in a memorandum dated 23 May 1990, he gave Garven instructions to start preparing the material for presentations he wished to make to the banks on the group’s budgets for 1990 – 1991. He said that these instructions reflected his belief at the time that it was very important to achieve the confidence and support of the banks so that they could demonstrate how closely management was being monitored.
   24.1.11.2. BRL negotiations
   5278 On 18 May 1990 Aspinall and Simpson met with Youens (Westpac). This meeting is confirmed by a fax from Youens to various bankers immediately after it occurred. Aspinall told Youens that BCHL and BRL were very close to resolving the brewing transaction. A deal had been arranged in which TBGL and BCHL would effect a pro rata sell down of their shareholdings to an agreed level by 31 December 1990 and then 31 March 1991. The proposed deal also involved TBGL reducing its voting rights. This was to ensure that the BCHL group had no control over the brewing assets. Aspinall said that he hoped that this arrangement would add value to the BRL share price because it was in the best interests of the Bell group that the best possible price could be achieved for these BRL shares to reduce the debt of the group. On 22 May 1990 Aspinall wrote to Logie (BoS) on the BRL issue confirming that ‘substantial negotiations have been completed and the documentation is being drafted by the respective lawyers involved’. In evidence he said this reflected his belief at the time.
   24.1.11.3. An equity injection into WAN
   5279 In Sect 24.1.4.3 I discussed the various approaches made by several media barons to WAN. At the same time as Aspinall was dealing with the banks regarding the refinancing and in particular the waiver arrangements for the proceeds of the Bell Press sale, his evidence is that he was still engaged in discussions with interested parties in respect to the possible injection of equity into WAN. Aspinall consistently maintained in his evidence that he believed that WAN was a valuable asset.
   5280 In the period from the end of January 1990 to the end of May 1990 Aspinall said he was making progress in negotiations with Maxwell. Aspinall met with Maxwell in London on 13 March 1990; this meeting was followed by further meetings in London on 25, 29, 30 and 31 May 1990. There were more meetings with Maxwell or representatives of the Mirror group on 1, 6 and 7 June 1990. Aspinall said these meetings he said ultimately resulted in TBGL and the Mirror group entering into a conditional letter of intent for the purchase by the Mirror group of a 50 per cent holding in BPG. In addition, both the Chicago Tribune group and Stokes were interested in proposals for the purchase of Bell group convertible bonds and for these bonds to then be exchanged for shares in TBGL. I will discuss this in more detail in Sect 4 and Sect 6 below. I mention them in this section for the sake of completeness.
   5281 The fact that these proposals were being considered also supports the statement made to the Lloyds syndicate banks (particularly at the meeting on 8 May 1990) by Aspinall that:
   I am hopeful that within a few weeks I can present plans to the Banks for reducing the Group’s debt. These will include selling BRL shares to buy back bonds and repaying debt, exchanging BRL shares for bonds or selling some of the West Australian newspaper.
   5282 I accept the truthfulness of Aspinall’s evidence in this regard: at this time he thought he had ‘plans’ underway for the various possible means of restructuring the indebtedness of the Bell group. But there is a problem. There is insufficient evidence from which I could conclude that at any time much before May 1990 there was anything that could reasonably be regarded as a ‘plan’ to restructure the finances of the various Bell group companies.
   5283 Some efforts had been made to devise strategies for the publishing assets but that is about as far as it goes. It continued to be slow progress thereafter. I note, for example, that on 7 June 1990 Simpson and Garven made a presentation to the Australian banks. A note of the meeting taken by Keane (NAB) records Simpson as saying he was still not in a position to ‘advise details of the restructure being negotiated’ but hoped to be able to do so by 15 June 1990. An updated cash flow was presented to the meeting and the note concludes with this remark:
   [I]t is clear that maintainable earnings are insufficient to service TBGL’s debt burden. Simpson clearly acknowledged this, and said that all efforts were being put into a restructure to restore the group to a position where it can service its debt commitments.
   5284 The reference to TBGL’s inability to service its debt commitment is important for two reasons. First, that had been obvious before 26 January 1990 and nothing had changed. Secondly, maintainable earnings were unlikely to be the answer: the solution had to involve reduction in debt levels. This, too, had been obvious before 26 January 1990 and the banks. No‑one was much the wiser as to how and when that might occur.
   24.1.12. Aspinall’s involvement with LDTC
   5285 Aspinall gave evidence that his involvement with LDTC on behalf of the Bell group was confined to concerns raised by LDTC about the group’s financial position. The earliest date that he said he had contact with LDTC was 3 August 1989. Duffett wrote to the directors of TBGL saying:
   Bondholders have expressed their concern to us that the Issuer may be affected by the reported difficulties surrounding the Bond Group and hence we are concerned on their behalf that The Bell Group Limited is and will be able to perform its obligations under the Trust Deed dated 25th July 1988.
   5286 A provision in the trust deed for the issue of the convertible subordinated bonds enabled the trustee (LDTC) to ask for certificates of solvency, and that was the purpose of the letter. In evidence there are several examples of such certificates provided by TBGL, signed by Aspinall and another director. Then, on 5 January 1990, LDTC wrote to TBGL and informed the company that Schroders had been appointed to advise LDTC on its obligations as trustee of the subordinated convertible bonds. TBGL was asked to provide information on request from Schroders. A request came from Schroders in a letter dated 8 January 1990. It sought:
   Copies of the most recent management accounts, including funds statements, for the Company and each of its subsidiaries. Such accounts should set out the proceeds received by the Company since 30 June 1989 from all sales of non-current assets and the application of these proceeds. In addition, details should be provided of all other material transactions which occurred post 30 June 1989.
   Full particulars of all amounts receivable by the Company from Bond Corporation Holdings Limited (‘BCH’) or any related corporations or associated companies of BCH (including an estimate of the amount that would be recoverable in respect of such receivables as if they were immediately due and payable and a call was made for their payment).
   A copy of the valuation dated 17 March 1989 prepared by Whitlam Turnbull & Co. Ltd. concerning the value of the Bell Publishing Group and its newspaper mastheads.
   5287 Aspinall replied to LDTC on 11 January 1990. He pointed out that the provisions of the trust deed do not oblige the company to provide information to anyone other than the trustee. He says that (based on legal advice) the company objects to providing the information to Schroders in reliance on a distinction between the doing of acts in connection with the trusts and the mere exercise of a power under the deed, and taking the view that requesting information is in the latter category. He says that a ‘certain potential conflict of interest’ exists. His letter concludes:
   Pending resolution of these matters we would be happy to respond to a direct request from you for the provision of information and evidence so long as we can feel confident that the commercial sensitivity and confidentiality of the information and evidence provided will be respected (if for no other reason than that the protection of confidentiality of commercially sensitive information is as much in the interests of bond holders as it is in the interests of the Bell Group).
   5288 The potential conflict of interest is disclosed in a letter of the same date from Aspinall to Schroders. He says, after raising the same objections about delegated authority that he raised in the letter with LDTC, that TBGL objects ‘in the most strenuous terms’ to Schroders’ acceptance of appointment as the trustee’s agent. Schroders had told Beckwith that they acted for Rural Press Limited when pursuing on that company’s behalf a possible purchase of The Countryman and other rural newspaper interests of BPG.
   5289 On 26 January 1990 Aspinall and Simpson met with Duffett (LDTC) in Perth. Duffett’s note of this meeting states that Aspinall complained about the involvement of Alan Molyneux and Schroders. Aspinall’s expressed concern, according to the note, was that he was weary of financial advisers and conflicts of interests. He, Aspinall, was taking legal advice and once he had that advice he would then be happy to sit down with Molyneux. Of particular significance in the note was Duffett’s recording of Aspinall’s reference to the future and the ‘consolidated bank facilities into a single feature of 19 largely European banks’. I will return to this note in the part of my reasons dealing with LDTC’s knowledge of the Bell group’s financial position and the entry into the Transactions.
   5290 There was no evidence before me that any of the financial information that Schroders sought from TBGL was provided at any time in the period January 1990 to end of May 1990 or indeed thereafter.
   5291 Aspinall’s next contact with LDTC arose in May 1990 when he was compelled to tell the trustee that the interest due on the subordinated convertible bonds would not be paid on the due date. I dealt with this evidence in Sect 24.1.10.6. I also referred to Aspinall’s evidence on the meetings with LDTC on 8 and 15 May 1990 in Sect 24.1.10.9. The correspondence at this time clearly indicates that LDTC were being told of problems with the banks and the asset sale proceeds but little else. In summary, Aspinall’s evidence of contact with LDTC, which I accept, is:
   I met with the representatives of LDTC on a number of occasions in 1990. I recall meeting Christopher Duffett on 26 January 1990. I refer to his file note of that meeting below. I discussed my plans for the Bell Group with Duffett at that meeting. I met Jeremy Potter (Potter) of LDTC on 8 May 1990 with Simpson as recorded in Potter’s fax of 8 May 1990 and I met Potter and Duffett again, together with Simpson on 15 May 1990 as recorded in the note of 16 May 1990. I have not seen copies of those notes before but they accord with my general recollection of my discussions with LDTC.
   I did not discuss my plans in relation to purchasing the subordinated bonds at the meetings in May 1990 for the reasons set out above. Other than my plans for purchasing bonds, which I did not discuss with Duffett because, as I say above, I did not think it in the interests of the Bell Group to do so at the time. I told Duffett of my plans for the development of the Bell Group during the meetings referred to above.
   LDTC received the preliminary final statement and dividend announcement for the Bell Group for the year ended 30 June 1989 under cover of a letter of 20 October 1989 the TBGL annual report for 1989 under cover of a letter of 27 November 1989, a stock exchange release of 2 November 1990 under cover of a fax (mistakenly) dated 25 October 1990 and a letter from Colin Simpson dated 7 November 1990.
   Although I cannot now recall the precise terms of my discussions with Duffett, my recollection is that in those discussions I told Duffett, in effect, that the Bell Group had refinanced its bank lending and in the course of doing so had secured its assets to the banks together with explaining my objectives for the Bell Group as I have discussed above. I do not recall Duffett reacting with any surprise or concern at being so informed. If he had reacted in that way I believe I would recall him doing so.
   5292 Aspinall’s next direct contact with LDTC did not occur until 19 October 1990 when he advised the trustee of the company’s need to obtain a moratorium on bondholder interest as part of the plan to restructure the Bell group at that time.
   24.1.13. The period June 1990 to end of December 1990
   24.1.13.1. Proposed sale to the Mirror group: June to August
   5293 Aspinall said in evidence that at the beginning of June 1990 he was in England negotiating with Maxwell regarding the possible purchase of an interest in BPG. The proposal was to sell a 50 per cent interest (this became 49 per cent later) for $175 million in cash, $75 million of assumed debt and a credit facility to repurchase the convertible bonds of the Bell group at a discount.
   5294 On 7 June 1990, the same date the conditional letter of intent with the Mirror group was signed, Simpson and Garven had a meeting with the Australian banks. Aspinall said that the purpose of this meeting was to discuss restructuring the Bell group and the cash flows. Before that meeting Aspinall said that he spoke to Simpson. He instructed him to keep the proposed deal with Maxwell confidential during the meeting. However, after the meeting, he said that Simpson told him that he had limited success in doing so because there had been a report in The Australian implying that Maxwell was a potential purchaser. However, Simpson conveyed to Aspinall the message of the banks that they were prepared to wait until 15 June 1990 for a report.
   5295 On 11 June 1990 Aspinall met with the Lloyds syndicate banks in London. A note dated 12 June 1990 made by Moorhouse of BoS is in evidence. Aspinall said that note accorded with his general recollection of what had occurred. The note states that Aspinall discussed details of the prospective sale, and he explained that the banks would be paid out in some three to four months. Westpac, he said, was negotiating the provision of new credit facilities for the ‘Bell/Mirror’ entity which would assist in the pre‑payment of the senior lenders, then provide funds to buy-back the bonds at a ‘deep’ discount, and then provide working capital. He explained to the banks that the sale was subject to various regulatory and shareholder approvals of which the consent of the Foreign Investment Review Board (FIRB) was the most critical. FIRB would make the recommendations to Treasury; however, there had already been comment in the press that Keating (the Treasurer) would block the bid. The note went on to record that Aspinall told the banks that in the event the bid was blocked he had already instructed Lloyds Bank to research two separate schemes concurrent with the Maxwell bid. No details were provided, but the banker’s comment is that:
   They couldn’t release details at the moment but we know from previous discussions that this will probably be either a sale of the BRL shareholding or swapping of the BRL shares in retirement of the Bond Issues, leaving the senior debt secured against B.P.G.
   5296 On the same date the company released to the ASX the details of the signing of the letter of intent with the Mirror group. Simultaneously Aspinall advised several of the Australian banks of the announcement; the banks’ consent to the transactions had to be obtained. On 22 June 1990 Aspinall attended a meeting of the directors of TBGL. Those minutes record that the interest payments due on 8 July 1990 would be met, provided that:
   (a) the £4 million from ITC was received;
   (b) a facility to fund the Queensland Government payment to Q-Net was arranged; and
   (c) the New York apartment sale was completed.
   5297 The minutes record the appointment of Sir Maurice Byers QC to advise the company on the sale of the interest to Maxwell. Reference is also made to the appointment of Lloyds Corporate Advisory Services (LCAS) to give advice on the area of public debt defeasance.
   5298 Between 22 June 1990 and the middle of July 1990, Aspinall either wrote or responded to various queries from individual banks asking for more information in respect to the Maxwell transaction and progress on signing of the subordination deed. He had little to add to what he had already been able to tell the banks at this stage; so much hinged on the outcome of the FIRB applications that there was little to report at this time.
   5299 In July 1990 the proceeds from the tax refund (the ITC contract) were received and held by Westpac in London. Aspinall referred to a letter from Lloyds Bank (Latham) to all banks in the syndicate confirming that the ITC payment was being held towards payment of the bond interest due in July. He also referred to the Garven cash flow forecast of 10 July 1990 (which he said he had seen at the time) that showed the ITC payment being used for bond interest. A letter written by Aspinall to BoS on 11 July 1990 states that Aspinall was confident that the brewery transaction would still proceed. The bondholder interest was paid on the scheduled date (13 July 1990). The correspondence in Aspinall’s witness statement showed that the bondholder interest on Bond group bonds (owned by Manchar) had been repaid to Bell group in reduction of the JNTH debt.
   5300 On 17 August 1990 Simpson was appointed a director of TBGL. Aspinall’s evidence was that this was necessary because Simpson was to go to Canberra to lobby politicians in respect to the Maxwell deal. The minutes of the board meeting for this date record that ‘cash flow situation is still a concern’. Aspinall’s management report in the minutes explains that while business costs were being held below budget, overall results were also below budget. The poor economic conditions were blamed for this difficulty. Aspinall even referred to the possibility of barter trading with some of the company’s customers to improve the difficult trading.
   24.1.13.2. The cash flow difficulties: September 1990
   5301 The next meeting of the board of TBGL was held on 24 September 1990. Aspinall presented his managing director’s report: the news was not good. The report outlines the difficult trading conditions in Western Australia at that time; it gives details of the fall in profitability of BPG even in the face of significant cost savings; it compares the position of The West Australian with The Sunday Times and reports that revenue was down for The West Australian, even though in terms of advertising sold it appeared to be doing better than its rival The Sunday Times.
   5302 It records that APM had stopped supplying paper because of unpaid accounts. Aspinall said that the reason for withholding payments from suppliers was because of the need to meet the interest payment due at the end of September. The situation, it is noted, was serious because they had only 10.5 weeks of paper in store: they needed more and they had insufficient supplies on hand to cover any risk from industrial disputes or transportation difficulties. The report explains that no capital expenditure is being incurred because the additional press units that they had already ordered from the manufacturer Goss had not been collected. It is reported that this is causing a problem: not just as to the possible legal dispute that could erupt, but because the presses were actually needed.
   5303 Aspinall’s report records the ‘attacks’ on the newspaper from politicians and in the electronic media. He specifically raises the issue of the wide publicity being generated by the Bond Corporation and ‘Alan’ at that time that had resulted in the negative comments about the ownership of the paper. He states that it is cash flow that is causing him ‘grave’ concern because it not only impacts on creditors, but other business areas as well. He refers to the risk that they may not maintain their IATA insurance plan that was essential to the travel business of WAN.
   5304 It is noted in the minutes that the company will not be able meet its 28 September 1990 interest payments to the banks. Not only was there an economic downturn, but it is noted that the Bond Corporation could not make any repayments of its debt to TBGL. The Q‑Net payment is still a problem. The minutes record that given this difficult situation, Aspinall and Simpson were instructed by the board to approach all the banks and request an interest moratorium. The objective was to retain the available cash for general, operational, payments.
   24.1.13.3. Interest payment moratoria
   5305 On 27 September 1990 Aspinall addressed a meeting of the Australian banks in Sydney. Simpson was there with him and Tilley (LCAS) also attended. Aspinall’s notes for the address are in evidence. He says that those notes correctly reflect what he believed he said at that meeting. In essence, Aspinall said to the banks that:
   • He had consistently told the banks during past presentations that even though there was an agreement in principle with the Mirror group, they would have a second plan available should that agreement with the Mirror group run into FIRB difficulties.
   • Tilley and his team had advised the Bell group on an alternate restructuring proposal, which was approved by the TBGL board and the Bell group would run this proposal in parallel with the Mirror group FIRB application.
   • The stock exchange was to be advised that day that he would become chairman of the Bell group in addition to his role as managing director.
   • A cash flow crisis loomed. He said that as early as 6 September 1990 the management of the Bell group had told the directors of BCHL that they would require payment of the funds that were owed to the Bell group by BCHL, to enable the Bell group to trade until December.
   • The outstanding amounts due by BCHL to the Bell group were $2.4 million (he described this as a ‘disputed’ amount) and $3.2 million in relation to the partly paid Bell group shares held by GFH.
   • There were no other outstanding amounts owed by the Bond group to the Bell group through inter‑company accounts.
   • The directors of BCHL had advised that the outstanding debts would not be paid.
   • He was asking the banks to support the Bell group over the next five months in order to enable the company to complete its restructuring.
   That restructuring was the subject of the LCAS advice.
   5306 The meeting was also addressed by Tilley from LCAS. I will refer to Aspinall’s evidence on the details of the restructure plan in Sect 24.1.18. Aspinall’s evidence did not indicate that there was any resolution of the delayed interest question on that date. However, on 28 September 1990 he received a fax from NAB. This fax says that NAB would allow a seven‑day grace period for payment provided that the Lloyds syndicate banks agreed to the same. There is also a condition that TBGL will permit, and ensure that each subsidiary also permits, any representative of the Australian banks ‘satisfactory to NAB to inspect the premises books and records of TBGL and each subsidiary’. It went further to provide that a ‘representative’ could include an accountant or financial consultant designated as such by NAB. The costs of this appointment and inspections were to be paid for by TBGL or its subsidiaries. This requirement ultimately led to the appointment of C&L in the role of business adviser, but C&L were required to report directly to the Australian banks. The objective appeared to be to provide a method of independent monitoring of the accounts of the business of the companies so as to identify any exceptional payments.
   5307 On 1 October 1990 Aspinall was in London and addressed the Lloyds syndicate banks. He covered the same matters that he had raised with the Australian banks on 27 September 1990. The outcome of this meeting, according to Aspinall, was to defer the interest then due for 7 days to 5 October 1990. The banks were to meet again on 4 October 1990 to consider a further interest moratorium. At this 1 October 1990 meeting several of the Lloyds syndicate banks required Mitchell and Oates to resign as directors of the Bell group. Aspinall said in his evidence that he believed this related to the banks’ desire to see the Bell group ‘de-Bonded’.
   5308 On the same day as he met with the Lloyds syndicate banks (1 October 1990) Aspinall went to see Duffett at LDTC. Aspinall told Duffett he needed to arrange to meet with the subordinated convertible bondholders to obtain agreement to defer interest on their bonds. That meeting was eventually arranged for 5 December 1990. The meeting was a disaster. It failed to attract the appropriate quorums required in accordance with the provisions of the trust deeds. In particular, SGIC notified the chairman that it would not vote in respect to the matter to be put at the meeting (that is the deferment of interest payments) and would rely on a 40‑day period to consider the matters provided under the deed. The bondholders’ meeting was therefore adjourned until 15 January 1991.
   5309 On that date SGIC advised the trustee that it would defer its consideration of the deferred interest proposal a further 35 days to 18 March 1991. Aspinall received copies of this correspondence. SGIC maintained a position that there had been default in payment of the interest due on 10 December 1990 and that it had not waived any of its rights consequent upon that default. This adjournment was agreed at the meeting on 15 January 1991. At the meeting, an informal committee of bondholders was appointed to consider the bondholders’ interests; however, by the time that adjourned period lapsed, the situation was irretrievable.
   24.1.13.4. The October cash flows
   5310 Aspinall said in evidence that the October cash forecasts provided to the banks showed the need for a two‑ or three‑month bank interest moratorium; a 12‑month moratorium on convertible bond interest; and newsprint and other creditors to be delayed to enable TBGL to put into place the LCAS plan. A two‑month moratorium would have enabled the Bell group to trade to 28 December 1990 and allowed time for the bondholders’ meetings to occur in December. A three‑month moratorium would get them through to 31 January 1991.
   5311 On 4 October 1990 the Lloyds syndicate banks agreed to a further deferral of interest until 12 October 1990; however, the various notes from bankers referred to in Aspinall’s evidence indicated that there were steps being taken to consider a proposal to defer interest until the end of November subject to various conditions. Indeed, a letter from SCBAL dated 5 October 1990 to Aspinall indicated an agreement to an interest moratorium until 30 November 1990, but subject to the agreement of all the banks and subject to formal documents being prepared on terms that could be agreed.
   5312 Westpac followed this up with a letter dated 5 October 1990 in precisely the same terms as that received from SCBAL. The agreed conditions were ultimately contained in a letter dated 15 October 1990. These were detailed and tight conditions requiring constant reporting obligations by the directors of TBGL to the syndicate banks and giving control over certain business decisions to the business advisers to be appointed under the agreement or, in the instance of LCAS, already acting. Some of these discretions were described in the agreement as being ‘unfettered’. This included the ability of the business adviser to determine if available cash could be used to pay bank interest. These conditions were all accepted by TBGL.
   5313 By 19 October 1990, in accordance with the terms of the moratorium agreement with the banks, Alan Good (C&L) had been approached to act as a business adviser. Ord Minnett had been approached together with LCAS to pursue the matter of the disposal or realisation of TBGL’s shares in BRL. As a result of the demand by the banks that the board of the company be restructured, Oates tendered his resignation effective immediately. The minutes noted that LCAS had advised Aspinall and Simpson that there were ‘a number of parties’ expressing an interest in equity participation in BPG and LCAS would be providing weekly updates. These reports would be forwarded to the relevant banks. There was also in place an arrangement that required the newly appointed business adviser to report to the banks weekly.
   5314 On 23 October 1990 Aspinall met again with the Lloyds syndicate banks in London. He recalled that he had told them in general terms of the progress with the sale of the 49 per cent interest in BPG to Maxwell and LCAS’ investigations of alternative equity participation. From the evidence that Aspinall gave in this regard it was clear that the pursuit of the Maxwell agreement and the possible equity injections occupied most of his attention well into November.
   24.1.14. Further concessions sought in interest payments: November
   5315 The minutes of the board meeting of TBGL on 16 November 1990 record that Tilley from LCAS attended the meeting. He reported on progress in discussions with interested parties as to an equity participation in BPG. There were indicative offers (non‑binding) from Heytesbury Holdings, Australian Capital Equity and BT Australia representing the O’Reilly family interests. Tilley reported that there was still no firm offer from Maxwell. He said that LCAS believed that ‘there is still a reasonable prospect that the restructure of the Group will proceed’. The board resolved to take further legal advice from Corrs regarding the position of the directors under s 556 of the Corporations Law.
   5316 Aspinall reported on the progress on restructure to a meeting of Lloyds syndicate banks on 21 November 1990. At this meeting several bankers’ notes indicate that Aspinall told the banks that he would have to ask for a further extension of time to pay the interest already deferred. The notes of the meeting kept by an officer from BfG state that the banks required any formal request to defer to be for an extension of time to pay rather than a capitalisation of the interest then due.
   5317 On 22 November 1990 Aspinall wrote to the banks seeking a further extension of time to pay their interest. He advised them that while penalty interest on the overdue interest amounts from September and October could be paid and they could also meet the November interest payment due under the facilities agreement, the company still could not meet the interest for September or October, nor the default rate prescribed in the October extended facilities agreement. He sought an extension until 31 March 1991 for the company to pay this interest. In return for the extension he offered terms and conditions similar to those agreed to in October, including retaining the services of the C&L business adviser and LCAS. He offered to comply with an even tighter default period.
   5318 The extension was granted, with additional conditions imposed by both the Lloyds syndicate banks and the Australian banks. There was a little confusion in the evidence about the precise date this extension was granted. In Aspinall’s evidence he referred to the minutes of the board meeting of 5 December 1990, which say that this extension was effected in a letter of agreement dated 30 November 1990 that he signed. This agreement was ratified by the company at this board meeting. Later in his evidence he referred to a copy of the letter executed by all the borrower companies (Aspinall and Simpson, as directors, witnessed the seals) dated 10 December 1990. It confirms the agreement by the banks to extend the period for payment of the interest under the facility agreements to 31 January 1991.
   24.1.15. Dealing with the BCHL group: December 1990
   24.1.15.1. Approaches to BCHL for repayment of debts
   5319 By November 1990 BCHL was proposing a scheme of arrangement. Of particular concern to TBGL in November and December 1990 was the repayment of the debts due by the BCHL group to the Bell group. One was the GFH debt incurred in January 1988. The debt had been reduced by instalments but the July 1990 instalment had not been paid; the amount owing at November 1990 was $3,216,449.76. The other was the debt due by BCF to TBGL; the amount owing at 1 November 1990 was $2,572,100.23. In addition, JNTH owed TBGL $17,188,754.53 and interest.
   5320 In the board pack prepared for the meeting of 6 November 1990 there were copies of two letters of demand dated 1 November 1990 and signed by Simpson as director of TBGL and BGF respectively. Aspinall explained in his evidence that he initiated these demands against the BCHL group companies. Each demand was for payment within 10 days. At the board meeting of 6 November 1990 these letters of demand were discussed. It was resolved that Aspinall should pursue the demands and have the moneys repaid or obtain some adequate security for them. It was also resolved that consideration be given to the effect of the proposed scheme of arrangement on any repayments.
   5321 Aspinall wrote to each of the companies regarding the outstanding debts on 7 November 1990. He received replies from each in similar terms: they could not pay. They were all waiting on the application before this Court, which was heard on 10 December 1990, regarding the proposed scheme to allot redeemable preference and ordinary shares in the capital of BCHL. The rights to redeem would be spread over a period from December 1992 to December 1995. The allotment of shares would ‘enable the satisfaction of the claims of the Company’s creditors’. This of course was possible but clearly this method of repayment would not occur for some considerable time.
   24.1.15.2. Advice taken from Corrs
   5322 On 8 November 1990 Aspinall wrote to Corrs seeking advice on several matters; in particular, the position of the directors in respect to possible insolvent trading. On 14 November 1990 he received a letter of advice in which the author (Carmel McClure) poses the question:
   [W]hether, for the purposes of Section 556, it is proper to consider the financial position of the Group of which a company forms part, or is the proper course to examine the individual position of each corporate entity forming part of the Group. We are of the opinion that the correct approach is the latter.
   5323 In postulating an answer to that question the author noted the difficulties of group structures generally and of dealing with debt in that context:
   The focus of Section 556 is on the incurring of a debt. That involves a legal analysis as to liability for the debt. Where a member of the Group incurs a debt, liability for the debt is confined to that company. It is not a Group liability.
   Thus, in our view, it is improper to look at the financial position of the Group as a whole when considering liability of the Directors pursuant to Section 556 of the Code. In the short time available, we have been unable to locate any authority to support our view. We will continue to research this point.
   5324 I doubt that the author contemplated that it might be the Bell group in liquidation and this case that would perhaps provide the authority for which she then searched. Ultimately, at this time Aspinall felt that the individual entities were still in a position to pay debts as and when they fell due. But that advice depended on various factors not the least of which was the recovery of certain debts due to the Bell group.
   24.1.15.3. BCHL’s inability to pay
   5325 On 3 December 1990 Aspinall wrote to Lucas, the chairman of BCHL. He refers to certain pre‑payments made by BCHL to cover various ongoing accounts within the ‘group’. By this he has to mean the Bond and Bell group. The costs are advertising, travel and legal costs incurred by various Bond and Bell companies. The legal costs related particularly to the costs of appearances before the Sulan inquiry. Aspinall explains that under pressure from the banks he wishes to credit, or offset, these inter‑company accounts in favour of TBGL. He received a reply from Lucas within days. Lucas said in his response:
   I understand your position on this matter, however, I suggest that The Bell Group Limited (‘TBGL’) banks
   (a) have no right to insist that TBGL credit any remaining amount to the outstanding inter‑company account; and
   (b) misconceive entirely the relevant legal obligations and duties involved.
   5326 He went on in the letter to make it clear that Garven’s summary of what is owed is not ‘necessarily’ accepted by BCHL as being accurate. However, he says, detail can be dealt with later. He is ‘concerned here only to deal with the principle inherent in your letter’. He then sets out in the briefest terms the tangled inter‑company loan arrangements. These lead him to conclude that:
   I would suggest that, except by mutual agreement, the amounts owing to BCHL by TBGL cannot be used to offset amounts owed by BCF and GFH to BGF.
   5327 He then reminds Aspinall that BCHL has lodged its application to convene the meeting of creditors to consider the proposed scheme of arrangement. He says:
   Until all classes of creditors have had the opportunity of considering the Scheme, as finally settled, and of adopting by the requisite majority (or rejecting it as the case may be) it is mandatory for the board of BCH, and by its direction its wholly owned subsidiaries, not only to oppose any action brought by any particular creditor or group of creditors to enforce preferential or early payment of a claim, but to take reasonable action to prevent such occurring.
   Accordingly, it seems to me that if we were prepared to allow the suggested offset, the directors of BCH, and its relevant subsidiaries, would be in breach of their fiduciary duties, in that such an offset gives to TGBL [sic] a preferential position.
   Therefore it will be necessary for this matter to be pursued further, unless, in the meanwhile, you are able to persuade the [TGBL] banks to allow the previously existing arrangements to continue.
   5328 Aspinall in evidence said that he maintained the view he had expressed in his letter dated 3 December 1990 that an offset should occur. But it is clear that these debts were never repaid. By 31 January 1991 Aspinall reports in the board minutes that the relationship between the Bell group (Aspinall) and the Bond group (Lucas) is so bad that on that date Lucas threatened the Bell group with liquidation. In his evidence Aspinall said that Lucas was silent on the reasons why the Bond group should pursue the liquidation of the Bell group.
   24.1.16. Death by a thousand cuts: January 1991 to April 1991
   5329 On 16 January 1991 Aspinall addressed a meeting of the syndicate of Lloyds syndicate banks in London. While he did not recall the particular meeting, notes taken by Dowler (representing one of the bondholders) were referred to in Aspinall’s evidence, and Aspinall said he had no reason to doubt the accuracy of the record of the meeting contained in those notes. The notes detailed the information given to the meeting by Aspinall and included reference to the current trading results of the company, cash forecasts through to March, the asset disposal programme and, in particular, the proposed sale of BPG. The list of potential interested purchasers is also identified in the notes.
   5330 There is a copy attached to the notes of a report by LCAS to Westpac of the outcome of the bondholders’ meeting on 15 January 1991. It simply confirms the meeting postponed consideration of the request for an interest moratorium (which was put to the bondholders on 5 December 1991) yet again.
   5331 On 30 January 1991 Aspinall and Simpson met with ARH to discuss matters ‘pertaining to liquidation and receivership’. By 31 January 1991 all the banks had agreed to extend the interest moratorium until 11 February 1991.
   5332 On 1 February 1991 there was a meeting of the directors of TBGL. The minutes record a gloomy view of the Heytesbury expression of interest and similarly of the ACE (Stokes) interest. The directors resolved to ask those two companies to return all the documents provided to them in the course of the negotiations. They also resolved to continue to take advice in respect to their legal position from Corrs. The possibility of a restructuring of TBGL is again discussed, this time in the context of the BRL interest: I discuss this proposal in Sect 24.1.16.
   5333 Aspinall reported to the meeting of directors about his meeting with Lucas of BCHL on 31 January 1991; the directors resolved to take legal advice on this situation including preparing notices for service on Bond Corporation if necessary.
   5334 It is also reported to the meeting that Mitchell, no longer a director of TBGL, had also advanced a proposition to BRL regarding the shareholding of TBGL in BRL; this is rejected by the directors of TBGL as having no commercial merit. Aspinall was instructed by the board to again pursue Maxwell.
   5335 Between 1 February 1991 and 15 February 1991 LCAS developed the proposal that had been advanced by BRL for the restructuring of the Bell Group. The details of that proposal were set out in a letter from Hill the chairman of BRL to Aspinall on 14 February 1991. This letter formed the basis for a memorandum of understanding between the two companies. In essence the proposal was for:
   (a) TBGL to sell its 39 per cent holding in BRL at 20 cents per share to parties identified by BRL.
   (b) BRL to invest $45 million in cash in BPG and TBGL shares.
   (c) The provision of a new bank facility to BPG of $138 million.
   (d) The exchange of the convertible bondholders’ subordinated bonds into shares in TBGL to an aggregate amount of 48 per cent of the ordinary share capital of TBGL.
   (e) The conversion of the balance of the bank debt into $75 million preference shares in TBGL.
   5336 Aspinall’s evidence is that throughout February 1991, to his knowledge, LCAS met with the Australian banks, SGIC and the Lloyds syndicate banks to pursue approvals for the BRL proposal. The European bondholders were represented by an informal committee. That committee had indicated in principle support for the proposed restructure. However, SGIC was the sole owner of the two series of convertible bonds in TBGL and its board rejected the proposal. In a letter passed on by LCAS to Aspinall on 28 February 1991 the solicitors for SGIC, Robinson Cox, said that the Commission was determined to protect its position as a bondholder of TBGL in view of the continuing default in the payment of interest then overdue. On 28 February 1991 the banks and TBGL executed an extension taking the time for TBGL to pay the interest then overdue to 15 March 1991.
   5337 On 1 March 1991 Aspinall met with Neville Wran, Gary Weiss and Watkins of Turnbull & Partners representing SGIC. A memorandum dated 4 March 1991 (by McFadden of LCAS, who was present at the meeting) was attached to Aspinall’s witness statement. It records the view expressed by Aspinall that SGIC’s refusal to further defer consideration of the interest moratorium would probably lead to receivership of the company. Wran’s response to this was that the proposal put by BRL was so unsatisfactory that SGIC believed it would fare better under a receivership. Aspinall made it clear that the banks were fully secured and that in the circumstances it was unlikely that the bondholders would get anything at all.
   5338 The note evidences a certain amount of heat in the discussion. Wran told Aspinall that SGIC did not think the proposal was a genuine attempt to act in its interests. Aspinall was offended by this remark. He replied that the proposals regarding the equity injections were ‘genuine’. Weiss is recorded as saying that SGIC has $150 million of ‘real debt in the company and wanted to be treated that way’; he said that the deferral in interest due had been on the basis that there would be a genuine equity injection into the company, and that was clearly not the case. Aspinall disputed that position. He said that they ‘had been dealing with parties, who, upon ultimate investigation … didn’t have adequate resources to proceed.’ He asked if they (SGIC) had an alternate proposal: Wran said there was none. It is recorded in the note this way:
   Neville Wran said the SGIC is not prepared to be treated with disdain. It has $150 million of real money in the company and it doesn’t believe it has been dealt with by the company or its advisers in the way it should have been. He said they find that even the European bondholders won’t speak to them. He said there was very nasty relationship with the company’s advisers. David Aspinall said the company’s advisers don’t treat the SGIC or you nastily and besides this fact this was a matter for the company and the SGIC. Neville Wran said that he had been present at the meetings in which the advisers had been present and he believed they were nasty.
   5339 The notes of this meeting indicate the difficulties in the relationship between these parties and their advisers by this date. Those advisers were LCAS for TBGL and Turnbull & Partners for SGIC. Aspinall tried at that meeting to see if he could bypass the advisers and meet with SGIC. On 5 March 1991 SGIC gave notices to LDTC that one of the series of bonds was to be called up for payment by reason of the failure of TBGL to pay interest due on 10 December 1991. This triggered a cross‑default in the other series of bonds.
   5340 In Aspinall’s witness statement, immediately following the meeting referred to with the various parties from Turnbull & Partners, there is a transcript of another meeting at the offices of Turnbull & Partners in Sydney. The meeting was held on 6 March 1991. Aspinall was there with Simpson; Turnbull, Wran and Watkins from Turnbull & Partners were also present. On the telephone were various people representing SGIC. At the meeting Wran complained bitterly about a letter that Aspinall had written to the State Government following the meeting on 1 March 1991. Wran alleged that the letter was an attempt to politicise the refusal by SGIC to deal further with the BRL proposal. Wran emphasised that the reason SGIC will not entertain the latest proposal involving BRL is that it is a commercially unattractive proposal from SGIC’s point of view. Aspinall responded to this by saying, in effect, that they (the company) did not understand why this draft proposal was unacceptable; they wanted to talk about it, to seek some more information as to why it was unacceptable, and to see if there:
   [I]s some way of making it acceptable because it is in the interests, and certainly the directors of Bell believe it is in the best interests for a reconstruction to take place, however, we must recognise that all creditors must be taken into account. This is the secured, the unsecured, subordinated…
   5341 The record of further discussion in that meeting shows that the core of SGIC objection is that the BRL proposal was not viewed as an ‘arm’s length proposal’. It was viewed as an ‘in-house deal between Bell Resources, Bell Group and of course Bond Corporation’. Despite Aspinall’s protestations at this characterisation of the proposed transaction, little was achieved at the meeting. On 13 March 1991 SGIC agreed to hold further action until 20 March 1991 in respect to its right to enforce the payment of the overdue interest on its bonds.
   5342 On 13 March 1991 LCAS recommended that the banks move to appoint a receiver to the Bell group. LCAS’ recommendation was based on the premise that the receivership will enable the BRL proposal to proceed. Aspinall in his evidence said that between 15 March 1991 and 19 March 1991 he persisted in exploring the prospects of still implementing the BRL restructuring proposal. He had meetings with LCAS and Turnbull & Partners to this end.
   5343 On 19 March 1991 Turnbull & Partners produced an alternative restructuring proposal. It involved at its core the acquisition by Packer’s ACP of a 50.1 per cent interest in BPG. Aspinall’s evidence was that this proposal was rejected on the advice of LCAS. The view of the corporate adviser was that the proposal was of benefit to ACP only, not the creditors and shareholders of the Bell group.
   5344 On 26 March 1991 LCAS prepared a paper entitled ‘The Bell Group Ltd – Discussion paper for the Banks’. The paper provided a background history of the proposed TBGL restructure. The paper also stated that only one option remained if the proposed restructure of BRL did not proceed. This was the appointment of a receiver and manager of TBGL’s publishing assets.
   5345 It is unnecessary for me to discuss in detail Aspinall’s evidence on the difficulties that occurred between the end of March 1991 and into April 1991 in respect to the BRL proposal, the changes that occurred in that proposal and the approaches to the banks by BRL for further funding to complete the proposed restructuring. Suffice to say that neither the Australian nor Lloyds syndicate banks were prepared to contemplate further funding.
   5346 On 12 April 1991 LCAS advised the directors of TBGL that there was no reasonable prospect that a restructuring could be achieved. They recommended that the directors appoint a provisional liquidator to TBGL.
   5347 16 April 1991 Westpac as the Security Agent made demand of WAN, BGF and BGUK for repayment of the total indebtedness then outstanding. The demands were served on each of the indebted companies. On 17 April 1991 Corrs confirmed the advice given to the directors of TBGL by LCAS. By letter Corrs counselled the directors of TBGL that, in the absence of the banks withdrawing the letters of demand; agreeing to extend the time for payment of interest to a date sufficiently in advance to proceed with the restructuring; and agreeing to indemnify each of the TBGL directors for any liability for insolvent trading, the steps necessary to undertake an external administration of TBGL and its trading subsidiaries should be commenced.
   5348 On 18 April 1991 Aspinall initiated applications to this Court for provisional liquidators to be appointed to TBGL, BPG and BGF.
   24.1.17. The Mirror group (Maxwell): a postscript
   5349 Aspinall’s witness statement traced the history of the unsuccessful negotiations with Maxwell’s Mirror group in some detail. I referred to some of the relevant details in Sect 24.1.4.3 above. For the sake of completeness I note here that the evidence Aspinall gave was that the proposal developed was for Maxwell to lend TBGL funds to purchase TBGL convertible bonds. The debt was then to be swapped for equity in TBGL. Maxwell and BCHL would then each have 41 per cent of TBGL.
   5350 It appears that the attraction for Maxwell of this proposal was the acquisition of the interest at a discount given the value attributed to WAN in particular. That was the essence of the transaction, although it clearly involved more complex steps including the incorporation of at least two new entities, one of which would acquire all the issued capital of BPG of which the principal asset was The West Australian newspaper. In effect, it was intended by the proposal that there would be a joint venture for the purpose of expanding the interests of TBGL and the Mirror group in the Australian media industry.
   5351 The proposal required various consents including that of the shareholders, the banks and, critically, FIRB. The letter of intent made it clear that it did not constitute a legally binding agreement; however, Aspinall however said that he had every confidence that the deal would proceed and he expressed this confidence to the banks. He also said that it came as ‘an absolute shock’ to him that the then Treasurer, Paul Keating, ‘would take it upon himself’ to oppose the Maxwell’s involvement.
   5352 In the months of June, July and August 1990 there was a considerable amount of lobbying of politicians, business leaders and unions undertaken in respect to the Maxwell proposal. In August 1990 Maxwell wrote to Alan Bond. He said that ‘in view of the uncertainties which the Iraq crisis is creating in various areas relating to our proposal’ he considered it appropriate to postpone the FIRB application. In particular, he noted the instability in the Gulf area which could put at risk oil production, which in turn would affect the price of newsprint, energy costs and interest rates. These were factors to which he thought BPG was particularly sensitive.
   5353 Aspinall said in his evidence that when he saw this letter to Alan Bond, he went to London immediately to have further discussions with Maxwell. He said that he concluded at that time that the reasons advanced by Maxwell in the letter were simply an excuse, and that Maxwell was ‘backing out of the deal’ because of the political opposition to it in Australia, particularly from Keating.
   5354 On 1 November 1990 Aspinall reported his beliefs to the board of TBGL. Aspinall then tried another approach, the details of which were contained in a proposal dated 1 November 1990. In essence, the proposal was to retain the interest of the existing convertible bondholders of TBGL in a new investment vehicle, the structure of which was intended to ensure that there would be no conflict with FIRB requirements.
   5355 Aspinall pursued Maxwell further with this new proposal. In his witness statement he said that he thought that there was still a prospect of developing this new strategy, and that he felt that Maxwell had not terminated discussions with TBGL at this point. Aspinall also instructed Tilley of LCAS to pursue this new proposal in parallel with any of the other proposals that LCAS was developing for the restructure of the Bell group. But nothing further came of this proposal.
   24.1.18. The various plans for restructure
   5356 In his witness statement Aspinall said:
   I did not think that the Bell Group was doomed to liquidation. I thought that there was a realistic prospect of restructuring the Bell group.
   5357 The details of the various plans for restructure occupied a great deal of the cross‑examination of Aspinall. Counsel sought identification of a single plan. Aspinall gave evidence of what he described as ‘many plans’.
   5358 A consistent theme of Aspinall’s evidence is that from the time that he became a director of TBGL in 1988 he planned to run a strong and profitable publishing group. He was heavily involved in the structural and management changes that were being implemented, particularly in respect to the publishing business. When he was instructed by Beckwith ‘to get involved with the banks’ he said he was determined to convince the banks that the Bell group had a strong future independent of BCHL.
   5359 At the heart of the plaintiffs’ submissions on Aspinall’s evidence is the proposition that there is nothing in any of it that showed that there was a concrete plan for restructuring the Bell group in place in January 1990. They say that there was neither a developed, nor even a developing, restructuring strategy in the directors’ minds at that time. They say that the directors only knew that something needed to be done before the Bell group collapsed. They described Aspinall’s decision in 1989 to give security to the banks, which resulted in the Transactions, as ‘irrational’. Responding to Aspinall’s view that the giving of the security to the banks was the first step in restructuring the liabilities of the Bell group, the plaintiffs say:
   His failure to address practical considerations when committing the Bell Group assets to the Banks as security discloses his failure to take account of the interests of creditors in making the decision to grant security to the Banks while expecting the other creditors to bear the risk and cost of the essential restructuring of liabilities. He had no plan and did not know how or when he could complete a restructuring, save for the fact that creditors would likely have to compromise at a later time.
   5360 Plaintiffs’ counsel pursued this issue in his cross‑examination. It was put to Aspinall in this way:
   I just want to clarify this, confirm again the sequence – that a specific plan once it was drawn up would identify precise actions which were to be taken, would include figures, would include participants, people, would include a time line? It would set out, would it not, the steps that had to be taken to bring about the effective restructuring?—That is correct.
   5361 To the extent that the plaintiffs say that Aspinall at 26 January 1990 did not have a single, structured plan in place to effect a restructuring of the Bell group they are correct. However, it was clear that Aspinall was, with little warning, effectively dropped into the existing difficulties with the banks in July 1989. The evidence he gave made it clear to me that with his background in media and publishing he had a great deal of faith in the value of those particular assets and the long-term viability of various parts of them: The West Australian newspaper in particular. He consistently maintained that as an essential element of any restructure he had to reduce debt to a level where it could be sustained by the income of the core operating businesses. Aspinall displayed to me in his evidence considerable confidence in his own ability to deal with the particular difficulties facing the group at that time. He said:
   I spent a lot of time in pursuing the negotiations with the Banks; I exerted a great deal of effort in convincing the Banks that their distrust of the Bond Group was not a relevant matter because I was controlling the management and future of the Bell Group … My belief at that time was that the key to a restructuring of The Bell Group was to lock the banks into a medium-term financing and then to plan and implement a restructuring.
   5362 I accept his evidence that he thought that once the refinancing was in place he had 12 months to plan and implement a restructure. While there was no single plan, he gave evidence that:
   There were plans being developed before the refinancing was entered into, but the refinancing had to be entered into to enable any one of a number of plans that were being looked at to move forward with some certainty.
   5363 But this is where I have difficulty with his approach. The ‘various plans’ to which Aspinall made reference cannot be described as ‘a plan’ in the sense in which a corporate or financial restructure is commonly understood. For example, Aspinall’s faith in the future of the publishing assets and the various improvements that he pursued to increase the cash flows of those assets, was really a consistent strategy, rather than an identifiable plan. Similarly, the pursuit of prospective purchasers of an interest in the newspaper assets was an opportunistic tactic, not a single cohesive plan.
   5364 Aspinall may have had some ideas, such as raising equity by issuing shares in TBGL. He may have toyed with the idea of purchasing the Bell group’s convertible bonds on issue in the Eurobond markets. The possibility of raising capital through an equity investor in the Bell group might have occurred to him. Restructuring the company by repurchasing bondholder debt at a discount may have been another suggestion as at 26 January 1990. But they were no more than ideas. There is little or no evidence in the contemporaneous documents revealing real exploration of the mechanisms by which these things could be achieved. In my view, there was nothing that merits the description ‘a plan’.
   5365 Reference was made in Aspinall’s witness statement, in particular, to various ‘plans’ that Mitchell was developing in respect to a restructure of the entire Bond group and Bell group. Aspinall’s evidence was that there were many of these ‘plans’ and he discussed them from time to time with Mitchell. They included a proposed security preference share issue, a BRL restructure proposal, and a privatisation proposal for the Bond group of companies. Some of the proposals had names: ‘Project Irma’ and ‘Phoenix One’. There was even a Bond action committee formed with the intention of creating some sort of global plan for the restructure of the entire group. But, as Aspinall said in his evidence, he did not agree with the Bond ‘plans’ because he was intent on ‘de‑Bonding’ the Bell group. It was really not until the banks insisted in May 1990 on a restructuring plan that LCAS was engaged to prepare a formal restructure plan for the Bell group in isolation from the Bond group.
   5366 It is clear from the communications between Aspinall and the band of four that in May 1990 there was nothing remotely approaching a plan for the buying back of bonds at a discount. He felt that until he was able to put a detailed proposal to the bondholders any approach to them for an interest moratorium would be futile. It would hinder, rather than assist, the chances of success. And a detailed proposal to buy back the bonds at a discount could not be developed in isolation from the restructure plans for the whole group.
   5367 My view of Aspinall’s evidence in respect to forward planning is that at 26 January 1990 he considered that the first step in any restructure, or way forward, was to secure the medium-term financing facility. This would give him time to plan and implement a restructure, undoubtedly based on the ‘tools’ that he had available and the ideas that he had in his mind for utilising the tools. I consider that in totality his evidence demonstrated that he certainly had some ideas in mind before the refinancing was entered into. But he had to achieve the refinancing to buy the 12 months’ time that he considered he needed to plan and implement his ideas.
   5368 If 1989 was a bad year for the Bell group 1990 was to prove no better. There were continuing problems with cash flows. Various difficulties arose with such matters as the BRL shares, the inability to obtain the Treasurer’s approval for any deal with Maxwell, intervening issues with other prospective purchasers of the newspaper assets and the taint of the BCHL group. All of these were to have an impact on plans to restructure the finances of the Bell group. Man of them were evident as at 26January 1990. Ultimately, the endemic illiquidity of the Bell group worked against any restructure.
   5369 The confidence Aspinall demonstrated, both in his belief in the intrinsic value of the core assets of the publishing business, and the confidence in his own ability to find a solution to the difficulties the company faced, enabled him to carry others with him for quite some time. Ultimately, even this confidence was overrun by factors beyond his control. In any event, confidence and ideas do not amount to ‘a plan’.
   24.1.19. Aspinall’s evidence: conclusion
   5370 Almost at the end of his four days in the witness box Aspinall was asked by counsel to try to encapsulate his views on what would have been the consequences if the refinancing had not taken place in January 1990. He said:
   This refinancing was a very long and drawn out affair and to encapsulate it in one statement is difficult. However, I will attempt to answer the question by saying that if any one of the Australian banks had made a demand or called their facility during this period, because they were all on call, and we could not repay the sum demanded, then the consequences would surely follow. The European banks had a facility which went through till May 1991. However, there were a number of assets that I was dealing with and a number of funding sources to ensure that The Bell Group could continue to trade, so I would agree with your proposition that if one or more of the six Australian banks had made a demand, because they were on call, then obviously what would follow would be a receiver or liquidator appointed, but there were a lot of assets that I was dealing with at the time leading up till and post the refinancing to ensure that The Bell Group could continue to trade.
   5371 I have no reason to doubt Aspinall’s integrity. I think he held most of the belief’s that he professed to have held. The question, though, is whether the beliefs were based on reasonable grounds so as to be genuinely held in the sense required by this aspect of company law: see Sect 20.7.3. It is premature to enunciate a final conclusion about his conduct because there is a lot of other evidence to consider. What can be said is that, as at 26 January 1990, Aspinall:
   (a) knew about the precarious financial position in which the Bell group found itself;
   (b) appreciated that the companies would need access to asset sales proceeds if the companies were to survive;
   (c) had not reached an agreement or understanding with the banks that such access would be granted; and
   (d) had nothing that could reasonably be described as ‘a plan’ to effect the financial restructure that was required.
   24.2. Peter Mitchell
   24.2.1. Mitchell: an opening comment
   5372 Mitchell was the second Australian director to give evidence. He was in the witness box three and a half days. His witness statement was 51 pages long (including an annexure list) and there were 281 documents attached to his statement or that he referred in his evidence. In giving his evidence, Mitchell had the benefit of parts of what were described as his wallet diary and his desk diaries for the period 1987 to 1990. I do not need to examine Mitchell’s evidence in as much detail as I have done for Aspinall. The reason is that at the beginning of his witness statement Mitchell said:
   Though I was a director of TBGL and its subsidiaries I held no executive position nor was I employed by TBGL. Accordingly, I had no involvement in the day to day operation of the Bell Group and its businesses. With respect to such matters I relied on the Bell Group executives and management to keep me abreast of relevant information. In this regard I relied on David Aspinall to inform me if there were any problems or difficulties facing the Bell Group.
   5373 As a consequence, Mitchell’s oral evidence was of marginal utility. Certainly he was a director of TBGL and of its subsidiaries. But simultaneously he was a director of several BCHL subsidiaries and it was clear to me that his primary interests and responsibilities revolved around the BCHL group. A considerable part of his cross‑examination was spent exploring the BCHL connection, in particular various proposals for restructuring the BCHL group.
   5374 Other than in respect to the evidence he gave in regard to the subordination issue and the BRL transactions, Mitchell’s evidence was very general and his memory of specific details and actions was poor. The impression I gained from it was that Mitchell’s saw his role in relation to TBGL as being limited. When he was asked about critical financial matters affecting the Bell group I was surprised that in so many of his responses he professed ignorance. This has had consequences for the view I have taken of Mitchell’s performance of his duties as a director of TBGL and its subsidiary companies. Even if Mitchell thought he was doing little more than making up the numbers on the board, he had duties and responsibilities that he was required to perform. As the following discussion will reveal I do not believe he fulfilled his functions properly.
   24.2.2. Personal history
   5375 Mitchell is a qualified accountant. From 1966 to 1990 he was an employee of BCHL; first he was group accountant, then from 1968 to 1971 he was Alan Bond’s personal assistant. From 1971 he headed the department that for a time was known as ‘New Business’. His role was to analyse new business opportunities that presented themselves to BCHL and its subsidiaries in the Bond group. This included the structuring of takeover bids, the valuation of businesses and the preparation and assessment of feasibility studies. He said that:
   Through my work I obtained an extensive knowledge of many varieties of debt and equity instruments.
   5376 During the 1980s the department he headed was retitled ‘Corporate Planning and Development’ (CPDD). This was the role that he had through 1988, 1989 and 1990. In his role as head of CPDD he was involved in the BCHL takeover of TBGL in 1988.
   5377 Mitchell said that he was one of the four senior executives with the BCHL group during 1989 and 1990. The others were Alan Bond, Oates and Beckwith. Alan Bond was executive chairman and Mitchell’s evidence is that he, and the three other executives, had what he described as ‘precise line functions’. By this I understood him to mean clearly delineated areas of responsibility. He said he reported directly to Beckwith. Only rarely did he report to Alan Bond and that would only be when Beckwith directed him to do so. Mitchell was a director of BCHL until the takeover of TBGL. On the takeover Mitchell and Oates resigned from the board of BCHL. The reason for his resignation was the cross‑media ownership rules, although when he gave evidence Mitchell said he could not recall the precise ownership conflicts that caused the separation of the directorships. After the TBGL takeover Mitchell remained a director of JNTH and its subsidiaries. He was also a director of BBHL, GFH, BRL and the majority of the BRL subsidiaries.
   5378 Mitchell became a director of TBGL on 2 August 1988 and remained as such until 18 January 1991. He was a director of its subsidiaries during 1989 and 1990, but ceased to be a director of most of them at various times in 1991. As I have already said, although he was a director of TBGL Mitchell maintained that he had no involvement in the day‑to‑day operations of the Bell group and its business. I intend only to consider Mitchell’s evidence in respect to certain specific factual matters.
   24.2.3. The subordinated bond issues
   5379 Mitchell, said that as head of CPDD for BCHL he was very involved in the takeover of TBGL in 1988. Prior to that takeover he was charged with the responsibility of valuing the TBGL shares. He said there was nothing that suggested to him a mechanism or structure in the Bell group that would cause the BGNV bondholders, who were stated to be subordinated, to rank pari passu with the other unsubordinated creditors of companies in the Bell group. He said that in the course of carrying out his functions before the takeover he visited RHaC’s home for meetings. He gave evidence that RHaC said to him:
   As you know there are subordinated bonds issued by the group. They represent a hidden asset. They are trading at heavy discounts and can be purchased cheaply.
   Mitchell said:
   At the time of this conversation, through the due diligence, I was aware that the Bell Group had issued subordinated bonds both locally and in Europe through a Netherlands Antilles subsidiary. I understood that the conversation concerned the European bonds.
   As an analyst for BCHL, I had had occasion to look at all types of debt instruments, including bonds, in analysing publicly traded Australian companies. Some of those debt instruments were issued out of tax havens, such as the Netherlands Antilles. I was aware of the practice of an Australian company issuing bonds in Europe through a Netherlands Antilles company. At the time I believed the purpose of doing so was to obtain a tax advantage.
   5380 As a result of the due diligence carried out during the Bond group takeover of the Bell group and because he was a director of TBGL, Mitchell said he understood in 1988 and thereafter the following matters.
   • The Bell group had issued bonds in 1985 and 1987 through TBGL and BGF in Australia and through BGNV in Europe.
   • These bonds were described as ‘subordinated bonds’. He understood in 1988 and thereafter that subordination was a ranking issue; that is, subordinated creditors ranked behind other creditors who were not subordinated. If a company was not in liquidation and the interest on a subordinated debt became due or the subordinated debt matured, then the interest or the principal, as the case may be, had to be paid.
   • The BGNV bonds were convertible into shares in TBGL. His view was that the company, in giving this ‘reward’ for subordination, had the benefit of such subordination. That is, the bondholders took second ranking in return for the right to take equity, unlike other creditors.
   • All bonds were guaranteed on a subordinated basis by TBGL.
   • The money raised by BGNV was on‑lent to the Bell group in Australia.
   • The bankers to the Bell group had agreed to treat the debt owed to the bondholders as equity for the purpose of certain negative pledge ratio covenants with which the group had to comply. He recalled being told this by RHaC.
   5381 Mitchell’s evidence is that, while he could not recall precisely what documents he saw at this time or what he was told, at all times during his directorship of the Bell group he believed, and understood, that the debts owed on bonds issued by BGF, TBGL and BGNV were subordinated to the banks lending to the Bell group and to all other unsecured debts of TBGL and BGF. As to the issue of the ‘on‑lending’ by BGNV, Mitchell said that he did not turn his mind specifically to this aspect of the arrangements. It would not have occurred to him that BGNV bondholders could, through a claim by BGNV in a liquidation of TBGL or BGF, rank pari passu with the unsecured creditors of TBGL or BGF. He said that he based this belief and understanding on the matters I have set out above and the following further matters.
9. The conversations with RHaC prior to the BCHL takeover bid. In these conversations RHaC described the existence of subordinated bonds issued by the group that were trading at a discount. Mitchell understood that the fact that the bonds were subordinated debt of the whole of the Bell group was a factor in the discount at which the bonds were trading. He also said that he was aware that RHaC himself held bonds. He assumed that RHaC would have structured the bond issues correctly and not permitted the potential for the BGNV bonds to rank ahead of the domestic bonds issued to interests associated with him.
10. His experience: in that he had never heard of, or been exposed to, convertible bonds which were not subordinated. He understood that the convertible nature of the bonds renders those bonds quasi‑equity. In any ordering of stakeholders in the group their ranking is as follows: secured creditors, unsecured creditors, quasi‑equity holders, and equity holders. The price of having the right of conversion into equity ‘is the placement of such bonds behind other debt which has no such right’.
11. It made no sense to him for the group’s bankers to treat the bonds as equity for the purposes of the negative pledge ratio unless they were subordinated to debts of the Bell group. That is, ‘if the bondholders, through whatever mechanism, could effectively rank pari passu with the banks it would have, in my mind, been commercial nonsense for those banks to have treated the bonds as equity. The treatment of bonds as equity reflected, in my understanding, an acknowledgment (by the Bell group) that the bonds ranked after the bank debt and all other secured unsubordinated debt’.
12. He had seen the 1988 accounts of TBGL. He said that he recalled that those accounts reflected in their treatment of the bonds the subordinated nature on a consolidated basis. In the notes to the accounts they are recorded as a non‑current liability of the Bell group and are described, on a consolidated basis, as ‘Subordinated convertible bonds’. This was the same in the 1989 accounts.
13. On no occasion, during his directorship of TBGL or in his employment with BCHL, had it been suggested to him that the bonds were anything other than fully subordinated to all the other unsecured creditors of the Bell group. In addition, all the restructuring proposals in which he said he was involved during 1989 and 1990 had proceeded on the basis that the bonds were fully subordinated. On no occasion was it ever suggested to him that such treatment was in any way incorrect.
    5382 He went on to say that any assertion in this litigation that the on‑loans from BGNV to the companies in the Bell group were not subordinated is ‘directly contrary’ to:
    (a) how he understood the position to be during his directorship of the Bell group companies;
    (b) the basis on which he proceeded in his decision‑making as a director of TBGL;
    (c) the basis on which he proceeded in his role as head of CPDD at BCHL when he planned the possible restructuring; for example, ‘Project Benjamin’, or the proposal known as ‘Bond Corporation Holdings Limited Financing Proposal’ dated 12 January 1990, or ‘Bond Corporation Holdings Limited Phoenix 1’ (I will say more about these plans or proposals later); and
    (d) the way the bonds were represented to financiers and potential investors in the Bell group, to the effect that the bonds issued by the group were subordinated to all other unsecured debt of the group.
    5383 In cross‑examination Mitchell said again that he proceeded throughout the whole of his directorship with TBGL on the basis that the bondholders were subordinated to all other unsubordinated creditors of the Bell group. So, when the issue of giving security to the banks arose he did not consider that this elevated the banks above the bondholders. He said he always believed and acted upon the basis that the banks, in any event, ranked ahead of the bondholders. There was a significant exchange with counsel in cross‑examination about the evidence he gave that he ‘did not turn his mind specifically to this point’. It was as follows:
    Given that you didn’t turn your mind to this issue in 1990 – and you agree with that, don’t you?—I agree it was unnecessary to turn my mind to it.
    By saying it’s unnecessary to turn your mind to it, you’re telling me that you didn’t turn your mind to it. Do you agree with that?—Correct.
    Thank you. Now, in paragraph 20 you say what you would have done had you found out there was any doubt as to the subordinated nature of the BGNV bonds as a result of on loans. Do you see that?—Yes.
    You set out two steps, A and B. The first is, ‘Determine the position from the Holmes à Court executives’ point of view’?—Yes.
    I presume that you never had occasion, or you don’t recall any occasion, on which you did so?—No.
    The second step is to take advice – either you or of course directors of other relevant companies to take advice on the issue?—Yes.
    You don’t recall any steps you took in that regard?—No.
    Now, for the directors to take advice on this issue, they would have to instruct their lawyers, would they not?—On the issue of the subordination?
    Yes?—Yes, they would.
    And they would have to instruct their lawyers on the structure of the bond issues as they saw it?—They would have to provide their lawyers with the documents, yes.
    Yes, and they would have to provide their lawyers with the financial position of each company to see how it affects them, how this issue affects them?—Why?
    Are you saying that to resolve any issue about ranking, the directors would not look at the financial position of each company?—The bonds were subordinated not at some later point in time but when they were issued. If there suddenly became a question about when they were subordinated, it would have been whatever the financial position was at the time of subordination.
    5384 In Sect 12 and Sect 13 I have found that the bonds and the on‑loans were subordinated from inception. I have based this finding on the contemporaneous documentation, supported by the evidence of persons who were officers of TBGL at the time. There is no evidence that any information contrary to that finding was passed to Mitchell or anyone else associated with TBGL after mid‑1988. Against that background, I have no reason not to accept Mitchell’s evidence about his state of mind concerning the bond issues and the on‑loans. It was his belief, based on his dealings and experience, that the bonds were subordinated at the point of issue. Subsequent events could not elevate their ranking. He went on to say later that in respect to the taking of securities in the Transactions in January 1990:
    Given my understanding and belief in relation to the subordinated status of the convertible bonds it was, in my view, unquestionably in the interests of the Bell Group to enter into the refinancing. It permitted its continued existence. Certainly I was of the view that if the Bell Group was liquidated in January 1990, the bondholders due to their subordinated status would achieve either a nil or an almost nil return on their investment. On the other hand, I was of the view that an immediate liquidation would result in the banks having a 100%, or close to 100% return.
    He also said:
    Whilst I cannot recall now all the documents which I saw during my directorship of TBGL, I do recall that during 1989 and 1990 the Bell Group represented to financiers and potential investors in the Bell Group, that it had bonds issued by the group which were subordinated to all other unsecured debt of the group. That was, to my knowledge and understanding, an accurate representation of the position.
    5385 Mitchell was taken specifically in cross‑examination to the issue raised in Aspinall’s evidence regarding the BGNV on‑loan issue. In particular he was shown the letter dated 18 December 1989 and signed by Aspinall to Altringham of SCBAL. I referred to this issue in Aspinall’s evidence in Sect 24.1.3.6. Mitchell said that he was not told ‘at any stage’ about the BGNV on‑loan issue. He said that Aspinall did not raise this issue with him in December 1989 or January 1990. When taken to cl 17.6(a) of the RLFA No 2, Mitchell could not explain why the clause was in that document; he did not recall any discussions about the clause in January 1990 or at any other time. He maintained throughout his evidence that on‑loans were subordinated. There is no evidence that contradicts Mitchell’s assertion in this regard.
    24.2.4. The financial position of the Bell group
    5386 Mitchell’s evidence supports Aspinall’s description of the way the BCHL group generally operated its financial arrangements. He said:
    During 1989 Bond Group operated by means of a centralised treasury which dealt with the cash flow requirements of each of the companies in the group. I had no involvement in the day to day ‘finance’ matters of the group. My recollection is that, during 1989 I did not receive cash flows prepared by the Treasury of the Bond Group though I did have access to cash flows as required for planning purposes. My recollection is that during 1989, Treasury prepared regular cash flows for the Bond Group including the Bell Group. From early 1990 cash flows were prepared for the Bell Group by the management of TBGL at the direction of David Aspinall rather than by Treasury. I did receive some of those cash flows. I refer to those below. My recollection is that in early 1990, David Aspinall caused the TBGL operations to be removed physically from the centralised Bond Group operations.
    5387 It was not, said Mitchell, part of his responsibility to monitor the cash flows of the Bell group. In 1989 and 1990 he relied on others to do it. He spent some time in his evidence explaining that part of his role as head of CPDD for BCHL required him to consider the ‘most appropriate structure of the Bond group’. He referred to the October 1988 conference in Hawaii. He said he prepared a plan, on Beckwith’s instructions, which he presented at that conference. He said that he recalled that the fundamental features of the Hawaii plan were that the BCHL group would be restructured so that each arm of the group had a core and ‘easily understood business’. The essence of the plan was ‘to create single purpose entities’: BRL would control the brewery assets and pursue a brewery business and TBGL would control print media (in particular, The West Australian).
    5388 While the Hawaii plan did not ultimately proceed, throughout 1989 asset sales did occur in the BCHL group, particularly in the Bell group. Mitchell said that in the Bell group the rationalisation was aimed at making the focus of the group print media and communications. He said that as a result of the asset sales process he was aware, in 1988 and 1989, that the debt of the BCHL group and the Bell group was ‘dramatically’ reduced. He noted that the 1989 annual accounts for the Bell group showed that its total liabilities were reduced from $2,581.2 million to $1,145.8 million.
    5389 Some considerable time was spent in cross‑examination taking Mitchell through certain aspects of the Bell group’s finances. Various matters were put to him, for example:
    Were you aware that Mr Oates’s finance and treasury department was seeking to raise $400 million on the security of the publishing assets from banking institutions in January 1989?—No.
    Were you aware of any of the responses to those attempts?—No. I didn’t know about the attempts and didn’t know of any responses about the attempts.
    Wouldn’t it be an important matter for you to know, as a director of Bell Publishing or West Australian Newspapers, as to whether the asset was being offered as security to financiers?—If in fact an agreement was struck that required the board approval, I would know about it then.
    Did you become aware that by May 1989 Westpac had refused to offer to refinance some of The Bell Group’s banking loans on the strength of the publishing assets?—Again I don’t believe I knew and I don’t believe in the normal course of business I would have done.
    And a little later:
    Were you aware that The Bell Group was having difficulty refinancing its debts on the strength of the publishing assets?—No, I did not.
    5390 However, in his written evidence, Mitchell said that in 1989 he believed that TBGL’s most valuable assets were The West Australian newspaper and its related publishing assets and its 39 per cent shareholding in BRL. He said that during the course of 1989 he knew of proposals, or events, that affected both of these assets. I rely on the cross‑examination, which suggest that Mitchell paid minimal attention to the affairs of the Bell group. A proposal to raise $400 million could hardly be called a minor matter of day‑to‑day administration.
    24.2.5. WAN
    5391 Mitchell’s evidence was that during 1989 he was aware of a number of expressions of interest received by TBGL in relation to the possible sale of the newspaper. He said that generally he was informed of any proposals to sell or deal with major assets of the Bond group and the Bell group. His recollection was that much of his knowledge about such dealings would come from Aspinall, sometimes it came from John Corr. Corr was one of Mitchell’s subordinates at the time and he worked for the Bell group before the BCHL takeover. Mitchell said that he talked to Aspinall and Corr quite often. As a result of these conversations he knew that Maxwell had expressed an interest in acquiring an interest in TBGL or the newspaper asset.
    5392 It was clear from cross‑examination that Mitchell was not involved in any of these negotiations. He referred to some internal correspondence between Corr and Beckwith (copied to Mitchell) that referred to a possible put option by Maxwell and another memorandum concerning the possible sale to Maxwell of a 50 per cent interest in the newspaper for $250 million. The latter proposal included repayment of all the Bell group’s bank debt. He said that he was also aware of the approach by Stokes, and aware of TBGL’s response. Similarly, he knew that O’Reilly had expressed an interest in purchasing The West Australian. He said he thought he obtained this information from Aspinall. And he said it was ‘highly likely’ that Aspinall told him that O’Reilly was talking about a purchase price between $480 million to $576 million. He said that these matters were ‘relevant’ to his department:
    I believed the West Australian was a unique asset which would be well sought after by investors and an asset which would command a significant purchase price.
    5393 He supported his view with the following reasons:
    • The West Australian held a monopoly position in Western Australia with significant barriers to entry by a competitor.
    • The West Australian had ‘beat off’ an attempt by a competitor to start a rival paper (The Western Mail).
    • The West Australian was well run and profitable. Significant investment had occurred to move the operations of the paper to Herdsman. This was a state of the art facility that would lead to a reduction in costs and improved profitability.
    • The improved business would attract a higher earnings multiple than other newspapers in the country in any calculation of value.
    • Its value would continue to grow.
    5394 He also said that he saw the Whitlam Turnbull valuation in March 1989; his recollection was that he saw that valuation soon after it was prepared. He considered that it had been provided by an independent merchant bank and when he reviewed the valuation methodology employed at the time, there was nothing that caused him any concern. He said that Whitlam Turnbull’s valuation of the mastheads were included in the TBGL 1989 accounts at that amount. He believed that this was appropriate.
    I held the views expressed above in relation to the value of the newspaper assets at the time of the entry by the Bell Group into the refinancing transaction with its bankers in January 1990.
    5395 This was Mitchell’s assertion of his views. But nothing in his responses in cross‑examination caused me to believe that Mitchell paid close (or perhaps any) attention to the terms of the valuation of this asset at the critical date. Nor did he indicate that he paid close attention to any of the approaches by prospective purchasers. He was not involved in any negotiations. He gave no evidence that he was familiar with the details of the approaches. There were no documents put to Mitchell that identified any specific knowledge he may have had about developments in the prospective sale of WAN. When he was taken through important aspects of the Whitlam Turnbull valuation he did not show that he was familiar with the terms of that valuation or how it may have been affected by economic changes at the 26 January 1990. Significantly, this was almost one year after it been prepared.
    5396 Nothing in Mitchell’s answers in cross‑examination could support an assertion that he had been at that time properly attentive to his duties as a director. If he had been, even allowing for the passage of time, his recollection of these events should have been triggered. I concluded that Mitchell had paid little attention to these issues of valuation and possible dealings with the core business of the company of which he was a director. A reader may feel that the conclusions that Mitchell did not ‘pay close attention’ to matters or was not ‘properly attentive to his duties as a director’ smack of a lack of care, skill and diligence. I am aware that there is no pleaded allegation that Mitchell (or the other directors) breached their duties in that respect. In my view, these failures fit within the pleaded duties. I will amplify the reasoning later in this section.
    24.2.6. Shareholding in BRL
    24.2.6.1. Mitchell’s involvement with BRL
    5397 Mitchell was a director of both BRL and BBHL. He was appointed to the board of BRL in August 1988, immediately after the BCHL takeover of the Bell group had been completed. When the settlement was reached with Adsteam in December 1989 concerning the management of BRL, Mitchell remained on the board as one of the two representatives of BCHL (Alan Bond was the other). I am not sure when he left the board but he was still in office at the end of October 1990, when the BRL annual report was released.
    5398 Mitchell said that in 1989 he was given the responsibility by Alan Bond to organise the sale of BBHL’s brewing interests to BRL. In his statement he said:
    I had no involvement in determining the price at which the brewing assets would be sold. I understood that the ultimate price which would be paid would need to be accepted by an independent expert pursuant to the Stock Exchange Listing Rules. My responsibility was the mechanics of the transaction. I was given this role by Alan Bond in my capacity as head of Corporate Planning and Development. I cannot recall the precise time at which I was given this responsibility. I do however recall that at the time BRL had previously lent BCHL approximately $1.2b. That loan was to be treated, in the transaction, as a deposit for the brewery assets.
    5399 Mitchell said that Alan Bond struck the figure of $3.5 billion. He did not know how he arrived at that figure but he did say that he was aware that the purpose of the first brewery deal was to have the loan moneys repaid.
    24.2.6.2. The first brewery deal
    5400 Mitchell detailed his understanding of the initial agreement involving BRL and BCHL in this way:
    The initial agreement entered into by BRL in relation to the purchase of the brewery interests concerned the sale by BCHL to BRL of its shareholding in BBH, and effectively its world wide brewery interests. BRL was to purchase the shareholding through its subsidiary, Manchar Holdings Pty Limited. I recall that the purchase price was $3.5b (of which $1.2b was a deposit). At the time I regarded that purchase price as being within the ‘ball park’ of the value of the assets. As indicated above, however, I knew that by reason of rule 3J (3) of the Listing Rules, BRL shareholder approval would be needed after the preparation of an independent report on the ‘fairness’ of the purchase price. Accordingly, whilst I considered the purchase price to be within the right ‘ball park’ I knew it would be subjected to independent scrutiny before the deal was completed.
    5401 Mitchell’s evidence is that the initial agreement was entered into on 29 May 1989: he referred to this as the first brewery deal. He said at that time he was aware of the price at which the BRL shares were trading; however, he did not regard the trading price as particularly relevant to the value of the TBGL shareholding in BRL. He said that his view in 1989 was that the inherent value of TBGL’s shareholding should be assessed by reference to the net tangible asset backing of the BRL shares. He also said that he took the view that because an acquisition of TBGL’s shareholding by a purchaser included effectively the opportunity to control BRL, any purchaser would have to pay a price that was equal to or greater than the net tangible asset backing:
    That is, a controlling shareholder such as (TBGL) would be better off voting to voluntarily liquidate a company and obtain the return on its equity rather than selling the shareholding to a purchaser at a price less than the return it would receive on such a liquidation.
    5402 Mitchell said that in 1989 he believed that, prior to the first brewery deal, there existed a perception in the stock market that there was uncertainty in the asset backing of BRL, which arose from the uncertainty about whether the $1.2 billion loan would ever be repaid. But he thought that once the first brewery deal was in place, the uncertainty about BRL’s asset backing would be removed because of the acquisition of what he described as ‘excellent brewery assets’. He went on to say that he was aware in 1989 that security was to be provided to BRL in relation to the deposit. However, he was not involved in the selection of the assets that were pledged as security. He said he had no reason to believe that the assets selected as security would be insufficient for that purpose. At the same time, he could not recall who was charged with the responsibility of organising the security. He also said that he did not have a detailed knowledge of the value of the security offered. He noted that the BRL auditors did not express any qualification or uncertainty in relation to the adequacy of the security in the 1989 accounts.
    5403 Mitchell said that he recollected that at the time of the first brewery deal the debt in the BCHL brewing companies was approximately $2.3 billion. He thought this information had come to him from someone in Treasury. Having been involved in the takeovers of each of the breweries by the Bond group he said he had a good knowledge of the brewery assets. In addition, after the first brewery deal documents were executed he saw the Whitlam Turnbull report. He said that at the time he saw it, he held the view that the assets had values consistent ‘at least’ with the upper range of the Whitlam Turnbull valuations. On that basis, BCHL would have been required to return $351 million to BRL in addition to the first brewery deal in order to fully repay the $1.2 billion deposit. He stated:
    At all times I believed that BCHL would ensure that BRL was fully repaid (through, amongst other things, the brewery transaction) and I also believed that adequate security was in place to protect BRL in this regard.
    5404 It is notable that in evidence Mitchell conceded that the Whitlam Turnbull report was only a draft: it was never presented to the shareholders, and the shareholders of both BCHL and BRL would have had to approve the transaction.
    24.2.6.3. The Lion Nathan joint venture
    5405 In his witness statement Mitchell said that he recalled that an agreement was entered into in September 1989 between BCHL, BRL and Lion Nathan Limited. He said that the agreement concerned primarily the sale of the Australian brewery assets owned by BBHL. He referred to an announcement made to the ASX on 19 September 1989. He could not recall the precise details of the proposed transaction but it was ‘highly likely’ that the structure of this transaction was something that would have been devised by his CPDD. Part of this proposed transaction involved the privatisation of BRL, so that BCHL and TBGL would own 100 per cent of BRL. Lion Nathan was to provide the finance for the privatisation which required that all the minority interests would be bought out. A subsidiary of BRL was to purchase the Australian brewing assets of BBHL with an option to purchase the US brewery Heileman Brewing Inc. BRL, through a subsidiary, was to purchase the outstanding US dollar and Swiss franc denominated convertible bonds issued by Bell Resources Financial Services NV and the subordinated debentures issued by BBHL. It was proposed that Lion Nathan would also finance that purchase. Then Lion Nathan would purchase a 50 per cent interest in the company owning the breweries.
    5406 This transaction proposed that $850 million of the $1.2 billion deposit would be applied to the purchase price for the Australian brewery assets and $350 million would be applied as a deposit for the option to purchase Heileman. Mitchell said that he believed that this transaction would be of great benefit to BRL. It would have recovered $850 million of its deposit and achieved significant debt defeasance. This in turn would produce a significant deposit. He went on to say that on his understanding, the $350 million that was intended to be applied as a deposit for the option to purchase Heileman was covered by adequate security. However, in cross‑examination Mitchell was not able to recall anything about the security. Nor he did recall any doubts at the time. He maintained that he had ‘assumed’ that the proposed security was adequate. In any event the Lion Nathan joint venture did not proceed.
    24.2.6.4. The third brewery deal
    5407 Mitchell said that after the termination of the Lion Nathan joint venture, the first brewery deal was enlivened, with some variations. It was referred to as the third brewery deal. However, his evidence was that he had no independent recollection of the details of this transaction and he referred to the announcement to the ASX dated 28 December 1989, a letter from BCPL to the ASX dated 26 December 1989 and the minutes of a meeting of directors of BRL dated 28 December 1989 to help him recall the details. He believed that CPDD worked out the mechanics of the transaction with BDW preparing the legal documents.
    5408 In general terms, the proposed transaction involved BRL purchasing (through a subsidiary) the Australian brewery assets of BCHL by purchasing the issued capital of Castlemaine Perkins Limited for $2 million. The debt that was to be transferred to BRL was estimated at $1.42 billion after certain asset sales agreed to by BCHL. This left a balance payable of $580 million. This was to be extinguished by a portion of the $1.2 billion deposit previously paid by BRL. BCHL was still required to repay $620 million of the deposit to BRL. This in turn would be repaid by payment of $400 million from the anticipated profits from the purchase of BCHL debentures at discount and the transfer of two assets being a receivable from an existing contract for the sale by BCHL of the Hilton Hotel and a 50 per cent interest in Bond University. These had an estimated value of $220 million. Mitchell said that his view, at the time, was that the second brewery deal would return full value to BRL in relation to the $1.2 billion deposit if each of its components were carried out. He said:
    Whilst the Second Brewery Deal would have resulted in BRL assuming a significant amount of debt, I was aware at the time that Lion Nathan was still interested in a joint venture arrangement and believed that such an arrangement would relieve BRL from the assumed debt burden.
    5409 In cross‑examination Mitchell was referred to the minutes of a meeting of BRL directors on 10 December 1989 at which he was present. Parts of the minutes read as follows:
    Mr Mitchell reported to the meeting on the status of negotiations with Lion Nathan Limited concerning the joint venture brewing acquisition proposal. The directors considered the general nature of the report and noted that concern had been expressed by the bankers for Bond Brewing Holdings as to Lion Nathan’s financial capacity to complete the proposed acquisition. The directors were themselves not yet satisfied that Lion Nathan had sufficient financial capacity for the completion of the transaction. Lion Nathan intended to put a further proposal to the Company during the coming week regarding the terms of the proposed acquisition and it was noted that Bond Corporation had determined to keep negotiations open with them until next Thursday morning, 14 December 1989, by which time their further proposal would have to be submitted.
    5410 It was then put to Mitchell by counsel that if he had such a view at that time then he must have been concerned on 28 December about Lion Nathan’s financial capacity to complete any such transaction. He responded:
    That’s a conclusion that could be drawn from that, but I was obviously still working on it so I didn’t believe it was a matter that was totally terminus.
    Did you have concern about the financial capacity to complete the transaction? That’s all I’m asking?—I’m not sure that I did at that time.
    5411 Mitchell was referred to a report prepared by Grant Samuel & Associates dated 25 January 1990. It was a detailed analysis of various proposals for the acquisition by BRL of the BCHL brewing businesses. In that report the valuation given for the Australian brewing business of BBHL (net of debt) was only $214 million. The report also said that at 31 December 1989 the BBHL debt totalled $1.597 billion. BRL would have to refinance that debt. The report concluded that the net purchase price, the report concluded, ‘based on these debt levels and the upper end of our valuation range, would be $49 million’. The report went on to state that:
    A crude analysis of the value of the value of the securities held for the $1.2 billion deposit indicates that at best they might realise a value in the range of $400 million to $600 million. In the event that Bond is otherwise unable to repay the deposit, based on these figures it is unlikely that the deposit will be recovered in full unless Bell Resources acquires the Australian Brewing Businesses.
    5412 Mitchell said he could not recall seeing this report prior to February 1990. He could not remember whether he read the report. He did not recall that the report changed his view in any way about whether the brewery transaction should proceed. He maintained: ‘I felt that it was in the best interests of BRL and in turn TBGL ‘.
    5413 On 26 January 1990 BRL advised the ASX by letter that BRL and BCHL were reverting to the first brewery deal at a price of $2 billion for the Australian assets. Mitchell said he might have been aware of this at 26 January; however, he said that his views in relation to the ‘desirability and effect of a brewery deal would not have changed by reason of this development’. He said that he could not recall being involved to any great extent in the brewery transaction after January 1990. He said he was dealing with ‘other matters’ after this time, although he did say he recalled being involved in some negotiations with Lion Nathan in regard to its continuing interest in a joint venture relationship.
    24.2.6.5. Other interest in the brewing assets of BCHL
    5414 Mitchell gave some evidence that in 1989 there had been other interest in the Bond brewing assets by Magnum Corp, Allied Breweries Limited, SA Brewing Holding Limited, and John Labatt Limited. But he said that the discussions with these interested parties were primarily undertaken to consider any and all offers and to prepare a possible fall-back position if the shareholders of BCHL or BRL rejected the proposed brewery transaction between those companies. These expressions of interest gave him confidence that BCHL would be able to sell its brewery assets at a price in the order of $1.8 billion. This would enable BCHL to effect a substantial repayment to BRL of the $1.2 billion receivable. He said it did not matter, to his mind, whether such a deal effected a transfer of the brewery assets to BRL or to a third party. In any case, two events occurred late in 1989 that had an impact on the proposed transactions regarding the brewing assets of BCHL.
    24.2.6.6. Changes to the board of BRL
    5415 Mitchell referred to a letter dated 13 December 1989 from BRL to the ASX advising that new appointments had been made to the board of BRL. Two nominees of each of BCHL and Adelaide Steamship and three independent directors were appointed, including the new chairman Geoff Hill. Mitchell said it was his view that this development made the proposed brewery deal between BCHL and BRL more likely to be completed. He said:
    I believed that an independent board would view that proposed transaction as in the best interests of BRL and that its recommendation to the shareholders would be persuasive … I did not regard the appointment of independent directors as in any way diminishing the prospect of TBGL’s shareholding in BRL having its value significantly restored.
    5416 I understood Mitchell’s evidence to be that he had discussions with Geoff Hill (although he could not recall the precise content of those discussions) and his best recollection was that Hill’s view was that a brewery transaction in which BRL acquired the brewery interests of BCHL was in the interests of BRL. This is consistent with Aspinall’s evidence about what Mitchell was telling him concerning the BRL shares. However, in his witness statement Mitchell also said that he was not involved to any great extent in the brewery transaction in or after January 1990.
    24.2.6.7. Receivership of BBHL
    5417 On 29 December 1989 NAB successfully applied (on an ex parte basis) to appoint receivers and managers to BBHL. Mitchell said he recalled these events. On Christmas Eve 1989 Mitchell was in Colorado. He had to fly to Melbourne, probably at the request of Alan Bond, to meet with Don Argus of the NAB on 27 December 1987. He said the purpose of the meeting was to try to dissuade NAB from pursuing the receivership course. On the afternoon of New Year’s Eve 1989 he met with Oates, Fisher of BDW and Ferrier of Ferrier Hodgson. He said in his written evidence he recalled that Oates had suggested it would be appropriate to seek advice about the position of the directors and officers of BBHL following the appointment of receivers and managers.
    5418 His evidence is that while he could not remember the details of the discussions, he did recall that the tenor of the advice given by Fisher and Ferrier was that if the directors believed that carrying on the companies as a going concern would produce a better return for stakeholders than liquidation, then that was the course the directors should take. This evidence led to the following exchange with counsel:
    I presume you’re talking to Mr Fisher and Mr Ferrier primarily about issues relating to Bond Brewing Holdings?—I can’t recall specifically. You say: My recollection is that Mr Oates suggested that it would be appropriate to seek advice about our position as directors and officers following the appointment of the receivers and managers to [BBHL]. Do you see that?—Correct.
    Were you referring to your position as directors and I presume you’re talking to Mr Fisher and Mr Ferrier primarily about issues relating to Bond Brewing Holdings?—I can’t recall specifically.
    Were you referring to your position as directors and officers of [BBHL]?—I would have believed that I was referring to my position as a director and officer of all the group companies, not simply [BBHL].
    Now, you have provided no financial information to Mr Fisher or Mr Ferrier regarding the financial condition of any particular company, did you?—Not at that meeting I don’t think.
    And you made no note of the meeting?—No, I did not.
    And you sent no letter from any particular company retaining Mr Fisher and Mr Ferrier to give advice?—I don’t recall doing so.
    Do you recall that there were separate lawyers engaged by The Bell Group in respect to The Bell Group refinancing, Sly and Weigall?—I do.
    In fact you met with Mr Watson later in January about the refinancing transactions, did you not?—I did.
    Now, you say in the last sentence of paragraph [68] – you refer to some advice to the effect that if the directors believe the carrying-on of the companies as a going concern would produce a better return for stakeholders in liquidation, then that was the course the directors should take. Do you see that?—Yes.
    To first consider that advice, you would have to evaluate the financial condition of each company?—That is correct.
    And you would have to ascertain whether those companies could pay their debts as they fell due from their own resources?—Yes.
    And you would have to evaluate the effect on creditors of each particular company of any particular course of action?—Yes.
    In doing so, your normal practice would have been to call for reports about the financial condition of each company?—Of the companies – in the main, yes, but not necessarily all of the small subsidiary companies.
    You would take a global group approach?—No. I wouldn’t take a global group approach. I would try and classify them into the companies, depending on how they fitted within the group.
    In terms of going forward as a going concern, you would also have to formulate a plan as to how that would occur, would you not?—A plan in the sense of what was going to be done in terms of meeting the obligations of the company?
    Yes, who, when, how the plan would be effected?—You might not necessarily formulate a plan at that time. I mean, the primary concern, I think, would be whether the assets of the company exceeded its liabilities.
    5419 Mitchell said in his witness statement:
    At the time of the refinancing of the Bell Group facilities with the Lloyds syndicate and its Australian bankers in late January 1990, it was my firm belief that BRL would acquire the Australian brewery assets of BCHL and that, as a result, the realisable value of TBGL’s investment in BRL would be significantly enhanced.
    5420 Against this evidence was the fact that on 2 January 1990 BBHL applied to have the receiver and manager removed. This application was dismissed on 9 February 1990. An appeal was then lodged by BBHL, which was successful. On 28 February 1990 the receiver and manager was removed. The shares in BRL had been suspended: a fact that Mitchell did not even recall.
    5421 In the middle of January the US bondholders had demanded repayment of their debts. This was the subject of a s 364 notice. This demand was triggered by the non‑payment by BBHL of interest due to the debenture holders before the end of January. Mitchell said he did not recall these events either. Nor could he identify with certainty against this background any particular brewing transaction that might have resulted in a sale.
    5422 There could be no significant improvement in the value of TBGL’s investment in BRL, that is the value of the shares, at that time, unless a brewery deal could be done. In order for such a deal to take place, finance would have to be arranged, and then it would have to be completed. All of these factors affect the weight that I place on Mitchell’s evidence regarding his belief in the value of TBGL’s shareholding in BRL as at the date of the transactions. His evidence in this regard lacked cogency.
    24.2.6.8. Planning for the Bond group
    5423 Mitchell was head of the CPDD and said that throughout 1989 he was involved in many proposals to restructure the Bond group. He said that the restructuring proposals were essentially driven by an aim to maximise the potential in the group and to further its future operation. He said that at that time he did not believe that the Bond group would fail; he did not believe that it was insolvent; he believed that it needed to be restructured to reduce its debt. He said in evidence that part of the restructure in 1989 involved the Bond group embarking on a significant asset sale programme.
    5424 Mitchell said that he was monitoring the BCHL asset sales, which were designed to raise cash that could be used to reduce debt. He said that he believed that the debt BCHL had at that time was manageable. He referred to the notes to the financial statements of BCHL dated 13 November 1989 (note 37 in particular) for the year ended 1989. The note sets out the post‑balance sheet disposals of assets that had occurred. Mitchell said in his evidence that 1989 was a ‘uniquely difficult’ year for the Bond group, for the following reasons:
    • There were significant increases in interest rates.
    • The tribunal inquiry had initially made adverse findings against Alan Bond. Only later were the findings overturned by the Federal Court.
    • BCHL suffered a very public attack by Rowland of Lonrho when it purported to mount a takeover bid for Lonrho.
    • The asset sales had resulted in significant losses.
    5425 Mitchell then said:
    In late 1989 I was of the view that there was a negative market perception about ‘Bond’ companies. I recall many newspaper articles that had negative comments about the Bond Group. However I also recall that it was my view that that position presented significant opportunities for the group to reduce its debt in a relatively cheap manner, namely by embarking on a process of debt defeasance. Tradeable debt issued by group companies was trading at significant discounts in late 1989 and early 1990. I was of the view that the group could significantly, and on advantageous terms, reduce its debt by purchasing the tradeable debt at deep discounts. Debt defeasance formed part of certain of the restructuring proposals on which I worked. I refer to this later in this statement.
    5426 In his witness statement Mitchell described many plans that he said that he proposed. The purpose of these plans, he said, was to maximise efficiencies and opportunities within the BCHL group. He said this included the Bell group. He said these were plans prepared in 1989 and 1990 up to the entry into the refinancing transactions with the bankers to TBGL in January 1990. I do not accept this evidence. All the plans referred to by Mitchell concerned the Bond group and only incidentally did they mention or affect the Bell group. The plans he referred to included the following:
14. Project Helena. The document in evidence is dated 1 September 1989 but Mitchell said this was ‘a second generation’ proposal, and referred to an earlier memorandum from Corr dated 9 June 1989 that was headed ‘Corporate Planning & Development for Board Meeting of Bond Corporation Holdings Ltd’, which refers to this proposal. This proposal was in reality the first brewery deal. Later the terms were adopted in what became known as the third brewery deal. The proposal was Bond brewing focussed; the only connection with the Bell group was the shareholding that TBGL held in BRL.
15. The Hawaiian plan. This was the plan referred to in Sect 24.2.4 about which Mitchell had given a paper on at the Hawaii conference in July 1988. A part of that proposal was to sell off the TBGL assets, leaving the WAN assets intact.
16. Project Trojan. This was in a document called the ‘Bond Group of Companies Restructuring Proposal’ dated 26 June 1989. Mitchell said this was, in effect, the Hawaiian plan with the exception that Dallhold would remain in control of the BCHL group companies dividing the core businesses between the companies. So, for example, TBGL would have press businesses and BRL would have resource operation. The proposal included BCHL repaying its debt to BRL and TBGL selling its investment in BRL for $480 million.
17. Portia Plus. This was a proposal dated 4 July 1989 prepared by Corr. In very shorthand form it included the words ‘TBGL sold’. That was the only reference to a Bell group company. Mitchell said this was unlikely to have gone to the BCHL board.
18. In another memorandum from Corr to Alan Bond dated 4 July 1989 there was another proposal, in limited detail, of a restructure of the BCHL group with some reference to TBGL. This proposal was, as Mitchell described it, ‘premised’ on the assumption that Maxell would take an interest in TBGL and WAN. Mitchell could not recall seeing this memorandum previously but he said the assumptions it made about Maxwell’s involvement were consistent with his views at the time.
19. Project Mercury. This proposal was dated 7 July 1989 and resembled Portia Plus but included the possible purchase by Maxwell of TBGL and the purchase by BCHL of Stroh breweries. About this proposal Mitchell said:
    The acquisition aspect of the proposal reflected my belief at the time that the aims of the restructuring proposals being prepared were to maximise opportunities for the Bond and Bell Groups by creating efficient structures and by taking advantage of opportunities.
20. The JS Proposal, dated 7 July 1989, involved a proposal that Spalvin’s purchase TBGL’s shareholding in BRL for $480 million.
21. A fax dated 10 July 1989 from Mitchell to Corr referred to a proposal to issue new bonds in BCHL. Mitchell said that the reason this proposal related to Bell group planning was that the funds from this sale would have repaid the brewing deposit paid by BRL. I noted that part of this plan involved the move on Lonrho; otherwise, it had little to do with TBGL. However, this proposal gave rise to a further proposal headed ‘Proposed Securitised Preference Share Issue dated 25 July 1989’. Rather than issue bonds, the amended proposal was to issue preference shares. Again, the aim was said to be to repay the BRL deposit and to privatise BCIL. It was proposed that some of the funds be used for the purchase of bonds of TBGL and BRL at a discount. Ultimately, Mitchell said, the funds could not be raised.
22. Bell Resources Ltd Restructuring Proposal. This proposal dated 20 July 1989, was also a BRL‑centred plan which had the objective of changing the focus of BRL from a brewery into a resource company. TBGL is not even mentioned.
23. Proposed Privatisation of the Bond Group of Companies. This proposal dated 26 July 1989 explored the possibility of utilising the tradeable debt of the Bond group which Mitchell said was being traded well below its face value. Again the objective was to privatise the companies and to sell off assets leaving a core group of companies of which one would be WAN. This proposal was said to involve purchasing the convertible bonds on issue in TBGL for 60 per cent of the face value and then acquiring the shares of TBGL and BRL at a price of 65 cents for the former and 75 cents for the latter. One possibility was TBGL raising funds of $483 million to purchase BRL. It was noted in the proposal that it would require new borrowings by the WAN group. Again, this was a BCHL‑centred plan. Mitchell did say that he did not recall if this plan went any further than this initial ‘exploration’ proposal.
24. Elders and BRL. A memorandum dated 23 August 1989 from Williamson to Mitchell and a fax from Scholes of Elders to Mitchell referred to a possible scrip offer by Elders for BRL conditional upon the completion of the brewery deal with BCHL. In this proposal TBGL’s shareholding would be sold to Elders.
25. Project Benjamin Proposed Privatisation of the Bond Group of Companies. This proposal was dated 28 August 1989. It was another proposal to privatise the Bond group (except BCHL) through the acquisition of minority interests and the purchase of convertible bonds at a discount. Again its only application to the Bell group was that it proposed a sale of assets leaving WAN as a core business, refinancing the debt on WAN by paying out existing lenders and leaving a small surplus. Mitchell said that the rationale of the plan, and his belief at the time, was expressed in the opening sentence: ‘As a result of the massive discounting of all of the Bond Group securities a unique opportunity exists to privatise the entire structure and generate substantial profit for a modest investment’.
26. Pritzker (US investor). A memorandum dated 1 September 1989 from Williamson to Mitchell contained another variation of the above privatisation proposal using funds from a proposed joint venture between Dallhold and the international investor and philanthropist Jay Pritzker. Again this proposal envisaged the brewery deal being completed. With apologies to those associated with the prestigious eponymous architectural award, this Pritzker prize was never won by BCHL.
27. Bond Corporation Holdings Limited Financing Proposal. This proposal is found in a memorandum dated 12 January 1990. Mitchell recalled little of this proposal, apart from the fact that, like earlier proposals, it was intended to take advantage of the significant discounts at which group debt and equity instruments were trading. The plaintiffs refer in their submissions to a report said to be attached to this memorandum, from Rose of Douglas Capital Markets. It was addressed to Williamson and Mitchell and in the proposal Rose noted that for this proposal to work, all the bonds would have to be purchased simultaneously or the discounts would shrink immediately there was a tender for any one part of the deal.
28. Bond Corporation Holdings Limited Phoenix 1. This proposal, dated 24 January 1990, arose out of the appointment of a receiver to BBHL. It was expressed to be a ‘starting point’ for submission to interested equity participants who would agree to become involved ‘on a rolling basis’ with the ultimate privatisation of the Bond group. This proposal contemplated the sale of many assets (including WAN) for $500 million. This was, in Mitchell’s recollection, on a par with what was then being discussed with Maxwell. The proposal, like others, was aimed at taking advantage of the discounted prices associated with the equity and debt instruments of the Bond group by privatising BRL, BCHL and TBGL. It also contemplated the sale of the Australian brewery assets at $1.8 billion. In total the plan contemplated that the cost of privatisation, including the debt defeasance, was $1902.6 million. There would have to be an equity investor of some considerable size. Mitchell said that he was confident that the group would be able to borrow funds and attract such an investor or investors. I find it difficult to accept that Mitchell could have believed, in January 1990, that BCHL would be able to attract almost $2 billion in equity funding.
    5427 In cross‑examination Mitchell was asked about common features in these plans or proposals. This exchange occurred.
    Mr Mitchell, in paragraph 85 and following of your witness statement you set out a number of the restructuring proposals the Bond group of companies were considering in 1989 and 1990?—Correct.
    There’s a common feature of those proposals in one shape or another that bonds issued by companies within the Bond group were to be purchased through one mechanism or another at a significant discount to par value?—Correct.
    It’s also a common feature, would you agree, that Bond Corporation Holdings was trying to restructure itself into a manageable form where it could go forward into 1990 and 1991?—That was the intention of the proposals, yes.
    Was that your view, that the cash flows of the Bond group were unsustainable in 1990 to 1993 without asset sales, being a view in mid 1989?—In 1989, mid 1989, I would have had no discourse about the cash flows of Bond group because it wasn’t something that was concerning me. What was concerning me was how to restructure the group.
    5428 There is no evidence that any of these proposals advanced beyond the conceptual phase. Certainly nothing concrete came of any of them. This was conceded by the defendants at trial. None of them seemed to progress beyond an exploratory stage. One of the obvious impediments to implementing any such proposal was the need for external funding: something that was not easily forthcoming. I think it is worth repeating here something Baker (the group company secretary to the BCHL group) said in his evidence:
    Mitchell told me that [BCHL] needed a ‘white knight’ who was prepared to sink a significant amount of money into the [BCHL] Group. I recall one [BCHL] board meeting which as far as I can recall was 5 February 1990, where Mitchell spent about 30 to 45 minutes outlining a particular proposal. A director asked what was required to implement the first step. Mitchell responded that about $700m to $800m was required. That was the end of discussion of that particular proposal. The need to obtain external funding was one of the reasons that directors and executives in Mitchell’s presence at a board meeting said that the plans were clever but not necessarily commercially feasible.
    5429 It was of interest to me that a common theme of the majority of these ‘plans’ was that WAN would remain under the control of TBGL, which in turn would be controlled by BCHL because, as Mitchell said more than once, WAN was one of the premier assets of the Bell group.
    24.2.7. Bell group restructure plans
    5430 Mitchell did not identify in his witness statement or in his evidence before me any plan that was specific to the Bell group. He said that the plans I have referred to in Sect 24.2.6.8 were ‘plans’ that affected both the BCHL group and the Bell group.
    5431 I had just as much difficulty with the assertion by Mitchell that these proposals constituted ‘plans’ for the Bell group as I had with Aspinall’s evidence on planning for the group. These were not ‘plans’ in the sense of being formulated, detailed methods for achieving a given goal. Mitchell’s proposals were nothing more than opportunistic ideas. I have to say I formed the view that they were born of desperation in the situation that the BCHL group found itself. I formed this view in spite of the assertion by Mitchell in evidence that he did not recall at any time in 1989 feeling that BCHL was in a mood of ‘crisis and desperation’. I do not accept that evidence. If the time frame of these ‘plans’ is considered, mainly between July 1989 and January 1990, it is obvious that they arose in and around the time of the appointment of the receiver to BBHL. They had little or no focus on the position of the Bell group and they offered no insight at all into planning for TBGL or indeed for any appropriate consideration by Mitchell as a director of TBGL for the future of that company.
    24.2.8. The refinancing Transactions
    24.2.8.1. Mitchell’s involvement generally
    5432 Mitchell’s evidence in respect to the refinancing of TBGL debt to its banks, in the Transactions in January 1990, was that he did not make any personal investigations of the state of the Bell group finances but relied on others to deal with the need for refinancing and the details of refinancing. There is no evidence that he ever met directly with any bankers. He had already said in his evidence that there were ‘precise line functions’ in the way the Bond group was managed and I think it is clear that this was the way he approached his role in the Bell group as well. He said he knew little about the cash flows. On various occasions in his evidence he said that he relied on Aspinall, for example:
    My recollection is that I was not informed that as at 26 January 1990 The Bell Group had failed to pay any of its interest obligations. As such I proceeded on the basis that such interest payments had been made. As indicated earlier, I was not provided with cash flows for The Bell Group in 1989. I do not recall having any detailed knowledge of the cash flows for the group. I relied on David Aspinall to inform me if any significant future shortfalls of cash were projected. As at 26 January 1990 I cannot recall being told of any immediate concerns as to future cash flows.
    5433 Mitchell said that he did understand that at the time of entering into the refinancing agreements with the bankers to the Bell group, the directors of TBGL and its relevant subsidiaries had to consider whether it was in the interests of their respective companies, particularly as the Transactions incorporated the giving of security. In paragraph 103 of his witness statement he said:
    I was aware at the time that prior to the entry into the refinancing the relevant banks were unsecured but had the benefit of negative pledges.
    5434 He stated the reasons that he regarded the Transactions in January 1990 as necessary, and his evidence in this regard echoed that given by Aspinall, but with fewer details:
    It was my firm view that it was in the interests of all the companies in the Bell Group for the group to carry on as a going concern. As at January 1990:
    (a) I was aware and believed that the facilities of the group with its various Australian banks were on demand but that no demand was currently on foot;
    (b) I was aware and believed that the group could not then repay the outstanding debt to the Australian banks with cash then available;
    (c) I believed that if the refinancing was not entered into by BGF and TBGL, the Australian banks would place the group into liquidation;
    (d) I understood that a failure by BGF to meet a demand for repayment by the Australian banks would trigger a cross‑default by BGUK under its facility from the Lloyds syndicate; and
    (e) I believed that BGUK could not then repay the Lloyds syndicate facility with cash then available, so if there was an event of default under that facility, the Lloyds syndicate would be likely to place BGUK into liquidation.
    5435 He went on to say that if TBGL, BGF and BGUK went into liquidation, it would cause the collapse of the entire Bell group of companies, and further he said:
    I believed that the liquidation of TBGL, BGF and BGUK would likely lead to the collapse of the Bond Group and would result in the termination of the brewery deal with BRL to the disadvantage of TBGL.
    5436 Mitchell maintained that he did not believe that the Bell group was insolvent. He said he felt it had a realistic future. He then gave evidence of how, he said, he had discharged his obligations as a director of TBGL, and other companies within the Bell group, at the time of entering into the Transactions. He said that he considered all of the following:
    • That it was necessary to look to the interests of the ‘companies as a whole’. He said he believed that it was in the interests of all the companies to enter into the refinancing arrangements rather than have the group placed into liquidation.
    • That the Bell group (and the wider BCHL group) had in 1989 engaged in a process of selling non‑core assets to reduce debt. He said that he knew that there still remained a number of non-core assets available to reduce debt further or to assist in cash flow requirements, including Q‑Net, Bell Press, the ITC payments and the proceeds from the sale of Bryanston Insurance.
    • That the BCHL group would ensure that its debts to the Bell group would be paid. He said that this was based on his belief that it was in the interests of the BCHL group to avoid a liquidation of the Bell group: there were cross‑default provisions in the BCHL financing documents.
    • That the collapse of the BCHL group would lead to a termination of the brewery deal with BRL because any liquidator of the BCHL group would simply sell the brewing assets. A sale in ‘distressed’ circumstances of the brewing assets would result in a lower price and this in turn would be to the detriment of TBGL’s shareholding in BRL. This reinforced his belief that BCHL would ensure that, when needed, loans from Bell group would be repaid.
    • He believed in the value of WAN and that the full value would only be achieved if the Bell group had time to negotiate with various interested parties.
    • He was of the view that the second brewery deal (with the debt defeasance component) would be completed. This would restore ‘significant’ value to TBGL’s shareholding in BRL. Mitchell said that he ‘knew’ that $1 a share would be sufficient to pay out all the group’s bank debt. He believed the net asset backing of BRL would exceed such an amount.
    5437 However, Mitchell also gave very clear evidence that in 1989 he was not provided with cash flows for the Bell group. As at 26 January 1990 he could not recall being told of any immediate concerns as to future shortfalls of cash. He said that he was aware in general terms that the annual interest obligations of the group were approximately $90 million and that he was aware that the annual operating cash flow of the newspapers was approximately $30 million. He said he was also aware that the management fees from BRL and dividends from JNTH largely made up the shortfall. He said that he did not recall turning his mind to the reliability of the management fees and the dividends but he ‘probably’ thought there was a real risk that the BRL management fees would no longer be paid. And, he maintained that he believed that the BCHL group would continue as a going concern and that the Bell group had various assets from which any cash shortfall could be made good.
    5438 In the context of the 26 January 1990 refinancing he also repeated his belief in the subordinated basis of the bonds:
    I always proceeded, in the whole of my directorship of TBGL, upon the basis that all the bondholders were subordinated to all other unsubordinated creditors of the Bell Group. Accordingly, I did not consider that the giving of security to the banks elevated them above the bondholders as I always believed and acted upon the basis that the banks, in any event, ranked ahead of the bondholders. Whilst I was aware that there were trade creditors in the Bell Group (from the operations of the newspapers) I did not consider that the giving of the security to the banks affected their interests in any material respect because I believed that as the newspaper would continue as a going concern (whether or not sold by the group or a liquidator) their interests would likely be protected. In any event the trade creditors amounted to a small proportion of the total debt owed by the Bell Group.
    And, explaining the benefits of the refinancing generally:
    I believed that there were significant benefits in proceeding with the refinancing. The single biggest benefit was the greater ability to realise assets at true values rather than have assets being sold on a distress basis by a liquidator. That benefit was one which largely accrued to the bondholders, being the subordinated creditors. It also was a benefit to shareholders of the Bell Group. I did not perceive it as being a particular benefit to the banks as I believed that even on a liquidation they would have received either a 100% or close to a 100% return. By having its financing on a medium term basis, I believed that the Bell Group would be afforded time with which to enter into a restructure which could have involved the selling of WAN or an interest in it at a significant value or the sale of the controlling shareholding in BRL at a time when the value of that shareholding had been fully restored.
    5439 Mitchell gave this evidence largely in his witness statement. However, in the witness box he said that in January 1990 he was still producing reconstruction proposals. He did not want any creditor to take any sort of steps towards putting the Bell group into any form of insolvency. Counsel asked this question:
    You would agree with me that any winding up or insolvency arrangement of The Bell Group with its creditors would affect the prospects of BCH group restructuring plans?—Yes, it would.
    Right, and you wanted to avoid that?—In the interests of all the companies in the group, of course.
    5440 He repeatedly said that he did not recall certain events or details that were of some significance at the time. Given the frailty of memory over a substantial number of years since these events occurred I would generally accept that this is an understandable response. However, I was concerned that even where documents were used to remind Mitchell of certain events, or suggest that he had an awareness of them at the relevant time, I could not rely on his evidence. His response in the following exchange with counsel illustrates the basis for my concern:
    Mr Mitchell, it was your practice if a document was marked to your attention to read it?—It depends.
    Was it not your practice to review documents that were marked to your attention in 1988, 1989 and 1990?—It depends where I was. I mean, I travel so extensively, documents that arrived would be out of date by the time I got back, so I may or may not have reviewed them.
    And a little later:
    Can I show you a document dated 3 January 1990? It’s a memorandum from Mr Oates to Mr Aspinall and copied to you, I will see if I can get you a hard copy, Mr Mitchell?—Thank you.
    Do you see that’s a memo from Mr Oates to Mr Aspinall?—Yes.
    At the bottom it says, ‘CC, PAM’?—Yes.
    I think in your witness statement you say somewhere that something that had been marked to your attention, it’s likely to have come to your attention?—Things marked to my attention would have been delivered to me. Whether I have read them or not, I cannot be sure.
    5441 I gave greater weight to Mitchell’s evidence in matters where he demonstrated actual knowledge and attention and where he had some particular experience. In part of his witness statement Mitchell says that throughout 1989 he was busy with other matters. Those other matters were clearly described in Corr’s witness statement: ‘During 1989, Mr Mitchell and I and the [CPDD] were examining ways in which [BCHL] could be restructured to reduce the debt owing by [BCHL]’. This was at the heart of Mitchell’s concerns at that time: hence his peripheral interest in the affairs of the Bell group.
    24.2.8.2. The tax issue
    5442 Mitchell was asked by counsel in cross‑examination if he had any recollection of the litigation with the taxation office in 1989 and 1990. He said that he knew there was a tax issue in the accounts but could not recall the details. However, Mitchell said he had undertaken the due diligence for BCHL before the purchase of TBGL. He said did not recall discussing such an issue with Oates or Aspinall. He was then asked:
    Were you aware in 1989 and 1990 that particular companies within The Bell Group were engaged in litigation with the Australian Taxation Office?—Certainly the accounts reflected that there had been a claim, but there hadn’t been a provision made based on the advice of the auditors.
    5443 He was then shown a memorandum from Issakov and Dennis (the group accountants) to the directors, Beckwith, Oates, Aspinall and Mitchell dated February 1989, which stated:
    [As] at 30 June 1988, The Bell Group balance sheet contained general provisions of $38m. The provisions arose primarily from the practice of the previous management of releasing The Group Stock Exchange Announcement prior to the completion of the Group consolidation. The provisions served to give the auditors some degree of comfort on issues such as the carrying value of Associates.
    The Stock Exchange Results for December 1988 include the write down of associates ($149m) and the write off of capital tax losses ($30m).
    A general provision of $30m was originally intended to be left in the December Balance Sheet to cover any potential liability arising from the Bell Bros. taxation dispute’ (copy of June 1988 notes to accounts attached). This has now been fully reversed to offset the unfavourable effect of the capital losses write off.
    5444 This memorandum describing the effect of the accounts was a significant document. It did not come from auditors. It originated within the company. But Mitchell said he did not recall seeing the memorandum. This answer caused me to return to this document with Mitchell towards the end of his oral evidence. I asked him to look again at extracts from the annual reports of the Bell group. When he looked at the relevant extracts he conceded that the provisions in the accounts were general provisions and not a tax provision as such. He said that it was likely that he had seen the annual reports at some stage but could not recall when. I asked him again how an important memorandum such as the one from Issakov and Dennis would have been brought to the attention of the directors:
    From your knowledge of the practices and the way in which the treasury functions and the tax functions and the accounting functions generally were conducted at this time are you able to cast any light on how a document such as this memo would have arisen? In other words, how a document which deals with one particular aspect of a reasonably complex set of half‑yearly accounts is brought to the attention of the directors?—I’m afraid I can’t, your Honour.
    5445 These answers led me to conclude that Mitchell paid no particular attention to the tax issues. There is insufficient evidence from which I could conclude that his office, or department, had proper systems in place for dealing with these important issues and bringing them to his attention. I understand that in his role as head of CPDD he was required to travel a great deal. However, given these absences I cannot see that he had introduced any sort of consistent mechanism for ensuring that critical information reached him to enable him to properly discharge his duty as a director of the various companies within the Bell group. Once again, I caution against seeing this as straying into the area of lack of care, skill and diligence.
    24.2.8.3. TBGL board meetings generally
    5446 Mitchell’s evidence is that prior to January 1990, the board meetings of BCHL, operating at what he described as ‘the level above Bell Group’, considered all groups within the company. He said that reports on the day‑to‑day operations of the Bell group would have been received but at ‘Bond Corporation or at the centralised level of what was happening within Bell Group’. I understood that this meant there were no separate meetings of the board of TBGL but that the meetings were incorporated in the overall Bond group meetings. There is evidence to show that Mitchell attended BCHL board meetings on the following dates: 5 December 1988, 17 October 1989, 1 December 1989, 5 February 1990, 21 February 1990, 27 March 1990, 10 April 1990, 30 July 1990 and 31 August 1990.
    5447 Like Aspinall, Mitchell said that there were meetings that took place where the secretary was present that would have occurred in the boardroom but in general there were other meetings that were discussions on the telephone or just general discussions among the executive, in close proximity to each other in the Bond building in St Georges Terrace. It was clear from his evidence and reference to his diary entries that Mitchell was from 21 December 1989 to 19 January 1990 either overseas or interstate. In particular, he was involved with the problems associated with NAB’s appointment of a receiver to BBHL. There was no evidence from Mitchell that the directors of TBGL were conversing about the refinancing issues on a daily basis over this period.
    5448 When Aspinall physically moved the Bell group offices away from the Bond group it was Oates who sent a memorandum to Aspinall and copied it to Mitchell. The memorandum was dated 3 January 1990 and Oates suggested in it that:
    In view of your relocation to the WA News Offices, I believe that we should institute the procedure of holding regular monthly Board Meetings with normal reports supplied at each of those Board Meetings, on the day to day operations of all of the investments of Bell Group Limited.
    5449 Mitchell could not recall the memorandum but it clearly demonstrated that this procedure of holding ‘regular’ meetings of TBGL was something new. From other evidence at trial it appeared that the first formal meeting of TBGL actually occurred on 7 February 1990. I am not suggesting that the directors breached their duties by failing to hold regular, formal meetings: see Sect 25.4. But it does reflect on the way in which the directors interacted with one another and acquired knowledge about the affairs of the companies.
    24.2.8.4. Meetings before the refinancing
    5450 In evidence before me there were minutes of meetings of directors of various TBGL group companies that were held prior to signing the security documents and the entry into the Transactions. I will return to these documents in the separate section dealing with these meetings, Sect 25. However, in his evidence Mitchell said he had no independent recollection of any of these meetings. Similarly, he had no recollection of meetings of directors of TBGIL and BGUK held on 24 January 1990, the minutes of which record that he attended by telephone.
    5451 He did say that he recalled in relation to BGUK and its subsidiaries that Edwards had handled the entry into the refinancing. Mitchell said he recalled that Edwards obtained legal advice for the companies in the BGUK group and for the directors of the companies (Mitchell being one of them). There was reference to a file note made by Morrison of S&W at the time, which recorded:
    The English directors resolved not to sign until certain things had been clarified. They adjourned the meeting because Peter Mitchell had raised some aspects. He felt that further matters should be disclosed in the minutes. Every thing, he felt, should be on the record.
    5452 Mitchell said that the minutes of the BGUK directors’ meeting record the conclusion that the ability of that company to meet its creditors would be ‘enhanced’ by giving TBGL more time to repay the Australian banks. He said he could not say what he was thinking at the precise time, but that he would have been aware that BGUK’s main asset was an investment in preference shares issued by Western Interstate, a TBGL subsidiary. Mitchell said he believed that had the refinancing not gone ahead it was likely that the banks would wind up TBGL and its subsidiaries. He said that he believed now that he would have thought then that the winding up of TBGL and its subsidiaries would have reduced the value of BGUK’s investment. So, he believed that it was in the interests of BGUK to enter into the refinancing.
    5453 There is little evidence that Mitchell paid particular attention to the Transactions and the consequences of the giving of security and the interests of any other creditors. In fact, the weight of the evidence is that Mitchell had little knowledge of the cash flow forecasts and the liabilities of the Bell group of companies at the time the available assets of the companies were committed to the banks. He appeared to compartmentalise aspects of his role as an employee of BCHL and his duties as a director of TBGL. He was prepared to accept responsibilities for planning, particularly in respect to the Bond group, but he did not consider that he had any executive responsibilities in respect to the cash flow position of the Bell group.
    5454 I need to make one thing clear. I am not suggesting that directors of a large commercial concern must know what is in, and what is behind, every single line of a cash flow. The preparation of cash flows is the responsibility of management. But cash flows are a vital management tool and are necessary for directors properly to perform their functions. This is especially so where there is (or might be) a material question about the adequacy of sources of cash to meet known commitments.
    24.2.9. TBGL in 1990: continuing the restructure plans
    24.2.9.1. Knowledge of the Bell group cash flows
    5455 When the cash flow forecasts from 1990 were put to Mitchell in evidence he again said that during 1990 he had no executive responsibility for the cash flow position of the Bell group. He said he relied on Aspinall and the executive team to inform him if there were any difficulties. Documents were shown to Mitchell that indicated cash flow shortfalls at the time of bank and bondholder interest payments. He said he did not recall seeing them but, again, he said there was no reason why he would not have seen them at the time they were produced.
    5456 In any event, he testified that he would have believed the cash flow shortfalls could be overcome by asset sales, namely, the ITC contract payment, Q‑Net and the proceeds of sale of Bell Group Press. He also said that, relying on Oates, he was confident that the BCF borrowings from TBGL would be repaid. He believed the banks would support the Bell group and allow it sufficient time to implement a restructure. Given the fact that much of his evidence demonstrated that he paid no particular attention to the details of the Bell group’s financial interests, this evidence was of little assistance. For example, if, as I have found, Aspinall was not aware of the ITC payment until after 26 January 1990, it is highly unlikely that Mitchell was better informed. In relation to the BCF borrowings, there is no evidence of particular communications between Oates and Mitchell.
    24.2.9.2. Carrying value of shares in BRL and JNTH
    5457 For the purposes of the accounts of TBGL for the six months to 31 December 1989 the directors of TBGL, including Mitchell, agreed that it was appropriate to carry the BRL shares in the accounts at a net tangible asset backing of $1.80. This figure was agreed by the directors of TBGL as a reasonable provision. Mitchell said he believed that the provisions made for the value of BRL shares should, at that time, be written back because he believed that:
    (a) the brewery deal would be completed;
    (b) a successful restructure of the Bond group would occur and there would be no need to provide for inter‑company debt and investment and BCHL would repay its debt to BRL; and
    (c) the PICL litigation in Western Australia would be successful, resulting in damages being paid to BCHL.
    5458 He had a similar view in respect to the JNTH shares. The board of TBGL resolved to carry them at $3.13 believing, according to Mitchell, that both Dallhold and BCHL would repay their debts to JNTH. Mitchell did not attend the board meeting of TBGL where this resolution was made but he said he did agree with the resolution. His evidence is that if he did not attend the meetings the public company minutes were copied to him. If he did not agree with a resolution passed at a meeting he would take it up with the directors. He said this was his practice. There is no evidence of any particular issue being taken up by him after the resolutions were passed.
    24.2.9.3. More restructuring proposals
    5459 After the refinancing of the Bell group was effected by the Transactions Mitchell said that he continued to focus on forming plans that would result in a ‘deal’ to restructure the wider Bond and Bell groups. He referred to the Maxwell and Stokes proposals. Although he could not recall whether or not his department prepared these documents he said that the structure of the proposals appeared to have come from his department. Part of both proposals (like many others) was defeasance of public debt. The proposals assumed defeasance at 42.5 per cent of the face value of the public convertible bonds. Mitchell said that throughout 1990 he believed that debt defeasance was achievable. He referred to a fax sent by Michael Edwards QC in London to him dated 16 March 1990, which says that he (Edwards) had made inquiries of Salomon Brothers in New York and Barclays in London as to where the bonds could be found and the price at which the bonds could be bought in bulk. Edwards says that the enquiries were made by him, emphasising the ‘extreme confidentiality’ of such an enquiry.
    5460 Mitchell was never involved in the Maxwell negotiations. He was not involved in the FIRB approval process, although he did see Aspinall’s ‘White Paper’ dated 7 August 1990. Mitchell said he believed that the Maxwell deal would ‘complete and deliver an effective restructure of TBGL’. He said he recognised the risk, although initially he thought it to be a minor risk, that the Maxwell deal might not get the FIRB approval. Other proposals were considered both before and during the time of the Maxwell deal.
    5461 These proposals included:
29. LeBow. This proposal, dated 24 January 1990, was similar to Phoenix 1. Mitchell said that he flew to the United States to present the plan to LeBow, Weskel & Co, Inc (LeBow), which owned Western Union. The proposal involved debt defeasance and he saw LeBow as a potential investor for the funding of that defeasance. According to Mitchell, LeBow expressed an interest in taking over the BCHL group but ultimately it withdrew its interest.
30. Four plans ‘Bond/Bell Group‑Proposal to the Board of Bell Resources’; ‘Bond/Bell Group Restructure’ dated 8 February 1990; ‘Bond/Bell Group Restructure’ dated 9 February 1990; ‘Bond/Bell Group Restructure’ dated 12 February 1990. Each proposed a reverse takeover by BRL of BCHL. The last three proposals also contain an extra element of the removal of Adsteam as a shareholder in BRL. In these proposals TBGL would become a subsidiary of BRL. Mitchell could not recall what occurred with these proposals.
31. John Labatt Limited. This proposal was contained in a memorandum from Mitchell to Alan Bond dated 9 March 1990. The proposal was for the brewery deal to be completed with Labbatt acquiring a majority ownership of BRL. This also involved debt defeasance in relation to BBH debentures and all BRL convertible bonds. The result of this proposal for BRL shareholders would have been that BRL shares would have had a net tangible asset backing of $1.63. This proposal would not have required TBGL to sell any of its BRL shares. There was also a detailed memorandum (dated 31 May 1990) in evidence from Mitchell to Alan Bond describing the pursuit of this plan and various people with whom he had discussions regarding it.
32. Price Waterhouse report. This was dated 16 March 1990 and it contained a proposal similar to the Labatt proposal, with the exception that minorities were not to be bought out. Price Waterhouse recommended debt defeasance and asset sales ‘on an orderly basis in an orderly market’. Mitchell said that he took a lot of comfort from this report because Price Waterhouse, an independent firm of accountants, had appraised the situation and considered there was a way forward. There was no suggestion in the Price Waterhouse report that the directors ought to place any of the group companies, including TBGL, in liquidation. Mitchell said a planning committee was set up to pursue the recommendations. He was not on the planning committee.
33. ‘Defeasement of The Bell Group Limited Public Debt Cash Alternatives’ dated 19 June 1990. This proposal provided for defeasance of TBGL convertible bonds at 40 per cent of face value by way of a swap of shares in either WAN or BRL. According to Mitchell, the proposal would have reduced the debt burden of TBGL at a significant discount and thereby ease the interest burden on TBGL. He could not recall what happened with this proposal. This was the first ‘exchangeable’ proposal, meaning the exchange of debt for assets (namely, shares in certain companies). Mitchell conceded in evidence that such a proposal was then necessary because it was not possible to secure funding either by BCHL or the Bell group to defease the tradeable bonds. Mitchell said that this proposal was never put to the bondholders. It remained a proposal only.
34. ‘Exchangeable Issues for Public Debt in Bond Corporation Holdings Limited and The Bell Group Limited’. This proposal, dated 26 June 1990, would also have achieved the reduction of significant debt at a discount. The ultimate aim was to convert interest bearing bond debt to equity.
    Again, my view is that these plans are all ‘Bond‑centric’. TBGL’s involvement in them is peripheral.
    24.2.9.4. Bond scheme of arrangement
    5462 According to Mitchell’s evidence, from mid‑1990 it appeared that a scheme of arrangement would be needed for BCHL. From that time on he said that he assisted in the preparation of what ultimately became the court approved scheme. His planning responsibilities obviously shifted to this scheme.
    24.2.9.5. LCAS planning
    5463 In respect to involvement of LCAS in planning for TBGL, Mitchell said that by 11 June 1990 he considered that it was likely that the TBGL restructure would have a greater chance of success if it were presented by LCAS rather than Bond executives. Mitchell was still a member of the board of TBGL. He was one of the directors that approved the appointment of LCAS as advisers to TBGL to assist in restructuring and to achieve debt defeasance. He said that he probably saw the document that was the presentation to the banks by the Bell group dated 26 September 1990. He noted that the minutes of the meeting of directors of TBGL on 16 November 1990 record that Tilley of LCAS was said to believe that there were reasonable prospects that a restructure of TBGL would proceed. Mitchell was not involved in any of these proposals.
    24.2.9.6. Mitchell and the bankers to TBGL
    5464 Mitchell said that he was not involved in dealing with the Bell group banks. He said that Aspinall and Simpson, as executives of TBGL, undertook all the dealings with the banks. There was no evidence that he had any contact with any of the banks or officers of the banks on behalf of TBGL. There was evidence of some contact with the bankers to BCHL, for example, he met with Argus of NAB in December 1989 in regard to the BBHL receivership crisis.
    24.2.9.7. Mitchell and LDTC
    5465 Mitchell gave evidence of one meeting only with LDTC and some of the BGNV bondholders. It was the meeting that occurred one morning in early December 1990 at the Royal Westminster Hotel in London. He went with Aspinall to the meeting to seek an interest moratorium. A meeting of TBGL board was held in the afternoon. In the minutes of that meeting it was noted that the directors had all attended but the meeting was inquorate and postponed. There is no other evidence of any contact between Mitchell and this body of creditors.
    5466 There is a reference in Duffett’s evidence to a meeting in Perth on 26 January 1990. In his note of the meeting Duffett says he met with Aspinall and his assistant. He does not name the assistant but later in the note refers to him as ‘David Mitchell’. That is incorrect. It was Simpson that met with Duffett and Aspinall on that date. There is no evidence of any direct contact between Mitchell and LDTC except for Mitchell’s attendance at the meeting I have described.
    5467 I did note however that there is in evidence a letter from Robinson Cox to Duffett dated 8 May 1990. In this letter the solicitors referred to a telephone conversation with Mitchell on 7 May 1990 in which Mitchell is reported to have said that TBGL was not in a position to meet its obligations in respect of interest then due under the bonds, and that TBGL would use the interest grace period of seven days afforded to it under the conditions of issue to meet the payment. This was significant information. In my view, in light of this information, even given the lapse of time involved, it becomes even more surprising that Mitchell took no interest in and had no knowledge of critical cash flow matters.
    24.2.10. Corporate benefit
    5468 In Sect 20.3 I described the duty that directors have to act in the best interests of the company. The duty is owed by a director to each separate legal entity of which he or she is a director and it includes the obligation to consider the interests of creditors of the company. I will return to this issue in Sect 29. In this section I deal with the evidence Mitchell gave about his understanding of the corporate benefit issue.
    5469 In par 106 of his witness statement Mitchell said:
    I understood that my obligation as a director, when considering the refinancing, required me to look to the interests of the companies as a whole and determine the appropriate course having regard to those interests. It was my belief, for the reasons set out below, that it was in the interests of the companies as whole to enter into the refinancing rather than to have the group placed into liquidation.
    5470 He then provided a long list of matters that he considered relevant to his consideration of the proposed refinancing:
    (a) the Bell group (and he said the wider BCHL group) had been selling non‑core assets to reduce debt and there was available more assets that could be sold to reduce debt or assist in future cash flow requirements;
    (b) his belief that the BCHL group would pay its debts to the Bell group to prevent the liquidation of the Bell group, which would lead to a collapse of the BCHL group;
    (c) the value of WAN, and that with time to negotiate its sale this asset could realise more than the bank debt of the Bell group;
    (d) his belief that a brewery deal would be completed, restoring the value to the Bell group’s BRL shareholding;
    (e) his belief that the subordinated bondholders would benefit from the continued existence of the Bell group, whereas liquidation would result in a nil return on their investment; and
    (f) that while there were trade creditors in the Bell group (particularly from the operations of the newspapers) he did not consider that the giving of the security to the banks affected their interests because the newspaper would continue as a going concern and these creditors amounted to a small proportion of the total debt owed by the Bell group.
    5471 He said: ‘I did not believe that the group was insolvent, I felt that it had a realistic future’. But this evidence all centred on an aggregate of group interests and concerns. It also strayed into the interests of the BCHL group as well. Mitchell did not give evidence that he considered the interests of the individual companies.
    5472 As I describe later, when the meetings that approved the entry of the UK companies occurred, the directors had taken legal advice on the duty to consider the best interests of the individual companies within the UK group. Mitchell attended the meeting authorising the entry into the Transactions by telephone. He had a package of material in front of him. Included in the documents were copies of advice from senior counsel and lawyers on the corporate benefit issue. Notably, there were cash flows and carefully prepared statements of assets and liabilities identifying intra‑group and external creditors. Mitchell had been told that this was the level of detail that was required.
    5473 At the meeting Mitchell gave certain assurances to the other directors about the position of the Bell group in Australia. These assurances were made without the benefit of any financial information about the Bell group in Australia that approximated the level of financial information that was before the UK directors. Illustrative of his lack of detailed knowledge of the financial affairs of the Bell group is this exchange which occurred in cross‑examination.
    Can I show you the profit and loss summary for The Bell Group for the five months ended 30 November 1989, I presume this is the type of information you didn’t look at. It’s more in Mr Oates remit, was it?—That’s correct.
    I just want to see if you agree with me that it was possible for you to call for such information should you choose?—Yes.
    Can I take you to the profit and loss summary for the six months ended 31 December 1989? I presume you never considered or discussed these reports with Bell Group management or officers?—Not until Aspinall took over, no.
    5474 The first meeting of the directors of the Bell group called by Aspinall, at which the cash flow difficulties were discussed, was in February 1990: after the entry into the Transactions. Not only did Mitchell cause the Australian companies in the Bell group to enter the refinancing transactions without regard to the corporate benefit issue, his assurances (as I explain further in Sect 26.13) ultimately caused the breach of the same duty by the UK directors.
    24.2.11. Mitchell’s evidence: conclusion
    5475 It is possible to list all the matters, important, even critical to TBGL and the Bell group, throughout late 1989 and into 1990 about which Mitchell said he had no knowledge. This list includes:
    • Basic operational and financial information of the Bell group.
    • The cash flow shortfalls in 1989 and 1990 that precipitated the difficulties with the banks.
    • The profit and loss summaries for TBGL throughout the critical refinancing period.
    • He could not recall any discussions with Aspinall regarding the cash flows in 1989 and up to January 1990.
    • He knew little, if anything, of significance about the problems with the refinancing.
    • He knew of no difficulties associated with refinancing on the value of the press assets.
    • He had little knowledge of restrictions placed on asset sales by the banks.
    • Throughout the critical period he did not meet a banker or participate in any meetings with any bankers to the Bell group.
    • He attended only one meeting with the bondholders (in December 1990 London). That meeting was aborted.
    • He said that he did not know that the Bell group had not met its interest payments under the bonds in 1990.
    • He gave little indication that he knew anything about the taxation issues.
    • He recalled nothing of any taxation arrangements concerning the Inland Revenue Commission in England that affected the ITC payment.
    • He did not know who had the legal title to Q‑Net in January 1990 nor did he recall any requirement for approval by the tribunal of any transfer of a radio licence to another member of the Bond group.
    • He did not recall that the proceeds of Bryanston Insurance sale were to be held in a separate account for the creditors of BGIL and would not be available to meet the cash flow requirements of the wider Bell group.
    • He did not consider the financial position of each company within the Bell group in January 1990 in terms of what was owing to external creditors.
    • There was no evidence that he considered the best interests of the individual companies within the Bell group.
    • He knew nothing about the securities given for the Freefold loan in the course of the BRL arrangements.
    5476 A consistent theme of his evidence was that these matters were not within his executive responsibility. His responsibilities were as head of CPDD in which role he was an employee of BCHL. As head of planning he was travelling the world looking for that ‘white knight’ to come to the aid of the failing BCHL group and he did not find one. On all of this material there is a strong case that on 26 January 1990 Mitchell failed to discharge his duties as a director of TBGL and the subsidiary companies.
    5477 As with Aspinall, I will defer enunciating a final conclusion until I have discussed other relevant evidence. Despite his lack of attention to the affairs of the Bell group companies, I believe he must have known generally about the cash flow situation within the group. He was a director of BRL and of JNTH and he must have known, for example, that reliance on those companies as ongoing sources of income was at best problematic. Mitchell would also have been aware generally about the problems the Bell group companies were facing. The evidence overall supports a conclusion that Mitchell concentrated his energies on restructuring (and thus saving) the BCHL group, in which Dallhold was interested, rather than on the interests of the Bell group companies of which he was a director.
    24.3. Antony Oates
    5478 Oates was not called to give evidence and his absence was not explained. As the banks were able to call Aspinall, Mitchell and Studdy I assume they could have adduced evidence from Oates. The absence of testimony from Oates has not made my task any easier. I am left in the position where I have no direct evidence on a critical issue; namely, the state of mind of a director involved in a case in which his knowledge, belief or suspicion is a central issue.
    5479 What a person says about his or her state of mind is not determinative. The court must still assess what the person says against the objective background and then determine whether or not to accept it. Accordingly, the fact that Oates did not give evidence does not mean that I must reach a finding contrary to his interests but it certainly does not simplify the task.
    5480 Oates was one of the four senior executives of the BCHL group. He was a director of BCHL until his appointment to the board of TBGL on 2 August 1988. He was involved in specific projects for BCHL and continued to fulfil those roles after he left the board. As Chief Executive, Finance and Administration he was directly responsible for financing and treasury functions, subject to Beckwith’s role as managing director.
    5481 There are myriad references to Oates in the letters and other written communications flowing between Bell group (and BCHL group) companies and the banks in 1988 and 1989. Oates attended many meetings with representatives of the banks. Before Aspinall became involved in July 1989, Oates was intimately involved in dealings with the banks. He continued to play a role in the months that followed. For example, it seems that when the events of December 1989 unfolded the banks were looking to Oates as the (or a) primary decision‑maker for TBGL. I have no doubt that Oates had a much greater role in the affairs of the Bell group than did Mitchell.
    5482 The failure to call Oates has consequences. I will give some examples. In Sect 25 I will deal with the corporate benefit issue and the directors meetings held to authorise entry into the Transactions. I do not believe that the meetings occurred in the way reflected in the minutes. Nor do I believe that Aspinall and Mitchell appreciated the true nature of, and acted in accordance with, the duty on directors to act in the best interests of the company. Aspinall says that Oates and Simpson were lawyers and that he relied on them in this respect. But neither were called.
    5483 It is one thing to say that, as lawyers in a commercial enterprise, Oates and Simpson would have known of the broad legal implications of the corporate benefit concept. But it does not follow that they would necessarily have appreciated its full import in the circumstances in which it fell to be applied in January 1990 and, in particular, the need to look to the interests of individual companies rather than the group. Nor does it follow that they would have explained to Aspinall the test, its proper application and the content of the documents.
    5484 In fact, as I understood Aspinall’s evidence, it was more likely to have been Simpson, rather than Oates, who assembled the documents and presented them at the meeting. The contemporaneous documents do not permit me to infer that Oates played the guiding role that he was said to have taken. To the extent that there are gaps in the evidence in relation to the documentation and the meetings, and it will emerge in Sect 25 that I think there were, the banks can take no comfort from what Oates is said to have communicated.
    5485 In my view, there is evidence from which I could draw inferences that Oates must have had an appreciation of the cash flow and general financial problems that the Bell group companies were facing. He may not have been as closely concerned in the day‑to‑day operations as Aspinall was but he had greater involvement than did Mitchell. He must have been aware of the precarious financial position, the uncertainties surrounding sources of income to cover cash flow deficits, the need to gain access to asset sale proceeds and the relevant terms of the documentation that might affect access.
    5486 There is evidence from which I could draw an inference that in January 1990 Oates primary concern would have been the survival of the BCHL group rather than the interests of individual companies within the Bell group. I say this based on:
    (a) his position within the BCHL group, and in particular his membership of the ‘inner cabal’; and
    (b) the evidence of other BCHL officers such as Corr, Swan and Baker about how BCHL operated and Oates’ knowledge of and involvement in the various BCHL restructure plans devised by Mitchell and CPDD.
    5487 As Oates was not called to give evidence and his absence from the proceedings was not explained, I feel more comfortable in drawing those inferences and I do so.
    24.4. Other relevant officers
    24.4.1. Colin Simpson
    5488 In the preceding section I have probably telegraphed a punch as to what I am going to say about Simpson. He was not called and no explanation was provided for his absence.
    5489 Simpson is a lawyer by training. He became Aspinall’s personal assistant in October 1988. At that time both men were employed by BCHL in its media and telecommunications division. This was around the time when Aspinall moved into TBGL. From July 1989, Simpson was intimately involved, along with Aspinall, in negotiations with the banks. He continued this involvement right through 1989 and 1990. In fact, in August 1990 he became a director of TBGL and continued to hold that office until April 1991.
    5490 The plaintiffs do not allege that Simpson was a director (actual or de facto) in January 1990 or that he breached duties to the Bell group companies. Nonetheless, the contemporaneous documentation and Aspinall’s evidence attest to the central role he played in these events. It is a surprise to me that Simpson was not called. But because he is not alleged to have breached duties it does not lead to the drawing of inferences as to his conduct in the same way as I have mentioned in relation to Oates. On the other hand, where there are gaps in the evidence, particularly in relation to the directors meetings and corporate benefit, the banks can draw no comfort from what Simpson is said to have believed or done.
    5491 It will be apparent that I regard the whole cl 17.12 issue and the existence of assurances or expectations that the banks would release asset sale proceeds when required as an important question. This is another area where Simpson could have provided material evidence. He was present at the 6 November 1989 meeting with Lloyds Bank officers and he wrote the letter dated 13 November 1989. When Aspinall came to challenge the banks in May 1990 about the problems that were then being encountered he wrote in terms that the assurances of reasonable behaviour had been given to Simpson. I note also that this the way the banks approached the case in their particulars.
    5492 I turn now to three individuals who were relatively senior officers within the BCHL structure, although they were not directors. Their evidence is important because it gives a picture as to how BCHL operated and about the pivotal role played by Alan Bond, Mitchell and Oates who, along with Beckwith, were the guiding minds of the corporate group. I have relied on their evidence in dealing with the plaintiffs’ allegations that those people acted in the interests of the BCHL group rather than the Bell group.
    24.4.2. John Corr
    24.4.2.1. Corr’s role in CPDD
    5493 Corr was called by the plaintiffs. He has a commerce degree, which led to qualifications in accounting. Significantly he worked for the Bell group (TBGL) from 1983 to 1987. In that time he said the Bell group had been involved in a large number of takeovers as both participants and interested observers. From 1985 to 1987 he was the Assistant Group Treasurer in the office of the Treasurer. That office organised the finances for the whole of the Bell group.
    5494 In 1988 he was employed by BCHL and remained there until October 1990. He was the manager of the CPDD of BCHL. He reported to Mitchell. His duties were to oversee the work relating to the Bond group including mergers and acquisitions, disposal of asset sales, development of new business, strategic growth and in particular to effect a restructuring of the Bond group. He also reported to Beckwith and to individual members of the board of BCHL (if requested to do so). He said that he dealt directly with Alan Bond in respect of certain matters that related to BCHL and Dallhold; it was the major shareholder in BCHL.
    5495 He said that he reported to Mitchell on a day‑to‑day basis. His evidence referred to the same plans, proposals and documents as in Mitchell’s evidence. Corr said that these documents were prepared under the supervision and direction of Mitchell, in the ordinary course of business for BCHL recording the proposals for restructure of the BCHL business. He said that the decision makers within BCHL were Beckwith, Oates, Mitchell and Alan Bond.
    5496 This evidence was given by Corr:
    Could I ask you to tell his Honour in more particularity what were the observations you had and the dealings you had which led you to say the major decisions relating to the affairs of BCH group were usually taken by Mr Beckwith, Mr Tony Oates, Mr Mitchell and Mr Bond?—I guess it was always a truism in the group that they were the four people who ran it at an executive level and really – I mean, I don’t think it was ever in doubt for people who were involved that that was the case; I mean, even to the point of the reference there to ‘inner cabal’ is a quotation from a UK court case, one of the Lonrho court cases, I think, where I think the judge referred to them as an inner cabal, but it was just a very clear understanding that they were the main decision makers and that was always the case.
    What about your observations? Did you ever see them together?—Very regularly.
    Was it always the four or was there some other combination?—No. There would be different permutations each time and, you know, it wasn’t – a lot of the time it wasn’t necessarily an organised meeting but particularly Beckwith, Oates and Mitchell’s offices were more or less adjacent and so you might see either two or the three of them together or in a casual arrangement rather than something that was more formal.
    5497 Corr’s evidence is that his instructions from Mitchell were to review what he described as an overall reconstruction for the BCHL group in order to address the financial problems which were being suffered by BCHL in late 1989 and early 1990. He said that he was not instructed to, and he did not consider, the position of any particular group such as TBGL or its subsidiaries, nor did he prepare any proposal for any particular group company alone. In his evidence in chief he made it clear that BCHL was the most important company and this was where the emphasis was placed. This, he said, was just a given in the context in which he was working.
    5498 Corr said he never received any instructions from Aspinall. However, in cross‑examination he was taken to various proposals that involved Maxwell, Stokes and the Chicago Tribune. All of these proposals were specific to the circumstances of the Bell group of companies. They centred on WAN assets. He said that he had been involved with these proposals. However he could not recall working on a proposal such as ‘Defeasement of The Bell Group Ltd Public Debt Cash Alternatives’ dated 19 June 1990. He did say he recognised the format of the proposal as one which would have originated in CPDD.
    5499 This is important evidence on which I rely to support the conclusion that prior to 26 January 1990 neither Aspinall nor Mitchell had developed any relatively firm ideas as to the restructuring of the Bell group. So far as Mitchell was concerned, his concentration was on the BCHL group, not the Bell group.
    5500 Corr was employed by BCHL when Lonrho published its various reports into the affairs of the BCHL group. He read them. He spoke to each of Mitchell, Oates and Beckwith about the reports. Each told him they had read them. He added nothing further about this issue.
    5501 Corr’s reference to the origin of the expression is correct. In what is described as the ‘Lonrho litigation’, (Re Lonrho plc an unreported decision of the Chancery Division of the English High Court in 1989) the Vice‑Chancellor, Sir Nicolas Browne‑Wilkinson, described the BCHL hierarchy as Alan Bond, the chairman, and three executive directors: Oates, Mitchell and Beckwith. The Vice‑Chancellor said that during the three week trial those three executives had been referred to as ‘the triumvirate’. But he went on to describe Alan Bond and the three executives together as a type of cabal. He also said that it was part of the policy of the ‘inner cabal’ to keep matters of business as secret as possible. He said that while much of the information that Alan Bond and his group were dealing with was market sensitive information, he felt compelled to remark that the evidence he had received in that case ‘suggests at times the secrecy verged on paranoia.’
    24.4.2.2. BCHL restructure plans generally
    5502 Corr gave evidence that the plans on which he worked usually involved identification of a lender or investor who would provide the necessary capital or loan funds to effect a purchase of either minority shareholders, or the purchase of bonds issued by the group. Sometimes these plans involved preference share issues or convertible notes. This exchange occurred:
    So the injection of the capital would be used for what purpose?—The injection was going to be used to buy the bonds back at a discount.
    I see. So you raise capital, use that to buy back bonds at discount. That then gets the company some breathing space to sell the assets that are non‑fire sale assets. Correct?—Yes, and it changes the perception of where the company is at.
    5503 His view was that most of these plans were drawn in general terms, or outlines. They were very confidential because they were market sensitive. Sometimes they were simply prepared as discussion papers for BCHL executives and some were then ‘worked up’ from the initial outlines. Some of these proposals were prepared for third parties.
    5504 Corr said that any of the major steps involved in the proposals prepared by CPDD would have taken approximately six months to complete. He based this estimate on his experience in this area (particularly with TBGL pre‑takeover) and because bonds had to be purchased, major assets had to be sold or refinanced and minority interests had to be purchased. In respect to the purchase of the bonds or the minority interests it was possible that this could have taken even longer than six months. This exchange occurred:
    What I would like you to tell his Honour is what is your experience which led you to proffer that statement that the transactions would have taken approximately six months to complete?—Well, you know, my background was that I had worked with The Bell Group, which was a Holmes à Court organisation, for about four or five years and we had been involved in a large number of takeovers and had observed them both as participants and as interested observers and that was the time it took because of the requirements to have independent analyses and reports and documentation and, as in those days, part A and part C documents, and where complications arose, we weren’t meeting maximum or minimum acceptance requirements or someone was injuncting cases, invariably time dragged on so, you know, I guess I had been involved or looked at large numbers of those type of transactions.
    5505 Corr, like Mitchell, was taken to the various proposals all with the interesting code names of Helena, Benjamin and Phoenix and others. He was asked this question:
    Did those proposals raise any money or were they successful in raising any money?—No.
    In re‑examination the witness was asked:
    In considering the proposals, and I think you said such as Benjamin and Phoenix, did you have regard to the day to day management cash flows of the sub-groups within the Bond Group?—No, never.
    5506 In June 1989 Corr said helped prepare a report entitled ‘Bond’s Future Strategy’. The report was reviewed by Mitchell prior to its delivery to Alan Bond, Beckwith and Oates. The stated purpose of the report was to consider the future possibilities for the Bond group, and the five public companies within the group. Those possibilities were identified as consolidation; deconsolidation; and privatisation. Following this CPDD prepared a plan entitled: ‘Proposed Privatisation of the Bond Group Companies’ it was dated 26 July 1989. This was followed by another, with the same title, dated 28 August 1989. This was followed by a report dated 28 August 1989. It was CPDD’s analysis of the effect of the privatisation of the Bond group companies. The report was titled ‘Project Phoenix’ and considering its content it was obviously named after the mythical creature arising from the ashes, rather than the place in the United States.
    5507 Project Phoenix compared the Group’s assets at book value and on a ‘real world’ basis. It also considered the impact on the Bond group if the group was forced to sell all assets in an environment which did not allow full values to be realised. A critical element of Project Phoenix was the purchase of the convertible bonds issued by various members in the Bond group of companies at a discount to their face value. Page one of the report noted that on a ‘real world’ basis, Bond group net assets before privatisation could be valued under certain criteria at a deficit of $8.6 million. However, after the proposed privatisation took place, the value of these assets would increase to $1,071.6 million.
    5508 The ‘real world’ valuation is what CPDD estimated might be the approximate sale price of an asset which could be expected to be concluded at that time for an asset by an interested partner. On page two of the report it is noted that on a forced sale basis, net assets before privatisation were estimated at a deficit of $832.2 million. The ‘forced sale’ valuation is what CPDD estimated to be the sale price of an asset if the Bond group was forced by its bankers, or as a result of other financial pressures, to sell the assets, in a manner that would not allow time for the full value of the assets to be realised.
    5509 This report was immediately followed by another, dated 28 August 1989, named Project Benjamin. It was similar to the document dated 26 July 1989 by CPDD entitled ‘Bond Corporation Proposed Privatisation of the Bond Group of Companies’. In his written statement Corr explained that to effect the privatisation proposal it required the following:
    (a) identifying an investor or lender who would agree to provide the necessary capital or loan funds for the scheme to effect the purchase of minorities and the purchase of bonds issued within the BCHL group;
    (b) reaching an agreement with the investor or lender as to the terms on which (a) would occur and the manner in which it could occur (for example, under a joint venture or some other form of arrangement between Dallhold and the investor or lender;
    (c) purchasing the interest of minorities within the Bond Group; and
    (d) purchasing of the bonds issued by various members of the Bond Group.
    5510 A further critical element was the time required to effect the sales of assets held within the Bond group and thereby return funds to the investor or lender under the agreement.
    5511 In September 1989, BCHL made an announcement regarding an agreement reached with Lion Nathan for the establishment of a joint venture between BRL and Lion Nathan to acquire and operate the Australian brewing assets of BCHL held by BBHL. Prior to this announcement, Corr had travelled to New Zealand to negotiate this agreement with others from CPDD, with the Lion Nathan representatives. There were a number of contingencies which had to be satisfied prior to completion of the proposed joint venture, including obtaining the consent of the banks. Corr’s exposure to the negotiation of this proposed joint venture was limited because Oates subsequently took control of the negotiations to finalise the joint venture. Corr said he was subsequently involved in those negotiations on a peripheral basis only.
    5512 In October 1989 Corr said that he prepared, under Mitchell’s direction, the 1989-1990 Business Plan for BCHL. Once the plan had been approved by Mitchell, Corr was instructed by Mitchell to deliver them to Alan Bond, Oates and Beckwith for their approval. As he said earlier in his evidence, they were the decision makers. Shortly thereafter, Corr said in his evidence, that he was instructed to effect the steps set out in the business plan. To achieve the objectives of the plan he said it would require an orderly sale of the assets of BCHL to meet or reduce its debts. Critical to this was the need for time to carry out such sales. This was something that would have been obvious to all involved in the planning.
    5513 In November 1989, the BCHL annual report was filed. It disclosed an operating loss of $980.2 million and the auditor’s qualified the accounts. Referring to the reconstruction programme for the BCHL group which included:
    [M]ajor asset sales and debt repayments, the intention to purchase various BCH Group non-bank debt and convertible bonds at significant discounts to par value, based on current market values, and the refinancing and the restructuring of major BCH Group companies … In our opinion, as a result of the uncertainties on the timing of completion of the reconstruction program and the carrying value of significant BCH Group assets (as discussed in this report) there is some doubt that BCH and the BCH Group will be able to continue as a going concern.
    5514 Corr’s evidence is that after the date of publication of these reports, the plans developed by CPDD, headed by Mitchell and from whom Corr took his instructions were a response to the financial difficulties of BCHL and were designed to ensure that BCHL continued as a going concern. He also said that the appointment of Hill as chairman of BRL, and other independent members of the board, increased the complexity of the Lion Nathan proposed joint venture. The appointment of a receiver to BBHL in late 1989 and the loss of control of the BRL board by BCHL increased the difficulty of securing a sale.
    5515 In evidence given by Mitchell he referred briefly to the fact that in January 1990, at the time of the refinancing of the Bell group debt, he was involved in a proposal concerning LeBow, Weskel & Co, Inc. Mitchell did little more than mention this proposal. Corr gave more detailed evidence about this particular proposal.
    5516 Corr said that on 12 January 1990 CPDD prepared a report under Mitchell’s direction entitled ‘Financing Proposal’. It was a proposal prepared for potential lenders or investors to fund the purchase of:
    (a) minority shareholders in the BCHL Group; and
    (b) bondholders in all BCHL group companies at a discount to face value-net asset backing.
    5517 Corr set out in his witness statement the underlying scheme of this proposal which was:
    (a) A joint venture would be formed between potential lenders or investors and Dallhold in order to purchase bonds issued within the BCHL group at a discount and minority shareholders;
    (b) the underlying assets in each company within the BCHL group would then be sold and converted into cash;
    (c) the cash would be used to pay out the bonds at 100 per cent of face value (at a profit to the joint venture); and
    (d) the profit in the joint venture company would be shared equally between the lender/investor and Dallhold.
    5518 Part of this plan was developed on the advice of Douglas Capital Markets’ Andy Rose and Ken Cory. The plan included the sale of TBGL’s assets.
    5519 A little later in January 1990, Corr did not give the precise date, Corr met Alan Bond in Hong Kong and had a meeting with representatives of the Hong Kong Bank. Bond then told Corr to fly to Sydney where Alan Bond was to meet with LeBow himself because, as Corr said:
    Mr Bond said Mr LeBow was a big player in the US financial markets who had a history of buying companies cheaply. He said Mr LeBow had access to very large amounts of money. Mr Bond told me that he required me to speak to Mr LeBow about the details of a proposal by which Mr LeBow would invest in the BCH Group with Dallhold. He said he wanted me to discuss with Mr LeBow the details by which a joint venture between Dallhold and Mr LeBow’s companies would take out minorities within the BCH Group, would purchase bonds issued by the BCH Group, would arrange asset sales and generally, how Mr LeBow’s investment with Dallhold in the BCH Group would be returned to him.
    5520 Corr flew to Sydney where he went to the BCHL offices and met with Alan Bond and LeBow. An associate of LeBow’s, Richard Wressler, was also present. Alan Bond, LeBow and Wressler met privately for about an hour and then, according to Corr’s evidence, Corr was called in to discuss the details of the proposal (in accordance with the plan formulated earlier). Later said Corr:
    We continued our discussions throughout the afternoon regarding the details of the proposal. I cannot recall whether or not these matters had been formalised into a written proposal at this stage. I recall that Mr LeBow said he was interested in the proposal.
    After I had met with Mr LeBow, I spoke with Mr Bond. I told Mr Bond about my discussions with Mr LeBow. Mr Bond told me that he believed Mr LeBow could introduce up to $1 billion into the proposed venture. I do not recall whether Mr Bond said Mr LeBow would introduce his own money, or procure other US investors to lend money to the joint venture.
    5521 Thereafter, CPDD prepared a proposal to LeBow: ‘Proposed Acquisition of Debt Instruments and Privatisation of the Bond Group of Companies’ dated 24 January 1990 and another dated 29 January 1990. The proposal acknowledged that at that time the BCHL had negative worth and the way to improve the position was for BCHL to purchase at discount some of its public issues of bonds. It acknowledged the need to do that sequentially. It involved the creation of a new entity to provide funding and undertake the transaction. It was based on debt funding with a provisions that subject to certain approvals, it could convert part of the new entities debt to equity. But it also provided in the proposal that in the event of a receiver or provisional liquidator being appointed to a BCHL principal subsidiary, then the agreement to convert to capital would cease.
    5522 This proposal formulated under Mitchell’s direction, and discussed between Alan Bond and LeBow at the time that the meetings to approve entry into the Transactions were held in late January 1990; particularly the meetings of the UK directors which included both Alan Bond and Mitchell.
    5523 I have referred to Corr’s evidence concerning the various plans to restructure the BCHL group because I believe it is relevant to the allegations concerning the ‘Bond‑centric’ nature of these proposals. I take two things in particular from this aspect of Corr’s evidence. First, it confirms that Mitchell was intimately involved in devising and presenting the strategies. Corr gave some evidence about Oates involvement and there will be other evidence linking Oates to knowledge of Mitchell’s activities in this respect. Secondly, I drew from Corr’ s evidence that that these restructure plans were aimed primarily at fixing BCHL problems and restoring value to Dallhold’s investments. They had little to do with TBGL or the Bell group.
    24.4.2.3. ‘Bond-centric’ plans
    5524 In June 1989 Corr said helped prepare a report entitled ‘Bond’s Future Strategy’. The report was reviewed by Mitchell prior to its delivery to Alan Bond, Beckwith and Oates. The stated purpose of the report was to consider the future possibilities for the Bond group, and the five public companies within the group. Those possibilities were identified as consolidation, deconsolidation and privatisation. Following this, CPDD prepared a plan entitled: ‘Proposed Privatisation of the Bond Group Companies’, which was dated 26 July 1989. This was followed by another, with the same title, dated 28 August 1989. This was followed by a report dated 28 August 1989, which was CPDD’s analysis of the effect of the privatisation of the Bond group companies. The report was entitled ‘Project Phoenix’ and considering its content, it was obviously named after the mythical creature arose from the ashes, rather than the place in the United States.
    5525 Project Phoenix compared the group’s assets at book value and on a ‘real world’ basis. It also considered the impact on the Bond group if the group was forced to sell all its assets in an environment that did not allow full value to be realised. A critical element of Project Phoenix was the purchase of the convertible bonds issued by various members in the Bond group of companies at a discount to their face value. Page one of the report noted that on a ‘real world’ basis, Bond group net assets before privatisation could be valued under certain criteria at a deficit of $8.6 million. However, after the proposed privatisation took place, the value of these assets would increase to $1,071.6 million. The ‘real world’ valuation is what CPDD estimated might be the approximate sale price of an asset that could be expected to be concluded at that time for an asset by an interested partner. On page two of the report it is noted that on a forced sale basis, net assets before privatisation were estimated at a deficit of $832.2 million. The ‘forced sale’ valuation is what CPDD estimated to be the sale price of an asset if the Bond group was forced by its bankers, or as a result of other financial pressures, to sell the assets in a manner that would not allow time for the full value of the assets to be realised.
    5526 This report was immediately followed by another, dated 28 August 1989, named Project Benjamin. It was similar to the document dated 26 July 1989 by CPDD entitled ‘Bond Corporation Proposed Privatisation of the Bond Group of Companies’. In his written statement Corr explained that to effect the privatisation proposal the following was required:
    (a) identifying an investor or lender who would agree to provide the necessary capital or loan funds for the scheme to effect the purchase of minorities and the purchase of bonds issued within the BCHL group;
    (b) reaching an agreement with the investor or lender as to the terms on which (a) would occur and the manner in which it could occur, for example, under a joint venture or some other form of arrangement between Dallhold and the investor or lender;
    (c) purchasing the interest of minorities within the Bond group; and
    (d) purchasing of the bonds issued by various members of the Bond group.
    5527 A further critical element was the time required to effect the sale of assets held within the Bond group and thereby return funds to the investor or lender under the agreement.
    5528 In September 1989, BCHL made an announcement regarding an agreement reached with Lion Nathan for the establishment of a joint venture between BRL and Lion Nathan to acquire and operate the Australian brewing assets of BCHL held by BBHL. Prior to this announcement, Corr had travelled to New Zealand to negotiate this agreement (with others from CPDD) with the Lion Nathan representatives. There were a number of contingencies that had to be satisfied prior to completion of the proposed joint venture, including obtaining the consent of the banks. Corr’s exposure to the negotiation of this proposed joint venture was limited because Oates subsequently took control of the negotiations to finalise the joint venture. Corr said he was thereafter involved in those negotiations on a peripheral basis only.
    5529 In October 1989 Corr said that he prepared, under Mitchell’s direction, the 1989 – 1990 business plan for BCHL. Once it was approved by Mitchell, Corr was instructed by Mitchell to deliver the plan to Alan Bond, Oates and Beckwith for their approval. As he said in his evidence, they were the decision‑makers. Shortly thereafter, Corr said, he was instructed to effect the steps set out in the business plan. To achieve the objectives of the plan he said it would require an orderly sale of the assets of BCHL to meet or reduce its debts. Critical to this was the need for time to carry out such sales. This was something that would have been obvious to all involved in the planning.
    5530 In November 1989 the BCHL annual report was filed. It disclosed an operating loss of $980.2 million and the auditors qualified the accounts. It referred to the reconstruction programme for the BCHL group, which included:
    major asset sales and debt repayments, the intention to purchase various BCH Group non-bank debt and convertible bonds at significant discounts to par value, based on current market values, and the refinancing and the restructuring of major BCH Group companies … In our opinion, as a result of the uncertainties on the timing of completion of the reconstruction program and the carrying value of significant BCH Group assets (as discussed in this report) there is some doubt that BCH and the BCH Group will be able to continue as a going concern.
    5531 Corr’s evidence is that after the date of publication of these reports, the plans developed by CPDD (headed by Mitchell and from whom Corr took his instructions) were a response to the financial difficulties of BCHL and were designed to ensure that BCHL continued as a going concern. He also said that the appointment of Hill as chairman of BRL and other independent members of the board increased the complexity of the Lion Nathan proposed joint venture. The appointment of a receiver to BBHL in late 1989 and the loss of control of the BRL board by BCHL also increased the difficulty of securing a sale.
    24.4.2.4. LeBow
    5532 In evidence given by Mitchell he referred briefly to the fact that in January 1990, at the time of the refinancing of the Bell group debt, he was involved in a proposal concerning LeBow, Weskel & Co, Inc. (LeBow). Mitchell did little more than mention this proposal. Corr gave more detailed evidence about it.
    5533 Corr said that on 12 January 1990 CPDD prepared a report under Mitchell’s direction entitled ‘Financing Proposal’. It was a proposal prepared for potential lenders or investors to fund the purchase of:
    (a) minority shareholders in the BCHL group; and
    (b) bondholders in all BCHL group companies at a discount to face value net asset‑backing.
    5534 Corr set out in his witness statement the underlying scheme of this proposal, which was:
    (a) a joint venture would be formed between potential lenders or investors and Dallhold (in order to purchase bonds issued within the BCHL group at a discount) and minority shareholders;
    (b) the underlying assets in each company within the BCHL group would then be sold and converted into cash;
    (c) the cash would be used to pay out the bonds at 100% of face value (at a profit to the joint venture); and
    (d) the profit in the joint venture company would be shared equally between the lender/investor and Dallhold.
    5535 Part of this plan was developed on the advice of Douglas Capital Markets’ Andy Rose and Ken Cory. The plan included the sale of Tag’s assets.
    5536 A little later in January 1990 (Corr did not give the precise date) Corr met Alan Bond in Hong Kong and had a meeting with representatives of the Hong Kong Bank. Bond then told Corr to fly to Sydney, where Alan Bond was to meet with LeBow himself because, as Corr said:
    Mr Bond said Mr LeBow was a big player in the US financial markets who had a history of buying companies cheaply. He said Mr LeBow had access to very large amounts of money. Mr Bond told me that he required me to speak to Mr LeBow about the details of a proposal by which Mr LeBow would invest in the BCH Group with Dallhold. He said he wanted me to discuss with Mr LeBow the details by which a joint venture between Dallhold and Mr LeBow’s companies would take out minorities within the BCH Group, would purchase bonds issued by the BCH Group, would arrange asset sales and generally, how Mr LeBow’s investment with Dallhold in the BCH Group would be returned to him.
    5537 Corr flew to Sydney where he went to the BCHL offices and met with Alan Bond and LeBow. An associate of LeBow’s, Richard Wressler, was also present. Alan Bond, LeBow and Wressler met privately for about an hour and then, according to Corr’s evidence, Corr was called in to discuss the details of the proposal (in accordance with the plan formulated earlier). Corr said that then:
    We continued our discussions throughout the afternoon regarding the details of the proposal. I cannot recall whether or not these matters had been formalised into a written proposal at this stage. I recall that Mr LeBow said he was interested in the proposal.
    After I had met with Mr LeBow, I spoke with Mr Bond. I told Mr Bond about my discussions with Mr LeBow. Mr Bond told me that he believed Mr LeBow could introduce up to $1 billion into the proposed venture. I do not recall whether Mr Bond said Mr LeBow would introduce his own money, or procure other US investors to lend money to the joint venture.
    5538 Thereafter, CPDD prepared a proposal to LeBow: ‘Proposed Acquisition of Debt Instruments and Privatisation of the Bond Group of Companies’ dated 24 January 1990 and another dated 29 January 1990. The proposal acknowledged that at that time BCHL had negative worth and the way to improve the position was for BCHL to purchase at discount some of its public issues of bonds. It acknowledged the need to do that sequentially. It involved the creation of a new entity to provide funding and undertake the transaction. It was based on debt funding with a provisions that subject to certain approvals, it could convert part of the new entities’ debt to equity. But it also provided in the proposal that in the event of a receiver or provisional liquidator being appointed to a BCHL principal subsidiary, then the agreement to convert to capital would cease.
    5539 This proposal was formulated under Mitchell’s direction. It was discussed between Alan Bond and LeBow at the time that the meetings to approve entry into the Transactions were held in late January 1990; in particular, the meetings of the UK directors that included both Alan Bond and Mitchell.
    24.4.2.5. Subordinated bonds and proceeds
    5540 Corr’s evidence is that in the period he worked for the Bell group, prior to the BCHL takeover, he was involved in the raising of funds for the group through the bond issues. This included the 1985 and 1987 bond issues. A way of raising funds with cheap interest rates was to issue subordinated bonds. His understanding was that the bonds could be treated as equity and thereby leave the borrowing ratios, that is, the ratios of tangible assets to liabilities, unaffected. The Bell group, he said, could raise debt within its borrowing ratios through the issue of subordinated bonds. He said that the issue of subordinated debt in the Bell group enabled that debt to be excluded from the borrowing ratios because it was subordinated to the negative pledge facility. This exchange occurred in cross‑examination:
    I’m going to ask you about your understanding as assistant treasurer of the performance of your functions in the period 1985 to 1987? I have drawn your attention to the fact that the bonds were subordinated. Correct?—That’s correct.
    And I have drawn your attention to the fact – is it not correct that within treasury at the time, the bonds and the proceeds of the issue of the bonds were not treated as debt for the purposes of the negative pledge ratios?—That’s correct.
    And they were not treated as debt for the purpose of the negative pledge ratios for a group of companies called the negative pledge group?—That’s correct.
    A little further in the transcript:
    Was your understanding that the bonds and the proceeds of the bonds were not treated within treasury as ranking equally to the debts owing to the bankers to the negative pledge group?—Yes, but they were subordinated bonds. They were subordinated to the banks.
    Further in the examination again:
    …you’re involved in part of the issue of bonds to Mr Holmes à Court in 1985?—That’s correct.
    You understood that to be part of another issue of Eurobonds at the same time?—Yes, they were parallel.
    There was also, I can remind you, another issue later on in 1987?—I will take your word for that.
    Yes?—There was another issue. I don’t know whether it was … I thought it was late 86.
    Whatever; to your recollection there was an issue – another issue that involved …?—I can recall there were two series of bonds, yes.
    Thank you. In your capacity as assistant treasurer and in your work between 1985 and 1987 no-one suggested to you, did they, that there was any distinction between the bonds that were issued to Mr Holmes à Court and the Eurobonds?—I recall they were two series. They were extremely similar bonds and there may have been some issue in relation to them being issues in Australia. I mean, the way I viewed them was they were the same for all intents and purposes.
    Yes. No-one suggested to you that there was any distinction between the bonds issued to Mr Holmes à Court and the Eurobonds in terms of their priority or ranking to assets in the negative pledge group?—No.
    No-one suggested to you – I want to ask you a question about the Eurobonds for a moment?—Right.
    In your capacity as the assistant treasurer and in the performance of your functions during that period, 1985 to 1987, no-one suggested to you that the Eurobonds had any priority to the assets of the negative pledge group over Mr Holmes à Court’s money, did they? … So did the Eurobonds have priority over the Heytesbury bonds?—No. I believe they were pari passu.
    No-one suggested to you that that – I’m really asking you for a negative. No-one suggested to you that they were other than equal?—Yes. No-one suggested it to me.
    5541 An important issue that arose in Corr’s evidence related to the distribution of the proceeds of the bond issues because he was Assistant Group Treasurer of the Bell group at the time of the bond issues. He was asked if the proceeds that were raised were distributed within the group from the company that raised the moneys from the issues. He confirmed that this was the case and said:
    The process was that the money would come in on one hand, it would be loaned across to another group company.
    5542 Counsel for the plaintiffs asked Corr to describe how the process of on‑lending occurred and in particular whether there was a means of ascertaining the terms of the on‑loans in the company’s records. Corr’s response was:
    I think it was always done between 100 per cent owned subsidiaries so I don’t think, on recollection, there was a set of terms between the companies. I think the money was lent across, there was ‘on call’ between the companies, but I’m not certain of any of the protocols and I’m not sure whether they were in place but there certainly were some protocols, but no detail.
    5543 I have mentioned Corr’s evidence about the subordination question for a particular reason. I have said on a couple of occasions that there is no evidence that any person who was an officer of TBGL at the time of the bond issues passed on to persons who became officers in mid‑1988 information suggesting the bonds or the on‑loans were not subordinated. While Corr’s evidence is that he could not recall any particular protocols relating to the terms of intra‑group lending, there is nothing to suggest he believed the on‑loans were not subordinated. Nor is there any evidence that he said or did anything that might have led the later officer holders to take contrary position.
    24.4.3. Michael Swan
    5544 Swan is a chartered accountant who had qualified in the United Kingdom and worked for C&L. He transferred to the Perth office of C&L in 1981 and worked there until he joined BCHL. Swan was employed by BCHL in 1984, and worked as Group Financial Accountant in the Accounts department of BCHL from that time until 1989. In September 1989, the Group Chief Accountant, Chris Bennett, resigned and Swan replaced him in that role.
    5545 As the Group Financial Accountant Swan was involved in:
    (a) preparing the consolidated statutory accounts for BCHL and its subsidiaries on an annual and six‑monthly basis, as well as the BCHL annual report;
    (b) preparing monthly consolidated internal management accounts for the BCHL group;
    (c) managing the ledgers of BCHL and some of its subsidiaries such as BCPL and Bond Corporation Finance Pty Ltd ;
    (d) attending to BCHL’s reporting obligations to the ASX; and
    (e) coordinating and consolidating financial and accounting information across the BCHL group of companies so that the directors of BCHL could understand the financial position of BCHL and the group.
    5546 Swan’s evidence is that his duties imposed a heavy workload. He supervised up to 20 accountants and clerks in the department at BCHL’s head office. He also dealt with many other accountants and staff in the subsidiaries of the BCHL group in Australia and overseas. As Group Financial Accountant, he also liaised with the auditors of the BCHL group’s annual accounts: Price Waterhouse between 1984 and 1987, and Arthur Anderson between 1988 and 1992. He reported to the Group Chief Accountant, Bennett, who in turn reported to Oates. When Swan took over from Bennett he said there was little change in his day‑to‑day role and duties and he reported to Oates. But he said that his most contact with Beckwith, the Managing Director of BCHL, with whom he dealt on a day‑to‑day basis.
    24.4.3.1. The role of Oates and Mitchell
    5547 Swan observed that Oates was primarily concerned with financing transactions. Swan’s main contact with him occurred only at the time statutory accounts needed to be filed and when decisions needed to be made in relation to accounting issues at an executive level.
    5548 Swan said that he had ‘some’ contact with Mitchell and his subordinates, such as Corr, in late 1989 and 1990 in respect to various reconstruction proposals for BCHL and its subsidiaries, which were prepared by CPDD. He said that he recalled assisting Mitchell and CPDD prepare the 1989 – 1990 business plan and he could recall supplying accounting data to help Mitchell’s department put together the de‑consolidated group figures in the plan.
    24.4.3.2. The decision‑makers
    5549 In his witness statement Swan said that, as a matter of practice, the major policy decisions relating to the affairs of the BCHL group were made by Beckwith, Mitchell, Oates and Alan Bond. In his oral evidence he expanded on this statement when he was asked:
    Can you tell his Honour the basis on which you make that statement? What are you referring to?—Any major decisions in relation to the decision, whether it be in relation to financing or the acquisitions or disposals of assets, those four individuals were the main people who made the decisions and gave instructions in relation to those decisions.
    Are you able to say that from your own personal knowledge?—That’s based on my personal observations.
    Can you give his Honour an indication of the things you observed that you’re referring to?—For example, in relation to the decision to purchase shares in Bond Media, the instructions as to what the consideration was to be, what the intention was for the financing of those shares, all the decisions were made by those individuals.
    5550 Similar evidence about the roles of these four individuals was given by Corr and Baker.
    24.4.3.3. Access to accounting information
    5551 There is another matter of interest to me in Swan’s evidence. He said that the four named ‘most senior executives’ had unrestricted access to all accounting information prepared in the Accounts department. Swan said that this was not the case for other executives. He said that this was as a result of oral instructions given by Beckwith to Swan on more than one occasion. He explained this in an exchange with counsel:
    Can you tell his Honour about Mr Beckwith’s instructions? When you say he gave you instructions, what are you referring to?—Instructions as to who was to receive particular bits of information came directly from Peter Beckwith. It was always my understanding that the other three individuals had unlimited access to any accounting information they required.
    How did Mr Beckwith give you those instructions? Did he send you a letter?—Orally.
    5552 Swan provided an example. He said that in 1989 he prepared monthly management accounts in the form of consolidated profit and loss statements and consolidated balance sheets. He said that during 1989 it was customary for Beckwith to tell him to arrange for his department to prepare and include in the monthly management accounts two versions of the consolidated profit and loss statements. These consisted of:
    (a) a short version that set out the profit (or loss) before interest and tax; and
    (b) a longer version that set out the position after taking into account interest and tax.
    5553 Beckwith reviewed the accounts once they were prepared and then instructed Swan about who should receive copies of the short version and the long version of the accounts. He said of these versions that:
    On several occasions during the 1989 financial year, I recall that the monthly management accounts contained information that was of a negative or adverse nature such as revealing that the BCHL Group has made a loss after taking into account interest. I recall that, on several occasions, Mr Beckwith restricted the distribution of the long version accounts to a limited number of executives.
    5554 In an exchange with counsel in his examination in chief Swan expanded on this:
    Was there any differentiation between the long form and the short form version you referred to, between who would receive them and who wouldn’t?—The four individuals that we’ve previously mentioned always received the long form version.
    That’s Messrs Beckwith, Oates, Bond and Mitchell?—That’s correct.

Were there any people who didn’t always receive those long form versions?—The other directors frequently received the abridged version or shortened version. I was aware that they accounted for the group cash funds on a global basis. They didn’t have separate treasury functions for discrete parts of the group.
5555 Swan’s evidence in this respect lent support to Aspinall’s evidence that he had struggled to obtain financial information from Treasury. Clearly, he was not one of the favoured executives.
24.4.3.4. Central Treasury
5556 Another aspect of Swan’s evidence related to the functions of the central Treasury. He said that in 1989, the treasury function for the BCHL group, including TBGL, was carried out by the BCHL Treasury department in Sydney. Treasury managed cash inflows and outflows for the entire BCHL group. Swan had never worked for Treasury but, from his observations and experience of transactions that were entered into by Treasury in 1988, 1989 and 1990, it appeared to him that the Treasury department managed funds for the entire BCHL group as a collective entity. It collected funds on a daily basis from all sources in the BCHL group. It then allocated these funds to wherever the funds were most needed within the BCHL group. The accountants for the various companies were then left to account for these transactions (often as inter‑company loans) after the event, often a considerable time after the event. In his witness statement Swan said:
By October 1989, I had prepared monthly financial statements for BCHL being a summary profit and loss report (including corporate) for the 3 months ended 30 September 1989. These statements revealed that for the 3 months to 30 September 1989, BCHL made an operating loss (after external interest and borrowing costs) of $168,387,000. Because of the negative type of information in this, document Mr Beckwith may have instructed me not to release the information to executives other than Messrs Bond, Mitchell and Oates as well as himself.
5557 I found Swan’s evidence about these matters useful.
24.4.4. Graeme Baker
5558 At the time of the events the subject of this action Baker had been employed by BCHL for nine years. He was initially the assistant to the company secretary for BCHL. On the retirement of Noel Reed, Baker became the BCHL group company secretary on 22 December 1989. In the course of his employment he was company secretary to 161 companies in the BCHL group, including BCHL, TBGL, JNTH, and BRL. He was not a director of BCHL or any of the other intermediate holding companies. But for ‘reasons of administrative convenience’ he was a director of many subsidiary companies. Baker gave evidence about the administrative structures within the BCHL group.
24.4.4.1. Administrative structure of BCHL
5559 The structure described by Baker consisted of the chairman, Alan Bond, and four senior executives. Mitchell was head of CPDD and was responsible for group acquisitions, asset sales and restructuring. Oates was in charge of Finance and Administration, which included finance, accounts, tax and central Treasury. Beckwith was in charge of the property portfolio and eventually became managing director. Birchmore was responsible for resource operations such as earthmoving and gold mining companies, until he moved to London in about 1988 and became responsible for BCHL’s UK operations.
5560 Baker testified that until August 1988 each of the four senior executives was a director of BCHL. Because of the cross‑media ownership rules, when BCHL took over the Bell group Oates and Mitchell resigned from the board of BCHL. But each retained their position as senior executive in the BCHL group. Both continued to attend all the board meetings of BCHL.
5561 Baker’s evidence supported that given by Swan in that he said that the core management team of the BCHL group comprised Alan Bond, Oates, Mitchell and Beckwith. They were responsible for all major decisions about asset acquisitions and disposals, participation in projects and obtaining or restructuring finance facilities of the BCHL group companies, at least for the period August 1988 to 31 July 1990. They were known within the group by a number of nicknames, including ‘BOMB’ (derived from their initials), ‘the cabal’ (which Corr explained in his evidence was a reference to the ‘inner cabal’: a name ascribed to them by Vice‑Chancellor Browne‑Wilkinson in the Lonrho litigation) and ‘the gang of four’. I note that Baker even referred to the ‘cabal’ in a memorandum addressed to Mitchell, Beckwith, Oates and Aspinall on 1 September 1989.
5562 Baker provided a helpful chart entitled ‘simplified organisation structure’. It outlined the structure of the BCHL group and its various divisions. Baker confirmed that in the head office, or corporate division, there were a number of departments, which consisted of:
(a) the office of the chairman;
(b) the managing director (Beckwith);
(c) Finance and Administration (headed by Oates) – the company secretarial department (headed by Reed) was part of Finance and Administration; and
(d) CPDD (headed by Mitchell).
5563 Baker became familiar with the management roles within BCHL of Alan Bond, Beckwith, Oates and Mitchell in the course of his employment. In this respect he was in a good position to appreciate what individuals did in his work as company secretary. He also assisted Oates with the maintenance of certain banking relationships. Baker also worked with Mitchell and Oates on a number of major deals (some of which also involved Beckwith and, less often, Alan Bond).
24.4.4.2. Transactions: Oates and Mitchell
5564 When Baker referred to major deals, or transactions, he said that he was referring to asset acquisitions and disposals, or obtaining and restructuring finance facilities. As part of his work, he had regular dealings with colleagues in other departments within this division, such as Treasury (Devries and Noonan), finance (Nizzola and Farrell) and accounts (Swan).
5565 Many of these dealings also involved Oates. Baker’s evidence is that he became familiar with Oates’ role as the head of this division. He observed Oates’ actions in both setting up new banking facilities and maintaining ongoing relationships with various banks. During late 1988 and early to mid‑1989, while Baker was based in London working on the Lonrho litigation, he worked with Oates on various finance facilities obtained from banks based in London. During this time, he talked regularly with Oates about these banking relationships and visited certain banks in London on his behalf and on his instructions.
5566 Baker also said that he worked closely with Mitchell on the acquisition of Australian Occidental (a 1984 acquisition from Occidental Petroleum a major US company), the takeover of TBGL, the disposal of some of TBGL’s non-core assets and the Lonrho litigation. He also worked with Mitchell on certain reconstruction proposals put forward by CPDD in 1989 and on the BCHL scheme of arrangement in 1990. He worked closely with Oates on the establishment of the NAB syndicate facility for BBHL.
24.4.4.3. The decision‑makers
5567 In the course of assisting Mitchell and Oates on the above transactions, Baker said that he observed the way in which decisions were taken and implemented, not only by Mitchell and Oates but also on occasion by Alan Bond and Beckwith. His evidence is that he was present on a few occasions when a decision to do a deal was made. He observed that the decision to do the deal was made by Alan Bond, Beckwith, Oates and Mitchell or some combination of them. After they had decided to do the particular deal, he also observed that Mitchell or Oates assigned responsibilities, including to Baker, for implementing various parts of the transaction. He said that the decision to do the deal would subsequently be put forward to the board of BCHL for ratification. He said:
In the course of my work as company secretary and in assisting Mitchell and Oates with various projects, I also observed the way in which the operational businesses of the BCHL group (such as the Australian breweries, Heileman and Bond property) were managed at the level of Bond corporate. Bond, Beckwith, Mitchell and Oates and the BCHL board delegated a great deal of authority in relation to the day to day operations of these businesses to the various executives whom they had put in charge. However, I also observed that if major strategic decisions had to be taken which affected an operational subsidiary, it was Bond, Oates, Mitchell and Beckwith (or some of them) who took those decisions after consulting the management of the relevant subsidiary. From time to time I prepared documentation relating to those major decisions.
5568 This evidence supports that given by Corr and Swan. It shows the close association between the four members of ‘BOMB’ and supports the view that Alan Bond and Oates, as well as Mitchell, would have had a store of knowledge about the various CPDD restructure proposals. In particular, they would have been aware that the proposals were ‘Bond‑centric’ with little emphasis on the separate concerns of the Bell group.
24.4.4.4. Minutes and meetings
5569 Baker described in his evidence (both written and oral) various transactions in which he had participated by virtue of his role in the secretariat. These included the Freefold loan, the BRL and BBHL brewery sale, and the Manchar security package. In particular, he gave uncontradicted evidence of his involvement in the meetings that approved entry by the Bell group companies into the Transactions. I have described this evidence in detail in Sect 25.7. He also gave evidence about various requests from BGNV’s director, Equity Trust, in respect to the provision of the LDTC certificates and the way that these requests were dealt with by Tagliaferri and MacPherson: see Sect 31.3.
24.4.4.5. Cross‑defaults
5570 Baker gave evidence that he had been present at, and party to, discussions that took place involving BCHL executives including Oates, Mitchell, Nizzola and Farrell about the potential for cross‑defaults into the BCHL finance facilities and convertible bonds caused by a failure in any one part of the BCHL group. These discussions had been prompted by the actions taken in the BBHL receivership by the NAB syndicate, and by SGIC’s application to wind up BCHL. Baker’s evidence is that in these discussions Oates and Mitchell had said that everything in the BCHL group was so interwoven that a cross‑default in one part of the group could give rise to cross‑defaults across the BCHL group. Baker said that they did not have a clear picture of what would happen if any one part of the group failed, but they were very concerned about the potential for cross‑defaults to occur.
5571 In discussions between Oates, Mitchell, and the other relevant executives, Baker said that in his presence all acknowledged that, at the very least, a failure in the Bell group would give rise to a potential for cross‑default into the Midland and Wardley facilities, which had financed the takeover of the Bell group and that had been secured against the BCHL shareholding in the Bell group. He said that the concern expressed by these executives was that if the Bell group collapsed, the security for this facility would become worthless, resulting in immediate cross‑defaults.
5572 Baker was a good witness. He gave clear evidence and I formed the view that I could rely on what he said. I am satisfied that Mitchell, Oates and Alan Bond would have been well aware of the problems a collapse of the Bell group could cause for the wider BCHL group through cross‑defaults.

25. Recitals; minutes; directors meetings; solicitors’ involvement
    25.1. Introduction
    5573 In dealing with the evidence of the Australian directors in other parts of these reasons I put to one side the meetings that were held to authorise and execute the documents that effected the Transactions. I now wish to deal with the factual and legal issues raised by the documents that provide the record of these meetings. In so doing I will need to deal again with some of the evidence of the Australian directors.
    5574 This section also canvasses another contentious issue. The plaintiffs allege that the banks instructed the solicitors to draft and (or) settle the refinancing documents. This includes the recitals and the minutes of meetings. The importance of this plea is twofold. First, it fixes the banks with knowledge of the content of the recitals and the minutes: see Sect 30.5.4. Secondly, it is germane to the various aspects of the corporate benefit argument.
    25.2. The background
    5575 ABSA cl 5.1 imposed a condition precedent to ABFA (with a similar provision in LSA No 2) that the banks were to receive copies of the resolutions of the directors of the borrowers and the security providers approving the financing documents and the transactions contemplated in them. The purpose of the condition was to verify corporate authority and, as I will outline, to cover the question of corporate benefit. The phrase ‘corporate benefit’, as used in the contemporaneous documentation, is a shorthand way of describing the principles encompassed within the directors’ duty to act bona fide in the best interests of the company as a whole. In this sense, it incorporates much of what I have said in Sect 20.3.
    5576 The directors of the Bell Participants met at various times to authorise the execution of the Transaction documents. I have included as Schedule 38.16 a list of the directors’ meetings the minutes of which are said by the plaintiffs to be Transactions. I have also included as annexures representative samples of the minutes. In some instances, the document tendered in evidence was an extract from the minute, rather than a complete copy of the minute itself. In these cases, it is not possible to say which directors participated in the meeting. However, it is reasonable to infer that the same directors participated in those meetings that are said to have been present at all other meetings held on the relevant day.
    5577 The three parts of the table in Schedule 38.16 disclose 71 (or possibly 72) meetings for 66 different companies, as follows:
26. On 25 January 1990, three (or possibly four) meetings were held, in which Oates and Aspinall or Oates and Mitchell participated.
27. On 31 January 1990, 26 meetings were held, in which Aspinall, Oates and Mitchell participated.
28. On 12 February 1990, 42 meetings were held, in which Oates and Mitchell participated.
    5578 The minutes are all similar. In each instance they list the Transaction documents that were tabled at the meeting and say that the chairman read out verbatim the recitals to ABSA and LSA No 2 in order to explain the purposes of the Transactions. For TBGL, BGF and WAN, the minutes include a statement that the directors discussed the terms of the Transactions and noted the ‘substantial benefit’ to the company and TBGL generally that would result from execution of the documents. The benefit is described as being the deferral of the repayment date for ‘certain loans which were repayable on demand’. These minutes include a declaration of interest by the directors under s 228 of the Companies Code (due to cross‑directorships) and record the relevant resolution in these terms:
    It was resolved that the execution by the Company of the Company’s Transaction documents would be:
    (a) in the best interests of the Company as a whole after taking into account both its members’ and creditors’ interests; and
    (b) something of real and substantial benefit to the Company.
    5579 For the other security providers (I have used Albany Advertiser and Belcap Trading as examples in the annexures), the minutes identify the Transaction documents tabled. These contain the same comment about the recitals to ABSA and LSA No 2 having been read out verbatim. The minutes go on to say that the directors discussed the terms of the Transaction documents and ‘noted the substantial benefit that would flow to the Company by execution of the Transaction document or documents’. The benefit was described in the minutes as follows:
    (a) the company was a member of the Bell group of which TBGL was the parent;
    (b) a demand by the Australian banks for repayment of their facilities would render TBGL liable under its guarantees and would, in turn, give the Lloyds syndicate banks grounds to call up their facility;
    (c) the company wished to maximise the likelihood of obtaining financial support from TBGL and other group companies, a goal that would not be achieved if the bank facilities were called up; and
    (d) execution of the Transaction documents would lead the Australian banks to defer the date for repayment to 30 May 1991 and cause the Lloyds syndicate banks to follow suit.
    5580 The minutes then recorded the resolution in exactly the same terms as I have set out above. I wish to draw attention to several aspects of the ‘benefit’ that is described in the explanatory section of the minute. The relevance of this will become apparent later.
29. The minutes draw on and refer to the recitals. The minute also says that the recitals were read out ‘verbatim’.
30. There is a reference in the resolution to the interests of creditors but the explanatory material makes no mention of creditors other than the banks.
31. The advantage to the company is framed in terms of improving the likelihood of ensuring financial support from TBGL and from other companies within the Bell group.
    25.3. The dispute
    5581 The question is whether the minutes faithfully record what occurred at the meetings. Counsel for the plaintiffs put to Aspinall that no such meeting at which those things happened occurred on 25 January 1990. This exchange caused me some concern because of the latent allegation that no directors’ meetings took place. If that were the case the Transactions may be a nullity because they were not authorised.
    5582 The matter was raised again when, on 22 August 2006, the plaintiffs made an application to amend 8ASC and PP. At that time, I asked counsel for the plaintiffs whether the plaintiffs’ contention was that the directors did not give consideration to the interests of each company, or to the interests of their creditors; and further, to the extent to which the directors pointed to those minutes as being evidence of such consideration, they ought not to be accepted because the meetings never occurred. Counsel for the plaintiffs agreed with that summary but added that there was an alternative argument, namely, that if the meetings occurred then the form of the minutes proves the plaintiffs’ case that the directors did not give consideration to the interests of each of the companies. This exchange then occurred:
    Judge: I just want to make it clear that you’re not seeking to raise an argument that says that these transactions are void because they required formal authorisation, that the method of formal authorisation was a properly constituted meeting of directors; no such meeting occurred, therefore there was no authorisation and therefore the transactions are void.
    Counsel: That’s correct, your Honour. We don’t put that, and we do put that the directors caused the companies to enter into the transactions. We do put that they authorised it … So we are not running an indoor management rule case to that extent.
    5583 The dispute is not, therefore, whether the meetings occurred at all. That could not be so because it is the plaintiffs’ case that the directors caused the companies to enter into the Transactions. What is in issue is whether the minutes properly record what actually occurred at the meetings.
    25.4. The minimum requirements for meetings
    5584 Before expressing my conclusions about the meetings and the minutes, it might be as well to touch upon some essentials of the law of directors’ meetings.
    25.4.1. The fact of the meeting
    5585 The most usual way for a company to make decisions by its directors is to convene a meeting and pass a resolution. There is now a provision in the Corporations Act (s 248A) that authorises the making of resolutions without a meeting by passing a circulating resolution; but that was not the law at the time under consideration. At that time, there had to be a meeting.
    5586 In order for there to be a valid meeting of directors, it is not necessary that the directors be simultaneously present in one room; one be chosen to chair the meeting; and the director so selected run the meeting through an agenda of minutes of previous meeting, matters arising not otherwise dealt with, agenda items (with resolutions as to each), other business and finally formal closure. In other words, directors of even large companies can meet and validly resolve as directors to bind the company and authorise acts without the formality typical of a civil service committee meeting.
    5587 What is essential is that there be, in the phrase so often used, a genuine ‘meeting of minds’ of the directors, so that they have in reality met, considered, and decided.
    5588 The Australian authority most frequently referred to in support of this proposition seems to be Swiss Screens (Aust) Pty Ltd v Burgess (1987) 11 ACLR 756, 758. It was cited with approval in Atkins v St Barbara Mines Ltd (1996) 135 FLR 119, affirmed on appeal: (1997) 138 FLR 425. It is of passing interest that the antagonist of the plaintiff in Atkins was the same Alan Birchmore earlier involved in the events the subject of these proceedings. His contribution to the development of the law of directors’ meetings in this jurisdiction has been sustained.
    5589 Swiss Screens has also been cited with approval this State in Versteeg v R (1998) 14 ACLR 1 and in Poliwka v Heven Holdings Pty Ltd (No2) (1992) 8 ACSR 747, 785 – 786. In Poliwka at 8 ACSR 785, Ipp J observed:
    A valid resolution of directors can be taken at an informal meeting; there must, however, at least, be a demonstrable expression of will, on the part of the directors, approving of the resolution. As was said by Sir James Bacon VC in Re Bonelli’s Telegraph Co (Collie’s Claim) (1871) LR 12 Eq 246 at 258:
    If you are satisfied that the persons whose concurrence is necessary to give validity to the act did so concur, with full knowledge of all that they were doing, in my opinion the terms of the law are fully satisfied.
    5590 Whether there is such a meeting of minds is thus a question of substance and not one of form. Given that, and given also the premise fundamental to the plaintiffs’ case that the directors actually resolved to enter into the Transactions, I proceed on the basis that directors’ meetings were held. Whether they occurred in the manner described in the evidence is a separate question.
    25.4.2. The records of the meeting
    5591 What happened at those meetings is another matter. Section 550 of the then Companies Code provided that any book of a corporation required to be kept pursuant to the legislation is ‘admissible in evidence in any proceedings and is prima facie evidence of any matter stated or recorded in the book’. There was an equivalent provision in s 1305 of the Corporations Law. That provision was re‑enacted in s 1305 of the Corporations Act. Although nothing turns on it, I think the correct analysis is that s 1305 of the Corporations Act applies, notwithstanding that the books and records are ones that were required to be kept under the Companies Code, not the present Act: see Corporations Act s 1405 and s 1406; R v Turner [2002] TASSC 18; (2002) 10 Tas SR 388.
    5592 The minutes of the TBGL meeting on 25 January 1990 show that it was resolved that the execution of the Transaction documents would be ‘in the best interests of the Company as a whole after taking into account both its members’ and creditors’ interests’ and that it would be ‘something of real and substantial value to the Company’. The banks argue that the provisions of s 1305 mean that the minute is evidence not open to be contradicted that the directors had turned to the recited considerations, and concluded that there were benefits to the company as resolved.
    5593 I do not accept that argument. The statute only makes the minutes prima facie evidence of the events of the meeting. That is, the minutes are a starting point. But they cannot preclude factual investigation. In my view, I am entitled and indeed required to have regard to the evidence of how the meetings were conducted, and what happened at them, in order to reach a conclusion about whether the directors discharged their duties to the companies respectively concerned.
    25.5. An overview of the conclusions
    5594 In my view, it is inherently unlikely that the minutes are a faithful record of what actually occurred at the meetings. Take the meetings held on 31 January 1990 as an example. Aspinall (I assume) was in Perth, Mitchell was somewhere in Sydney on the end of a telephone and Oates was somewhere else, again on the end of a telephone. It is not likely that on each occasion Aspinall identified the particular company and said words to the effect: ‘These are the Transaction documents that this company has to sign. I will now read the recitals (verbatim) to ABSA and LSA No 2’; and actually did read them. Neither is it likely that there then followed a discussion about the benefit that would accrue to that particular company; nor that the directors moved on to the next company and repeated the dose, 26 times in all. To have done so would have been almost as excruciating as sitting through a long commercial trial.
    5595 Aspinall conceded as much during cross‑examination. In questions that I put to him, I sought to clarify his position. He agreed that he, Oates and Mitchell were the three directors at the relevant time. He said that throughout that period there were many discussions between the three of them, or combinations of them, about the process or progress of the negotiations for the refinancing. He also had many conversations with Simpson about what was happening with the terms sheets, the negotiations and the documents. Simpson was primarily responsible for collating and coordinating the documentation and he quite often visited the banks independently.
    5596 I gave Aspinall a definition of a ‘formal meeting’; that is, where the chair says ‘this is a meeting of X and the business is Y’, the business is discussed, resolutions are put, and the meeting is closed. He agreed that on 25 January 1990 there were no formal meetings (within the definition I put to him) of either TBGL or BGF or WAN. But he said that what is written in the minutes of those meetings captures the substance of things that were discussed. This exchange occurred:
    You said that the chain of events was not, ‘All right, here is TBGL. Stop, we’ve done that. Here is BGF. Stop, we’ve done that. Here is [WAN]. Stop, we’ve done that’. That was really the effect of what you said to me?—That is correct, your Honour.
    Tell me then, what can you recall of the events of 25 January that enables you to say to me now that separate consideration was given to each of those three companies?—Your Honour, as I said, the documents would have been explained to us and quite possibly, as [counsel] has pointed out, the minutes may well have been in front of us at the time, but what makes me recall that is that was an issue that was in the forefront of my mind – was that the benefit that flowed from the negotiations that had taken place and ultimately the facility that was going to be put in place had to be for the benefit of all the companies in the group and these were three companies that basically were – if I could call them the top companies, being [TBGL, BGF and WAN] which held the majority of the realisable assets and we had to make sure that it was in the interests of each of those companies. Now, I confirm … that I can’t say that we started one meeting and we stopped and discussed, then we started and stopped, but as a group we considered the effect – if I could put it in the negative way, we considered the effect that if one of them didn’t agree, one of them didn’t enter into the transaction, what would happen, so there was discussion. I am quite clear in my mind about that, your Honour.
    5597 Mitchell’s evidence on this was of little use. He could not recall the meetings. However, when it was put to him that it was unlikely that a meeting occurred in the form set out in the minutes, he said: ‘I don’t know I accept that. I mean, [Oates] and I would have discussed this by telephone’. In Sect 24.2.8.1 I have described Mitchell’s role and my conclusions in relation to it. I place little or no reliance on what Mitchell said about the meetings of the Australian Bell Participants. Of course, neither Oates nor Simpson was called to give evidence so there is nothing of significance arising as to their participation.
    5598 The fact that it is unlikely the meetings occurred as set out in the minutes is highlighted by a peculiarity relating to the BGF meeting on 25 January 1990. There are two minutes relating to this meeting. Save in two respects, the minutes are identical. In one, it is recorded that Oates and Aspinall were present, in the other that Oates and Mitchell (by telephone) attended. In one, it is said that the tabled documents included the mortgage debenture (but not the share mortgage) and in the other that the share mortgage (but not the mortgage debenture) was before the meeting. Both minutes are signed as ‘a true and correct record’. I am not aware of a share mortgage given by BGF. Be that as it may, the peculiarity was not satisfactorily explained by Aspinall or by Mitchell in evidence. Of course, Oates did not give evidence.
    5599 One or other of those minutes is incorrect. They cannot both be a ‘true and correct record’. I have not raised this peculiarity to cast doubt on whether a meeting of BGF was held at all. But in my view it supports the contention that the minutes were prepared in rote form, probably before the meetings the proceedings of which they are said to record. They are not necessarily a faithful record of what happened.
    5600 My overall impression is that Aspinall would have had a working knowledge of the documents. I think he was aware of the content of the terms sheets as they were developing during the second half of 1989. He was particularly concerned about the list of securities that the Bell group was prepared to offer and those that the banks were prepared to accept. The object, until about November 1989, was to keep as many of the assets as possible (the Bryanston proceeds and the BRL shares being two examples) out of the security net. But I am less convinced that Aspinall would have had an intimate knowledge of the precise contents of the documents. As he said, he was not a lawyer: Simpson and Oates were. He relied on Simpson to explain things to him. In any event, it is one thing to be aware of the content of the documents, but quite another to consider the precise effect, on each company, of entering into the Transactions.
    5601 Aspinall said he could not recall any documents outlining the financial position of each company being tabled or considered at the meetings. He said he could not recall what information he had as far as financial detail was concerned. But he could recall the 10 documents (referred to in the WAN minute of 25 January 1990) being in front of him, although they were not read verbatim.
    5602 Aspinall was asked whether he knew, without reference to financial records, the particular assets owned by each company and the particular liabilities it had. His response was, ‘I would have had a general understanding, yes’. It is to be remembered that the major operating entities were those that controlled the publishing assets, particularly WAN. Aspinall may have had reasonable knowledge of the financial position of those entities. I doubt he had such knowledge of the broader range of TBGL subsidiaries.
    5603 In my view, Mitchell would have had very little knowledge of the financial position of individual companies. There is insufficient information in the contemporaneous documentation on which to base a conclusion that Oates had an intimate knowledge of the assets and liabilities of individual companies. As Oates did not give evidence, I cannot find that he possessed the requisite knowledge.
    5604 I think it is probable that Aspinall and Simpson had taken the running in negotiations with the banks concerning the form of the documentation. Simpson was primarily responsible and he was reporting to Aspinall. There would have been discussions from time to time with Oates and, to a much lesser extent, with Mitchell. A store of knowledge about the Transactions and the documents was being built up during the negotiations. When it came to holding the meetings, the documents and the minutes were available and were presented to the directors. I think it is unlikely that much, if any, consideration was given to the financial position of individual companies. Certainly, no financial information in relation to individual companies was tabled or discussed. It is difficult to see how directors who did not have knowledge of the financial position of each company could be said to have taken into account the interests of the company’s creditors.
    5605 In my view, the store of knowledge to which I have earlier referred caused the directors to form the view that TBGL and BGF had to be ‘in’ the deal. For that to happen, BGUK and WAN and the other Bell Participants had also to be ‘in’. But I am not satisfied that the individual financial position of each of these companies was considered. I return to these conclusions later. I will now outline how the negotiations relating to the documents and the minutes developed. I will also cover, in some detail, the corporate benefit argument.
    25.6. Negotiation of the financing documents
    5606 While it is not easy to put things in neat compartments, it is possible to look at the course of negotiations during 1989 and January 1990 from two separate standpoints: the commercial aspects of the refinancing and the legal structure by which the arrangements were to be implemented.
    5607 It was clear to me from the evidence of various witnesses that the commercial terms upon which the refinancing was to be arranged emerged over a period of months in negotiations between Simpson and various bankers. Aspinall gave evidence that Simpson kept him informed of the process. The terms sheets were negotiated back and forth between Simpson and the lead bankers such as Weir (Westpac), Latham and Armstrong (Lloyds Bank). The core terms of the arrangements were set out in considerable detail. In relation to the commercial terms, one of the more serious issues that arose was the extent of the assets over which security would be taken.
    5608 There were several revisions of these terms sheets: see Sect 30.9. They were consistently referred to the legal advisers who would be acting for the banks: on English law, A&O in London; and on Western Australian law, MSJL in London. P&P in Perth acted for Westpac as the Security Agent. I have dealt with some aspects of the involvement of the lawyers in other parts of these reasons (see Sect 30.5) but in this part it is necessary that I consider the chronology of the instructions to the various lawyers involved and the content of those instructions.
    5609 Before I start on the chronological recitation I wish to make a comment of general application. In what follows in this section and elsewhere in the reasons, particularly Sect 30, I will have a lot to say about what the lawyers did and what they knew. This is an essential part of understanding what the banks did and what the banks knew. But I would not want it to be thought that I have formed the view that any of the lawyers contravened professional standards or behaved inappropriately. That is not part of the case, it is not what I have found and nor is it what I think. In the normal course of legal practice lawyers act on instructions and I have no reason to doubt that they were doing so throughout these negotiations. The banks are the defendants and it is there that responsibility lies.
    25.6.1. A&O
    5610 On the evidence of Perry, then an employed solicitor at A&O, it appears that instructions in respect to the Lloyds syndicate facilities provided to BGF and BGUK, guaranteed by TBGL, were first received in May 1989. Perry said that he recalled being told by a partner of A&O, Humphrey, that because he (Perry) was the only Australian solicitor on the floor he could work on the matter known as the Bell facility.
    5611 Perry said that his recollection was that he met with Humphrey and representatives of Lloyds Bank (Evans, Tinsley and Brackenridge) on 11 May 1989. He kept a detailed file note of the meeting. Evans kept an even better note. Evans’ note recorded that Humphrey had disclosed that he had also been acting for Merrill Lynch on a proposed syndicated facility to Bell but that the request by Lloyds Bank to advise should not cause any problems. The Evans note accorded with the less detailed note of Perry. Between the two notes it seems that TBGL had proposed to restructure the Bell group loan facility by bringing in, as security, shares held by the Bell group in BRL. The Perry note continued that while the bank (Lloyds) considered the Bell group to be quite sound, it was concerned that BCHL was a ‘dodgy’ parent. The bank feared that the BCHL group would dilute the creditworthiness of the Bell group.
    5612 Issues regarding material adverse changes were discussed at the meeting and the advice recorded was that such changes would be very difficult to prove where no specific financial covenants were breached. A downgrading in ratings could be considered a material adverse change but it was not sufficient. Otherwise, the bank had no direct concern regarding the Bell group’s capacity to meet its obligations and repay the loan when due. The concern expressed at the meeting, as recorded in Perry’s note, was that BCHL was trying to ‘bully’ the Lloyds syndicate into a position that would allow the Bell group to act outside the financial covenants set out in the negative pledge arrangement. There was reference to the concern that there seemed to be no restriction on the Bell group or BRL ‘upstreaming’ financial support to the BCHL group.
    5613 The general view, recorded by Perry, was that the present position with the negative pledge arrangements appeared more attractive than this proposal, but Lloyds Bank was investigating the proposal put by the BCHL group. It had sought more information. It had a right to seek this information under the existing facilities and could ask a series of questions, both general and detailed, to ensure that the BCHL group ownership was not having a ‘bad effect’ on the Bell group. The Evans note shows that Lloyds Bank was anxious to ensure that it was doing the ‘right things’ in its role as agent bank for the Lloyds syndicate. However, Evans remarked that Lloyds Bank did not have to regard itself as doing all the thinking for the syndicate; he noted: ‘If we said no to the present proposal from Bell and the Bond Group went bust we could not be held at fault’.
    5614 Perry said his next involvement came some time in July 1989. He wrote a memorandum to two partners of A&O: Jonathan Horsfall Turner, a senior banking partner, and John Rink, a senior litigation partner. He provided them with details of a meeting to be held by the Lloyds syndicate in central London on 20 July 1989, which they were to attend. At trial, Perry said that Horsfall Turner was to be there to advise on English banking law and Rink was to be there to give advice on the law and on tactical commercial strategy. The memorandum attached a copy of the facility agreement and some clippings reporting on various events affecting BCHL.
    5615 Those events included the ABT’s finding that Alan Bond was not a fit and proper person to hold a radio and television licence, and the two consequential proceedings in the Federal Court. In the first proceedings the tribunal sought a determination from the Federal Court on the extent of its powers to cancel, suspend or order the disposal of the BCHL television and radio interests. The second was the appeal by Alan Bond against the tribunal’s findings.
    5616 The other clippings related to the proposal to restructure BCHL’s brewing interests by selling them to BRL. There was also reference to the fact that the ASX had suspended the BRL shares for a period because of the refusal by BCHL to provide a second independent valuation of the brewing assets to be acquired by BRL. Perry’s memorandum noted that:
    The syndicate is concerned that these events may have a material adverse effect on Bell Group and its ability to meet its obligations under the Loan Facility. It should be noted that the Loan Facility was negotiated and entered into prior to Bond Corporation acquiring a majority interest in Bell Group. As such, the Loan Facility does not specifically contemplate occurrences or events outside Bell Group which could have an adverse effect on it.
    5617 Perry also made a note of another meeting on 20 July 1989 with Armstrong, Farquhar and Tinsley (Lloyds Bank). Perry’s evidence is that this meeting was held immediately preceding a meeting with Oates of the BCHL group. The note stated that Lloyds Bank had not received the information that had been promised for some time. It recorded that Lloyds Bank intended to put a more formal request for the information if required. There was a list of questions formulated, presumably for the meeting that was to occur later the same morning, asking about the status of the proposal by TBGL and why the requested information had not been received by Lloyds Bank.
    5618 Later in the same note Perry recorded a presentation by Oates. According to Perry’s note, Oates told the Lloyds meeting that the earlier proposal had been withdrawn and that the non‑Lloyds banks that were lending on the negative pledge arrangements to Bell group might be happy to take up a restructured facility. The note appeared to indicate that the banks in Australia were being approached first about the new arrangements (prior to the Lloyds syndicate).
    5619 The note then recorded a meeting of the Lloyds syndicate members and said, in effect, that even though the earlier proposal had been withdrawn, more information was needed about the inter‑company debt and the security to be offered over BPG. In particular, it recorded that there was a concern expressed by those attending the meeting about the BRL loan and the BCHL group’s ability to repay. There was also notation of advice provided in respect to the obligations of Lloyds Bank as agent under the loan agreement.
    5620 Perry said that in July 1989, after these meetings, his job was to obtain as much information as possible about the companies in the Bell group so that the syndicate banks could make an informed decision on ‘solvent restructuring’. Perry said that, rather quickly, it was he (rather than Horsfall Turner) who became the solicitor to whom the instructions were given. There are copies of letters in evidence that were being sent by Lloyds Bank to the Bell group companies, together with copies of the drafts of those letters marked by Perry. The correspondence with the Bell group indicates that the Lloyds syndicate was taking legal advice on all the matters it raised and that the Bell group would have to pay for it. The letters all state that the legal advice was being taken and given on the position of the syndicate in respect to the borrower and the guarantor companies. The emphasis in all the correspondence is on providing material that would assure the solvency of the Bell group companies.
    5621 I see no need to restate the detail of all the correspondence between A&O and Lloyds Bank, which was conducted generally by Perry with Evans and Tinsley, sometimes Latham. At par 13 of Perry’s witness statement there is a body of correspondence indicating that Lloyds Bank was referring its letters to the various Bell group companies to A&O before they were sent. Perry was amending the letters. They were carefully written, couched in legal terms and frequently referred to particular sections of the facilities agreements that enabled lenders to require provision of the information sought. Perry even gave advice about appropriate service of the letters.
    5622 Perry said he did not advise on whether or not the companies were solvent. He said it was Lloyds Bank that undertook the asset‑backing assessments. Perry’s evidence is that a number of drafts of the terms sheets went backwards and forwards between Perth and London, coordinated by Lloyds Bank and Westpac. However, he said that many of the drafts were held on A&O’s word processing system. There are various examples in evidence of terms sheets being distributed by A&O.
    5623 One of the terms inserted in the terms sheet at this early stage by A&O was a requirement that all intra‑group indebtedness be fully subordinated, both as to priority and enforcement, to the claims of the Australian banks and the Lloyds syndicate. Perry’s evidence is that Horsfall Turner told him it was standard practice in London to include such a requirement in a restructuring of facilities of the nature they were considering. He said he did not consider it in any more detail.
    25.6.2. MSJL
    5624 On 1 September 1989 Perry wrote to Willis at MSJL’s. He asked MSJL if they would be able to act as advisers on Australian law to Lloyds Bank, both generally and in relation to the preparation of the Australian security documentation for the restructured facility:
    Since May this year, we have been advising Lloyds generally on its obligations as Agent under the Loan Agreement and, more particularly, in relation to their concerns as to the effect Bond Corporation Limited’s current financial difficulties could have on The Bell Group Ltd.
    5625 According to the letter to Willis, the proposal by this date was that the existing facility be restructured in order for the negative pledge to be discharged. In return the facility would be secured over the assets of the BPG group. The Australian banks that had lent money at call were to join in the restructured facility with two tranches: tranche A of $130 million and tranche B of £60 million. One of the proposals involved the current loan agreement being amended with new borrowers, guarantors and lenders being introduced to the facility. The other was that a new facility be entered into with BPG as the borrower. Perry commented:
    This latter proposal may not be particularly attractive given that you have suggested that this could give rise to adverse Australian insolvency law implications.
    The reference to the suggestion made by Willis was to a telephone conversation on the previous day.
    5626 Perry conceded in cross‑examination that the purpose of retaining MSJL was to advise Lloyds Bank on issues of solvency. The partner to whom these instructions were passed was Richard Ladbury. He is an Australian, who was working in London and dealing only with matters of Australian law. He ultimately delegated much of the day‑to‑day work to be done by MSJL on the refinancing of the Lloyds syndicate’s loan to Robert Cole and Sally Ascroft. Cole was responsible for the day‑to‑day conduct of the corporate and insolvency issues. Ascroft was responsible for the banking and finance issues. Ladbury said he discussed all relevant matters with these two solicitors regularly.
    5627 Ladbury’s instructions were to act for Lloyds Bank as agent for the Lloyds syndicate. He said that his instructions came usually from Perry at A&O, but often from Latham at Lloyds Bank. Ladbury said that it was his recollection that
    [I]nstructions provided to us by A&O disclosed that companies in the Bond Group were having financial difficulties. I recall also that from early on in the matter the instructions to [MSJL] were to advise on structuring the refinancing facility in a way that would avoid possible difficulties under Australian law issues relating to the winding up of companies, voidable preferences, voidable settlements and issues of corporate benefit.
    5628 On 5 September 1989 Ladbury had a conversation with Perry about which Ladbury kept a note. The cryptic contents of this note show that Perry and Ladbury were discussing insolvency issues. The note referred to the following:
    Is the company able to pay its debts as they fall due? Certificates to that effect; preference – the repayment or the charge-6 months’ … S 451 adopts 122-452-floating charge, commensurate level-better to take security-borrower/guarantor.
    5629 Importantly, the note contained the words ‘corporate benefit’. While there was some controversy about it, in evidence Ascroft referred to a file note (dated 4 September 1989) of a telephone conversation that she had had with Ladbury and Perry. Her evidence is that preference issues were specifically discussed during that conversation and I see no reason to take a different view.
    5630 On 13 September 1989 Ladbury sent a fax to Latham at Lloyds Bank. He commented on the current terms sheet, made some suggestions regarding further information and amendments, and raised the possibility of obtaining a certificate of solvency. He confirmed this had been discussed with Perry.
    5631 On 19 September 1989 Latham, Horsfall Turner, Perry, Ladbury and Cole met in London. Cole made a note, which recorded that Ladbury ‘ran through law in area’ and Latham expressed his concerns about proving the borrower company was solvent if ‘looking back in 6 months time’ and ‘lenders would want to be able to realise and sell the whole business’. The conclusion reached at the meeting was that MSJL would prepare an opinion ‘forthwith on risks etc re preferences – based on certain assumptions’. Those assumptions are set out in the detailed letter of opinion dated 27 September 1989.
    5632 The opinion was drafted by Cole with some help from two solicitors at MSJA, Collinson and Troiani. Ladbury reviewed the opinion before it was sent to Lloyds Bank. The 22 pages of comprehensive advice were based, as Cole confirmed in his evidence, on an assumption that the Bell companies were insolvent. Cole said that was an assumption that Ladbury had instructed him to make. The concluding paragraphs of Cole’s opinion say:
    The above advice discusses the specific questions of whether the repayment of the Existing Facility and/or the granting of the new security to support the New Facility could constitute ‘voidable preferences’ under Australian insolvency legislation in particular section 451/122 and 452. However, these are not the only bases upon which a liquidator can seek to avoid a transaction entered into by a company prior to its liquidation. In particular, it is always open to a liquidator to challenge a transaction entered into by a company on the ground that the transaction was not ‘in the best interests of the company as a whole’. To satisfy this test, the directors of the company concerned are required to have taken into account the interests of the shareholders of the entity concerned as well as the particular creditors of the entity concerned.
    In the context of the present restructuring, there is in our view a real risk that certain of the charges granted by entities within the Bell Group might be vulnerable to avoidance on the ground that they are not [in] the best interests of the companies concerned. We can advise you further on these issues in the near future if you so desire.
    5633 The last paragraph is, once again, a reference to the corporate benefit problem. After this opinion was received by Lloyds Bank, Latham asked Cole’s permission to circulate it to the other syndicate banks. Permission was given but Latham did not distribute it. He took up the invitation to discuss the corporate benefit issues further with the lawyers. A meeting was held on 5 October 1989 between Latham and Evans of Lloyds Bank, Horsfall Turner and Perry of A&O, and Cole of MSJL.
    5634 Cole kept a note of the meeting, but a more detailed note was made by Latham. Latham’s note says that the object of the meeting (following the 4 October 1989 meeting of all the banks and Simpson in Sydney), was to ‘review ways in which the banks could be assisted in their understanding of the preference issue’. It refers to Perry’s summary in matrix form of the ways in which the voidable preference issue could ‘bite’ the various parties on the borrower/guarantor side. It says that they reviewed the ways in which the voidable preference risks might be reduced. They discounted increasing the number of borrowers for reasons of practicality, complexity and matching security issues. They discussed whether or not a ‘sense of new lending’ could be helped by changing offices. That too was discounted because, in Latham’s view, a capital allocation issue could arise and, in any event, not all banks had other offices.
    5635 According to Latham’s note, there was an ‘attraction’ in making the Bell group a borrower, particularly in relation to the possible mortgage of BRL and JNTH shares. The note continues:
    The problem of possible double jeopardy was again discussed. Whilst this problem would be removed by keeping the present borrowers, that creates other difficulties in relation to the reliance which could be placed on the guarantee from Bell Publishing.
    Robert Cole would check various detailed items and would check once again that – other than the fundamental question of the proposed transactions not being in the interest of the company as a whole – our proposed fixed charges were unimpeachable.
    We agreed to meet again, probably on Tuesday 10.10.89 when we could try to come closer to the text to be sent to the banks.
    I mentioned some of the points which had emerged during the meeting of the Banks in Sydney, and Allen & Overy undertook to check the UK legal position in relation to the present borrower with one of their insolvency partners. It will clearly be vital to have the balance sheets of the present borrowers, both from the English law standpoint and to mitigate the double jeopardy risk.
    5636 I will describe the ‘double jeopardy’ problem in some detail in Sect 30.8. Briefly it is a risk that the banks might lose the benefit of any repayments made to them and, in addition, lose the benefit of securities taken under the refinancing.
    5637 On 10 October 1989 Cole sent a fax to Collinson in Melbourne asking for the opportunity to discuss two questions:
32. The question whether, if we remain with the existing borrower and simply take a fresh guarantee from [BPG], that would cause [BPG] greater difficulties with the ‘best interest of the company as a whole’ question than if we notionally made an advance direct to [BPG]. In both cases, the result at the end of the day is the same-Bell publishing gives a whole lot of security for moneys it never actually receives.
33. If we proceeds with the advance to [BPG], the question whether the ‘double jeopardy’ could be avoided by Bell Finance assigning/novating all its rights and obligations under the existing loan agreement to [BPG]. The consideration for the transfer would be £60 million (ie the amount of the existing loan) payable by [BRF] to [BPG] in 1991 (timed to coincide with the repayment date under the loan agreement with the Banks).
    Our immediate concern is whether or not a Court would be prepared to go so far as to construe this transaction as in effect amounting to a form of payment (in substance) by [BRF] to the Banks of the existing loan for the purposes of s 122 (though the Court would be drawing a pretty long bow in reconstructing the transaction in this way).
    I noted with wry amusement he began this fax ‘This saga continues!’
    25.6.3. The combined advice
    5638 There were discussions that followed this fax between the lawyers and Lloyds Bank. These discussions resulted in a draft joint opinion from MSJL and A&O dated 13 October 1989. The opinion is addressed to the Lloyds syndicate and was distributed at a meeting of the Lloyds syndicate banks on 13 October 1989 in London. It sets out three possible restructures: (1) the fresh loan to BPG coupled with repayment of the existing loan; (2) the continuation with the existing borrowers; and (3) a novation by BPG assuming all liability under the existing loan.
    5639 Each alternative contemplates that mortgages (fixed and floating security) would be taken over all assets of TBGL, the existing borrowers, and BPG and its subsidiaries. The opinion proceeded on an assumption (described as a ‘worst case’ scenario) that every Bell entity making a payment or granting security would be unable to pay its debts as and when they fell due and that each entity would enter into winding up within six months of the date of the transaction.
    5640 The opinion identifies the risks of each alternative restructure. In respect to (1) the opinion states is that it would ‘clearly’ be a voidable preference. This would enable a liquidator of the existing borrowers to force the Lloyds syndicate to disgorge the repayment and prove in the winding up for the repayment of such a debt notwithstanding that moneys had not, in reality, been repaid to the banks. This is the identified ‘double jeopardy’ and the opinion states that:
    Given this ‘double jeopardy’ (ie, the potential for the restructuring to worsen the Banks’ present position), the Repayment/Fresh Advance Structure should not be proceeded with if the Banks have any doubts about the solvency of the Existing Borrowers.
    5641 Structure (3) was not recommended because of the double jeopardy consequences and the risk of a preference extending to the entire transaction, including all fresh security.
    5642 The opinion identifies structure (2) as the preferred structure if there is any concern about the solvency of the existing borrowers. It is stated that this structure involves no risk of double jeopardy and that the banks would not harm their present position by following this course. The opinion identifies the risk that certain of the fresh securities may be vulnerable as a voidable preference but during the first six months only. It is noted that apart from these concerns, there is
    a separate issue of whether or not each of the relevant Bell Entities will be acting for their own corporate benefit in granting security or making a repayment. If they are not, and at the time of doing so they are insolvent, the security/repayment is voidable. There is no time limit as this is common law principle relating to the directors acting without due regard for the interests of the company concerned.
    5643 And a little further into the opinion:
    With each Structure, there is a risk that a future liquidator could have these guarantees (and all fresh supporting security) set aside as not being in the best interests of Bell Publishing Group or the subsidiaries (as the case may be) as a whole.
    …
    At the end of the day, however, the question of corporate benefit is one of fact to be determined by the courts. The ultimate test would be whether the directors of each Bell Entity can justify themselves on reasonable grounds that the transaction to be entered into is or are bona fide in the best interests of the Bell Entity concerned. (emphasis added)
    5644 That is precisely the issue. It was for the directors to consider the best interests of the companies concerned and to give the security bona fide in these terms. But at this point all the discussions were between the banks and their lawyers; none of this advice had been directed to the borrower companies. Nor is there any evidence that the bank officers to whom it was directed discussed it with the directors.
    5645 Various drafts of this opinion passed between the lawyers. Ultimately, it was superseded by another dated 20 October 1989. The introductory paragraph to the 20 October 1989 opinion said that it incorporated further refinements and a new recommended structure that ‘has been devised after consultation with Westpac and its legal advisers’. Included in the 20 October 1989 opinion are references to English insolvency law and the possibility of the transactions being avoided because they defraud creditors. The most significant alteration is the replacement of structure (3) from the earlier opinion (the novation structure) with a new assignment structure. This new structure was proposed by P&P.
    25.6.4. P&P
    5646 P&P in Perth had acted for Westpac for many years. Stow at P&P was, as he described in his evidence, the relationship manager. He recalled in his evidence that his first meeting with Weir and Browning of Westpac in respect to the Bell group loans occurred in late August or early September 1989. He said that at the first meeting ‘no advice was sought or given’.
    5647 Thereafter Stow had a number of discussions with the same two representatives of Westpac. He said that the discussions related to the indebtedness of the Bell group to a number of Australian banks and a syndicate of overseas banks led by Lloyds Bank. He said that at least by 10 October 1989 he was aware of A&O and MSJL’s involvement on behalf of the Lloyds syndicate. In fact, he would have known earlier than this date because there is in evidence his file note recording a telephone conversation with Perry (A&O) and Stephen Paterniti (P&P) on 17 September 1989.
    5648 Sadly, Paterniti died before trial. His witness statement was admitted by consent. In it he says that he was told by Stow in September 1989 that he was to assist him in the giving of advice to the Australian banks on a proposed refinancing of loans made by the banks to the Bell group of companies. He was specifically told by Stow to consider any insolvency law issues raised by the proposed refinancing and how the risks could be minimised by the structure of the refinancing. He was not instructed to investigate or assess the solvency or otherwise of the Bell group. Thereafter, Paterniti said, between September and the end of October 1989 he had many discussions with Stow, Perry, Cole and Collinson; with Browning and Weir of Westpac; with Derham, the in‑house lawyer at NAB; and with Armstrong of Lloyds Bank. He said he saw the joint opinions prepared by A&O and MSJL. He had discussions with the solicitors involved, and the bank representatives he mentioned, about the issues raised by the opinions.
    5649 Various alternate structures were proposed during this period, including the assignment structure proposal, which came from P&P. This was a proposal whereby the banks would assign their rights under the existing loan agreements to one or more of the companies providing the proposed securities in consideration of the assignee agreeing to pay to the banks a sum equal to the amount of the existing facilities. The obligation on the part of the assignee to repay that sum would be secured by the proposed securities.
    25.6.5. Westpac’s in‑house lawyer
    5650 Diane Browning was a Westpac in‑house lawyer. Her title at the time of the Transactions was Manager, Legal, of the Corporate Banking department in Western Australia (Corporate Banking WA). She said in her witness statement that her role had been to document transactions and to provide legal advice on request to members of Corporate Banking WA. She did not have a direct relationship with bank customers, nor was she involved in making decisions from a credit perspective. Essentially her role, she said, was to negotiate documentation and to provide advice on the legal aspects of any transactions as and when requested by other members of the department. If a particular issue was complex, or she thought it prudent to obtain external advice, she instructed the bank’s external legal advisers. Sometimes she would discuss issues with the head office legal officers. She said that something of the scope and complexity of the Bell group refinancing needed external legal advice.
    5651 Her evidence established that she was involved with the negotiations concerning the Bell group facilities from February 1987. The extent of her involvement and knowledge is important because I formed the view that she was a direct conduit of information from, and to, Westpac’s senior management involved in the refinancing. In particular, she worked closely with Cutler and Weir. She was present at numerous meetings with Weir and Stow and Peek of P&P. She gave evidence that in relation to any transaction in which she was involved she would have read any legal documents relating to the transaction and she would have been copied in to any correspondence about it to see if it had any legal content. She said that it was her usual practice to require external solicitors with whom she was dealing to send her copies of all correspondence.
    5652 In her witness statement there were numerous examples of letters and faxes sent by her, addressed to her or which had been copied to her. All legal advice written by P&P and received by P&P in respect to the refinancing was copied to Browning at Westpac. This includes correspondence that attached, or referred to, advice being given by S&M in London to the Bell group companies in the United Kingdom. In addition she was included in most, if not all, of the meetings between Westpac and P&P, and between Westpac, P&P and S&W (Watson and Morison) who were acting for the Bell group.
    5653 I did think it rather unusual that, having been present at most if not all of the significant meetings in the course of the refinancing negotiations, Browning did not have one file note of her own arising out of the meetings. All the notes recording her attendance at these meetings were made by others. She gave no adequate explanation for this in cross‑examination. In her evidence she said that she knew and understood the test of corporate benefit but thought this was a matter for the directors of the Bell group. I will say more about that view later.
    25.6.6. Senior counsel’s advice
    5654 Paterniti said in his witness statement that by 19 and 20 October 1989, the banks’ lawyers had agreed that they should take advice from senior counsel about the most appropriate structure for the proposed refinancing. He prepared the preliminary draft of instructions to counsel. That draft was sent to the other lawyers, including Browning at Westpac. Some contributions to the draft were made by Perry and Cole. Browning suggested some amendments but they appeared to be in respect to the amounts of total indebtedness. Paterniti sent a copy of the instructions to counsel to Derham (the in‑house lawyer at NAB) at his request. No details were included of the inter‑company lending.
    5655 The instructions finally went to MSJA in Melbourne and, at the suggestion of Collinson, an opinion was sought from Kenneth Hayne QC and Julian Burnside. The instructions were given on behalf of all the banks. Counsel were asked to advise about which of two proposed structures was preferable: the ‘existing borrowers structure’ described as (2) in the joint opinion; or the ‘assignment structure’ suggested by P&P.
    5656 On 26 October 1989 a conference was held at Hayne QC’s chambers in Melbourne. In attendance were Hayne QC, Burnside, Collinson, and Paterniti. Oral advice was given immediately and the written opinion was delivered the next day. Counsel were aware that the question put to them (assignment structure or existing borrowers structure) did not arise in a vacuum. As they noted in their opinion:
    There is considerable publicity about the financial plight of the business enterprises of Alan Bond, of which the Bell Group is a part. Unless certain assumptions are made, the questions are empty. For the purposes of this opinion, we adopt the following assumptions, in an excess of conservatism:
    (a) The security providers are presently insolvent.
    (b) The security providers will be wound up.
    We do not know whether either assumption is accurate.
    5657 Adopting those assumptions, Hayne QC and Burnside stated a preference for the existing borrowers structure over the assignment structure. They advised that if the borrowers were insolvent at the time of assignment, the liquidator could avoid it as a manifestly bad transaction for the assignee because ‘the true value of the consideration it receives is far less than its apparent value’. And, ‘there is no obvious commercial rationale for the assignment if existing debtors are able to repay their debt: if they are not the assignment is likely to be avoided’.
    5658 They said that a suggestion made at the conference between counsel and the lawyers on 26 October 1989, that the assignment structure could be improved by provision of guarantees and indemnities from the security providers, would not work. In their opinion, the device would ‘fail the corporate benefit test’ because the assignees would pay the full face value of the loans, which were worth much less than that, and the security providers would pay the full face value of the loans and receive nothing at all.
    5659 The existing borrowers structure, they opined, had the advantage that each security taken would stand separately. They advised:
    If the fresh securities are susceptible to attack, they will have to be set aside one by one; but the avoidance of one will not directly affect any other. We note in passing however, that if our two stated assumptions are right, the securities will be set aside if the security providers are wound up within six months of the grant of security.
    5660 They noted that a potential objection to the existing borrowers structure was that the security providers would get no valuable consideration for their security. But, because the loan funds ‘all have been on‑lent’ to subsidiaries of the borrowers, if the Westpac loan was liable to be called up, BFG would be entitled to call up its loans to the subsidiaries. In those circumstances, they advised, the forbearance of Westpac to call up loans would be of real value to the subsidiaries. No security could be given by the security providers unless the Lloyds syndicate waived the benefit of the negative pledge, and this waiver would be of real value to the security providers. They said that the proposed existing borrowers structure could be improved by ensuring that the security documents recited the facts that enable it to be said that the security was given for valuable consideration.
    5661 Their advice continued to the effect that in respect to one part of the proposed existing borrowers structure (that is, the proposed change in the Westpac facility from an on call loan facility to a syndicated revolving bill acceptance facility) the change could expose the lenders to ‘double jeopardy’. That means that the repayment of the existing advance would be voidable and the fresh advance would be irrecoverable. They noted that this is because the loans were ‘presently’ on call and putting a bill facility in place would involve accepting and discounting bills and applying the proceeds to discharge the present debt. On the assumptions adopted the repayment would be a voidable preference because:
    Sufficient time has past since the previous bill facility expired to defeat an argument that the repayment of the present debt by reinstating the bill facility would be defensible as a payment on a running account.
    5662 Hayne QC and Burnside concluded their advice by saying that the assignment structure was ‘essentially fragile’ and likely to be set aside leaving the lenders with no security. The existing borrowers structure was, they said, ‘comparatively much more robust and has a chance of surviving at least in part’. Finally, they noted, ‘If both of our assumptions are correct, either structure would fail’.
    5663 This was clear and considered advice. But in giving the advice, counsel had not been provided with any details of the inter‑company loan arrangements.
    25.6.7. The follow‑up to the advice
    5664 All Australian banks were represented at a meeting held at Westpac’s offices in Sydney on 27 October 1989. The crux of the advice was communicated orally by Paterniti to Weir. It was then discussed at the bankers meeting. Paterniti and Stow discussed the advice on or about 30 October 1989.
    5665 Counsel’s opinion was distributed by Collinson on 30 October 1989 to MSJL and P&P. Cole (MSJL) sent it to Latham (Lloyds Bank) and to Perry (A&O). Stow (P&P) sent it to Weir at Westpac. Stow wrote in a covering letter that the existing borrowers structure should be used: this was what was recommended by counsel. The letter mentioned a difficulty with SocGen wanting their facility to expire on 31 December 1990 (rather than the existing Lloyds syndicate facility’s end date of 19 May 1991), which might prove to be a consideration problem and that they intended to give this more thought. The letter said that P&P would be discussing this further with the Lloyds Bank lawyers.
    5666 I am satisfied that Weir distributed the letter from P&P and the opinion from counsel to all the Australian banks. Latham did not distribute counsel’s opinion to the Lloyds syndicate. Rather, he set about revising the terms sheet in light of the opinion. The revisions removed reference to ‘new facilities’ so that it read that the terms of the ‘existing facilities are to be restructured’. Various consequential amendments were made. He inserted under the conditions and covenants a heading that ‘Bell Publishing group and its subsidiaries’ were to be subject to the existing Lloyds facility covenants and these were to be amended to provide ‘where necessary for the benefit of all lenders’. In the margin under ‘guarantors’ Latham inserted the reference to the various companies to be included in the arrangements (including Bryanston and Western Interstate) giving security.
    5667 By 27 October 1989, the lawyers Ladbury, Perry, Ascroft and Cole had already met in London to discuss the categories of documents that would need to be drafted and a timetable for preparation. On 31 October 1989 MSJL wrote to A&O and Lloyds Bank with a proposal for how the drafting work was to be allocated. The same day Latham conferred with Perry, Ascroft and Ladbury concerning the documents to be drafted in light of counsel’s opinion and the revised terms sheet and the timetable. The timetable was tight. Latham saw a need to get this done quickly and it was intended to have the documents executed by 15 December 1989.
    5668 By now all the lawyers, including P&P, were of the view that the existing borrowers structure should be used. There was, at this point, something of a demarcation dispute, which arose between the lawyers and their respective bank clients, regarding the drafting of the documents. I see no reason to go into the detail of it, and ultimately it was resolved that A&O in London would draft the security documents in conjunction with P&P. MSJL would prepare the recitals and oversee the documents being produced by A&O for the Lloyds syndicate. P&P would do the same for Westpac.
    5669 In her evidence, Peek identified the final allocation of tasks in relation to production of the documents. Broadly, there was a division of the documents along geographical lines into the Australian and the English security documents. Sometimes the documents that were common to both locations were first drafted by one of the law firms and then passed on to the other. Each of the law firms was required to produce a body of what were described as ancillary documents. These included the minutes and resolutions.
    5670 Throughout November 1989 there was frenetic negotiation and production of the terms sheets. Perry, in particular, was involved in the drafting of the terms sheets. P&P advised Westpac on the content of the terms sheets. By early December there were many draft documents and detailed correspondence about the documents going between the lawyers. I wish only to deal here with two particular aspects of these documents: the evolution of the recitals to the Transaction documents, and the company minutes.
    25.6.8. The recitals: background
    5671 A specific element of the advice given by Hayne QC and Burnside was the need to ensure that the recitals to the Transaction documents recorded the factual circumstances that could be said to give rise to valuable consideration and consequential corporate benefit. As I noted at the start of this section, the phrase ‘corporate benefit’ is a shorthand way of describing the principles encompassed within the directors’ duty to act bona fide in the best interests of the company as a whole. As will appear from the discussion that follows, the lawyers advising the banks recognised this. In particular, they were aware that where a company is in an insolvency context, the interests of the company require that the interests of creditors be taken into account. They also recognised that the benefit had to be something of substance, not a mere trifle.
    5672 The legal concept of corporate benefit was something that guided the lawyers in drafting (the plaintiffs would say crafting) the Transaction documents, in particular, the recitals and the minutes. In this respect I will mention two documents that, I think, capture the mood. After the conference with counsel in Melbourne on 26 October 1989, a note was made by one of the lawyers present at that meeting, which said:
    Corporate Benefit test can be used to our advantage. Should attempt to recite our way into an advantage with the Corporate Benefit Test.
    5673 On the same date, one of the lawyers in London had a conversation with one of the lawyers present at the conference in Melbourne, and noted:
    Dress up in recitals
    5674 I do no more than mention these notes at this stage. I will return to them later in the course of describing how events unfolded.
    25.6.9. Drafting the recitals
    5675 The recitals to LSA No 2 and ABSA were drafted by Cole in London, with amendments and suggestions being made by Ascroft in London and Stow in Perth. These recitals were then passed to Peek who had to include them the security documents that she was preparing in Perth. I understand that the Australian documents followed the Lloyds document. As the plaintiffs’ counsel described the process at trial, they then ‘marched in lock step’. Perry arrived in Perth in the first week of December 1989 to liaise with P&P in the production of the documents.
    5676 There are numerous examples of correspondence between lawyers in the same firm and between the various firms. In Cole’s witness statement at par 21 there is an explanation of the way in which the documents were constructed. Attached to a letter dated 30 November 1989 and sent by Cole to A&O was the first draft of the set of recitals intended for TBGL (an existing guarantor); BPG and various other proposed security providers (all being subsidiaries of BPG); BGF (an existing borrower); and WAN (the existing borrower under the Westpac overdraft arrangements).
    5677 The recitals state what Cole then believed to be the correct factual circumstances of the borrowing and on‑lending. The recitals then said that the ‘the Company is of the view’ that deferment of the loans at call, under the original agreement, was something ‘of real and substantial value to the Company and in its best interests as a whole’. The waiver of the negative pledge by the Lloyds syndicate, which enabled the grant of security, was also expressed to be ‘something of real and substantial value to the Company in that it would enable the deferment of a call on BGF’. Finally, the recitals recorded that the execution of the security documents was in ‘the best interests of the Company as a whole after taking into account the interests of both its members and creditors’.
    5678 The assumption in the structure of these draft recitals, and indeed the basis of all the advice given to this point, was that BPG was a creditor of BGF. I note that on 21 September 1989 Weir sent Latham a hand drawn diagram that shows an assumption by the bankers that BPG owed BGF.
    5679 At this point DG Bank took advice from Clifford Chance. Clifford Chance raised the question whether TBGL’s confirmation of liability under its existing guarantee could be voidable as a preference, or for want of corporate benefit. In a letter dated 5 December 1989 from Cole to Latham (copied to Perry, Clifford Chance and DG Bank), Cole explained the corporate benefit principle in these terms:
    You are well familiar with the principle that directors of a company must act bona fide in the best interests of the company as a whole. This requires the directors to take account of the interests of its shareholders and its creditors. Where a company is financially unstable the interests of creditors become paramount, and, accordingly, the directors cannot allow the company to enter into a transaction that would put the creditors’ claims against the company at greater risk than prior to the transaction.
    Assuming Bell Group is ‘financially unstable’ (which does not necessarily mean insolvent) then the question arises…
    5680 Cole continued that the two rational bases for TBGL’s confirmation of existing guarantees were first, to protect its interest in its subsidiaries, the borrowers; and, secondly, that if it did not do so the restructuring would not proceed and TBGL would then face demands under its guarantee. His conclusion was that confirmation of the existing guarantee would not expose the Lloyds syndicate to any greater risk of avoidance than already existed.
    5681 Again Cole’s advice was correct. It was specific about the requirement for the directors to act bona fide in the best interests of the company; for the directors to take account of the interests of the shareholders and creditors; and that the directors could not allow the company to enter into a transaction that would put the creditors’ claims at greater risk.
    5682 The glaring omission was that no‑one gave the directors this advice. Cole’s conclusion about TBGL’s ‘rational bases’ for confirming the existing guarantees is one he drew. No‑one actually asked the directors to assure the banks that they, the directors, were bona fide acting in the best interests of the company.
    25.6.10. A problem arises
    5683 After the first draft of the recitals was circulated, Cole had a telephone conversation with Latham. Cole learned that BFG had in fact borrowed $45.7 million from WAN. Cole referred to the conversation in his letter to Latham dated 8 December 1989, which attached a further set of draft recitals. The heading of the letter is ‘Recitals-Insolvency-Corporate Benefit Issues’. Cole wrote that in his telephone conversation with Latham that day he discovered ‘for the first time’ that there was no evidence of any inter‑company loan from BGF to BPG.
    5684 Cole notes in this letter that the existence of a loan from BGF to BPG was an assumption made in all advice to date and in the brief to counsel. That was what Latham and Perry had told him. He said that, in particular, the advice of counsel (by which he must Hayne QC and Burnside) referred specifically to the existence of the inter‑company loan to BPG as a means of establishing the requisite valuable consideration under s 120 of the Bankruptcy Act. He wrote:
    In short, and as set out in the previous draft recitals I prepared for BPG, if it were true that BPG owed money at call to [BGF] then it would be something of substantial value to and in the best interests of BPG to grant security in order [to] avoid a call on [BGF] under the existing Australian loan.
    Without the existence of that inter‑company loan, BPG is in the same category as most of the other Security Providers in that there is no obvious corporate benefit to it in giving a guarantee and security in relation to obligations of a ‘sister company’.
    5685 Cole enclosed the redrafted recitals. But he said that pressure should be put on the Bell group to provide full facts, by early the following week, of all indebtedness between all the security providers that directly or indirectly leads back to TBGL, WAN or BGF. The letter and the recitals were forwarded to Latham at Lloyds Bank, and Perry (who was actually in Perth) and Nicholas Watson at A&O’s London office. A copy was sent to Stow at P&P.
    5686 There were four different sets of recitals intended for inclusion in the draft security documents for the different classes of companies: TBGL, BGF, various BPG security providers, and WAN. In the draft WAN recitals, Cole explained (in E) that there was a need to
    [i]nclude the following if any chain of inter‑company indebtedness from the Company or any of its subsidiaries back to either Australian borrower or BGL can be established:
    …
    The Company has/and/or/Certain subsidiaries of the Company have/borrowed moneys from the Australian Finance Borrower/Australian Overdraft Borrower/BGL/[any other company actually or contingently indebted to any of the above]/by way of inter‑company loan and those moneys are presently repayable on demand.
    A copy of these draft recitals was given to Stow. His comments, appended in handwriting, are succinct and, in my view, telling. He wrote: ‘Can’t’ and ‘how?’
    5687 There is further correspondence, including a letter from Stow to Westpac dated 9 December 1989, repeating the advice that the banks were at risk in respect to the corporate benefit test. Over the weekend of 9 and 10 December 1989 there was considerable attention to this issue, and conversations and correspondence passed among Cole, Latham, A&O and P&P about it. Latham in particular tried to persuade Cole that it would be enough for subsidiaries of BPG to have borrowed money from BGF; but Cole maintained his view:
    On the very limited facts we have, the only security provider which has an obvious argument of corporate benefit and valuable consideration is [TBGL]. In short as BGL is already bound by guarantees in favour of both Lloyds and Westpac banks, action taken on its part to defer a claim being made on it under both guarantees is arguably in the best interests of its members and creditors.
    5688 The absence of the fact of indebtedness between BFG and BPG undermined the advice the lawyers had given about the so‑called tenable corporate benefit and valuable consideration. Cole maintained his insistence that the banks should put pressure on the Bell group to provide the full facts of inter‑company indebtedness. But other pressures intervened and that advice was ignored.
    5689 In drafting the recitals Cole did not receive the necessary financial information to establish the facts of the existence of corporate benefit. And, perhaps even more telling, at this point the intention of the banks, and of the lawyers, was to have all these documents executed by 15 December 1989. In that compressed time frame there was no reason for either the banks or the lawyers to believe that the directors would have the requisite information and turn their minds to questions of directorial responsibility.
    25.6.11. The ‘panic weekend’
    5690 At 4.00 pm on Friday 8 December 1989 a petition was presented by Adsteam to this Court for the purpose of appointing a receiver to BRL. This action was precipitated by the BCHL and Lion Nathan brewing deal falling through. At this time Perry was in Perth at P&P and he would have relayed this information to London.
    5691 The events of the ensuing couple of days were referred to at trial as occurring in the ‘panic weekend’. A decision was made in London, certainly on instructions from Latham, to accelerate the taking of the security. There were various discussions, supported by notes in evidence, between Ascroft of MSJL in London, Perry of A&O in Perth, Naughton at MSJA’s Perth office, Watson of A&O in London (running the file while Perry was in Perth) and Latham at Lloyds Bank in London.
    5692 Stow in Perth had a number of telephone conversations with Weir. His advice was to take security immediately. Weir asked Stow to consider if this would be detrimental to the banks’ position. Stow and Peek of P&P wrote to Weir on 9 December 1989. In the letter they confirmed that they had recommended that the security intended to be given as part of the restructuring should be taken immediately. The letter referred specifically to the assumption made by senior counsel, and incorporated in the advice upon which the proposed restructuring was to occur, that there were at call inter‑company loans between BGF and BPG. As I have noted earlier, that was an incorrect assumption.
    5693 The letter revisited the Bankruptcy Act s 120 issue and the provision of valuable consideration. It said that in granting the security by the security providers, in particular BPG, it was necessary to ask whether or not the company had received something of a real benefit in exchange for the disposition of property. It also referred to the corporate benefit test and concluded:
    In summary, we have endeavoured to incorporate in the recitals all the consideration that we can see flowing between the various third party security providers to [BGF] and that position, in our opinion, is not altered by the proposed new course of action.
    As mentioned previously, the Banks are still at risk and for the reasons outlined previously to you and mentioned in Counsel’s opinion.
    5694 The letter explained the proposal to accelerate the taking of the security by finalising and executing the ABSA with the security and guarantees to be taken from the principal asset holding companies of BPG (in other words, WAN). The banks would simultaneously enter into the ICA and the STD. The documents for the Lloyds syndicate would follow the same pattern. The recitals would be those already drafted by Cole, now inserted in the ABSA.
    5695 For the Lloyds syndicate, confirmation of the instructions and the collective advice of the lawyers were contained in a very similar letter, from Watson (A&O) to Latham dated 8 December 1989. In cross‑examination Ascroft was taken through the letter, which began:
    In view of recent developments affecting [BRL] and [BBHL] it is proposed that the security to be given as part of the intended restructuring of the existing facilities be taken immediately.
    5696 The proposal in the letter was to alter the provisions of the terms sheets to include a material adverse change clause and full cross‑default provisions in relation to any related BCHL or Dallhold entities. The documents would ensure that cross‑default in the Australian banks’ facilities would operate as a default under the Lloyds syndicate banks’ facilities with recourse then to the security and guarantees from the principal asset holding companies of BPG, including WAN.
    5697 Cole marked up the proposed recitals to be used in the various documents. They were changed slightly from his previous drafts. As Ascroft wrote in a fax dated 11 December 1989 and sent to Perry, Watson, Peek and Latham:
    The changes, as I understand them, are designed to make it clear that each individual Subordinated Creditor considers this Subordination Agreement to be in its best interests as opposed to the best interests of the group as a whole. The case law in the area (Kinsela’s case) makes it fairly clear that when a company is in financial trouble the interests of its particular creditors become paramount and any given transaction must be in its individual best interests as a whole rather than it the wider interests of the group as a whole.
    Consistent with the above-mentioned principle, the recitals now indicate that the various requests and/or approaches made by the Borrowers and other Security Providers have in fact also [been] made on behalf of all the Subordinated Creditors. (emphasis in original)
    5698 These changes appear in recitals I and L of the subordination deed. Recital M was tweaked to recognise the need for the interests of the members and creditors of each subordinated creditor, rather than the interests of the group as a whole, to be taken into account. There was no change to Recital E that asserted that the subordinated creditors, or some of them, had borrowed moneys from ‘the Borrowers’ and had received, directly or indirectly, financial support from the proceeds of the existing loans by way of inter‑company loans from group companies, now repayable on demand.
    5699 In the letter sent to Weir by Stow and Peek, discussed above, they said:
    We confirm you informed us that Westpac have been advised by Mr Tony Oates, the finance director of the Bell Group Limited, that the Bell group of companies would be willing to grant security to the Lloyds Syndicate members and the Australian Banks on this basis as soon as the necessary documentation has been prepared. We understand that Lloyds will see Mr Oates’ confirmation of this over the coming weekend.
    5700 The security was to be given on the ‘expedient alternative basis’ rather than the original restructure proposal. There is no evidence that, as recited, the requests made by the borrowers for the extension of the facilities had been made by all the subordinated creditors. The documents included in the recitals the directors’ belief in the corporate benefit of giving the securities. But, again, there is no evidence that Oates, or any of the other directors, had a bona fide belief that the proposal was for the benefit of the Bell group of companies. Nor is there evidence that their minds had ever been directed to the need to have such a belief.
    5701 Another letter, the subject of some controversy, was that written by Ascroft but signed by Ladbury (MSJL) and dated 9 December 1989. It said:
    Due to the publicity currently surrounding Bell Group Limited and Bond Corporation Holdings Limited, I thought it was appropriate to let you know what our costs and disbursements are to date. Due to our concerns over the financial stability of the Bell Group, I think that it would be worthwhile to render an interim account to you for work done to date for payment by the Bell Group in Perth on Tuesday. Every effort should be made to have this paid on Tuesday and if necessary to our Perth office.
    So the Bell group would be required to pay for all this legal work but little effort seems to have been directed to ensuring that (or seeking confirmation that) the benefit of the work was passed on to the directors of the borrower companies. I acknowledge that the companies were separately represented – and I will come back to that shortly.
    5702 As I have described in other parts of these reasons, the urgency of the situation was over within days because of the withdrawal of the Adsteam proceedings. In the context of the Bell group refinancing the need to truncate the full security arrangements was removed. The banks thereafter reverted to the transactions as originally planned. But the recitals to the documents, drafted urgently, remained.
    25.6.12. The lawyers to the Bell group
    5703 The Bell group first instructed lawyers to act for it on these securities on 16 October 1989. Simpson sent a fax to Peter Watson at S&W in Perth. It referred to 17 attached pages. These included the then current terms sheet and a copy of a letter Simpson had written to Weir listing the latest objections or requests for amendments.
    25.6.13. Watson’s evidence
    5704 Watson said that until this date S&W had never acted for TBGL or BPG. He said that he had become acquainted with Simpson when he had previously worked for the predecessor firm to S&W in Melbourne. That firm had been on a retainer to Dallhold. The terms sheet that Watson was given required, among other things, that all ‘necessary corporate resolutions and certificates … be received from the Borrower and Guarantors’. He said that he reviewed this terms sheet.
    5705 On 16 November 1989 Watson met with Stow at P&P. There was a note of the meeting kept by Watson. It indicated his concern that what he described as issues of consideration and corporate benefit should not appear in the recitals to the documents so as to minimise potential stamp duty liability. He suggested that these factors should be mentioned only in the minutes or resolutions. The next day Watson wrote to Stow and attached draft minutes. I think the background to the minutes was derived from the draft terms sheet supplemented by what Watson had gleaned from his discussions with Stow. He says in his letter:
    I refer to our meeting in your office last night and enclose for your consideration a preliminary draft of minutes of a meeting of Directors of a Security Provider, which I have in mind as the means by which consideration for, and corporate benefit of, the provision of securities can be adequately established by the Banks for purposes of resolving their concerns as to the enforceability to those securities. Quite clearly the minutes would need to be massaged depending on the Security Provider to which they relate. Of course I have in mind that the minutes will be a true record of meetings actually held.
    What happened to this draft was never explained. It went no further.
    5706 In his witness statement Watson said that the refinancing documents provided to him by the lawyers for the banks were novel, in his experience, for three reasons. First, they were the first such documents he had seen that required directors of the borrowing company to set out the corporate benefit to the company. Secondly, they required the borrowers to provide minutes that expressly addressed the issues in detail. Thirdly, they required recitals to the agreements that addressed corporate benefit. In his evidence he clearly stated that he had not previously experienced a situation where the lenders had such a focus on the content of the resolutions that the directors had to pass to authorise the transactions:
    [A]t the time I made this statement, and I still believe it to be the case, I did not recall having previously been asked in the context of finalising a lending transaction, whether secured or otherwise, to provide the particular lengthy minutes with recitals. I have often been asked to provide directors’ minutes that recorded the resolutions actually passed authorising the execution of the documents but I had not – to the best of my knowledge I had not previously experienced a situation where we were required to produce complete minutes, including details of discussion, or background if you like, where shareholders’ minutes had been requested as well as directors’ minutes and where recitals to the document – to the agreement, the loan agreement – actually recited corporate benefit type issues.
    5707 Watson was asked in cross‑examination what type of information he would have required if he had been asked to advise on whether or not there was corporate benefit for each Bell company that entered into the Transactions. He answered:
    I actually have no idea as to the answer to that question. I don’t know what information I would have asked for had I been asked to advise on that question. I think my answer might well have been it’s not my decision as to whether there is corporate benefit or isn’t corporate benefit. That’s a commercial decision for the board of directors of the company to take.
    5708 He did go on to say that it was something about which he could give guidance on the sort of things that the courts had looked at in the past. But it was clear to me that the issue was not one that he addressed with the directors at the time of the Transactions.
    5709 This is important evidence. It throws into sharp relief the notes made by the solicitors in the aftermath of the Hayne QC and Burnside advice that they should ‘recite [their] way into an advantage’ and ‘dress up in recitals’ in relation to a corporate benefit. Watson was an experienced solicitor. His evidence that the concentration on corporate benefit in the recitals and the minutes was unusual leads me to conclude that the solicitors put into effect the gravamen of the earlier notes.
    25.6.14. Morison’s evidence
    5710 Ian Morison was also a solicitor at S&W. He said that on 30 November 1989 Watson telephoned him and told him about the proposed refinancing. Watson said that there would be a division of work between them in their work for the Bell group. Watson would be primarily responsible for the redrafting of the facilities (that is, the basis on which the transactions would occur) and Morison would be responsible for the security documents. Watson said they were to review each other’s documents.
    5711 Morrison said that on 5 December 1989 he had sent to Watson a draft guarantee and mortgage debenture. On 12 December 1989 Watson and Morison met with Simpson to discuss the documents. There are two important aspects of the notes kept by Morison at that meeting. The first is the comment right at the beginning: ‘Only absolute nut breakers’. Although I have not previously heard the phrase ‘nut breakers’ in this context, I have an inkling about what it means and, to avoid offending sensibilities, I will not explain it. Used in the context of the giving of instructions regarding the security documents, it is telling. The phrase seems to capture the tenor of the instructions: let anything through unless it is going to be the cause of incredible pain. Little did they know that the pain was going to endure for almost two decades.
    5712 The second important aspect is Morrison’s note to ‘take out a reference to any demand – make it a demand which is not W/D [withdrawn]’. This was necessary in light of the fact that SCBAL had issued a demand against TBGL under its loan arrangements.
    25.6.15. Drafting the company minutes
    5713 Included in Ascroft’s November list of documents to be drafted, under the heading Ancillary Documents, were shareholders’ and directors’ resolutions. P&P were shown as preparing the resolutions that were to support the Australian security. A&O were to prepare the resolutions that supported the English security and the insolvency certificates. When the work was accelerated over the ‘panic weekend’ the list of responsibilities remained the same, but Cole of MSJL was responsible for reviewing the board minutes from the corporate benefit perspective.
    5714 The suggested draft resolutions produced by Watson (in order to minimise stamp duty) were discarded quite quickly. Ascroft’s note of a discussion with Stow records that the banks’ lawyers were concerned about concealment issues and they had resolved to proceed as originally planned. There would be full recitals to the documents recording the transaction background and the valuable consideration and corporate benefit requirements. The minutes and resolutions would follow suit.
    5715 Stow of P&P drafted the minutes and resolutions. The draft resolutions were for TBGL, BGF and WAN. Also included were draft shareholder resolutions for BGF and WAN with associated minutes and notices. Strictly, these were extracts only of the relevant portions, intended for use in a complete record of a meeting. There is evidence that these drafts were seen by Cole (MSJL) and some amendments were made by him. Wright (P&P) sent them to S&W on 16 December 1989. The covering letter said that they were a ‘very rough first draft only’ and that S&W ‘may wish to use or adapt’ the drafts.
    5716 Morison said that these drafts did not come to his attention until probably around 8 January 1990. On that date Morison took the drafts, adapted them (he thought) for the security providers and subordinated creditors, and forwarded his redrafts to P&P. In the covering letter Morison wrote that he saw no need to convene a shareholders meeting, nor did the resolutions require this. Because his instructions were that none of the Australian security providers or subordinated creditors had any external indebtedness, he deleted reference to the interests of creditors. The letter continued:
    The Extract from Minutes provided by you related to [BGF], [WAN] and [TBGL]. The Extract of Minutes referred to a substantial benefit flowing to those companies in terms of the deferral of the date for the payment of certain loans. We assumed that you would want to have some mention made of the benefit flowing to the Security Provider or Subordinated Creditor of the execution of the Securities of the Subordination Agreement. The benefit flowing to the Security Providers and the Subordinated Creditors is less direct than that flowing to the Borrower and the Guarantor and so we have set down in greater detail an explanation of the benefit which will flow to these parties.
    5717 This letter was copied to Simpson. But what Simpson understood from it we will never know. There is no evidence that any of the directors saw this letter: Simpson was not a director at that time. There is no evidence of any discussions between the lawyers and the directors about the corporate benefit issue. The only mention of direct instructions to their lawyers from Simpson or the directors is in respect to the absence of creditors.
    5718 On 15 January 1990 P&P wrote back to S&W and, with minor changes only, approved this draft. On 18 January 1990 Peek sent the drafts to MSJL. Cole responded immediately. He said that the drafts only applied to the security providers and the subordinated creditors; they did not apply to those companies executing as borrowers. Cole’s letter to Peek continued:
    From a corporate benefit perspective there is work required to the resolutions at least in respect of the security providers as there are different categories of security providers which have not been taken into account. It will be necessary for these resolutions to be amended to reflect this. The resolutions in respect of the borrowers will again be different. For the purposes of execution of the Supplemental Agreements it is therefore difficult to comment on the resolutions of the security providers until we know whether these same resolutions are also being used for the purposes of the borrowers (in which case they are inadequate).
    And in the last paragraph:
    I look forward to your advice overnight as to whether there are in fact different resolutions drafted by [S&W] in respect of the borrowers or whether the resolutions we have been provided are in fact intended to apply to the borrowers (in which case we will need to comment on these resolutions as a matter or urgency to ensure they are in appropriate form before execution of the Supplemental Agreements on Monday).
    5719 That concern reflected Cole’s understanding that the various Bell group subsidiaries were not of one class: there were companies with creditors and companies without; there were companies with assets and companies without; there were companies that had borrowed from a borrower; companies that had lent to a borrower; and companies that had done neither. But only Cole appeared to have this understanding.
    5720 P&P received this fax from MSJL, forwarded it to S&W and immediately pressed S&W for the remaining documents. Morison telephoned Wright at P&P on 19 January. His note of that conversation said that he asked Wright for an explanation about what MSJL meant about the corporate benefit aspect. He recorded:
    T/A Russell Wright when I asked him for an explanation of what Mallesons meant about the corporate benefit aspect. He said that he thought that it related to the difference in the consideration. He really said that he didn’t know what they were talking about. He then said that he had had a quick look at the file and that it related to different concepts of corporate benefits. The borrowers are trying to link benefit in the minutes.
    I told him that he’d prepared the borrowers minutes and they were fine. We’d settled the Security Providers’ minutes, so what remained to be done? He said there was still the borrowers shareholders minutes to be done. He asked me to put as much together as I could and to do whatever is appropriate.
    5721 Morison did what he thought was appropriate and passed the documents on to the company secretary, Graeme Baker. Before I go on to discuss Baker’s role, there is one other incident that I wish to mention. It concerns the letters of comfort required by the UK directors.
    25.6.16. The 12 February 1990 meeting and the letters of comfort
    5722 The UK directors demanded letters of comfort from TBGL as a pre‑condition for them to commit the BGUK group companies to the Transactions: see Sect 26, and in particular Sect 26.8.4.
    5723 In the minutes of a meeting of the directors of TBGL on 12 February 1990 at which Oates and Mitchell are said to been in attendance, resolutions were passed authorising the provision of these letters of comfort. The operative part of the resolution is in these terms:
    As it is the firm policy of the Company to ensure that each of our subsidiaries has adequate and sufficient financial resources to carry on its business and to enable it to pay its debts as they fall due, we therefore agree to undertake that the Company will procure that the companies concerned have sufficient financial resources in order to enable them to pay their debts as they fall due whether by way of provision of loans, the subscription of share capital, or by any other means to support the solvency of the above mentioned companies.
    5724 There are two things that occur to me about this minute. First, the meeting took place soon after the directors’ meeting of 7 February 1990. At the previous meeting the directors had noted the inadequacies of the cash flow information then before them. They had directed Garven to produce a further cash flow but it had not then been received. They had also commissioned advice on their responsibilities under s 556 of the Companies (Western Australia) Code (the insolvent trading provision). Secondly, there is no reference in the minutes to any enquiry by the directors about the solvency of the company or its ability to honour the commitment it agreed to make as a consequence of its ‘firm policy’.
    25.7. The company secretary’s role
    5725 Baker was the group company secretary for BCHL from 22 December 1989. He had been employed by BCHL in the secretarial department since 1980. During the period of his employment he became company secretary to 161 companies within the group, including TBGL.
    5726 In both his witness statements and before me, he gave detailed and clear evidence of the practices in relation to the preparation of minutes of directors’ meetings, circular resolutions and full BCHL board meetings. I formed the view that I could rely on his evidence. I also noted that Baker described how his involvement in corporate matters over the period of his employment changed from the traditional secretarial compliance practice to what could be described as transactional work. I understood this to mean he became more involved in such matters as documenting structural changes, takeovers and acquisitions of other entities, and refinancing group debt, including debenture issues.
    25.7.1. The minutes
    5727 Baker had for many years been responsible for preparing the minutes for two types of directors meetings: minutes for full BCHL board meetings, and minutes that authorised entry into particular transactions. The latter minutes gave rise to the use by Baker of the expression ‘notional minutes’, which caused some of the controversy I referred to in Sect 25.3. This was a description applied to meetings of directors in which the directors did not sit down together in a stated place and make a recorded decision as a group.
    5728 Baker gave evidence of the practice that took place in regard to this kind of meeting. He said that minutes to authorise all subsidiaries to enter into the proposed transactions named the director responsible for the transaction as chairman. The other directors listed as in attendance were those who were present in the BCHL Perth office on that date. Once drafted, the minutes were sent to the director nominated as chairman for signing. Each director had a file on his desk into which any minutes for signing were placed. If a matter was urgent, Baker said he would take the minutes to the director for signing.
    5729 Baker explained that if he was aware that a director was familiar with the details of the transaction, he would only send the minutes to be signed. If the director was not familiar with the details of the transaction he would send the relevant documents with the minutes. Sometimes he was asked for more information. Sometimes the director named as chairman would discuss the contents of the minutes with his co‑directors before signing. The directors listed in the minutes as in attendance, other than the director named as chairman, did not ordinarily receive copies of the minutes. This procedure, as Baker neatly summarised it, was:
    Partly inherited [from BCHL’s previous company secretary] and partly developed as circumstances through the years had become more complicated. There were more and more transactions being done in 1988, 1989 and the speed at which they were required to be done or the sheer volume of transactions, it just made it easier to develop that procedure.
    25.7.2. Resolutions
    5730 Baker gave evidence of the Bond and Bell groups’ corporate practice in respect to resolutions that authorised entry into transactions. He explained that where the articles of the relevant group company permitted it, he would use circular resolutions to authorise entry into a particular transaction. He drafted the resolutions on the information provided to him, and sent them to each director of the relevant company for signing. When a director was not in Perth they were sent, and returned signed, by fax.
    5731 Baker also explained that the minutes and resolutions of BCHL (executed as described above) were usually included in the board pack for the next full board meeting. But this was not the practice with the holding companies, of which TBGL was one.
    25.7.3. The minutes and resolutions for the Transactions
    5732 Baker said that in mid‑January 1990 he was approached by both Aspinall and Simpson to assist with the preparation of documents for the restructuring of the loan facilities of the Bell group with the banks. He said in evidence that the recommendation had been made by Oates to Aspinall on the basis that he (Baker) had a great deal of experience in the area. He said either Aspinall or Simpson explained the nature of the Transactions and that they had to be done quickly.
    5733 Baker was not involved in any direct negotiations with the banks. Nor did he deal directly with the banks’ lawyers in drafting the wording for minutes of meetings, powers of attorney and certificates of appointment of corporate representatives. He did deal with Wright and Peek of P&P in answering corporate requisitions for copies of documents such as share certificates and memoranda and articles of association. He also dealt with Morison (S&W). Baker said he took on extra secretarial help to put together the number of documents required. He said there was extreme pressure at the time and it was necessary to ensure that the correct documents were referred to in the minutes and the powers of attorney.
    5734 Baker said that when he started work on the Transactions either Aspinall or Simpson provided him with copies of the draft agreements so that he could familiarise himself with their basic structure. He said it was usual when working on documents for finance facilities for him to be provided with copies of the documents to enable him to read the recitals and the clauses setting out the principal terms of the transactions. He would use these to draft the minutes of meetings that would authorise the company’s participation. In these Transactions he said his role was limited to providing comment to Morison on the wording adopted in the drafted documents.
    5735 Baker said that on 19 January 1990 he received a fax from Morison enclosing draft extracts of minutes of meetings for the directors of BGF, WAN and TBGL. Also enclosed was a letter from P&P, and a letter to P&P from MSJL. Baker’s evidence was clear: normally he would spend hours drafting resolutions (and the other minutes) but here they were done for him. He had no input into the drafting of the extracts of minutes, which he noted had been dated for certification in December 1989. The initials on the minutes were RAW: Wright (P&P). I did note that Baker observed that some of the wording of the various documents was precisely that used in BCHL documents, which he had supplied to P&P for BCHL security and finance matters, and upon which P&P (acting for BCHL) were often asked to comment.
    5736 The revised security documents, the final form of directors’ minutes, the s 244(6) certificate, and the power of attorney documents for TBGL, BGF and WAN came to Baker from Morison on 24 January 1990. They were accompanied by a letter to which I will refer in due course. The draft extracts of minutes and resolutions were the documents that Baker arranged to put on his word processing system to create full minutes of meetings and extracts for TBGL, BGF and WAN, with s 244(6) certificates for BGF and WAN.
    5737 His evidence is that the procedure he described for ‘notional meetings’ then occurred. There were no actual meetings. He sent the minutes in a signing book to the 45th floor of the R&I Bank Tower, their office building, for signing by whichever director happened to be in town and who had been nominated by Baker as chairman. He did not send copies of the documents referred to in the draft minutes to any of the directors for them to consider. No other documents were attached.
    5738 Baker said Aspinall had told him when he first started preparing the minutes for execution that he, Aspinall, had discussed the Transactions with Oates and Mitchell ‘in general terms’. On 25 January 1990 Baker certified the extracts of the minutes of the directors meetings for TBGL, BGF and WAN and the s 244(6) certificates of shareholders’ resolutions of BGF and WAN. These were ultimately passed back to the banks, through P&P.
    5739 On 29 January 1990 Morison sent Baker a fax enclosing revised resolutions for the security providers. Included were extracts of the minutes of meeting of the board of directors of the security provider; a s 244(6) certificate as to the resolution passed at a shareholder meeting for a wholly owned subsidiary; and an extract from the minutes of meeting of the shareholders of a security provider where that security provider was not a wholly owned subsidiary.
    5740 On 30 January 1990 at 10.15 am Morison copied to Baker another fax received from P&P. The fax said that 30 January was the ‘Operative Date’ in terms of the supplemental agreements and the conditions precedent had to be met and satisfied that day. At 12.50 pm Baker received another fax from Morison in relation to the execution of the securities. Clearly there had been some discussion about whether or not they could be executed by power of attorney and not under seal. Finally, the revised power of attorney and resolution document, and minutes for a security provider were faxed from S&W at 6.30 pm.
    5741 The copies of faxes to P&P indicated that discussions had been conducted throughout the afternoon. The amendments were all in respect to certain formalities only, not to the content of the various documents. Baker said he passed these documents to Simpson, who was attending to settlement that evening. These were the documents of the 26 meetings that I described in Sect 25.2.
    5742 Baker said that he later discovered that the secretary typing the extracts had not saved them on the word processing system. She had used each document as a template for each Bell group company. This, of course, resulted in various mistakes in the documents. Baker said that when he did discover that the full minutes had not been printed off and signed he had to obtain copies of the extracts from the banks. He then arranged to get the minutes typed and signed based on the text of the extract. Baker’s evidence is that all these minutes referred to notional meetings. No formal meetings took place.
    5743 On 9 February 1990 Baker said he received another fax from Morison. It referred to the resolutions for the subordinated creditors and the relevant power of attorney. Enclosed was a copy of a letter to P&P in which Morison said that the extracts of minutes relating to corporate resolutions had been settled by P&P. Morison’s letter to Baker also said:
    We confirm as we did in a previous facsimile that we have been asked to make no comment on the corporate benefit to any of the borrowers, security providers or subordinated creditors in respect of the execution of any of the supplemental documents, security documents or subordination agreements or any other financing documents and we have expressed no opinion on the issue of corporate benefit or any associated matters.
    5744 The enclosed resolutions in S&W’s letter were put on Baker’s word processing system. On 12 February he certified the extracts of minutes for the subordinated creditors, signed the s 244(6) certificates for the shareholder meetings of wholly owned subsidiaries and certified the extracts of shareholder meetings for non-wholly owned subsidiaries.
    5745 There were several other certificates required as part of the conditions subsequent to the ABSA that Baker had to arrange. These included statements by two directors of TBGL of the aggregate financial indebtedness of each of TBGL, BGF and WAN and each of the other security providers that as at the operative date there had been no change to such details other than as set forth in the statement. A similar certificate was required in respect to any indebtedness of the group associates to TBGL. These included BCHL, BRL and JNTH and any of their respective subsidiaries not being a member of the Bell group. Again, Baker said he certified copies of the required documents. The documents referred to notional meetings. No actual meetings took place.
    5746 The first formal meeting of TBGL that Baker said he attended occurred on 7 February 1990. He said he was told by Oates that the directors were going to have this formal meeting because there had not been any previous such meeting. Baker’s evidence, supported by the minutes taken at that meeting, is that the directors were concerned at that date about their personal liability for insolvent trading under s 556 of the Companies Code.
    25.8. Corporate benefit and the documents: conclusions
    5747 The Australian directors executed the security documents, the minutes and the resolutions without the benefit of any of the critical financial information. That is, they did not have financial information for each and every company that they were causing to enter the Transactions. Morison (having never received any instructions about the financial position of the companies) did not understand the problem that Cole had raised on 18 January 1990 regarding the differences in the nature of the corporate benefit for borrowers and security providers. Wright, who was dealing with a small part of the work involved in the Transactions, did not appreciate the distinctions among the companies that should have been drawn.
    5748 Morison wrote to P&P on 19 January 1990. He said in that letter that the P&P draft of the resolutions forwarded in December would be adopted. He also requested that P&P ask MSJL to expand on the comment in the letter about the corporate benefit issues. He invited them to suggest some drafting. But he said ‘the comment appears to relate to the security providers and appears to be less urgent’. There is no evidence of any response to that request. Both lawyers just continued with the arrangements that were being made for execution of the documents. The critical issue was overlooked.
    5749 In the minutes that S&W prepared, adapted from P&P’s December drafts, Morison repeatedly removed the reference to the ‘interests of creditors’. He did this on the basis, he told P&P, that he had been instructed that there were no external creditors. In a fax from A&O to P&P dated 15 January 1990 the English lawyers took strong exception to this omission. Perry protested:
    I have also examined Ian Morison’s letter to you of 8th January, 1990 and am most surprised by the points raised in paragraphs 1 and 2 on the second page. As you well know, there are very good reasons for obtaining shareholders resolutions from the Security Providers and the assertion that there is no external debt appears to be quite contrary to the information which we have been provided by Bell and upon which we have been basing the Facility Agreements.
    5750 It was only at A&O’s insistence that the words ‘interests of creditors’ were reinserted in the minutes. At the very last moment Morison told Baker just to insert the words ‘and creditors’ before the word ‘interests’ in the resolutions ‘if this is not too late and is acceptable to you’. No explanation was given.
    5751 In par 8.2 of his witness statement Morison said:
    S&W were specifically not instructed or requested to give any advice regarding any commercial benefit issues in respect of those transactions.
    5752 I found this statement perplexing. Did he raise the issue and was then instructed not to advise on it? Or did he not raise the issue at all? The answer, I think, lies in his use of the words ‘commercial benefit’, rather than ‘corporate benefit’. The latter is the legal phrase that was being used to denote the principle of directorial responsibility. Looking at Morison’s evidence as a whole I am not sure that he appreciated the corporate benefit issue in quite the same way as it was being raised by the banks’ lawyers. On 24 January 1990, on the eve of execution of the security documents by TBGL, BGF and WAN, Morison sent a fax to Simpson, which said it all:
    We have been passing on to you and to Graeme Baker the minutes and certificates relating to directors and shareholders resolutions, the substance of which have been provided by [P&P] and [MSJL]. The directors’ resolutions set out provisions which seek to confirm that the execution of the documents concerned will be in the best interests of the company taking into account its members’ and creditors’ interests and will be something of real and substantial benefit to the company.
    We need to place on record that we have not been asked to advise on the presence or extent of any corporate benefit arising out of the execution of the documents. I am sure that this is understood between us and this note is just by way of confirmation.
    5753 Watson said in his evidence that he did not recall this letter but he had ‘some’ recollection that S&W did not advise on the corporate benefit to the companies entering into the refinancing. Apart from the faxes of 24 January 1990 and 9 February 1990, there is no evidence of discussions between Morison and Simpson or Aspinall about the corporate benefit concept.
    5754 Baker said in his evidence that he saw this fax on 24 January 1990. He said that he discussed it with Simpson. His evidence is that they both commented that they had never seen a letter like that before. Baker said he thought it should be passed on to, or discussed with, Aspinall. As Simpson was not called, I have no idea what he made of this letter or how he appreciated the corporate benefit problem.
    5755 Aspinall could not recall that he saw this letter but he said it was Simpson’s practice to show him the correspondence and Simpson ‘probably’ drew it to his attention. But I am not able to say what Simpson might have told Aspinall about it. There is no evidence that either of them discussed it with Morison. In any event Morison’s correspondence poses the question as one of the commercial value of the Transactions to the company, not as one of the directors properly satisfying themselves that they had discharged their duties.
    5756 Contrastingly, Cole had alerted the banks to the requirement that the directors of the Bell group had to be aware, as a matter of substance rather than form, that entering into the Transactions was for the corporate benefit of each company that resolved to do so. Cole flagged the issue very early in the negotiations. Senior counsel reinforced it. Perry knew that the interests of creditors was a factor in the test.
    5757 There was a chain of instructions and advice. But the last link – the one to the directors – failed. I am not able to find that the directors appreciated the factual basis of the corporate benefit test. In order for the Transactions to stick, the directors of each company had to make a bona fide determination that it was in the best interests of that company to enter into the Transactions. All the lawyers busied themselves with the form of the recitals, the resolutions and minutes. But what is missing is any real attention to the substance of the test: the directors’ actual belief in the corporate benefit.
    5758 Perhaps the most telling comment about way in which the matter was to be approached is the note made by Paterniti at the meeting with Hayne QC and Burnside in Melbourne. His handwritten note said:
    Corporate Benefit test can be used to our advantage. Should attempt to recite our way into an advantage with the Corporate Benefit Test.
    5759 Paterniti’s note recorded that after the meeting in counsel’s chambers in Melbourne he telephoned Stow at P&P and reported this view. I think it is likely that Paterniti may have then telephoned Weir at Westpac and reported. I say this because the substance of counsel’s opinion was discussed at the Australian banks meeting on 27 October 1989. At the very least Stow said in evidence that he, Stow, would have telephoned Weir after his conversation with Paterniti. After the same meeting in Melbourne Collinson telephoned Ascroft in London. As I earlier noted, her note of the conversation in relation to the corporate benefit concern is: ‘Dress Up in recitals’. Together these cryptic notes seem to me to capture the basis on which the documents used in the Transactions then proceeded.
    5760 In my opinion, the drafting of the recitals and the minutes was a triumph of form over substance. There was a chain of advice and instructions in relation to the corporate benefit question. The banks’ lawyers appreciated the problem at an early stage: unless there was a corporate benefit to a company entering into a Transaction, that Transaction would be vulnerable. The banks’ lawyers made this clear to the banks. In turn, the banks instructed the lawyers to draft the documents on that basis. They did so and they negotiated the drafting with TBGL’s lawyers accordingly. TBGL’s lawyers told the directors, through Simpson, that this is what the documents contained. But at that point, the last link in the chain, the nexus was broken. I am left in the position where I cannot find that the directors knew and appreciated the real import of the corporate benefit test.
    5761 There is another problem. The banks’ lawyers appreciated that, in the circumstances, the corporate benefit test would (or at least may) involve the interests of creditors. There was some to‑ing and fro‑ing between them and S&W about the inclusion in the minutes and recitals of an express reference to creditors. In the end, it was included. This must have heightened their appreciation that the entire question was one of substance, not form. It should be borne in mind that by this time all of the lawyers (and the banks) were aware of the argument that the on‑loans might not be subordinated. This affected creditors.
    5762 I want to make one thing quite clear. I am not suggesting that any of the lawyers involved in these negotiations was derelict in the performance of his or her functions. Nor am I suggesting that it was for the lawyers to decide whether or not, in fact, corporate benefit existed. This was ultimately a matter for the directors. What I do say is that the course of the negotiations and the presence of certain words in the recitals and minutes can be of no comfort to the banks in this litigation.
    5763 Simpson was a lawyer. Aspinall was not. But Simpson was not called and I have no idea what he may have understood about the corporate benefit concept or how it applied, or would have been applied, in the peculiar factual circumstances in which the Bell group companies and the directors found themselves in January 1990. According to Baker, Simpson was surprised at the content of Morison’s missive, but there is no evidence he sought clarification. I am therefore not able to find that Aspinall obtained from Simpson (or anyone else) the requisite understanding of what was entailed. There is no evidence that Simpson or Aspinall discussed the corporate benefit test with either Oates or Mitchell.
    5764 This, then, disposes of the form argument. I proceed on the basis that the directors did not appreciate the true nature and import of the corporate benefit test. I will return to the question of substance in Sect 29.
34. The UK directors’ knowledge and conduct
    26.1. The UK directors
    5765 In Sect 6 of these reasons I identified the directors of the three United Kingdom‑based Bell group companies (the UK directors). In the second half of 1989 and the first half of 1990 the directors of TBGIL and BGUK were Alan Bond, Alan Birchmore, Mitchell and Michael Edwards QC. The directors of BIIL were Edwards and Peter Whitechurch. Edwards was the managing director of BGUK and all its group companies that consented to the Transactions. One was Ambassador Nominees, a shareholder of BIIL.
    5766 Edwards had been a director of the BGUK companies since 1982. He had extensive legal experience and he had practised law in England since 1949. He had also been an assistant parliamentary counsel for the UK Treasury and had worked as a legal adviser in industry, including at Courtalds Ltd and British Steel Corporation. Edwards was at British Steel at the time of, and was involved in, the events that led to the Rolled Steel case. He had been a QC since 1981. Because in these reasons I am discussing to Edwards in his role as a company director I do not intend to use the post‑nominal when I refer to him. It was Edwards who handled the involvement of BGUK and TBGIL in the Transactions.
    5767 Birchmore was the other London‑based director. He had been a director since 1978 and had been in London since 1985 attending specifically to the Bond group’s overseas interests. In relation to BGUK and TBGIL, Birchmore could be accurately described as a non-executive director. He had no day‑to‑day involvement in the management of the companies. However, it was necessary to have one other UK resident director to assemble a quorum for the board. Birchmore fulfilled that function.
    5768 Alan Bond was a director of BCHL and BRL. His private company Dallhold was the ultimate principal shareholder of BGUK and TBGIL through its shareholding in BCHL and then BCHL’s shareholding in TBGL.
    5769 Mitchell was also a director of BGUK and TBGIL but he had no involvement at all in the day‑to‑day running of these companies, or any other within the group, as I have already discussed: see Sect 24.2.
    5770 Whitechurch was the company secretary of BGUK, TBGIL and BIIL and, with Edwards, was a director of BIIL and most of the BGUK group companies. When called to give evidence at this trial Whitechurch was 74 years of age and he had not been in good health. He explained that at the time he gave his witness statement in 2003 he had been at some considerable pains to ensure its accuracy and that it accorded with his recollection of events in 1989 and 1990. Whitechurch explained that the problems affecting his health had arisen after 2003 and there were still events that occurred earlier for which he had a very clear memory.
    5771 Whitechurch gave evidence over three days. His evidence is that he undertook his duties as secretary at Edward’s direction. He was present at most, if not all, the critical meetings including those with the lawyers, accountants and Lloyds representatives. Whitechurch also gave evidence that because of his close involvement with Edwards, he had been present on several occasions when Edwards telephoned Birchmore about the refinancing matters. He also said that on various occasions during this period when problems arose Edwards told Whitechurch that he was going to discuss the issues with Birchmore. Whitechurch said that on 24 January 1990, Birchmore conducted himself in a manner that indicated he was familiar with the documents referred to in the minutes and the issues.
    5772 Richard Breese, the financial controller of the UK group companies, also gave evidence over three days. He was at many of the meetings (particularly the meetings held with the lawyers) and he wrote some of the critical letters from the companies at Edwards’ direction. He was also, with C&L, responsible for the preparation of various important cash flows and reports prior to the Transactions.
    5773 Mitchell gave evidence. But Edwards, Alan Bond and Birchmore were not called to give evidence. I received no explanation about this. There was quite a bit of finger pointing by both the plaintiffs and the defendants about the failure to call various important participants in the Transactions. While this was mildly amusing, it was not at all helpful. For example, in the case of Edwards, his role as managing director of the UK companies meant that his actions were central to the way the UK companies entered the Transactions.
    26.2. Edwards
    5774 In dealing with the role of Edwards in the Transactions I have relied particularly on the evidence of Whitechurch, Breese, and Richard Thornhill (S&M). I have concluded from this evidence and the many documents available to me that Edwards dealt with the Transactions on behalf of the UK directors and the companies within the UK group. His involvement was from November 1989 to the end of January 1990. Prior to November 1989, Edwards’ only role in the proposed refinancing was to provide information about the UK companies when requested to do so by TBGL. It appeared to me that much of Edwards’ information about the proposed refinancing came from Simpson.
    5775 On 2 November 1989, Edwards had lunch with Latham and Armstrong. Immediately afterwards Edwards sent a memorandum to Simpson in which he wrote:
    Our telephone conversation this morning meant that I was well prepared for lunch with John Latham and Johnny Armstrong.
    …
    I am grateful you warned me about the idea which had been canvassed by Lloyds that you should provide specific security within Bentray, Bryanston and the other UK subsidiaries of Bell. Johnny Armstrong raised the point.
    5776 This evidence of the conversation was supported by a memorandum from Latham. He said that Edwards had made ‘statesman like comments on what we could sensibly look for by way of UK based security’. In his witness statement Latham said that he meant by this that Edwards told him and Armstrong that there was very little left by way of assets in BGUK, but what there was the Lloyds syndicate could have. Latham also wrote that when the two bankers asked if any valuable assets might be found in the subsidiaries of BGUK, Edwards said that it was most unlikely ‘but we were welcome to look’.
    5777 I have made it clear in other parts of these reasons that it was Simpson and Aspinall who undertook all the negotiations for the refinancing with the banks. Neither Edwards nor any other UK director had any direct involvement in those negotiations. Edwards’ role related to the giving of the securities by the BGUK group companies.
    26.3. BGUK’s legal advisers
    5778 Slaughter and May (S&M) were the lawyers to the various BGUK group companies. Richard Thornhill was a partner of S&M and Roger Fink an employed solicitor. Thornhill’s evidence is that Edwards was the only UK director that he and Fink had meetings and discussions with. He dealt with Edwards in his capacity as managing director of BGUK and TBGIL. He also dealt with Whitechurch as the company secretary of BGUK and TBGIL and as one of the two directors of BIIL.
    5779 Thornhill gave evidence that on 7 November 1989 Simpson asked him to review the terms sheet under negotiation. Thornhill said that his oral instructions were to limit his comments to matters of detail, of particular relevance to English law, or to the relevant BGUK companies. He said that his role was not to renegotiate the whole deal. He said that on 8 November 1989 he received a copy of a redrafted terms sheet from A&O. Thornhill discerned a problem with this terms sheet; namely, the reference to the Bryanston sale and the limits on it. He asked Perry (A&O) not to distribute the terms sheet until he could give his comments to Simpson. Perry, on Lloyds’ instructions, did not agree to that request. Lloyds were pressing to have the refinancing arrangements completed as quickly as possible.
    5780 Thornhill did provide his comments to Simpson, copied to Edwards, on 9 November 1989. He commented on the Bryanston sale because the terms did not correlate with the then current negotiations for that sale. He dealt also with the provisions requiring the consent of all lenders to certain transactions and the imposition of stricter terms than the existing NP agreements. He expressed the view that the overly onerous terms would impede the ordinary course of business.
    5781 Finally, Thornhill queried the nature and purpose of the solvency certificates to be given by the directors of the security providers. As he pointed out, these required a 12‑month projected view and, in his opinion, this might prove difficult for some directors unless they took ‘comfort’ from the parent company that the individual company would be kept in funds. All these comments were pertinent. A&O immediately revised the terms sheet to pick up the changes to the Bryanston negotiations but no other significant changes were made.
    5782 Simpson wrote on 13 November 1989 to Latham in relation to the terms sheet. His letter includes many of Thornhill’s comments either word for word, or in substance. On 20 November 1989 Edwards wrote to Lloyds Bank confirming that apart from Bryanston (as he had told the Lloyds Bank officers earlier in the month) there were no significant assets, other than cash, held by BGUK and its subsidiaries.
    5783 This was the last communication for some time. The drafting of the proposed agreements proceeded without further input from either Thornhill or Edwards. On 6 December 1989 Latham sent Edwards a timetable. It envisaged the agreements being signed by 15 December 1989. Edwards sent this on to Thornhill.
    26.4. Drafts received by BGUK
    5784 On 12 December 1989 Watson of A&O wrote to Thornhill and enclosed drafts of the following: LSA No 2; RLFA No 2; a subordination agreement; the ICA and mortgage debentures; guarantees; indemnities; and debentures, all to be given by BGUK and TBGIL. On the same date the negotiations for the sale of Bryanston were concluded. On 14 December 1989 Edwards, Whitechurch and Breese spent all day reviewing the drafts of the documents sent by A&O. Breese’s evidence is that, at Edwards’ direction, on 14 December 1989 he wrote to C&L and said:
    Michael Edwards has requested that Coopers make themselves available to advise on three specific areas of the agreements:
    (a) The directors of [BGUK] in respect of a solvency certificate. Copy attached.
    (b) The capacity of [BGUK] to take on specified cross guarantees.
    (c) To what extent [BGUK] is able to give certain specified warranties.
    Clearly this was the start of a process, initiated by Edwards, in which the specific positions of BGUK and TBGIL, and their directors were being addressed.
    26.5. S&M’s advice
    5785 On 15 December 1989 Edwards, Whitechurch and Breese had a conference with Thornhill and Fink at S&M’s offices. During that conference they spoke with Simpson by telephone. Thornhill, Fink, Breese and Whitechurch all gave evidence about this conference. They discussed whether it was appropriate, from a legal rather than a commercial perspective, for companies in the BGUK group, particularly BGUK and TBGIL, to enter into the proposed transactions.
    5786 Thornhill said the giving of the guarantees by BGUK for TBGL and BGF, and for TBGIL to guarantee the obligations of TBGL, BGF and BGUK, was of particular concern to him. He said that Edwards was concerned about the propriety of BGUK and TBGIL entering into the transactions and, in particular, the possibility that if either of those two companies went into insolvent liquidation, the directors might be pursued by creditors or liquidators of the companies. Thornhill’s evidence is that he received instructions from Edwards to advise the directors about this and the steps that the directors should take to protect themselves against such a possibility.
    5787 Thornhill said (and this was supported by Fink, Breese and Whitechurch) that he advised Edwards, and the others present during this meeting, that the directors of each company had to satisfy themselves that it was in the interests of that company, not the group taken as a whole, for that company to enter into the transactions. He said he told them:
    They would need to consider how the deal benefited their respective company and why it was in the interests of BG(UK) and TBGIL to do it.
    5788 This advice was repeated in a fax from Breese to Simpson on 15 December 1989, copied to Thornhill, which he said was sent on instructions from Edwards:
    Further to our conference call this morning, we have had the opportunity of reflecting on the deal from the viewpoint of the directors of the two UK companies … The directors of these companies will need to convince themselves that it is in the company’s best interests to sign the various documents under discussion. In order to do this they need to understand how the deal benefits their respective companies.
    Currently, both [BGUK] and TBGIL have positive net worth, albeit that this is largely attributable to their investment in Western Interstate Pty. Ltd. By realising part of this investment they could simply repay the borrowing from Lloyds Bank.
    Unless the solvency of the Bell Group, and consequently the recoverability of the investment in Western Interstate, is dependant on the renewal on the loan from Westpac, there would appear to be little reason for the UK directors to wish to proceed in this matter. The solvency of the Bell Group is presumably not threatened by the non‑renewal of the Westpac loan as the Bell Group has considerable net worth (at 30 June 1989 this was A$460 million).
    I look forward to receiving your comments.
    5789 There is no evidence of any written response to this fax. Breese said in his witness statement that this last comment on the solvency of the Bell group was ‘somewhat tongue in cheek’ because he had a belief, expressed at the meeting on 15 December 1989, that there was some doubt as to the solvency of TBGL.
    26.6. UK counsel’s opinion
    5790 Thornhill said that at the meeting on 15 December 1989 he advised Edwards, Whitechurch and Breese that advice should be obtained from counsel about whether BGUK and TBGIL should enter into the proposed transactions, the steps the directors should take and what risks they would be facing if those companies were subsequently wound up. The directors gave him instructions to obtain that advice.
    5791 Thornhill said that they were being pressed in this matter to move quickly. When he first became involved he understood that there was to be a 15 December 1989 deadline on signing the documents. That deadline had been overtaken, but the banks were still imposing further deadlines.
    5792 Fink was told by Thornhill to see if David Richards was available to provide them with advice. Richards was then a barrister at the commercial bar (he took silk in 1992) who specialised in company law, and S&M instructed him often. Fink drafted the letter of instructions to Richards, which was initially to obtain oral advice.
    5793 The instructions set out the factual background and details of the guarantees that the companies were being asked to give. One of the assumptions counsel was asked to make was that the chances of the whole of the Bell group going into insolvent liquidation were quite high. Fink asked counsel to consider in particular whether or not the directors were exercising their duties properly. He referred to the Rolled Steel case and asked if the ‘acting in the interests of the company’ issue would arise if all transactions were approved by unanimous shareholders’ resolutions rather than the board of directors. And, if the UK companies decided to go ahead and grant the security requested, what, in the event of liquidation, would be the potential personal liabilities of the directors, or shareholders, to creditors and or liquidators. Fink also asked for advice about whether the UK companies had power to give the security.
    5794 Richards responded to Fink’s request the next day. Counsel’s advice was recorded in a note made by Fink on 19 December 1989. This is in accord with what I understand to be (or to have been) the practice in the United Kingdom: the solicitor makes a note of counsel’s oral advice and the note is later sent to, and approved by, counsel. Fink wrote to Edwards, Breese and Whitechurch the same day. The letter enclosed a copy of the note of Richards’ advice and contained S&M’s follow‑up advice. Both the letter and the note confirm that:
    • The directors were under a duty to act in what they considered to be the best interests of the company concerned.
    • In reaching a decision the directors must consider whether entering into the Transactions would be in the company’s interests.
    • ‘Interests’ means the interests of that particular company, as distinct from the interests of the other companies in the group, or the interests of the group as a whole.
    • ‘Interests’ included the interests of the shareholders and creditors of a company separately considered.
    5795 I would add here that in this respect there is no relevant difference between the law in the United Kingdom and that prevailing in Australia.
    5796 The letter from S&M also said that they had not discussed with their clients who, in addition to the Lloyds syndicate, were the creditors of the UK companies. But they said that a crucial question was whether the two UK companies were currently solvent, and what would be the effect on their solvency if they gave the proposed security to Westpac (they meant the Australian banks), and to the Lloyds syndicate. The test of solvency under the Insolvency Act 1986 (UK) was explained in this context as the ability of the company to pay its debts as they fall due, immediately before and after the security is given. S&M also advised:
    Before reaching a view on whether or not the companies should give the security, the directors would be well advised to take independent advice (perhaps from the auditors) as to the consequences with regard to the companies’ solvency if (i) the security is given and (ii) the security is not given. They must consider whether it is crucial to the UK companies carrying on business that the security is given.
    5797 The risk that the directors would be personally liable to a liquidator for losses suffered by the companies as a result of a breach of their fiduciary duties was carefully explained. The observation was made by Fink that, even though A&O had requested shareholders’ resolutions as well as board resolutions, if the directors were in breach of their duties in deciding to approve the giving of security, a shareholders’ resolution would not cure the breach.
    5798 Fink’s letter also referred to a suggestion that S&M had made that morning to A&O to the effect that the security to be given by the UK companies be limited to their assets. Fink said that Richards’ view of this suggestion was that while this was an improvement on giving security that if called would render the UK companies insolvent, it was still necessary to consider the unsecured creditors of the UK companies in assessing the ‘best interests’ of the company concerned. When asked by Fink if it made any difference if the only unsecured creditors were the other companies in the UK companies’ group, Richards responded that it was still necessary to consider the effect that the giving of the security has on the creditors.
    5799 I need to explain here that Western Interstate (which is the twentieth‑named seventh plaintiff) was a wholly owned subsidiary of Bell Bros (the third‑named seventh plaintiff). The relationship between Western Interstate and other companies in the group is the subject of Sect 10.7. Briefly, Western Interstate had issued redeemable preferences shares to BGUK to the extent of about £206 million. Western Interstate lent all of that money to BGF. All creditors, including external creditors (other than the creditors of TBGIL due to be paid from the Bryanston sale proceeds) were dependent upon the flow of income coming through Western Interstate from BGF and, in addition, the letter of comfort which TBGL as the parent company had provided and which supported the audited 1989 accounts of the BGUK group.
    26.6.1. The follow‑up to UK counsel’s opinion
    5800 Simpson telephoned Edwards on 20 December 1989. A note made by Edwards of the telephone call is in evidence. Simpson made it clear that regardless of the balance sheet position of the Bell group (the $460 million in assets) the solvency of the Bell group – and that included BGUK – was threatened by the inability to renew the facilities. BGUK would not be able to realise the Western Interstate investment because the Lloyds syndicate banks would make a call on their facility.
    5801 On 20 December 1989 Thornhill and Fink conferred again with Edwards, Breese and Whitechurch. Both Fink and Whitechurch made notes of the advice. Thornhill and Fink told Edwards that he should take advice from C&L, the auditors to the UK companies. The questions they said needed to be answered were:
    (a) Are the two UK companies solvent?
    (b) Will the companies remain solvent after giving the security?
    (c) Is the giving of the security in the best interests of each of the two companies? This question must be looked at from the point of view of each company separately.
    (d) Because ‘interests’ means the interests of the creditors of each company as a whole, not just Lloyds Bank, the directors must take a view on how the creditors of each company would be affected if the Lloyds facility is called and whether the creditors’ position would be improved if the security is given.
    Whitechurch’s note summed it up this way:
    If we did nothing and the Australian Banks call the [TBGL] loans: what are the consequences for shareholders & creditors; would it impinge on the UK companies; if it did TBGIL would have to realise Western Interstate holding, probably worthless;
    Effect on [TBGL]:
    If it goes into liquidation, what are its assets? Could it reimburse Western Interstate?
    What would [creditors] get?
    What would shareholders get?
    If we give limited recourse guarantees equivalent to Net Asset Value, what are consequences?
    What are chances of events of default occurring before 1991?
    Effect on creditors?
    5802 All the questions that needed to be asked, and answered, were clearly identified. Importantly, following this conference Breese also provided to Fink, at his request, the list of the creditors of TBGIL and BIIL to assist the lawyers in understanding the liabilities and advising properly on the corporate benefit concerns. The reader will notice a marked difference between this exchange of communications and what occurred, or more accurately did not occur, in relation to the Australian Bell group companies.
    26.6.2. S&M confer with A&O
    5803 On 21 December 1989 Thornhill and Fink attended a meeting with Perry and Horsfall Turner at A&O’s offices. They were given fresh drafts of the proposed loan agreements and the subordination agreements. Fink forwarded these to Whitechurch immediately. Thornhill also reported to Edwards by fax after the meeting. He also copied this faxed letter to Simpson. At the meeting, according to Thornhill, the following had been discussed.
    5804 First, A&O said that the banks were no longer seeking a mortgage debenture and guarantee from TBGIL but they wanted the proceeds from the Bryanston sale to repay part of the loan. To this Thornhill had responded that the directors of TBGIL would ‘have great difficulty in agreeing to any security documentation which secured the Bryanston proceeds’. He told A&O that he would not advise the directors of TBGIL to give the proposed guarantee or security over the Bryanston proceeds because to do so would not be in the best interests of the company. He also said that if TBGIL did not have to give security or a guarantee, then only BIIL (as a creditor of BGUK) need enter into a subordination deed.
    5805 Secondly, he made a suggestion that BGUK could, as a matter of contract, procure that TBGIL pass the proceeds by way of dividend to BGUK which could then use it to repay part of the loan. A&O were to take instructions on that proposal. If it was accepted then TBGIL would not be a party to any of the proposed documents.
    5806 Thirdly, A&O had confirmed that the triggering event for the guarantee and mortgage for BGUK would be an ‘enforcement event’ as defined in the ICA. Representations and warranties would be removed and appear only in the loan agreement. The only covenants that would remain would relate directly to the security.
    5807 Fourthly, it was provided that the guarantee would be of limited recourse, but that meant to the gross assets of BGUK. Thornhill’s response to this was that such a provision would be a problem for the directors of BGUK unless it was limited to the net assets. He said to A&O that it was possible to construct the security so that it did not rank ahead of the creditors at the time of granting the securities. A&O were to think about that too.
    5808 Fifthly, Thornhill expressed his concerns about the provisions of the subordination agreement. He said that it did not allow for sufficient flow of funds between the companies. He said he suggested that as far as the BGUK group companies were concerned, all of them should be eliminated from the agreement other than BIIL, which was owed money by TBGL. Thornhill repeated a warning he had already given to the directors of BIIL: that they would have to consider carefully whether it was in the best interests of that company to subordinate the debt.
    5809 Thornhill’s evidence is that at this meeting with A&O a significant disagreement occurred between the respective solicitors. He said that A&O took a different view on the Rolled Steel case. The lawyers from A&O maintained that the directors could enter into the transactions and would be safe from attack so long as their action was ratified by the shareholders. This ratification had been made a condition of the agreement to refinance. Thornhill did not think that was correct. He expressed the view that (as in the present situation of BGUK and TBGIL) where there was a ‘quite high’ chance of the companies going into liquidation, ratification by the shareholders was not enough. The directors needed to obtain the consent of the creditors.
    5810 Thornhill reported on this meeting to Edwards, Whitechurch and Breese. He copied his fax to Simpson in Australia. He also carefully set out what he understood to be the scope of S&M’s role as far as the loan documentation was concerned. He said it was to advise on the security documents that BGUK and the BGUK group companies were being asked to sign and not on the other documents, which included the refinancing agreements. That part of the Transactions was being negotiated in Perth with the Bell group’s advisers there. It was not, Thornhill said, appropriate for S&M to give advice on the terms of the loan agreements without being specifically asked to do so because they related to the Australian companies. Thornhill said that he made sure the fax went to Simpson so that he was aware of the basis on which S&M were proceeding. There is no record of a response by Simpson to this letter.
    5811 I note that Perry (A&O) also reported to Stow (P&P) on this meeting with Thornhill. In his letter Perry set out the concerns that Thornhill had raised and he said that he considered Thornhill’s view of the Rolled Steel case to be very restricted:
    While we are fully aware of the corporate benefit issues we have difficulty in seeing why it is that [S&M] are taking this view so stridently. From the point of view of the English securities, limiting the liability of the companies to permit existing creditors to rank pari passu will not really be a problem as there is only about £100,000 of third party debt in [BGUK]. However, if we were to concede this point, there is no reason (as far as I am aware) why this interpretation of the Rolled Steel case could not be applied to each of the Australian Security Providers.
    5812 I also noted that Perry said that he had referred all the other points raised by S&M at the meeting with Lloyds Bank and that they were to discuss them the next day with Westpac, he continued:
    My advice to them [Lloyds] is that we should not depart from the Term Sheet if to do so is to materially affect the interests of the Banks‑otherwise, a number of Banks may need to go back to their respective credit committees for approval.
    26.7. C&L’s advice
    5813 Murray Legg was a partner in C&L’s London office. C&L had been the auditors for BGUK and TBGIL. Legg was asked by Edwards to advise on the questions raised in the letter Fink wrote after the conference with Richards, and on the matters Thornhill raised in the letter he wrote to Edwards on 20 December 1989. The issues, in particular, were the solvency of BGUK and TBGIL and the respective positions of the companies if the transactions were, or were not, undertaken. On 22 December 1989 Legg sent a draft letter (addressed to Edwards) to Thornhill. Legg separated the position of the two companies: BGUK from TBGIL.
    26.7.1. The position of BGUK
    5814 In Legg’s view BGUK’s solvency was dependent on the realisable value of its £206 million investment in Western Interstate. This, in turn, was dependent on the financial position of the parent company TBGL. The position was ‘somewhat circular’ because, in the short term, the solvency of TBGL and BGUK could be dependent on the granting of security by the UK companies. He cautioned:
    The key test however is whether on a break up basis the parent company would realise sufficient funds to meet its obligations under s123(2) Insolvency Act 1986; based on the 1989 accounts this would appear to be the case, but you should check the current position.
    5815 He suggested that the UK directors obtain a legal opinion from S&M on the enforceability of the letters of comfort dated 13 November 1989 given to the directors of BGUK and Western Interstate by TBGL. These letters were obtained as part of the last audit of the accounts of the UK companies undertaken by C&L. The auditors had also relied too on the June 1989 accounts of TBGL, finalised in November 1989. They showed that TBGL had significant assets and was a going concern. These letters confirmed that TBGL would continue to provide the financial support necessary to enable the Bell group to meet its debts as and when they fell due.
    5816 In answer to the question: ‘what is the effect of giving the security?’ Legg responded that if the additional security was given, then the Westpac loans would presumably remain in place in Australia for a determined period and:
    Given the substantial net asset position of [TBGL], the solvency of that company, and hence of [BGUK] through the Western Interstate investment would be ensured, at least for the short/medium term. Providing that funds continue to be made available to [BGUK] on the basis set out in the comfort letter of 13 November, [BGUK] will remain solvent.
    5817 In Legg’s opinion giving security for other group companies would not fall foul of the Rolled Steel case because he said it would be clearly in the interests of BGUK to ensure the survival of the rest of the group on which it itself depends. That is, it needed to ensure that it would obtain the realisable value of its major asset.
    26.7.2. The position of TBGIL
    5818 In respect to TBGIL the position was not so clear. C&L’s advice was that the company was solvent with or without the support of the rest of the group. This was on the basis that the proceeds from the sale of Bryanston would exceed the company’s debts. In Legg’s opinion, TBGIL would be solvent even after allowing for substantial write‑offs for debts due from subsidiaries or investments in subsidiaries and he said:
    Because TBGIL is solvent the directors cannot be accused of preference in granting security over the company’s assets. However the company has no direct bank indebtedness and the directors may be guilty of misfeasance if they grant security over the assets for the benefit in effect of other group companies.
    5819 He considered that TBGIL could survive on its own even if the rest of the Bell group collapsed. It could not be said that it was in the interests of TBGIL’s creditors to give security to the banks unless it could be confined to surplus assets. That meant assets that could be realised without prejudicing the continuation of the remainder of the business. Legg therefore advised Edwards that he should seek to avoid this situation in his negotiations
    in order to protect the directors from possible claims from creditors. A negotiation point here is that the validity of any charge granted by TBGIL may be successfully challenged by a subsequent liquidation and ultimately be of no benefit to the bank.
    5820 The plaintiffs were critical of this advice in their written closing submissions. They said that it was ‘garbled’, for two reasons: first, the parent company referred to was TBGL and it was not subject to the UK Insolvency Act. They also submitted that Legg’s understanding of the debt position of TBGIL was confined to external creditors. There was a debt due to BGUK in the accounts. Breese, however, was aware of this. On his copy of the draft letter of advice against Legg’s comment, he noted: ‘on the basis that amounts receivable for the sale of Bryanston Insurance exceed the company’s external creditors’. Regardless of the plaintiffs’ criticism of the quality of advice being received, the critical point to me was the fact they were taking it. Breese’s note indicated that attention was being paid to the detail of the advice.
    5821 Thornhill understood the jurisdictional issue: that the letters of comfort would have to be enforced in Australia. It seems to me, from his actions later, that he was concerned about the absence of contractual provisions in the November letter. Thornhill caused Fink to write to Simpson to request S&W to advise on the enforceability of the letter of comfort to BGUK under Australian law. There is no evidence of any response.
    26.8. January meetings between S&M and A&O and their clients
    26.8.1. The 2 January 1990 meeting
    5822 On 2 January 1990 Thornhill again attended A&O’s offices, this time with Edwards, Whitechurch and Breese. Latham was also present at the meeting and he kept notes. These notes record that the issues raised by Thornhill at the meeting with A&O on 21 December were raised again. These included the existence of external creditors of the BGUK group companies; provision for tax, including whether an amount would be needed from the Bryanston proceeds to cover this liability; and the history of BIIL in its role as what was described as the ‘group banker’, and its status as the only creditor of BGUK.
    5823 Whitechurch supported Thornhill’s evidence that he, Thornhill, also informed the bankers and their lawyers at this meeting of all of the following: the need for the directors of BIIL to be able to justify the subordination of the debt due to it; the requirement that the directors of BGUK would have to be satisfied of TBGL’s solvency; and that TBGIL and BGUK would need to have the benefit of enforceable letters of comfort from TBGL.
    5824 Breese also said that Thornhill discussed these issues with the directors, in Breese’s presence after the meeting. In particular, Thornhill was concerned that the existing letters of comfort from TBGL were unenforceable. It does not seem to me to matter whether the discussion occurred at (Whitechurch) or after (Breese) the meeting. To me the issues raised correlate with the notes Latham took. They are just an expanded version of similar issues.
    5825 On 2 January 1990 Breese, on Edwards’ instructions, sent a memorandum to Aspinall and Simpson that set out clearly the issues discussed at the meeting on 2 January 1990 with Lloyds Bank and its lawyers. There is no evidence of any response to this letter. On 3 January 1990 Breese sent to Latham at Lloyds Bank a letter and schedules, which Breese had prepared, setting out the asset position in the BGUK group and the position of TBGIL.
    26.8.2. The 8 January 1990 meeting
    5826 On 8 January 1990 Edwards, Whitechurch and Breese with their lawyers, Thornhill and Fink of S&M, met with Latham, Armstrong and Evans and lawyers from A&O. The purpose of the meeting, according to Whitechurch and Breese, was to negotiate exactly what security would be given by BGUK, and particularly by TBGIL; to insist on the enforceable letters of comfort; and to ensure that if there was to be a proposed subordination of the intra‑group debt, it would not prevent TBGL from honouring the letters of comfort. The extent of the security over the Bryanston proceeds was discussed along with the extent of the external liabilities of the BGUK group, including the effect this had on the capacity of the companies in the BGUK group to subordinate debts owed to them by BGUK and TBGIL.
    5827 Breese’s evidence is that Latham opened the meeting with a forceful speech to the effect that the banks did not want to have to renegotiate details, including the provision of security, that had already been extensively negotiated and agreed with the Bell group officers in Australia. Breese said that he found the speech intimidating, direct, and critical of the actions of the BGUK group companies. Latham, according to Breese, said there had been extensive negotiations for many months and they (the UK directors) could not come in now and attempt to renegotiate the proposed transaction.
    5828 According to Whitechurch this speech by Latham was met, equally emphatically, by Thornhill on behalf of the BGUK group who said that the UK directors had duties to their companies and they were not prepared to ignore their duties. He said that it did not matter what the banks thought, TBGIL could not enter into the proposed transactions in their (then) current form. This evidence was supported by Breese, Thornhill and Fink.
    5829 Whitechurch and Breese both said in evidence that they, including Edwards, were told by Thornhill after this meeting:
    That the UK directors had to make their own enquiries as to the ability of the BG(UK) Group to honour its commitments and this, in turn required an understanding of the ability of TBGL to honour any letter of comfort, and that we should also be satisfied that by entering into the proposed transactions, BG(UK) and TBGIL would be better off. To perform these tasks required reliable figures to be produced and analysed. The directors had to consider the interests of each individual company and not simply go through the motions of assessing the situation.
    26.8.3. The 10 January 1990 meeting
    5830 On 10 January 1990 another meeting took place between Edwards, Breese, Whitechurch, Thornhill and Fink and A&O and Lloyds Bank. There were more discussions about the position of the UK companies, their external liabilities and the intra‑group debts. Both Fink and Whitechurch kept notes. In evidence, Whitechurch said that he did recall that Evans from Lloyds Bank had said that the proposed transactions had been set by the terms sheets as a result of much negotiation. His evidence is that Evans had said: ‘If we had a problem with TBGIL entering into the transactions, we should be innovative and provide a solution. He [Evans] said any difficulty was not the Banks’ problem’.
    26.8.4. Letters of comfort
    5831 Having not received any response from Simpson, or S&W, to the request regarding enforceability of the November letter of comfort, Thornhill, instructed by Edwards, drafted what he believed would be a new and enforceable letter of comfort. Breese had written to Aspinall and Simpson on 2 January 1990 and said that that TBGIL could pay the Bryanston proceeds to BGUK for payment to the banks, and BGUK could enter into the transactions, provided that:
    (a) both companies received new letters of comfort (these were the letters redrafted by Thornhill);
    (b) the obligations of TBGL under those letters were not subordinated; and
    (c) the directors of TBGIL and BGUK could be satisfied of TBGL’s solvency.
    5832 Breese’s letter, written on instructions from Edwards, explained that the directors of TBGIL needed to satisfy themselves about the solvency of TBGL and its ability to meet TBGIL’s liabilities required in the foreseeable future. He said that by paying over the Bryanston proceeds TBGIL would have to rely on funding from TBGL to meet its creditors. It needed to be assured that TBGL could provide that support.
    5833 The effect of these letters of comfort was emphasised by Legg at C&L. In particular, in a letter dated 4 January 1990 responding to a request from Edwards, Legg had set out the matters upon which the directors of BGUK and TBGIL would need to be satisfied regarding TBGL’s ability to honour the letters of comfort. He said that the UK directors needed to have:
    (a) a letter from TBGL confirming its solvency at the appropriate date;
    (b) summary details of TBGL’s current financial position and statements and an assurance that it was capable of paying its liabilities as they fell due, and into the foreseeable future;
    (c) a cash flow projection for the next twelve months covering at least the major items of income and expenditure;
    (d) details of how TBGL intended to fund its obligations shown in the cash flow projection;
    (e) confirmation that the total assets exceeded liabilities, including contingent liabilities; and
    (f) an indication of how the Lloyds facility of £60 million would be repaid when it fell due in 1991.
    5834 There are a number of drafts of this letter in evidence. The various drafts deal differently with the question of the solvency of TBGIL. I have included in the above list all the relevant information.
    5835 It is only reasonable to infer that all of these requirements were in the minds of the UK directors when they and their lawyers attended the meetings with Lloyds Bank and A&O in early January 1990.
    26.8.5. Financial information: TBGL
    5836 The letter from Legg of C&L to Edwards was forwarded by Breese to Simpson on 5 January 1990. In the covering fax, Simpson was requested to provide the information that Legg had identified as necessary. Breese also sent Simpson a cash flow for BGUK for the next 12 months. He based it on the usual cash flow sent to TBGL but this one was adjusted to show all the external liabilities of the BGUK group, including the interest payments due to the Lloyds syndicate, which were not normally included in the BGUK cash flows because they were met from Australia. This cash flow showed that from June 1990 to January 1991, BGUK would have a substantial cash deficiency each month and that until the initial £5 million was received on the sale of Bryanston, there would be a deficiency for each month.
    5837 Even if, as I have discussed earlier, the list of creditors was not entirely accurate, the issue here is that Breese was being assisted by C&L and attempts were being made to identify all creditors and liabilities. Even if the directors were not correctly informed about the existence of all the debts (particularly the one owed by BGUK to BGF), they had taken steps to ascertain their creditors and they believed the list to be complete. Ultimately, however, it was the directors’ knowledge of TBGL’s financial position that would be critical in determining whether or not they should bring the BGUK group companies into the Transactions.
    26.9. Further advice from counsel on 11 January 1990
    5838 The requirement that it was essential to establish the financial position of TBGL was emphasised to the UK directors by Richards at a conference on 11 January 1990. Legg also attended this meeting.
    5839 Richard’s advice was recorded in a note by Fink. In essence, the advice was that the directors of BGUK could cause that company to enter into the Transactions provided the directors reasonably, and on evidence, formed the view that by doing so they would improve the position of creditors by giving TBGL time for an orderly disposal programme over the next two or three years. And further, that the ultimate realisation of the Western Interstate investment would be improved. This meant that the directors would have to rely on TBGL to honour the letter of comfort, which of course implied that TBGL was solvent and would remain so. This also required the consent of BIIL to the transaction and the subordinated debt owing to it.
    5840 The advice to the directors of BIIL was that they could give consent to the subordination of the debt owed to the company if they reasonably, and on evidence, formed the view that they were improving the position of their creditors on the same basis as that described above for BGUK; and that they obtained the consent of creditors (even if not all of the creditors gave the consent). They were also advised that all other companies that were intra‑group creditors would need to have regard to the same considerations as BIIL if they were to subordinate debts due to them.
    5841 Richards was specific in advising that there was no corporate benefit to TBGIL in giving security because it had no liability under the two existing bank facilities and therefore the expectation that the Transactions would provide TBGL with time to conduct an orderly disposal programme did not have the same relevance to TBGIL as to BGUK. His advice was that to grant security over the Bryanston proceeds would be to substitute for those proceeds an entitlement under a comfort letter which would be of lesser or doubtful value, because there was a reasonable possibility that TBGL would become insolvent. He concluded that giving the security over the Bryanston proceeds could only be given subject to provision being made, from those proceeds, for the external creditors and those intra‑group creditors which could not, or were not expected to, subordinate debts due to them.
    5842 Fink’s note of this advice was given to Edwards, Whitechurch (and Breese) Thornhill and Legg. It was sent by Whitechurch to the UK directors on 22 January 1990, and copied to Aspinall and Simpson. This note was altered on 23 January 1990 but not materially. The altered note was sent to the UK directors after the meeting of 24 January 1990 by Whitechurch. Whitechurch’s statement sets out all the relevant notes and attachments. There are also handwritten notes in evidence made by Legg and Whitechurch. All notes were consistent.
    5843 In his evidence Whitechurch made it clear that, throughout these negotiations with the banks, ‘in particular through their solicitors’ the UK directors were under constant pressure to meet deadlines, set by the banks, to execute documents. He gave a good example. On 17 January 1990, according to Whitechurch, a set of fresh drafts of various agreements were received from A&O and he said they were told by Latham, or Armstrong, that the RLFA document had to be signed by the next day. He said this was impossible. Edwards wrote his letter dated 18 January 1990 (to which I will refer below) partially in response to this demand. Whitechurch said that when he spoke to Fink and Thornhill about this time limit he was told by both of them that it would be impossible for S&M to give the documents appropriate consideration in such a short time and it would not be possible for the directors of BGUK to give the documents due consideration.
    26.9.1. The final proposal
    5844 After receiving the advice from counsel, Thornhill (on instructions from BGUK and TBGIL), put another proposal to Lloyds Bank. Edwards wrote to Armstrong on 18 January 1990 explaining the proposal. Whitechurch helped write the letter. This letter was sent to all the UK directors and was copied to Simpson and Aspinall. Lloyds Bank passed it on to the syndicate banks and to Westpac. Westpac copied it to all the other Australian banks. It was a letter included in the bundle of attachments available to all the UK directors at the meeting on 24 January 1990.
    5845 In the letter, Edwards said that BGUK would give the security requested provided that it received a letter from Lloyds Bank on behalf of the syndicate confirming that without the UK security, the syndicate would not consent to the granting of the Australian security. And, if the Australian loan was called up then the Lloyds syndicate banks would view this ensuing default ‘severely’ and would be entitled to call the Lloyds syndicate facility.
    5846 TBGIL would only grant security over the Bryanston proceeds and provide a limited guarantee to those proceeds, if cash was available to satisfy the existing liabilities of TBGIL as and when they fell due. The letter said the directors of TBGIL had concluded that they would be unable to rely on a letter of comfort from TBGL as a substitute for the proceeds from the sale of Bryanston, which were currently available to meet its liabilities. Those liabilities were to external creditors and intra‑group creditors that the directors of TBGIL believed were unable, or unable within the time available, to subordinate the amounts due from TBGIL or consent to the granting of the security.
    5847 The letter also set out the requirement of BGUK and its subsidiaries that they have in place, at all times, legally binding letters of comfort from TBGL, unlimited in amount and relating to both external and intra‑group liabilities, present and future. The letter stated that BGUK would seek to procure subordination or postponement by companies in the BGUK group of intra‑group debts owing to them as requested by the Lloyds syndicate banks and they would do this by 31 March 1990. But this could not be a condition precedent, condition subsequent or a term of the restated loan agreement because it was a matter for the board of each of the companies concerned. The express exception to the agreement to subordinate would be Bell International Ltd (Switzerland), which was owed £25.2 million by BIIL and those intra‑group creditors of TBGIL that could not subordinate their debts and for which provision had to be made from the proceeds of the Bryanston sale.
    26.9.2. The 21 January 1990 meeting
    5848 Over the next few days, and in particular on Sunday evening 21 January 1990, there were meetings and further negotiations between Edwards, Whitechurch, Thornhill and Fink for the BGUK group companies; Latham and Armstrong of Lloyds Bank; and Perry and Horsfall Turner (A&O). The purpose of the negotiations was to amend the facility agreements that would be required as a result of the proposals put in Edwards’ letter. These negotiations effectively continued up to 26 January 1990 when the agreements were signed. There were further negotiations after that date as to the precise terms on which the securities would be taken.
    5849 There were also negotiations continuing with Simpson about the exact wording of the letters of comfort that TBGL was prepared to sign.
    5850 There were meetings between Edwards, Whitechurch, Thornhill, Fink and Legg between 18 January and 26 January 1990. There is no evidence of any written response to the request made by Breese on 5 January 1990 for information on the financial position of TBGL. On 19 January 1990 Legg had sent a fax from Bond group’s UK offices to Simpson repeating the request for a response to the letter dated 5 January 1990. Legg reminded Simpson that the directors of BGUK and TBGIL still needed to satisfy themselves that those companies were solvent, since the solvency of the two UK companies depended on the solvency of TBGL. A handwritten note on the fax, made by Legg, indicates that Simpson telephoned and said a written response was being prepared.
    5851 There were many examples in the evidence given by various UK participants that showed that documents were being negotiated and amended as the discussions progressed. But as late as 21 January 1990 three things still needed to be obtained before the meeting of UK directors: the letter of comfort from TBGL; evidence of the future plans of TBGL and the effect on Western Interstate shares; and, critically, evidence of the solvency of TBGL.
    26.9.3. Edwards’ final request
    5852 On 22 January 1990 Simpson sent Edwards a draft letter from the directors of TBGL. This letter was referred to in evidence as the ‘solvency letter’. It was forwarded immediately by Edwards to S&M and to Legg for their comments. The letter said that TBGL was solvent; that there had been no material adverse change in the financial position of the company since 30 June 1989; that it was capable of paying its liabilities as and when they fell due; and that it was intended that a refinancing of TBGL be completed prior to May 1991, which would enable a repayment of all lenders to TBGL. It referred to the provision of a letter of comfort that dealt with the issue of supply of funds for the next 12 months. Whitechurch wrote immediately to Simpson and said that the only letters of comfort that they would accept were the S&M drafted letters. These letters would be for each individual company within the BGUK group.
    5853 There was a lot of argument between the parties as to who said what to whom and who was instructed to carry out individual tasks. I believe it is reasonable to infer that Edwards then asked Legg to draft another note to Simpson setting out the information from TBGL that Legg thought necessary to satisfy the directors of BGUK before they could approve the additional security. I have drawn this inference because I do not believe Legg would have done this without being requested to do so. Legg sent his draft to Edwards and copied it to S&M on 22 January 1990. Some amendments were made to the draft at Fink’s suggestion and then Edwards sent the amended note to Simpson on the evening of 22 January 1990. This is an important note. It sets out in very clear terms the information that the directors of BGUK required before they could authorise the giving of the additional security.
    5854 In the note, Edwards identified the primary issues for the directors; namely, that they would need to be satisfied that the company, BGUK, was solvent. They would also need to be satisfied that it was in the interests of BGUK’s shareholders, and ‘more particularly its creditors, that they will not be prejudiced by the granting of the security that is sought by the banks’. He referred to the draft solvency letter sent by Simpson, and said that in respect to the issue of solvency the letter was satisfactory subject to the amendments that he wanted made.
    5855 I note here that the amendments he referred to were requested in a separate fax, sent by Edwards, also on the 22 January 1990. In this second fax Edwards asked that Simpson amend the solvency letter to refer specifically to the refinancing repaying all lenders to TBGL and to BGUK, in order to cover the Lloyds Bank loan. He also asked that the limitation to 12 months be deleted. He explained that their advice was that they had to have a comfort letter, unlimited in time.
    5856 Edwards then explained in his fax that the ‘question of the interests of creditors’ was more complex. He said that the issue was whether or not BGUK’s creditors would be better served by TBGL’s continued operation as a going concern, or by the appointment of a receiver. He repeated the fact that BGUK’s only significant asset was its investment in Western Interstate and its main asset was the loan owed by BGF. The ultimate value of Western Interstate was dependant on the value of TBGL. Further, he noted TBGL was the only source of funds available to BGUK to meet its creditors, including the loan from Lloyds Bank; Edwards continued:
    The directors of BGUK need therefore to understand, in outline, what strategy is to be adopted by TBGL in the foreseeable future, to support the conclusion that BGUK’s investment in Western Interstate has greater value if the security is granted, and hence that the granting of security is in the interests of BGUK’s creditors. Some of what is envisaged by TBGL was communicated to me orally by David Aspinall last week, but I consider that the position should be properly recorded to support the view reached by BGUK directors. This approach is consistent with the advice from Counsel that we obtained recently.
    5857 Edwards then assured the directors of TBGL of the confidentiality of their response to this request. He also asked for clarification as to what extent the financial position of TBGL was linked to the financial position of the BCHL since this ‘may be a factor’ in the directors’ assessment of whether granting security would prejudice the BGUK creditors:
    You will, of course, appreciate the legal reasons that require the directors of [BGUK] to give due consideration to these matters from the perspective of the company, rather than from the perspective of the Group as a whole. However, the issues are, I would imagine, similar to the questions that the Board of TBGL have to themselves consider for the purpose of that company granting the additional security that is sought.
    If we are to sign tomorrow, Tuesday, I am afraid time for your response is very short, since the directors will need to consider it before they authorise signature.
    5858 This note clearly demonstrates that Edwards knew and understood the corporate benefit issue, and that as late as the evening of 22 January 1990 the UK directors were still seeking critical information from the directors of TBGL that would enable them to enter into the Transactions.
    26.9.4. Legg and Montgomery
    5859 On 22 January 1990 an incident occurred which, like so many others during this trial, was of some controversy between the parties. Legg, from C&L London, telephoned Frank Montgomery of C&L in Perth. Legg made a note of the conversation with Montgomery, which he marked as ‘private’. It is not known what if anything of this conversation Legg communicated to Edwards. It was ultimately discovered and referred to in many submissions.
    5860 C&L Perth were TBGL’s auditors. Legg apparently wanted Montgomery’s views on the position of the Bell group in Australia because the solvency of the UK companies was dependent on the financial position of the Australian parent. Legg’s note of the conversation recorded that Montgomery referred Legg to the June 1989 accounts of the Bell group and the assets shown therein and said that he was unaware of any significant changes from this position.
    5861 Legg also recorded that Montgomery said that he ‘did not believe there would be a problem on solvency’ and referred to the profitability of the publishing business, the options for disposal of parts of that business and options for realising the investment in BRL. Legg noted that Montgomery referred to conversations he had had with Aspinall, which indicated that Bell ‘had plans’ to be more efficient, to consolidate the publishing business and to pay off the group’s borrowings, after disposal of the BRL shares. Montgomery was of the view that this approach would generate ‘more for value’ for the Bell group shareholders (and creditors) than the appointment of a receiver and a forced disposal of the assets.
    5862 Montgomery apparently also expressed the view that the Bell group could stand alone from the BCHL group and that there was only a relatively ‘low level’ of inter‑group borrowings. At the end of this note Legg recorded his own view:
    This is all consistent with Michael Edwards’ assessment of the position and with the information that BGUK are receiving from its parent company. Nothing arises which suggests that Michael Edwards would be ill advised to approve the granting by BGUK of additional security on the basis of advice he has been given.
    5863 The defendants particularised this note as a matter relevant to the beliefs formed by the UK directors and the directors of BIIL prior to entering the Transactions. However, neither Legg nor Montgomery was called to give evidence. Edwards, as noted earlier, did not give evidence. Whitechurch gave evidence that he had not seen this note previously but that he recalled that Legg may have said, at the time, that he had checked with his Perth office. Legg did not, according to Whitechurch, ever specify what he had discussed. Thornhill was not asked about the note or its contents.
    5864 Assertions that this information formed part of the basis for the UK directors entering the Transactions did not assist me. There is no evidence that this note was disclosed to the UK directors, or that it influenced their decision to enter the Transactions, or contributed in any way to a reasonable belief in the solvency of the Bell group at that time.
    26.10. Knowledge of the UK directors
    5865 I am satisfied that the evidence establishes that by 8 January 1990, Edwards (as a director of BGUK and TBGIL) and Edwards and Whitechurch (as directors of BIIL) had been advised about their obligations as directors of the individual companies within the BGUK group. Breese, as financial controller of the companies, was diligent in recording much of this advice and communicating his concerns regarding his doubts on the net asset position of TBGL.
    5866 I am also satisfied on the evidence given by Breese that these concerns had also been conveyed to Birchmore. The completeness of the advice on the corporate benefit issue is best encapsulated in a note made by Fink of the meeting between the directors and the lawyers on 8 January 1990 date to this effect:
    [A]t the end of the day the decision had to be taken by the directors of each company on the basis of information which they regarded as sufficient to enable them to reach an informed decision. Crucial to this decision is the value to the UK companies of the letters of comfort and diligent enquiries must be made of the ability of [TBGL] to honour its obligations. A simple assurance from Australia to this effect would not be sufficient in this respect – reliable figures need to be produced by Australia and analysed by the directors of the UK companies. The directors should not regard themselves as employees of the group as a whole – their duties are to the UK companies alone.
    This is not simply a question of going through the motions to make it appear that the formalities have been adhered to. (emphasis in original)
    5867 This is a particularly important piece of evidence and one on which I have placed considerable weight. In Sect 25.8 I described the drafting of the recitals and minutes as a triumph of form over substance. This is the exact opposite: it is an appeal to the sanctity of substance and the rejection of form. The reference to ‘reliable figures’ and ‘not going through the motions’ gives clear direction as to what needed to be done. It mirrored the advice given to Edwards by Legg earlier in January 1990 and it was consistent with the approach advocated by S&M throughout the dealings.
    5868 There is considerable evidence that this advice was being adhered to by Edwards and Whitechurch between 2 January and 8 January 1990 (and up to 24 January 1990 and beyond to 13 February 1990) and that, as a result of the advice, there were extensive negotiations occurring between those directors and their advisers on the one hand, and Simpson for TBGL on the other. Additionally, some of Thornhill’s advice to the UK directors was referred by Simpson to Watson (S&W) and he, according to Thornhill, either disagreed with it, or indicated that various matters had been taken up with the banks, argued and lost.
    5869 Lloyds Bank was involved in the negotiations as well and there is evidence of various meetings with Latham and A&O and Edwards, Whitechurch, Breese and S&M in this critical period. There are also letters in evidence, sent by Breese to Latham at Lloyds Bank, detailing schedules of amounts owed to the creditors of BGUK and TBGIL. Thornhill gave uncontradicted evidence that he had expressed to Edwards, to Legg (C&L), to solicitors at A&O and to Latham (Lloyds Bank) that the banks should accept the argument that BGUK and TBGIL required enforceable letters of comfort in order to enter into the Transactions and that TBGIL’s obligations under the letters could not be subordinated.
    5870 The impression that I gained from the tone of the correspondence and the evidence of various witnesses (including Fink, Thornhill, Breese and Whitechurch) was that the negotiations between these UK directors and Simpson at TBGL, and between the UK directors and Lloyds Bank and A&O, were difficult. Considerable pressure was being exerted by Simpson or, as Whitechurch described it, ‘pressure in all directions from the Bell office in Perth and the banks’, (that meant Lloyds Bank), which was intended to secure the cooperation of Edwards in the refinancing. This is evident in the body of correspondence and drafts and redrafts referred to in Thornhill’s witness statement.
    5871 Thornhill gave evidence that Simpson tried to restrict the advice that S&M were giving. He wanted them to confine themselves to matters that ‘would contravene English law or which would be impossible under UK law’. Caught in the middle of this, it seems that Edwards was trying to be cooperative and various attempts were made by Edwards and Whitechurch, after discussions with S&M and C&L, to put various proposals to Simpson and to Lloyds. These included:
35. An offer made through Thornhill on 2 and 8 January 1990 to the effect that, provided TBGL gave an unlimited and unsubordinated letter of comfort, TBGIL would give security over the Bryanston proceeds, but not give an unlimited guarantee or a fixed and floating charge over all its assets. This was rejected by Lloyds Bank on 10 January 1990.
36. A proposal to set aside on trust part of the Bryanston proceeds equal to the estimated amount of the existing external creditors. Eventually this was agreed but limited to £1 million.
37. A proposal to create an exception in the subordination agreement so that funds could flow through from TBGL to the extent necessary to meet the external creditors of BGUK and TBGIL, and the other UK companies.
    5872 At the heart of the matter was the necessity for there to be a realistic possibility that TBGL would not go into liquidation. This was the critical issue upon which much advice had been given and taken by the United Kingdom‑based directors: Edwards, Birchmore and Whitechurch. I have no difficulty in finding that they knew what was required to discharge their directorial responsibilities.
    26.10.1. Alan Bond
    5873 Alan Bond was not called to give evidence. There is no direct evidence from him as to his state of mind. All I have is the evidence of Whitechurch that the London‑based directors sought assurances from Alan Bond that the Bell group companies were solvent and that TBGL would and could honour the letters of comfort if called upon to do so. Apparently he gave that assurance. There is little, if anything at all, in any of the documents or witness statements that would lead me to conclude that Alan Bond had any particular knowledge about the affairs and financial position of the Australian Bell group companies. He was not a director or executive of any of them.
    5874 Whitechurch, the company secretary, was the only former officer of BGUK who gave relevant evidence about Alan Bond’s participation. He said:
    My face to face dealings with Alan Bond were extremely infrequent. I only recall meeting Alan Bond two or three times. I rarely communicated with him in writing. To the best of my recollection I never spoke to him on the telephone save for the meetings referred to later in this statement, at which I was present, but did not actively participate
    5875 There is some evidence that certain advice was copied to Alan Bond before the meetings that authorised the Transactions were held. Whether he read it or not, I will never know. He participated by telephone in the meeting of 24 January 1990 and Edwards read out the critical documents, or paraphrased substantial parts of them. I cannot be satisfied that Alan Bond had any particular knowledge or understanding of the affairs of BGUK or about the detail of the Transactions.
    5876 On the evidence as it is, I am not persuaded that any beliefs professed by Alan Bond that the companies were solvent and that the letters of comfort given by TBGL would be met, were based on reasonable grounds or were honestly and genuinely held by him. I refer once again to the evidence of Corr, Baker and Swan about the way BCHL operated (through the ‘inner cabal’) and the concentration on Mitchell’s restructure plans. I have no doubt that Alan Bond would have been fully aware of the plans. This, coupled with a lack of evidence of any knowledge about or participation in the affairs of the Bell group, satisfies me that Alan Bond’s focus was more on the survival of BCHL and Dallhold than on the companies in the Bell group.
    26.10.2. Mitchell
    5877 Mitchell is in the singular position that he was a director of TBGL, BGUK and TBGIL. The evidence that I have dealt with in Sect 24.2.8 establishes that he had no knowledge of the financial position of the Australian companies entering the Transactions. Nor did he have any understanding about the issue of corporate benefit. And, as the evidence discloses, his lack of knowledge and understanding about of the position of the Australian companies, TBGL in particular, ultimately contributed to the breach by the UK directors of their duties as directors. I also refer in this context to the evidence of Swan, Corr and Baker, about Mitchell’s ‘Bond‑centric’ plans.
    26.10.3. S&M draft the minutes and resolutions
    5878 Draft minutes of the meetings for BGUK and TBGIL were prepared as part of S&M’s legal advice to the companies and their directors. Thornhill’s evidence is that these minutes were prepared by Fink, but he saw them and made amendments to Fink’s drafts. Thornhill and Fink both said that the minutes contained matters that the directors ought to take into account in forming their views on whether or not the companies should enter into the Transactions. The drafts had various blank spaces in them which were intended, according to Fink, to enable the directors to specify what conclusions had been reached on various issues. Fink sent the draft minutes to Whitechurch on 22 January 1990. In respect to the issue of preparation of the minutes for the meetings Thornhill gave this evidence:
    [T]hese minutes were not advice from S&M to the directors of BGUK and TBGIL that they could enter or should enter into the transactions and S&M did not provide advice to this effect. The views of the directors which the draft minutes set out were not the views of S&M but views which the directors would need to form themselves after making proper enquiries.
    5879 Edwards and Whitechurch (as company secretary) amended the draft minutes on 23 January 1990. They were amended, according to Whitechurch, in anticipation of receiving the letters dealing with TBGL’s solvency that they had requested. Whitechurch said he also inserted various figures in the minutes as at the date of the Transactions. He then had to assemble the documents referred to in the draft minutes so they would be available to all the directors at the meetings.
    5880 It was envisaged, from the draft minutes, that each of the directors would have before them at the meeting the following:
    • The drafts of the proposed agreements.
    • The proposed comfort letter from TBGL.
    • The letter from C&L dated 4 January 1990
    • Evidence of the solvency of TBGL and its ability to meet the obligations under the comfort letter.
    • The letter from Lloyds Bank dated 22 January 1990.
    • A note of the conference with counsel (Richards) as prepared by Fink.
    • Edwards’ letter to Lloyds Bank that he sent on 18 January 1990.
    • An anticipated final form ‘solvency letter’ from TBGL confirming its capacity to pay its liabilities as and when they fell due.
    • Provision for whatever would be provided by TBGL, in response to Edwards’ memorandum to Simpson dated 22 January 1990, regarding the plans for TBGL’s future as a going concern.
    5881 The draft of the minutes also made reference to the UK directors’ assessment of the ‘evidence supplied’ by TBGL of its plans for the foreseeable future as a going concern. They also referred to the UK directors’ assessment of the likelihood of BIIL directors consenting to the entry by BGUK into the Transactions. Whitechurch’s evidence is that these passages were drafted on Legg’s advice before the document or documents that were anticipated to contain such evidence were received, but on the basis that would be available for consideration at the meetings.
    5882 On 22 January 1990 Whitechurch sent the draft minutes and some of the documents referred to in those minutes to the UK directors. Still missing was the information sought from TBGL about future strategy and the financial relationship of TBGL with the Bond group. His covering fax referred to the advice they had received from S&M; that is, the need for the directors to consider the implications of the agreements, and the need to consider the solvency of BGUK. He referred to the fact that these issues impinged on the personal liability of the directors. He explained that it was intended the directors of TBGIL should subsequently consider the minute of the BGUK documents and then would pass a resolution in similar terms. He then indicated that the London‑based directors would telephone the Australian directors (Bond and Mitchell) the next morning to discuss the business of the meeting.
    5883 The anticipated meeting on 23 January 1990 did not take place. It was postponed to the next day. A decision was taken (it was not clear by whom but probably Edwards) that the UK directors would meet first as the board of TBGIL for the specific purpose of considering and approving an estimate of the liabilities of TBGIL. A rider was drafted to the minutes to record this meeting. In particular it was to record the assessment by the TBGIL directors of the amount to be withheld from the Bryanston sale proceeds to cover external, and intra‑group, liabilities. The latter creditors included those that ‘may not give their consent to the granting of security’. There was some evidence, which I have discussed earlier, to the effect that it was Mitchell who sought this information. However, Mitchell gave evidence that he had no recollection of the issue.
    26.10.4. Identifying the creditors
    5884 Breese said in his evidence that on 23 January 1989 Edwards asked him urgently to prepare a schedule giving his ‘best’ estimate of the external creditors of TBGIL and a schedule of TBGIL’s intra‑group creditors. Edwards told Breese that the directors needed to satisfy themselves of these matters because they had to know that the £5 million from the sale of Bryanston was sufficient to cover these debts. He said that he prepared these schedules by amending a copy of the schedules he had prepared on 3 January 1990 (see Sect 26.8.1 above) and a copy of the schedule of expenses relating to the sale of Bryanston that Edwards had sent to Oates on 18 December 1989. He discussed his draft schedules with Edwards and then at Edwards’ direction he sent the finalised schedules to the directors of TBGIL that day.
    5885 Breese also recalled a telephone conversation on 23 January 1990 with Armstrong (Lloyds Bank who asked Breese to send to him a list of the intra‑BGUK group creditors that would not be able to subordinate their debts. Breese said he prepared this schedule and listed the companies and the amounts of their debts and he arranged for it to be sent to Armstrong that same day. He said that he also sent Latham information that Latham had requested including information on the Bell group’s Swiss division.
    26.10.5. Simpson’s draft letters received
    5886 On 23 January 1990 Simpson drafted and circulated to the directors of TBGL, with a copy of Edwards’ fax to Simpson dated 22 January 1990, a draft of the amended letter of solvency; a separate draft of the same letter addressed to TBGIL, a draft of the ‘comfort letter’ in terms suggested by Thornhill; and a draft letter from the directors of TBGL, described by Simpson as a ‘brief statement of what is envisaged for TBGL’.
    5887 It was a very brief statement. The letter described WAN as being a very profitable business. It also reminded the UK directors of the Bell group’s holdings in BRL and JNTH and ‘some communications assets’. It referred to ‘the intention of the directors to rationalise the business and operations of the Bell Publishing Group’. It mentioned the negotiation of the sale of Bell Press’ printing division to News Limited and said that ‘it is envisaged that approximately $25 million will be realised from the sale of this asset’. Of course, it would have been clear to the UK directors from the draft refinancing documents then available that the Bell Press sale proceeds were ear‑marked as a pre‑payment of the banks’ facilities. It went on to express confidence that ‘value will be returned to the BRL’ shareholding and that when that occurred ‘it would be our aim to review our shareholding in that asset and deal with it in the most appropriate manner’.
    5888 All that was said about the information requested regarding the extent to which the financial position of the Bell group was linked to the financial position of the Bond group was that ‘other than the $25 million which is owed by Bond Corporation or companies associated with it, there is no exposure to the Bond group’. And, in even less precise terms, it closed with the words:
    You also sought information in respect to the conditions precedent and subsequent which need to be met under the facility agreement and the supplemental agreement. It is our view that these matters can be met in the time frame outlined in those agreements.
    5889 Simpson forwarded these drafts to Edwards. He also copied them to Thornhill. These were the documents that were before the UK directors at the meeting on 24 January 1990. The minutes were amended again to describe in particular the ‘brief statement’ being the letter from TBGL about its plans for the foreseeable future as a going concern and confirming its ability to meet the conditions precedent and conditions subsequent to LSA No 2. Whitechurch’s evidence is that he (on Legg’s advice) tried to have some amendments made to these letters but Edwards said to him that ‘it had been enough of a struggle to get those letters out of TBGL as they were and he would rather just let it be’.
    5890 These were the letters that were then included in the materials before the meeting of the board of directors on 24 January 1990.
    26.11. The meeting on 24 January 1990
    5891 The UK directors met on 24 January 1990 at 9.00 am London time and 8.00 pm Sydney time. Of those present at the meeting only Mitchell and Whitechurch gave evidence. Mitchell said that he had no independent recollection of the meeting. He was of no help to me.
    5892 Whitechurch was of considerable assistance. He said he had a very clear recollection of the meeting. This meeting on 24 January 1990 was the first meeting that he had been involved in since he joined the Bell organisation at which Mitchell and Alan Bond had been present, even if only on the telephone. It was also the first time he had been involved in a meeting of a board where some board members were on the telephone. He said he had been specifically told by Edwards that there were matters that Alan Bond and Mitchell needed to be involved in.
    5893 The meeting took place in Birchmore’s office in Piccadilly, London. Edwards, Birchmore and Whitechurch were present. Alan Bond and Mitchell were on speakerphone. Whitechurch said that the critical documents for the meeting had been sent by fax that morning. Birchmore opened the meeting. He explained briefly the purpose of the meeting. Edwards asked Alan Bond if he could take the directors through the documents. He asked those directors on the telephone to confirm that they had the documents referred to in the minutes. Whitechurch said he recalled a ‘grumble’ by Alan Bond that there were ‘lots of papers to read’ and whether it was ‘necessary to have so many documents’.
    26.11.1. The TBGIL meeting
    5894 Edwards explained that first there would be a meeting of TBGIL and that would be followed by a meeting of the directors of BGUK. The first meeting was to determine if TBGIL could rely on the estimate of external and intra-group creditors of TBGIL prepared by Breese. That had to be approved before the meeting of directors of BGUK. The directors of BGUK would take into account the view formed by TBGIL. Edwards further explained that as part of the refinancing, the securities set out in the minutes would have to be provided by the BGUK group.
    5895 Edwards then, according to Whitechurch’s evidence, repeated in substance par 3 of the minutes. This referred to Richards’ advice that there would be no corporate benefit to TBGIL in granting any security either to the Australian banks or to the Lloyds syndicate, because TBGIL had no present obligations to those banks. He said that unless the position of TBGIL’s creditors was safeguarded at the time TBGIL gave the contemplated security, the directors of TBGIL would be acting in breach of duty and would expose themselves to personal liability to a liquidator of TBGIL. Edwards said the directors needed to satisfy themselves that they could rely on the schedule of estimates prepared by Breese ‘on a cautious and prudent basis’. These estimates would determine the part of the Bryanston sale proceeds required to meet the liabilities.
    5896 Whitechurch recalled that Mitchell asked whether the directors in London (Edwards and Birchmore) were comfortable with Breese’s estimate. He said that he and Alan Bond personally had no idea and they wanted to make sure that the London directors had satisfied themselves in this matter. Edwards gave the assurance. He said they had made sure that they had considered all known creditors of TBGIL and that they were satisfied that the amounts of each liability were accurate. Edwards then read out in substance pars 4 and 5 of the minutes and he asked if the directors unanimously resolved each of the matters. All agreed. The meeting then closed.
    26.11.2. The BGUK meeting
    5897 Edwards then opened the meeting of the board of directors of BGUK. He explained that the minutes had been drafted by S&M with the assistance of C&L. According to Whitechurch’s recollection, Edwards referred to pars 2 and 3 of the minutes. Whitechurch and Edwards followed the wording closely, and in some places paraphrased it. These parts of the minutes set out the reasons why BGUK was being asked to enter the Transactions. Whitechurch gave a detailed account of the way that Edwards was careful to draw the directors’ attention to various matters in the minutes and the documents. He they went on to discuss the situation of TBGIL and the liabilities that needed to be met from the Bryanston sale proceeds. He then considered par 3 and 4 of the minutes and the reference to the shareholders ratifying BGUK’s entry into the Transactions. Edwards said that the basis of his belief that ratification would occur was from information received from Aspinall and Simpson. Edwards then turned to par 5 of the minutes. This contained the critical issues.
    26.11.3. The critical issues
    5898 Edwards explained that the legal opinion received from Richards and S&M was that the directors had to act in the best interests of BGUK as a whole, and that given its financial position, careful consideration had to be given to BGUK’s creditors. Apart from the liabilities to Lloyds Bank (£60 million) the only other liabilities were to BIIL for £237 million and to TBGIL for £7.7 million. He said that the debt to TBGIL would be cancelled by TBGIL declaring a dividend in favour of BGUK in the amount of the debt. He turned to that part of the minutes that said: ‘Michael Edwards explained that consideration had been given to the evidence supplied by TBGL as a going concern’.
    5899 Edwards, according to Whitechurch, then took the directors through the following:
    (a) the letter from Lloyds Bank confirming that it would not give its consent to the granting of the proposed security in Australia without the security requested from the BGUK group;
    (b) that this meant that it was probable that the Australian banks would call up their loans;
    (c) that these loans could not be repaid by the Australian companies, which included TBGL;
    (d) that this would give rise to an event of default under the Lloyds facility, which would result in the Lloyds syndicate calling up their loan from BGUK;
    (e) that BGUK could not repay the loan of £60 million and nor could TBGL, which was the guarantor of the loan; and
    (f) that it would then be inevitable that the Bell group would be wound up.
    5900 He then said that the Australian banks had threatened to call up their loans unless BGUK resolved, that day, to enter into the Transactions. If the Westpac syndicate did call up their loans, this would set in train the winding up of the whole group.
    5901 According to Whitechurch, Edwards went on to explain that the only way in which BGUK could meet its obligations under the proposed Transactions was with the support of TBGL. BGUK would have, he said, the letter of comfort from TBGL which would be in the form attached to the minutes (sent by Simpson and containing the amendments Edwards had insisted upon) being unlimited in both amount and time.
    5902 Edwards confirmed that it was S&M’s advice that this was legally enforceable and that it had been drafted by S&M to have that effect. But Edwards said that the advice he had received from S&M was that the directors had to form the view that it was reasonable to rely on the letter of comfort if BGUK was satisfied that TBGL had the financial capacity to meet its obligations under the proposed Transactions. He explained that C&L had given advice, (that letter was attached) about what enquiries had to be made to assure BGUK of the solvency of TBGL.
    5903 That advice included the need to obtain summary details of TBGL’s current financial position and financial statements and an assurance that it was capable of paying its liabilities as they fell due and into the foreseeable future. It also referred to the need to obtain TBGL’s cash flow projection for the next 12 months; details of how TBGL intended to fund its obligations shown in the cash flow projection; and confirmation that the total assets exceeded liabilities, including contingent liabilities. The directors had none of that information before them.
    5904 Edwards then referred to the draft letter received from TBGL that asserted its solvency. He explained that even though the information in the terms advised by C&L had been requested, this was all they had been given. Whitechurch said that Edwards then asked Alan Bond and Mitchell, in particular, to look at C&L’s letter. From Whitechurch’s account I understood that what Edwards was drawing the two Australian directors’ attention to was the fact that, despite repeated requests, this was all they had received. Again according to Whitechurch’s evidence, Edwards went on to say he had spoken to Aspinall and Simpson but they had told him no more than what was in the letters. He said that the London directors were not in a position to make any further enquiries. Whitechurch said Edwards then asked Alan Bond and Mitchell if they were confident about the letters. Birchmore pursued the enquiry. This is what Whitechurch recalled:
    Alan Birchmore spoke more firmly than Michael Edwards and used a raised tone of voice. His language was more colloquial than Michael Edwards’ which was more polite. Alan Birchmore said words to the effect addressing the following statements to Alan Bond and Peter Mitchell ‘You are the only two who know what’s going on. You’re the only ones who have all the information. Don’t piss us around. We want to know what you’re up to’.
    5905 Whitechurch’s recollection was vivid. The UK directors needed more information. They needed specific information. They needed, as they had been reminded by their legal advisers repeatedly, to make an independent assessment based on an ‘analysis’ of ‘reliable figures’ and they should not accept a ‘simple assurance’. They had to do more than ‘go through the motions’. They did not have reliable figures or current financial statements or projected cash flows. They had nothing before them that would provide any appropriate basis for an independent analysis that could lead to the conclusion that TBGL could honour its letter of comfort to BGUK so that BGUK could meet its liabilities. As Whitechurch said in evidence: ‘We had obtained as much information as we possibly could, but it was still not satisfactory’. They then turned to the two directors on the telephone in Australia for assistance.
    5906 According to Whitechurch’s evidence, Alan Bond and Mitchell then told the London directors that they had received legal advice that they would succeed in setting aside the receivership of BRL and they were confident that the sale of the breweries to BRL would then proceed. They said this would take some months but when it occurred it would return value to BRL and the Bell group’s shareholding in BRL. Mitchell said the sale of the press asset to News Limited was proceeding and from this $25 million would be realised (that information was in the comfort letter). He said it was the intention of the TBGL directors to realise other assets. Both Alan Bond and Mitchell asserted that they were confident that the Bell group, over time, would be in a position to meets its liabilities and repay its debts.
    5907 Nothing they said, in my view, added to the information that Edwards and Birchmore already had, and that Edwards and Birchmore knew to be inadequate. There was no discussion of the cash flow of the Bell group over the next 12 months or any other financial assessments. In effect, all they had obtained from Alan Bond and Mitchell were, at best, further simple assurances on which they had already been warned not to rely. There was no reasonable information that would enable the UK directors to identify the benefit to the individual companies by the giving of the securities.
    5908 Edwards then proposed (in the terms of par 5 of the draft minutes) that it was reasonable for BGUK to rely on the comfort letter to meet its liabilities as they fell due. Whitechurch said that there was then some discussion to the effect that BGUK faced a choice: either enter into the proposed Transactions or face the probability of winding up.
    5909 Edwards then ‘set out the substance of par 6 of the minutes’ and the UK directors resolved to enter into the Transactions as set out in par 7 of the draft minutes. Whitechurch described it in his witness statement:
    Michael Edwards then said ‘I take it that it is resolved that BG(UK) enter into the LSA No 2, the Restated Agreement and UK Debentures in the forms which you each have and that any amendments are subsequently approved by me and that I be authorised to sign any engrossments’. Everyone said ‘Yes’.
    5910 After the meetings, Whitechurch certified the minutes and resolutions and, ultimately, attached final copies of the letters referred to in draft at the meeting, which were received after the meeting. These final letters were signed by Oates and Aspinall. An excerpt of the minutes was sent to Armstrong (Lloyds Bank) on the evening of 24 January 1990. No copies of the documents, or the letters, referred to in the minutes went to Lloyds Bank or A&O. They did not ask for them.
    5911 The security documents still needed to be signed and some negotiations on the terms continued after the meeting on 24 January 1990. It was originally intended that the security documents were to be signed on 25 January 1990 but this deadline was extended by Lloyds Bank to 15 February 1990. Whitechurch said that the issues delaying the documents included settling the list of external creditors and the intra-group creditors that could not be subordinated. This list affected the amount of money to be withheld from the proceeds of the Bryanston sale. The list of liabilities was to form a schedule to the security to be granted by TBGIL. The LSA No 2 and the ABSA were only received in final form for execution on 26 January 1990. Edwards had to sign a waiver letter.
    5912 The draft securities were not sent by Perry (A&O) until 28 January 1990. In his covering letter Perry raised a concern about the validity of a telephone meeting for BGUK. On 2 February 1990 Fink suggested that the constitution of BGUK should be amended to permit telephone meetings. Whitechurch also asked Simpson to provide letters of comfort in favour of various BGUK subsidiaries. On 6 February 1990 Whitechurch received from Fink a bundle of draft minutes and consents for BGUK’s and TBGIL’s creditors and shareholders. One of these creditors of BGUK was BIIL.
    26.12. The meeting on 13 February 1990
    5913 On 12 February 1990 Whitechurch said he received, from Fink at S&M, drafts of various other documents required for the Transactions, including minutes for meetings of the directors of TBGIL and BGUK that were to be held on 13 February 1990 and for a subsequent meeting of BIIL. Included were:
    (a) BGUK minutes.
    (b) Consent of BGUK shareholders.
    (c) Consent of BIIL as creditor of BGUK.
    (d) TBGIL minutes.
    (e) TBGIL shareholders’ consents.
    (f) BGUK’s consent as creditor of TBGIL.
    (g) Assignment and agreement between TBGL, Bell Management and BIIL.
    (h) Letter from BGUK to TBGIL re the ‘netting off agreement’.
    (i) BIIL minutes.
    (j) BIIL shareholders’ consents.
    (k) Bell Management minutes.
    5914 The purposes of the meeting to be held on 13 February were first, for the directors of BGUK and TBGIL to approve the execution by BGUK and TBGIL of the securities to be given under LSA No 2, and to approve the form of letters to be sent to shareholders and creditors. Secondly, for each company (as shareholder and creditor of other companies in the BGUK group) to give consents to the entry into the Transactions. Thirdly, in the case of TBGIL, to approve letters that were to be sent to the creditors that were being asked to consent to the Transactions. And also to ratify the waiver letter already signed by Edwards.
    5915 Whitechurch, in his evidence, gave his account of the meeting. He said that the meeting of TBGIL was held first and then the meeting of BGUK. Alan Bond and Mitchell were on the telephone from Sydney. Edwards, Birchmore and Whitechurch were together in London. Edwards took the other directors through the minutes for BGUK and TBGIL. These minutes, drafted by Fink, referred to specific terms of the security documents (including some terms that were onerous) and the ‘risk’ associated with either facility. Whitechurch said that Edwards was meticulous in this reading. He followed the actual text, paraphrased very briefly in some instances but more or less read the minutes to the directors. He listed the documents referred to in the minutes and asked them all to identify the various documents they had. In particular, Edwards referred to the guarantees and the mortgage debentures and explained the purpose of the documents.
    5916 At that time BIIL had not given its consent to the Transactions but it was proposed that a meeting of BIIL would be held as soon as all the documents had been prepared. I deal with this issue in Sect 27. In his evidence before me Whitechurch said:
    Although it’s not in the minutes, I’m pretty confident in my mind, having given a lot of thought to this, that the whole question of the solvency of the group was very much in our minds. Although I can’t prove it by any documentation, I’m absolutely certain that Edwards raised the point with Alan Bond and Peter Mitchell, just saying that we were still waiting for information from Bell about their solvency and how they were going to finance the UK group, and that we were still relying on the statements that Bond and Peter Mitchell had made at the previous meeting about the solvency of the group as a whole, bearing in mind we had had – by this stage I think we had had more information about the Bond Brewing deal than we had earlier.
    5917 It is reasonable to infer that the solvency of both the BCHL and Bell groups must have been very much in the minds of the London‑based directors. Whitechurch gave evidence that from the time of the takeover of the Bell group by the Bond group, BGUK and TBGIL did not have any staff of their own. The employees of the Bell group in the United Kingdom had been transferred to Bond UK or to other Bond group companies in the United Kingdom by about March 1989. Because Bond UK did not have any real assets of its own, but was simply a management company for Bond group’s UK assets, it depended on income from service agreements with other Bond companies to meet its expenses. After Lonrho, financial staff of Bond UK had become very concerned about the Bond group’s capacity to pay staff entitlements. There had been a qualified auditors’ report and record loss recorded for BCHL in the 1989 accounts; there was the loss of control of BRL and the appointment of the receiver to BBHL; and the US bondholders were calling up their loans to BBHL. Further, specific requests for financial information identified by lawyers and accountants as essential information (and particularised carefully in requests to TBGL) were ignored.
    5918 Ultimately however, it mattered little what the meetings on 13 February 1990 or indeed 15 February 1990 approved. Once the facilities agreements became operative, BGUK was already bound by the covenants. It was bound as a result of the resolutions made on 24 January 1990 when the directors had on that date committed the companies to enter into, and to procure, the securities comprised in the Transactions. The directors had done so without the level of financial information that they should have had about the solvency of TBGL or its ability to honour the letters of comfort upon which the very existence of BGUK, in particular, would have to rely.
    26.13. The UK directors’ knowledge and conduct: conclusion
    5919 The UK directors had obtained the clearest legal and accounting advice about the need for them to make an analysis of the financial position of TBGL based on reliable figures. They needed to know what the future strategy for TBGL was and this strategy needed to be based on proper, reliable financial statements. They had been cautioned not to accept simple assurances about the financial health of TBGL. They had been told, and (it is reasonable to infer from all the evidence) they knew, that this issue was critical to determining whether or not it was in the best interests of the individual companies of which they were directors, not the group, to commit to the Transactions.
    5920 The directors went to the meeting on 24 January 1990 knowing that they did not have any evidence of the financial position of TBGL from which they could properly and reasonably exercise their commercial judgment. This appears most clearly from the evidence of Whitechurch. In re‑examination he said:
    Richard Breese in his fax of 5 January set out a series of points that he needed covered and also sent Murray Legg’s letter and a cash flow statement. The responses we got to that fax were minimal, I would say, in that they barely covered the points, but they did just about, which is why – I mean everybody was still dissatisfied with them which is why the assurances of Alan Bond and Peter Mitchell were sought at the subsequent board meeting.
    5921 Ultimately the London‑based directors relied on assurances from one of the directors, Alan Bond, who was not even a director of TBGL. The other assurances were provided by Mitchell, who referred only to matters already in the draft letters from TBGL without providing anything further.
    5922 The reference to the application of the proceeds of the sale of the Bell Press assets should have been sufficient to raise the alarm. Edwards had already brought to the attention of the directors at the meeting the restrictions on the application of the proceeds of the sale of assets in the proposed agreements. Further, he had been required to engage in intense negotiations to secure the retention of part of the Bryanston sale proceeds, against the demand of the banks to take all the security available.
    5923 The critical information that the directors knew was missing prior to the meeting was still missing at its conclusion. They could not have bona fide formed a view that they were acting in the best interests of the companies, or that the Transactions were of real and substantial benefit to the companies, because there was no objective information available to them to satisfy the corporate benefit test.
    5924 I am also satisfied that Alan Bond and Mitchell were focussing on the survival of BCHL and Dallhold, rather than on the separate and distinct interests of the BGUK group companies. In this respect they also breached their duties to BGUK and TBGIL by exercising their powers for an improper purpose.
    5925 I was impressed by the evidence of Whitechurch, Breese, Thornhill and Fink. I believe that the recitation of the facts concerning the negotiations and the meetings, so far as they concerned the London‑based directors, is a reliable account of what happened. I can say a number of things by way of conclusion.
38. The legal advice the UK directors received from S&M was meticulous. So, too, in the main, was the advice from C&L.
39. The London‑based directors were told about the substance of the corporate benefit test and they applied themselves diligently to the task of complying with it. But, as I will say in a moment, they fell at the last hurdle.
40. They took steps to identify the issues that might affect the solvency of the BGUK group companies.
41. They looked at the individual companies within the group. Not only did they identify the creditors of each company, albeit that one of the lists may have contained some errors, they sought to ensure that the creditors were protected. The setting aside of the Bryanston proceeds in an example of this.
    So far so good. And it is in stark contrast to what happened in Australia. But, as I have already said, they fell at the last hurdle. They were given strong advice that they must satisfy themselves as to the solvency of TBGL, because its letter of comfort was critical to the solvency of the BGUK group companies. They were told that they ought to do more than rely on simple assurances. As I have outlined, they did not take this final step.
    5926 I acknowledge that this is a tough call. The London‑based directors (and Whitechurch) had done everything right. As I said earlier, they were true to the doctrine of substance over form. They relied for assurance on two of their fellow directors – and this is one of the reasons why I categorise this finding as a tough call. In the circumstances, I just do not think it was reasonable for them to rely on Alan Bond and Mitchell and on Simpson (who was not a director of any of the companies).
42. BIIL directors’ knowledge and conduct
    27.1. Edwards and Whitechurch
    5927 I noted in Sect 26.1 that Whitechurch and Edwards were the two directors of BIIL. Whitechurch was also the company secretary of most of the UK group companies. The basis of the knowledge that both Edwards and Whitechurch had to have about the concept of corporate benefit was gained through their attendance at all the critical meetings, in particular, the meeting on 24 January 1990; the meetings with all the advisers; correspondence directed to the companies; letters written by Whitechurch at the direction of Edwards; and from their participation in meetings with the other UK directors. In addition, the general advice given by S&M, C&L, and counsel in respect to the position of BGUK and TBGIL was relevant for the directors of BIIL.
    27.1.1. The advice received
    5928 The first specific advice to the directors regarding the position of BIIL in the refinancing arrangements was in the letter written by Thornhill on 21 December 1989 after the conference at A&O’s office in London. Thornhill had been given by A&O fresh drafts of the security documents and the subordination deed. The requirement of the banks (as set out in the documents) was that all creditors of the security providers should subordinate the debts owed to them. This applied to BIIL because it was a creditor of BGUK. Because it was owed £237 million by BGUK, Thornhill advised in the letter dated 21 December that:
    The directors of BIIL will have to carefully consider whether it is in the best interests of that company to subordinate the debt.
    5929 On 8 January 1990 Whitechurch and Edwards were both at the meeting where Thornhill gave the very clear warning about the need for the directors of TBGIL and BGUK to have regard to the interest of those companies alone; the need for diligent enquires regarding the value of the letters of comfort; the fact that ‘a simple assurance would not be sufficient’; the need for reliable figures to be produced by TBGL and analysed by the directors of the UK companies; and, importantly, that the directors were not to regard themselves as employees of the group as a whole. Their duties were only to the UK company of which they were directors.
    5930 At the meeting with Richards on 11 January 1990 (at which both Edwards and Whitechurch were present) particular consideration was given to the position of the directors of BIIL. I have set out the advice in Sect 26.9. BIIL would have to give its consent both to the entry by BGUK into the Transactions and to the subordination of the debt due to it by BGUK. Richards advised the directors of BIIL that in giving consent they would be in breach of their duties, unless they could show they were not prejudicing the interests of BIIL’s creditors. This was a significant difficulty because the creditors of BIIL included various companies within its sub‑group that were not in the United Kingdom.
    5931 An example of this problem arose in relation to the Swiss sub‑group. They were owed £25 million by BIIL. This sub‑group had an ongoing liability to the Swiss tax authorities. The liability had been recorded by Brown (on about 15 January 1990) as part of the response to Breese’s request to identify all possible tax liabilities. According to Brown’s note, the liability was accumulating at £250,000 per annum. He said that the way to avoid the continuing exposure was to liquidate the Swiss companies, but even if this occurred there would still be a non‑recoverable withholding tax cost of £1.2 million. Brown also said in his note on the tax liabilities that it ‘may’ have been necessary to fund a £7 million withholding tax ‘loan’ to the Swiss tax authority for two months. He also made it clear that the primary liability for the withholding tax exposure was with BIIL. Such a situation made it impossible to obtain the consent to the subordination of debt of all the subsidiaries within the sub‑group and their creditors, one of which was the Swiss tax authority.
    5932 The directors of BIIL would have to show that by agreeing to subordinate the debts due to the company they were improving the prospects of BIIL recovering the debt from BGUK. Richards advised that if the directors of BIIL were to rely on the comfort letters, then they had to be able to justify that decision by producing evidence that it was reasonable so to rely. They would also have to safeguard their own intra-group creditors who did not agree to subordinate their debts.
    27.1.2. The pre‑condition issue
    5933 The banks contend that the entry by BIIL into the subordination deed cannot form part of the Transactions because it was not a condition of the Transactions. I do not accept that submission. First, there is evidence in draft letters written by Edwards on 12 January 1990 to Lloyds Bank of the requirement that all of the subsidiaries of the UK group would agree to subordinate all of their intra‑company debts to one another. This requirement is referred to by Edwards in a covering fax to Latham as a being one ‘of the points which we do not feel able to accept’. Secondly S&M, in providing comments on the relevant UK security documents, wrote to Simpson to 18 January 1990 and said that they had commented ‘on a number of occasions’ to Lloyds Bank that BGUK would endeavour to obtain subordination agreements from its subsidiaries, but it would not be held liable if these could not be obtained.
    5934 The obligation to subordinate was imposed by cl 17.6 of the then current draft of the facility agreement, in the definition of subordinated creditor. S&M had objected to the provision as follows:
    Paragraph (c) of this definition [the definition of ‘UK Subordinated Creditors’ on page 19 of the then draft of LSA No 2] imposes an obligation on [BGUK] to use its best endeavours; this is not acceptable and must be deleted. The paragraph should be reworded to read:-
    ‘(c) such subsidiaries of BGUK as will enter into the UK Subordination Agreement.’
    5935 Thornhill said in the letter to Simpson (copied to Edwards) that he had told A&O that the proposed term in the draft agreement was ‘simply not right’ and it could not stay in its current form. He said that Lloyds Bank and A&O had been told on numerous occasions that there could be no obligation on BGUK to procure the various subsidiaries to subordinate the intra‑group debt. I can understand why Thornhill gave that advice. The obligation to convert existing financial accommodation into subordinated debt would of itself raise issues of corporate benefit for the directors of the subsidiaries. And it would make nonsense of the letters of comfort because it would, as he went on to say in his letter, restrict the flow of funds under those letters of comfort.
    5936 On 19 January 1990 Watson of S&W, when advising TBGL in Perth on the Transaction documents, wrote to Peek of P&P. He said that he had received Thornhill’s 50 comments on the draft of the LSA No 2 and RLFA No 2. Watson said that he had been ‘very selective’ in those which he had then referred to Peek. It is clear from the letter that he had omitted any reference to Thornhill’s comments on the subordination issue.
    5937 On the same day, Watson wrote to Thornhill and said that the definition of subordinated creditor in the draft agreement had been deleted and that cl 17.6 was still being worked on, noting that
    it may be that some amendment is required. The objective is to honour the bargain struck between BGUK and Lloyds. Flow of funds under letters of comfort is dealt with by the permissions granted in clause 17.14.
    5938 The issues of corporate benefit were the same for all the directors of all the companies required to enter the Transactions. In my view, this issue was not being properly identified or considered by S&W. It appeared to be left to S&M to try again. On the afternoon of 19 January 1990 S&M wrote to A&O. S&M raised a number of points that they had made to Simpson and which Watson had omitted from his letter to P&P. They say in the letter that the clause imposing an obligation on BGUK to use its best endeavours to obtain subordination is not acceptable and must be deleted. It could be reworded, they suggest, to read ‘such subsidiaries of BGUK as will enter into the UK subordination agreement’.
    5939 This was one of the issues discussed at the meeting on 21 January 1990 that I referred to in Sect 26.9.2 above. Edwards and Whitechurch were both at that meeting. They received the legal advice that BGUK and TBGIL could not undertake to the banks that the other companies in the BGUK group, including BIIL, agreed to subordinate the debt due from BGUK. Nor could this be a condition of the Transactions. However, the effect of the resolutions passed by the directors of BIIL on 15 February 1990 was, in practical terms, to commit the directors of BIIL to that course.
    5940 The effect of the Transactions to which BIIL consented was that BGUK had given security over all its assets, and was then reliant on the comfort letter from TBGL (which had given similar security) to meet its liability to BIIL. If the other creditors and shareholders of BGUK also consented to the Transactions, a liquidator of BGUK would have difficulty in taking action in relation to any breach of duty in that regard by the directors of BGUK. BIIL could not itself enforce the comfort letter from TBGL to BGUK, and would have to rely on a comfort letter from TBGL in its own favour to meet its liabilities to its creditors. The undertaking from TBGL to provide financial support to BIIL in that comfort letter was expressed to be:
    in consideration of you agreeing to give the consent requested of you as a creditor of [BGUK] and to defer repayment of amount due to you from [BGUK].
    5941 The same applied to the directors of BIIL as to the directors of BGUK and TBGIL. They had been advised not to rely on mere assurances regarding TBGL’s ability to honour the letters of comfort. They needed to make an independent assessment based on objective evidence that TBGL was solvent and that it had the financial capacity to meet its obligations under the proposed Transactions and the letter of comfort. This would enable BIIL to meet its obligations as they fell due. The directors needed to be confident that they would recover more of the £237 million owed by BGUK to BIIL if the Transactions proceeded. None of the directors had this information at the meeting on 24 January 1990. In the period between 24 January 1990 and 15 February 1990 they had even more reason to be concerned about the financial reliability of TBGL. In that time events in relation to BRL unfolded and the BBHL difficulties became clearer. All they had received from the directors of TBGL was information that Whitechurch described as ‘not terribly satisfactory’ and ‘the absolute minimum that it was possible to give’.
    5942 The meeting on 24 January 1990 had proceeded on the basis that it was necessary for BIIL to enter into the Transactions. Certainly Edwards appeared to assume this. Whitechurch was present at that meeting only in his capacity as secretary. He asked no questions. He said that did not see it as his place to do so. And in any event he said that the refinancing was by that time ‘a fact of life’ and even if questions had been asked they would not have obtained any further answers.
    27.1.3. The meeting on 13 February 1990
    5943 Whitechurch said that the date for executing all the security documents was originally to be the end of January 1990, but this was delayed to the middle of February. He said, and I have dealt with this earlier, that in part the delay was caused by problems settling the list of external creditors, and those internal creditors that would not be subordinated for which the banks had agreed to release part of the Bryanston sale proceeds. However I note that no arrangements were made for the liabilities to the Swiss tax authorities.
    5944 Because he had a more intimate knowledge of the inter‑company liabilities than Whitechurch, Breese was asked to prepare drafts of the consents from creditors of BIIL, the board minutes authorising those consents, the consents to be given by shareholders and the creditors of creditors of BIIL, the board resolutions authorising them, and the letters of comfort to be given to the subsidiaries of BGUK.
    5945 Included in what Whitechurch described as ‘a bible’ of documents required for the meeting of BGUK and TBGIL directors on 13 February 1990 was the letter of consent by BIIL as a creditor of BGUK. Whitechurch had to assemble all the documents, and in doing so he forwarded to Simpson the draft letters of comfort to be given to the creditors of BIIL by TBGL. On 13 February 1990 Simpson telephoned Whitechurch. He asked him what all these letters of comfort were about and why so many were required. Whitechurch then asked Fink to write him a letter explaining the need for the comfort letters. This letter was then sent by Whitechurch to Simpson. It set out very carefully the financial dependency of BIIL and its subsidiaries on, ultimately, the worth of TBGL.
    5946 Whitechurch was present at the meeting on 13 February 1990. He asked no questions about the financial assumptions about TBGL’s solvency and the basis on which they committed BIIL to the Transactions. Whitechurch said that he had no particular recollection of any financial matters discussed at the meeting of 13 February 1990. He said his recollection was that the meetings were conducted on the basis that the ‘deal’ had already been approved on 24 January 1990 and by the execution of LSA No 2 on 26 January 1990.
    5947 The meetings on 15 February 1990 were ‘paper meetings’. There was no formally convened meeting. Whitechurch said in his evidence that he and Edwards were familiar with the contents of the documents and they just signed all the documents that needed to be signed and produced to Lloyds Bank.
    27.1.4. The meeting on 14 May 1990
    5948 The BIIL Subordination Deed was ultimately not signed until 14 May 1990. Its execution was authorised by another ‘paper meeting’. No actual meeting occurred. Whitechurch executed the deed as secretary of BGUK and BIIL. By this date the fact that TBGL was facing serious difficulties in attempting to meet the interest payments to the bondholders due in May 1990 became known to Whitechurch and, I infer, to Edwards. It was also known to them that TBGL would need the proceeds of the sale of Bell Press if it was going to pay that interest, which would require the consent of all the banks.
    5949 Whitechurch said that by 14 May 1990, and even earlier, he knew that if the banks did not provide their consent the non‑payment of the interest due to the bondholders there would be a default under the facilities entitling the banks to call up the entire debt immediately. By the date the subordination deed was signed Whitechurch and Edwards had been involved in the arrangements for the execution of a waiver by BGUK, so that the requirement that the proceeds of the BPG sale could be applied to the bondholders (rather than in reduction of the debt to the banks). Notwithstanding the change in the apparent circumstances of TBGL, the subordination deed was signed in fulfilment of the train of obligations put in place on 24 January 1990.
    27.2. BIIL directors’ knowledge and conduct: conclusion
    5950 The same fundamental deficiency in the manner in which the directors of BGUK and TBGIL entered into the Transactions infects the decision of the directors of BIIL. Despite a plethora of clear and cogent advice to the contrary, the directors proceeded to commit BIIL to the subordination of the debt due to it by BGUK. In order to discharge their duty to act in the best interests of the company they knew they had to be satisfied in participating in this multi-million dollar facility that the parent company could honour its commitment to support BIIL. Without objective evidence of the ability of TBGL to do so, the directors of BIIL could not be said to have acted in the best interests of BIIL, its creditors and shareholders. They received nothing more than mere assurances. In deciding to accept those assurances, the directors of BIIL, like the directors of BGUK and TBGIL, were in breach of their duties as directors.
    5951 Like the findings against the London‑based directors of BGUK and TBGIL, I reach this conclusion with some reluctance. As I have already said, I was impressed by Whitechurch as a witness. And the directors did everything right save for ‘the last hurdle’. In the case of BIIL, they took other steps after 26 January, 1990 to investigate the position. Nonetheless, I believe I am compelled to the conclusion that there was a breach of duty.
43. Equity Trust knowledge and conduct
    5952 As I explained in Sect 2 BGNV was a subsidiary of TBGL (its sole shareholder was BGF) and the issuer of bonds in the Eurobond market. It had one corporate director, Equity Trust (Curacao) NV (Equity Trust), and is named in these proceedings as the fifth defendant. In January 1990 and July 1990 Equity Trust was known by its then name: Etrusco International NV, or simply Etrusco. Although some contemporaneous documents refer to the director by that name, I refer in these reasons to the director of BGNV as Equity Trust.
    5953 The plaintiffs allege that Equity Trust breached its duties to BGNV but, as I have explained in Sect 3, no relief is claimed against it. Nonetheless, I must consider the plaintiffs’ allegations that Equity Trust breached its duties as a director because the deed it entered into is one of the Transactions that the plaintiffs seek to set aside. Pim Ruoff was the sole director of Equity Trust. Consequently, it can be inferred that he was its directing mind. As I explained in Sect 23.1, the early versions of the statement of claim contained an allegation that the Australian directors were de facto directors of BGNV and therefore implicated in the breaches of duty to BGNV. This claim had been abandoned before 8ASC was formulated.
    5954 Ruoff did not testify at the trial and no‑one else was called to give evidence on behalf of Equity Trust. I received no explanation for this. The failure to call the individual that was the directing mind of the director (Equity Trust) makes my task of deciding whether or not there has been a breach of duties by the director difficult, but not impossible.
    5955 There is one general matter that, while not in contention between the parties, I should mention to complete the record. It is to be borne in mind that Equity Trust and BGNV were incorporated in the Netherlands Antilles. In 8ASC par 39F the plaintiffs plead that they are entitled to rely on the presumption that any foreign law concerning the duties as a director of BGNV is the same as Australian law concerning the duties of company directors.
    5956 By operation of either s 7 of the Foreign Corporations (Application of Laws) Act 1989 (Cth) or by the common law conflict of law rules, the law of the Netherlands Antilles applies to the issues raised in 8ASC par 39F. But where foreign law governs a matter such as this and the foreign law is not proved there is a rebuttable presumption that the law is the same as the law in Australia. I can see nothing in the circumstances to indicate that this presumption ought not to apply in the context of par 39F. It seems to be common ground that the content of the law of the Netherlands Antilles in relation to directors’ duties should be taken to be the same as the law of Australia.
    28.1. The BGNV Subordination Deed
    5957 On 31 July 1990 BGNV, TBGL, BGF and Westpac (as Security Agent) executed what is called in this litigation the BGNV Subordination Deed. The deed provided that the parties to it agreed that the liabilities of each of TBGL and BGF to BGNV (that is, the on‑loans) and the rights of BGNV in respect of those liabilities were subordinated to any liabilities of the plaintiff Bell companies to the banks. The subordination was to be effected whether the liabilities were incurred prior to, or pursuant to, the Transactions. The BGNV Subordination Deed permitted payments to be made by TBGL, BGF and BGNV to meet interest payments on the bonds unless a ‘facilities default’ (as defined in ABFA clause 1.1) occurred.
    28.2. The alleged breaches by Equity Trust
    5958 The plaintiffs say that in causing BGNV to enter into the BGNV Subordination Deed Equity Trust was in breach of its duties as a director. In summary, the plaintiffs allege the following breaches:
    (a) If Equity Trust did give consideration to the deed, and formed a view that it was in the best interests of BGNV, the view was not a bona fide view in that Equity Trust did not truly and reasonably hold such a view.
    (b) Further, or alternatively, no honest and reasonable director would have acted as Equity Trust did.
    (c) Further, or alternatively, the entry into the BGNV Subordination Deed was not reasonably incidental to, or within the scope of, carrying on the business of BGNV and, therefore, the decision to enter into the Transactions was not made bona fide in the best interests of BGNV and was made for an improper purpose .
    The plaintiffs particularised the breaches. They say that the breaches occurred when:
    (a) Equity Trust knew, suspected or ought to have known or recklessly disregarded the fact that:
    (i) each of BGF, BGNV and TBGL was insolvent, nearly insolvent, of doubtful insolvency or would inevitably become insolvent;
    (ii) or, alternatively, unless each of BGF, BGNV or TBGL were able to enter into a valid and effective restructuring of their financial position, they would be wound up or their assets liquidated.
    (b) Further, or alternatively, Equity Trust knew or ought to have known that BGNV:
    (i) was insolvent, nearly insolvent, or of doubtful insolvency;
    (ii) was not previously liable for BGF’s debts to the Australian banks or BGUK’s debts to the Lloyds syndicate banks (this is the subordination issue);
    (iii) BGNV had creditors pursuant to the three BGNV bond issues and the effect of the BGNV Subordination Deed was that the amounts owed to BGNV by BGF and TBGL were no longer available to BGNV; and
    (iv) Equity Trust suspected, ought to have known or recklessly disregarded each of the above matters.
    5959 That is a summary of the allegations pleaded. The pleading is confined to the alleged breaches of directors’ duties as I have set them out. Item (b)(ii) above has to be approached with some care. It is the case (as the particular says) that prior to the Transactions BGNV had no liability to the banks in respect of the indebtedness of BGF and BGUK to the banks. But that was also the case after the Transactions. BGNV’s involvement was solely directed to subordination of inter‑company indebtedness. It did not for example (and as some other Bell Participants did) give a guarantee of the indebtedness of BGF and (or) BGUK. I think the particular is directed at countering any argument that BGNV already had an indebtedness to the banks and thus had a reason to support BGF and BGUK.
    5960 There is no allegation in the pleading of dishonesty against Equity Trust. Nor is there an allegation that it preferred its own interests, or breached any other fiduciary duty of loyalty and honesty to BGNV.
    5961 Equity Trust did not receive the financial information regarding the position of TBGL and BGF from those companies that it should have received. The plaintiffs’ case is that it could and should have found out the information withheld from it by making its own enquiries, but did not. They say these matters were relevant to (and by necessary implication would have had some causative effect on) the decision to enter into the Subordination Deed.
    5962 These claims are denied by the banks. The banks say that the plaintiffs’ case is really one, put at its absolute highest, of negligence by Equity Trust.
    28.3. History and function of the participation of Equity Trust
    5963 Equity Trust was a company incorporated in the Netherlands Antilles. It was appointed the sole director of BGNV on 10 March 1988 and it remained the sole director of BGNV until its resignation in June 1991. I have discussed in Sect 4.3.4 and Sect 12.11 the reason for the interposition of BGNV in the three bond issues that I refer to as the BGNV bond issues. BGNV had no assets other than the debts due to it by TBGL and BGF resulting from the on‑loans. BGNV’s only shareholder was BGF. BGNV’s only creditor was LDTC as trustee for the bondholders. While interest under the bonds was paid at regular intervals, the principal sums were not due for repayment until 1995 or 1997; with the possible exception of the put option (in respect to part of one of the issues) which could have been exercised in July 1992. At the time of these events that possibility was still some years away.
    5964 Part of the function of the issuer of the bonds was to respond to communications and requests from the bondholders that they were entitled to make pursuant to the terms of the trust deeds. Over the life of these bonds various requests had been directed to Equity Trust.
    5965 Equity Trust had a management agreement with TBGL. Equity Trust had contracted to undertake the local management of BGNV and to provide all appropriate administrative services that it was directed to undertake by TBGL. Mary Tagliaferri, Bruce MacPherson and then Simpson were the people from TBGL with whom Ruoff usually communicated. The director would pass the requests for information received from the trustee of the bond issues on to TBGL and BGF and receive, in return, the requisite information required to satisfy the enquiries made. Equity Trust would then respond to the enquiry.
    28.3.1. Knowledge of the financial state of TBGL and BGF
    5966 If, at the time BGNV was requested to execute the BGNV Subordination Deed, TBGL and BGF were insolvent, as I have found in Sect 9.20, there is no evidence that Equity Trust knew or suspected that such a state of affairs existed. Nor can I find support for the allegation that it ought to have known or recklessly disregarded the alleged states of the insolvency, or insolvency context, of those companies at the time it entered into the BGNV Subordination Deed. Because there was no direct evidence from any witness about the state of knowledge or the state of mind of Equity Trust, through Ruoff, I rely on the only available evidence, which is entirely in letters, faxes and other documents.
    5967 On 6 December 1989 the draft of the annual accounts for BGNV was sent to Ruoff by TBGL in Perth. The accounts had been prepared as part of the Bell group accounts. The director’s statement supporting the accounts had to be signed by Ruoff. At the same time he received a copy of TBGL’s annual report for the year ended 30 June 1989. Ruoff was asked by TBGL to take the accounts to C&L in Curacao to obtain the audit report that supported the accounts. He clearly did so because there is in evidence a letter written on 13 December 1989 from Melvin, an accountant at C&L in Curacao, to C&L in Perth.
    5968 In the letter Melvin asked C&L in Perth to advise him if there was any reason to doubt that BGNV could repay its borrowings when they fell due. On 15 December 1990 Montgomery at C&L in Perth replied by fax and said that C&L had no reason to doubt that BGNV would be able to repay its borrowings when they fell due. On 19 December 1990 Melvin forwarded copies of the audited accounts of BGNV to Equity Trust and on 28 December 1990 Ruoff forwarded the director’s statement, audit report and the signed accounts for BGNV to TBGL in Perth. The auditors’ report states:
    We have examined the financial statements of Bell Group N.V. for the year ended 30 June 1989.
    In our opinion, based on our examination, the accounts present fairly the financial position of Bell Group N.V. at 30 June 1989 and the results of its operations for the year then ended.
    5969 In these circumstances it is not possible to say that by reason of these accounts Equity Trust suspected, ought to have known or recklessly disregarded the alleged insolvency of BGNV. Whatever may have been the difficulties disclosed in TBGL’s annual report, and the accounts included in it, to which I have drawn attention in other sections, there was nothing in evidence that would suggest that Ruoff was or should have been disturbed in that respect. There is nothing to have excited his attention. He passed the draft annual accounts for BGNV and the TBGL annual report on to C&L in Curacao and sought, and received the appropriate audit certificates. There was no evidence about Ruoff’s command of English, the language in which the annual report and accounts were presented. Not that the language difficulty would be an excuse for any failing as Equity Trust had assumed the role for reward.
    5970 Equity Trust’s role was as the independent director of BGNV and it carried out its functions in that context. It operated in Curacao, a long way from Perth, Western Australia. It is a reasonable inference that Equity Trust relied on the information provided to it by TBGL, in particular the audited accounts, and the information sought by its own accountants in Curacao from C&L in Perth. It had no other information that would or should raise doubts or spark interest. This accounting information enabled the accountants in Curacao to give the proper statutory certificates and to assume a state of solvency of the parent company of BGNV.
    5971 In addition, from October 1989 and into 1990 there were various occasions on which LDTC requested certificates of compliance with the terms of the trust deeds from BGNV. And BGNV in turn asked for the assurances from TBGL, received them and passed them on to LDTC. There is nothing in this chain of correspondence that would indicate the difficulties of which, the plaintiffs say, Equity Trust ought to have been aware. LDTC says it relied on these certificates and there was no reason why Equity Trust would do otherwise. In fact, on 26 January 1990, almost contemporaneously with the request to enter into the BGNV Subordination Deed, TBGL provided Equity Trust with an executed certificate of compliance. On receipt of this, Equity Trust provided a certificate to LDTC.
    5972 There is one other incident that I should relate here. In Sect 30.18.3 I describe the demands issued by SCBAL against TBGL and BGF in December 1989. In the course of the exchanges following the issue of the demands, Aspinall raised with officers of SCBAL the possibility that the BGNV on‑loans might not be subordinated and that BGNV might rank equally with the banks in a liquidation. The demands were withdrawn, but the subordination question was a live issue from that time on. On 22 December 1989, Tagliaferri (a legal officer with TBGL) wrote by fax to Ruoff in these terms:
    According to our records, the proceeds of the $75,000,000 1985 bond issue were on lent by [BGNV to TBGL] and the proceeds of the $175,000,000 and £75,000,000 1987 bond issues were on lent by [BGNV to BGF].
    I would be obliged if you would check your records and minute book to ascertain whether or not those loans were ever formally minuted and whether the terms and conditions of those loans were in any way documented. If such information is available, I would be obliged if you would fax it to me … as soon as possible.
    The information is required to enable us to reply to a query raised by our banks as to whether or not the loans from [BGNV to BGF and TBGL] were subordinated to creditors of The Bell Group Ltd group of companies …
    5973 It should be noted, however, that although this letter was sent, there is no evidence that it was actually received or responded to by Equity Trust. Nor is there any evidence that at any time, either before or after 26 January 1990, TBGL renewed the request for information about the on‑loans. As the banks pointed out in their closing submissions, the letter was directed to an incorrect fax number. This being so, I think it is a reasonable inference that Ruoff never received it.
    5974 On 18 May 1998 Ruoff was examined in the Rotterdam District Court under a rogatory commission. It is not clear whether the commission was issued at the behest of BGNV’s liquidator or by the Curacao authorities. The examination seems to have taken the form of responses to a series of written questions. In one of the questions (numbered 74), Ruoff’s attention was drawn to the 22 December 1989 letter. He was asked whether he reviewed the minute book and Equity Trust’s records for the purpose of determining whether the on‑loans were subordinated. His response was as follows:
    I do not remember there being a minute book in the BGNV file, but I assume that there was something there. However, it was customary that the minutes of meetings were filed in a separate file as a sub-file of the Corporate file. In general, this was also the place where the powers of the attorney of the meetings were kept. In answer to the question literally put under 74, I inform you that I cannot remember this. However, I had no reason not to do this.
    5975 This answer seems to have been directed at whether or not he looked for a minute book. It provides no basis for determining that he found the minute book and (or) that it contained a resolution about the on‑loans.
    5976 While I am on the subject of the Rotterdam examination, I should add that I did not find the questions and answers to be particularly helpful in relation to other issues concerning BGNV or Equity Trust. Although the plaintiffs tendered the transcript of the proceedings, they do not seem to have placed much reliance on it. I think it is correct to say that the plaintiffs mention it only once in their closing submissions. I am not suggesting that the plaintiffs are somehow bound by what was asked or not asked during the examination. I have mentioned it purely as part of the factual matrix to the extent that it contains (or more accurately does not contain) useful material.
    28.3.2. The request to enter the Subordination Deed
    5977 By the terms of cl 17.6 of ABFA, TBGL was obliged to use reasonable endeavours to obtain BGNV’s entry into the Subordination Deed. TBGL appears to have first raised this with BGNV on 24 January 1990, not long after the financial statements and annual accounts were provided to Equity Trust, as I have described above.
    5978 Simpson made the request in a letter and he explained that the directors of TBGL had arranged a refinancing of the debt of the companies in the Bell group. He said that the lenders to the facility had requested that all companies in the Bell group enter into a subordination agreement whereby all inter‑company debt is subordinated to that of the lenders. His letter also explained that the subordination would be on the basis that none of the inter‑company debt could be repaid, and no interest paid on it, until the whole of the debt to the lenders was repaid.
    5979 Simpson asked for an urgent response about ‘whether or not BGNV would be able to enter into such an agreement’. The letter clearly contemplated that it was a possibility that BGNV would say no to the request. On 26 January 1990 Ruoff responded by fax and said:
    [U]nder Netherlands’ Antilles’ law in principle there would be no objection against the Bell Group NV becoming a party to such arrangement. However, you might wish to submit to us the draft documentation which in this respect is to be signed on behalf of Bell Group N.V. for review by one of the major law firms here in Curacao to render more specific advice.
    5980 There is no evidence that Simpson responded to this fax until 11 April 1990. He wrote to Ruoff in response to his 26 January fax and enclosed a copy of the Principal Subordination Deed, which showed that it had been executed on 15 February 1990 by all the relevant parties to it, including Westpac as the Security Agent. Only BGNV was left to sign. Simpson asked that the document be reviewed by one of the major law firms in Curacao and then requested that Ruoff advise whether or not BGNV could subordinate the inter‑company loans.
    28.3.3. BGNV seeks legal advice
    5981 On 12 April 1990 Ruoff forwarded Simpson’s letter (together with the letter written by Simpson on 24 January 1990) to Statius van Eps of the Curacao law firm Promes, Trenite van Doorne (Promes). Van Eps was not called to give evidence, so I do not know the precise terms of his instructions. But on 11 May 1990 van Eps wrote to Simpson and said that he was:
    Pleased to inform you that BGNV has the corporate authority to enter into the Subordination Deed whereby its inter‑company loan is subordinated in favour of the lenders of the facility.
    5982 There is no evidence about what occurred between this date and 18 May 1990 when Ruoff next wrote to Tagliaferri. He told her that they had been advised that Smeets, Thesseling & van Bokhorst (Smeets), lawyers in Curacao, were acting on behalf of A&O, who were in turn acting for Lloyds Bank. Smeets had asked Equity Trust for a copy of the offering memorandum for one of the bond issues. Equity Trust did not have this ‘readily’ available. Ruoff asked Tagliaferri if Equity Trust were authorised to communicate with Smeets. This was followed by an exchange of faxes between Tagliaferri and Ruoff clarifying which bond issue was being referred to; in this exchange Tagliaferri was told by Ruoff that the lawyer handing the matter at Smeets was in New York and that is where she could send the information.
    5983 On 24 May 1990 Tagliaferri informed Ruoff that she had sent the offering memorandum to Smeets.
    28.3.4. A&O intervene
    5984 Shortly thereafter, on 24 May 1990, Smeets’ office in New York sent Simpson a proxy form for BGF for the amendment of the articles of BGNV. The Smeets letter said that it had been prepared on instructions from Perry at A&O.
    5985 Smeets obviously had simultaneous correspondence with Equity Trust because on 25 May 1990 Ruoff wrote to Tagliaferri informing her that Smeets had given Equity Trust advance notice that steps were being taken to amend BGNV’s articles of incorporation. Arrangements had been made between the lawyers for the documents to be signed within days. Ruoff said in his letter:
    We assume that you are aware of the above and that we are to proceed upon receipt of the duly executed Shareholder’s Proxy unless you advise us to the contrary by Monday 28th May 1990.
    5986 From her response it was obvious that Tagliaferri was not aware of the proposal to amend the articles, and she said she would refer the matter to Simpson and Aspinall. Simpson wrote the same day to Latham (Lloyds Bank) and expressed his annoyance:
    I am becoming most concerned that we are incurring large legal fees in relation to this matter. You will be aware that the Bell Group does not have a significant amount of cash flow and from the number of faxes we have been receiving from Damien Perry, it would appear that considerable effort is being expended on the Subordination Deed and it appears that lawyers have been briefed in New York to deal with the matter as well.
    I would have thought, at the very least, that we would have been consulted prior to any money being expended. My experience with New York lawyers (no different to my experience with English lawyers) has been that they are extremely expensive, and I am most concerned, once again, that expense is being incurred unnecessarily.
    l have today received an incomplete facsimile from Damien Perry suggesting certain things that need to be done which have never been contemplated or discussed at any of our meetings. I refer in particular to the amendment of the Articles of Incorporation of Bell Group NV. These are matters that we do not take lightly and to suddenly receive a Form of Proxy from some New York lawyer with a fax attached, saying that Mr Perry will contact us to explain and that we are to sign and return asap is unacceptable. You will recall that we undertook to have executed a Subordination Deed in substantially the same form as the one presented to the Directors of Bell Group NV. On no occasion was the question of changes to Articles of Incorporation discussed and this is a matter the Directors must address.
    I am sure David will discuss this matter with you as well.
    5987 This fax was copied by Simpson to Ruoff. In the covering letter he said that the matter would be taken up with the Lloyds syndicate in London that week and until the matter was resolved, BGF would not be executing the form of proxy. I note that in the letter to Latham, TBGL’s obligation to have the Subordination Deed executed is referred to in very clear terms. Simpson says: ‘we undertook to have executed’ the BGNV Subordination Deed by BGNV. I see no reason to doubt that Ruoff would have noted this.
    28.3.5. Promes’ advice
    5988 Responding to the earlier request for advice from Equity Trust, van Eps (Promes) wrote to Simpson on 1 June 1990. It is clear from the circumstances that van Eps had been given the executed PRINCIPAL SUBORDINATION DEED dated 15 February and that he was advising on that document. He said in his letter that he had learnt from Ruoff that there had been consideration given to the issue whether or not entry into the BGNV Subordination Deed was permitted by BGNV’s purpose clause in its articles of association. This, of course, is a reference to the A&O intervention. His letter, copied to Equity Trust, says:
    It was and is my understanding that if the Company would not cooperate with the subordination of the inter‑company debts the inter‑company loans might be actually worthless due to possible execution by the banks of the assets and securities held by the parent company. The entering into by the Company of the subordination deed would therefore be an act to preserve the value of the assets of the Company and is therefore not ultra vires the Company’s purpose. Please confirm that this position is correct.
    Of course, there is nothing against implementing the proposed amendment of the company’s purpose clause, for indeed a broader purpose clause might be helpful in any restructuring of the Company and future transactions to be entered into.
    5989 The plaintiffs say that I should infer that van Eps would not have written this letter if he thought the debts were already subordinated. But the letter is not expressed in those terms. Without more evidence I am not able to draw such an inference. In fact, it is possible to draw another inference from the document; that is, in saying that if BGNV did not execute the deed, the inter‑company loans may be ‘worthless due to possible execution by the Banks of the assets and securities’ there is an acknowledgment that the banks already had such priority. This priority could have arisen as a result of the existing subordination of the on‑loans. Or it could have been drawn from the terms of the document itself, which showed that an agreement had already been reached by all of the security providers defined within it (BGNV being the only company that had not yet signed).
    5990 In the letter dated 1 June 1990 van Eps asked Simpson to confirm his (van Eps’) understanding of the position affecting BGNV as he had expressed it in his letter.
    28.3.6. Simpson’s response to Promes
    5991 A responsive fax was sent by Simpson to van Eps on 22 June 1990. In it, Simpson said that TBGL wished to be satisfied that the proposed amendment to the articles of incorporation of BGNV was absolutely necessary. He said that the Lloyds syndicate’s lawyers had raised this concern, but he was not convinced that their view was correct.
    5992 In respect to van Eps’ view expressed in his letter dated 1 June 1990 that without the cooperation of BGNV entering into the Subordination Deed the inter‑company loans might be worthless, Simpson says:
    I am not sure that I totally understand your comments in relation to the co-operation with the subordination of the inter‑company debts.
    By way of background, the Bell group entered into a financing arrangement with a syndicate of Banks. One of the conditions in this financing was that certain companies within the Bell group would subordinate their debt to that of the Banks. This has been done.
    The Banks also sought to subordinate the BGNV debt. It was pointed out to them that the Directors of Bell group would not request the Directors of BGNV to do anything that they were not legally able to do and until we had advice that they were legally entitled to enter into such Subordination Agreement we would not be requesting them to do so. This position was accepted by the Banks and they asked us to use our best efforts to obtain a Subordination Deed from BGNV.
    Provided it is within BGNV’s power, and it is legally able to do so, then the Directors of BGNV may enter into the Subordination Agreement.
    5993 I do not understand why Simpson did not properly answer the question posed by van Eps. There is no evidence from him to explain the difficulty. It has to be borne in mind that van Eps would have been aware that the securities in favour of the banks were already in place. It seems to me that van Eps was asking for confirmation of his understanding that unless BGNV cooperated in signing the Subordination Deed, the banks could execute on their securities, and therefore the debts due to BGNV by TBGL and BGF might be worthless. From this correspondence I consider it only reasonable to infer that this was also the basis of his advice to Ruoff about Equity Trust’s position in entering into the BGNV Subordination Deed.
    28.3.7. The Subordination Deed dated 15 February 1990
    5994 The first version of the Subordination Deed sent by Simpson on 11 April 1990 was the document executed on 15 February 1990 by most of the Bell group companies, except BGNV. It is known as the Principal Subordination Deed. This is the document van Eps considered. That document set outs, particularly the carefully drafted recitals, certain information from which it is reasonable to infer that van Eps would have concluded the following:
    • A company in the Bell group had borrowed moneys from the Lloyds syndicate banks.
    • It was a term of that loan that it was repayable on 19 May 1991 or earlier if there was an event of default and the loan was declared due and payable (Recital E).
    • An event of default occurred if:
    (a) An amount due and payable by that company or TBGL in excess of $1 million was not paid within 14 days after demand for payment (Recital E).
    (b) Security was granted without the prior written consent of the Lloyds syndicate banks over the assets of certain companies in the Bell group.
    • Other companies within the Bell group had borrowed moneys from certain Australian banks and those loans were repayable on demand but no demand had been made (Recital D).
    • TBGL guaranteed each of the loans referred to above (Recital C).
    • The borrowers of the above loans and certain other companies in the Bell group had requested that the Australian banks extend repayment of their loan to 30 May 1991 (Recital G).
    • In consideration therefore, TBGL agreed to seek to procure that BGNV would execute the BGNV Subordination Deed and certain other companies in the Bell group would provide security to the Australian banks for repayment of their loans (Recital G).
    • The same companies also requested that the Lloyds syndicate banks consent to the provision of security in respect of the above loans, and the Lloyds syndicate banks agreed to do so on the basis that certain companies in the Bell group executed a subordination deed by 15 February 1990 and granted security documents to Westpac (as Security Agent) no later than the Operative Date to secure the loans of the Australian banks and Lloyds syndicate banks (Recitals I and J).
    • Those companies were of the view that the consent of the Lloyds syndicate banks was of real and substantial value because it would defer demand by the Australian banks and thus avoid a cross‑default under the Lloyds syndicate loan (Recital I).
    • The Operative Date occurred on 1 February 1990 and the facilities in respect of the above loans had been amended and restated (Recital K).
    5995 The information in the deed is comprehensive and I am prepared to infer that van Eps, and Ruoff, read the document, including the recitals of the statement of facts that the document set out.
    5996 There was nothing in the deed that would have caused any reader of the document to conclude or suspect that TBGL or BGF were insolvent. There was nothing in the deed that would have caused any reader to question the factual basis of a document executed by those companies. I do not know what van Eps’ instructions were. But, rather ironically, it is certainly possible that the terms of the BGNV Subordination Deed itself (particularly the recitals), when added to the accounting information available and the recent provision of the certificates of compliance, formed the basis on which van Eps was able to advise, and Ruoff was able to conclude, that there was no impediment to BGNV executing the deed.
    5997 And there is another important fact in all of this. While the negotiations for the signing of the BGNV Subordination Deed were going on, the May 1990 interest payment was made to the bondholders. These payments, as I understand it, were not made directly through Equity Trust but through a paying agent. I assume that notice of receipt was given to Equity Trust. The May 1990 payment was late but still paid within the seven‑day grace period. At the time the BGNV Subordination Deed was executed, 29 July 1990, the second payment of interest to bondholders was also made. It was made on time.
    28.3.8. The BGNV Subordination Deed
    5998 On 30 May 1990, before the Principal Subordination Deed was executed by BGNV, an amended version of the deed was produced by A&O in London, sent to P&P in Perth and forwarded by P&P to S&W. This version referred to only one subordinated creditor: BGNV. There were some differences in this deed and Simpson referred it to S&W for advice. In the correspondence the document is referred to as Subordination Deed No 2.
    28.3.9. TBGL seeks advice from S&W
    5999 Advice on the amended version of the deed was provided by Watson at S&W to Simpson on 1 June 1990 in a letter, a copy of which was sent to Ruoff. In his letter Watson identified the differences between the first Subordination Deed and the amended version on a paragraph by paragraph basis.
    6000 Watson’s advice was that the changes to the recitals seem to have been made partly because of ‘pedantry’ but also because the timing of the execution of the deed had to be different to the Principal Subordination Deed. He raised no concerns about these changes.
    6001 Watson explained that a number of definitions had been deleted. He suggested that this was as a result of this version being more specific, as compared to the body of documents in the refinancing, which set out to be common to all. Many of the changes were needed to change the plural ‘Subordinated Creditors’ to the singular ‘Subordinated Creditor’ (BGNV).
    6002 One of the changes – cl 15(d) – was added to refer to ‘articles of association and other constitutional documents or any instrument, agreement or undertaking affecting it’. That again, Watson said, was precautionary because the document was to be executed in a non-common law jurisdiction.
    6003 A new clause – cl 15(g) – was inserted that was intended to be a warranty from BGNV that it only had two debtors within the Bell group (BGF and TBGL) and that the situation would remain so. In Watson’s letter he said:
    Under clause 17.6 (the Facility agreement), The Bell Group Limited has an obligation to use reasonable endeavours to procure the execution of a Subordination Agreement by Bell Group NV. Ultimately it is up to Bell Group NV as to whether it will execute the document.
    …
    The substantive issue is really whether BGNV is able to enter into this Subordination Deed having regard to the provisions of Antilles law and to its obligations under the Convertible Note Trust Deeds to which it is a party.
    …
    Although it is difficult to characterise the Subordination Deed in terms of its effect on BGNV, we can find nothing in the Convertible Bond Trust Deeds which inhibits the entry into the Subordination Deed regardless of how it is characterised.
    The Trust Deeds are governed by English law. It would therefore be advisable to have an English lawyer confirm that execution of the Subordination Deed is not prohibited by the Trust Deeds and does not accelerate maturity of the Conversion Bonds.
    …
    One final point, by reason of the provisions of the Subordination Deeds coupled with clauses 17.13 and 17.14 of the Facilities Agreements, the only payments which TBGL and BGF may make to BGNV on account of the former’s indebtedness to the latter is interest in an amount equal to, and to enable BGNV to pay interest due under the Convertible Bonds.
    We would understand that this commercial consequence has been known for some time.
    6004 Simpson sent the BGNV Subordination Deed (clearly marked up to show the changes) and a copy of S&W’s letter of advice on the document to Ruoff and van Eps on 6 June 1990.
    6005 This letter raises no issues that would have concerned Ruoff or van Eps. In fact, it says the most substantive issue for BGNV was the capacity to enter into the BGNV Subordination Deed. Watson also says that he can find nothing in the trust deeds for the convertible bonds that would prevent BGNV entering into this deed ‘regardless of how it is characterised’. This is emphatic advice, and would have given Ruoff and van Eps reassurance.
    28.3.10. Ruoff’s response to Simpson
    6006 Ruoff responded on 8 June 1990. He raised some concerns that he had, as follows.
    (a) That he would rely on confirmation from van Eps about BGNV’s ability to give the warranty. He says that van Eps was still waiting to hear from Simpson regarding the assumptions he has made about the rationale for ‘BGNV’s subordinating its inter‑company loans’.
    (b) That he would have to rely on confirmation by UK counsel (as indicated by S&W) to confirm whether BGNV, by executing the trust deeds, would breach the trust deeds for the bonds.
    (c) He noted that S&W said the latest version of the deed (proposed to be signed in London) could be executed under power of attorney and he asked for instructions to arrange this, including any further certified articles or the like.
    (d) He sought confirmation that the terms of the BGNV Subordination Deed would not prevent payment of fees, taxes or other expenses payable by BGNV. He also asked that the standard management agreement, which he had discovered had not been executed by TBGL, be signed.
    6007 The reference to the rationale for BGNV ‘subordinating its inter‑company loans’ requires comment. I have considered this carefully because it is one the few, perhaps the only, document created by Ruoff referring to the subordination of the on‑loans in that way. But, on balance, I believe I should treat it in the same way as I have the van Eps communication of 1 June 1990. It arose in the context of a question concerning constitutional authority. And it relates directly to the form of the document that BGNV was being asked to execute. In my view, it is not a sufficient basis on which I should base a finding that Ruoff knew (or suspected) that the BGNV on‑loans were not subordinated.
    6008 The issue raised in (d) above also points to Ruoff’s main area of concern; namely, to ensure that nothing in the proposed deed would interfere with BGNV’s ability to fulfil its responsibilities. In other words, that if the BGNV Subordination Deed were to be signed, BGNV could continue to operate as it had done before. I note in passing that in the Rotterdam examination, Ruoff was asked about this letter. But the question was directed at item (d), not item (a), and in particular whether this was the first time he had noticed the absence of a formal management agreement. The enquiry was also directed at ascertaining what, if any, ‘special services’ were provided by Equity Trust. The answers he gave are not material for present purposes.
    28.3.11. Simpson replies to Ruoff
    6009 Simpson was away when Ruoff’s letter came to TBGL’s Perth office. But on his return on 19 June 1990 he wrote to Latham (Lloyds Bank) and asked why the execution of the BGNV Subordination Deed had not progressed. He advised Latham that BGNV’s director had raised four matters that required clarification. He says that ‘two are of a minor nature and are easily resolved. The other two are not’. One of the ‘other two’ is the question about the need for confirmation from UK counsel about the effect of the provisions in cl 15 of the deed. Simpson says:
    I believe this is only a misunderstanding and can probably be resolved directly.
    Of more importance is their reliance on certain assumptions made by their Counsel which I do not understand. I will be attempting to contact their Counsel to clarify the position.
    6010 Simpson referred to the concerns raised by Ruoff about payment of the fees and other expenses incurred and said that he believed that the director of BGNV would wish for some form of comfort from the banks in this regard. He asked Latham to tell him what they were prepared to do.
    6011 On the same date, 19 June 1990, Simpson wrote to Ruoff and arranged a time to telephone him and van Eps. The telephone conversation obviously occurred because in a letter from Simpson to Ruoff dated 22 June 1990 Simpson refers to it. In relation to the concerns about the warranties, he says:
    We believe you should be relying on van Eps in relation to these warranties.
    6012 Ruoff tried again in his letter to Simpson dated 25 June 1990 to get Simpson to deal with this concern, he wrote:
    Please let us have a confirmation by UK Counsel to cover the UK legal aspects of the Subordination and the Subordination Deed. Mr. Van Eps can only opine concerning the Netherlands Antilles’ legal aspects.
    6013 Simpson again wrote to Latham on 27 June and said:
    Clause 15(d) of the Subordination Deed No. 2 has been amended, we think to reflect the fact that BGNV is incorporated in a non-common law jurisdiction. BGNV’s solicitors are not prepared to opine on this particular matter. They are seeking confirmation from UK Counsel that this is in fact the position. In the interests of saving time, it would seem to me that were Damien Perry able to confirm that this is the reason for the amendment we may not have to go through the process of giving the whole Subordination Deed to UK Counsel for their opinion.
    6014 In Latham’s response he said that he discussed the matter with Perry, who considered that certain amendments to cl 15(d) and cl 15(g) would be acceptable and he set them out. Latham told Simpson to discuss the amendments with Westpac and Peek because the deed is on P&P’s word processing system. The amendments read:
    Clause 15 (d) delete ‘association and other constitutional documents’ and replace with ‘incorporation and other documents constituting the Subordinated Creditor’.
    Clause 15 (g) insert after ‘Permitted Payments’, ‘(which for the avoidance of doubt shall include the fees and expenses of [Mr P Ruoff of Etrusco International NV] provided always that these shall be judged reasonable by the Security Agent and be paid in pursuance of Clause 17.14(a)(vii)(B) of the Facility Agreements)’.
    6015 Latham also said that he could not ‘to any good purpose’ give the assurances required by Ruoff. He said it does seem to be a matter ‘either for the Security Agent or all the banks’. Whether or not this exchange indicated confusion between Simpson and Latham, or more likely that Simpson did not understand the issue raised by Ruoff, is ultimately irrelevant because the amendments were made and the deed was marked up to note the changes. It was forwarded to Ruoff by Simpson on 10 July 1990, Simpson said:
    It would appear from the change to Clause 15(d) that the warranty is only given in relation to Netherlands Antilles law and that Mr van Eps ought to be able to be satisfied with respect to that.
    This is a clear and reassuring statement: the amendment, on the face of it, limits the warranty to be given.
    6016 Thereafter, progress towards entry into the BGNV Subordination Deed continued. There is in evidence further correspondence of a routine nature between Equity Trust and Simpson, particularly in regard to the necessary board resolutions and the execution of a power of attorney. Ultimately, van Eps considered that it would be ‘more practical and wise’ to meet Smeets’ demand that the articles be amended and, on Simpson’s instructions, he amended them. On 31 July the BGNV Subordination Deed was signed.
    28.4. LDTC and Equity Trust
    28.4.1. Dealings and communications
    6017 Throughout the period that Equity Trust was the sole director of BGNV it had on many occasions responded to the requests of the trustee of the three BGNV bond issues to provide certificates of compliance with the terms of the trust deed. These were routine. As I understand the practice, these requests would come to Equity Trust, they would then be passed on by Ruoff to TBGL or BGF (or both) and then the corresponding certificates for BGNV would be provided by the relevant Bell group company. It is obvious that BGNV had no assets other than the inter‑company loans and it depended on TBGL and BGF to satisfy the loans. So when the certificates of compliance were provided by TBGL or BGF to Equity Trust, these were then incorporated into a certificate from the director of BGNV and passed on to LDTC.
    6018 I discuss the circumstances that led to the request by LDTC for more particular certificates in dealing with LDTC’s knowledge in Sect 31. But here I note that the body of correspondence from LDTC in July 1989, and later that same year, requiring what were in effect certificates of solvency were passed on by Equity Trust in the same way. The correspondence dealing with the content of the certificates was carried on between LDTC and Tagliaferri in BCHL’s Treasury, and then with Oates direct. There is no evidence that Ruoff knew about the extent of the controversy. In December 1989 Tagliaferri provided LDTC with certificates in terms that confirmed the directors certified the ability of TBGL, BGF and BGNV to pay their debts as and when they fell due. The certificates provided by Ruoff were expressed as his certification that ‘to the best of his knowledge information and belief’, since the date of the previous certificate, no breaches of the trust deed had occurred or any event of default had arisen.
    6019 After the appointment of the receiver to BBHL in December 1989, Bicket (LDTC) requested further certificates. The request was made direct to Macpherson at BRL and the request covered all of the Bell group bond issuers. Around 24 January 1990, Baker (the company secretary) prepared a draft resolution pursuant to the articles of TBGL, in which the company resolved to provide the certificate required by LDTC certifying that the company was able to meet its liabilities and pay its debts under the bond issues as and when they fell due and that the realisable assets of TBGL exceeded its liabilities. The resolution provided that the certificate would be given to Equity Trust as the sole director of BGNV. And the certificate in these terms was provided to Equity Trust.
    6020 Then, on 26 January 1990, Tagliaferri sent a memorandum to Baker in relation to the three BGNV bond issues and the TBGL and BGF issues. In the letter she enclosed a further request from LDTC dated 22 January 1990 to provide certificates of compliance. She also enclosed, among other documents, a draft form of certificate for BGNV. The certificate which Tagliaferri prepared for Ruoff was in these bare terms:
    The Company certifies that as at 31 December, 1989:-
    (a) it was able to pay its debts and to meet its obligations in respect of the Trust Deed as and when they fall due; and
    (b) the realisable value of the Company’s assets exceeded the amount ‘of its liabilities, including prospective and contingent liabilities.
    6021 These certificates were sent by Baker to Ruoff on 26 January 1990. In each case, he asked Ruoff to arrange for the BGNV certificates to be retyped on plain paper, faxed to LDTC and for the original signed certificates to be couriered to Baker. The letter requesting certificates from BGNV as to its financial condition, enclosed the certificates that Oates and Baker had signed (referred to above). The letter requesting BGNV to sign certificates of compliance enclosed certificates of compliance signed on 26 January 1990 by Aspinall and Mitchell on behalf of TBGL.
    6022 Ruoff did not sign these in the form delivered by Baker and drafted by Tagliaferri. He faxed Baker on 19 February 1990 and said that his counsel recommended the following wording for the footnote to the certificates which BGNV had been requested to issue:
    This certificate is issued at the request of the Bell Group Limited of Perth, Western Australia (hereinafter the Bell Group) and as regards the correctness of its contents Etrusco International N.V. has fully relied on a certified confirmation dated … 1990 as relayed to us by … secretary of the Bell Group.
    6023 There was some further correspondence between Ruoff, Baker and Tagliaferri in February 1990 that resulted in an amendment to the certificate provided by Equity Trust to LDTC. It confirmed that in issuing the certificates of ability to pay debts and asset values, Equity Trust relied on certified confirmation from TBGL. In supplying the certificates of compliance with the terms of the trust deeds Equity Trust relied on certificates of compliance provided by the directors of TBGL. I do not know what Ruoff’s state of mind was when he made the amendments in these terms, but there is no evidence that would lead me to conclude that he was being anything other than cautious in discharging his obligations as the sole director of BGNV’s director.
    28.4.2. The corporate benefit argument
    6024 BGNV had only one shareholder, namely, BGF. LDTC was the only creditor of BGNV. I have already found in Sect 13.4 that the three bond issues were subordinated, and that the three on‑loans were also subordinated. But here I note that part of the corporate benefit test requires the directors, or director, of a company to consider the best interests of the company as a whole, taking into account both its members’ and creditors’ interests. The request to execute the BGNV Subordination Deed had come from BGNV’s only shareholder. In circumstances where the legal advice provided to BGNV’s director was likely to have been that the execution of the deed was (as I have described above) ‘an act to preserve the value of the assets’ of BGNV, namely the inter‑company loans, then I have to conclude that by executing the deed the director considered it to be an act that paid proper regard to the interests of its only creditor.
    28.5. Equity Trust’s knowledge and conduct: conclusion
    6025 The allegation made by the plaintiffs against Equity Trust (as the independent director of BGNV) is that it acted recklessly in entering into the BGNV Subordination Deed. This is a serious allegation. Because there is no direct evidence from the individual who caused the company to enter into the deed I am asked to consider this allegation and make a finding on the basis of inferences from the limited factual material available. I am asked by the plaintiffs to draw conclusions from a web of conjecture about beliefs that are alleged to have been held. I am not able to do this.
    6026 I have laid out the evidence that was available to Equity Trust about the financial circumstances of TBGL and BGF. There is nothing in this that would excite any concern. On the available evidence I find that Equity Trust did receive legal advice about the proposed BGNV Subordination Deed. It is not possible for me to be certain as to precisely what advice was given; but there is no basis for any inference or finding that the absence of proof of any particular advice shows that Equity Trust suspected insolvency on the part of the Bell group companies. Indeed, the evidence discloses that, to the extent possible, legal advice was being given and followed by Equity Trust.
    6027 There is nothing in the Subordination Deed itself that would lead van Eps to conclude that TBGL or BGF were not solvent or that there was any issue of breach of duties by the directors of those companies in entering into the deed. I find that it is likely that the recitals to the BGNV Subordination Deed itself could reasonably be said to have formed the factual background against which BGNV concluded that it was not only safe to enter into the deed, but necessary to do so. A great deal of effort had been put into the documents by the lawyers to ensure that it read precisely this way.
    6028 My finding that the BGNV on‑loans were subordinated from inception creates a difficulty for the plaintiffs. In my view, before I could find that Equity Trust breached its duties to BGNV, I would have to be satisfied that Ruoff knew, believed, suspected or ought to have known that the on‑loans had been made on an unsubordinated basis. In other words, that Ruoff held a state of mind contrary to facts.
    6029 For the reasons explained earlier, the fax dated 22 December 1989 and the letter dated 8 June 1990 are an insufficient basis from which I could draw such an inference. Nor is there any other evidence that would persuade me to do so.
    6030 It has not been proved to my satisfaction that Equity Trust failed to act bona fide in the best interests of BGNV as a whole in entering into the Subordination Deed.
44. Breaches of duty by directors: analysis and conclusions
    29.1. Introduction
    6031 In all that I am about to say the reader must bear in mind that the plaintiffs do not allege, and I do not find, that any director was dishonest or guilty of conscious wrongdoing.
    6032 In my view each of the Australian directors, the UK directors and the BIIL directors breached the fiduciary duties that they owed to the companies of which they were, respectively, directors. Because of the complexity of the factual situation, the evidence and the pleadings, I need to explain with as much care as I can exactly why I have come to that conclusion. I will do so in two ways. First, I wish to stand back from the minutiae of the evidence and the pleadings and set out in clear terms, sometimes resorting to the vernacular, the precise nature of the conduct that I believe constitutes the relevant breaches. I will then turn back to the evidence and the pleadings and fit the findings more particularly into the pleaded case.
    6033 In essence, the directors failed to carry out the necessary investigations so as to ensure that, in causing each company to enter into a Transaction, there was a corporate benefit for each company arising from the Transaction. I am not at all sure that any of the Australian directors actually understood the true nature and full import of the corporate benefit test. The lawyers understood their remit as excluding advice to the directors on the corporate benefit test. The directors were told by the lawyers that they had to satisfy themselves that there was corporate benefit (couched in terms of ‘commercial benefit’) but that they (the lawyers) were not advising on it. I am satisfied that the Australian directors did not do what was required of them in the circumstances. The UK directors and the BIIL directors were given precise, and in my view accurate, advice as to what was entailed in the legal test. They came considerably closer to what was required but unfortunately, they fell at the last hurdle.
    6034 A finding that a person has breached a fiduciary duty, even when not accompanied by an allegation of conscious wrongdoing, is a serious matter. I have not reached these conclusions lightly.
    29.2. The essence of the breaches
    29.2.1. The Australian directors: summary
    6035 There are some things that it can be said with a good degree of confidence about what the Australian directors knew as at 26 January 1990. In this respect I am using the word ‘knew’ in its commonly understood meaning, rather than some legal construct such as applies in a Barnes v Addy context. The following is a list of some of the things the directors knew.
45. The financial position of the companies was parlous. I do not find that the directors knew the companies were actually insolvent. But they knew that it was of doubtful solvency or that it was nearly insolvent.
46. The facilities due to the Australian banks were at call and a demand for repayment could be made at any time, subject to the sorts of posturing with which they confronted SCBAL when it issued demands in December 1989.
47. If any Australian bank demanded repayment others were likely to follow suit. If that happened, the demands could not be met. This would cause defaults in relation to the Lloyd syndicate facility and the convertible bond issues. Liquidation of the companies would inevitably follow. A collapse of the Bell group could have a domino effect bringing down the BCHL group. Similarly, a collapse of the BCHL group would endanger the Bell group.
48. The BRL shares, a major asset of the Bell group, had little realisable value in the short‑to medium‑term. The BCHL camp had lost control of BRL and the fate of BRL was tied to its capacity to complete the acquisition of an interest in the breweries or recover its deposit from the BCHL group. The BRL shares were then in a trading halt and the restoration of value was, at least, problematic.
49. The publishing businesses, the other major asset, were trading satisfactorily and had real value. But the free cash flow from those businesses was not sufficient, at least in the short‑to‑medium term, to meet the interest commitments to the banks, let alone fund other liabilities such as bondholder interest.
50. There were no other recurrent sources of cash to cover the cash flow deficit. In order to survive, the Bell group companies would need to sell assets and recover debts and utilise the proceeds to meet the shortfall.
    6036 The basis on which I have found that the directors knew or ought to have known that the companies were of doubtful solvency or nearly insolvent is difficult to summarise because it encompasses most of the factual matrix leading up to January 1990. The matters set out in items 2 to 6 are all part of the factual matrix. The directors knew about all (or certainly most) of the cash flow holes that I have identified in Sect 9. The holes had to be plugged and, as at 26 January 1990, there is no indication that the directors had identified exactly how it was going to be done.
    6037 I note also that on 7 February 1990, little more than a week after the Transactions had been entered into, the directors resolved to take advice on their responsibilities under Companies Code s 556. That section was often described, not necessarily with complete accuracy, by the phrase ‘insolvent trading’. It is unlikely that the directors would have commissioned such an enquiry unless they harboured doubts about the financial well‑being of some or all of the companies concerned.
    6038 That is the essential background. Aspinall wanted to do two things that he felt were essential to the future of the Bell group companies. The first was to extricate TBGL from the administrative control of BCHL. The second was to get the banks off his back. I am not at all sure whether, and if so to what extent, Oates and Mitchell shared Aspinall’s desire to ‘de‑Bond’ the group. I have little doubt that they took a similar view about the need to do something about the banks.
    6039 In my view the essence of the breaches, so far as the Australian directors are concerned, lies in three areas. First, they concentrated on the interests of the group and failed to look at the interests of individual companies. Secondly, they effected the first step in a ‘plan’ to restructure the financial position of the group without any or any sufficient idea about what the ‘plan’ was, how it would be implemented, how long it would take to do so and how the companies could survive in the meantime. Thirdly, Mitchell and Oates (but not Aspinall) were concerned about the interests of the BCHL group rather than the interests of the Bell group companies of which they were directors. I will develop each of these thoughts in turn.
    6040 The Australian directors failed to arm themselves with clear and precise advice as to what was required of them given the financial position in which the companies found themselves. They looked at the problem solely from a group perspective and said something to the effect: ‘We all survive or we all go down’. They did not look at the circumstances of each individual company that was to enter into a Transaction. They did not identify what, if any, creditors (external and internal) the individual companies had or might have and what, if any, effect a Transaction would have on the creditors or shareholders of an individual company.
    6041 There is another aspect to this problem. The directors knew that the Bell group companies were in a precarious financial position. If they did not know the companies were insolvent, they certainly knew that they were nearly insolvent or of doubtful solvency. Yet they caused companies that did not have a pre‑existing indebtedness to the banks to undertake such an obligation. Further, by the terms of the Transactions bringing that situation about, the directors caused those companies to place their assets in jeopardy in the interests of borrowers and guarantors that were themselves insolvent, nearly insolvent or of doubtful solvency. This brings into play the notion that the companies would themselves, if not already insolvent, inevitably become so. It constitutes an improper purpose for which powers were exercised.
    6042 The shareholders of a company (even in a group situation where there are interlocking relationships) have relevant interests in their own right. They might also have interests because they have creditors to whom they owe obligations. In the remainder of this section if I refer only to the interests of creditors it should not be taken that I have overlooked the concomitant interests the interests of shareholders
    6043 Brought down to its most basic terms, the directors failed to ensure that there was a corporate benefit to the individual companies in entering into the respective Transactions. In Sect 20.7.4 I summarised my view of the law relating to group considerations. It is a question of fact whether the directors failed in this respect. I think they did.
    6044 In this respect there is a marked contrast between the Australian directors and the London‑based members of the boards of BGUK, TBGIL and BIIL. The latter went to great pains to draw up lists of creditors who might be affected and to take steps to ensure that the interests of those creditors were protected. The list was discussed in detail at meetings and was central to their thinking. This was the reason behind setting aside the first instalment of the Bryanston proceeds.
    6045 Not so the Australian directors. I am satisfied the Australian directors did not consider the detailed information that would have been necessary to enable them to decide whether, and to what extent, there was corporate benefit to each individual company called upon to enter into a Transaction. I am not saying the information was unavailable to them. It may have been. Someone must have given the information to the lawyers to enable them to ascertain the intra‑group debtor and creditor and shareholding relationships that is reflected in the complex and detailed workings of the Transaction documents. Similarly, someone must have given Weir information concerning inter‑company lending to enable him to prepare his diagram. But I am not in a position to say which officer or officers of TBGL possessed that information and who gave it to the banks and their lawyers. It might have been Simpson but he was not called.
    6046 The cash flows of the 19 January 1990 and 26 January 1990 disclose negative closing cash balances and they still contain some individual income items that the directors must have known, certainly ought to have known, were unlikely to materialise. I have in mind the preference dividends from JNTH and BRL. The minutes of the 7 February 1990 meeting suggest that the directors might, by then, have begun to look at the cash flows in more detail. But it was not until the Garven cash flow emerged later in February 1990 that a list of sources available to plug the holes saw the light of day.
    6047 There are some individual instances that I should mention. Having themselves raised the status of the bonds as an issue the directors failed to investigate (or at least to carry through an investigation) about that question and how it might affect the creditors concerned. Leaving the 22 December 1989 communication to one side, no effort was made to clarify the situation and to spell out the consequences for the companies involved in the on‑loans.
    6048 It is not to the point that the directors, at least Aspinall and Mitchell, did not really believe there was a subordination problem and that the question had been raised as a tactical ploy. Nor is it material that what was in issue was not whether BGNV was a creditor at all but rather the status or ranking of the indebtedness. It was considered sufficiently serious to make an approach to Equity Trust but there is no evidence that anyone followed it up. In commercial terms, a problem with the bondholders (if one existed) could not be resolved by raiding the petty cash tin. The liabilities amounted to hundreds of million of dollars.
    6049 I do not shirk from the difficulty that my finding that the on‑loans were, in fact, subordinated from inception causes for this line of reasoning. Had I reached the conclusion that the on‑loans were, at all time prior to 31 July 1990, unsubordinated it would be all over bar the shouting. The prejudice to an individual creditor of BGF (and TBGL) would have been palpable and unarguable. But I think that the problem persists and I will come back to it when I tie in the findings to the evidence and the pleadings.
    6050 The directors knew that there were problems with some income tax assessments. But there is no evidence that they made any enquiries about the substance of the claims or about how it would play out, for individual companies, if any or all of the assessments were confirmed after the review proceedings had been completed. Nor is there any evidence that the directors looked at the SPI futures trading and identified what, if any, debtor and creditor relationships existed on those accounts and what affect the Transactions might have on the companies concerned.
    6051 The way in which the Transactions were implemented is a pointer to the lack of corporate benefit and of any meaningful search for it. As I have commented earlier, the solicitors’ notes contained references to ‘dressing up the recitals’ and to ‘reciting the way in’ to corporate benefit. To repeat a colourful phrase used earlier in the analysis, it was a triumph of form over substance. I refer again to my conclusion that the recitals and the minutes reflected form rather than substance. At the end of Sect 25.2 I drew attention to three aspects of the explanatory section of the minutes of the directors’ meetings and said I would explain the relevance later.
51. The minutes draw on and refer to the recitals. This takes on a special significance given the references to ‘dressing up the recitals’ and to ‘reciting the way in’ to corporate benefit. The minute also says that the recitals were read out ‘verbatim’. I am satisfied that this did not happen.
52. There is a reference in the resolution to the interests of creditors but the explanatory material makes no mention of creditors other than the banks. For example, there is no mention of the fact that demands for repayment of the Australian banks loans and (or) the Lloyds syndicate banks facility could be an event of default under the bond issue trust deeds. Even though the bondholders were subordinated they were still creditors. Not only that, they were owed about $546 million. I do not believe any attention was given to the interests of creditors other than the banks.
53. The advantage to the company is framed in terms of improving the likelihood of ensuring financial support from TBGL and from other companies within the Bell group. This is an a reflection of an attitude I described earlier as ‘we all survive or we all go down’. Such an approach can only justified if it is arrived at after due consideration of the interests of individual group companies separately from the interests of the group. I repeat that I am not saying the law requires directors to ignore the interests of the group. The contrary is the case. But attention must be directed to both levels. Save for minutes of the other group companies (which suffer from the same defects) there is no evidence of any real attention to the financial position of the associated entities.
    6052 The second major area on which I have based the findings of breach lies in the plans (or lack of plans) to restructure the financial position of the Bell group companies. As I have said, a primary concern of the Australian directors was to get the banks off their backs. They did so appreciating that they would need to undertake what the plaintiffs call a valid and effective restructure. But therein lies the problem. That which was, on the banks’ case, step one of the restructure was taken – and it involved giving security to the banks over pretty well everything within the Bell group companies that had value. What was missing was any real investigations into or appreciation of steps two, three and four and following. This was a particular problem because step one meant the directors were at the mercy of the banks in relation to their ability to get hold of funds they would need for the companies to survive long enough to devise and then implement steps two and following.
    6053 One of the central features of the plaintiffs’ case is that the Transactions gave the companies no prospect of benefit and a probable prospect of loss. The lack of any real appreciation of steps two and following is part of that argument. It also causes real difficulties for an important feature of the banks’ retort; namely, that step one gave the directors time to enter into a valid and effective restructure of the companies’ finances. What does that really mean when the gravity and all‑encompassing nature of step one is taken into account?
    6054 I accept that commercial life is complex. It would be unrealistic to say that a company under financial stress could not deal with a major creditor so as to buy time to get the remainder of its house in order unless it could spell out, chapter and verse, every single move it intended to make in that respect. Life is not that simple.
    6055 But here the first step in the restructure had far‑reaching consequences in relation to future moves because of the pledging of all worthwhile assets and the effective ceding of control of asset sale proceeds to one creditor. In that situation it was incumbent on the directors, if they were properly to carry out their functions, to have investigated feasible solutions to rectify the position. This is especially so in a restructure where steps two and following may involve asking other creditors to cooperate and, perhaps, take something less than 100 cents in the dollar in respect of their debts. Counsel for the plaintiffs put it in blunt terms:
    You could just drive a truck through the insolvency laws if the directors could say, ‘We’re hopelessly broke. We’ve got $800 million of debt. We can only support 200, but the creditors might come to the party – we haven’t asked them – so we’re solvent’.
    6056 I am here concerned with the perception of insolvency and what it means for the content of the directors’ duties. I am not talking about the equitable fraud claim, as pleaded. Nor do I have in contemplation a species of equitable fraud based on a fraud against the bankruptcy laws. But if a company is, to the knowledge of the directors, in an insolvency context the shape and content of the fiduciary duties they owe to the company may be affected by the remedial action they propose to take. And the obligation to take into account the interests of creditors arises as part of the duty to act in the best interests of the company.
    6057 This was the position confronting the Australian directors. As I have said, Aspinall believed that he had 12 months to get the house in order. He had to deal with about $260 million of bank debt and about $580 million of bonds. There was no reasonable prospect of the publishing assets being able to service debt of that magnitude within that time frame. There was no reasonable prospect of the BRL shares being returned to value sufficient to bridge the cash flow gap or make any material contribution to a restructure.
    6058 How, then, was the shortfall to be covered during this period? This is where the problems with access to asset sale proceeds comes to the fore again. Aspinall and Simpson had fought hard to have the banks agree to asset sale proceeds being available ‘for commercial purposes’. They lost that argument. With some exceptions, asset sale proceeds were earmarked for pre‑payment of the principal sums owing to the banks. The companies could seek release of the proceeds but in that respect they also lost the argument that they should not be thwarted by a single bank or a few banks. The directors knew that they had lost those battles and that they were facing an ‘all banks’ situation in relation to release of funds. They cannot have been under any misapprehension about those matters and they entered into the Transactions accordingly.
    6059 Aspinall may have believed that once the Transactions were in place he would have a bargaining chip; namely, the banks would not jeopardise their situation if he put the wood on them. Taken to its extreme, that situation would have to last indefinitely because the jeopardy would (in the absence of corporate benefit) not simply expire after six months. There was no agreement, understanding, arrangement or expectation on the part of the banks in that respect. It was, on Aspinall’s part, a commercial gamble, albeit one that in fact turned out to be a winner (at least until May 1990). Nonetheless, as at 26 January 1990 there were no reasonable grounds on which such an expectation could have been based.
    6060 Looked at from January 1990 the longer term position in relation to a restructure plan was no clearer. If the publishing assets were to be retained debt would have to be reduced to about $200 million. Aspinall agreed in cross‑examination that this was the amount of debt that could comfortably be serviced from the WAN free cash flow. If the publishing assets were sold outright there would be nothing left to service whatever debts remained. If there were to be an equity injection into the BPG group by joint venture some of the free cash flow from the publishing assets would most likely have been diverted to the investor. This would inevitably have reduced the funds available to the Bell group to fund service ongoing interest commitments, albeit on a lesser debt load. As at 26 January 1990, all of this was entirely up in the air. There were no plans of any degree of precision or detail about how the creditors would be approached, engaged and dealt with.
    6061 There is evidence that by the time of the Lloyds syndicate banks’ meeting on 12 March 1990, the estimate of the comfortable debt carrying capacity of a restructured Bell group had been reduced to between $100 million and $150 million. At the Australian banks’ meeting of 15 June 1990, a figure of $150 million was mentioned.
    6062 In January 1990 it could not reasonably have been contemplated that a financial restructure would be feasible without a reduction in the gross indebtedness to bondholders. It could not have been contemplated that there would be any further conversions of bonds into equity, at least in the insolvency review time frame that I have mentioned. Even by May 1990 (let alone January 1990) there was nothing remotely approaching a ‘plan’ in that respect: see Sect 24.1.10.
    6063 Those in the trade will be familiar with the term ‘work‑out’ in relation to efforts to rescue a business that is in financial distress. What was happening to the Bell group companies in January 1990 was, in effect, a work‑out. The problem is that the ‘out’ (the desired end objective) was clear but the ‘work’ (the means to get there) was not.
    6064 I think this identifies an important component of the breach of duty case. I have found that the companies were insolvent. On any view of the matter they were nearly insolvent or of doubtful solvency. They were, as I have phrased it in earlier sections of these reasons, in an insolvency context. This triggered an obligation to take into account the interest of creditors as part of the duty to act in the interests of each company as a whole. In a group situation such as this, it demanded a tracing exercise to ascertain the effect on creditors of what was proposed. In this respect ‘creditors’ includes indirect creditors, that is, creditors of debtor companies and debtors of creditor companies within the group. As an evidentiary matter this takes you back to the SNAs. The directors did not do that tracing exercise. They did not ascertain the extent of external creditors of individual companies and nor did they consider how those creditors would be affected by what was proposed. There is an obvious flow‑on effect in a group situation. It filters through the group from debtor to creditor to debtor to creditor and, eventually, to the shareholders.
    6065 The directors focussed on one group of creditors (the banks) to the exclusion of all others. They did so without having a plan as to when and how they would deal with the interests of the other creditors. This, it seems to me, is the real import of the allegation in the pleading that the directors entered into the Scheme as a means for the banks to deal with the insolvency or inevitable insolvency of their debtors BGF and BGUK (and TBGL). There is another plea to the effect that the directors acted for the express purpose of delaying any approach to the bondholders concerning a financial restructure. I will have more to say about the latter in the context of the equitable fraud case.
    6066 At first glance these pleas have something of an aura of conspiracy about them. That could never have been a legitimate approach in a case where the plaintiffs expressly eschewed any allegation of conscious wrongdoing on the part of the directors. I am here concerned with what the directors did – not what the banks did. That comes later and (save for some aspects of the equitable fraud case and possibly the statutory claims) it has significance only if the directors breached their duties. The plea that the directors (qua directors) entered into the refinancing as a means for the banks to deal with the insolvency of the companies requires comment. One of the lines of argument run by the plaintiffs was that many of the bank officers were concerned not only to take security but to realise on the securities. They entered into the refinancing for the purpose of realising on the securities. They knew that they would do so because it was the only way they would get their money back. If that is correct, and assuming the directors knew that this was the objective, it would be irrational for the directors to commit the companies along that path. It would make no commercial sense. I am not sure this is the correct approach.
    6067 The mischief does not lie in the bald fact that the directors dealt with the banks and not with other creditors. The simple fact that the bondholders (for example) were not, then and there, brought to the negotiating table is not, of itself, a fatal flaw in the arrangements. Again, I will have more to say about the absence of the bondholders when I come to the equitable fraud case. The vice lies in the fact that the directors committed the companies to Transactions that, for example, created a liability in company A for the pre‑existing obligations of company B when company A had no previous liability in that respect. Further, this occurred in circumstances where company B was, to the knowledge of the directors of company A, in an insolvency context. The assets of company A were exposed and became vulnerable to expropriation by the banks. Therein lies the prejudice. I think it will be apparent from what I said in Sect 19.4 that I regard the pleas based on ‘no probable prospect of benefit but the probable prospect of loss’ as being at the very heart of the prejudice to individual companies. It is a prejudice of which the directors were aware but which they did not confront.
    6068 The directors chose to deal with creditor C in a way that was to the advantage of creditor C but to the disadvantage of creditors D and E. They did so without having a plan as to how the disadvantage would be overcome. In this respect, directors of companies that were in an insolvency context failed to take into account the interests of creditors as part of their obligation to consider, and act in, the best interests of the company as whole. It is in this way that the directors failed to deal with the insolvency or inevitable insolvency of the individual companies. In my view, to exercise power in that way and in those circumstances was to do so for an improper purpose.
    6069 The third major area of concern lies in the concentration of Mitchell and Oates on the interests of the BCHL group and on the survival of those companies. As I have said, this finding does not affect Aspinall. I accept his evidence that by January 1990 he could not have cared less about BCHL. The finding against Mitchell and Oates is based on the evidence that they were, along with Alan Bond and Beckwith, members of the BCHL ‘inner cabal’ or ‘kitchen cabinet’. They had access to all information, including the second set of accounts referred to by Swan. Mitchell appeared to pay little regard to the affairs of the Bell group. All of the relevant restructure plans in which he was involved were ‘Bond‑centric’ and did not deal in any meaningful way with the separate interests of the Bell group companies. The evidence suggests that Oates had a greater degree of the involvement in the affairs of the Bell group than Mitchell did. But Oates was still primarily a BCHL senior executive and I am satisfied that he would have been apprised of all of the plans in relation to BCHL.
    6070 By January 1990 a multitude of restructure plans of varying types had been floated by Mitchell and his assistants to deal with the problems of BCHL and Dallhold. By that time the possibility of a formal scheme of arrangement for BCHL had also been raised. It is not difficult to see how a failure of TBGL to do a deal with its bankers and the consequent collapse of the Bell group companies would, or at least could, have had a major impact on the plans to restructure BCHL. In my view this was the motivating factor in the involvement of Mitchell and Oates in the Transactions. Even though Aspinall’s conduct is not coloured by these considerations, Mitchell and Oates were two of three directors of the relevant companies. Their conduct was therefore causative of a breach of duty owed by the directors to the companies concerned.
    6071 I will have a little more to say about the ‘Bond‑centric’ activities of Mitchell and Oates in a later section when I come to deal with the pleadings and the conflict of interest issue. It is sufficient to say here that I regard them as a breach of the duty to exercise powers properly rather than as an infringement of the conflict of interest rule. As Mitchell and Oates were a majority of the board, their actions would be causative of a breach by the directors: see Sect 20.3.4.
    6072 Before leaving the Australian directors I want to deal, still in summary form, with four miscellaneous but nonetheless important matters. Some of the issues with which I am about to deal are relevant also to the UK directors and the BIIL directors.
    29.2.2. Corporate governance and stewardship
    6073 In engaging in the conduct that they did, the Australian directors failed to put into practice the notion of stewardship that is at the heart of corporate governance and which underpins the fiduciary concept to which directors are subject. This is the reason why, in Sect 20.2.3 and Sect 20.6.3, I made some general comments about corporate governance and then tied the notion of stewardship more directly into the fiduciary nature of directorial responsibility.
    6074 The idea of stewardship requires directors to identify the interests of individual companies. I am not suggesting that this must always be at the expense of the interests of the group of which an individual company is a member. But attention must be paid to the position singularly as well as globally. It goes without saying that this is even more so when the global interests are outside the direct group of which the individual is a member.
    29.2.3. The pari passu principle and a valid and effective restructure
    6075 In their closing submissions the banks raised an issue that they said disclosed a fatal flaw in this entire aspect of the plaintiffs’ case. It relates to what they described as the ‘pari passu principle’. For example, in one instance the banks describe the plaintiffs’ case in these terms:
    If winding up was not inevitable at January 1990 this was only because of the availability of an (unidentified and unproved) alternative which, to be valid and effective, would have to recognise the fundamental pre‑winding up pari passu principle (represented by a rule of law or equitable principle) which required a company to treat all of its creditors in exactly the same way.
    6076 This, the banks say, is at the heart of the plaintiffs’ case and it depends upon three cardinal (and totally incorrect) legal precepts:
    (a) that there is such a thing as a recognised ‘pari passu’ principle that operates outside, and prior to, the laws regulating corporate insolvency;
    (b) that the pari passu principle cannot be disturbed; and
    (c) if it is disturbed then the directors have ex hypothesi breached their fiduciary duty to the company that disturbs it.
    6077 The banks say this is ‘judicial reform’, retrospectively, because the Bankruptcy Act provides relief in prescribed circumstances and this is outside those circumstances. I am not sure whether this was said in terrorem. It smacks of the controversy about judicial activism, one that I have cunningly avoided to date. I do not think I need to become engaged in the debate at this late stage in my career because, in my view, the answer lies in a principled approach to the facts rather than in an attempt to invent a new doctrine.
    6078 The plaintiffs’ response is that the banks’ submissions misstates their case and that the causes of action based on a breach of fiduciary duty do not stem from such a base. In their responsive submissions the plaintiffs say:
    The plaintiffs do not propose such a case. The plaintiffs’ case is based on a finding that the directors acted in breach of their fiduciary duties in the circumstances of this case. No ‘inflexible rule’ is proposed. The plaintiffs contend that, in the facts of this case, the directors did not act for the benefit of the companies or for proper purposes. The pari passu rule which would apply in a liquidation or other insolvency arrangement is relevant to demonstrating that lack of benefit to the companies. The banks’ contention confuses the conduct which constitutes the breaches of duty with the effects of that breach of duty on each company.
    The submission ignores the fact that there was no plan. It is misleading to characterise something as a ‘first step’ when no plan exists that would warrant the taking of any so called ‘steps’.
    6079 This raises, again, the issue of a valid and effective restructure. Throughout the case the banks have been critical of the plaintiffs for not specifying the nature of the ‘valid and effective restructure’ that was available to the directors and which they failed to consider. This is the reason why, in the portion from their submissions that I have set out above, they used the phrase ‘unidentified and unproven alternative’. The consistent response of the plaintiffs was that they were not obliged to do so. To avoid liquidation the companies had to have a plan that dealt not only with the banks but with all creditors. ‘Valid’ means that the plan has to be lawful and ‘effective’ means that it is one that works. Beyond that, there is no requirement for specificity.
    6080 I am in broad sympathy with the plaintiffs’ approach. The breaches of duty that I have found lie in a failure to identify creditors and, before embarking on the proposed course of action, to take into account how those creditors might be affected by the proposed course of action. There is a flow‑on effect to shareholders that might themselves have creditors. This is the essence of the failure to act in the best interests of the company and the duty to not exercise powers other than for a proper purpose. It does not necessarily follow that the ‘plan’ must inevitably treat each and every creditor on an equal footing. That might be the case; it might not.
    6081 On the facts of this case, as the banks effectively concede on the pleadings, without some form of restructure it was curtains for the Bell group. I say ‘effectively’ concede because the pleading is couched in terms of the banks believing that the directors were entitled to believe that a restructure was necessary. In any event, Aspinall testified that he held that belief. Where the parties differ is in the circumstances and consequences of what happened. The banks say that the refinancing gave the directors the opportunity to carry on the businesses as a going concern and the time to implement a restructure. None of this would have been possible had the refinancing not occurred.
    6082 On the other hand the plaintiffs say that there was no ‘plan’ to implement and that the refinancing was no more than a means to avoid having to deal with the inevitable insolvency of the relevant group companies. There is, I think, merit in that argument. Had the companies gone into liquidation then subject to the statutory exceptions (which are legion) there would have been some application of the pari passu principle. But it does not mean that a valid and effective restructure, if one could be worked out, must necessarily have involved equal treatment among creditors. Of course, once the Transactions had been effected, it became less likely that a valid and effective restructure that treated pre‑26 January 1990 creditors equally would be effected. The only way that could occur is if the banks gave up their security. There is nothing in the evidence to support the contention that either the directors or the banks had given thought to such a prospect.
    6083 The breach of duty arises not from a failure to apply a pari passu principle but, rather, from a failure to take the interests of creditors into account in the context of deciding where the interests of the company as a whole lay. A similar approach applies when considering whether, in the circumstances, the refinancing was a proper purpose for which the relevant directorial powers could be exercised.
    29.2.4. The subjective–objective dichotomy
    6084 In Sect 20.7.3 I set out eight propositions that, in my view, represent the current state of the law as to whether the test for a breach of duty is objective or subjective. I added some further comments in Sect 20.7.4 and Sect 20.7.5. At the risk of oversimplification the question is whether the directors held an honest and genuine belief that entering into the Transactions was in the best interests of the companies and constituted a proper purpose for which the relevant powers could legitimately be exercised. The question is what the directors believed, not what the court thinks was the appropriate commercial decision.
    6085 That having been said, it is not entirely a subjective test. The court is entitled to look at the surrounding circumstances to see what light they shed on whether the beliefs that the directors profess were honestly and genuinely held and whether those beliefs were based on reasonable grounds. In the end, honest and altruistic behaviour by the directors cannot survive if they failed to act in the best interests of the company or exercised powers for an improper or collateral purpose.
    6086 It will be apparent that I have considerable sympathy for the position in which Aspinall found himself. Although he had a long history of involvement with the BCHL group he was, certainly from July 1989, a ‘Bell group man’. I have little doubt that Aspinall believed the basic things about which he gave evidence. For example, I think that Aspinall believed that ‘the group’ was not actually insolvent and that if he could get the banks sorted out, he had about 12 months to right the ship. He also had a strong faith in the commercial strength of the publishing assets. But he was well aware that the publishing assets could not produce sufficient cash to meet bank interest. He was also well aware of the parlous financial circumstances of ‘the group’ and of the need to gain access to asset sales proceeds in order to survive.
    6087 There are some references in documents circulating during late 1989 that the debt servicing shortfall from the publishing assets would be a problem for ‘the first year’. That is a most optimistic view of the cash flows and projections that were available at the time. Even given the most favourable operating circumstances, BPG was unlikely to produce sufficient cash flow to service debt for many years.
    6088 In the circumstances that I have outlined it was not reasonable for him to commit the companies to the grant of securities without:
    (a) identifying the creditors each company in the group might have and considering what effect the proposed securities might have on the creditors and shareholders of that company; and
    (b) having a plan worked out, not in absolute detail but with sufficient precision to make sense, to deal with the longer term problems of the companies and, in particular, with the consequences for each individual company of the proposed course of action.
    6089 It can be put in a slightly different way. Whatever Aspinall may have believed about the issues I have described, he did not take the action enunciated in (a) and (b) above and therein lies the failure to act in the best interests of the company and the failure to exercise powers for a proper purpose. Alternatively, if there were no reasonable grounds on which to base the belief that the Transactions were in the best interest of the group and that the powers were exercised for proper purposes, the beliefs (though held) were not genuinely held. For the beliefs to be genuine (in the sense required by this aspect of company law) they would have to be directed at, and held in relation to, individual companies rather than ‘the group’. This is not to impugn Aspinall’s honesty. Rather, it is to look at true nature of the relevant duties. It goes directly to the exercise of his functions as an officer of the companies concerned.
    6090 The evidence leads me to conclude that Mitchell, unlike Aspinall, was essentially a ‘BCHL man’. He was a member of the ‘inner cabal’ or ‘kitchen cabinet’ and his energies were directed at the survival of the BCHL group. The evidence of other officers of the BCHL group, such as Baker, Corr and Swan, supports that conclusion.
    6091 Mitchell paid little attention to the affairs of the Bell group companies and most certainly did not carry out the functions mentioned in (a) and (b) above. I have not been persuaded that Mitchell honestly and genuinely held the beliefs about, for example, the solvency of ‘the group’, because there is no evidence of any real enquiry or attention to material from which such a belief could stem. Even if he did hold the beliefs, the same lack of enquiry and attention would call into question whether he did so reasonably. Mitchell failed to act in the best interests of the companies and failed to exercise powers for a proper purpose. The latter includes the ‘Bond‑centric’ nature of his involvement.
    6092 I did not have the benefit of hearing from Oates and thus have no direct evidence about what beliefs he held. I am forced to rely on the contemporaneous documentation and evidence of other officers of the Bell group companies and the BCHL group. Oates was a lot more involved in the affairs of the Bell group than was Mitchell. He played a role in negotiations with the banks throughout 1989 and into 1990. But he, too, was a member of the BCHL ‘inner cabal’ and was intimately involved in Mitchell’s restructure plans. The evidence leads me to conclude that, like Aspinall and Mitchell, Oates failed to do what was required on him in accordance with (a) and (b) above and, like Mitchell, his involvement was ‘Bond‑centric’. This constitutes a breach of his fiduciary duties.
    29.2.5. Identifying the directors duties as pleaded
    6093 As I have already said the plaintiffs did not plead a breach of the duty to act with care, skill and diligence. On many occasions during the hearing the banks protested that the case that the plaintiffs were advancing was, at its highest, one of negligence by the directors. The plaintiffs were equally adamant that they were not attempting to do so.
    6094 The distinction between the various duties recognised by the statutes and by the general law is a real one. I have borne it in mind. There have been occasions on which the language used by counsel was equivocal in this respect. For example, at one stage in the oral closing submissions, counsel for the plaintiffs said:
    One of the matters the plaintiffs do rely upon in establishing that the directors did not have a bona fide belief that the transactions were in the best interests of the companies or that they were acting for improper purposes is that they knew and understood the transactions and knew of the prejudicial effects of the transactions.
    [I]t’s one of our arguments that a person who knew and understood the prejudicial effects of the transactions is unlikely to have thought that they were in the best interests of the creditors. It would seem that the directors, if they did think it was the best interests of the companies, had misunderstood what the interests of the companies were.
    6095 Language that refers to a failure to investigate, identify and consider certain things or which suggests that the actors have misunderstood their obligations can have overtones of negligence. But that is not the case here. The failures are the ones that I have outlined in (a) and (b) in the preceding section. They go directly to the breaches complained of in the pleading. While I have been alive to the problem, I do not believe that the case, as advanced, is negligence dressed up as misconduct of different genre.
    29.2.6. The UK and BIIL directors: summary
    6096 There is not a lot I wish to add to what I have said in Sect 26.13 and Sect 27.2. The London‑based directors did everything right – up until the last hurdle. They stumbled at the last obstacle by relying on assurances from officers of the Australian Bell group companies and from Alan Bond. They should have obtained (in accordance with the advice they received) reliable financial statements and information to verify that the letters of comfort on which they were relying, and which were essential for the survival of BGUK, were worth powder and shot. This was a critical factor in determining whether or not it was in the best interests of the individual companies of which they were directors, rather than the interests of the wider group, to commit to the Transactions.
    6097 Once again, while at first glance this may seem to be a failure of care skill and diligence, it is not. The information was critical to the exercise of directorial responsibility and its absence goes to the very heart of the obligation to act in the best interests of each company in the BGUK group.
    6098 In my view, Mitchell’s conduct as a UK director is infected in the same way that I have described in relation to the Australian Bell group companies. I did not hear from Alan Bond. He was not a director of the Australian Bell group companies, or for that matter the BGUK group companies, and there is no evidence that he knew anything in particular about the affairs of those companies. Nor is there evidence from which it can be inferred that he paid attention to the interests of individual Bell group companies separate and apart from the Bell group generally or from the BCHL group. There is no evidence from which it can be inferred that whatever information about the financial health of TBGL and whatever assurances he gave concerning the letters of comfort was reasonably based. He, too, breached his duties as a UK director.
    6099 As I have acknowledged, the finding of a breach of duty by the London‑based directors is a tough call. As with Aspinall, I have considerable sympathy for the position in which Edwards, Birchmore and Whitechurch found themselves. They did not merely roll over and do the bidding of their Australian holding company. They took advice and they fought hard to ensure that the interests of the BGUK group companies were identified and protected.
    6100 One reason why I had difficulty reaching this finding is that it is common experience in corporate boardrooms for members to rely on their fellow directors. A board in which there is a lack of trust, even distrust, between members is likely to become dysfunctional. The problem is that the London‑based directors had enough other advice and information to raise questions about whether they should do so in this instance.
    6101 If it were necessary to rely solely on the breach by Mitchell and Alan Bond of their duty to exercise powers only for a proper purpose, brought about by the ‘Bond-centric’ nature of their activities, I would find a breach by the directors established. The evidence leaves me in no doubt that Edwards and Birchmore relied on the assurances given by Mitchell and Alan Bond. In that sense their actions were causative of a breach: see Sect 20.3.4.
    29.2.7. The BGNV director: a summary
    6102 Once again, there is little I wish to add to what I said in Sect 28.5. In my view there is insufficient evidence from which to conclude that Equity Trust (through Pim Ruoff) breached its duties to BGNV. As with Oates and Alan Bond, I did not hear from Ruoff. But the difference between them is that in Equity Trust’s case there is very little evidence from which the necessary inferences could be drawn.
    6103 Critical to the case against Equity Trust is PP par 39E(d)(v)(A). This is to the effect that Equity Trust breached its duty to act bona fide in the interests of BGNV as a whole, including its creditors, because ‘it knew, as was the fact, that such instrument prejudiced BGNV’s creditors’. The bondholders were the only creditors of BGNV. I have found that those creditors were not relevantly prejudiced by BGNV entering into the BGNV Subordination Deed because they already ranked behind the banks. Thus it was not, as particularised, ‘the fact’ that the creditors were prejudiced. This is the factual matrix from which the alleged knowledge would have to arise. As I have said, the evidence falls short of establishing knowledge.
    6104 The plaintiffs’ case against Equity Trust has elements of a commercial equivalent to the tortious doctrine res ipsa loquitor: it signed the document so it must be guilty. Very little is crystal clear in this litigation. A point such as that most certainly is not.
    6105 This is a finding of real consequence for the end result of this litigation. Because there was no breach of duty by the director of BGNV no question of a Barnes v Addy claim can arise in relation to the BGNV Subordination Deed. This means that the plaintiffs must establish their equitable fraud claim (Sect 32) or the claim under the Territory legislation (Sect 33.1.2) if they are to avoid that Transaction.
    29.3. The breaches and the pleadings
    6106 In the preceding sections I have been narrating a story in language that might resonate with non‑lawyers. I now return to my role as a black letter lawyer so as to explain the breaches that I have found in accordance with the pleaded case. .
    6107 The breaches are pleaded in 8ASC pars 37, 39A, 39C, 39D, 39E, 46, 47 and 48. They have been described earlier and there would be little point in repeating them: Sect 6.7.
    6108 The particulars in support of the pleaded breaches of duty extend across 24 pages and are set out in literally hundreds of paragraphs. I do not intend to go chapter and verse through each and every paragraph with a tick or a cross indicating the fate of the allegation. That would not be possible as many of them build from one to another. Following the pleadings has been a delightful task. The interminable and often unfathomable system of cross‑referencing between paragraphs in PP ought to be patented as a sure-fire cure for insomnia. I will set out the gravamen of the pleaded allegations that have been made out. This is not intended as an exhaustive list.
    6109 The particulars commence with a global set of allegations that apply to the Bell Participants generally. They are then amplified in relation to individual companies and groups of named companies. I propose to start with the Bell Participants and then to give examples of the more specific allegations in relation to groups of named companies.
    29.3.1. The Bell Participants generally
    6110 In relation to the Bell Participants generally, some of the core allegations that, in my view, have been made out include the following acts, omissions or conduct by or of the directors. They are to be found in PP par 39A(a) to (r).
54. Failed to have regard to the effect on the individual company as a whole, including all of its creditors, future creditors or shareholders of its Transactions and the Scheme. In particular, they caused the companies to incur an obligation to the banks they did not previously have. It was an obligation in respect of debts of companies that were in an insolvency context.
55. Caused that company to enter into its Transactions and the Scheme which rendered that company liable for, precluded the realisation of that company’s assets until repayment of, and exposed its assets being applied in satisfaction of, the debts of BGF and BGUK when:
    (a) that company obtained no actual or prospective benefit;
    (b) the means of realising that company’s assets were made available exclusively to the banks for repayment of the debts owed by BGF and BGUK to the banks;
    (c) the incurring of such liability;
    (d) being precluded from realising that company’s assets until repayment of the debts to the banks; and
    (e) the exposure of that company’s assets to such application, were not reasonably incidental to, or within the scope of carrying on the business of that company.
56. Did not hold a genuine belief that its Transactions and the Scheme were in the best interests of that company as a whole, including all of its creditors, future creditors and shareholders.
57. Knew, believed, suspected or ought to have known the prejudicial effect of its Transactions and the Scheme on the creditors (other than the banks), future creditors and shareholders of that company; in that there was no prospect, alternatively no probable prospect, of benefit, but had cast upon them the probable prospect of loss.
58. Exercised their powers in a way that was not reasonably incidental to and within the scope of carrying on that company’s business for the reasons particularised in items 1 to 4 above.
59. Exercised their powers for an improper purpose, namely, to cause that company to enter into its Transactions and give effect to the Scheme.
60. Exercised their powers for an improper purpose, namely, to protect BCHL by removing a threat to its continuing survival, namely, the winding up or liquidation of assets of Bell Participants and acted in the interests of BCHL and other BCHL companies (Mitchell and Oates; Mitchell and Alan Bond).
    29.3.2. TBGL and BGF
    6111 The allegations against the directors of TBGL and BGF are dealt with in PP par 39A(s) and (t). They are somewhat different because they focus more directly on the financial position of the companies. They also deal specifically with the relationships between the ultimate holding company and the group treasury company on the one hand and individual group companies on the other. The impugned conduct includes the following.
61. Did not hold a genuine belief that BGF’s Transactions were in the best interests of BGF as a whole, including all its creditors in that:
    (a) they knew, as was the fact, that those instruments prejudiced BGF’s creditors, other than the banks; and (or)
    (b) also knew, as was the fact, that by those instruments the creditors of BGF, other than the banks, obtained no prospect, alternatively no probable prospect, of benefit but had cast upon them the probable prospect of loss.
62. The instruments entered into by BGF rendered it liable for, and exposed BGF’s assets to being applied in satisfaction of, the debts of a company that was either insolvent or otherwise in an insolvency context, namely, BGUK.
    29.3.3. Other named companies
    6112 PP par 39A(u) relates to the BRL shareholders, Bell Bros, WAON, BPG, Wanstead, Western Interstate and BGUK. The factual background is that none of the companies was previously liable for the debts of BGF to the Australian banks or (except for BGUK) for the debts of BGUK to the Lloyds syndicate banks. The directors knew that BGF, BGUK and TBGL and some of the named companies were in an insolvency context and TBGL was likely to be unable to fulfil its intention to provide such companies with the financial support necessary to meet their debts. In those circumstances the directors breached their duties to act in the best interests of the companies and failed to exercise their powers properly. The particularised reasons are:
    (a) they knew, as was the fact, that those instruments prejudiced such creditors, other than the banks; or
    (b) they also knew, as was the fact, that by those instruments such creditors, other than the banks, obtained no probable prospect of benefit, but had cast upon them the probable prospect of loss;
    (c) as the instruments rendered each of those companies liable to be applied in satisfaction of the debts of insolvent companies, namely BGUK and (or) BGF, they were not reasonably incidental to or within the scope of the business of those companies and, hence, exceeded their proper interests; and
    (d) with respect to Bell Bros, Wanstead, Western Interstate and BPG, the directors knew the effect of the instruments was to render the companies insolvent or place them in an insolvency context.
    6113 PP par 39A(w) contains allegations that are similar to those in the preceding paragraphs. However they are directed specifically at the directors of W&J, Belcap and Ambassador Nominees.
    29.3.4. Giving effect to the Scheme
    6114 PP par 39A(f) says that ‘the Directors’, as directors of a Bell Participant, ‘gave effect to the Scheme without regard to the interests of that company’ and thereby breached their duties. Although it is often difficult to determine what the pleadings mean (and that comment is aimed at both sides), I assume this is a reference to the steps to facilitate and protect the Scheme pleaded in 8ASC par 36T to par 36APC. One of the matters asserted as a step to facilitate and protect the Scheme (8ASC par 36APA to par 36APC) is an agreement by the banks and ‘the Directors’ in May 1990 for ‘the Directors to approach LDTC. The purpose was to inform LDTC of the financial position and the proposed restructure. However, says the pleading, the agreement was waived because it was not in the best interests of the banks for an approach to be made at that time.
    6115 I assume this is the basis of the allegation in PP par 39A(o)(i) that ‘the Directors’ exercised their powers for an improper purpose; namely, to delay approaching the bondholders or LDTC as part of a restructure of the financial position of the Bell Participants.
    6116 The term ‘the Directors’ is defined in 8ASC to include the Australian directors but not the UK directors or the BIIL directors. But the latter are dragged back in to the net by PP par 39C as follows:
    (a) the UK directors, as directors of BGUK, (with one irrelevant exception) all allegations relating to Bell Participants including (f) and (o);
    (b) the UK directors, as directors of TBGIL, some allegations relating to Bell Participants including (o) but excluding (f);
    (c) the BIIL directors, neither of the allegations in (f) or (o).
    6117 There is a further exception arising from PP par39C; namely that insofar as the allegations in PP par39A(o) are levelled at the UK directors, only the conduct of Mitchell and Alan Bond is impugned.
    6118 If I am correct in assuming that PP par 39A(f) and (o) relate to steps taken to facilitate and protect the Scheme, they may be inconsistent with the statement of claim to the extent that they purport to cover anyone other than ‘the Directors’. In the end it does not matter. Whatever the pleading and the particulars actually mean, I have seen no evidence that ties Edwards, Birchmore or Whitechurch into the events surrounding the proposed approach to LDTC. I would make the same comment about Alan Bond. There is evidence that Mitchell was involved in some of those events but, if he was, it may well have been in his capacity as an Australian director.
    6119 Insofar as there is a case relying on a breach by the UK directors or the BIIL directors of their duties because of steps taken to facilitate or protect the Scheme, I find that it has not been established. It will be more convenient to deal with the allegations against the Australian directors in the context of the equitable fraud claim.
    29.4. Conflict of interest
    6120 The relationship between Aspinall, Oates and Mitchell, on the one hand, and the BCHL group on the other, is pleaded in 8ASC par 36A to par 36L and the particulars to those paragraphs. 8ASC par 36O contains similar facts concerning Alan Bond, Dallhold and the BCHL group. Much of what is in those paragraphs in admitted in the defence. In any event, I am satisfied both that those relationships existed and that the banks were aware of those matters.
    6121 In 8ASC par 36M the plaintiffs plead the various restructure plans advanced by Mitchell and the CPDD. I am satisfied as to the basis of those pleas. In 8ASC par 36N the plaintiffs plead that at or shortly before 26 January 1990 the survival of BCHL was threatened by a number of events, including:
    (a) the financial circumstances disclosed by the publication of the BCHL annual accounts for the year ended 30 June 1989;
    (b) the loss of control of the board of BRL in December 1989;
    (c) the appointment of a receiver and manager over the BBHL in December 1989;
    (d) the demand issued by the US bondholders of BBHL for repayment of approximately US$510 million in early January 1990;
    (e) the inability of BGF and its guarantor, TBGL, to repay the loans from the Australian banks which were then repayable on demand; and
    (f) the likelihood of a winding up or a liquidation of assets of TBGL unless there was a valid and effective restructuring of its financial position.
    6122 It will be apparent from what I have said in various parts of these reasons that I am satisfied as to the factual basis for those pleas. These matters are relevant both to the conflict of interest allegation and to the claim that the directors exercised powers for an improper purpose by taking what I have called a ‘Bond‑centric’ approach their duties.
    6123 In Sect 20.5.3 I expressed some misgivings about the true import of the conflict of interest plea in 8ASC par 37(c). The law seems to extend to a range of possibilities: conflict of duty and duty; conflict of interest and duty; conflict of duty and interest; and conflict of interest and interest. The pleading is an uneasy mix of some of those possibilities.
    6124 I expressed particular concern about an alleged breach of the conflict of interest rule by reason of the directors preferring the interests of a third party, rather than pursuing their own interests. In the absence of a case where the directors’ interests lie in benefiting a third party, the action of a director in benefiting a third party is dealt with under one or both of the duty to act in the interests of the company and the duty to exercise powers properly. In my view, the factual situation here is adequately covered by the more conventional duties pleaded in 8ASC par 37(a) and (b).
    In PP par 39A(p) the conflict is said to arise because the directors:
    (a) acted in their own interests;
    (b) acted in the interests of BCHL and other BCHL companies.
    6125 In my view there was insufficient evidence to justify findings against Mitchell, Oates or Alan Bond in accordance with (a). As I have already said, the crux of (b) is adequately covered by the duties to act in the best interest of the companies and to exercise powers only for proper purposes.
    6126 Interestingly, some of the allegations that would, at first glance, appear to relate to the conflict rule are brought forward as indicia of an exercise of power for improper purposes in PP par 39A(o). They include protecting BCHL by removing a threat to its survival; a step in a BCHL restructure (including buying back bonds at a discount); and a means to entrench the directors’ position of control of TBGL and to protect their financial interest in BCHL and other BCHL companies. I think I have dealt sufficiently with the first two parts of those allegations.
    6127 There is no evidence to justify findings in relation to the third. I do not recall it being put squarely to Aspinall or Mitchell that their motivation was to ensure the continuance of their respective offices as directors of TBGL. They gave no evidence suggesting that this was a consideration, even a remote one. They were asked questions about their financial interests in BCHL and they denied that it was a consideration. I accept their evidence. Save for admissions in the defence that Oates had financial interests in BCHL there is nothing to suggest that he acted because of, and to protect, those financial interests. It is not the sort of issue on which I would be prepared to draw an inference against him simply because he was not called to give evidence.
    29.5. Corporate benefit
    6128 The lack of corporate benefit to individual companies is at the heart of the plaintiffs’ various causes of action. Nowhere is this more so than in relation to the breaches of duty by the directors. In this respect, I refer to what I have said in Sect 19 and Sect 10 and to the SNAs themselves. In relation to the pleadings, the relevant material appears in 8ASC par33C, PP par33C and PRP par 1.12 to 1.14 (responding to ADC par 59TB). There is nothing I wish to add.
63. Banks’ knowledge and state of mind issues
    30.1. Introduction
    6129 The plaintiffs seek relief against the banks, not the directors. Accordingly, the fact that the directors might have committed breaches of their fiduciary duties is of no moment unless the banks are, somehow, rendered responsible for the consequences of those breaches. The plaintiffs contend that the banks are responsible for the breaches because they knew, believed or suspected, or ought to have known about material matters relating to the breaches (among other things) and, having acquired that knowledge, they entered into the Transactions.
    6130 A great deal of the oral hearing was taken up with evidence from former bank officers employed during the time of the Transactions. On my calculations, 87 witnesses fall into this category. This does not include the solicitors from various firms who advised the banks in relation to the Transactions. Most of the officers that were called are no longer with the banks to which they were attached at the time. The events that they were asked to recall occurred a long time ago. I suspect there are few officers who recall this saga with fondness, and that some of them might have left the witness box recalling the last speech of Othello:
    ‘I pray you, in your letters, when you shall these unlucky deeds relate, speak of me as I am; nothing extenuate, nor set down ought in malice’.
    6131 I think that, generally speaking, most of the bank officers who were called to give evidence did their best to recount events and to avoid patent partisanship. I did not get the impression that witnesses set out deliberately to mislead or obfuscate. That is not an unqualified acceptance. There are aspects of the testimony with which I am not comfortable and assertions made by some witnesses that I have had cause to doubt. This is hardly surprising given the large number of witnesses, the broad range of the issues canvassed and the passing of time. I will deal with those aspects as I go through the evidence. The main difficulty I had with the evidence was sorting out what was recollection and what was reconstruction: see generally Sect 8.5. As with other areas in the case, I have used contemporaneous documentation as my primary source wherever possible and have assessed the reliability of oral evidence against what was written at the time.
    6132 This is a long section. But it is shorter than the 10,969 pages of written closing submissions that the parties devoted to this topic alone. In the first part, I will return to the discussion introduced in Sect 7.5.2.2 about legal principles relating to states of mind and the ways in which knowledge can be proved. In the second broad part of this section, I will examine the evidence concerning the banks’ knowledge of the financial position of the Bell group companies and evidence of other specific matters. Those matters include the banks’ knowledge of the CBA and SCBAL demands, the status of the on‑loans, the position of the bondholders and the position of other external creditors. Finally, I will deal with the corporate benefit argument (as to which, see the last two paragraphs of this Sect 30.1).
    6133 When I come to subsections dealing with the knowledge of individual banks (and in parts of the recitation of material of a more global import), the reader will note that there is a great deal of factual detail and a lesser quantity of close analysis of what I think can be taken from the detail. In writing these sections I decided that it would aid comprehension if I were to set out the facts in chronological order, relatively undisturbed by comment. In later subsections I will embark on the analysis and formulate conclusions. There is another reason for this approach. There is nothing in the evidence that I could characterise as a clear, unequivocal concession that the banks knew the companies were insolvent or that they knew the refinancing would prejudice others. Not surprisingly, no‑one said (either in oral evidence or in a contemporaneous document) something to this effect: ‘Oh my goodness, we know these companies are hopelessly broke; haven’t got a brass razoo between them; never mind, we’ll just carry on regardless, stitch them up and the best of British to everyone else’. Rather, on the plaintiffs’ case, it is the accumulation of material available to each bank that justifies inferences that each bank possessed the requisite knowledge. In my view this is correct. Accordingly, I could not avoid the task of collating and describing the material from which those inferences are said to arise.
    6134 It is not possible (and it would not be sensible) to formulate a list by way of general summary of the factual areas covered in the knowledge section. But there are some recurring themes which I have set out below as examples. The reader should bear them in mind when looking at this section.
    1 To what extent did each bank build up a store of knowledge about the structure and finances of the Bell group companies, either alone or through its association with BCHL?
    2 Exactly what level of knowledge did each bank have by January 1990 about the financial position of the Bell group and what attitude did each bank have in that regard? In the phrase ‘financial position’, I include both cash flow (cash inflows compared with outgoings, particularly debt servicing) and balance sheet (whether on a realisation of assets, the value of assets would exceed the liabilities).
    3 As a matter of general approach, did the banks harbour concerns, and if so to what extent, about dealing with the Bell group or the BCHL group and their respective executives?
    4 Were the banks motivated by the consideration that they would be no worse off by entering into the Transactions?
    5 What did the banks know about the status of the on‑loans and what, if any, part did that knowledge play in the decision to proceed with the refinancing?
    6 Did the banks refrain from seeking additional financial information from the Bell group and, if so, why?.
64. What did the banks know about the conduct of the directors in causing the companies to enter into the Transactions and, in particular, whether conduct was or might be a breach of fiduciary duty?
    6135 The first six of these questions are all, in one way or another, related to the financial position of the Bell group. In other words (and ignoring different states of mind and gradations in states of impecuniosity), they are all directed at ascertaining whether the banks knew that the Bell group companies were insolvent. But that is not an end to the matter. Particularly in relation to the Barnes v Addy claims, it is necessary also to examine whether the banks knew that the conduct of the directors in causing the companies to enter into the Transactions was a breach of duty. Again at the risk of over‑simplification, this involves the question whether there was a corporate benefit to the companies and what the banks knew about that question. Hence the seventh question.
    6136 Issues relating to the knowledge of the financial position of the companies evolved over a long period of time and, in that respect, I have little choice other than to examine them on a bank by bank basis. The corporate benefit question was directed at the form and implementation of the refinancing and came to light during the negotiations that took place from about September 1989 and into January 1990. By that time, Westpac and Lloyds Bank were playing a greater role in accumulating and disseminating information. For that reason, it will be convenient to discuss the corporate benefit argument on a more global basis, without losing sight of the fact that the case must be established against each bank individually.
    6137 My final introductory comment is this. What the banks knew and what motivated them to act as they did in 1989 and 1990 did not arise in a vacuum. It emerged in the context of a long history of commercial relationships between the banks and the Bell group companies. What I have said about the history and the relationships in Sect 4.2 and in the extensive recitation of factual material in Sect 17.4 to Sect 17.23 is relevant to the considerations raised in this section.
    30.2. Legal approach to determining knowledge
    30.2.1. Some introductory comments
    6138 In Sect 7.5.2.2, I made some comments about questions of state of mind, particularly in relation to the pleading difficulties associated with the plaintiffs’ disavowal of a case based on conscious wrongdoing brought by the directors and the extension of that disavowal to the banks. Knowledge is, of course, an aspect of state of mind. I need to return to the general legal principles that will govern my approach to ascertaining what individual bank officers knew and what the corporate entities knew. In doing so, I will be repeating some of what I said in the earlier section.
    6139 I will start by returning to the organic theory of knowledge and the imputation of knowledge to a corporation. A significant aspect of that issue is the extent to which information held by individual employees of the company is aggregated to constitute the knowledge and state of mind of the company.
    6140 Agency looms large in these proceedings. One aspect is the pleaded agency case between the banks (8ASC par 49 to par 49D) and another is the extent to which some, or all, of the solicitors who acted for the banks in the Transactions were agents of the banks. This is relevant to the question whether, and, if so, to what extent, knowledge acquired by the solicitors can be imputed to the banks.
    6141 One of the bases on which the plaintiffs say the banks knew certain things (for example, the precarious financial position of the Bell group companies) is that they refrained from seeking information that would have revealed the true position. This is referred to in the cases, and in the pleadings, as ‘calculated abstention from inquiry’. I have to examine what that phrase means as it is necessary to steer clear of matters that necessarily involve conscious wrongdoing. The question is whether the phrase ‘calculated abstention from inquiry’ falls into that category.
    30.2.2. The organic theory and aggregation of knowledge
    6142 The banks’ knowledge and state of mind must be determined in the same way as any other corporation. Since companies do not have consciousness, knowledge and state of mind can be attributed to a company via the organic process. This usually means identifying the directing mind and will of the company in relation to the particular issue, and may involve an aggregation of knowledge held by separate officers of the company. Knowledge can also be imputed to the company via its agents, such as employees or external agents, like solicitors.
    6143 The knowledge and state of mind of directors (and to a lesser extent senior officers) will generally be taken to be that of the company: Tesco Supermarkets Ltd v Nattrass. But this will not always be the case. As Nourse LJ said in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 696:
    It is important to recognise that management and control is not something to be considered generally or in the round. It is necessary to identify the natural person or persons having management and control in relation to the act or omission in point.
    6144 The directing mind and will of the company in relation to a given transaction will not necessarily be that of a single person. Also, this person may vary from transaction to transaction. Persons will often be treated as the directing mind and will of the company if they have been granted authority to act on behalf of the company in relation to the transaction, or have been vested with autonomy, control, discretion or a significant degree of responsibility in relation to the transaction (or similar transactions): El Ajou (705 – 706); Re Morris v Bank of India [2005] 2 BCLC 328 [126]; Highwater Nominees Pty Ltd v Mead [2006] WASC 17 [49].
    6145 Where all the requisite knowledge is not held by a single person representing the ‘directing mind and will’, a court may, in certain circumstances, aggregate the knowledge of multiple agents to determine the knowledge of the company. As the High Court noted in Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563, 583:
    A division of function among officers of a corporation responsible for different aspects of the one transaction does not relieve the corporation from responsibility determined by reference to the knowledge possessed by each of them.
    6146 It follows that knowledge can be imputed to a company even where the pieces of knowledge are held by several people, rather than a single figure. But this is not to say that every piece of information held by separate employees can be aggregated. Furthermore, there are no definite rules concerning aggregation of information. However, some guidance can be gleaned from the reasons in Krakowski:
    1 If mental states, like knowledge or belief, are to be attributed to a notional and metaphysical entity like a corporation, this can only be done by attributing to it the knowledge or belief actually possessed by one or more of its officers or employees.
    2 Difficult questions can arise in this connection. But it is wrong to say that any state of mind to be attributed to a corporation must always be the state of mind of one particular officer or employee alone. It is also wrong to say that the corporation can never know or believe more than that one person knows or believes.
    3 It is the company’s belief that is important. The belief of any officer or employee is relevant only insofar as that belief may be imputed to the company.
    4 Before beliefs or opinions or states of mind will be attributed to a company, it is necessary to specify some person or persons so closely and relevantly connected with the company that their state of mind can be treated as the state of mind of the company.
    5 Thus, a division of functions among officers or employees of a company responsible for different aspects of a transaction does not relieve the company from that responsibility, determined by reference to the knowledge possessed by each of them.
    6147 There is an important distinction here. There are cases in which mere knowledge of facts held by separate officers are aggregated to determine the total knowledge held by the company as a separate legal entity. There are other cases in which a particular state of mind is sought to be attributed to the company. This attribution is based on an aggregation of the knowledge of separate officers, none of whom necessarily hold that state of mind. The first type of aggregation is certainly possible given the appropriate circumstances. The second type is more controversial. This distinction is evident in Macquarie Bank v Sixty-Fourth, where Tadgell JA, referring to the passage from Krakowski cited above, commented at 145:
    Neither that passage … nor any other principle justifies the simple aggregation of the knowledge of a number of persons individually unaware of fraud, or facts which ought to disclose it, to create a notional person with a dishonest intent. The High Court in Krakowski was not purporting in the passage relied on to lay down any such principle but to authorise a consideration of the knowledge and circumstances of all relevant persons – including what may properly be inferred – in order to ascertain the mind of the corporation.
    6148 Similarly, Ashley AJA said, at 160 – 161:
    The effect of this proposition was that the actual state of a servant or agent of the company, which was in the circumstances to be treated as the company’s state of mind, could be attributed to the company for the purpose of determining whether a representation had been made by another servant of the company (which representation was evidently false) had been consciously made by the company. That, it appears to me, is different from saying that certain facts known to different servants or agents of a company may be aggregated so as to give rise to a factual totality from which a dishonest corporate intent, held by none of the individuals, may be inferred.
    6149 These statements indicate that it might be possible to aggregate pieces of knowledge in order to determine the overall knowledge held by a company, but it will be more difficult to aggregate pieces of knowledge held by separate individuals to attribute a subjective state of mind to the company.
    6150 On the other hand, in Re Chisum Services Pty Ltd (1982) 1 ACLC 292, Wootton J contemplated that, in certain circumstances, it may be possible to aggregate pieces of information held by separate officers to determine the state of mind of the company. In Chisum, Wootton J was not prepared to attribute to a corporation (a bank) information contained in a document when the document was in the possession of the head office but had not then been received by the relevant branch. The officers at the head office did not appreciate its significance. The officer had a duty to pass on the document to the regional branch, where its significance would have been appreciated. But that obligation was not enlivened at the time when the bank’s state of mind was assessed. Wootton J commented, at 298, that:
    The inference that has to be drawn is that the payee had reason to suspect the specified matters. The reason to suspect would only arise from the co‑existence of the separate pieces of information in one mind, and I do not think that it would be sufficient to say that both pieces of information were possessed by the Bank through separate agents, unless one had the duty and opportunity to communicate it to the other.
    6151 Wootton J’s dicta therefore suggests that it may be possible to aggregate separate pieces of information held by separate officers to establish that the corporation knew both things at once. This aggregation would thereby give rise to a particular state of mind, if the bearer of one piece of information had a duty and opportunity to communicate it to the other. If this duty and opportunity exists, the court may infer that the company simultaneously knew both facts from the time when, in the usual course of events, the information would have or should have been communicated.
    6152 In Macquarie Bank v Sixty-Fourth, Ashley AJA (albeit in dissent) took a similar approach. Having commented that there is a ‘good deal to commend’ in Wootton J’s approach, Ashley AJA said, at 16:
    It does seem to me to be somewhat unsatisfactory that the state of mind of such a person should be considered apart from any knowledge of circumstances which ought to have been but was not conveyed to that person by another servant or agent of the company.
    6153 Looked at in this way, the approach is not as controversial as may first appear. The court is not creating a notional person with a particular intent. It is ascribing a state of mind to a particular employee of the company who holds one piece of information, and who can be deemed to hold another via the principles of attribution and agency.
    6154 Similar sentiments are evident in the reasoning of Bray CJ in Brambles Holdings Ltd v Carey. I have already noted the reasons of Bright J in that case: see Sect 7.5.2.2. Brambles was prosecuted for permitting a vehicle to carry a load that exceeded the relevant statutory limit. The manager responsible had in fact given instructions to the intended driver as to how to stow the load so as not to breach the statutory limit. However, the intended driver fell ill and was replaced. The instructions were not passed on to the new driver and as a result the limit was breached. Brambles argued that it ought not to be convicted because it had acted under an honest and reasonable mistake of fact. Although this is not strictly a case involving aggregation, Bray CJ, in rejecting the defence, noted that the state of mind of a company does not necessarily have to reside in a single officer. Again, it comes back to the concept of duty. His Honour said, at 275 ‑ 276:
    [I]n my view, it is a fallacy to say that any state of mind to be attributed to a corporation must always be the state of mind of one particular officer alone and that the corporation can never know or believe more than that one man knows or believes. This cannot be so when it is a case of successive holders of the office in question or of the holder of the office and his deputy or substitute during his absence. Let us suppose that a piece of information, x, is conveyed to one officer of the company, A. Then A goes on holidays and B takes his place and a further piece of information, y, is communicated to him. It is a fallacy to say that the company does not know both x and y because A only knows x and B only knows y. As a matter of fact it may well be B’s duty when he is told about y to find out about x.
    6155 I should also mention ACCC v Radio Rentals Ltd. Finn J, in looking at whether there had been unconscionable conduct, was asked to aggregate the knowledge of different employees at a call centre. His Honour rejected the submission. The call operators were not working on the same transaction and there was no duty for them, or any employee, to monitor the records to report anything which may have alerted them to the existence of a special disability. Finn J noted the dicta in Chisum. He expressly declined to advance a concrete view but, like Ashley AJA, he was inclined to support the proposition that aggregation may be possible where there is a duty and an opportunity for one employee to communicate it to the other. Importantly, these statements were made in the context of equitable fraud. This supports the approach that even where no single agent of a bank has the requisite state of mind, the knowledge of multiple agents may be aggregated to justify a finding as to the state of mind of the company as a whole.
    6156 Whether a court is prepared to infer that the company held particular knowledge or had a particular state of mind, based on the collective knowledge of its officers and agents, depends on the circumstances of the case. It may depend on the type of information and the effect that such a piece of information may have (or should have had) on the particular employee. It will also depend on the employees’ positions, their duties and responsibilities, and their proximity to the relevant transaction.
    6157 In National Bank of Australasia v Morris (1892) AC 287, the court was prepared to aggregate knowledge held by bank officers in Sydney and Melbourne. One of the reasons for the aggregation was that the officers were working on the same transaction. The officer in Sydney was aware of the significance of the information received by him and had opportunity to pass it on. By contrast, in Chisum the court declined to aggregate the knowledge contained in the document because the officers at the head office who received the document were not involved in the relevant transactions conducted by the regional branch. These considerations may be just another way of determining whether there was a duty and opportunity to communicate the information.
    6158 Inferring knowledge or state of mind may also depend on whether the court is evaluating the company’s knowledge objectively or subjectively. For example, in Chisum the court was looking at a quasi-objective state of mind – whether the company had ‘reason to suspect’. In contrast, in Macquarie it appears there was a greater reluctance to impute to the bank knowledge of something that would constitute fraud.
    6159 I have not been able to find a case where knowledge held by separate employees has been aggregated to allow a finding of a state of mind that is not held by any individual employee. But I believe that Chisum, Krakowski, Radio Rentals and Macquarie leave this possibility open in the right circumstances. I am inclined to agree with a submission made by the plaintiffs that there is good reason for aggregating the information held by various officers of a bank working on the same transaction in order to determine its state of mind, even in cases involving actual or equitable fraud. A corporation ought not, by compartmentalising its decision‑making, be able to escape the consequences of causing harm to others.
    6160 Take a hypothetical example. Suppose two employees are working on a transaction and each comes into possession of a piece of information which, when combined, would alert the company that the other party had a special disability. If one employee was a subordinate of the other and had a duty to report all relevant information, it seems sensible that a court should be able to infer that the superior has both pieces of knowledge and thereby has knowledge of the special disability.
    6161 That having been said, it is not the case that the court will aggregate knowledge if there is a duty and opportunity to communicate, but rather it may do so. There is a need to demonstrate the nature, source and content of the duty. Any duty to communicate would have to be owed to the person who holds the other relevant information, although arguably it would also include situations where both possessors of information have a duty and opportunity to communicate their knowledge to a superior. The particular information would also have to fall within the scope of that duty.
    6162 Where it is alleged that a particular bank received a particular document, the contents of that document are not automatically imputed to the bank: K & S Corporation Ltd v Sportingbet Australia Pty Ltd [2003] SASC 96; (2003) 86 SASR 312338. In the absence of direct evidence that a bank officer actually read the document, it may be inferred from the banks’ possession of the document that it was read. This approach may also allow a finding of deliberate abstention from enquiry.
    6163 The question whether a company may be taken to ‘know’ information contained in the relevant file was considered in Commercial Union Assurance Co of Australia Ltd v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735. Davies AJA, with whom Meagher JA agreed, said that information set out in the current formal records of a company may constitute knowledge in the appropriate circumstances. Foster AJA noted the attractiveness of that proposition. However, he decided that the present state of authority does not support a finding that the information so stored becomes ‘known’ to the company unless it is actually transferred into the mind of an officer. Before deciding whether information contained in a record is to be attributed to the company, regard must be had to all the circumstances. Relevant factors will include the nature of the information (whether it is material), how it was received (whether it was acquired by some unrelated process), whether the information ought to have been read and the characteristics of the person who ought to have read it (whether their knowledge and training would have enabled them to understand the significance of the information). In relation to this last point, see RCA Corporation v Custom Cleared Sales Pty Ltd (1978) 19 ALR 123, 126.
    6164 Issues of this kind arise in relation to documents that are, or were at the time, on a bank’s file. Sometimes, there was evidence from a bank officer acknowledging that the document was seen at the time. In the absence of direct evidence to that effect, when in the following sections I mention a document that a particular bank had on file, it will usually mean I have drawn the inference that the document was read and understood. If that is not the case, I will say so. This includes documents provided by the Bell group, as well as publicly available information such as newspaper reports (subject to my natural disinclination to take notice of missives from the fourth estate) or ratings reports that were placed on the banks’ files.
    6165 The main reason for me drawing such an inference is that the banks knew that the Bell group was in an unhappy financial situation. The evidence discloses that the banks were ‘keeping an ear to the ground’ to detect any adverse occurrences that might affect their position. It would have been evident from a cursory glance at most of such documents whether they were likely to contain relevant information. This is not a case where important information was buried in a seemingly irrelevant or innocuous document. The evidence of the banks’ practices in relation to public information is discussed below.
    30.2.3. The general principles of agency
    6166 The plaintiffs bear the onus of establishing the existence of an agency arrangement. Agency is a fiduciary relationship that arises where the parties mutually consent for the agent to act on behalf of, and under the control and direction of, the principal in respect of a defined matter. The agent also has the authority to affect the principal’s legal relations with third parties: see, for example, International Harvester Co of Australia v Carrigan’s Hazledene Pastoral Co (1958) 100 CLR 644, 652, Petersen v Moloney (1951) 84 CLR 91, 94. It does not matter that the agent only has the power to affect the principal’s legal relations in a minor way: Dal Pont GE, The Law of Agency (2001) [4.9].
    6167 A party who is an agent for another may not always be acting in that capacity in its dealings with the principal. Acts by the agent that do not relate to the defined matter are beyond the scope of the agency relationship.
    6168 These elements are relatively uncontroversial. But as will become evident, the nature of an agency relationship takes on considerable importance in relation to Westpac and Lloyds Bank, who are alleged to have been agents for the Australian banks and the Lloyds syndicate banks respectively. It is arguable that Westpac and Lloyds bank were merely ‘conduits’, ‘facilitators’ or ‘administrators’ in the negotiations to refinance the Bell group’s borrowing. On the banks’ argument, Lloyds Bank and Westpac had no authority to affect the other banks’ legal relations with third parties, other than for a very limited purpose (for example, seeking legal advice). Whilst they may have been the banks’ agents for the purpose of obtaining legal advice, they did not have the power to affect the banks’ legal relations with the Bell group in any way. Therefore, in the course of the negotiations with the Bell group, Westpac and Lloyds Bank would not be agents because of the absence of discretion and decision‑making power.
    6169 However, it seems to me intuitively strange that if an agent is granted actual or ostensible authority by another to accept information on its behalf, the principal can avoid the imputation of knowledge acquired by the agent acting in that capacity simply because the agent has no power to affect legal relations. There are some cases that support the view that an agency arrangement can arise where the alleged agent has authority that falls short of the ability to create legal relations between the principal and third parties.
    6170 Dixon J touched on this issue, in obiter comment, in Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41, 48 – 49. His Honour distinguished between persons engaged to act on behalf of another in a representative capacity, and those merely engaged to work for another – the latter being an independent contractor not an agent. Dixon J then said, at 48 ‑ 49:
    But a difficulty arises when the function entrusted is that of representing the person who requests its performance in a transaction with others, so that the very service to be performed consists in standing in his place and assuming to act in his right and not in an independent capacity. In this very case the ‘agent’ has authority to obtain proposals for and on behalf of the appellant; and he has, I have no doubt, authority to accept premiums. When a proposal is made and a premium paid to him, the Company then and there receives them, because it has put him in its place for the purpose. This does not mean that he may conclude a contract of insurance which binds the Company. It may be, and probably is, outside his province to go beyond soliciting and obtaining proposals and receiving premiums; but I think that in performing these services for the Company, he does not act independently, but as a representative of the Company, which accordingly must be considered as itself conducting the negotiation in person. (emphasis added)
    6171 In Permanent Trustee Australia v FAI General Insurance Co Ltd [2001] NSWCA 20; (2001) 50 NSWLR 679, Handley JA made some obiter comments that are relevant in this respect. His Honour discussed the difference between ordinary cases of agency and cases where the agent is an ‘agent to know’. In the latter instance, where the agent is authorised to enter into a transaction in which his own knowledge and abilities are required, material knowledge acquired outside his capacity as agent may also be imputed to the principal. In this context, Handley JA said, at [87]:
    In many of the imputed knowledge cases, the agent concerned had no authority to commit the principal to the transaction in question and was not engaged in negotiating that transaction. The duty, if any, of the agent in what I will call mere notice cases was simply to communicate information to the principal so that it could be acted on by others. It is understandable that in cases of that description the agent would ordinarily have no duty to pass on information received otherwise than in the course of his agency. The situation is quite different where the agent has active duties to perform and has knowledge present to his mind, however, acquired, which is relevant to their performance.
    6172 I am not clear about the nature of the other cases to which Handley JA was referring. The preceding cases discussed by him are not cases in which the ‘agent’ had nothing more than the mere power to receive notice or exchange information. Handley JA appears to suggest that a party can be an agent if they are authorised by another to receive communications on the other party’s behalf. If that is the case, it has to be reconciled with the general principle that an agent is a person who has the ability to affect the principal’s legal relations with third parties.
    6173 It must be asked, then, whether the ability merely to receive and communicate information on behalf of another is enough to constitute a power to affect legal relations with third parties. Although receipt of information may be said to have legal implications (as is evident from the present case), it does not, by itself, demonstrate an ability to create legal relations. Of course, there may be situations in which an ‘agent’ is vested with authority to receive information that does affect legal relations. An example is the authority to receive contractual offers and acceptances. But such examples involve a conferral of authority above and beyond the ability to receive merely factual information, which is all that exists (on the banks’ argument) in the present case.
    6174 The question whether a party who is engaged to pass on information is an agent was considered in Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1. It was held that accountants who were given authority to pass on information, but nothing else, were not agents. Henderson involved a group of solicitors who undertook to act, not in their capacity as solicitors, but as promoters of an investment scheme. It was held that the solicitors were not the agents of the vendors since they acted on behalf of the purchasers in organising the investment. But, more relevantly, an issue of sub‑agency also arose as to whether the accountants, who had been engaged by the solicitors, were agents of the solicitors. The solicitors conveyed information to the accountants, knowing and intending that the accountants would pass that information on to prospective investors. It was held that there was no agency relationship, given the accountants’ lack of ability to affect the legal relations of the solicitors. Nevertheless, the misleading and deceptive information passed on by the accountants was held to be actionable against the solicitors.
    6175 In Cornwall v Rowan [2004] SASC 384; (2004) 90 SASR 269, the Court commented, at 479:
    In Petersen v Moloney (1951) 84 CLR 91, Dixon J, as he then was, referred to agency covering a person who is able, by virtue of the authority conferred upon him, to create or effect legal rights and duties as between another person, who is called his principal, and third parties. A person who has the authority to act on behalf of a principal, either generally or in respect of some particular act or matter, is an agent: see Erikson v Carr (1945) 46 SR (NSW) 9. What is critical to the legal concept of agency is that the agent represents the principal.
    6176 The last sentence, in particular, points to a possible resolution. The authorities often say that the critical element is the ability of the ‘agent’ to create legal relations on behalf of the principal with third parties: see, for example, International Harvester. But equally, many authorities phrase this requirement in a slightly different way: the critical element is the ability of the agent to represent the principal in law. This phraseology is evident in Erikson v Carr (1945) 46 SR (NSW) 9 and Cornwall v Rowan. It is also mentioned in Dal Pont GE, The Law of Agency (2001) [4.9]. This element is consistent with Dixon J’s use of the term ‘representative’ in Colonial Mutual Life and it conforms with the approach Handley JA took in Permanent Trustee v FAI. The two phrases are often used interchangeably, but they are not quite the same. A party who is given authority to receive notice or communications on behalf of another may not have the power to create legal relations with third parties. This party, however, is acting in the capacity of the ‘principal’ by receiving communications from the third party, such that the communication to the ‘agent’ is taken to be communication to the ‘principal’. If such a view is taken, it would avoid the difficulty where a party could be permitted to hold out another as being legally capable of receiving communications on its behalf, then disclaim knowledge of the information received by that party on the basis that the party had no authority to act in a way that would bind it to a third party.
    6177 This problem also arises when looking at whether the banks’ solicitors were agents of the banks. It is often stated as a settled principle that a solicitor is an agent for the client. However, decisions cited as authority for this proposition are, generally speaking, ones in which the client is involved in litigation or in which the solicitor is authorised to carry out the legal aspects of a transaction. In such circumstances, there is an express or implied authority to act on behalf of the client in all matters that may reasonably be expected to arise for decision in the course of the proceedings, subject to those matters in which the client’s consent is specifically required: Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) 26 NSWLR 711, 729 – 730; Sargent v ASL Developments Ltd (1974) 131 CLR 634; Forestview Nominees Pty Ltd v Perron Investments Pty Ltd (1999) 93 FCR 117.
    6178 The position is not as clear when a solicitor is engaged in a purely advisory role. It is difficult to see how a solicitor who is retained to do nothing more than provide an opinion has any power to affect the client’s relations with third parties. In the present case, the solicitors were not acting on behalf of the banks in litigation or anticipated litigation. They did not have express or implied powers to, for example, deal with an opposing party and their lawyers, compromise claims or make decisions about waiving privilege: Spedley Securities. It has been observed that the extent of the lawyer’s authority may be more readily inferred to be of a wider compass in the context of litigious business than in the context of non‑litigious business: CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 23 ABLR 401 (Kirby P).
    6179 A lawyer’s retainer carries with it the implied authority to do all things incidental to the object of the representation: Polkinghorne v Holland (1934) 51 CLR 143. ‘The attorney is the general agent of the client in all matters that may reasonably be expected to arise for decision in this cause’: Prestwich v Poley (1865) 18 CBNS 805, 816; 144 ER 662, 666. But where a solicitor’s role is purely advisory, there are no decisions, in the legal sense, that need to be made. Dal Pont discusses in The Law of Agency, at 196 – 198, the various powers that may be implied in a solicitor’s retainer, including the authority to institute proceedings, the authority to contract, the authority to incur costs and the authority to compromise. But other than the ability to incur costs, all these powers would only arise when the solicitor is acting in a legal dispute, as opposed to a drafting or advisory role. In addition, the authority to incur costs does not of itself carry with it an ability for the lawyer to affect the client’s legal relations. If this were so, most independent contractors would be agents.
    6180 The conflict is evident in Dal Pont GE, Lawyers’ Professional Responsibility, (2nd ed, 2001). The author notes, at 46, that the critical element of agency is that ‘the agent is conferred an authority the exercise of which affects the principal’s legal relations with third parties’. But then, at 49, he comments that ‘the lawyer/client relationship is perhaps the paradigm example of an agency relationship’ and that a lawyer is ‘in a powerful position to affect another’s legal position’. I am not sure how this fits with a situation where a lawyer is merely asked for an opinion.
    6181 I have been unable to find a case in which the knowledge of a solicitor who is merely engaged to provide advice has been attributed to the client. However, it would seem logical that where a solicitor obtains information in the course of advising a client, that knowledge should be imputed to the client. This is so because the solicitor is, in effect, acting as the representative of the client in obtaining that information.
    6182 There are numerous cases in which a solicitor has been engaged to manage the legal aspects of a particular transaction, such as the sale of land, and the courts have been prepared to impute knowledge acquired by the solicitor in the course of facilitating that transaction to the client. It could be said that the present case is not dissimilar. The banks’ solicitors were engaged to manage the legal issues arising from the proposed refinancing transactions. Perhaps the answer is to take a broad view of the phrase ‘affect legal relations’ so that it includes receiving knowledge of facts that would affect a party’s legal ‘situation’. In other words, if knowledge or information is received that would have the effect of making a particular course of action more (or less) legally desirable, it could conceivably be said to fall within the category of affecting a party’s legal relations.
    6183 Rolland v Hart (1871) LR 6 Ch 678 is a case in which the nature of the solicitor’s retainer played a part in the reasoning. Lord Hatherley said at 682:
    The purchaser of an estate has, in ordinary cases, no personal knowledge of the title, but employs a solicitor, and can never be allowed to say that he knew nothing of some prior encumbrance, because he was not told of it by his solicitor. It cannot be left to the possibility or the impossibility of the man who seeks to affect you with notice being able to prove that your solicitor did his duty in communicating to you that which, according to the terms of your employment of him, was the very thing which you have employed him to ascertain.
    6184 Similarly, Stephen J in Sargent v ASL Developments noted, at 649, that where a client authorises his solicitor to carry out a conveyancing transaction on his behalf, he ‘thereby not only authorizes his solicitor to perform all necessary steps but also places the solicitor in the position of acquiring at firsthand knowledge of relevant facts, at the same time depriving himself of the opportunity of acquiring such firsthand knowledge.’ The policy is no different here. Where a solicitor stands in the shoes of the client and holds himself out as being able to receive information on the client’s behalf and does in fact acquire material information in the course of advising a client, the logical consequence would seem to be that the information will be imputed to the client.
    6185 In this litigation, the lawyers were asked to do more than simply give an opinion. They prepared and settled documents and advised on a broad range of issues that arose during the negotiations. I think it is appropriate to take an expansive approach to questions of knowledge and agency as between solicitor and client in the circumstances in which the banks and their legal advisers found themselves in 1989 and 1990.
    30.2.4. Attribution of the knowledge of agents to principals
    6186 The general principles that explain the circumstances in which the knowledge held by an agent may be imputed to the principal are well settled.
    6187 A principal will only be fixed with knowledge held by the agent if the agent acquires knowledge of something material to the transaction for which he is responsible whilst acting in the course of, and within the scope of, his authority. Further, the circumstances must be such that there is a duty on the agent to communicate that information to the principal. In such circumstances, the principal will be deemed to have constructive knowledge from the time when the principal would have received the information had the agent acted with due diligence: see Wyllie v Pollen (1863) 3 De G J & S 596, 601; El Ajou (703 – 704); Sargent v ASL Developments Ltd (1974) 131 CLR 634.
    6188 As the banks put it in their closing submissions, the court must determine three things. First, the precise parameters or scope of the agent’s authority, both substantively and temporally. Secondly, whether the knowledge in issue was obtained in the course of that authority. Thirdly, whether the knowledge is relevant to the authority. Evidently, a party who acts as agent for another will not always act in that capacity. It will be necessary to look at any contractual terms and any implied terms based on the nature and history of the agency relationship to determine whether the ‘agent’ was acting in that capacity when he or she acquired the relevant knowledge. The court must also enquire whether there was a duty to communicate the information. This may be found as a term of the agency agreement; otherwise, it may be inferred from the relevance and proximity of the information to the agent’s scope of authority. There is a duty to communicate every material fact acquired in the course of the business in which the agent is engaged to the principal: Blackburn, Low & Co v Vigors (1887) 12 App Cas 531.
    6189 Where an agent has actual or apparent authority to receive formal notification from a third party, notification to the agent within the scope of that actual or apparent authority will effectively bind the principal regardless of whether the principal actually receives the information: Bowstead & Reynolds on Agency, [8-204]; El Ajou (703) (Hoffman LJ). The situation is different where the third party knows that the information will not be passed on to the principal.
    6190 There are exceptions to the general rules of imputation that increase the burden on the principal. These exceptions are described in Bowstead & Reynolds on Agency as follows:
    Where an agent is authorised to enter into a transaction in which his own knowledge is material, knowledge which he acquired outside his capacity as agent may also be imputed to the principal.
    Where the principal has a duty to investigate and make disclosure, he may have imputed to him not only facts which he knows but also material facts of which he might expect to have been told by his agents; unless the agent was defrauding the principal in such a way as to make certain that he would not disclose the facts to the principal. (footnotes omitted)
    6191 The plaintiffs do not rely on either of these exceptions (‘agent to know’ or ‘agent to investigate’) in their agency case. As a result, I do not need to consider the law in this area.
    6192 Conversely, there are times when imputation will not occur. One example is an agent acting in fraud of the principal: Aequitas v Sparad No 100 Ltd (1062).
    6193 The banks contend that the plaintiffs are seeking to impute not only facts held by the banks’ agents but conclusions, beliefs and suspicions arising in the minds of the agents from those facts. They say that generally only raw facts can be imputed. They rely on Vaughan v Byron Shire Council [1999] NSWCA 235, a case where a solicitor acquired a sewerage plan in the course of acting for his clients (the plaintiffs). The plaintiffs sought to rely on the property boundaries as set out in the sewerage plan as part of an estoppel defence to an encroachment action. It was held that the solicitor ought to have known that the sewerage plan should not have been relied on for such a purpose (and he would have been negligent if he did). However, this opinion was not brought home to the principal via the agency arrangement. Handley JA said, at 326:
    Knowledge of facts obtained by a solicitor in the course of acting for a client in a conveyancing transaction is imputed to the client (Sargent v ASL Developments Ltd (1974) 131 CLR 634, 649 per Stephen J), but it is not clear that knowledge of the significance of those facts will be imputed in the same way … the knowledge that an agent ought to have but does not is not imputed to his principal although it may constitute constructive notice for some purposes.
    6194 This case would seem to be limited to situations involving knowledge that an agent ought to have, but does not. Agents are often engaged for their particular abilities and experience to act for the principal in matters in which the principal has a lesser ability. In such a situation, it may well be within the scope of the agent’s authority to form and communicate any opinions, beliefs or suspicions arising from facts which may come into the agent’s possession. This would depend on the nature of the agency arrangement. But it seems to me that where the principal is expressly or impliedly reliant on the judgment and skill of the agent, the principal can be fixed with the expert comprehension of the agent regardless of whether the agent actually expressed those views. For example, if a solicitor, acting in the course of his retainer, forms a view that a certain act is unlawful or has a particular legal consequence, that knowledge, opinion or belief could be imputed to the client because it is the precise material that the solicitor is duty‑bound to communicate to the client.
    30.2.5. Abstention from enquiry
    6195 The plaintiffs allege that the banks knew of the financial position of certain Bell participants pleaded in 8ASC par 20A to par 29B and par 33B. Alternatively, they plead that the banks knew those Bell participants were in such a financial position because of a ‘calculated abstention from inquiry’: 8ASC par 58. The plaintiffs also plead that the banks ‘refrained from seeking any or any adequate information’ about a number of things; including the current financial position of the Bell participants, the position of the Bell participants’ shareholders, creditors and future creditors, and the effect of the Transactions and Scheme on them: 8ASC par 59TA.
    6196 This raises, once again, the difficulties associated with the plaintiffs’ disavowal of conscious wrongdoing. In Bell (No 5), I dealt with the relevant pleadings and concluded that they were not a sufficient basis from which the plaintiffs could mount a case of actual dishonesty on the part of the banks. However, I did not deal with the issue of whether the allegation of ‘calculated abstention from inquiry’ can still be maintained in light of this finding.
    6197 It is necessary to have regard to the plaintiffs’ particulars. PP 58(a) and (c) list the enquiries the plaintiffs say should have been made, in light of the circumstances set out in PP 58(b). PP 58(e) says that these enquiries would have been made by honest and reasonable persons in the position of the banks who did not already have the information which such enquiries would have yielded or who did not already know or believe that the financial position of the Bell Participants was as pleaded in 8ASC 20A – 33B. In PP 58(f) the plaintiffs allege that it is to be inferred that the banks abstained from such enquiries because they believed or suspected that the Bell Participants were in the aforementioned financial position. The allegation in 8ASC 59TA, that the banks refrained from seeking any or any adequate information, is particularised in a similar way.
    6198 The banks included in their closing submissions a useful summary of cases in which the phrase wilful blindness has been explained. They include: a ‘deliberate decision not to confirm the facts’ (Twinsectra); ‘contrived ignorance’ (Twinsectra); a ‘concealment, deliberately and by a pretence’ from oneself (Macquarie); ‘designed or calculated’ ignorance (Macquarie); a ‘conscious decision’ not to make enquiries (Barlow Clowes International); and ‘a conscious decision upon facts known to the actor’ (Midalco Pty Ltd v Rabenalt [1989] VR 461).
    6199 The language of the plaintiffs’ pleading is not dissimilar to that set out in the previous paragraph. As such it might be a proper basis from which to launch a case of wilful blindness. The plea of a calculated abstention from enquiry has been part of the plaintiffs’ case for a long time. It was introduced by amendment in the fourth amended statement of claim dated 15 August 1997. In other words, it was there during the interlocutory skirmishes in the Federal Court and, indeed, was part of the plaintiffs’ case at the time the matter was due to go to trial in 1999. It was not added in the substantive amendments that were the subject of the hearing before me in October 2000, although there were some changes to the form of the plea and the particulars in support.
    6200 As explained in Bell (No 5), I formed the view that the pleading of ‘calculated abstention from inquiry’, in the context of the overall pleadings and the way the case had been conducted, cannot be used as a platform from which to pursue a case of conscious wrongdoing on the part of the banks. But as Lord Nicholls said in Royal Brunei, an honest person does not ‘deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless’. This proposition was also accepted in Twinsectra and in Lego Australia Pty Ltd v Paraggio (1993) 44 FCR 151. It raises the question what, if any, role ‘calculated abstention from inquiry’ can play in a case that does not involve such allegations. I believe that it can and should have a role. I am aware that I have to tread carefully in this area. I have to allow the plaintiffs to advance the case that they have pleaded and particularised. But at the same time I cannot allow the ‘calculated abstention for inquiry plea’ to be a ‘back door’ mechanism for a case that, in reality, amounts to conscious wrongdoing. I need to explain my reasoning in a little more detail.
    6201 Royal Brunei and the other cases mentioned demonstrate that fraud or dishonesty may easily be inferred where there has been a deliberate abstention from enquiry. This is a different point: drawing conclusions of fraud from the evidence (where a finding of fraud is open on the pleadings) is not the same as pleading the fraud in the first place. As explained in Bell (No 5), fraud must be pleaded clearly and specifically and will not be inferred from the pleadings. The plaintiffs have not pleaded which bank officer or officers were dishonest in an actionable sense. I also commented in Bell (No 5) [77]:
    The plaintiffs’ case on knowledge has not been disturbed because all of pars 50 to 59U and their accompanying particulars remain in place. They have not been struck out. They must mean something. But they will be construed by me in accordance with these conclusions and applied accordingly. Some very fine distinctions will no doubt be made as to the meaning of parts of the pleading in the context of a case that is largely objective in nature.
    6202 I am not faced with one of these fine distinctions. I have said that I will not make any findings of dishonesty against a bank or a bank officer. But it is still necessary to define the scope of the plaintiffs’ pleading of calculated abstention from enquiry. I return to the Baden categories of knowledge. The authorities that I have mentioned seem to suggest that the second category, ‘wilfully shutting one’s eyes to the obvious’, will often involve dishonesty. But is it necessarily so? I think the same question can be posed in relation to the third category: ‘wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make’. The phrase ‘wilful and reckless’ is a strange one. The ‘and’ appears to indicate that it should be read conjunctively, but it is difficult to see how something can be both wilful and reckless. As was said in R v Nuri [1990] VR 641, reckless conduct occurs when a person can foresee some probable or possible harmful consequence but nevertheless decides to continue with those actions with an indifference to, or disregard of, the consequences. Similarly, the court commented in R v Stones [1956] SR (NSW) 25, 34:
    If [the accused] applied his mind to the consequences and without concluding that they would happen (which is criminal intent) his state of mind was that he did not care whether they happened or not, that is recklessness.
    6203 I think the third category of knowledge (and perhaps also the second) is meant to apply in cases where there has been a complete and aloof disregard of the state of affairs or consequences. Although such behaviour may well be considered dishonest, it does not necessarily follow from such an allegation that the behaviour must be categorised as dishonest. Thus, the plaintiffs would be entitled to allege a reckless (but not dishonest) failure to make enquiries that an honest and reasonable person would have made in the circumstances. They would thus be able to mount a case involving knowledge for the purposes of the first limb Barnes v Addy claim and other causes of action that do not depend on a finding of actual dishonesty.
    6204 There is some support for this approach in the reasons of Tadgell JA (with whom Winneke P agreed) in Macquarie. Ashley AJA dissented, but expressed similar views to Tadgell JA on this point. The trial judge had found that the appellant had been careless and reckless and guilty of wilful blindness in different aspects of its behaviour. But he went on to conclude that there was no dishonesty. It seemed to puzzle Tadgell JA that, given the finding of wilful blindness, the trial judge had not found the appellant to be dishonest. His Honour explained the trial judge’s decision on the basis that the wilful blindness may not have been a substantial reason for the appellant’s ignorance. He said, at 144, that if the ‘wilful blindness of the appellant was a substantial reason for its ignorance … it is difficult to see why a conclusion should not have been drawn that that the registration was referable to fraud’. More importantly, Tadgell JA considered whether the carelessness and recklessness of the appellant could amount to dishonesty. His Honour commented that a ‘negligently‑made false representation, if made with reckless indifference to its truth or falsity, may very well be fraudulent’. He then moved to the facts of the case and concluded that to lodge a mortgage for registration in ignorance of a forgery where the ignorance was only attributable to wilful blindness or wilful and reckless failure to enquire, would be fraud ‘or akin to it’.
    6205 It seems to follow that being reckless to the consequences of an act or omission may be fraudulent, but not necessarily so. The plaintiffs’ primary allegation in this aspect of the case is that the banks intended to proceed with the Transactions regardless of the financial situation of the Bell group companies. They were moving to improve their position because they felt they would be no worse off. As a result, it was of no real consequence to them at the time whether the Bell companies were insolvent because it would not change their course of action. To make out those allegations, it is open to the plaintiffs to argue that the banks were recklessly indifferent to the financial condition of the companies. On that basis, they failed to make enquiries which honest and reasonable persons would have made. In some circumstances, such behaviour might be characterised as dishonest. But that is not this case and I do not have to go down that path. Indeed, in accordance with what I said on many occasions during the hearing, I cannot do so.
    6206 I do not see any similar difficulties in relation to the fourth category mentioned in Baden: knowledge of circumstances which would indicate facts to an honest and reasonable person. Knowledge of this sort does not carry with it the spectre of conscious wrongdoing.
    6207 As I mentioned in Sect 21.2.4, relying on what Anderson J said in Hancock Family Memorial Foundation, knowledge in any of the first four categories mentioned in Baden will suffice in a second limb Barnes v Addy claim. The fifth category, knowledge of circumstances that would put an honest and reasonable person on enquiry, is outside the bounds of the current jurisprudence. There are some things that I think the banks actually knew. Leaving those things to one side, as a practical matter I will be concentrating on the third and fourth categories or an amalgam of the two, although I would not rule out entirely reliance on the second species of knowledge.
    30.3. The relevant lawyers
    6208 I should repeat the warning I gave in Sect 25.5. In this section I will have a lot to say about what the lawyers did and what they knew. This is an essential part of understanding what the banks did and what the banks knew. But I would not want it to be thought that I have formed the view that any of the lawyers contravened professional standards or behaved inappropriately. That is not part of the case, it is not what I have found and nor is it what I think. In the normal course of legal practice lawyers act on instructions and I have no reason to doubt that they were doing so throughout these negotiations. The banks are the defendants and it is there that responsibility lies.
    30.3.1. Parker & Parker
    6209 P&P had acted for Westpac for many years. Dudley Stow had been a partner of P&P since 1972 and in 1989 was the relationship partner for the firm’s association with Westpac and was the partner in charge of the Bell group matter. His first meeting with representatives of Westpac in relation to the refinancing of its loan to the Bell group was in late August 1989 or early September 1989 when he met with Weir and Browning of Westpac. The first meeting was preliminary in nature and no advice was sought or given. He had a number of other discussions concerning the indebtedness of the Bell group over the remainder of 1989. He was heavily involved in the events of the ‘panic weekend’ of 9 and 10 December 1989. On 8 January 1990, Stow suffered a serious illness and took no further part in events.
    6210 Steven Paterniti was an employee of P&P from 1983 and a partner of the firm from 1 July 1989. Between September 1989 and October 1989, he was involved in giving advice to the Australian banks in connection with certain of the Transactions, although Stow had overall responsibility for the matter at that time. During that period Paterniti gave consideration to the insolvency issues raised by the proposed refinancing and discussed them with Stow, officers of Westpac and Lloyds Bank and solicitors from A&O and MSJL. Paterniti prepared the first draft of the instructions to Hayne QC and Burnside for an opinion and attended the conference with counsel. Other banks and lawyers made comments on the draft before it was finally settled by Collinson (MSJA, Melbourne).
    6211 Rosemary Peek joined P&P in 1983. She was appointed a senior associate on 1 January 1987 and became a partner on 1 July 1988. From the time of her admission as a solicitor until June 1995, she was involved in the banking and finance section of the firm. Peek was not involved in the appointment of P&P by Westpac to act in relation to the restructuring of the loan facilities between the Bell group and the banks but had been carrying out work on Westpac matters since 1985. In 1989, Stow was the partner in charge of Westpac assignments but as they were in the same section, Peek saw Stow daily and discussed with him new instructions and the matters on which they were working. Stow asked Peek to assist him in undertaking the work required for the restructuring.
    6212 Prior to 8 January 1990, Peek was responsible for drafting the security documents and, in relation to these tasks, reported to Stow. On matters that concerned the drafting of securities, she had direct contact with Browning. She also went to some meetings that Stow had with Weir and Browning. From 8 January 1990, following Stow’s illness, Peek became the partner in charge of the matter. After that time she was involved in finalising the drafting of the facility agreements and subordination deed.
    6213 Tony Parker, a solicitor in the firm, took over the task of completing the security documents in order to enable Peek to concentrate on finalising the drafting of the other documents. Geoffrey Stevens and Russell Wright, solicitors in the firm, were also involved in the restructuring in late 1989 and during January 1990, undertaking such tasks as checking the extracts from the minutes of meetings of the relevant Bell group companies in relation to compliance with the condition precedent.
    6214 Stow and Peek both gave evidence during the hearing but the other solicitors were not called. Paterniti passed away during the trial.
    30.3.2. Allen & Overy
    6215 From May 1989 until 1994, Damian Perry was a solicitor employed by A&O. He was the A&O lawyer most closely involved with these events and the only person from that firm called to give evidence. Perry was an Australian solicitor who had worked for Mallesons and Freehills in Melbourne from 1986 until he left for London in May 1989. In Australia he had been involved in corporate law rather than finance.
    6216 At the request of Tony Humphrey, an A&O partner, Perry became involved in the Lloyds syndicate and Bell group matter shortly after he arrived in London, presumably because of the Australian connection. Thereafter, the responsible partner seems to have been Jonathon Horsfall Turner.
    6217 Perry was in Perth from 3 to 16 December 1989 and was heavily involved in the events of the ‘panic weekend’. He drafted some of the A&O opinions that were distributed from time to time and co-authored the joint A&O and MSJL memoranda.
    30.3.3. Mallesons Stephen Jaques
    6218 When MSJL initiated a file in relation to the Bell facility in 1989 it was opened showing A&O as the client, cross referenced to LMBL (later Lloyds Bank). MSJL only practised Australian law. MSJL was instructed to act as Australian adviser to the Lloyds syndicate banks generally on Australian issues and in relation to the securities to be granted by the Bell group.
    6219 From February 1989, Sally Ascroft was an associate in the London office. She had been a solicitor at MSJA Sydney since 1985, practising in the area of banking and finance. Ascroft first became involved in the transaction in about September 1989 at the request of Richard Ladbury, the partner in charge.
    6220 Ladbury had been a partner of MSJA Melbourne since 1974. In September 1987 he commenced working in the London office principally undertaking banking, finance and corporate work. Ladbury was the partner with overall responsibility for the transaction.
    6221 Robert Cole was admitted as an Australian solicitor in 1985 and worked at the MSJA predecessor in business in Perth. In March 1988 he was transferred to the London office as a commercial and corporate solicitor. In mid‑September 1989 he was introduced to the Bell group transaction by Ladbury. Cole worked principally on the corporate and insolvency related issues arising in the transaction. Cole and Ascroft assisted Ladbury in the carrying out of the transaction. When Ladbury was unavailable, Peter Willis, another partner of MSJL at that time, supervised the matter.
    6222 Peter Collinson was a partner in the insolvency section of MSJA, Melbourne. He had various discussions with Cole and others about the Bell group matter. He prepared the final version of the brief to Hayne QC and Burnside and attended the conference with counsel.
    6223 Ladbury, Cole and Ascroft all gave evidence at the hearing.
    30.4. Public information
    6224 I wish to deal first with three sources of information available to the banks; namely, ratings reports, stock exchange announcements and press coverage. All of this information was in the public domain.
    6225 For most of the banks, there is evidence that they routinely monitored the financial press and (or) ratings reports. Many of the banks looked specifically for articles relating to their key customers. Almost all of the banks utilised a press cutting service. In relation to some banks (such as Kredietbank) there is no evidence of such practices but the evidence of the other banks indicates that it was common industry practice to keep up to date with publicly available information. In such cases I would infer that all of the banks were broadly informed of the general picture reflected in the reports. It probably does not matter greatly because I think the documentary evidence actually held by each bank is a sufficient basis from which to assess the level of knowledge they possessed from these sources. Evidence about publicly available information primarily works to reinforce other conclusions. Generally speaking, I have not relied on it as a basis from which to draw fresh conclusions.
    6226 One of the many notable series of events in the life and times of the BCHL group is that surrounding the ill‑fated attempt to take over Lonrho plc. I need to describe the Lonrho saga because it was a means by which a great deal of information concerning BCHL came to be in the public domain. Lonrho had its origins in the mining industry in Rhodesia but during the 1970s it expanded into a conglomerate, dealing in newspapers, hotels, distribution, and textiles (among other things). The managing director and chief executive of Lonrho was the late Roland ‘Tiny’ Rowland, at the time a formidable figure in English business circles. In 1988, BCHL acquired a shareholding in Lonrho and launched a takeover bid. Rowland took umbrage at the BCHL bid and decided to fight it in the courts and in the financial press. The opposition to the bid was successful and BCHL was forced to retreat, licking its (not inconsiderable) wounds. The 1989 financial statements for BCHL contained a provision for a loss of $132.4 million on the Lonrho shares.
    6227 Between November 1988 and June 1989, as part of the tactical manoeuvrings, Lonrho issued five reports containing a detailed financial analysis of the Bond group. These reports were widely reported in the financial press (‘The Lonrho reports’). In a covering letter to the second report (December 1988), Lonrho said that it had received ‘over 800 telephone requests from banks, institutions and financial analysts’ concerning the document. At the beginning of the first report (November 1988), Lonrho summarised the financial position and said: ‘[the] Bond group of companies are technically insolvent, the commercial existence of which is through extraordinary bank support’. In the fifth report (June 1989), Lonrho said: ‘the financial position of the Bond group of companies has deteriorated further from the already technically insolvent position’.
    6228 I will make mention of knowledge of the Lonrho report when describing the practices of each of the banks.
    6229 In Sect 23.3, I described the activities of ratings agencies and the preparation of ratings reports. In his witness statement, Duncan Andrews, a principal of Australian Ratings, said that all the major Australian banks were clients of his firm, as were some European banks and most of the international merchant banks operating in Australia. The banks admitted that Westpac, HKBA, NAB, DG Bank and Lloyds were subscribers. I accept from Andrews’ statement that CBA, NAB, SocGen and SCBAL were also subscribers.
    6230 Latimer (CBA) acknowledged in cross‑examination that he had known about the Australian Ratings’ reports in the ordinary course of his banking duties. SocGen discovered the April 1989 Australian Ratings’ report downgrading BCHL, TBGL and BRL to ‘CCC’. SCBAL discovered the Rating Memorandum for TBGL from March 1989 at ‘B’. It is likely they received the subsequent downgrading report. Hebb (Crédit Lyonnais) noted the drop in the April 1989 ratings of Bell in his internal assessment note of 16 June 1989 based on the problems associated with BRL and Bond group.
    6231 The plaintiffs prepared a document in which they listed all newspaper articles dated in 1988 and 1989 that had been discovered in the files of the various defendant banks. There is another document that describes a number of tender lists which, in turn, include (among other things) newspaper articles from 1990. I have included as Schedule 38.17 an analysis of the number of newspaper articles in the 1988 and 1989 collection in the files of each bank. This exercise is quantitative rather than qualitative but in the light of the numbers, there is a compelling case that a wealth of information of this type was available to the banks. I do not pretend to have read all of the articles. Indeed, I read very few of them. I will recite a couple of examples to give an idea of the content of relevant articles that appeared in the press towards the end of 1989. Having done that I will describe the practices (in relation to material of this type) adopted by each bank.
    6232 On 15 November 1989, there was a lot of press coverage of the release of the BCHL annual report. All of the reports placed emphasis on the auditor’s qualification of the accounts and the doubts as to whether BCHL could continue as a going concern. The report in The Australian contained the headline ‘Bond flagship in trouble’. The headline in the Sydney Morning Herald was ‘Auditors deal a severe blow to Bond Corp’. The article contained a table setting out the financial details and the deterioration since 30 June 1988. The Financial Times reported under a headline ‘Bond Corporation debt set at A$8.2bn in qualified accounts’.
    6233 On 4 December 1989, the financial press in Australia had a field day on the misfortunes of the BCHL group. The following is a selection of some only of the articles:
    (a) Australian Financial Review (AFR): ‘Bond’s final round – wind up action gets under way’; (reporting SGIC’s intention to commence wind up proceedings against BCHL over an indemnity agreement relating to SGIC’s shareholding in TBGL);
    (b) AFR: ‘Bonds triumphs and troubles – Bond under the hammer’;
    (c) AFR: ‘Spalvin’s Bell move may win control of brewery assets’; (reporting the Adsteam attempt to oust the board of BRL and replace them with new directors);
    (d) Sydney Morning Herald: ‘A receiver looms for Bond Brewing’ (reporting that BBHL had missed an interest payment due to the banks); and
    (e) The Age: ‘NCSC turns up the heat with new demands for information’; (concerning the brewery transaction).
    6234 The article in (b) above may still be of interest to students of corporate and commercial history. It is a long piece, described by the author as a ‘chronology of Bond’s enormously fertile career [focussing] only on the highlights of what has been a two‑decade roller‑coaster ride’. The author invites the reader ‘to read and be awed – the next person with this appetite for deals may be a long time coming’. The chronology covers the period 1956 to 1 December 1989.
    6235 CBA discovered relatively few newspaper articles in the period under consideration. But it is plain from the evidence of CBA’s officers that they read the financial press on a regular basis as part of their usual practice. The senior managers responsible for the Bell group account in late 1989 – Dennis and Smith – both said they read the financial press regularly to keep abreast of developments in relation to Bond. Dennis said that he always read the financial press, especially the AFR, which he regarded as the journal of choice at CBA.
    6236 Smith said that he kept up to date with the AFR and The Australian and was aware of the speculation surrounding the Bond group. He said that he was aware of the very real danger of a collapse of the Bond group in late 1989 or early 1990. Poulter’s evidence was similar to that of Dennis. Latimer appears to have taken a slightly different approach. He said there would have been ‘no benefit to the bank in terms of what the bank was trying to achieve’ at that time by any analysis of the Bell group’s figures. Nevertheless, he acknowledged ‘flicking through’ the AFR. Poulter said he did not recall the Lonrho reports but had a vague recollection of reading an article about the ‘stoush’ between Bond and Rowland.
    6237 HKBA discovered some newspaper articles from the relevant period. Davis could not recall a system of collecting newspaper articles with HKBA in 1989. Nevertheless, I believe that, as an Australian bank with interests in both the Bell group and the Bond group (via its participation in the BBHL syndicate), at least some of the key HKBA officers such as Davis would have read or been exposed to the broad tenor of coverage about Bell and Bond in the Australian financial press.
    6238 Geoff Farr, who was a Senior Manager of Credit in Western Australia, said in cross‑examination that he took into account the view of Australian credit ratings from time to time, not only in 1986, but through to 1990. He conceded that if Australian Ratings said there was a risk of default, or a default had already possibly occurred with an account, he would take that as a good guide. In any event, because HKBA’s close relationship with the Bond group, it either possessed or had access to a wealth of material concerning the companies.
    6239 Davis acknowledged that HKBA had received copies of the Lonrho reports. He said that these reports, and other media reports, were leaving a negative impression of the Bond group for both investors and lenders.
    6240 NAB discovered numerous newspaper articles – which is not surprising since they were the lead bank in the BBHL syndicate and were following developments closely. NAB apparently utilised the press cutting services of NJP News Express during the relevant period to monitor press articles relating to BCHL and BRL. From the volume of information they collected, it can be inferred that they were regularly reading and collecting material from the media which might be pertinent to their interests in the Bond and Bell groups. Interestingly, there is an internal memorandum referring to an article in the AFR reporting on the down‑grading of a credit rating. In the memorandum the down‑grading is advanced as part of the reasoning process for the recommendation then made. The nature of the recommendation is not relevant for present purposes.
    6241 NAB received, at the very least, an extract from one of the Lonrho reports, probably the fifth report issued in June 1989.
    6242 SocGen, too, discovered many relevant newspaper articles. Edward’s evidence was that he regularly read the financial press as a matter of practice, including the AFR most days, as well as following the stock market. It can be inferred from this practice that he was aware of the ASX announcements that related to the Bell group in the relevant period. He said he was aware of press reports relating to the publication of the BCHL 1989 accounts, the details of the brewery transactions and the Maxwell proposal to acquire an interest in WAN. Edward occasionally mentioned newspaper articles in his reports to superior officers. Purves said he read the AFR daily and the business pages of The Australian ‘often’.
    6243 Edward recollected that a campaign was conducted by Lonrho and that Lonrho released a series of reports which were highly critical of the accounting methods used by BCHL and which suggested that BCHL was in dire financial circumstances. He also acknowledged that those reports generated a lot of publicity in the financial press.
    6244 The documents discovered by SCBAL also demonstrate a practice of reading relevant material in the financial press. Walsh said he regularly read the AFR as a matter of practice and would have been familiar from the press with major developments in relation to TBGL, BRL and BCHL. There is no direct evidence linking SCBAL to knowledge of the Lonrho reports.
    6245 Westpac collected a large body of newspaper articles during the relevant period, including material on BRL and BCHL. They utilised the press cutting services of NJP News Express. Weir testified that he read and paid attention to the financial press, including the AFR, The West Australian and The Australian. He acknowledged being aware that BCHL was in a tight financial position in March 1989 by reason of the media reports and was aware of press reporting in relation to the BBHL receivership application. Cutler said that ‘it was the practice of the [Bell] group to provide the Bank with any announcements through the stock exchange’. He also said that he would regularly speak to Cahill of TBGL and receive exchange announcements. Stutchbury and Weir testified that the Australian Ratings reports were important sources of information. The bank placed some reliance on them as an independent assessment of a company.
    6246 Weir said he was aware of the Lonrho reports, although he regarded them as vindictive documents issued by a takeover target. Westpac received a letter from Oates dated 29 June 1989 about the Lonrho report. The text suggests it might have been a pro forma communication sent to all of the banks. There is direct evidence it was received by Westpac, SocGen and NAB.
    6247 Lloyds Bank produced a number of newspaper articles from the relevant period. They utilised the press cutting services of McCarthy Information Ltd in the United Kingdom during the relevant period to monitor the Australian and international financial press. Evans (of Lloyds Bank in London) had asked his colleague Hanley in Sydney to supply them with any media reports which dealt with the Bell or Bond groups. Hanley sent a number of articles or press releases to Lloyds. One example is a Reuters article relating to the appointment of receivers to BBHL, which Hanley sent to Armstrong on 29 December 1989.
    6248 Tinsley said that he would read the Financial Times in order to keep up to date with the Lloyds’s borrowers and would keep relevant articles. Latham acknowledged that he understood in mid‑1989 that BCHL was in financial difficulty. This understanding was based on press reports. Latham said that he relied on the financial press for information about the brewery sale and that ‘it was very difficult to form a clear picture as to what was happening’. He was aware of ‘significant press comment about the possible collapse of BCHL’ but he only knew what he read in the press and ‘did not know whether that was accurate’. There is evidence that Latham placed some reliance on the press articles because he sought comment from the Bell group after reading certain articles which raised concerns.
    6249 Armstrong declined to agree that the press was a tool of the trade for him as a banker. He said that such an expression was ‘a very broad statement’; sections of the press might write many different things and that Lloyds Bank ‘may or may not take account of them’. Armstrong gave evidence that Australian Ratings was not a major rating agency and he did not recall what significance their views were given. Latham felt that the Lloyds syndicate banks had a better knowledge of the Bell and Bond groups than that available to the ratings agency. I generally accept this evidence, although there was some interest by Evans in obtaining the ratings report.
    6250 Banco Espírito, BfG, Gentra and Dresdner all discovered a number of newspaper articles from the relevant period. For Banco Espírito, Brodie, general manager of the London office, confirmed that it was the practice of Banco Espírito to keep newspaper articles dealing with significant events affecting the Bell group. Brodie accepted that matters such as Bond group losing control of the BRL board might well have come to his attention – indeed, he might well have read it himself in the newspapers. Brodie agreed that a change in control of a company which was supplying a significant stream of income to TBGL would be a significant matter.
    6251 BfG had a similar practice to Banco Espírito. Hagemann said that he would read newspaper articles regularly, for example, The Times. Wright said that he would read The Financial Times and The Times for articles relating to borrowers. If he saw such articles, he would cut them out or copy them and place them on the file. Laubrecht said that press cuttings were filed in the London branch and were also filed in the syndicated loans department in Frankfurt. Mauersberg said that his concerns about the financial position of BCHL in September 1989 were based ‘primarily upon financial press reports at the time’.
    6252 I am not aware of any evidence that links either Banco Espírito or BfG to possession of, or any particular knowledge of the contents of, the Lonrho reports.
    6253 Jessett, an accounts officer in the London branch of Dresdner, said it was a practice within the bank to note up and circulate relevant articles from the financial press. He himself did not read The Financial Times, but he was a relatively junior officer. I infer from the articles discovered that more senior officers would have read and relied on such articles. Jessett also stated that stock exchange statements and negative pledge reports were ‘not looked at when considering restructuring’. Mick testified that he was aware that Bond was having a battle with Lonrho and that Lonrho had published reports saying the BCHL group was insolvent.
    6254 Jenkins acknowledged that press articles formed the basis for analysis by Gentra of the circumstances of BCHL and the Bell group in mid 1989. The minutes of Gentra’s banking committee meeting dated 19 April 1989 referred to the matter of adverse press coverage for the Bond group. Jenkins recalled perusing the Lonrho report in 1989 and that it was scathing of the Bond group.
    6255 Farstad, managing director, London branch, said that he had ‘some respect for’ the Financial Times as a newspaper. Farstad also said he was aware of the Lonrho reports, which contained detailed financial analysis of the financial position of the Bond group. The bank was provided with copies of those Lonrho reports but he did not look at them. However, he knew that they were very critical of the financial standing of the Bond group and that there was a great deal of publicity about it in the British financial press.
    6256 In July 1989 senior management of Gentra asked Harris to provide a report on the Bell group because of its exposure to the BCHL group. In cross‑examination he acknowledged that receipt of the Lonrho report had been the catalyst for his report.
    6257 BoS discovered few relevant articles. Moorhouse gave evidence that he read the Financial Times business section on a regular basis. He said that he was aware of the suspension of the BRL shares and of the cessation of Lion Nathan joint venture. In cross‑examination, Moorhouse was asked to agree with the proposition that in January 1990, based on the newspaper articles he had shown, he must have had a concern about BRL’s financial position. He gave only qualified assent to that proposition: ‘Here and now and reading these papers again as you presented them to me, I can understand that maybe there should have been some concern, but to what extent?’ He was aware that there was a substantial loan from BRL to BCHL and understood, at the time, it was to be a deposit for the purchase of BBHL assets.
    6258 Smith said that he followed the Bell group file closely in January 1990 and was reading The Financial Times. He accepted that articles concerning the appointment of the receivers to BBHL and those concerning BRL’s involvement in the BBHL receivership litigation were the kind of reports he may have read. He accepted it was likely he became aware of the BBHL receivership and the suspension of the BRL shares at the time.
    6259 BoS discovered a copy of the first Lonrho report. A number of officers (including Smith and Moorhouse) placed their initials on the front page. This suggests they read it. Smith acknowledged he did. Moorhouse said he had no recollection of the reports.
    6260 Crédit Agricole appears to have had a thorough practice of monitoring and reading the financial press. They utilised the press cutting services of McCarthy Information Ltd in the United Kingdom during the relevant period to monitor the Australian and international financial press for articles relating to BCHL. De Rohan said:
    I regularly checked the press for any articles on the Bell Group. After the Bond Group takeover of the Bell Group I checked the Bank’s on‑line press service most days for press reports. The events taking place in Australia seemed a long way away from the London branch and I was keen to obtain current information so that we could continue to assess our position in relation to the Bell Facility.
    6261 Crédit Agricole was the first bank to bring a number of matters to Lloyds Bank’s attention, including the downgrading of the ratings for TBGL, BCHL and BRL and the suspension in trading of BRL shares (discussed in more detail later). Rex said that he could recall ‘a constant stream’ of adverse press comment concerning the Bond group. In cross‑examination, de Rohan did not demur from the proposition that she received the Lonrho reports and passed them on to other members of the bank. She was generally aware of the Bond group’s worsening financial position throughout 1989.
    6262 Crédit Lyonnais produced a number of relevant articles from its files. In the section on BRL, I note several examples where Crédit Lyonnais brought matters to the attention of Lloyds Bank, primarily by press announcements about the Bond group and BRL. Hebb said that the Australian branch of Crédit Lyonnais monitored developments in Australia, including the press. He could recall no formal procedure but information would be passed to the London Branch from time to time.
    6263 The London branch reviewed The Financial Times for any reports on the Bell group and placed them on the file. Hebb used these reports as an additional source of information to that provided by the Bell group, as did McGahan. Ramanoel also regarded The Financial Times as a good source of information. Hebb testified that when he prepared the 24 October 1989 credit application for the TBGL facility, he did not have the audited accounts for the year ending June 1989 available and accordingly, based on his ‘usual practice’, relied on ‘information available at the time, including stock exchange reports and negative pledge reports’.
    6264 Creditanstalt discovered very few newspaper articles and none in the relevant period. But the evidence, particularly that of Crocker, shows that they were still following the financial press. Crocker read the financial press including the Financial Times and the AFR. He was aware of press comment about the loans from BRL to BCHL, the brewery transaction and the adverse speculation about the health and credibility of BCHL. He said that he would have seen the bundle of press searches conducted by Creditanstalt’s London department dated 30 November 1989. This search had produced articles from a number of newspapers and financial journals published in various parts of the World. Crocker also asked Lloyds Bank to make enquiries following an article from the International Herald Tribune on 2 January 1990. The article was entitled ‘Bond Corp Set to Fight Creditors on 2 Fronts’ and reported on litigation between SGIC and BCHL, and on BCHL’s litigation to overturn the appointment of receivers to BBHL. On the same day that the article was published, Crocker referred Latham to the article and asked whether TBGL had defaulted under SGIC convertible notes. From all this evidence, I infer that Crocker was following and was aware of the major events which were reported in the financial press.
    6265 Crocker also said that he had seen some stock exchange announcements relating to BRL, BCHL and the brewery deal. He was aware of the negative ratings for the Bell group but he said that he disagreed with those assessments. But I note that in his witness statement, Crocker said ‘Bell Group’s strong recovery was reflected by its increase in Australian ratings, namely from CCC to B+ (adequate or satisfactory capacity to meet debt obligations)’. This suggests that he placed at least some reliance on Australian Ratings.
    6266 In December 1988 Creditanstalt London received a document containing extracts of selected news articles, including one that identified a UK news article dated 28 November 1988 and entitled ‘Lonrho report analyses Bond Group commitments’.
    6267 DG Bank discovered numerous articles from the relevant period. It appears they had a subscription to the press cutting services of Worldwide Subscriptions & Distribution Services to monitor the Australian financial press for articles relating to BCHL. Bannman, who was in Frankfurt, appeared reluctant to place much reliance on press articles, but nevertheless other officers like Borig and Jonker, who were more closely related to the Transactions and based in Singapore, did indeed do so. Borig said that it was the practice of the Singapore branch to keep newspaper articles relating to borrowers. He would normally read these. Borig included a press article relating to BCHL in the materials he sent to DG Bank’s lawyers, Clifford Chance, on 12 September 1989. Jonker, too, used press articles as sources of information upon which he formed or reviewed his opinions about the borrowers. It is to be inferred from Jonker’s evidence that he was responsive to public information distributed through the press.
    6268 In September 1989 DG Bank received a copy of a press article about the BCHL group. The article included information about the Lonrho reports. According to Jonker, at this time DG bank was ‘actively looking for an event of default’ and they sent the article to Clifford Chance seeking an opinion.
    6269 Gulf Bank was one of the more active banks within the Lloyds syndicate. It retained a number of relevant newspaper articles from the relevant period. Pettit gave evidence that he read the Financial Times and regarded it as a reliable source of information. He said he would try to send on to Singapore information of interest arising from the press wherever possible. Pettit said he would have been aware of the Lonrho allegations from the press and he recalled various public announcements being made in relation to the brewery deal. I have some difficulty with his evidence that he ‘took comfort’ from these announcements that the deal would go ahead (or at least, if he did take comfort, I doubt he did so before 26 January 1990). The reasons for this follow in the section on BRL.
    6270 Skopbank did not discover any relevant newspaper articles but the evidence shows they did utilise the media as a source of information. Simonen, the bank’s finance manager, said that Skopbank had a press clipping service and that relevant articles concerning its customers were circulated throughout the bank. Fennoscandia was a Skopbank subsidiary based in London. It also had access to the press and would from time to time circulate newspaper articles from London. Simonen said he regarded the Financial Times to be a reputable journal but was cautious about relying on press comment as he had experienced instances where it was not accurate. He said he considered stock exchange statements to be ‘quite useful’ in making decisions about a facility.
    6271 Like Skopbank, Banque Indosuez and Kredietbank discovered only a few newspaper articles and none in the relevant period. There was no relevant cross‑examination. But I infer, as a matter of industry practice, that these banks would have had similar practices to the other banks and would have been aware of the broad picture that was emerging (particularly about the Bond group) in the media. Monahan (Kredietbank) said he had some recollection of Lonrho spreading information about Bond but his memory was general. The information ‘was regular in the press, but press-driven’.
    6272 What is to be made of all of this evidence? The answer, in my view, is something, but not too much. Take the following as an example. A press article that says that a company reported an operating loss of $1 million in a reporting period and that the company is in danger of collapse is not evidence of the truth of either of those statements. It is evidence that there was, in the public domain, material suggesting the existence of source material from which someone had taken the information about the size of the loss. It is also evidence that there was, in the public domain, an expression of opinion from a commentator that the company was in danger of collapse.
    6273 The same can be said of ratings reports. A report that ascribes to a company a rating of ‘CCC’ is evidence that the author of the report has ascribed that level to that company. But it is not evidence of the truth of the underlying financial data from which the author has arrived at that conclusion. The example indicates why I said, a little earlier, I accepted Latham’s evidence about the comparative positions of the bank and the ratings agencies and why I had sympathy with Simonen’s caution about relying on press comment.
    6274 On the other hand, I am prepared to accept that the banks paid regard to press coverage and ratings reports affecting their customers and that it is relevant to the question of knowledge. The banks cannot say, for instance, that that they were blissfully unaware of any problems confronting either the BCHL group or the Bell group and that they were knocked over with the proverbial feather when news of the difficulties came directly to them. Nor can they say that the contents of the reports were regarded by them to be utterly unreliable and not worth a moment’s consideration. Why would an organisation collect press reports and (on occasions) refer to them in internal memoranda unless it thought they might sometimes be of value?
    6275 There are problems in assessing the extent of the influence that press reports had (or might have had) on the thinking of the bank officers who saw them. It emerges from the evidence that different banks had different systems and that within each individual bank, different officers might have had differing views about the material. There is also the problem of the passing of time, as indicated by the passage from the evidence of Moorhouse to which I referred earlier.
    6276 I think it is sufficient to say that I regard evidence of material of this nature, being in the public domain as it was, as part of the factual matrix from which to assess the level of knowledge possessed by each bank concerning the matters in dispute in this aspect of the litigation. There was a build‑up of material over a long period of time. From time to time it formed the basis of queries made by banks to the companies for explanations or further information. The Lonrho reports, for example, caused BCHL to correspond with the banks to put forward some form of explanation. However, the existence of press coverage and of ratings reports is not determinative of anything.
    30.5. The agency case
    30.5.1. The banks as agents
    6277 The plaintiffs narrowed their pleaded case in the course of the closing submissions. Rather than claiming that all knowledge held by Westpac and Lloyds Bank was to be imputed to the other banks, they accepted that only information material to the Transactions and the arrangements with the banks could ever be imputed via agency.
    6278 The pleading in 8ASC par 49D is that because of certain agency relationships, information known to one bank was known to all. Read strictly, 8ASC par 49C pleads that from September or October 1989:
    (a) each bank became an agent of all other banks for the purpose of obtaining and communicating information; and (or)
    (b) Westpac became the agent of the Australian banks and (or) the Lloyds syndicate banks, and (or) Lloyds Bank became the agent of the Lloyds Banks for the purpose of obtaining and communicating information.
    6279 During closing submissions the plaintiffs announced that they did not press the following allegations.
65. Westpac became the agent of all other banks (including the Lloyds banks).
66. Lloyds Bank became the agent of all other banks (including the Australian banks).
67. Each bank (other than Westpac and Lloyds Bank) became the agent of each other bank. For example, there was no allegation Skopbank becoming agent for DG Bank or for CBA.
    6280 In other words, the plaintiffs’ case, as pressed, is that from September or October 1989, Westpac became agent for the Australian banks (but not the Lloyds syndicate banks) and Lloyds Bank was the agent of the Lloyds syndicate banks (but not the Australian banks) for the designated purposes. This does not affect the issues surrounding the ICA and the STD, executed on 8 January 1990, by which Westpac became Security Agent for the purposes of the refinancing. That raises different questions.
    6281 Essentially, the plaintiffs’ claim is that about September or October 1989, the banks decided to work together to facilitate the making of refinancing agreements. It is said that from this time Lloyds Bank was the agent for all the Lloyds syndicate banks and Westpac was the agent for all the Australian banks, until the time when Westpac became agent and trustee for all banks. In doing so, Lloyds and Westpac allegedly undertook obligations to co-ordinate the sharing of information relevant to the proposed refinancing. It is also pleaded that each bank acted as the agent for all other banks, but this claim is not pursued by the plaintiffs.
    6282 The banks’ case is that although Westpac and Lloyds had certain duties to the other banks, these were purely of a mechanical and administrative nature. In no way was there a relationship of agency of the kind contended for and in no way can the knowledge of the matters claimed to be held by Westpac and Lloyds be imputed to the other banks.
    30.5.2. Westpac’s agency
    6283 The plaintiffs assert that the agreements between the banks to cooperate and to obtain and share information were partly in writing, partly oral and partly implied: 8ASC par 49 and PP par49(a). In PP par 49A(a)(vi) and par 49A(b)(iii), the plaintiffs call in aid those same matters to support the contention that from September or October 1989, Lloyds Bank was the agent of the Lloyds syndicate banks and Westpac was the agent of the Australian banks. I think it is convenient to approach this issue on the basis that PP par 49 in relation to the sharing of information also set out the basis from which the legal agency relationships is said to arise.
    6284 The ICA, executed on 8 January 1990, plays a material part in this plea. It is one of the particularised facts on which the information sharing agreement is said to have been partly in writing. It is also pleaded (8ASC par 49A(b) and(c)) that the September or October agency arrangement had an end point, namely, the time at which Westpac became agent of all banks under the terms of the ICA. Accordingly, it will be convenient to look first at the ICA and then work through the earlier material.
    6285 The plaintiffs rely on particular clauses in the ICA. Clause 3.1 contains the essential elements of the agency appointments by each Australian bank of Westpac and by each Lloyds syndicate bank of Lloyds Bank:
    (a) [I]ts respective agent with authority on its behalf to perform such duties and to exercise such rights and powers under this Agreement and each Financing Document as are specifically delegated to each such Agent by the terms of this Agreement and each of the Financing Documents, together with such rights and powers as are necessary for the purposes thereof or are reasonably incidental thereto.
    (b) The Agents shall only have those duties and powers which are expressly specified in this Agreement or under the Financing Documents. The Agents duties’ hereunder are solely of a mechanical and administrative nature.
    6286 Clause 2.3(a) sets out the nature of information sharing between creditors. The agents (Lloyds Bank and Westpac) had an obligation to inform the banks as to:
    [T]he exercise of any material right or power vested in it by virtue of… [the ICA or any of the refinancing documents] and in relation to any other matter by which the interests of any of the… [banks] may be materially affected.
    6287 The agents were also required to notify the banks of certain matters which were specifically relevant to the administration of the ICA and the refinancing agreements, but these were purely of a routine nature: cl 2.3(b). The agents were not required to disclose any information relating to any borrower or security provider other than as described above: cl 2.3(c).
    6288 Clause 2.3(a) is not easy to understand. The plaintiffs do not specify what knowledge is alleged to fall within the scope of the clause. The first part of the clause, which requires the banks to be informed of any exercise of the agents’ powers, does not appear to create an agency of the kind for which the plaintiffs contended. The second part, at first glance, appears to broaden the duty of disclosure. The obligation to inform the banks of ‘any other matter by which the interests of the banks may be materially affected’ may be said to be additional to the first part of the clause. Thus, on the plaintiffs’ characterisation of the clause, it imposes a broad obligation on the agents to disclose anything by which the interests of the banks may be materially affected.
    6289 The banks submit that the phrase ‘any other matter’ must be qualified by the first part of the clause. The word ‘other’ is said to link the two phrases. In other words, the requirement to provide information which is relevant to the interests of the banks only relates to information concerning the exercise by Westpac of specifically delegated rights and powers in the identified instruments. I think this is the preferable view. Looking at the clear restrictions on the agents’ liabilities and responsibilities in supplying information expressly provided elsewhere in the ICA, I do not think the clause was intended to establish such a broad-ranging obligation to disclose information. In this sense, the addition of the phrase beginning ‘and any other matter’ actually limits and qualifies the duty which precedes it. That is, Westpac and Lloyds Bank only had a duty to disclose an exercise of power conferred on them under the refinancing agreements when that exercise of a material right or power may have materially affected the interests of the other banks.
    6290 The administrative nature of the agents’ role under the ICA is confirmed by several other clauses in the document. But, with the possible exception of cl 2.3(a) as discussed above, the agents’ powers and duties were merely administrative in nature. They did not have any substantive powers to act on behalf of any of the banks to affect their legal relations. And the responsibilities of the agents and the other banks in obtaining and circulating information were expressly limited. I do not see that the ICA provides a basis for knowledge held by Westpac and Lloyds Bank to be imputed to the other banks.
    6291 Even if this view is not correct, a broad obligation to disclose would, of course, be subject to the express limitations imposed by the ICA. As mentioned, there was no duty to disclose or circulate any information relating to the finances of the Bell group. In cl 3.9(a) each bank warrants that it has made its own independent investigation and assessment of the financial condition and affairs of each borrower, security provider and their respective related corporations and has not relied on any information provided by any agent. However, I do not place much weight on this clause. If the facts demonstrate that prior to the ICA there was some kind of agency relationship pursuant to which knowledge was shared, it could not be undone by such a term.
    6292 The plaintiffs also place reliance on cl 3.5 and cl 3.8. Clause 3.5 allows the agents to employ other agents and attorneys and to delegate powers and rights to each other. Clause 3.8 provides, among other things, that the agents may rely on any communication and documents believed by them to be genuine and correct. I have difficulty in seeing how either of these provisions indicates the existence of an agency relationship.
    6293 In any event, the ICA, although signed on 8 January 1990, did not come into effect until 1 February 1990. There is force in the banks’ argument that any agency arrangements arising from this contract could only come into existence on the latter date: see cl 2.1. I note in passing that although the plaintiffs relied on the ICA in their pleadings, they did not expand on this claim in their closings.
    6294 If the ICA does not provide a basis for the plaintiffs’ agency claim, the question is whether, prior to the ICA, there was some different or broader legal relationship that amounts to agency. In this respect, I note that during the refinancing negotiations, Westpac was paid by TBGL to co-ordinate dealings with the Australian banks and facilitate the successful completion of the negotiations. It arguably undertook practices and assumed responsibilities which were broader than those set out in the ICA.
    6295 Westpac had enjoyed a close relationship with the Bell group as a result of being the local bank for WAN. It stepped into a ‘leadership’ role shortly after the Bell group initially sought to restructure their facilities. As early as 14 August 1989, it had actively sought a position as either security agent or syndicate agent (if a fully syndicated facility were to eventuate) in order to maintain control of its exposure. The Bell group agreed to Westpac’s role on 15 September 1989.
    6296 Westpac and TBGL agreed to a fee of $200,000, contingent on the successful completion of the Transactions. TBGL also accepted liability for all legal and out‑of‑pocket expenses incurred by Westpac in connection with its services as ‘facility/security agent for the co-ordination of restructuring of the Group’s existing debt’. On the other hand, Westpac was being paid by the Bell group, not the Australian banks. This detracts from the argument that Westpac was the agent for the Australian banks. Indeed, the contingent nature of the fees might indicate that a vested interest existed for Westpac to ensure successful completion of the refinancing (whether or not it was in the interests of the other banks). If this is correct it would be less likely that Westpac was acting on behalf of, and in the interests of the other banks.
    6297 Westpac stepped into the role of ‘agent’ more formally shortly thereafter, as evidenced by the records of the 4 October 1989 meeting of Australian banks and Lloyds Bank (on behalf of the Lloyds syndicate banks). Weir of Westpac expressly agreed that Westpac would act as a ‘focal point’ for all the banks in their dealings with the Bell group. This is a key pillar of the plaintiffs’ agency claim. From this time, the other Australian banks’ level and frequency of interaction with the Bell group was greatly diminished and the majority of correspondence went through Westpac. There were exceptions. For example, in December 1989 SocGen contacted TBGL directly to seek information in connection with a report they were preparing as part of a credit approval application.
    6298 The terms sheet considered at that 4 October 1989 meeting is relied on by the plaintiffs in support of their agency claim. This proposed some broad terms and conditions for the refinancing of the Australian bank loans and the Lloyds syndicate bank loan. This terms sheet was not pleaded as part of the agency agreement. In any event, it does not assist the plaintiffs’ case. It states that Westpac and Lloyds Bank will act as ‘Security/Facility Agents’, but this merely describes their proposed role if the proposed Transactions were to take effect. It does not relate to their role in the negotiations. Other versions of the terms sheet listed Westpac and Lloyds Bank as ‘arrangers’, but again this would seem to be of little assistance.
    6299 To determine whether an agency relationship exists as a matter of implication, it is necessary to look in some detail at the nature of Westpac’s role and its interrelationship with Lloyds Bank’s role in respect of the Lloyds syndicate banks.
    6300 Westpac was, for all intents and purposes, solely responsible for all administrative operations during the negotiations. It was to ensure the negotiations proceeded expeditiously. This included organising meetings with the Australian banks and (or) Lloyds Bank and (or) the Bell group. It was to be the ‘focal point’ for all material communications between the Australian banks and the Bell group, and the Australian banks and Lloyds Bank. The Australian banks were to receive from Westpac much of the information pertinent to the refinancing negotiations. Westpac adopted a practice of circulating most of the information which it came to possess. Westpac was responsible for obtaining legal advice on behalf of the Australian banks. The Australian banks decided that Westpac would engage P&P to advise on the legal ramifications of the proposed transactions and report the results to the Australian banks. I accept the plaintiffs’ submission that, in doing so, Westpac assumed an incidental duty to obtain sufficient information to give adequate instructions to P&P.
    6301 As a matter of convenience, pragmatism and efficiency, it made sense to have the Bell group communicate with one bank instead of all the Australian banks. Likewise it made sense for a single Australian bank to act as a focal point for communications with the Lloyds syndicate. It also made sense for a single bank to deal with the solicitors. As Weir put it:
    The company was located in Perth, we were located in Perth and the company’s solicitors were located in Perth so it seemed a convenient and practical way for me to be involved as a coordinator or mailbox or liaison.
    6302 It must also be borne in mind that Westpac already had the role as the banker for The West Australian, the main operating business of the Bell group. Weir also testified that:
    This was not a typical syndicated loan where the lead manager would perhaps do a lot of analysis of the financing and the borrower. In this context, any information I received was merely passed on to other parties without me making any analysis of it on their behalf.
    6303 Westpac did, on occasion, conduct analyses of relevant information and put forward opinions and proposals as to the refinancing agreements. But I do not think it follows that, in doing so, Westpac was acting in the capacity as agent, as opposed to as opposed to its own position as a lender to the Bell group. In this sense, it was no different position to other Australian banks, which also expressed various views on the refinancing.
    6304 When looking at Westpac’s position, the overlapping role of Lloyds Bank should not be ignored. While Westpac was facilitating the negotiations in Australia, Lloyds Bank was playing a similar role at its end on behalf of the Lloyds syndicate banks. It was the bridge between the Lloyds syndicate banks and the Bell group, as well as the bridge between the syndicate and the Australian banks.
    6305 Westpac and Lloyds Bank often exchanged information, including information as to the attitudes of various banks to the refinancing. It also included financial information received from the Bell group, some of Westpac and Lloyds Bank’s own analyses and pieces of legal advice. For example, Westpac analysed the TBGL balance sheets for 1986, 1987 and 1988 and the estimates for 1989. They did the same for BPG’s financial position and inter‑group lending. These analyses must have been given by Westpac to Lloyds Bank because Lloyds Bank also passed them on to Cole of MSJL.
    6306 It is possible to identify some kind of division of labour between Lloyds Bank and Westpac. As Latham said, ‘Lloyds Bank’s focus and, if you like, the distribution of activity, meant that it was us and nobody else that had dealings with the [BGUK] directors’. Westpac was entrusted with obtaining information about the corporate structure of the Bell group, its assets and its internal and external debts. They concentrated on BGNV and the Australian Bell group companies. Meanwhile, Lloyds Bank did the same thing with the Bell companies incorporated in the United Kingdom and sought information regarding the terms and instruments of the bond issues.
    6307 Lloyds Bank engaged A&O and MSJL to advise the syndicate banks on the proposed transactions. Therefore, while the Australian banks and the syndicate banks had separate solicitors, there was considerable collaboration and exchange of information between Westpac, Lloyds Bank and their respective solicitors. It was agreed that A&O, MSJL and P&P could communicate with each other and share information where it was within the scope of their retainers and in the interests of their clients to do so. Westpac, Lloyds Bank and their respective solicitors also undertook to instruct MSJA on behalf of all the banks to obtain advice from counsel on certain legal issues arising from the transactions. This advice was circulated to all banks.
    6308 All these facts provide scope for the view that Westpac had a capacity to act on behalf of the other banks. But Westpac did not have any authority to negotiate on behalf of the other banks and any duty they had to provide information was limited. If it did have the power to make decisions on behalf of the other banks, it would have been in a compromised position, given that it was being paid by TBGL to facilitate the Transactions. Each bank contributed separately to the negotiations and reserved to itself any decision‑making power. This situation appears, for example, in a note made by Walsh of SCBAL of a meeting of the banks on 27 October 1989. The situation is also evident from the fact that Westpac regularly passed on the independent and sometimes dissenting views of the other banks. It is also evident from the fact that even during the negotiations, the banks were mindful that any one bank could act unilaterally to call on its loan and precipitate the collapse of the group. When CBA and NAB expressed a disinclination to participate in the scheme, Westpac took steps to persuade them to a different view.
    6309 Although information was regularly shared and exchanged between Westpac and Lloyds Bank on behalf of their respective banks, it seems that the exchange of information generally only occurred when it was specifically agreed or seen to be in the interests of those parties to do so. There was no duty to share. Likewise, the solicitors only exchanged information when it was seen to be in their clients’ interests to do so. An example is the non‑disclosure to other banks of the SCBAL demands in December 1989. Also, the fact that information was on occasion shared is not necessarily determinative of a wider obligation to act for the banks in the sense of having an ability to affect legal relations. As counsel for the banks put it:
    In the context, one would have to have some fairly special circumstances where these are all competing banks … Their only relationship was bilateral obligations to the Bell group. They would not put, we would say, into the hands of Westpac any ability to affect their legal relationship with the Bell group. What they were doing was negotiating forward to a transaction and when it came to the point of having to decide what powers and duties Westpac would have as an agent, they wrote it down and put it in this agreement … Until they actually had a transaction that they had entered into, there was no agreement whereby Westpac could affect their legal relationship so that there’s no basis upon which there was an agreement under which the knowledge of Westpac would be imputed to the Australian banks.
    6310 Westpac’s role as a provider of information was therefore limited. Its obligations to pass on information included legal advice which it had undertaken to obtain, as well as the views of the Bell group and each of the banks as to the proposed refinancing agreements. It was not as if Westpac had appropriated to itself (or had conferred on it by the other banks) exclusive rights to communicate with the Bell group. For example, in a fax dated 6 November 1989, Weir advised Simpson of SCBAL’s insistence that the group debt be reduced to $200 million and suggested that Simpson discuss it directly with SCBAL. I have already mentioned the approach by SocGen to TBGL and the SCBAL demands, both occurring in December 1989.
    6311 The scope of Westpac’s obligation to obtain and circulate financial information is not as easy to define. When asked in cross‑examination whether Westpac ought to have circulated relevant financial information which it was not specifically required to pass on, Stutchbury replied:
    I don’t believe that was a role of the facility agent. Each banker has still got their individual lending to the company and it is still a requirement or the company should still be assessing its own – making its own assessments as regards its own credit analysis and position of the company. I don’t see that as a role of the facility agent, to parade all information.
    6312 Westpac does not appear to have had an obligation to analyse or assess the information on behalf of the other banks. But Westpac’s own practices demonstrate that it was in the habit of passing on material information that was supplied to it. Officers from the other Australian banks gave evidence that they saw Westpac as having obligations to circulate only that information which was given to it for the purpose of dissemination to the Australian banks. Most information received by Westpac would fall into this category given that Bell, Lloyds Bank and the various solicitors knew that information given to Westpac would likely be distributed amongst the Australian banks. Although financial information was often shared and much the same legal advice was relied on, each bank was required to form its own conclusions about the financial state of the Bell group.
    6313 In PP par 49(e), the plaintiffs point to a series of telephone calls as evidence in support of their agency claims. The record of a conversation between Weir and Latham on 20 September 1989 shows Latham was pleased that Westpac had been nominated as the ‘Australian agent bank’. Similarly, a discussion on 18 September 1989 between Weekes of SocGen and Brookman of SCBAL noted Westpac’s intention to seek the position of ‘agent bank’. Latimer of CBA made a diary note on 13 September 1989 that Westpac had agreed to ‘lead’ the Australian banking group. But these are merely labels and provide little assistance in categorising the legal nature of the relationship between Westpac and the Australian banks. The true nature of the relationship falls to be determined from all material circumstances.
    6314 Weir disagreed with the proposition that Westpac was the lead banker for the Australian banks and said that there was no lead banker for those banks. Weir also said (and it is correct) that the Australian banks were never a syndicate. This was just a loose way of referring to a group of banks and it was not used in the more technical sense as with the Lloyds syndicate. In the same sense, the mere fact that a party is labelled as an ‘agent’ does not constitute them an agent in a legal sense. The term ‘agent’ is commonly used in relation to collaborative financing arrangements to describe the ‘servicing’ or ‘administrating’ bank. In the words of Clarke and Farrar, ‘Rights and Duties of Managing and Agent Banks in Syndicated Loans to Government Borrowers’ (1982) University of Illinois Law Review 229, 244, it is an ‘unfortunate designation’ which does not necessarily reflect the true role of the administrating bank. Similar sentiments are expressed in O’Sullivan J, ‘The Roles of Managers and Agents in Syndicated Loans’ (1992) 3 Journal of Banking and Finance Law and Practice 162. The author says, at 183, that there is ‘no question’ that the ‘agent bank’ is the (legal) agent of the participant banks, but that this authority is ‘extremely limited’.
    6315 It is to be remembered that the ability to affect the legal relations of the principal is a critical element of agency; this element appears generally missing from Westpac’s powers and responsibilities. It had no power to make decisions on behalf of the Australian banks or affect their relations with the Bell group. In Sect 30.2.3, I mentioned a broad view of the phrase ‘affect legal relations’ that might include a situation where receiving communications on behalf of a ‘principal’ to the ‘agent’ is taken to be communication to the ‘principal’. But that is not this case. Here, the information was being communicated to Westpac under an arrangement initially struck between Westpac and the Bell group, albeit in the knowledge that it would be passed on to the Australian banks.
    6316 But in one area it might be said that Westpac had the capacity to affect legal relations. By this I mean Westpac’s authority to obtain legal advice on behalf of the banks could be sufficient to create an agency relationship for that limited purpose. By instructing solicitors, Westpac was creating contractual and fiduciary relations between the solicitors and each of the Australian banks, giving the Australian banks certain legal rights against the solicitors. On this basis, Westpac would have had a duty to circulate all material advice received from P&P to the Australian banks and where it failed to do so, that information could be imputed to the Australian banks. But the duty may go further than that. Given that the Australian banks accepted collaboration between the various firms of solicitors, advice received by Westpac from MSJ or A&O would also appear to fall within the scope of its duty to obtain legal advice.
    6317 Westpac’s duty to obtain legal advice could also be said to include the incidental duty to obtain and pass on all necessary information as to the financial and commercial state of the Bell group (such as the inter‑company lending) to P&P, to enable P&P to provide informed advice. But knowledge is only imputed when an agent has a duty to communicate it to the principal. Although Westpac may have been required to give full instructions to P&P, it does not necessarily mean that it had a duty to pass on that factual information to the Australian banks. This would depend on whether the factual information upon which the advice was predicated was necessary for a proper understanding of the legal opinion. In those circumstances there may be an incidental duty, not only to pass on material legal advice, but also to pass on material factual information which formed a foundation for that advice and which was relevant to understanding the advice. If this is correct, the scope of information which could be imputed via the agency relationship could be quite wide.
    6318 The plaintiffs also argue, as an alternative to the claim that Westpac had actual authority as agent, that each Australian bank represented or permitted it to be represented to the Bell group that Westpac was acting as its agent for the purpose of negotiating the refinancing. In that situation, the banks could not deny the agency. But no evidence additional to that which I have already discussed was cited in support of the proposition. I do not think the claim is made out on the evidence. Nor is such a claim pleaded.
    6319 The plaintiffs also argue that an agency arrangement can be implied as part of the customary banking practice for a syndicate manager or syndicate leader. A leader negotiating a financial facility would:
    (a) convey material information relevant to the proposed syndicated loan from the borrower(s) to the syndicate;
    (b) convey questions and material information from the syndicate to the borrower(s);
    (c) negotiate terms and conditions of the proposed syndicated loans; and
    (d) otherwise obtain legal advice and do all things reasonable and necessary to facilitate the implementation of the proposed syndication.
    6320 There are several difficulties with this argument. First, it is not pleaded. Secondly, the Australian banks were not a syndicate and did not become one. Each bank continued to act independently. Additionally, the implied terms pleaded by the plaintiffs conflict with the actual authority given to Westpac by the Australian banks. For example, it cannot be implied that Westpac had a customary duty to negotiate the terms of the proposed syndication (regardless of whether or not it was in fact a syndicate) when the facts do not bear out the vesting of such a power. Finally, even if such terms were a matter of common practice, no evidence or authority for such a common practice is advanced.
    6321 In my view, the nature of Westpac’s role was not that of agency with the duties for which the plaintiffs contend. The significance of the agency question lies in the degree to which knowledge held by the agent can be imputed to the principal. In my view, the duties or obligations resting on Westpac in relation to the collection and dissemination of information are circumscribed. In the light of all of the circumstances, I think it is appropriate to characterise the role of Westpac as a conduit or focal point of information, in the language used from time to time during the hearing. The main reason for this conclusion is that Westpac did not have the power to affect legal relations in the sense that I have described it. The nature and extent of the obligation to pass on information is not such as would bring the case within what I have termed the ‘broader understanding’ of the notion of affecting legal relations.
    6322 However, Westpac did have the power to affect the Australian banks’ legal relations in relation to obtaining legal advice. I think Westpac was the agent of the Australian banks for that limited purpose. Westpac had a duty to pass on all material legal advice to the syndicate banks. In those circumstances, there would be an incidental duty not only to pass on material legal advice, but material factual information which formed a foundation for that advice and which was relevant to understanding the advice.
    30.5.3. Lloyds Bank’s agency
    6323 The basis for the plaintiffs’ claim that Lloyds Bank acted as agent for the Lloyds syndicate banks is similar to that discussed above in relation to Westpac. The gravamen of the plaintiffs’ claim is the Lloyds syndicate banks conferred authority on Lloyds Bank to negotiate on their behalf in relation to the proposed refinancing. Lloyds Bank acquired and circulated information in its role as agent. Much of the same factual matrix discussed in relation to the dealings between Lloyds Bank and Westpac is relied upon by the plaintiffs in this aspect of the case.
    6324 One significant difference is that, unlike Westpac, Lloyds Bank was officially syndicate manager for the Lloyds syndicate at all times leading up to the Transactions. At all relevant times up until 1 February 1990, the relationship between Lloyds Bank and the syndicate banks was governed by RLFA No 1. There is no doubt that the relationship between Lloyds Bank and the Lloyds syndicate banks was that of principal and agent. This is what cl 21.3 says. But what type of style of agency was envisaged and how far did the duties of the agent extend, particularly in relation to the collections and dissemination of information?
    6325 The terms of RLFA No 1 suggest a narrower relationship than that contended for by the plaintiffs. RLFA No 1 specifically placed the onus on the syndicate banks to accept responsibility for obtaining and assessing information about the Bell group finances. It provided that Lloyds Bank had no obligation to supply any information about the affairs, financial condition or business of the Bell group (except for a limited number of notices, reports and documentation which are specified in RLFA No 1). Because of their importance, I will have to set out some of the relevant provisions in detail.
    6326 Clause 21.1 expressly limited Lloyds Bank’s duties and powers to those specified in RLFA No 1. Those duties and powers were ‘solely of a mechanical and administrative nature’. Once again, I do not place undue weight on that provision. Although it may effectively limit the scope of Lloyds Bank’s duties pursuant to the RLFA No 1, it would not have prohibited Lloyds Bank and the syndicate banks from entering into some other arrangements which conferred additional duties and powers (whether written, oral or implied). In addition, Lloyds Bank’s ability to exercise its rights and powers under RLFA No 1 was always subject to the directions and restraint of the ‘majority banks’: cl 21.2. These exculpatory clauses are standard for syndicated loans (see the Clarke and Farrar article cited in the previous section). Clarke and Farrar in fact suggest, at 244, that such clauses may be unnecessary given that the ‘agent’ bank is generally not a fiduciary:
    [B]ut simply a contact point to alleviate the administrative burdens for both the borrower and the banks. Without an Agent, syndicated loans would be an administrative nightmare. Nevertheless, while an Agent is necessary, the syndicate members view its powers somewhat jealously. No bank desires to give the Agent too much discretion…
    6327 By cl 21.9 each of the Lloyds syndicate banks acknowledged that it had made its own independent investigation and assessment of the financial condition and affairs of the borrowers in connection with its participation in the Lloyds facility. But this acknowledgement was not limited to the initial decision to participate. It had continuing effect. Clause 21.9 continued:
    Each … undertakes to the Agent that it shall continue to make its own independent appraisal, based on such documents and information as it shall deem appropriate at the time of the creditworthiness of the Borrowers … while the Loans are outstanding or its Commitment is in force. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrowers of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Borrowers and the Guarantor. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrowers or any of its related companies which may come into the possession of the Agent or any of their respective subsidiaries.
    6328 The obligation to collect and disseminate information (including the ‘notices, reports and other documents and information expressly required to be furnished to the banks by the agent’ by virtue of cl 21.9) is the subject of a detailed provision in cl 21.10:
    The Agent shall furnish each Bank with a copy of any documents received by it under Clause 11 of the Second Schedule of the Negative Pledge Agreement (but the Agent shall not be obliged to review or check the accuracy or completeness thereof) and, if requested by such Bank, with a copy of all documents received by the Agent under Clause 5 above.
    (a) The Agent shall not have any duty
    (i) either initially or on a continuing basis to provide any Bank with any credit or other information with respect to the financial condition or affairs of the Borrowers and the Guarantor, or any related entities whether coming into its possession or that of any related entities of the Agent before the entry into of this Agreement or at any time thereafter;
    (ii) unless specifically requested to do so by a Bank, to request any certificates or other documents from the Borrowers hereunder.
    (c) The Agent need not disclose any information relating to the Borrowers or any related entities if such disclosure would or might in the opinion of the Agent constitute a breach of any law or any duty of secrecy or confidence.
    6329 The information the subject of cl 11 of the second schedule of the NP agreement is described in Sect 12.13.6.3. Clause 5 relates to documents relevant to the initial formation of the loan arrangements in May 1986 and it adds little for present purposes.
    6330 I do not think that RLFA No 1 is the source for an agency relationship of the kind contended by the plaintiffs. The duties to collect and disseminate information to the syndicate banks are very limited. The syndicate banks expressly retained the decision‑making function. The conduct of the agent bank was always subject to the will of the ‘majority banks’. The question is, then, whether the plaintiffs can establish some additional relationship and obligations which arose above and beyond RLFA No 1.
    6331 The banks contend that since the relationship is in writing, there is no scope for implying terms or implying the existence of a relationship that goes beyond those express terms. A term can be implied ‘if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case’: Hawkins v Clayton (573) (Deane J). The banks say that the implication of an agency arrangement therefore cannot occur in the present circumstances, particularly where the implication would be in conflict with the express agreement of the parties.
    6332 But I think it is incorrect to characterise the plaintiffs’ approach as to imply a term into an existing contract (that is, RLFA No 1). Rather, they contend that there is an additional, separate agreement creating an agency arrangement. It is well settled that a party can be in a legal relationship with another party and act as agent in some respects and not in others. The mere fact that Lloyds Bank and the syndicate banks were in a pre‑existing legal relationship, as set out in RLFA No 1, does not preclude a court from finding, on the facts, that the nature of the parties’ conduct, in practice, indicates a separate and additional agency relationship.
    6333 An agency arrangement can be inferred by a court irrespective of the words used by the parties. A court can find that a party is an agent despite a contract saying they are not, or vice versa. Although the written agreement is relevant, the court must determine the legal relationship between the parties by looking at all the circumstances and the way in which the parties have, in reality, dealt with each other. I think this is the proper approach to the plaintiffs’ contentions in this regard. It may be, for example, that Lloyds Bank undertook a merely mechanical role in administering RLFA No 1, but then assumed additional duties during the refinancing negotiations. As Clarke and Farrar note, at 247, during negotiations to amend a facility, the agent ‘generally will act as the intermediary between the borrower and the syndicate and may unwittingly assume obligations in so doing’.
    6334 I will commence with the material identified in PP par 49(a) and (b) relating to the agreement to cooperate and share information (and which are imported into the agency plea by PP par 49A). The additional contract is said to be partly in writing, partly oral and partly implied. Insofar as the alleged agency agreement was in writing, the plaintiffs rely on:
    (a) a letter from Latham of Lloyds Bank to the Lloyds syndicate banks on or about 25 September 1989; and
    (b) letters dated 13 October 1989 and 19 October 1989 from each of the Lloyds syndicate banks to Lloyds Bank;
    6335 It is not clear from the particulars whether these items are relied on in respect to Lloyds Bank or Westpac or both. Insofar as it pertains to Westpac, the letters of 25 September 1989, which each syndicate bank approved, describe Westpac as the ‘agent bank for the proposed Australian dollar tranche’. But this does nothing more than describe Westpac’s future role pursuant to the Transactions. Nor does that letter add much to what is already admitted by the banks about Lloyd’s role. It facilitated and led the negotiations with the Bell group and it sought and circulated various information, including legal advice and certain financial information.
    6336 The letters of 13 October 1989 and 19 October 1989 are responses to Lloyds Bank’s request at the 13 October 1989 meeting that it be permitted to exchange information with Westpac, the Australian banks and the Bell group as necessary. Lloyds Bank also sought approval to engage A&O and MSJL to advise on the refinancing and to exchange information with P&P as necessary. Each bank consented to these requests. Latham gave evidence that he and Armstrong were of the view that without the consents to exchange information (some of which may have been confidential), they did not have the right to do so and may have been in breach of cl 21.10(c) of RLFA No 1.
    6337 In their closing submissions, the plaintiffs also rely on the terms sheet tabled at the meeting of the syndicate banks on 13 October 1989 as evidence of a written agency agreement. As discussed in relation to the 4 October 1989 terms sheet in the context of Westpac, the document does not advance the agency argument. Unlike the terms sheet relied on in the case of Westpac, this document does not even mention Lloyds Bank’s role as facility agent. The plaintiffs do not identify any particular part of the terms sheet on which the court should place emphasis.
    6338 Insofar as the alleged agreement was oral, the plaintiffs rely on the express agreement at the 13 October 1989 meeting ‘to finalise the terms sheet for the proposed refinancing adopting the existing borrower structure’. But Lloyds Bank did not have the power to bind the syndicate banks in that way. Each bank retained its own discretion and Lloyds Bank’s role was to facilitate the process. Lloyds Bank agreed to ‘finalise’ the terms sheet but this essentially meant incorporating any material changes required by the other banks. They were not acting independently in a way that would create legal relations between the syndicate banks and the Bell group companies in relation to the conditions reflected in the ‘final’ terms sheet.
    6339 The additional agency arrangement is also alleged to arise by implication. The plaintiffs contend that by September 1989, Lloyds Bank’s role had changed from its limited role under the RLFA No 1. This was, according to the plaintiffs, a process of evolution from around April 1989. Advice was provided by A&O in May 1989 regarding possible financial difficulties facing the Bell group. The advice indicated that Lloyds Bank should seek relevant information from the Bell and Bond groups and keep the syndicate fully informed. Lloyds Bank took on a more active role, which included liaising with syndicate banks and A&O to formulate requests for information from TBGL (including formal requests under cl 18.2(b)(vii) of RLFA No 1) and circulating any responses, liaising with BGUK and TBGL, liaising with Westpac and P&P, and calling and leading syndicate meetings on 25 April 1989, 20 July 1989 and 11 September 1989.
    6340 This is all consistent with a purely administrative role. But on 21 July 1989, Lloyds Bank informed the syndicate that it was incurring legal costs on behalf of the syndicate, for which the syndicate would be responsible if the costs could not be recovered from Bell. This was accepted by the syndicate banks.
    6341 Prior to the refinancing negotiations, Lloyds Bank accepted some small sums from the Bell group for initial work with a view to refinancing and sought another £150,000 to negotiate with the syndicate. BGUK agreed to the fee proposal. They noted that ‘[i]n view of the considerable changes to the agreement which are now in prospect and the great amount of negotiation and discussion with lenders which will be required we now wish to address this subject once again’. The fee was to be for ‘successful completion of a restructuring along the lines presently proposed’. The fee was significantly higher than Lloyds Bank’s previous fees, partly in light of the extensive additional work Lloyds Bank was required to do but also because Lloyds Bank had ‘no wish to pursue this relationship in future and therefore [had] little to lose by “bidding high”’. Latham made this comment in a file note of 30 August 1989:
    Since we are concerned exclusively with ‘leading’ a syndicate which in present circumstances we should not be seeking to lead on any grounds, the reward we have in mind is not disproportionate, and we can make some play of the difficulty we will face in persuading the syndicate.
    6342 Two-thirds of the £150,000 was contingent on completion. Consequently, Lloyds Bank had a strong interest in ensuring successful completion of the refinancing. As with Westpac, this tends to be indicative of a lack of agency. Lloyds Bank had a particular motivation for successfully facilitating and actively promoting the refinancing and in keeping all parties involved.
    6343 When the refinancing negotiations commenced, Lloyds Bank’s role did not change as much as Westpac’s did. This is because of Lloyds Bank’s existing role in dealing with the Bell group on behalf of the syndicate. This role became more exclusive during this period and the syndicate banks had next to no direct communication with the Bell group. There were minor exceptions. For example, on 28 November 1989 Crocker and Gayler of Creditanstalt wrote to Simpson of TBGL directly to seek information in connection with GFH. The reason for this direct approach was that the matter was urgent and they did not have time to go via Lloyds. The Lloyds syndicate banks gave Lloyds Bank authority to instruct and obtain advice from A&O and MSJL on the legal issues arising from the proposed refinancing. DG Bank was the only syndicate bank which sought its own external legal advice (from Clifford Chance in Singapore). This was still supplementary to the advice from A&O and MSJL.
    6344 Like Westpac, Lloyds Bank adopted a practice of passing information back and forth between the Bell group and the syndicate. On occasion they passed on accounts from TBGL and BPG and offered to pass on any requests for additional information from the syndicate banks to the Bell group. There is some evidence that the syndicate banks saw Lloyds Bank as having duties to investigate and disclose as agent. Koponen of Skopbank made a note of the syndicate banks’ meeting on 13 October 1989, which has been translated by the plaintiffs as follows:
    Once Bell Group’s difficulties became known Lloyds Bank has, pursuant to its obligations as agent, endeavoured to ascertain the cross-ownership relationships, true value and liabilities of the Group. … [W]e have yet to receive the results of our agent’s inquiries… The agent has undertaken to take responsibility for the banks’ refinancing in AUD.
    6345 But these comments do not necessarily mean that Lloyds Bank had any legal authority to affect the legal relations of any of the syndicate banks.
    6346 At the meeting of Lloyds syndicate banks on 11 September 1989, Lloyds Bank said that it could not take any responsibility for verifying statements made by the Bell Group. Pettit, of Gulf Bank, was cross‑examined about a note he made of the meeting. This exchange occurred:
    Did you understand that when you wrote it down to be a general message that the agent bank wouldn’t take responsibility for what the customer had said?—Yes. I think it was a general statement to ensure that situation of their agent role was understood.
    6347 Similarly, in letters dated 12 December 1989 (where Lloyds Bank circulated advice from A&O and draft refinancing documents) and 2 January 1990 (where Lloyds Bank circulated draft copies of the ICA and STD), Lloyds Bank said that:
    This letter and the enclosures hereto are provided on the basis that each Bank has made its own independent investigation and assessment of the financial condition and affairs of each Borrower, each Security Provider and their respective related corporations in connection with its continued participation in the facilities and has not relied exclusively on any information provided by ourselves as Agent Bank or Westpac.
    6348 Latham also testified that he did not proceed on the basis that Lloyds Bank had any obligation to circulate financial information which it had received through its own investigations. He did not see there being any responsibility to disseminate material other than as specifically required and according to his understanding, Lloyds Bank did not carry out any due diligence on the material it sent out to the syndicate banks. However, Latham also stated that:
    [W]e were not operating as an agent bank with the particular discretion as to what went and did not go to the syndicate. The rule that we operated under was that, to the very best extent possible, whatever we received from the company we distributed.
    6349 This seems to me to support the view that Lloyds Bank did not believe it had authority to affect the Lloyds syndicate banks’ relationships with the Bell group. Latham also gave evidence that Armstrong opened the 11 September 1989 meeting by stating that each syndicate bank had to make its own decision. Each bank reviewed the proposed refinancing documents independently. However, in their letter to the syndicate banks of 12 December 1989, Lloyds Bank sought comments on the draft refinancing documents and advised that ‘we do not expect to be able to incorporate your suggested changes unless these are substantive’. This may imply some power to make minor decisions on behalf of the syndicate banks. On the other hand, it may be no more than an expression of opinion that the time for major changes had passed. One thing is clear: each bank had to make a decision whether it would accept the terms as finally agreed and enter the refinancing agreements accordingly. This was not a decision which any bank delegated to Lloyds Bank and nor, on the evidence, is it a power that Lloyds Bank appropriated (or thought it could appropriate) to itself.
    6350 I think it is fair to say that Lloyds Bank took a more exclusive role in the negotiations with the Bell group than Westpac did on behalf of the Australian banks. My overall impression is that the Australian banks remained more actively involved but that syndicate banks appeared to have been more dependent on Lloyds Bank for information. This is not to say that the syndicate banks were not pressing Lloyds Bank for information and action. Crocker (Creditanstalt) and Pettit (Gulf Bank) were particularly active in this respect and were not always complimentary about Lloyds Bank’s endeavours. I will have more to say about those relationships in later sections.
    6351 Tinsley, Latham and Evans were the primary Lloyds Bank figures involved in circulating information to the banks. Tinsley described the kind of information he was in the habit of circulating and it is of an unsurprising nature: annual reports, balance sheets, negative pledge reports, directors’ reports and so on. Armstrong testified that the process of circulating information was ‘automatic’ but this does not mean everything was automatically distributed. Latham did state, however, that Lloyds Bank operated under the rule that, to the best extent possible, Lloyds Bank would distribute whatever it received from TBGL. But not every piece of information received by Lloyds Bank was circulated. Latham said that he only passed on legal advice when he felt it was in an appropriate form – thus merely preliminary advice and communications were not immediately shared, or not shared at all.
    6352 A great deal of evidence was led from representatives of the Lloyds syndicate banks on this issue. It can be summarised as follows. With minor exceptions, each bank only communicated with the Bell group via Lloyds Bank. The banks were almost, if not completely, reliant on Lloyds Bank to supply it with information. Each bank saw Lloyds Bank as having the responsibility and practice of passing on relevant information but having no duty to process that information on behalf of the other banks. Each bank saw itself as retaining responsibility for assessing the information and deciding any course of action.
    6353 It is evident from the letters sent to the syndicate banks (for example, letters of 25 September 1989 and 12 December 1989) that Lloyds Bank acted in a reasonably autonomous fashion in facilitating the refinancing. Lloyds Bank kept the syndicate banks informed about the main occurrences and sought their consent on the main aspects of the refinancing, but retained some freedom in their actions.
    6354 The argument that Lloyds Bank can be taken to be the agent for all syndicate banks because of customary practice is stronger than with Westpac, because the European banks were a genuine syndicate. As I have already said, there was a greater reliance by syndicate banks on Lloyds Bank than in the case of Westpac and the Australian banks. The question whether the lead bank in a syndicate is the agent for the other banks is a vexed one: see, for example, the Clarke and Farrar article mentioned earlier and Qu C, ‘The Fiduciary Role of the Manager and the Agent in a Loan Syndicate’ (2000) 12(1) Bond Law Review 86. The question whether an ‘agent bank’ is actually an agent and owes fiduciary duties will depend on the terms of the agreement. Where more onerous duties are alleged which extend beyond the written agreement, the question essentially comes back to general principles of agency and their application to the facts and circumstances of the particular case. The ultimate question is whether the lead bank did, in fact, take on a role as an agent.
    6355 It is well settled that a court can find that a party has assumed obligations of agency despite express words to the contrary in a contract: Commissioner of Customs and Excise v Pools Finance (1937) Ltd [1952] 1 All ER 775. The reverse also applies. Simply because Lloyds Bank is described as ‘agent’ does not in reality make them so.
    6356 As Qu notes, ‘[t]he agent bank’s responsibility is largely for channelling payments and communications between the borrower and the syndicate’. This aptly characterises the nature of Lloyds Bank’s role under RLFA No 1. It may be that Lloyds Bank did, in practice, assume an obligation to pass on information which it acquired in its role as agent where that information was material to the interests of the syndicate banks. But it is more difficult to make such a finding when the express terms of a written agreement governing aspects of the relationship. If it is correct (as I think it is) to construe cl 21.10 of RLFA No 1 as meaning there is obligation to obtain and circulate information of the kind which the plaintiffs seek to impute, the difficulties begin to emerge. It is one thing to treat with caution a clause that says a party is (or is not) an agent. Similar comments apply to a clause that seeks to characterise powers and duties as ‘solely mechanical or administrative in nature’. But it is quite a different thing to ignore the express exclusion of any obligation to obtain and disseminate information (other than that of nominated kind).
    6357 I have come to the same conclusion in relation to Lloyds Bank as I have with Westpac. The nature of Lloyds Bank’s role was that of ‘agent’ but it was not an all‑encompassing agency with the duties that the plaintiffs contend existed. The significance of the agency question lies in the degree to which knowledge held by the agent can be imputed to the principal. In my view, the duties or obligations resting on Lloyds Bank in relation to the collecting and disseminating of information are circumscribed. In the light of all of the circumstances, I think it is appropriate to characterise the role of Lloyds Bank as a conduit or focal point, in the language used from time to time during the hearing. The main reason for this conclusion is that Lloyds Bank did not have the power to affect legal relations in the sense that I have described it. The nature and extent of the obligation to pass on information is not such as would bring the case within what I have termed the ‘broader understanding’ of the notion of affecting legal relations.
    6358 However, like Westpac, Lloyds Bank did have the power to affect the syndicate banks’ legal relations with MSJL and A&O. I think Lloyds Bank was the agent of the syndicate banks for that limited purpose. As discussed in relation to Westpac, Lloyds Bank had a duty to pass on all material legal advice to the syndicate banks. In those circumstances there would be an incidental duty, not only to pass on material legal advice, but material factual information which formed a foundation for that advice and which was relevant to understanding the advice.
    30.5.4. The banks’ lawyers as agents
    30.5.4.1. Some introductory comments
    6359 In the preceding analysis, I have measured the extent to which knowledge acquired by the agent banks could be attributed to their principals by reference to the capacity of the agent banks to effect the legal relations of their principals. But it does not follow that I am required to approach in the same way the question of how much of the knowledge communicated to the various lawyers acting for the banks should be imputed to the banks. The position of the lawyers is different, for two reasons.
    6360 First, to the extent the banks were in relationships in which one had the capacity as agent to alter the legal relationships of the others, it was not the sole relevant nexus. Lloyds Bank and Westpac were also principals as lenders. The lawyers were different. They had (or should have had) no interest as principals in the negotiations and the ultimate transactions. Solicitors are involved in commercial matters only as agents of their clients and not in their own behalf. There is no need for the preliminary inquiry as to the capacity in which they acquire knowledge in the course of their retainer: they do so as agents of their client.
    6361 Secondly, capacity to affect legal relations of the principal seems a poor measure of duty to communicate. A solicitor’s duty to inform her or his client is not co‑extensive with the solicitor’s capacity to alter the legal relations of that client. As Megarry J put it in Spector v Ageda [1973] Ch 30 (48):
    A solicitor must put at his client’s disposal not only his skill but also his knowledge, so far as it is relevant; and if he is unwilling to reveal his knowledge to his client, he should not act for him.
    6362 If the knowledge of the agent that is to be imputed to the principal is that which the agent is obliged to pass on, then a solicitor’s capacity to affect legal relations of the principal is an unsatisfactory measure of that solicitor’s obligation to pass on knowledge to the client as principal.
    6363 That capacity is usually limited. In typical commercial negotiations, solicitors may well have authority to bind their clients as to such matters as the form of documentation or the language of a particular clause, but they will rarely have free-ranging powers to bind the client on matters of substance. It would be a narrow and artificial way of looking at things to say that a client was only to be imputed with knowledge gained by a solicitor if that knowledge was connected with the solicitor’s capacity to bind the client.
    6364 While the extent of a solicitor’s obligation of disclosure is to be determined in each case by the retainer, the nature of the relationship between solicitor and client means that the obligation is broader than would be suggested by a mere measurement of the solicitor’s capacity to bind the client.
    6365 In my view, a solicitor retained in the negotiations for, and the perfection of, a commercial transaction such as this is obliged to pass on to his client any information that comes into her or his possession that has a real connection with the subject matter of the transaction. This does not mean that the solicitor is obliged to pass on each an every bit of information gleaned during the course of negotiations. The question is whether the material has a real capacity to affect the client’s interests. If there is a sensible nexus between the information and the interest of the client being served under the retainer, it qualifies as what I have termed a real connection. In those circumstances the solicitor is obliged to pass on that information. And knowledge of that information is therefore to be imputed to the client as the solicitor’s principal. It is on that basis that I examine what the solicitors knew.
    6366 It is not disputed that P&P were retained as solicitors by the Australian banks in relation to the Transactions, and A&O and MSJL likewise for the Lloyds syndicate banks. But it is in issue whether the solicitors were thereby the agents of the respective banks and, if so, what was the scope of this agency arrangement.
    6367 The various firms of solicitors co-operated extensively with each other in fulfilling their duties. To a significant extent, the fortunes of each bank depended on the banks as a whole successfully obtaining securities over the Bell group’s assets. This is reflected in the way the solicitors shared information and advice to achieve a mutually acceptable outcome for their clients. Latham acknowledged that MSJL’s work was ‘available to and used by the Australian banks on various occasions, including on instructing counsel’. The following are examples of exchanges of views and of formal legal advice between the various firms:
    (a) A&O and MSJL handed out to the syndicate banks at their meeting on 13 October 1989 the initial version of their joint memorandum;
    (b) A&O and MSJL sent to P&P their second draft of the 13 October 1989 joint memorandum. P&P worked through that memorandum in conference with Westpac, and on 17 October 1989 Westpac circulated to the Australian banks Lloyds Bank’s summary of that advice;
    (c) a joint telephone conference was held on 18 October 1989 between Westpac, P&P, Lloyds Bank, A&O and MSJL concerning the insolvency and structuring issues;
    (d) the revised version of the joint A&O and MSJL advice was sent to Lloyds Bank, Westpac and P&P. Westpac circulated this version to the Australian banks on 19 October 1989;
    (e) the final version of the joint memorandum dated 20 October 1989 formed part of the joint brief to counsel. It was sent to P&P;
    (f) MSJL sent P&P and A&O its 8 December 1989 advice to Lloyds Bank concerning the corporate benefit problems arising from the fact that BPG had not borrowed from BGF; and
    (g) P&P and A&O shared their views as to the advice to be given to Westpac and Lloyds Bank respectively as a result of the application for the receivership of BRL and the collapse of the Lion Nathan joint venture.
    30.5.4.2. Parker and Parker
    6368 It is accepted that P&P were retained by the Australian banks to draft and settle the ABSA, ABFA, STD, ICA (insofar as it affected the Australian banks) and the securities involving the Australian Bell Participants.
    6369 The scope of P&P’s work is well illustrated by the interim account of 14 December 1989 and the accompanying letter which particularised the account. In broad summary, the items referred to in the bill include:
    (a) preparation and settling recitals for loan documentation, including security, and discussions and conferences on the terms sheet;
    (b) consideration and advice of the insolvency issues, including briefing and attending on counsel in Melbourne, and conferences and discussions with Westpac and other firms on insolvency issues;
    (c) advice generally on stamp duty and insolvency issues with recommendations on the appropriate course to adopt; and
    (d) preparation of and settling the drafts of the loan and security documents.
    6370 The advice to Westpac, on behalf of the other banks, also encompassed the possible effect of BRL receivership and the collapse of the Lion Nathan joint venture as well as the subordination issue. It appears P&P’s overall role was to ensure the best possible outcome for the banks given all the circumstances, including the banks’ unsecured position prior to the Transactions and the possibility of liquidation and legal challenge to the refinancing agreements. This broader role is, I think, evident from the active role P&P took in the negotiations and associated correspondence, and it is well illustrated by the letter dated 9 December 1989. In it, P&P advised Westpac and the Australian banks to proceed urgently with the Transactions in light of events which were threatening the banks’ position, especially the action taken by Adsteam in relation to BRL.
    6371 P&P also appears to have acted in a separate capacity in some instances. It is therefore necessary (although not easy) to distinguish between the knowledge it came to possess when acting for the Australian banks collectively and the knowledge gained when acting for individual banks on discrete issues. For example, on or around 20 December 1989, P&P advised CBA as to whether it should alter its facility. CBA was concerned to know ‘whether [it] would be disadvantaged in any way vis a vis having an FDL facility and not a bill facility on 30 day rollovers as some other banks in the Australian syndicate [had]’. Other instances are not as clear. P&P advised SCBAL on the issue of cross‑default and SocGen on whether it was necessary for the banks to extend their facilities, but it is apparent that these pieces of advice were channelled through Westpac and were thereby made available to all banks.
    6372 To provide the advice required, P&P needed information about the structure of the Bell group and its financial condition, internal lending, asset ownership, shareholdings and external creditors. Most of this information was provided by Westpac, but, on occasion, P&P obtained information directly from the other Australian banks, TBGL, A&O and MSJL.
    6373 I have already had a lot to say on the question whether the Bell group directors fulfilled their legal duties: see Sect 29. Strictly, the issue does not arise here because the primary responsibility for ensuring that there was compliance with the duties fell on the directors, not the banks. Nonetheless, it has significance because of the allegation that the banks knew the directors were acting in breach of duty. There is, therefore, an issue whether information obtained by P&P as to the conduct of the Bell directors falls within the scope of their retainer.
    6374 P&P undertook to advise generally on insolvency issues and advised the Australian banks as to how they could minimise the likelihood of the proposed transactions being set aside by a liquidator. This is evident from their participation in:
    (a) selecting the most appropriate structure for the refinancing and the preparation of documents to give effect to that structure; and
    (b) the in the drafting of the minutes and recitals for use by the Bell companies, bearing in mind the scope for a court to find that the directors breached their duties to act in the best interests of the companies.
    6375 In my view information obtained by P&P which alerted them, or ought to have alerted them, to possible breaches of duties would fall within the retainer. The same applies to information pertaining to the subordination of the bonds and the on‑loans because those questions were intrinsically connected with the structure of the refinancing. Knowledge of that information is to be imputed to the banks. But ascertaining the factual solvency of the Bell group companies was not a part of the retainer.
    30.5.4.3. Allen and Overy
    6376 It is accepted that A&O were retained by the Lloyds syndicate banks to draft and settle LSA No 2, RLFA No 2, the ICA (insofar as it affected the syndicate banks) and the securities involving the non‑Australian Bell Participants. A&O also acted on behalf of the Lloyds syndicate banks in relation to the STD and the securities given by the Australian Bell Participants. It is apparent that A&O’s retainer encompassed, either expressly or by implication, a similar role to P&P except that it was for the benefit of the Lloyds syndicate banks. Specifically, A&O worked with MSJL to devise a structure that would best suit the Lloyds syndicate banks. They conferred extensively with P&P and sent a representative (Perry) to Perth to collaborate with P&P.
    6377 The plaintiffs submit that A&O not only advised on the UK securities but also on the Australian Transactions. This seems reasonable, given that the refinancing transactions were essentially a combined strategy between the Lloyds syndicate banks and the Australian banks to work towards a common end. In a material sense the fortunes of each bank were linked to that of every other bank. But obviously, in doing so, A&O were providing advice with the Lloyds’ syndicate’s interests in mind. I should add that no direct evidence was led of such a relationship concerning the Australian Transactions. Such a finding could only be made by inference from all of the circumstances.
    6378 A&O, on occasion, also permitted its advice to be circulated among the Australian banks. For example, on 1 February 1990, an A&O opinion was given to all the banks about whether the refinancing transactions would be an event of default under the bond trust deeds. Further on 5 February 1990, all the banks received the A&O advice about the validity of the securities given by the UK Bell Participants.
    6379 I can see no material difference between P&P and A&O in these respects. Accordingly, the conclusions to which I have come concerning P&P apply with equal force here.
    30.5.4.4. Mallesons Stephen Jaques (London)
    6380 It is accepted that MSJL were engaged by A&O, on behalf of the Lloyds syndicate banks, to act as Australian law advisers to the Lloyds syndicate banks in relation to the refinancing. An itemised account dated 29 December 1989, rendered by MSJL to Lloyds Bank, was tendered as evidence. I do not need to go into any detail about its contents as it illustrates the work was of a similar nature as set out in the P&P account, discussed in Sect 30.5.4.2.
    6381 Although the work was technically done for the Lloyds syndicate, much of MSJL’s work was communicated to P&P and thereby to the Australian banks. This includes the brief to counsel in Melbourne in October 1989 and the work done by MSJL in drafting the minutes and recitals for use by the Bell group.
    6382 Once again, I can see no material difference between P&P, A&O and MSJL in these respects. Accordingly, the conclusions to which I have come concerning P&P and A&O apply with equal force here.
    30.6. Knowledge of Bell group’s financial position
    30.6.1. Some introductory comments
    6383 The plaintiffs plead that as at 26 January 1989, all or most of the plaintiff Bell companies were insolvent or nearly insolvent or of doubtful solvency or would inevitably become insolvent. By way of reminder, I have used the composite phrase ‘in an insolvency context’ to encompass ‘insolvent, nearly insolvent or of doubtful solvency, or would inevitably become insolvent’ when it is unnecessary to distinguish between these terms. The plaintiffs plead that the relevant companies became insolvent or inevitably would become insolvent as a result of their entry into the Transactions and Scheme. Further and in the alternative, it is pleaded that unless the Bell Participants were able to enter into a valid and effective restructuring of their finances, they would be wound up – save those who were solvent, in which case the shares would be sold off by the shareholder company.
    6384 The plaintiffs also plead that, as at 26 January 1990, the banks knew of the matters mentioned in the preceding paragraph. Alternatively, it is pleaded that the banks knew of these matters by reason of their ‘calculated abstention from inquiry’. Further and in the alternative, it is pleaded that the banks believed, suspected or ought to have known of these matters.
    6385 I wish to introduce this topic by making a few general observations by way of broad summary. In my view, the state of knowledge possessed by the banks concerning these matters was a lot greater than was suggested throughout the presentation of the case, from the pleadings to the interlocutory disputes and through the main hearing. The words ‘precarious’ and ‘parlous’ as descriptions of the financial condition of BCHL and TBGL appear frequently in the contemporaneous documentation maintained by the banks. But, perhaps not surprisingly, the state of knowledge possessed by individual banks covered a wide spectrum. This makes it difficult to announce an all-embracing conclusion. I have had no alternative other than to go through the material, bank by bank, and reach a conclusion in relation to each of them.
    6386 My conclusions have been drawn primarily from the information provided by the Bell group, particularly the annual reports and cash flows, and the documentary records of the views and understandings of the various banks and the various bank officers. I have concentrated on the contemporaneous documentation. This is not to say that I have ignored the oral evidence given by bank officers about the events and the documents. Of course, I have taken their evidence into account. But due to the passage of time and the peculiar nature of the issues raised, I have assessed the oral evidence in the light of, and looking for consistency with, the contemporaneous documentation.
    6387 In the main, the witnesses were commercially minded people who had no doubt as to the importance of the documents to their banks’ position and the courses of action available to the banks. The evidence indicates that they absorbed the information provided by the Bell group earlier in 1989 or after 26 January 1990. Generally speaking, I have not been easily persuaded that a bank did not know something that was contained in its records. This, I would suggest, is a valid application of the principles set out in Commercial Union Assurance Co of Australia Ltd v Beard discussed earlier.
    6388 This section will be structured as follows. I will begin by discussing the broad base of knowledge held by all the banks, essentially in common, and the sources of that information. This stems largely from the cash flows and the annual reports. The second part also emerges from the cash flows. It involves an examination of what the banks knew about the disputed cash flows items, particularly Bryanston, JNTH, GFH and BRL. Because the financial position of BRL was dependent on the brewery transaction, and because the latter was linked to the fortunes of BCHL, I will look at what the banks knew about the wider BCHL group. In the final section I will discuss what the contemporaneous documentation and the oral evidence of bank officers tells us about what the individual banks knew, believed or suspected concerning the financial position of the Bell group companies.
    30.6.2. Sources of information and knowledge
    30.6.2.1. The range of the enquiry
    6389 It is important to bear in mind that none of the banks entered into the negotiations in the second half of 1989 without a store of knowledge of either of the Bell group or the Bond group or both. In addition, some banks had enjoyed a prior association with the wider RHaC group. Some banks had extensive dealings with the groups, while for others it was of lesser significance. That is all relevant background material. It was for this reason that I spent some time in Sect 4.2 and Sect 4.2.8 explaining the history of the financial association between the banks and the several corporate groups or sub‑groups. In reading these sections of the reasons, it is important to bear this information in mind.
    6390 In this section I will be concentrating on the period during which the refinancing proposal was under negotiation and the period immediately following the execution of the main refinancing documents. In other words, I will be looking at sources of information available to the banks in the period from July 1989 to February 1990.
    30.6.2.2. The 1 July cash flow
    6391 The 1 July cash flow was received by each bank except HKBA. Each Australian bank had received the document by mid‑July 1989. The Lloyds syndicate banks received it from Lloyds Bank under cover of a letter dated 2 August 1989. I gave a broad outline of the style and contents of the 1 July cash flow in Sect 9.4.3.2.
    6392 HKBA received a different version of the cash flow in July 1989. One difference was that the document only covered the year ending 30 June 1990. It contained additional cash flows for Bondnet, Q‑Net, Bond Communications and Eastel. These differences are discussed later but they do not significantly alter the picture as to the Bell group’s financial position.
    30.6.2.3. The September cash flow
    6393 This was produced by the Bell group after SocGen wrote to Simpson on 29 August 1989 asking for an updated cash flow reflecting the revised terms of the proposed sale of Bryanston. It was received by Westpac on 4 September 1989 and forwarded to the Australian banks shortly thereafter. Lloyds Bank circulated a copy to the Lloyds syndicate banks on 9 October 1989. Each bank has either admitted receiving the July and September cash flows or has discovered a copy except Crédit Lyonnais. I am prepared to accept that Crédit Lyonnais also received a copy. I have no reason to believe that Lloyds Bank was selective about the list of addressees to whom information was sent. Goodall effectively accepted that Crédit Lyonnais received both cash flows. He used them to ensure that the Bell group was able to meet its debt obligations.
    6394 I gave a broad outline of the style and contents of the 1 September cash flow in Sect 9.4.3.2.
    30.6.2.4. The 1989 TBGL Annual Report
    6395 The Australian banks were sent a copy of TBGL’s 1989 TBGL Annual Report on 15 November 1989. The Lloyds syndicate banks were sent a copy on 23 November 1989. HKBA has not discovered a copy but I infer that they received the document. It is highly unlikely TBGL would have sent it to all other banks but not HKBA. Davis admitted that he ‘may have given it a cursory glance’. In November 1989, HKBA was keeping a close watch on the dispute between BCHL, TBGL and the ASX over the late delivery of the reports. I doubt that HKBA would have noted that the reports had been published late, yet not have looked at the contents when available.
    30.6.2.5. The 1989 BRL Annual Report
    6396 There were two annual reports for BRL released during 1989 as a result of a change in the accounting year for BRL. The report for the year ended 31 December 1988 was published in April 1989. Westpac, SocGen, SCBAL and Lloyds Bank have discovered copies.
    6397 The 1989 Annual Report included the profit and loss account for the six months ending 30 June 1989, together with the balance sheet and the BRL group’s activities as at 30 June 1989. It was released on 13 November 1989. Westpac, NAB and SCBAL have discovered copies of the 30 June 1989 report. HKBA discovered the cover page of the 1989 Annual Report, which I believe indicates that they received the whole document. Weir (Westpac) stated that it was likely he would have read it. SocGen discovered a different document – the preliminary final statement and dividend announcement for BRL – which was issued on 20 October 1989.
    6398 Given the stage that negotiations had reached in November 1989 and the significance of the brewery transaction, I think it is likely that all of the Australian banks received the documents and that Lloyd Bank would have sent it to the other syndicate members.
    30.6.2.6. The 1989 BCHL Annual Report
    6399 This document was released on 13 November 1989. NAB and SocGen have discovered copies. Keane (NAB), when asked if it was likely he would have considered the BCHL annual report, replied: ‘it’s possible, yes’. Weir (Westpac) stated it was likely he would have read it. Davis (HKBA) said he was aware of the publicity surrounding the 1989 BCHL Annual Report and accepted that as a matter of practice, he would have expected his subordinates to read the report and bring matters of significance to his attention. In any event, HKBA had intimate knowledge of BCHL’s financial situation, as it was a key lender to the group and was ‘managing’ its asset sale programme: see Sect 30.21.4.
    6400 For the same reasons that I expressed in relation to the 1989 BRL Annual Report, I think it is likely all banks received this document.
    30.6.2.7. The 1989 JNTH Annual Report
    6401 JNTH released its annual report on 13 November 1989. SocGen and HKBA have discovered copies. Weir (Westpac) stated it was likely he would have read it. Keane (NAB) said in his witness statement that he believed he had read it.
    6402 In the events with which I am concerned in this litigation JNTH played a somewhat lesser role. I am not as confident that all banks would necessarily have received this document. But in the grand scheme of things I do not think it is of great moment.
    30.6.2.8. The November 1989 negative pledge report
    6403 TBGL was under a contractual obligation to deliver to all bankers to the NP group (and thus to all of the defendant banks) a half‑yearly negative pledge report: see Sect 12.13.6. In relation to the period ending 30 June 1989, the report was delivered under cover of a letter from TBGL dated 29 November 1989. There is evidence that the letter was received by Westpac (Weir), Lloyds Bank (Latham), SCBAL (Walsh), Skopbank (Simonen) and SocGen (Edward).
    6404 I am in no doubt that the banks regarded the negative pledge reports as an important part of the information process. Given the stage that negotiations had reached in November 1989, and given there is no evidence of a protest by any bank at not receiving the 30 June 1989 report, I am confident that the document was seen by all banks.
    30.6.2.9. The Garven cash flow
    6405 The Garven cash flow, dated 19 February 1990, is described in Sect 9.4.3.2. It includes a summary of the cash flow projections. This document was tabled at the banks’ meetings in Perth on 22 and 23 February 1990. Garven also gave a presentation on his projections. Lloyds Bank was represented at the meetings and circulated copies to the Lloyds syndicate banks on 23 February 1990. Garven gave a further presentation to the Lloyds syndicate banks at the syndicate meeting on 12 March 1990.
    30.6.3. Knowledge source: the 1 July and September cash flows
    6406 The starting point in the plaintiffs’ case on the banks’ knowledge of the financial condition of the Bell group is the 1 July and September cash flows (and the HBKA cash flow). The plaintiffs allege that it was plain from these documents, and each defendant bank knew, that:
    (a) as at January 1990, the BPG group was the only available source of operating cash flow for the Bell group;
    (b) the Bell group’s expenditures as at January 1990 primarily comprised bank and bond interest and corporate expenses;
    (c) for the year ended 31 December 1990, TBGL, BGF, BGUK and BGNV were liable to pay approximately $88 million on their borrowings;
    (d) the forecast net cash flow for the BPG group for the year ended 31 December 1990 was approximately $40 million;
    (e) having regard to the interest commitments of TBGL, BGF, BGUK and BGNV and the forecast net cash flow for the BPG group, TBGL, BGF, BGUK and BGNV were dependent on the income received by Bell Corporate from management fees and dividends to meet interest payments as they fell due during the year ended 31 December 1990; and
    (f) if some or all of the projected management fees and dividends were not received by Bell Corporate in the year ended 31 December 1990, the Bell group would be unable to pay its debts as they fell due.
    6407 I think it is fair to say that the banks do not deny that these conclusions were open to a person reading the documents. They do not say that these conclusions could not have been drawn by a bank officer in possession of the cash flows. Rather, they say that no bank officers actually drew those conclusions. Their case is that these conclusions were not at all obvious, as the cash flows do not stand on their own. In other words, it would be wrong to confine attention to the four corners of the documents. There were other sources of cash inflows not reflected in the documents. In any event, the banks may not have looked closely at the cash flows. Even if they did, the documents were complex and the Bell group facilities were merely one of many the bank officers had to deal with. In those circumstances, it is dangerous to infer that the banks did in fact form the views contended for by the plaintiffs. The banks had the benefit of many years of consideration and analysis of the factual material.
    6408 As I have said, one specific rebuttal that the banks do make is that the banks’ officers did not believe that the cash flows reflected the only sources of cash available to the Bell group. The banks say that many officers believed that, in addition to what was contained in the cash flows, the Bell group was able to sell non‑core assets to raise cash.
    6409 It will probably come as no surprise to a person who has read Sect 9 that I think any person reading the cash flows would have had serious cause for concern. Much of what I am about to say will repeat material already covered in various of the subsections in Sect 9. Nonetheless, it is important to set it out here so that the attitude the banks took to this material can be put in context. The 1 July and September cash flows were divided into divisions: Bell Corporate, Bell International, Bell Publishing, Wigmores Tractors, and Western International Travel.
    6410 For the year ending 30 June 1990, looking at all the divisions, the 1 July cash flow projected a total net cash inflow of $127.7 million. Interest expenses were projected to be $91.3 and $30 million was forecast to be paid in reduction of the principal debt owing on the facilities. Thus, a total of $121.3 million in outgoings was projected, leaving a closing cash balance as at 30 June of $6.3 million. For the following six months (July 1990 to December 1990), the net cash inflow was forecast to be $58.3 million. Interest payments and payments in reduction of the cash advance facilities were forecast to be $60.6 million in the same period. That amount included a reduction in the amount owing under the facilities granted to the banks of $20 million.
    6411 In summary, for the year ended 31 December 1990, the total net cash inflow was predicted to be $110.9 million. Interest payments and payments in reduction of the total amount owing under the cash advance facilities granted to the banks was forecast to be $116.7 million in the same period ($86.7 million in interest and $30 million in principal debt reductions).
    6412 The HKBA cash flow painted a similar picture. I will mention the main differences only, since the overall conclusions that would have been evident to HKBA are the same as with the other banks. The main difference between it and the July cash flow was that the HKBA cash flow also included projections for Bondnet, Q‑Net, Bond Communications (Australia) and Eastel. Bondnet was forecast to generate a positive cash flow of $63,000 but the latter three were forecast to suffer losses ($2.7 million, $8.8 million and $1.1 million respectively). The HKBA cash flow also forecast a receipt of $51 million from the sale of Bryanston, to be received in August and September 1989.
    6413 By way of comparison, the 1 July cash flow forecast a receipt of $25.5 million in August, with a further $6 million to be received the following year. The 1 July cash flow allowed for repayments of bank facilities in the order of $30 million, whilst the HKBA cash flow made no such allowance. There were some other minor differences but the end result was similar. The HKBA cash flow forecast slightly higher net cash inflows, but this was balanced by slightly higher interest payments. Overall, net cash inflow in the HKBA cash flow was $131.2 million as compared to $127.7 in the 1 July cash flow. As I will explain later, HKBA, like the other banks, could not have regarded Bryanston as a source of cash flow for the Bell group. Accordingly, if the increased allowance for Bryanston were to be eliminated, the HKBA cash flow would show a smaller positive cash inflow for the period than that projected in the 1 July cash flow.
    6414 The figures in the September cash flow were slightly different again. Projected figures for the year ending 30 June 1990 were net cash inflows of $148.9 million and payments toward interest obligations and reductions in facilities of $119.3 million (of which $30 million was toward reductions of principal debt). This left a closing cash balance of $27.4 million. For the six months ending 31 December 1990, the cash flow forecast net cash inflows of $55.4 million and payments toward interest obligations and reductions in facilities of $59.2 million (of which $20 million was toward reductions of principal debt. For the 12 months ending 31 December 1990, the cash flow forecast net cash inflows of $108 million and payments toward interest obligations and reductions in facilities of $113.6 million (of which $30 million was toward reductions of principal debt).
    6415 Therefore, around mid to late 1989, the Bell group was projected to have small positive cash flows for the year ending 30 June 1990. But looking at the following six months, and the year of 1990 as a whole, negative cash flows were forecast. In my view, a person reading these documents would come away with the impression that things were tight and getting tighter.
    6416 The cash inflows for Bell Corporate, which were the same in both the July and September cash flows, consisted of:
    (a) management fees payable by BRL ($14.4 million in July 1989 and $3.6 million per quarter thereafter) and JNTH ($1.2 million in July 1989 $300,000 per quarter thereafter);
    (b) dividends to be received from BRL ($15.9 million in each of May and November 1990), JNTH ($4.2 million in each of April and October 1990) and GFH ($7.6 million in each of December 1989 and June 1990);
    (c) proceeds from the sale of Wigmores ($7.5 million in September 1989), HJW Engineering (a total of $6.8 million in July and August 1989) and certain radio stations ($200,000 and $500,000 in August and November 1989 respectively);
    (d) rental income from the Forrest Centre ($30,000 per month); and
    (e) other miscellaneous receipts ($519,000 in July 1989).
    6417 It is apparent that, of the total net inflows forecast in the year ending 31 June 1990, namely $99 million, $83.1 million was made up of management fees and dividends. In the year of 1990, no cash from asset sales was expected so, leaving aside the small amount received as rent for the Forrest Centre, management fees and dividends were the only source of cash for Bell Corporate. It is also apparent that the management fees and dividends formed a substantial portion of the total cash inflows for the Bell group as a whole.
    6418 Both the July and September cash flows indicated that the management fees for the year ending 30 June 1989 had not been paid but had been accrued. Receipt of the payment was expected in July 1989. They also indicated that the amount of forecasted dividend income from BRL had been calculated by assuming a dividend of 10 cent per annum on each ordinary share and 43.5 cent per annum on each preference share. The JNTH dividend forecasts were calculated on the assumption that a dividend of 63.6 cent per annum would be paid on each preference share.
    6419 Bell International’s only significant projected receipt was for the sale of Bryanston. The 1 July cash flow recorded that a sum of $25.5 million was expected in August 1989, with a further $6 million to be paid in interest in the year ending 31 December 1990. The September cash flow simply recorded a single payment of $42.5 million in October 1989. The 1 July cash flow predicted $7.8 million in expenses for the year ending 30 June 1990, while the September cash flow recorded $3.5 million. The Bell International division had effectively ceased all operating businesses by the end of 1989 and no cash inflows or outflows were projected for 1990.
    6420 The two cash flows received by the banks contained identical projections for the BPG group. For the year ending 30 June 1989, receipts were forecast to be $225.6 million and expenditure was forecast to be $209.1 million. Thus, the group had a projected net cash flow of $16.4 million and an opening cash balance of $3.8 million, leaving a closing cash balance of $20.3 million.
    6421 The two cash flows were also identical in respect to the receipts and expenditures of Wigmores Tractors and Western International Travel. The sale of the Wigmores business had been delayed as a result of a dispute over the Caterpillar franchise. For Wigmores, the cash flows anticipated the receipt of $11.9 million in trading receipts in the period July to October 1989. Expenditures were forecast to be $3.4 million, incurred in the period July 1989 to January 1990. Net cash flow was therefore expected to be $8.4 million with most of that cash to be received between July 1989 and September 1989. Notes to the cash flows indicated that termination payments estimated to be $800,000 had not been included in the cash flow forecasts.
    6422 Western International Travel was expected to generate $6.5 million in receipts and $6.4 million in expenditures in the year ended 30 June 1990. In the 1990 – 1991 financial year, Western International Travel was forecast to generate $1.8 million per quarter in receipts and incur expenses of $1.2 million per quarter.
    6423 Having received the cash flows, the banks must be taken to have known that the only remaining source of operating income for the Bell group was from the publishing assets. For the Bell group as a whole for the period to 30 June 1990, the September cash flow forecast $148.9 million in inflows, compared to $119.2 million in expenditure to the group’s financiers. This is a net inflow of $29.6 million. Included in the inflows were sums of $27.3 million in management fees and $55.8 million in dividends ($31.9 million from BRL, $8.5 million from JNTH and $15.3 million from GFH). If these amounts were not received, the position would deteriorate from a positive net inflow of $29.6 million, to an outflow of $53.4 million. If the projected receipt for the sale of Bryanston ($42.5 million) were eliminated, the overall deficit would increase to about $95.9 million.
    6424 It follows that the net cash flow generated by the publishing assets was substantially less than the interest commitments to the banks and the bondholders. The group had sold all its other main assets. This was clear from the director’s statement in the 1989 TBGL Annual Report:
    Following a decision by the Board to concentrate the Group’s activities on publishing and communications, substantially all property, industrial and other corporate assets were disposed of during the year.
    6425 In the report there is mention of the groups’ shareholdings in BRL and JNTH. No mention was made of the GFH shareholding. The plaintiffs say that that shareholding was recorded as a non‑current asset with a value of $38.3 million. This is based on a note to the accounts that recorded ‘unlisted shares in related company at cost’ of $78.6 million, from which a provision for diminution in the value of the shares of $40.3 million was made. The auditor’s report described these shares as being of uncertain value but again did not refer the GFH shares by name. The banks’ knowledge of the GFH shares is discussed below.
    6426 In my view, it emerges clearly from these cash flows, and must have been clear to any person with commercial experience reading them, that, aside from the publishing income, the only other sources of funds by which the group could service its debts after October 1989 were the management fees and dividends, or a sale of the BRL shares. The Bell group was critically dependent on these receipts. This was information that was in the possession of the banks. It is also worth noting that during the subsequent refinancing negotiations, the banks decided against an additional UK security because all the assets of value were already secured.
    6427 Later in this section, I will deal with the banks individually. But to put the cash flow information in perspective, I will give a few examples of the way various bank officers regarded these cash flows and the way in which they commented on the issues that I have just raised.
    6428 Keane (NAB) accepted that ascertaining the shortfall between the Bell group’s cash flow and its interest expenses (if the management fees and dividends were not received) was not a complicated calculation. He was aware that BPG could not service the interest debt from its own free cash flow. On 24 August 1989 he sent a memorandum to the Credit Bureau. In it, he commented on (among other things) the ‘TBGL cash flow forecast for 1989/90 and 1990/91’. This must be a reference to the 1 July cash flow. The memorandum records that the Bell group’s valuation of the shareholding in BRL was ‘far in excess’ of the current market value. In relation to cash flow, Keane noted that ‘the funds anticipated from BRL are critical to TBGL’s cash flow’. He concluded that:
    In summary, both servicing and amortisation of the proposed syndicated borrowings is dependent on finalisation and settlement of proposed asset sales in the short term, and income from TBGL’s investments in associated companies BRL, JNT and GFH in the longer term, to supplement the cash flow from the group’s only significant operating entity, BPG.
    6429 At a meeting of banks on 4 October 1989, Edward (SocGen) is reported to have made the comment that SocGen believed BPG could comfortably service the group’s debts. But this view appears to have been superseded by subsequent occurrences. Upon receiving the cash flows, Edward annotated his copy, noting that this ‘clearly demonstrates that if Bell Corporate cash flow does not materialise [then] debt costs of Bell Group cannot be serviced’. He also accepted in cross‑examination that TBGL’s viability depended upon the dividends and management fees coming in from BRL, JNTH and GFH. He also acknowledged that these companies had made substantial loans to BCHL group companies or to Dallhold. Therefore, he said, the capacity of JNTH, BRL and GFH to make these payments depended on them being repaid by the BCHL group companies.
    6430 HKBA’s refinancing proposal, prepared by Inglis on 25 September 1989, contains several different projected cash flows. One is a ‘best case’ scenario based on information provided by TBGL and the other is an ‘adverse case’ scenario, in which HKBA assumed that no dividends or management fees from BRL, JNTH or GFH would be received. Inglis noted that, in both cases, the BPG cash flow alone might be insufficient to service the bank debt. He also noted that TBGL’s cash flow was dependent on the flow of income from management fees and dividends from BRL and that:
    In the event that BRL [did] not pay dividends and management fees to [TGBL], the Adverse Case projection indicates that [TBGL] would default on interest payments. The syndicate would have little alternative but to realise its security and sell Bell Publishing. From the attached BCHL and BRL cash flow projections, however, it would appear that the sale of the Lonrho shares has provided sufficient cash to permit BRL to pay dividends and management fees subject to BRL effecting the rest of its asset disposal programme.
    6431 The opinion expressed in the last sentence will be discussed later, in both the general sections on BRL and the specific section on HKBA. HKBA subsequently had little hope of TBGL receiving any dividends, much less management fees, within a time frame that would permit the Bell group to meet its commitments.
    6432 Moorhouse (BoS) accepted that if there was doubt about the receipt of funds from BRL and JNTH, then there would be real doubt as to whether the Bell group could produce a positive cash flow for 30 June 1990.
    6433 Borig (DG Bank) was aware that the Bell group was reliant upon dividends from BCHL group companies to meet its debts. He was aware that BRL, JNTH and GFH were BCHL group companies.

30.6.4. Knowledge source: the 1989 TBGL Annual Report
6434 In this section I will confine my attention to the critical financial information contained in TBGL’s annual report for the year ending 30 June 1989. More specific issues, such as the nature and worth of the group’s assets are discussed in separate sections (for example, the JNTH shares). The annual report was not provided to the banks within the time specified in the several facilities agreements. I do not think the late publication is particularly relevant. The plaintiffs say it ’caused concern’ to the banks but I do not see how this advances the case.
6435 One of the non‑financial aspects of an annual report is the identification of the directors. It was apparent from the TBGL annual report who the directors of TBGL were and that each of them had close links to the BCHL group. But I do not think there is any doubt that the banks were already well aware of those matters.
6436 Aspinall noted in his managing director’s report that the Bell group’s overall activities, including sales of non‑core assets, produced an operating loss of $159.2 million, compared to a loss of $171.2 million from the previous year. This was achieved on a total operating revenue of $2.26 billion, as compared to $2.32 billion for the previous year. The report also stated that the group’s operating loss and extraordinary items after income tax attributable to members of the holding company was $271.8 million, compared to a loss of $76.5 million in the previous financial year. The latter figure is a little misleading, because it was not based on operating loss and extraordinary items after income tax. The figure with which the $271.8 million loss should be compared was $103.2 million. It was recorded that, in the year ending June 1989, the group had generated $1.41 billion in asset sales that had been substantially committed toward debt reduction.
6437 The operating loss was partly sustained by a loss of $381 million from the write down in investments in associated companies (BRL, JNTH and GFH) to the underlying net tangible asset values of those companies. This loss was partially offset by the fact that the group’s programme of asset sales had realised more than the book value of those items.
6438 Aspinall’s report as managing director concluded with a section entitled ‘Future Prospects’. He noted that the group planned to refinance its borrowings, moving from a negative pledge structure to secured facilities. It expected to have a medium‑term facility in place ‘shortly’. Aspinall also stated that the group had a number of ‘key strategies and objectives in the short term which are geared to increasing profitability and expanding the publishing media revenue base’. It was said that those strategies and objectives included:
(a) the lifting of advertising revenues by bringing them into line with other major comparable publications;
(b) further improving in operating efficiencies as a consequence of the introduction of new equipment;
(c) increasing the throughput of the group’s major presses by accepting major contract printing work; and
(d) developing the communications division and taking advantage of deregulation of the telecommunications industry in Australia.
6439 The plaintiffs dismiss these comments as general statements devoid of any content and nothing more than ‘management platitudes’. But it can, I think, be taken to reiterate something that the directors and executives had expressed on many occasions: that the group planned to focus on and develop the publishing businesses. This was a central feature of the group’s business plan.
6440 The annual report went on to discuss the prospects for The West Australian newspaper. The business had shown strong growth, which was expected to continue despite tough economic conditions. The paper’s new printing press was expected to enable it to improve its operating margins and thus expand its advertising revenue. Whether the operation could sufficiently increase its assets profitability to support what I would call the Bell group’s ‘debt‑heavy’ and ‘asset‑thin’ position is, however, a different question.
6441 The operating loss of TBGL as holding company for the 12 months to 30 June 1989 was $76.1 million (compared with an operating profit of $185.7 million in the previous financial year). TBGL’s operating loss and extraordinary items after income tax attributable to its members was $68.5 million (compared with a profit of $167.7 million for the previous financial year). The accumulated losses of the Bell group as at 30 June 1989 were $271.9 million while TBGL, the holding company, had retained profits of $96.9 million.
6442 As at 30 June 1989 the Bell group had net assets of $459.8 million and total current assets of $347.3 million. Total current liabilities were $524.6 million resulting in a net current asset deficiency of $177.3 million. TBGL, as the holding company, had positive working capital of $10.9 million, comprising total current assets of $20.9 million less total current liabilities of $10 million.
6443 The report also disclosed that there was a dispute between the DCT and the Bell group concerning tax assessments that had been issued.
6444 In summary, the annual report disclosed that the Bell group was continuing to suffer heavy losses. It had failed to make any real inroads into reducing its debt levels, despite widespread asset sales that had left the group with few operating businesses. It showed that the group had a deficiency of working capital, and that the group was financially highly dependent on:
(a) realising the value of their shareholdings in BRL and JNTH;
(b) the valuation of WAN and that business’ ongoing growth; and
(c) being able to arrange a refinancing of bank debt.
6445 In my view, these are all matters that must have been readily apparent to any person with commercial experience reading the annual report.
6446 I should also mention that the auditor’s report qualified the value of the JNTH and BRL assets (discussed below in the section on JNTH). This report also questioned the valuation of WAN. The auditors suggested that, based on their ‘own detailed assessment’, the Whitlam Turnbull valuation may have overstated the value of WAN in the order of $125 million. But the auditors also noted that they had been ‘informed’ (presumably by the Bell group) that unsolicited interest had been expressed by various parties in the purchase of the publishing assets at prices approximating the Whitlam Turnbull figure. The auditors concluded that considerable uncertainty existed as to the carrying value of the newspaper mastheads. Again, I doubt that any person with commercial experience reading the annual report would have failed to note the audit qualification.
30.6.5. The financial position of the Bond group
6447 I want to start this section with another of my (hopefully) well‑chosen words of warning. This case is not about Alan Bond or BCHL. On the other hand, what the banks knew about the financial position of BCHL and its subsidiaries is relevant to what they knew about the financial position of the Bell group. They knew that the cash income of the Bell group depended to a significant extent on the receipt of dividends and (or) management fees from BRL, GFH and JNTH. This depended on the value of these companies. That, in turn, was linked to the fortunes of the BCHL group. Accordingly, I cannot ignore the financial position of the Bond group. But it is not the most significant issue in the case. I do not want to be diverted into an in-depth analysis of the financial travails of BCHL. This section is, therefore, relatively short.
6448 The 1989 BCHL Annual Report painted a bleak picture for BCHL and the Bond group. This might be of no consequence because the board vouched that as at 13 November 1989 there ‘are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due’. Nonetheless, the future solvency of the group was evidently questionable. The auditor’s report stated that ‘as a result of the uncertainties on the timing and completion of the restructuring programme and the carrying value of significant [BCHL] Group assets (as discussed in this report) there is some doubt that [BCHL] and the [BCHL] Group will be able to continue as a going concern’.
6449 For the 12 months to 30 June 1989, BCHL and the BCHL group had incurred net losses of $123.3 million and $980.2 million respectively, and unaudited information indicated that these losses were continuing in the period after 30 June 1989. The balance sheet revealed that BCHL had total assets of $2.9 billion compared to total liabilities of $2.6 billion, whilst the group had total assets of $11.7 billion compared to total liabilities of $9.9 billion. But the working capital ratio (current assets compared with current liabilities) was much worse. BCHL had current assets of $43.3 million, compared to current liabilities of $109.2 million, while the figures for the group were $2.73 billion and $4.09 billion respectively. This meant the group had a working capital deficit of $1.36 billion.
6450 The auditor’s report noted that the group had undertaken a major reconstruction programme subsequent to 30 June 1989. The reconstruction was continuing but the group would be dependent upon the continued support from its lenders and its ultimate controlling entity, Alan Bond. The chairman’s report discussed many issues that had had, or were having, a negative impact on the health of the BCHL group. These issues included:
(a) the high‑levels of short‑term debt with which BCHL was confronted due to the Bell group takeover;
(b) a dispute with the BBHL syndicate banks over breaches of loan covenants;
(c) the sale of assets which included some operations which, in other circumstances, BCHL would have preferred to retain in order to realise their long-term potential;
(d) the NCSC inquiry into BCHL’s dealings;
(e) Lonrho’s continued attack of the group’s credibility, with provision made for a loss on the Lonrho shares of $149.5 million; and
(f) the continuing hearings before the tribunal.
6451 The report stated that the year’s results had been made to look worse because of certain exceptional ‘one‑off’ expenses. The largest such item was the non‑recognition and write-off of future income tax benefits totalling $453.3 million.
6452 All of the banks were aware that there was media speculation that the Bond group was in serious financial trouble. Of course, the media reports cannot go to the truth of whether this was in fact the case, but I accept that the media reports would have contributed to the body of information that shaped the banks’ knowledge. I do not think there is much doubt that all of the banks were aware that the financial condition of the BCHL group was precarious.

30.6.6. Promises to reduce bank debt: Wigmores and Bryanston
6453 From the time of the October 1987 stock market crash, the Bell group had been engaged in an asset sale programme to reduce debt. The programme continued after the BCHL group took control of the Bell group in mid‑1988. There is a great deal of correspondence between TBGL (or BCHL on behalf of TBGL) advising the banks of the progress in the asset sale programme. By way of example, on 8 November 1988 TBGL wrote to all of the Australian banks (among others) saying the asset sales programme was ‘continuing to progress according to the plans outlined to you earlier’. The letter contained this paragraph:
TBGL expects that the asset sale programme should be completed by mid December 1988 with the sale of Wigmores, Waugh & Josephson and the Bryanston Insurance Group. At that time TBGL plans to pay out the senior lenders within the Negative Pledge Group that do not wish to participate in future funding for TBGL.
6454 On 5 December 1988 BCHL wrote to the Australian banks saying that Wigmores might not be sold by year end. BCHL proposed that the banks accept a partial repayment and extend the facilities through to 31 March 1989. The letter said: ‘Early in 1989 TBGL will place before you a proposal for the medium term financing of the group’. So it is, then, that by December 1988, the Australian banks (other than SCBAL) were anticipating clearance of their respective facilities by 31 March 1989. In the case of SCBAL, the anticipated repayment date was 31 January 1989. Those expectations were not met.
6455 There had been some correspondence between TBGL and Lloyds Bank raising similar expectations. On 16 March 1989 Lloyds Bank wrote to the Lloyds syndicate banks saying: ‘As you are aware, it was expected that the Bell group would have realised sufficient asset sales to enable them to make some form of pre‑payment of this facility on 31 March 1989’.
6456 The failure of the Bell group to meet these expectations forms part of one of the subset issues advanced by the plaintiffs in the case. The plaintiffs say that in late 1989 and early 1990, the banks were aware of previous failures by the Bell group to honour commitments. The banks regarded the group, and its executives, as unreliable and not to be trusted. Against that background, plaintiffs say that the banks were (or should have been) alarmed at the financial condition of the Bell group and they could not have relied on subsequent plans to reduce debt.
6457 The commitment to retire the debts due to NP group bankers who did not wish to continue lending to the Bell group was dependent largely on the sales of Wigmores Tractors and Bryanston. I think the sale of Waugh & Josephson can be left to one side because, as I understand it, those proceeds were committed to the direct bankers of that operation. This is the reason why the fate of the Wigmores Tractors and Bryanston sales is relevant; it explains why I intend to trace through the history of those transactions in some detail.
6458 The background to the Bryanston sale and the Wigmores Tractors sale is set out in Sec 4.4.2.2 and Sect 4.4.2.6, respectively. It will be recalled that, in the end, the Bryanston sale realised only £5000. It was allocated entirely to towards the satisfaction of anticipated creditors of TBGIL. The Wigmores Tractors sale realised about $78 million, which came in progressively between May 1989 and September 1989. In this section I will be concentrating not so much on the sales themselves but, rather, on the communications between TBGL and the banks about their progress.
6459 The sales of Wigmores Tractors and Bryanston were, in early 1989, one of the main devices by which the Bell group promised to reduce bank debt. Both sales were protracted and the projected receipts, as well as the intended application of those receipts, were revised on a number of occasions. The banks were initially informed that the proceeds of the sale of Wigmores Tractors and Bryanston would be directed towards pro rata repayments of debt. This did not occur as promised. The unreliability of the Bell group in this respect is relied on by the plaintiffs as one of the reasons that the banks should have been alarmed at the financial condition of the Bell group and why the banks could not fully rely on subsequent plans to reduce bank debt.
6460 The various banks were told slightly different things about the Wigmores Tractors and Bryanston sales in the course of dealings but ultimately the picture was broadly the same.
6461 On 3 March 1989, Farrell wrote to the Australian banks (other than HKBA), noting that some settlements had been delayed and requesting an extension of the facilities for six months. Farrell requested that the NP covenants be varied to relate solely to Wigmores Tractors, Bryanston and BRL. He also invited the banks to convert their negative pledge to security over the assets of Wigmores Tractors and BRL. Farrell reassured those banks that the Wigmores Tractors situation would be resolved and that, despite it falling short of its budgeted profit for the year, it was still expected to realise over $80 million. Farrell advised the banks that Bryanston had been sold and settlement was expected to occur by mid April at the latest. Both these sales were to be directed toward repaying bank debts on a pro rata basis.
6462 On 7 March 1989, Farrell informed Westpac (Weir) that the sale of Wigmores Tractors would produce $100 million in the following six months and that TBGL intended to completely retire debt from the sale proceeds on a pro rata basis. Also on that day, Farrell spoke to Evans (Lloyds Bank) and sent out a package for the Lloyds syndicate banks. The package and the information conveyed by Farrell were forwarded to the Lloyds syndicate banks by letter on 16 March 1989. Lloyds Bank advised that the proposed pre‑payment of the syndicated loan would not be made on 31 March 1989 as it had expected, but the indebtedness of the Lloyds syndicate would be reduced pro rata to the other remaining indebtedness of the Bell group.
6463 The same suggestions or requests were made to the Lloyds syndicate banks regarding the negative pledge and the possible conversion to tangible security as were made with the Australian banks. As with the Australian banks, the Lloyds syndicate banks were advised of the projected value of Wigmores and the expected settlement date for the Bryanston sale. They were informed that the proceeds of both sales would be directed towards pro rata reductions in bank debt. In a telephone call on 9 March 1989, Farrell confirmed to Lloyds Bank that the proceeds of the Bryanston sale would be used to repay Bell group debt only.
6464 As mentioned, HKBA were contacted separately. On 28 March 1989, Farrell wrote to Davis requesting an extension of the TBGL facility until 31 May 1989. Farrell informed Davis that the negative pledge borrowings had been reduced from $1.6 billion to $364 million and that borrowings would be reduced by a further $50 million, with the repayment of facilities provided by CBA and Citibank on 31 March 1989. He said that ‘proceeds from the sale of Bryanston and Wigmores Tractors would reduce these facilities by a further $160 million.’ Farrell reported that the completion of negotiations regarding these sales should occur in the next few weeks. He also told Davis that they were expecting settlement of the Bryanston sale ‘within weeks rather than months’.
6465 The Australian banks also received additional reassurances about the Wigmores Tractors sale. On 28 March 1989, Farrell requested a further extension of TBGL’s facility with NAB for three months or until receipt of the proceeds of sale of Wigmores Tractors, Bryanston and the financing of BPG. Farrell informed NAB of the impending sale of Wigmores Tractors for $108 million, of which $100 million would be payable 30 days after signing. The remaining $8 million (plus interest) would be payable two years later.
6466 On 7 April 1989 SCBAL confirmed an extension of the TBGL facility until 15 May 1989. The extension was conditional upon repayments being linked to the sale of Wigmores. BGF was to provide SCBAL with a copy of the sale contract, specifying the purchase price and settlement date. The terms of the extension were accepted by Farrell on 11 April 1989.
6467 On 10 April 1989 Farrell informed SCBAL that the total value of the Wigmores sale would be in excess of $100 million. The letter attached a memorandum from Aspinall to Farrell dated 7 April 1989 containing the terms of the sale of Wigmores. It stated that certain Wigmores assets would be sold for $69.299 million with $67.699 million payable upon signing of the contract and FIRB approval. The remaining $1.6 million would be payable in two instalments within six months of signing. TBGL would retain the receivables and creditors of Wigmores; those receivables were worth approximately $12.7 million.
6468 On 11 and 12 April 1989 NAB was advised of the sale and the repayment of its debts was debated. NAB took a hard line and insisted that a portion of the proceeds expected on 7 May 1989 be directed towards a reduction of its debt before it would consider an extension of its facility. So far as NAB was concerned, the position was complicated by reason of another asset; namely, the Qintex receivable (as to which see Sect 4.4.2.5). On 31 March 1989 NAB had informed TBGL that it expected the Qintex receivable to be applied for the benefit of the NP group banks. On 12 April 1989, Willis (NAB) expressed his concern to Oates regarding the use of the Qintex receivable for meeting TBGL’s operating costs and not in reduction of bank lending. TBGL responded by saying that this kind of priority treatment would be problematic in light of the other banks’ claims. NAB responded that the expected repayment from Qintex was not ‘an early repayment, but rather the making of a reduction which was agreed and documented with the company’.
6469 By 9 May 1989 many of the conditions required by NAB, including pro rata distribution of the Qintex receivable and the Wigmores and Bryanston proceeds, had not occurred. Willis sent a further letter to BCHL demanding, as a minimum requirement for the continuation of the facility, the execution of a lien over the BRL shares and a reduction of $8 million of the facility (NAB’s pro rata share).
6470 On 18 April 1989 Raeburn from Bond Corporation (UK) wrote to Lloyds Bank and informed them that likely cash proceeds from the Bryanston and Wigmores Tractors sales were in the order of $70 million and $105 million respectively. Raeburn said:
It is felt that the remaining Bell Group assets are quite capable of servicing the outstanding borrowings, following the completion of the disposals of Wigmores and Bryanston, together with the consequential reduction of debt.
6471 On 28 April 1989 HKBA granted a further extension of the $25 million facility to TBGL until 12 May 1989, pending receipt of $12.5 million from the Wigmores Tractors proceeds. HKBA learnt of delays in the sale and agreed to extend the facility to 19 May 1989, with a balance of $12.5 million to expire on 30 June 1989, pending finalisation of the Wigmores Tractors sale.
6472 On 11 May 1989, Farrell promised to pay SCBAL $7.5 million on 19 May 1989 from the Wigmores Tractors proceeds, with the remainder of the payment to be made from the Bryanston proceeds. Farrell informed SCBAL that TBGL expected to receive only $58 million from the Wigmores sale and not the $68 million as previously understood. Walsh’s memorandum records Farrell as saying that all other banks were placing extreme importance on Bell’s ability to reduce 50 per cent of outstanding bank debt with the Wigmores proceeds on 19 May 1989, and that would satisfy them until the Bryanston proceeds were received. Walsh told the group manager at SCBAL that he would endeavour to obtain a copy of the Bryanston sales contract, which was expected to be signed on 15 May 1989, and would suggest that TBGL hold a meeting of all banks to explain details of the sale. Walsh canvassed several possible options including seeking an assignment of the Bryanston proceeds.
6473 The Bell group ultimately received a settlement payment of $51.6 million from the Wigmores Tractors sale on 19 May 1989. The Bell group retained the Wigmores Tractors receivables, worth around $12.7 million. Additional amounts, totalling around $14 million, were expected to follow for other assets associated with the HJW and Wigmores Tractors businesses. Of the $51.6 million instalment, Citibank received $15 million and NAB $22 million in reduction of their respective facilities. Other internal expenses and minor trade creditors of $8.7 million were paid.
6474 I was not able to find evidence accounting for the remaining sum of approximately $6 million dollars. One thing is clear: it did not go to the banks. By letter dated 25 May 1989, Farrell informed Westpac and SCBAL of the distribution of funds. SCBAL demanded to know why the Wigmores Tractors proceeds had been applied to certain banks in priority to others. It appears Westpac had a similar concern, given Farrell’s placatory tone in his letters to those banks. However, Farrell did not give a direct answer to the question why NAB and Citibank had been paid instead of the proceeds being applied pro rata as promised. But he said:
The major problem that we have had with the Banks is that everyone expects to receive every cent that comes out of asset sales and does not take into consideration that the cash flows from the remaining businesses fluctuate at times dramatically during the year. The other problem is that we have had Banks in The Bell Group that do not have a relationship with Bond and have simply not been prepared to extend their exposures, despite the source of their repayments being clearly defined. The cold fact of life is that The Bell Group does not have any funds of its own to make any further retirements until the receipt of the Bryanston monies or the drawdown of the Bell Publishing facilities. Therefore, The Bell Group has to look to its parent, Bond, and the reality there is that we do not have great amounts of cash until we receive the settlements from the various transactions announced recently.
6475 Westpac responded by saying that although they understood TBGL had other working capital requirements, by their calculations, they should still have had a surplus of $47 million and should therefore reduce Westpac’s share by $9 million by 31 May 1989.
6476 Wardley contacted BCHL on 3 July 1989, and informed it that Westpac had approved an extension of the facility to 31 July 1989. Wardley asked the company to advise on the latest position in respect of the sales of Bryanston and Wigmores Tractors. They were informed of the expected amounts and dates of the balance of the Wigmores Tractors proceeds and were told that a firm offer for Bryanston had been made. The group expected to receive at least £20 million for Bryanston.
6477 On 18 July 1989 Simpson had a meeting with Walsh (SCBAL), in which he informed the bank that its facility would not be repaid as expected. Instead, TBGL was planning a ‘club arrangement’ whereby all the banks would be repaid on a pro rata basis. The timeline for this was 25 per cent on each of 30 June 1990 and 30 June 1991 and the remaining 50 per cent by a refinancing facility that they expected to arrange well before ‘that date’ (presumably 30 June 1991).
6478 Simpson told Walsh that the Wigmores Tractors and Bryanston proceeds would be used to retire $20 million of the total bank debt of $134 million; Walsh was also informed that the Bryanston sale had progressed to the stage of exchanging contracts, but that the sale was still subject to Department of Trade and Industry approval. Simpson said that the settlement would take the form of a 50 per cent up‑front payment ($19 million), with the other 50 per cent repayable over a four‑year period, commencing June 1990.
6479 Walsh told Simpson that, given the continual deferment of repayment over the previous nine months, it was unlikely that SCBAL would participate in such an arrangement unless they received $7.5 million from the proceeds of the Wigmores Tractors sale. It is evident from Simpson’s memorandum to Beckwith, Oates and Aspinall dated 20 July 1989 that Walsh was unimpressed at the failure of the Bell group to retire any part of their facility as promised. He described Walsh’s reaction as: ‘everyone else got money back except us, we want our money back’.
6480 It is also evident from Simpson’s memorandum of 20 July 1989 that SocGen received similar advice from Simpson and were similarly unimpressed. Simpson recorded that Edward (SocGen) was concerned about the group’s cash flow and sought further information with respect to TBGL, GFH, BCHL and BRL. SCBAL and SocGen were not enthusiastic about the new (proposed) arrangement but would wait and see what attitude the other banks took. NAB was evidently less demanding, having received some of its money from the Wigmores Tractors sale. But they wanted security, as did SocGen and SCBAL, although Simpson had not made a firm offer in that regard. SocGen also demanded that any proceeds from the sale of Bryanston be applied pro rata in the reduction of bank debt as a condition of it considering a refinancing proposal.
6481 Walsh’s note of 18 July 1989 suggests that HKBA had also been approached about the club arrangement and had expressed in principle agreement. HKBA knew at least by 1 September 1989 that ‘virtually all the sale proceeds from Wigmores Tractors [had] been made available for general Bond Group cash flow purposes’ and that no reductions in their debt would be forthcoming from these proceeds. Davis’ internal memorandum of 19 July 1989 indicates that HKBA knew that the ‘so-called “imminent” sale’ of Bryanston had not been completed due to a lack of finance. Davis discussed the current offers but expressed scepticism that the sale could be completed in the near future. He envisaged that the facilities would only be repaid either by sale of the publishing assets or an overall refinancing.
6482 At the meeting with the Lloyds syndicate banks on 20 July 1989, Oates and Raeburn informed the syndicate that all banks had been asked to extend their facilities to May 1991 and that it was proposed that all banks would be put on the same footing. The meeting was broadly informed about the current status of the Bryanston sale and the proposed deferral of payment continuing into 1991, although it is not clear that specific details were advanced. Evans (Lloyds Bank) sent a letter to the Bell group containing an extensive list of requests for further information on behalf of the syndicate. They sought exact details of the Bryanston and Wigmores Tractors sales, the timing of the sales (to the extent it was known) and the Bell group’s intentions regarding the cash proceeds. Oates replied on 7 August 1989 that the Wigmores Tractors sale had been completed and explained how the proceeds had been utilised. He noted that a further $14.65 million was expected, as was evident from the July cash flow, which the Lloyds syndicate banks had been sent on 2 August 1989. Those proceeds would be used to retire Wigmores Tractors’ overdraft facilities and for working capital purposes. Oates’ letter said that they expected £20 million for Bryanston and that this would be paid at the time of completion. The proceeds were to be used for working capital and ‘amortisation of the call loans from the Australian lenders’.
6483 By letter dated 23 August 1989 Lloyds Bank were informed by Simpson that a sale agreement in respect of Bryanston had been signed and the purchaser was to pay £20 million. An inter‑company debt of £3 million owing to Bryanston by TBGIL would not be called for repayment within two years from completion.
6484 On 11 September 1989 Latimer informed Simpson that CBA would be looking for the full proceeds of the remaining Wigmores settlement to be directed to the repayment of their facility, with the balance to be cleared from the Bryanston proceeds.
6485 The September cash flow indicated to all banks that $42.5 million was expected to be received in October 1989 in a single payment. But, as things turned out, this was optimistic. Latham (Lloyds Bank) informed Weir (Westpac) on 8 November 1989 that he had spoken with Edwards, a director of BGUK, regarding Bryanston. Edwards had told Latham that the deal ‘was not going well for Bell.’ He said that the price was likely to remain the same but only £5 million was to be received mid-December, and that the remaining £15 million would be received at a later date. Weir informed the Australian banks of this on 12 November 1989; he suggested that the proceeds be placed in escrow until the full £20 million had been received. The full amount would then be applied in mandatory repayment to all banks on a pro rata basis. Weir told the Australian banks that it was a condition of sale that shares in Bryanston were to be unencumbered and had to remain so. Accordingly, the earlier proposal for the banks to take a mortgage over the shares could not proceed: it would have to be replaced with a formal assignment of the benefits under the contract for sale. Weir asked Simpson to confirm that the information he had received from Lloyds Bank regarding the Bryanston proceeds was correct. Simpson did so on the following day. Weir forwarded Simpson’s letter to the Australian banks on 15 November 1989.
6486 On 22 December 1989 Lloyds Bank distributed to its syndicate members a bundle of documents that included a copy of the sale contract for Bryanston. This contract made it clear that only £5 million would be received on settlement with the balance of the purchase price to be received over time if certain conditions were fulfilled. This was confirmed at the meeting of the Lloyds syndicate on 8 January 1990, where the banks were told that an initial payment of £5 million would be made, followed by payments totalling £15 million over the following five years.
6487 On 17 January 1990 Simpson also sent Weir a copy of the Bryanston sale agreement to be forwarded to the Australian banks if Weir thought it necessary. In the covering memorandum, Simpson advised that Department of Trade and Industry approval had been given for the sale. He also informed Weir that the procedure for calculating the deferred payment was such that it was ‘unlikely any portion of the £15 million would be received prior to the expiration of the facility’. The UK directors had taken the view that TBGIL would only be able to participate in the refinancing on the condition that the initial instalment of the Bryanston sale proceeds was set aside in an escrow account to protect the interests of TBGIL’s creditors.
6488 On 18 January 1990 Lloyds Bank wrote to the syndicate members regarding the application of the proceeds from the sale of Bryanston and attached a letter from BGUK to Lloyds Bank. Lloyds Bank explained that the directors of TBGIL believed there were legal problems that inhibited the ability of TBGIL to give a guarantee and a share mortgage over Bryanston. The directors of TBGIL felt obliged to
respond to the interests of their few third party creditors, and to be able to do so are advised to place the proceeds of the Bryanston sale in a special account, charged by way of fixed charge for the benefit of the banks, and to which Bell would only have very limited access until possible third party claims have either been met or have disappeared.
6489 Consequently, the proceeds from the Bryanston sale were likely to go in their entirety into the special account. This meant they would not be available to the banks until after the repayment date of the restructured facility.
6490 The notes of the 24 January 1990 meeting of the Australian banks, when read together, demonstrate that the Australian banks were provided with similar details as described above in relation to the Lloyds syndicate. They were advised, presumably by Weir, that an initial payment of £5 million would be made for Bryanston, with the balance of the purchase price to be deferred and made dependent on the performance of Bryanston. The £5 million would be secured to the banks but the funds would be available for TBGIL to satisfy its debts to external creditors, recorded as being around £3 million (per Walsh of SCBAL) or £5 million (per Inglis of HKBA). Smith (CBA) recorded that ‘it now seems unlikely that total proceeds from the sale will be available for distribution until closer to May 1991’. Inglis thought it conceivable that no further funds would be received. Walsh recorded that the ‘consensus view’ was that Bryanston would no longer be a source for reduction of the banks’ debts.
6491 On the basis of these last communications I conclude that, by 26 January 1990, the banks must have been aware that the Bryanston proceeds were not an item which could realistically be relied on as part of the Bell group’s cash flow. The banks knew the proceeds would be effectively cordoned off by TBGIL from the rest of the group and that the Bell group could have no reasonable expectation of gaining any useable cash flow from the sale prior to the expiration of the banks’ facilities.
6492 This view was ultimately confirmed after 26 January 1990, when the Garven cash flow was provided to the banks at the February meeting of the Australian banks and Lloyds Bank. The Garven cash flow did not predict any receipt from the sale. The Lloyds syndicate banks were sent copies of the cash flow on 23 February 1990 and received a presentation by Garven explaining his projections on 12 March 1990.
6493 I also conclude that, by the end of September 1989, the banks must have been aware that no further receipts would be available (for general cash flow purposes) from the Wigmores Tractors sale.
6494 This little saga is illuminating for another reason. It is a good example of the way the relationship between the Bell group and the banks developed during the first half of 1989, leading up to the commencement of serious negotiation for the refinancing later in the year. The culmination of the sales, and the amounts to be realised from them, was an ever moving feast. So, too, were the expectations of the banks as to the monetary relief they would receive from the sales. While I would not go so far as to say that this saga, by itself, is sufficient to establish the plaintiffs’ argument that the banks formed a view as to the unreliability of the Bell group, there is a clear indication of alarm in some of the dealings. This is the reason that I spent some time describing the communications between NAB and TBGL in early April 1989, Farrell’s letter to Westpac and SCBAL of 25 May 1989, and Walsh’s plaintive cry recorded in Simpson’s note of 20 July 1989. This is not intended to be an exhaustive list. But the sentiments reflected in these dealings are illustrative of a general impression that arises across the board from the contemporaneous evidence.
30.6.7. The GFH and JNTH assets
6495 The relationship between TBGL and JNTH, and between TBGL and GFH, and the background to the matters I will deal with in this section are set out in Sect 9.9 and Sect 9.11, respectively.
6496 The 1 July and September cash flows forecast management fees from JNTH in favour of TBGL in the amount of $1.2 million in July 1989 and $300,000 per quarter thereafter. It also forecast receipt of dividends from the Bell group’s shareholding in JNTH ($4.265 million in each of April and October 1990). The 1 July and September cash flows indicated that the management fees and dividends projected to be paid by JNTH were a material source of cash inflows for the Bell group given the tightness of its position; they projected the receipt of preference dividends from GFH in the amount of $7.66 million in each of December 1989 and June 1990.
6497 The cash flows also showed that management fees from JNTH had been accrued. As I understand it, the JNTH management fees were never paid and stood as a debt due by JNTH to TBGL in TBGL’s ledgers as at 26 January 1990.
6498 The practice of levying management fees within the Bond and Bell groups was disclosed in 1989 Annual Reports for TBGL, BCHL, BRL and JNTH. For example, note 32 to the financial statements contained in the TBGL annual report stated:
The Company became a subsidiary of [BCHL] on 26 August 1988. For the period from 26 August, 1988 the company was provided with services pertaining to management, accounting, taxation, insurance, personnel selection, finance, treasury and secretarial services by [BCHL], or direct and indirect subsidiaries of [BCHL], for which a fee was charged.
6499 It went on to describe how BCHL provided services to TBGL in connection with the disposition of assets formerly owned by the company as part of the corporate restructuring of the Bell group, for which a fee was charged. The report further stated that TBGL earned management fees in connection with administrative services it provided to BRL and JNTH during the year ended 30 June 1989, by virtue of arrangements which pre‑dated the ownership of these companies by the BCHL group. The fee was calculated on the total assets of the BRL and JN Taylor groups. The payment of management fees by BRL and JNTH were also described in the annual reports of those companies, whilst the payment of fees by TBGL to BCHL was also described in the BCHL annual report.
6500 The annual reports showed that, in effect, BCHL had taken over the task of providing accounting, finance, treasury and secretarial services for TBGL, BRL and JNTH. But as noted above BRL and JNTH continued to pay fees to TBGL for these services; TBGL paid similar fees to BCHL. Neither the 1 July cash flow nor the September cash flow referred to the payment of fees by TBGL to BCHL.
6501 The auditor’s report in the TBGL annual report qualified the listed value of the JNTH assets. The discussion was, admittedly, non‑specific:
The audit report on the accounts of JNT for the year ended 30 June 1989, has been qualified in relation to the carrying value of investments in related companies. The investments are material and circumstances similar to those described above in relation to BRL apply. Any shortfall on the recovery will affect the net tangible assets of JNT and consequently the investment held by the Group in JNT.
6502 The 1989 TBGL Annual Report made little direct mention of the GFH shareholding. Note 32 touched on the fact that BGF had purchased preferences shares in GFH at book value from BRL. It seems to have been recorded as a non‑current asset with a value of $38.3 million, based on a note to the accounts that recorded ‘unlisted shares in related company at cost’ of $78.6 million, from which a provision for diminution in the value of the shares of $40.3 million was made. The auditor’s report described these shares as of being of uncertain value but, again, did not refer to the GFH shares by name.
6503 All of this information from the cash flows and the 1989 TBGL Annual Report was information in the possession of all banks. But much of it, such as the fact that the GFH shares had effectively been described as being of uncertain value, needed to be pieced together. I can understand that a bank officer reading these materials might not have condescended to that level of detail; no evidence was led from any officer that he or she did so.
6504 A bank officer that received and read the 1989 JNTH Annual Report might easily have decided that the chances of the Bell group receiving payments from JNTH were problematic. SocGen and HKBA are the only banks to have discovered copies. Given Weir and Keane said it was likely they read it, I think that Westpac and NAB could have had knowledge of its contents. The report showed that all operative businesses had been disposed of, leaving JNTH as a corporate group whose only remaining activity was investment. It was apparent that these investments consisted almost solely of receivables from related companies. But I am not convinced that the reports were subjected to that level of scrutiny.
6505 When the reports are scrutinised, a picture emerges of a company in demise. The financial summary in the JNTH Annual Report recorded total current assets of $214.4 million, of which $214.1 million were receivables. Total assets were listed as $240 million. Of the $214.1 million receivables, $75.1 million was due from the ultimate holding company and $139 million from other related companies. Dallhold owed JNTH $75 million and $137 million was owed by BCF. The accounts also disclosed that JNTH owed a total of around $10 million to TBGL and BGF.
6506 The profit and loss account recorded that the operating revenue for the year ended 30 June 1989 was $58.6 million, of which $22.9 million was sales revenue, including the proceeds of asset sales. Operating profit was $24.5 million, while operating profit after extraordinary items and after income tax attributable to members of the holding company was $15.9 million. Accumulated losses at the beginning of the financial year were $11.1 million, so that the total amount available for appropriation was $4.7 million. A further $18.1 million was listed as a provision for, or to be utilised to pay, dividends. The accumulated losses at the end of the financial year stood at $13.3 million.
6507 A final dividend on ordinary shares had been paid on 30 November 1988. For preference shares, dividends had been paid on 30 November 1988 and 31 March 1989. A further half‑yearly preference dividend of $9 million had been approved by directors but not yet paid. Some of that amount had been provided for in the 1989 accounts.
6508 All of SocGen, Westpac, HKBA and NAB had a well‑developed understanding of the financial troubles of the Bond group and Dallhold, as has emerged in the individual sections on these banks. It seems unlikely they would have expected JNTH to receive substantial repayments from those companies. I am not sure that it necessarily follows that they were thereby in possession of information that struck at the very heart of the integrity of the cash flows.
6509 The Lloyds syndicate made some inquiries of the Bell group, seeking information about JNTH prior to the commencement of the refinancing negotiations. One example is a letter from Tinsley (Lloyds Bank) to Oates on 2 May 1989 where Lloyds Bank sought, on behalf of the syndicate, details of the consideration for its transfer to BCHL and when it would be received.
6510 The Lloyds syndicate banks were informed at the 11 September 1989 syndicate meeting that there was a dispute between the Bell group and its auditors about the valuation of the group’s holdings in JNTH and BRL. The auditors were claiming that Bell’s figures were excessive.
6511 Lloyds Bank knew that the receipt of funds from BRL, JNTH and GFH were material to the cash flows. Their letter dated 2 May 1989 to Oates was predominantly a detailed list of requests for information; many of the requests relate to BRL and the brewery sale. They also requested details of the consideration for JNTH’s loan to BCHL and when repayment was expected. This letter followed the 25 April 1989 syndicate meeting and a draft of the letter was circulated to the Lloyds syndicate banks prior to sending it to Oates. Lloyds Bank also sought details about GFH in its letter to the Bell group of 18 August 1989. Simpson’s reply (which was distributed to the syndicate banks) stated that GFH was a wholly owned BCHL subsidiary.
6512 As appears in the earlier section of these reasons, I believe that JNTH and GFH were mortally wounded (in a financial sense) at the relevant time. I also believe that the receipts of management fees and dividends reflected in the 1 July 1989 and September cash flows were material. Nonetheless, there were other items of much greater materiality reflected in the projections. The BRL dividends and management fees are an example. It is clear from the Lloyds Bank request for information (by way of example) that the viability of the projections, so far as they concerned receipts from JNTH and GFH, had exercised the minds of some bank officers.
6513 It seems to me that a clear picture would have emerged only when the reports of numerous, albeit connected, companies were read and the information digested. I am not sure that I can infer that all banks received the reports of the less significant companies, such as JNTH and GFH. Nor am I sure that those banks which had the information necessarily condescended to the level of detailed exploration of myriad reports that would have brought home the view that the cash flows were unviable in this respect.
30.6.8. The BRL assets
30.6.8.1. Some introductory comments
6514 In my view, an enquiry into the banks’ state of knowledge concerning BRL matters is likely to bear more fruit than a similar exercise concerning JNTH and GFH. The background to the BRL question is littered throughout these reasons. A good place for the reader to start a refresher course on matters BRL is Sect 4.1.3, followed by Sect 9.10. I mentioned the background to the management fee arrangement between TBGL and BRL in the preceding section.
6515 There are two separate (but closely related) aspects to the BRL problem. First, the financial health of BRL had a direct impact on the cash flows. The 1 July and September cash flows forecast receipt of management fees from BRL in the amounts of $14.4 million in July 1989 and $3.6 million per quarter thereafter. The cash flows also projected a dividend stream from BRL in the order of $15.985 million in each of May and November 1990.
6516 The second aspect has a broader focus. It is the banks’ case that the effect of the Transactions was to give the Bell group time to restructure its financial position. The Bell group had two major assets: the publishing assets and the BRL shares. It stands to reason that the viability of those two major assets would be a critical feature of any such restructure. Accordingly, the realisable value of the BRL shares was a significant factor in determining the Bell group’s future.
6517 In this section I propose to examine what the banks knew about the likelihood of TBGL receiving moneys on account of management fees and dividends from BRL and the potential for value to be returned to the shares to make them a saleable commodity in any restructure.
6518 To summarise the key factual points, BRL had loaned around $1.2 billion to BCHL. BRL did not have a great deal of funds of its own remaining. If the status quo continued BRL would not be paying dividends, and the shares in BRL held by the Bell group would be virtually unsaleable for various reasons that will become evident. From BRL’s point of view, to re‑establish its financial strength it needed to obtain something of value in return for its loan to BCHL. Repayment was unlikely, given the Bond group’s financial position, and the securities that it had been given over Bond group assets were of questionable value. A proposal was developed whereby BBHL would sell its brewery businesses to BRL. The $1.2 billion would be treated as a deposit for the purchase price. The worth and saleability of the Bell group’s shares in BRL, as well as the likelihood of a dividend being paid, was therefore heavily dependent on the health of BBHL and the ability of BBHL, BRL and the other involved parties to consummate the sale of the breweries.
6519 This is a difficult section to write because the banks had differing degrees of understanding and exposure to the affairs of BRL, BCHL and BBHL and the dealings in relation to the proposed brewery sale. The knowledge and beliefs of NAB, SocGen and HKBA can be considered together. The reason is that these three banks were all participants in the syndicated $880 million facility that had been granted to BBHL in November 1986. They were closely following the negotiations for the sale of the breweries and, as will emerge, had similar beliefs and understandings of BRL’s situation.
6520 SCB was also a participant in the BBHL syndicate. The banks say that the knowledge of SCB cannot be imputed to SCBAL, since they are separate companies. I think there is force in that proposition. SCBAL’s knowledge is therefore a separate question. Neither CBA nor Westpac was a member of the BBHL syndicate. But they too must be considered individually. CBA, for example, was a reluctant participant in the dealings with the Bell group late in 1989 and might not have followed the BRL events closely. Westpac, on the other hand, were keeping a close eye on proceedings. The Lloyds syndicate is, of course, in a different position.
30.6.8.2. The Australian banks and BRL: an overview
6521 The Australian banks were notified of the intended brewery purchase by BRL around 19 May 1989, when BRL and BCHL announced that BRL intended to purchase all of the worldwide brewing assets of the Bond Group for $3.5 billion. The press statement and announcement advised as follows:
(a) A deposit of $1.2 billion would be paid by BRL. The deposit would be refundable in 90 days in the event of the purchase not proceeding.
(b) The proposed transaction would be subject to the prior approval of the shareholders of both BCHL and BRL in general meetings.
(c) Whitlam Turnbull had been asked to prepare the independent report that was required for the shareholders of BRL. BCHL would seek a stock exchange waiver of the requirement for an additional independent report.
(d) The existing external debt of the brewing assets had been negotiated on a long‑term basis on interest rates better than the current market rates. The debts, and the borrowing structures within which they were contained, would be transferred to BRL, subject to the consent of the participating lenders. The amount of the debt, which totalled about $2.3 billion, would be offset against the purchase price.
6522 Each of the Australian banks, apart from HKBA, has discovered a copy of the announcement. HKBA was closely involved in the affairs of the BCHL group at all times during 1989 and 1990 and I have no doubt they were aware of all developments of note in relation to the brewery sale. Unfortunately, this just about exhausts the common ground between the Australian banks.
6523 On 19 September 1989, a new proposal was announced. It was proposed that the brewing assets be purchased by a joint venture company, with a BRL subsidiary and Lion Nathan each taking a 50 per cent interest. The announcement advised that a subsidiary of BRL would purchase the brewing assets for $2.5 billion. The price to be paid by Lion Nathan for its half interest was subject to certain adjustments. Copies of the announcement have been discovered by all Australian banks except CBA and SCBAL.
6524 The proposed arrangements had another component. BCHL was to make a takeover offer for the remaining shares in BRL. The announcement indicated that the offer was subject to the following conditions:
(a) BCHL becoming entitled to acquire compulsorily all outstanding BRL shares;
(b) each of the offers by the BRL subsidiary for its outstanding convertible bonds and the offer by the BRL subsidiary for the BBHL subordinated debentures becoming unconditional;
(c) completion of the acquisition of the Australian breweries;
(d) no ‘prescribed occurrence’ eventuating in relation to BRL or any subsidiary of BRL; and
(e) such further or other conditions as BCHL might decide.
6525 As was evident from the announcement, numerous details of the sale remained to be determined and many conditions had to be fulfilled. The acquisition was subject to gaining the necessary approvals required by the ASX, as well as all other requisite shareholder or regulatory consents. The acquisition by Lion Nathan of its 50 per cent interest was conditional upon FIRB approval and completion of a due diligence by Lion Nathan. It was also conditional on registration of BCHL’s Part A statement for the takeover offer for the shares in BRL. The acquisition agreement could also be terminated if any of the offers for BRL shares or convertible bonds or BBHL subordinated debentures did not become unconditional.
6526 Lion Nathan was to provide or procure the finance for BCHL’s takeover of the BRL shares and the associated takeover of the various bonds and debentures by the BRL subsidiary. It was planned that the subsidiary would take over each of the BRL convertible bond issues and the BBHL subordinated debentures. The terms and conditions upon which Lion Nathan would provide finance had yet to be fully determined. The proposed offer for the shares in BRL was subject to finance becoming available upon terms and conditions satisfactory to BCHL and Lion Nathan. The making of offers by BCHL for shares in BRL would also be conditional upon such modifications being granted by the NCSC as might be necessary to permit the offers to be made on the basis described in the announcement.
6527 The offers for the convertible bonds and debentures would be subject to a minimum acceptance condition at a level to be determined and would also be subject to the condition that each of the offers, and the BCHL offers for the shares in BRL, became unconditional. The price at which each of the offers was to be made would be determined at the time of the offer, although the announcement expressed some approximate figures.
6528 No deadline for the completion of the conditions precedent was specified in the announcement. However, some details were expressed in the 1989 BRL Annual Report (discussed below). The evidence discloses that the 1989 BRL Annual Report was read by Westpac, NAB, SCBAL and HKBA.
6529 The BRL annual report for the year ending 31 December 1988 disclosed a return to profit for the group. In the previous year, BRL had suffered significant losses as a result of the stock market crash. But the source of the profit was widespread asset sales; its interests in BHP had been sold for around $2.1 billion. Westpac, Lloyds Bank, SocGen and SCBAL have all discovered copies of this document.
6530 The 1988 Annual Report disclosed total assets of BRL, as at 31 December 1988, of just over $3 billion. The assets included $700 million as a current receivable from a related company and $194.5 million as non‑current receivables from related companies. The total liabilities of the BRL group were $1.4 billion, down from $2.5 billion the previous year. The principal liabilities comprised current and non‑current bank loans ($497.7 million) and convertible bonds ($589.5 million). There were also advances from related companies of $86.7 million. Total shareholders’ equity and convertible bonds as at 31 December 1988 were $1.6 billion.
6531 The chairman’s report noted that since control of the BRL group had passed to the Bond group in August 1988, the only significant investment that had been made by the BRL group was the acquisition of shares in Lonrho plc. However, the board of BRL had invited offers for the sale of that shareholding, due to the inability of the BRL directors to establish any ‘meaningful dialogue’ with the board of Lonrho.
6532 Banks that received, and read, both the 1988 and the 1989 Annual Reports would have noted a significant deterioration in the financial position of the BRL group. This was made more dramatic, given that the latter reflected the effect of only six months’ trading activity. The decline in the fortunes of BRL was fully apparent from the 1989 Annual Report. In Table 37, I have set out comparative figures taken from the profit and loss accounts in the two reports.
Table 37
PROFIT AND LOSS – 1988 TO 1989
ITEM 31 DECEMBER 1988 30 JUNE 1989
Operating profit (loss) $226.9 million ($240.9 million)
Operating profit (loss) after tax $233.3 million ($384.7 million)
Operating profit (loss) after tax (attributable to members of holding company) $187.3 million ($382.9 million)
Accumulated losses ($48.4 million) ($475.5 million)

6533 The balance sheet as at 30 June 1989 disclosed total assets of $2.6 billion; total liabilities of $1.4 billion; and total shareholders equity of $1.2 billion. The notes to the balance sheet disclosed that the main assets of the BRL group comprised:
(a) shares in listed corporations valued at cost at $683.1 million (primarily the shareholding in Lonrho, which had been sold after balance date);
(b) the value of the interest in the Bass Strait royalty ($266.1 million);
(c) property, plant and equipment valued at $385.1 million; and
(d) the brewery deposit of $1.2 billion which had been paid to BCHL by Manchar Holdings Pty Ltd, a wholly owned subsidiary of BRL.
6534 The June 1989 balance sheet indicated that the group’s liabilities comprised current bank borrowings and lease liabilities of $599.3 million; current advances from related companies of $118.4 million; and convertible bonds of $554.3 million.
6535 The 1989 Annual Report demonstrated that the only significant source of operating revenue for the BRL group was the Bass Strait royalty. However, a decision had been taken to sell the group’s interest in that royalty. The group had significant ongoing interest commitments on bank borrowings and the convertible bonds. The proceeds from the sale of Central Queensland Coal Associates, the Gregory joint ventures and the Bass Strait royalty could be applied to reduce bank borrowings, and thus reduce or eliminate interest expenses on bank borrowings. However, the interest commitment on the convertible bonds would remain.
6536 The losses sustained by the group were highlighted in the chairman’s report and the directors’ statement. A provision of $132.4 million had been made in respect of losses suffered on the sale of the investment in Lonrho. The report and statement also advised that:
(a) subsequent to the balance date, the group had announced the sale of its coal interests;
(b) the group had disposed of its shareholding in BCHL;
(c) the group proposed to dispose of its interest in the Bass Strait royalty; and
(d) the group was involved in litigation against Western Australian Government Holdings Ltd, the State of Western Australia and the Premier of Western Australia in respect of a loan of $50 million to Petrochemical Holdings Limited, a company that had been placed in liquidation on 20 September 1989.
6537 The 1989 Annual Report indicated that a final ordinary dividend of 10 cents per fully paid share had been paid on 1 May 1989. At the same time, a half‑yearly preference dividend was paid on convertible preference shares. However, the directors did not recommend the payment of an ordinary dividend for the current period. No provision was made for future dividends on preference shares.
6538 The auditor’s report gave little comfort in relation to the carrying value of some of the assets. The auditors issued the following qualifications.

1. The recovery of the loan made to Petrochemical Holdings was said to be uncertain because it was dependent upon the outcome of the legal proceedings that had been commenced.
2. The BRL group had an investment of $27.8 million in a related company that was a subsidiary of BCHL. The related company had a loan to BCHL and investments in other BCHL group companies, the accounts of which had been qualified by their auditors for uncertainty as to the carrying value of their assets. In those circumstances, it was uncertain whether the carrying value of the investment of $27.8 million was appropriate.
3. The group had an investment of $18.6 million in a listed related company. The related company had been qualified for uncertainty as to the carrying value of certain of its assets and, in those circumstances, it was also uncertain whether the carrying value of $18.6 million was appropriate.
   6539 When these qualifications are considered together with the significant operating losses incurred in the six‑month period, the potential for the balance sheet position to worsen becomes apparent. Nonetheless, it was the brewery deposit (which was substantially comprised of inter‑company loans previously made by BRL to BCHL) that remained the critical factor in the health of BRL. Whatever affected the health of BRL would necessarily reflect on the value of TBGL’s shareholding in BRL and on the likelihood of TBGL receiving management fees and dividends. This leads to the next question: what information concerning the brewery transaction was available to the banks?
   6540 The 1989 Annual Report contained details regarding the two alternative arrangements proposed for the purchase of the brewing assets: the May 1989 agreement and the September Lion Nathan joint venture agreement. The report disclosed that BRL, Manchar (the BRL subsidiary), BCHL and certain other wholly owned subsidiaries had entered into an agreement on 29 May 1989 to sell all of the Bond group’s worldwide brewing operations to Manchar for $3.5 billion. Subsequently, completion of the agreement had been made subject to the September 1989 agreement with Lion Nathan. The report disclosed that Manchar had paid a deposit of $1.2 billion to BCHL. If the conditions precedent to the May agreement were not satisfied by 28 February 1990 (or such later date as the parties might agree), BCHL was required to repay the deposit with interest from 29 May 1989 to the date of repayment.
   6541 Repayment of the deposit was supported by various securities and contractual rights granted by the BCHL group. The securities provided by BCHL were listed as:
   (a) an executed third mortgage over the shares in BBHL held by BCHL;
   (b) an executed third mortgage over the shares in certain BCHL related companies;
   (c) the right to receive repayment of advances made by certain BCHL subsidiaries to other BCHL subsidiaries; and
   (d) the right to a receivable owing to a BCHL subsidiary with provision for security to be substituted from time to time.
   6542 The report went on to say that the estimated realisable value of the assets held as security exceeded the amount of the deposit. But the estimated worth of the security was dependent on the value of inter‑company shareholdings and loans. As the auditor’s reports in the BRL and TBGL annual reports demonstrated, the listed value of inter‑company holdings and receivables was questionable. While there is no direct connection between the audit qualifications and the items that were the subject of the Manchar securities, the reports indicate that a degree of caution would have been appropriate. This is even more evident considering that concerns had been expressed about the ability of the BCHL group to continue as a going concern.
   6543 For as long as the deposit remained unpaid, Manchar had the right either to commence proceedings against BCHL for recovery of the deposit, or seek completion of the sale based on the current market value of the assets the subject of the sale less the aggregate of borrowings referable on the brewing assets.
   6544 Looking back with the benefit of history, the September 1989 agreement with Lion Nathan (by which minority shareholders would be bought out) was, at least from my perspective, a device by which the Bond group could overcome the problems it faced in completing the May agreement. But I am not sure that this conclusion would necessarily have been apparent to the banks upon reading the 1989 Annual Report. It described the joint venture arrangements; the associated arrangements for the takeover of BRL; the offers to purchase the convertible bonds issued by BRL; and the BBHL subordinated debentures. In relation to timing, the report said that the Part A statement by BCHL for the takeover for BRL and the completion of the due diligence by Lion Nathan were to be undertaken by 27 November 1989 and all other conditions precedent were to be fulfilled by 31 January 1990.
   6545 If the Lion Nathan joint venture agreement was not completed, the May 1989 agreement was to be revised and completed by 28 February 1990 to include terms that ensured:
   (a) the Australian brewing assets would be excluded from the agreement;
   (b) the deposit paid by Manchar would be deemed to be repaid to the extent of $850 million, leaving a $350 million deposit in respect of the US brewing assets of BCHL;
   (c) the US brewing assets would be sold for $1 billion, with completion to take place by 30 September 1990; and
   (d) the vendor was required to reduce borrowings on the Heileman Brewing assets to the equivalent of $650 million by 30 June 1990.
   6546 The chairman’s report also referred to ‘considerable public comment’ on the security provided by the Bond group for the deposit paid on the brewing purchase. As the nature of the security was relevant to the ability of BRL to recover the money from BCHL, I believe the banks would have been aware of this ‘public comment’. They would certainly have become aware on reading the annual report. The chairman described much of that comment as ‘misinformed and misleading’:
   Under the terms of the 29 May agreement the Group has the benefit of various contractual provisions and securities against a failure of Bond to repay the deposit consequent upon the conditions precedent to completion of the agreement not being satisfied. One such right includes the option to force Bond to take steps to ensure the Group can complete the contract and obtain unencumbered title to and full benefit of the brewing assets.
   In the circumstances the Directors believe they have acted honestly and in good faith for the benefit of the Group. The Directors have great concern about the necessity of the current [NCSC] inquiry and the consequent destabilisation that arises from such actions by the regulatory authorities. Significant time has been spent providing the NCSC with information and explanations requested by them and the Directors believe the inquiry will confirm the propriety of their actions.
   6547 On 8 December 1989 Adsteam applied for the appointment of a receiver to BRL. It is clear that all the Australian banks became aware of this shortly after it occurred. On the same day, BCHL announced the failure of the conditions precedent to the Lion Nathan joint venture. Both matters received considerable coverage in the financial press and gave rise to what has become known in this trial as the ‘panic weekend’ of 9 and 10 December 1989. The Australian banks’ solicitors recommended (by fax from P&P to Weir) that the banks immediately take security following these events. Westpac, Lloyds Bank and the banks’ solicitors worked frantically to finalise the refinancing documents, given the potentially damaging effect these events could have on BRL and, in turn, on the Bell group.
   6548 In the advice, the lawyers said that Oates had indicated to them his willingness for TBGL to grant the securities to the banks as soon as the documentation was prepared. In my view, this advice falls within the scope of Westpac and P&P agency obligations to the Australian banks. The P&P advice to Westpac referred to the need to finalise the securities urgently in light of ‘particular developments concerning Bell Resources Limited and the Lion Nathan/Bond Brewing’. I think it is clear that Westpac and P&P’s had knowledge of the collapse of the proposed joint venture and of the receivership application.
   6549 On 12 December 1989 a settlement was reached between BCHL and Adsteam concerning the management of BRL. The settlement was approved by the NCSC. Hill was appointed as an independent director and the chairman of the board of BRL. Adsteam and BCHL were to have equal representation with on the board of BRL. Those matters were the subject of a release to the ASX and of widespread media reports. The Australian banks knew that BRL had set up its own management operations following the appointment of the independent directors. It would have been obvious, therefore, that management fees would no longer be paid to TBGL. Weir (Westpac) accepted as much in his cross‑examination.
   6550 It must have been apparent to those banks that read the annual report that the financial position of BRL was heavily dependent on the brewery sale. It must also have been apparent that the deal was a complex one. Any person with commercial experience would know that the more complex a deal becomes, the greater are the chances that something might go amiss. I am not suggesting that an observer would necessarily have concluded that there would not have been any finalisation of a brewery sale in one of the ways contemplated in the annual report was impossible. But the evidence of the situation, certainly from November 1989 to January 1990, all points towards doubt. There were numerous and significant conditions precedent to the sale; the September agreement was a joint venture that carried the added complication of a third party; the NCSC was investigating the background to the transactions; and there was considerable public speculation on aspects of the deals. Furthermore, if the deal did not eventuate, the value of the BRL shares depended on BRL recovering the deposit. The securities described in the annual report would not have looked particularly comforting. The banks must therefore have known that the fate of BRL hinged on the brewery deal, the NCSC proceedings, BRL cash flows, BCHL cash flows and the strength of the securities.
   6551 These conclusions apply, in particular, to Westpac, HKBA, NAB and SCBAL in relation to the material in the annual reports. Westpac also knew (and I infer that the other banks probably knew) from the 19 September 1989 public announcement that Lion Nathan had not yet obtained finance for the deal. This must have had an impact on their appreciation of the likelihood of TBGL receiving any dividends or management fees from BRL.
   30.6.8.3. Knowledge of the BBHL syndicate banks
   6552 It will be remembered that NAB, HKBA and SocGen were members of the BBHL banking syndicate. So, too, was SCB, but not SCBAL. References to SCB in this section are there for completeness, and should not be taken as suggesting that SCBAL possessed all of the knowledge of SCB. NAB seems to have been an open and effective lead manager in the BBHL syndicate: almost all relevant communications that were passed to it in this capacity were circulated to the other banks in the syndicate. I do not think any serious issues concerning agency or imputed knowledge arise here.
   6553 As a starting point, the BBHL syndicate banks received the BRL and BCHL annual reports, as discussed above. They therefore knew that the value of the BRL shares (and BRL’s ability to pay dividends) was dependent on the syndicate banks getting something in return for its loan to BCHL. This most likely meant the completion of the brewery sale.
   6554 NAB knew the ASX was looking closely at the brewery deal from about 18 May 1989. In giving discovery NAB produced a copy of a letter that was written on that date from BRL to the ASX. BRL wrote:
   We have previously advised that funds management in the [BCHL] Group is handled on a centralised basis. This results in numerous transactions occurring from day to day which effects the inter-group loan balance between [BCHL] and its subsidiaries. Large numbers of accounting entries, we would suggest, make day to day balances neither practical nor relevant.
   Consistent with this policy, [BCHL] has a secured umbrella facility which although not fully drawn would permit an inter-group balance of up to $1 billion and in respect of which, an establishment and facility fee of $3.5 million has been paid.
   To provide you with meaningful information we have calculated the balance of previously reported receivables right up to the close of business on 18 May 1989.
   The receivable from [BCHL] as at that time was $805 million while the receivable from [TBGL] was $100 million.
   6555 It emerges from the evidence that the BBHL syndicate banks had some concerns about the proposed sale of the breweries. A SocGen file note dated 29 June 1989 records a meeting between Roger Johnson and Francois Buaud of SocGen and Willis and Meares of NAB. The file note records that Willis had already spoken to the other syndicate banks and that SocGen was the last on the list. Apparently, the other banks had expressed concerns about the lack of ongoing information from BBHL. The banks were also opposed to the idea of having ‘to share the benefit of the Australian breweries cash flow with the Heileman operations’. Heileman, it will be remembered, was the US brewery operations of the BCHL group. Buaud recorded that NAB’s position was ‘a confident “wait and see” as the assets of BBHL cannot go without the consent of the syndicate’.
   6556 The BBHL syndicate banks also questioned whether there had been any breaches of the facility agreement. A meeting of syndicate members was held on 14 August 1989. There was no uniformity of approach between the banks. But there appears to have been general agreement to push BBHL for more information about a number of aspects of its operations. The agenda for the meeting indicated that BBHL management would be asked for information on a broad range of areas, including its general financial position, performance and market share, details of its inter‑company loans and details of the proposed brewery sale.
   6557 On 15 August 1989 the syndicate banks met with BBHL and BCHL representatives. The banks’ representatives included Bruce, Meares and Willis for NAB, Davis and Inglis for Wardley, Pitcairn for SCB and Edward for SocGen. Bill Widerberg of BBHL discussed some of the events that had had an adverse impact on BBHL. He noted that ‘it was difficult to find any positive press about the Bond group and this was also having an adverse effect on BBHL’.
   6558 Noonan (BCHL) was asked to explain how Bond’s treasury operations were run in view of the banks’ concerns that BBHL group funds could be mixed with funds of the wider BCHL group. The minutes recorded:
   It was explained that all of the Bond group divisions operated on their own with each individual management knowing its division’s position as at a particular date (this was hard to understand in the light of difficulties the Agent and NAB have had in eliciting information on the whereabouts of cash of the [BBHL] Group). Bond Corporation Finance Ltd, (BCF) was the central treasurer.
   6559 Oates then addressed the syndicate on the proposed sale of BBHL to BRL. He said there were at least three groups interested in purchasing BBHL and predicted that the earliest time by which a sale of assets to BRL might be achieved was 30 November 1989. Importantly, he noted that 16 or 17 consents were required to effect the sale; completion was conditional upon those consents being obtained.
   6560 On 30 August 1989, Oates wrote to Willis (NAB) explaining the rationale for the issue of the preference shares. I should add that at some point the structure had been altered to issue preference shares in BBHL to BCHL. The eventual transfer of control of the brewery assets was to be effected by disposing of the preference shares. There were perceived tax advantages in this structure. Oates accepted that the ‘premature recording’ of the transaction in the accounts was likely to be a technical breach of the BBHL facility agreement and sought a waiver of those breaches. This letter was circulated to the BBHL syndicate banks.
   6561 Oates wrote again to Willis on 1 September 1989 addressing some of the issues that had been raised at the meeting with the syndicate. Meares (NAB) circulated this letter to the syndicate along with his own covering letter. Meares advised that Oates had not sufficiently addressed a number of areas of concern to the syndicate banks, including questions relating to the total tangible net worth of BBHL and requirements for documentation of the preference share agreement between BCHL and BBHL. He suggested that unless further information was provided soon, they should appoint a representative of the syndicate to compulsorily inspect the books and records of BBHL pursuant to their facility agreement.
   6562 The syndicate resolved to do just that, and Oates was notified on 13 September 1989 by a letter that was also circulated to the BBHL syndicate banks. NAB explained their reasons for doing so:
   We refer to previous correspondence in relation to various issues including the questions of the charges given by Bond Brewing NSW Ltd … the lodgement of funds with [named entities] and whether these funds were at risk in view of the liquidation of [another entity], the sale of land by [BCHL] to members of the [BBHL group] and the issue of redeemable preference shares by [BBHL to BCHL].
   We have noted the public comment and speculation about the sale of the Australian brewing assets. Such a sale would require the consent of the Participants.
   6563 A similar letter was sent to Farrell (BCHL) on 2 October 1989. The matters of concern identified in the letter included the ‘operation of a central Treasury by BCHL that may facilitate prohibited transactions under loan covenants between BBHL and BCHL or related companies’.
   6564 Crawford of KPMG and Willis were appointed to inspect the books of BBHL. NAB wrote to Oates in his capacity as a director of BBHL on 19 October 1989 expressing the syndicate’s concern about the delays in obtaining access to the records of BBHL. The letter also identified some specific information that was sought by the representatives about many specific transactions. It is unnecessary for the purposes of these reasons to describe in detail the specific transactions about which the banks were concerned and which were the subject of this request.
   6565 In the letter, NAB also sought details of the calculation of the total tangible net worth of BBHL, and a report on the inter‑company group account as reflected in the BCHL account in the BBHL general ledger. NAB asked how the account had been managed and requested explanations in respect to the balances owing from time to time relative to the agreed maximum pursuant to the loan documentation.
   6566 On the following day, NAB distributed to the syndicate participants Crawford’s interim report. Crawford explained why the report was ‘interim’: the intransigence of BBHL or BCHL senior management. For example, they had refused to allow the representatives to meet with the auditors, despite the fact that both the representatives and the auditors wanted the meeting. The report noted:
   Significant transactions had been entered into by companies within the [BBHL group], some of which involve other related and/or associated companies outside of the [BBHL group]. These transactions have been entered either:
   (a) for purposes of taxation minimisation for the Bond Group as a whole; or
   (b) for benefiting the cash flow of companies within the Bond Group, and which are in breach of loan covenants.
   Such transactions are then considered at a later date in the light of the requirements of the loan documentation and if it is perceived that there has been a breach, a compensating or offsetting transaction is recorded.
   We have yet to complete our review of Treasury operations, but the enquiries to date provide little comfort that the [BBHL] group is regarded as a discrete entity from the other Bond Group Companies for the purpose of treasury operations.
   6567 The interim report expressed concern about many breaches or possible breaches of the facility agreement and cash leakage from BBHL. The author said that the investigation should be completed in the shortest possible time frame. The final report was delivered on 1 November 1989 and was sent to the BBHL syndicate on 3 November 1989. The report identified that:
   (a) certain transactions had been undertaken by the group that the BBHL directors acknowledged were in breach of the loan covenants and these breaches had also been confirmed by the auditors of BBHL;
   (b) certain transactions appeared prima facie to be breaches of the loan covenants but the breach was denied by the BBHL directors;
   (c) there were various matters that had occurred which could be regarded as contrary to the ‘spirit’ of the loan and credit agreement or were transactions that could be considered detrimental to the interests of the NAB‑BBHL syndicate, including:
   i) loans to BCHL related companies which had been made via seemingly independent third parties;
   ii) preferential rates of interest on inter‑company loans that could be seen as ‘a method of upstreaming funds to BCHL’; and
   iii) inadequacies in the accounting of BBHL’s loan account balance, which made it difficult to ascertain the actual loan balance at any particular time.
   6568 Other matters that were relevant to the position of the syndicate were included in the report. One such matter is that as at 30 June 1989, the adjusted inter‑company loan account balance between BCHL and BBHL stood at $90 million. The auditors had informed KPMG of their view that, in the absence of a more certain arrangement to sell an interest in the brewing operations, it may be necessary to qualify the audit report to express doubts about the ability of BCHL to meet its obligation to repay that debt.
   6569 I should also mention that on 26 October 1989 representatives of NAB and KPMG held a meeting with the BBHL auditors (Arthur Andersen). A file note was prepared of the meeting. The author of the note records that the auditors anticipated qualifying the accounts of the BBHL group in a number of respects, including:
   (a) the carrying value of the investment in Airship Holdings (shown in the books to be $48 million but which had a market value of $8 million);
   (b) a loan due from BCHL that stood at $90 million, the recovery of which was of doubtful because the BCHL group as a whole had net liabilities; and
   (c) a probable going concern qualification, due to defaults on loan agreements and the possible consequences of the lack of continuing financial support from the banks.
   6570 The author also recorded a comment by the auditor on his belief in the ability of the BCHL group to survive:
   [T]he BCH group would not have survived had it not had access to the cash flow generated by the breweries, which were supposed to have been quarantined from the rest of the group. He confirmed that cash flow from the breweries had been used extensively to prop up the rest of the group, to such an extent that the breweries’ own ability to operate was impeded, with creditors pushed out to 90-120 day terms, and failure to meet the sales tax liability one month… [T]he ultimate ability of the group to survive is dependant upon a successful brewery sale in the very near future (before end November).
   6571 Around this time there were other expressions of concern about the financial health of BRL and the effect that the brewery deal was having on it. For example, SocGen and HSBC banking group (through Wardley) were jointly involved in the financing (by a lease) of an aircraft operated by a BCHL company. By a letter dated 24 October 1989, Edward (SocGen) advised Susan Young (a senior manager at Wardley) that SocGen believed the financial condition of BRL had deteriorated significantly since December 1988. This was of concern as BRL was the guarantor of the aircraft lease. Edward suggested that the deterioration might amount to a breach of the covenants in the lease and pointed to the brewery ‘deposit’ as a factor contributing to that situation. He said
   [T]he financial condition of BRL [was] primarily dependent on BCHL’s capacity to service and repay its debt. If the brewing sale does not proceed we doubt BCHL has the capacity to do so either.
   6572 He also noted that there had been a delay in providing audited accounts and that it was ‘apparent the auditors have strong reservations about signing the accounts and there will be qualifications’.
   6573 The BBHL syndicate (led by NAB) met on 8 November 1989. A file note of the meeting by Buaud of SocGen summarised the key concerns arising out of the report. Some extracts of the report are reproduced below:
   Summary of D Crawford’s impression:
   There is a daily outflow from [BBHL] to [BCHL] in violation of the document.
   There are periodic and unfrequent [sic] attempts to bring the balance back through unauthorised deals like for example an asset sale by [BCHL] to [BBHL].
   …
   The banks’ interpretation of the document differs from the one of the client who states that it enables him to lend money to a third party independent from the [BCHL] even if this third party on‑lends the moneys to a member of the [BCHL] group.
   …
   On the surface, the agreement is respected but in principle, there is obviously a breach.
   One problem is that the Directors of [BCHL] and [BBHL] are the same people.
   …
   D Crawford stresses that the major problem is this recent and illegal cash leakage which would put pressure on [BBHL’s] creditors (including the sales tax office).
   6574 Inglis and Davis (HKBA) sent a telex to their superiors summarising the meeting. They expressed similar sentiments to those contained in Buaud’s report. In my view, these comments accurately reflect obvious conclusions to be drawn from Crawford’s report and I little doubt that all the BBHL syndicate banks would have read the report in the same way. A set of resolutions were passed by syndicate participants at the meeting and sent by NAB to Oates on 10 November 1989 (and circulated to all BBHL syndicate banks). The resolution noted that there had been breaches of the covenants in the loan and credit agreement. However, the participants’ present intention was not to act on those breaches if certain conditions were fulfilled (while reserving all of the syndicate’s rights). The conditions required, among other things, that:
   (a) all ‘surplus cash’ of the BBHL group be deposited with the syndicate and applied, firstly, in payment of interest and then, in payment of reduction of the principal debt of the syndicate;
   (b) all proceeds of the sale of assets of the BBHL group be applied in reduction of the syndicate debt;
   (c) no member of the BBHL group to make any repayment of or otherwise satisfy any indebtedness to a member of the BCHL group other than a member of the BBHL group;
   (d) the BBHL group to introduce procedures acceptable to KPMG to ensure the retention of all cash and other assets of the BBHL group for the exclusive benefit of the BBHL group; and
   (e) KPMG, as representative of the syndicate, to monitor and review the day-to-day activities and affairs of the BBHL group and report back to the syndicate on a regular basis.
   6575 On 25 November 1989 SCB wrote to NAB referring to the proposed sale of one of the brewing assets (Austotel) and requested that NAB take ‘all steps, including legal action and injunction’ to ensure that Bond (which in the context of the fax was a reference to Alan Bond) did not proceed with the sale. SCB was concerned that Alan Bond might ignore the syndicate on the assumption that another event of default was not going to make his position any worse.
   6576 After this time, the cash flow of BBHL became an issue. The KPMG monitoring report of 28 November 1989 (sent to all BBHL syndicate banks) stated that BBHL’s cash flow position was extremely tight. In particular, it would require funding from BCHL to meet the major proportion of the interest commitment to the US unsecured subordinated debenture holders that was due on 1 December 1989.
   6577 Following this report, the syndicate banks met on 29 November 1989. One of the matters considered at the meeting was whether to issue a payment stoppage notice to the subordinated debenture holders (that would prevent interest being paid to the debenture holders). The file note of Buaud indicated that BCHL had stated it could not, despite previous statements, fund the payment of interest due on 1 December 1989 to the US subordinated bondholders. A proposal had been put to the syndicate seeking an extra loan to finance that expense pending receipt of the proceeds of the proposed sale of Bond group’s interest in Austotel. Crawford expressed the view that the proposal demonstrated that BCHL ran ‘on a very short liquidity basis’ and that BBHL and BCHL could be said to be ‘technically insolvent’. According to Crawford, BBHL faced very significant cash flow deficiencies and could not be helped by BCHL. These views were not recorded in HKBA’s record of the meeting, which simply notes that KPMG had provided an updated report of the financial position of BBHL. But I would accept that the statements recorded by Buaud were expressed to all banks at the meeting.
   6578 Most of the banks appear to have been in favour of taking steps to ‘take control of the agenda’. Other options mooted (aside from the payment stoppage notice) included the issuing of a formal notice of default or the appointment of a provisional liquidator or receiver. The decision was deferred to a subsequent meeting.
   6579 The interest which was due to the US subordinated debenture holders on 1 December 1989 was not paid by BBHL. NAB sought legal advice as to what steps should be taken. A letter of advice from MSJA to NAB (dated 1 December 1989) confirmed that a conference had been held between Hulme QC, Bruce and Willis of NAB, Fox and Turner of MSJA and Crawford of KPMG, and that Hulme QC had been asked to advise on several matters, including the following:
   (a) whether a failure by BBHL to pay interest to the subordinated debenture holders would constitute an event of default under the loan and credit agreement;
   (b) whether BBHL would be insolvent if its failure to pay interest did in fact constitute an event of default; and
   (c) whether the syndicate would be at risk if it continued to advance moneys and roll bills under the loan and credit agreement and BBHL was in fact insolvent.
   6580 The banks were advised that it was highly likely a court would find BBHL to be insolvent and that continuing to roll over bills could constitute a preference. This advice was circulated to the BBHL syndicate on 4 December 1989, along with a further memorandum from MSJA outlining the possible courses of action for the banks to take.
   6581 On 4 December 1989 Noonan of BCHL wrote to Fear of KPMG providing the latest version of the BBHL cash flow. In her letter she noted BCHL’s disappointment at the ‘outrageous and negative articles in the press with obvious leakage of confidential information passing between the Syndicate and yourselves and ourselves’. She stated that this was ‘seriously damaging to all concerned’ and that, ‘with the understandable fear of the banks given the range and number of corporate collapses, we ask you not to worsen the panic already evident in the marketplace and deprive us of this opportunity by presenting an overly negative picture’. Oates wrote a similar letter to Willis at NAB on 4 December 1989.
   6582 Buaud of SocGen prepared an analysis of BBHL’s cash flows on 5 December 1989 and sent it to Edward. Buaud concluded that the company had a cash flow deficiency of $90 million to $100 million, equating to a deficiency of $8 million per month. This would then have to be met by asset sales or the repayment of loans from BCHL. Buaud noted that the auditors of BCHL had cast doubt on the ability of BCHL to repay its inter‑company loans, and that the syndicate resolution of 10 November 1989 required all proceeds of asset sales to be used to repay debt.
   6583 The concerns about the solvency of BBHL culminated in the syndicate meeting of 5 December 1989. The meeting was attended by Fox and Bostock of MSJA and Crawford and Fear of KPMG. SocGen’s file note (by Godfrey) records that Crawford advised the syndicate of his conclusion that BBHL may be insolvent for the following reasons:
   The cash flows indicated that the only source of funds available to [BBHL] to meet its obligations would be repayment of loans from [BCHL] or sale of assets. There is no evidence to suggest that the repayment of loans to [BCHL] will occur. Any proceeds from the sale of assets should be used to repay debt rather than meet servicing obligations.
   The interest payment due to the subordinated debenture holders on [1 December] was not met. This is as a clear failure to meet an obligation as and when it fell due, notwithstanding the ‘grace’ period of 30 days.
   [BBHL] has deferred the payment of sales tax due in respect of October and November sales and its cash flows do not allow for this deferred payment to be made.
   Under the put and call options associated with the Emu Breweries site [BBHL] had an obligation to pay $130m on either 15 or 18 December [1989]. An extension is being sought, however when the previous extension was granted a further fee of $30m was paid. Again the cash flows do not allow for this payment.
   6584 Beckwith and Mitchell later joined the meeting; they insisted BBHL was solvent. They told the meeting that the failure to pay interest was simply a desire to take advantage of the grace period and that, in their opinion, BBHL or BCHL could make the payment immediately if required. They also referred to updated cash flows that had only become available that day. After Beckwith and Mitchell left, there was further discussion regarding the solvency of BBHL. Crawford said that he was unwilling to give a firm view on insolvency until he had reviewed the updated cash flows: he undertook to report to the syndicate the following day, after completing his review and seeking the advice of counsel.
   6585 The syndicate unanimously resolved to serve notices of default upon BBHL, requiring the rectification of the identified breaches of the facility agreement. This was done on 7 December 1989. After this date correspondence between various BBHL syndicate banks continued to be exchanged on the subject of the best course of action. SCB in particular was pushing NAB to have a receiver appointed as soon as possible in order to ‘control the assets on behalf of the syndicate’.
   6586 It should be remembered that the application by Adsteam for the appointment of a receiver to BRL occurred on 8 December 1989. By 12 December 1989, a settlement had been reached by which control of the BRL board was removed from BCHL and Hill was appointed as an independent director and chairman. It is not clear when the BBHL syndicate banks first knew of these matters. The exact date is not of great moment because it is clear that, before the end of December 1989, the banks were in contact with Hill.
   6587 The BBHL syndicate continued to investigate the financial position of BBHL. Fear of KPMG provided a report to NAB on 8 December 1989 in which he confirmed that BBHL had lent a total of approximately $198.2 million to BCHL. On 11 December, Fear provided a report to Willis regarding the BBHL cash flow provided by Noonan on 4 December 1989 and the question of the solvency of BBHL. Fear noted that the ability of BBHL to meet its debts as and when they fell due was dependent on whether BCHL could repay debts owed by it to BBHL. He noted that if BCHL did not provide any repayment of these inter‑company loans, then BBHL would incur an ‘ongoing cash deficiency from January to June 1990, peaking at $45 million in June 1990’. Fear said he was unable to determine BCHL’s capacity to repay BBHL. Similar views were expressed to NAB by Fox of MSJA.
   6588 The BBHL syndicate banks’ concerns continued to heighten. NAB issued further notices of default to BBHL and its related companies on 12 December 1989. BBHL replied on 20 December denying some of the alleged breaches. Also on 12 December, Buaud wrote a memorandum to the SocGen credit committee reporting on the latest developments concerning BBHL. Buaud referred to the notices of default that were issued on 7 December 1989 and noted that the BBHL syndicate banks’ trust in the client had been ‘severely shattered’: not only by the discovery in late August 1989 of a number of breaches by BBHL, but also by the fact that further breaches had then occurred despite the presence of the KPMG monitoring team.
   6589 Discussions of BBHL’s solvency and the best course of action continued at the 13 December 1989 BBHL syndicate meeting. Further notices of default were issued that day by NAB. Around this time, certain banks were considering a proposal from BCHL to provide further funds to facilitate the sale of the brewery assets to BRL. HKBA had prepared a paper on the proposal (optimistically, with the benefit of hindsight, named ‘Project Phoenix’) and had discussed it with NAB in order to gauge the potential response of the NAB syndicate. NAB did not respond positively and said that the BBHL syndicate banks had ‘lost faith’ in the ability of BCHL to deliver the brewery sale. HKBA then advised BCHL of NAB’s attitude. BCHL responded by putting forward a new proposal incorporating the idea of a ‘task force’ by which the syndicate banks would essentially take control of BBHL during the negotiations on the brewery transaction. The concept was discussed at the meeting on 13 December 1989 between NAB, HKBA and the KPMG representatives. NAB again rejected the proposal and observed that the level of control involved might in fact put the banks in the position of directors, with all of the associated risks of liability. NAB decided it would not pursue the proposal, instead opting to press BBHL to bring forward a viable plan for the sale of the brewery assets.
   6590 An internal memorandum from Davis (HKBA) to Townsend on 14 December 1989 illustrates HKBA’s understanding. Davis observed:
   The Bond Group appears to be running out of time as its creditors are running out of patience. Asset sales are stalling, cash is running out and grace periods for rectification of facility breaches, particularly in the case of [BBHL], are drawing close to expiry.
   6591 Davis referred to Project Phoenix and advised that HKBA should not recommend the lending proposal, stating there appeared to be no ‘bank led’ solution to the Bond group’s problems. In the short term, the determination of the BBHL syndicate to take ‘official action’ after 22 December if breaches were not rectified represented ‘the most significant threat to the Bond Group’s continued existence’. Davis considered that only the unconditional sale of the breweries, probably to BRL, would halt what he described as ‘the inevitable’. It appears ‘the inevitable’ meant the collapse of the group, but it is not clear from the context of the memorandum whether he is referring to the BBHL group or the whole Bond group. Given that in the next sentence he stated that in the longer term ‘asset sale debt retirement and debt discount repurchase of subordinated debt remain the key ingredient’, it may be that Davis did not suggest that the winding up of the wider Bond group was inevitable. Townsend gave his support, on 18 December 1989, to NAB’s proposed course of action that included issuing a payment stoppage notice and seeking a court appointed receiver.
   6592 The communications continued to pass back and forth between BCHL (or BBHL) and NAB in mid‑December. On 19 December 1989, Alan Bond personally wrote to Clark, the managing director of NAB. He noted that the brewery transaction was the most important transaction for the Bond group and called for NAB’s continued support for the group.
   6593 Willis wrote to Oates on 19 December 1989, noting a comment in an article in the Australian Financial Review on 14 December 1989 that the BBHL bondholders had commenced proceedings against the company ‘on notice of default’. Willis requested that BCHL provide an immediate explanation of any action, taken or threatened, by the US bondholders and whether BBHL had been served with any notices under s 364 of the Companies Code (or any other analogous legislation). So far as I can see from the evidence, Oates did not respond to this communication.
   6594 The BBHL syndicate met again on 21 December 1989. The banks resolved as follows:
   (a) upon an event of default occurring at midnight on 22 December 1989, NAB was authorised to issue a payment stoppage notice to the trustee for the BBHL bondholders;
   (b) NAB was to accelerate the facility on the first business day following the occurrence of the event of default;
   (c) as soon as practicable after acceleration of the facility, NAB was to apply to the court on behalf of the syndicate for the appointment of a receiver to BBHL; and
   (d) in the opinion of the majority participants, and having regard to the matters referred to in the notices served on BBHL and its related companies, there had already occurred a number of events which would have had a material adverse effect on the financial condition and business of BBHL.
   6595 In relation to the last point, a ‘material adverse effect’ is a common phrase used in finance documentation. It refers to a wide range of circumstances, not confined to the financial wellbeing of the borrower, which might constitute an event of default, thus permitting a lender to take action.
   6596 SCB did not attend the meeting but authorised NAB to agree to the above resolutions on its behalf. HKBA abstained on the first three resolutions. As the memorandum from Townsend to Yonge of 20 December 1989 illustrates, Townsend apparently believed HKBA would be better off trying to postpone the action against BBHL. Davis reported back to Townsend after the meeting, noting that HKBA had failed to change the attitude of the syndicate, and recommended that HKBA consent to its name being included on any proposed writs ‘to avoid the legal technicality of requiring us to be enjoined in the action’. Davis also said that:
   While one of the major problems in the Adsteam/Bell Resources imbroglio has been resolved by the appointment of an independent board we consider that there will still be further conflicts particularly as we understand that a further substantial amount of cash from BRL was used to purchase investments from Bell Group and BCHL of a nature and value which we are unable to identify or clarify.
   6597 The minutes of the 21 December 1989 meeting recorded that the syndicate banks were provided with a report by Crawford. The report included a comment that the cash resources of BBHL and its related companies had been depleted by the ‘upstreaming’ of funds to BCHL and the ‘sidestreaming’ of funds to Bond Brewing Investments (that is, Heileman). The cash resources had been depleted to such an extent that it appeared that the financial condition and business of BBHL had been ‘materially adversely affected’. Buaud’s file note of the meeting also noted that Crawford had informed the banks that the revised cash flow projections provided by BBHL consistently employed the tactic of deferring expenses and postponing capital expenditure and that the cash flows would ‘undoubtedly be shown to a court by BBHL as evidence of its solvency’.
   6598 On 22 December 1989, NAB sent a further letter to BBHL noting that none of the breaches previously mentioned had been rectified. Mitchell responded to NAB on the same day and either disputed the existence of the breaches or addressed how the breaches had been, or would be, resolved. The payment stoppage notice was issued on 23 December 1989 to BBHL and the US Trust Company of New York as trustee for the US debenture holders.
   6599 In another of the endearing little diversions in this litigation, P&P suddenly ‘entered stage left’, acting for BCHL and BBHL. On 26 December 1989 P&P wrote to NAB to inform them that BBHL had the funds to pay the subordinated debenture holders but were prevented from doing so by the payment stoppage notice. The letter further stated:
   Unless you withdraw the payment stoppage notice by 9.00 am (Melbourne time) on 28 December 1989 you will cause the liquidation of BCHL and the majority of, if not all, its subsidiaries, possibly including Bell Resources Limited, Bell Group Limited and Bond Media Limited and enormous loss to our clients, Dallhold Investments Pty Ltd and Mr Alan Bond.
   6600 P&P argued that the failure to withdraw the payment stoppage notice would cause cross‑defaults in BCHL’s other bank facilities and bond issues, leading to the acceleration of those debts. If a receiver was appointed, ‘a significant commercial opportunity’ would be lost as neither BCHL nor BBHL would then be able to pursue the plan to repurchase the BBHL debentures at a discount or complete the sale of the brewery assets. This letter was circulated to the BBHL syndicate banks.
   6601 On 27 December 1989, MSJA, acting for NAB as agent for the BBHL syndicate banks, replied to that letter and advised that the syndicate saw no reason to withdraw the payment stoppage notice. As to the repurchase of the BBHL debentures, the MSJA letter advised:
   The participants find very real difficulties in association with this matter. Even if one puts to one side those considerations as to insider trading which might well operate to inhibit the purchase of debentures by the parties mentioned, the ‘significant commercial opportunity’ sought is one whereby the shareholders of [BBHL] benefit at the expense of existing debenture holders (creditors).
   The participants find it difficult to see the basis upon which they should prefer the benefit of the shareholders in this way.
   6602 On 27 December 1989 BCHL (Williamson) sent a further letter to NAB (which was circulated on 27 December), continuing to object to the syndicate’s course of action. A letter from Hill addressed to NAB was attached. As Hill was an independent party, I will spend a little time on his letter. Hill recited the history of his appointment and some background to the brewery deal. He mentioned the May 1989 agreement for BRL to acquire the brewery assets, which had been suspended pending the outcome of the negotiations with Lion Nathan pursuant to the September agreement. Hill said that the amended proposals put forward by Lion Nathan ‘were not likely to be viable’ and that, in the light of those circumstances, the BRL board had resolved to proceed to complete the purchase of the Australian brewing assets of the BCHL group. Urgent discussions had been held with BCHL executives ‘and the terms of amendments to our arrangements were agreed upon’. Hill also said:
   I am confident that with the assistance of the bankers to [BBHL] we can shortly complete this acquisition.
   6603 In the letter, Hill argued that action by the BBHL syndicate banks would only cause ‘considerable damage to all involved’ and would give rise to prolonged proceedings which would, in turn, result in the ‘substantial deterioration’ of the value of the brewery assets.
   6604 On the same day, Mitchell and Beckwith put forward another proposal to the BBHL syndicate to effect the brewery sale. Meares (NAB) wrote to the BBHL syndicate banks to advise on this development but said that NAB saw no reason to change their current approach. SCB and SocGen were similarly unenthusiastic about the proposal. HKBA again abstained but was prepared to vote with the Australian banks, even to the extent of appointing a receiver, if they were in a position to swing the vote.
   6605 On 28 December 1989, BRL advised ASX that it had given notice to BCHL and Lion Nathan of their intention to terminate the September 1989 Lion Nathan joint venture agreement. In the release, BRL noted that:
   (a) on termination of that agreement, the original May 1989 agreement would revive; and
   (b) BRL had entered into an amended agreement for the purchase of the Australian brewing assets of the BCHL group for $2 billion. Payment was to be made through the assumption by BRL of the debt owed in respect of the brewing assets. However, BCHL had agreed to reduce the debt prior to completion through the application of the proceeds of asset sales. Further reductions would be achieved by BCHL paying to BRL the value of discounts achieved on the purchase by BCHL of debentures.
   6606 BRL said in the release that successful completion of the transaction would depend on the cooperation of the bankers and other creditors of BBHL. NAB and SocGen have discovered copies of this announcement. I have little doubt, given their overall interest in BCHL matters, that HKBA would have known, around this time, that the joint venture had fallen through and the parties had reverted to the original agreement (with amendments).
   6607 BRL also wrote to the ASX on 28 December 1989, noting that BRL was undertaking, in association with its lawyers, a review of the adequacy of the company’s security against the deposit. The announcement went on to say that the company was extremely concerned as to whether that security was adequate. There is no evidence that any of the banks received this communication.
   6608 Beckwith wrote to Willis on 28 December 1989, again pleading for the banks’ forbearance. He advised that a contract had been signed between BRL and BCHL regarding the sale of the brewery assets, with settlement scheduled to take place by 1 March 1990. Beckwith sought to reassure the BBHL syndicate that the refinancing and repayment of their loans would take ‘absolute precedence’.
   6609 Hill wrote to Ryan (NAB) on 28 December 1989, noting that as part of the negotiations between BRL and BCHL, Hill had become aware of the possibility that BRL might appoint a director to the board of BBHL, pending settlement of the brewery transaction. Hill said that it might be possible to convert the board of BBHL to mirror the board of BRL. Hill also noted the possibility for the appointment of KPMG to assist BBHL in the management of its cash flows. Hill went on to state that:
   It goes without saying that it would not be a particularly credible move on behalf of Bell Resources to negotiate a change in control of Bond Brewing Limited and immediately have this followed by an appointment of a receiver to Bond Brewing at least unless there had been already consultation between us.
   6610 NAB circulated to the BBHL syndicate banks a copy of this letter, as well as a draft response in which NAB reserved the rights of the syndicate. SocGen changed their tune around this time, informing NAB that it no longer supported the acceleration of the facility and would agree to the withdrawal of the payment stoppage notice if BCHL was able to meet the US bondholder payments from its own funds (that is, without accessing the funds of the BBHL group). SCB, via a letter from Dickinson to Willis, maintained their support for persisting with the acceleration of the facility. The other Dickinson (HKBA) put forward a third view. He suggested that they maintain the payment stoppage notice but hold off any receivership application until the syndicate had a chance to consider the new contract of sale and to meet the new management of BRL.
   6611 I think most people in the British Commonwealth have heard the phrase annus horribilis. I suspect that for those associated with the BCHL group, 29 December 1989 would be regarded as the dies horribilis. On that day there was a flurry of letters passing between NAB, BRL and BCHL and between MSJA and P&P. Hill sent another letter to NAB seeking the banks’ approval for BRL to take management control of BBHL. In the letter, Hill expressed confidence that, in time, a deal for BRL to buy the breweries could be put together; but it was complex and would take time. He exhorted the banks to give him that time and not to take precipitous action. They are my words, rather than a verbatim recitation of the exchanges, but I believe they are an accurate reflection of the sentiments expressed.
   6612 Grant Samuel & Associates wrote to Ryan (NAB), advising that they had been appointed by BRL to prepare an independent report regarding the proposed purchase by BRL of the brewery assets of BBHL Importantly, formal notices were from NAB (on behalf of the syndicate) to BBHL, setting out the events of default and declaring that all moneys due under the loan and credit agreement were immediately due and payable.
   6613 The attitudes of the respective parties had evidently not changed much. Unsurprisingly, BBHL sought to defend itself and P&P (acting for BBHL) wrote to MSJA disputing the validity of the notice issued by NAB and requesting a reasonable time in which to pay the claimed moneys. Nevertheless, NAB and the syndicate participants applied ex parte to the Supreme Court of Victoria for the appointment of a receiver and manager over the assets and undertaking of BBHL. That evening, Beach J acceded to the request and made the appointment. The ASX heard of the appointment of the receiver and immediately suspended trading in securities of BCHL and BRL. Copies of the documents referred to in this paragraph were distributed by NAB to the BBHL syndicate banks.
   6614 BBHL immediately moved to set aside the ex parte order appointing the receiver. On 2 January 1990 BBHL’s application commenced before Beach J. In defending the application, NAB relied on an affidavit sworn by Willis. The banks objected to the admissibility of the affidavit in this litigation. In my view, it is admissible as part of the factual matrix showing the state of mind of NAB (as syndicate manager) at the time. Willis stated that he was authorised to make the affidavit on behalf of NAB as agent for all of the plaintiffs in that litigation (being the syndicate participants) and that he made the affidavit from his own knowledge and from the books and records of, and in the possession of, NAB. In the affidavit, Willis deposed to the following (among many other things):
   (a) the threat to BCHL’s survival posed by matters raised in its published and audited accounts for the year ended 30 June 1989;
   (b) the threat to BCHL’s survival posed by acceleration of the unsecured debenture issued by BBHL in the United States;
   (c) the allegations of default under the loan and credit agreement and of the failure to remedy defaults;
   (d) what are described as the ‘fundamental breaches’ going to the heart of the security structure of the loan and credit agreement caused by ‘upstreaming and ‘sidestreaming’ of BBHL funds; and
   (e) a lack of confidence by the syndicate banks that BBHL, ‘under its present management’, would cease to contravene the agreements, with adverse consequences to the financial condition of BBHL’s business and to the syndicate’s security.
   6615 There were several attempts to settle the receivership proceedings by BBHL and BCHL in the ensuing days. The first of them was put forward on 2 January 1990 by Phillips Fox (solicitors) acting for BBHL and circulated to the BBHL syndicate banks by NAB. The Phillips Fox letter set out a proposal by which BBHL would consent to an amendment of the loan and credit agreement to bring the due date of the facility forward to 31 March 1990. In return, the syndicate would agree to vacate the hearing before Beach J, withdraw the payment stoppage notice and the acceleration notice, and undertake not to rely upon any of the defaults alleged in the notices.
   6616 On 4 January 1990, Alan Bond and Beckwith wrote to Argus (the general manager of NAB) proposing that the BBHL syndicate banks agree to the sale of BBHL to BRL for $2 billion and consent to an order rescinding the appointment of the receivers and manager to BBHL. In return the directors offered, among other things, to execute an enforceable undertaking by which a person nominated by the banks would have full power to seek the appointment of a liquidator to BBHL, with the consent of BCHL, if the loan was not repaid in full by 30 May 1990.
   6617 Both letters were passed on to the syndicate banks and each bank considered its options. An internal file note prepared by Keane at this time noted that NAB was becoming concerned with the ‘public perception’ problem of entering into a transaction with one part of the Bond/Bell Group (TBGL) whilst ‘forcing another part (BBHL) into receivership’. Keane said they had sought the advice of Hulme QC to ensure that this situation had not created any legal difficulties for them.
   6618 Turnbull and Auxenfants of SocGen (Paris) prepared a note dated 4 January 1990 regarding the BBHL situation. They forwarded the note to the banks for comment. Turnbull and Auxenfants said that they felt that the appointment of a receiver to BBHL was a positive step as this would stop ‘further leakage to Bond Corp’, and that the main risk of cross‑default lay with BCHL and Bond Group companies. Edward replied by stating that, as part of the action to remove the receiver, BBHL had claimed unspecified damages against the BBHL syndicate banks and that an offer had been made to withdraw these claims if the banks accepted a proposal advanced by BCHL. However, Edward noted that previous proposals along similar lines had been rejected by the majority banks. Edward also noted that, irrespective of the receivership appeal, it was likely that the bondholders in the United States would demand repayment due to default on interest payments and that this would ‘inevitably compel Bond Corp to sell Bond Brewing or cause Bond Brewing to go into liquidation’.
   6619 Edward wrote to Meares (NAB) on 5 January 1990 regarding the 4 January 1989 letter from BCHL. He noted that the bank’s position had not changed from that last put on 29 December 1989. He added that any act of the syndicate to rescind the notices might require the cooperation of the bondholders in the United States. Edward also noted that whilst SocGen was receptive to BRL acquiring the brewing assets, he felt that the bank did not have enough information to comment on the transaction. Edward also commented that he wanted a reduction of $150 million of the loan by 31 January 1990 included as a condition in any negotiations with BCHL.
   6620 Davis (HKBA) also wrote to Meares on 5 January 1990, noting that ‘in view of the conciliatory and apparently sincere tone of Mr Beckwith’s letter’, HKBA would consider positively the offer made by BCHL and would recommend acceptance to its parent HSBC. That was subject to a number of conditions, one of which was the renegotiation of the BBHL debt so as to provide the BBHL senior syndicate with direct security over the Australian brewing assets. Another condition was that if the BBHL syndicate debt was not fully retired by 30 May 1990, BCHL would consent to the appointment of a receiver and manager to BBHL. The letter was faxed to all banks in the BBHL syndicate on 9 January 1990. A telex from Townsend to Yonge dated 6 January 1990 confirmed that HKBA did not have a problem with the 4 January 1990 offer from BBHL, provided any purchase by BRL of BBHL shares was taken subject to HKBA’s existing charge over the shares.
   6621 Dickinson (SCB) confirmed his bank’s rejection of the proposals. On 11 January 1990, NAB circulated a bundle of documents comprising the responses of the BBHL syndicate banks to the 4 January 1990 proposal advanced by BCHL.
   6622 Moves to resolve the problems by settlement were not confined to those emanating from the BCHL camp. On 11 January 1990 Hill repeated his proposal for the reconstitution of the board of BRL. He proposed the appointment of an independent board acceptable to both the banks and BRL. The NAB copy of this letter contains handwritten notes recording Hill’s agreement for the letter to be circulated to the syndicate banks. The copy also carries a handwritten comment, noting that the proposal did not solve BBHL’s problem; namely, that it was cash starved. The SocGen copy of this letter has a handwritten note by Edward, commenting that the position of the debenture holders was something that would need to be considered once agreement between the principal parties had been reached ‘and not before’.
   6623 NAB’s formal rejection of BCHL’s offer was sent out on 12 January 1990. It was circulated to the BBHL syndicate banks. Cicutto (NAB) told Alan Bond and Beckwith that the majority view of the BBHL syndicate was that it was not appropriate to negotiate in relation to any proposal by BCHL until ‘there [was] firmly in place a system for maintaining the security of the assets of the companies in the interest of all properly concerned’. However, NAB would consider and negotiate any proposals for the prompt repayment of the loans. Alan Bond and Beckwith, in their reply to Argus and Cicutto on 12 January 1990, suggested that Crawford and Fear might instead continue their functions as directors of the company rather than as receivers. Cicutto advised that this idea had already been rejected.
   6624 Cicutto also wrote to Hill on 15 January 1990 to reject his offer of compromise. He advised that the proposal advanced by Hill in his letter dated 11 January 1990 was not appropriate to the situation, and specifically did not consider the potential for personal liability of any newly appointed directors nor address the interests of other creditors. However, Cicutto did note that the BBHL syndicate banks were willing to cooperate in seeking the best commercial outcome: he said they would consider any further proposals. Hill’s reply expressed doubt that the banks were truly interested in ‘exploring any constructive alternative to the present situation’. Copies of the letters between Hill and Cicutto dated 11, 15 and 18 January 1990 were all circulated to the BBHL syndicate banks.
   6625 A BBHL syndicate meeting was held on 17 January 1990. A draft of BBHL’s accounts as at 30 June 1989 was discussed. The accounts showed that the company was in breach of its net worth covenant for 1988 – 1989. A file note of the meeting by Buaud noted that most of the banks were against paying back the US bondholders at face value and were wary of the insider trading difficulties if an on‑market purchase at a discount was pursued.
   6626 Meares circulated to the BBHL syndicate banks on 23 January 1990 a copy of a letter from Beckwith to Clark (NAB). In the letter, Beckwith advised that he and Alan Bond had recently been in Hong Kong, and that they had held discussions with Willie Purves (HSBC). Following those discussions, Beckwith believed that HKBA would be prepared to help BCHL to find a resolution to the ongoing disputes. Upon receipt of this letter, Townsend wrote to the BBHL syndicate banks saying that the letter misrepresented the HSBC group’s position. They were prepared to consider providing assistance to the Bond group but only if the group made substantial reductions to the bank’s current exposure and, in any event, any proposals should be directed through NAB.
   6627 Up until 26 January 1990, the BBHL syndicate continued to correspond with BCHL and BBHL about the undertakings that the syndicate required. I do not think it is necessary to go through the correspondence in detail. It is sufficient to say that no real progress was made.
   6628 In my view, the state of knowledge of the BBHL syndicate banks, as at 26 January 1990 can be summarised as follows. NAB, SocGen and HKBA knew that the only asset of BRL with real value was the brewery deposit. They also knew that the influence of BCHL over the board of BRL had been minimised with the appointment of Hill as independent chairman. At 26 January 1990, trading in BRL shares remained subject to a suspension. All these banks had concerns about the way in which BCHL had removed funds from BRL. They knew that the financial position of BRL was dependent upon either completion of the brewery sale agreement or, if the agreement was not concluded, the value of the securities granted in respect of the deposit. Those securities had been granted by BCHL related companies and the banks were aware of concerns as to the value of those securities.
   6629 BBHL remained in receivership as at 26 January 1990, although the appointment of the receiver was being contested in legal proceedings. The consent of the NAB syndicate was required for the sale of the breweries. The syndicate banks remained aware that BBHL’s solvency was doubtful and that the same concerns infected BCHL. For the brewery sale to go ahead, BCHL needed to have sufficient liquid funds to pay the value of the deposit to BBHL. Crawford’s analysis, which was explained to the BBHL syndicate banks, demonstrated that BCHL probably did not have sufficient liquidity to do so.
   6630 The sale remained contingent on regulatory approval. Further, while the payment stoppage notice and receiver remained in place, BBHL’s bondholders in the United States could not be paid and it was possible, if not likely, that this would precipitate the liquidation of BBHL and in turn BCHL. At that time, the outcome of the legal action by BBHL to set aside the appointment of the receiver was not clear. For all these reasons, the prospect of the breweries being sold to BRL was most uncertain and must have appeared to the banks to be so. If either BCHL or BBHL went into liquidation, the arrangements for the sale of the brewery assets to BRL would have been in further jeopardy and, given the concerns over the value of the securities provided by BCHL for the brewery deposit, it was doubtful whether BRL would recover its deposit from BCHL.
   6631 NAB had demonstrated a consistently tough line with BBHL and BCHL. It preferred to persist with the receivership in order for the banks to control the tangible assets that the BBHL group held. Broadly speaking, SocGen was happy to accede to this line. The banks essentially held ultimate control over the fate of the brewery assets. They were not going to concur to the sale of the breweries unless it was on terms that alleviated the significant concerns held by the banks. They were also unlikely to agree to a sale unless it provided them with adequate protection. It was evident that the BCHL group directors could not provide these assurances at the time. There were legal concerns about allowing the transaction to go ahead, as well as concerns about public perception.
   6632 HKBA was more amenable to dealing with the Bond group but was not going to do so except in accordance with the other syndicate banks. Even if they were more prepared to deal with the BCHL group than the other banks, Davis’ memorandum to Townsend of 14 December 1989 illustrates that HKBA still had concerns about the cash flow of the BCHL group.
   6633 HKBA’s final opinions expressed on the BBHL proceedings before 26 January 1990 reveal that they thought that ‘[a]t this stage, it would appear that it is going to be a bloody fight to the death’ (memorandum from Davis to Townsend dated 9 January 1990). Davis also advised Townsend on 10 January 1990 that the outcome of the court proceedings was ‘likely to be of academic interest only’ because BBHL’s bondholders had made a formal demand and even if BBHL succeeded in its claim, the bondholders would likely appoint their own receiver or liquidator. Davis concluded that in light of this, ‘BBHL will not be able to return to its former self’. This does not demonstrate any real confidence that the brewery sale could go ahead.
   6634 Even if the brewery sale had eventuated I doubt the banks could have expected that TBGL would receive any dividends from BRL in the short to medium term. There was nothing to suggest to the banks that acquiring the brewery businesses would suddenly produce a cash pool to enable it to pay dividends within a time period anywhere proximate to what was predicted in the July and September cash flows.
   6635 SocGen’s knowledge of the unlikelihood of TBGL receiving the management fees and dividends from BRL, JNTH and GFH is highlighted in a memorandum dated 15 December 1989 from Johnson and Weeks to SocGen’s credit committee. The memorandum said that receipt of the projected management fees and dividend income from BRL, JNTH and GFH was ‘extremely uncertain’ and TBGL’s projected cash flow for 1990 was ‘highly questionable’. I will mention again Edward’s note to Turnbull and Auxenfants of 5 January 1990, which does not demonstrate confidence that the brewery sale would proceed:
   Irrespective of the result of the receivership appeal, it is likely the US subordinated bondholders will seek immediate full repayment due to default on payment of interest. This would inevitably compel Bond Corp to sell Bond Brewing or cause Bond Brewing to go into liquidation.
   6636 I also conclude that the banks must have known it was unlikely that the Bell group would be able to dispose of its shareholding in BRL in the immediate future and, in particular, in time to realise money which could be directed toward commitments, such as the interest due to the bondholders in May 1990. The shares were suspended from trading and lifting of the ban was not imminent. It was most unlikely that the shares could be sold at a time when BRL’s future was so uncertain. Even if the brewery sale eventuated, it was not imminent as at 26 January 1990. It would take time to complete and, after that, further time for the Bell group to arrange for the sale of the shares. The shares were not worthless, as BRL’s receivable from BCHL was still of some value but unless and until some certainty came into the situation, realising the shares at any meaningful value would have been problematic.
   30.6.8.4. The other banks and the BRL assets
   6637 As there was no uniformity in the information received by the other Australian banks, their knowledge about the BRL situation is best discussed later in the sections on each individual bank. This applies to SCBAL, Westpac, CBA and the Lloyds syndicate banks.
   30.6.8.5. BRL and the brewery sale after 26 January
   6638 In Sect 9.16.3.3 I dealt with events concerning the brewery transaction in and after February 1990. The focus in this section of the reasons is on the banks’ knowledge as at 26 January 1990. Events occurring after that date are, therefore, of limited value for present purposes. However, an issue may arise as to the banks’ knowledge of the Bell group’s solvency in relation to the Transactions that were executed after this date, the last of these being the BGNV subordination deed on 31 July 1990.
   6639 A SocGen watch list report as at 31 January 1990 noted the view within the bank that discussions with the finance director of BRL revealed that the new management were hopeful of recovering approximately half of the brewery deposit.
   6640 On 5 February 1990 ARH wrote to MSJA advising that their clients, the debenture holders in the United States, expected the BBHL syndicate banks to have regard to their interests when considering whether to consent to, or act to restrain, any proposed sale or disposal of the assets of the BBHL group. The debenture holders considered that the subordination arrangements imposed a duty on the BBHL syndicate members to ensure that BBHL and the BBHL group did not deal with any assets in a manner that might prejudice or affect the ability of the debenture holders to recover moneys due to them.
   6641 On 9 February 1990, Beach J delivered his judgment confirming the appointment of receivers to BBHL and the BBHL syndicate banks received a copy of his reasons for judgment. On 12 February 1990, BBHL lodged a notice of appeal against the decision.
   6642 A BBHL syndicate meeting was held on 20 February 1990. The syndicate was informed that BRL and Lion Nathan were holding discussions with a view to acquiring the brewery assets together. It was noted that, assuming no trade practices or FIRB problems arose, it was not unrealistic to have a sale contract signed within three months.
   6643 In a note dated 21 February 1990, Buaud and Johnston (SocGen) reported to Edward that the appeal hearing in relation to the appointment of receivers and managers to BBHL would begin that day and that a decision was expected by the end of the following week. If the appeal was successful, the BBHL syndicate bankers would have been left with the same options that were available to them as if they had lost the initial legal challenge. If the appointment of receivers was confirmed, the syndicate would move to sell the assets as soon as possible. BRL, Lion Nathan and the Canadian brewer, Labatt, were proceeding with their due diligence investigations in the meantime.
   6644 Around 23 February 1990, the Australian banks and Lloyds Bank received copies of the Garven cash flow and a summary. They also received presentations from Aspinall and Garven (among others). Garven did not provide for TBGL to receive management fees from BRL, but he did include receipt of $5.163 million in preference dividends in each of April 1990, October 1990 and April 1991.
   6645 On 28 February 1990 the Victorian Court of Appeal set aside the appointment of the receivers and managers to BBHL. As Buaud (SocGen) and Davis (HKBA) both noted in internal reports to their respective banks, the syndicate could not fully gauge the consequences and possible course of action until the court delivered its reasons. Buaud noted that the banks remained somewhat protected since the Bond group was under a high degree of public scrutiny (which, presumably, limited their capacity to make deals which might be detrimental to the banks) and BBHL had undertaken to the court that no assets would be sold without three days notice.
   6646 Davis reported that Oates had proposed a commercial settlement involving NAB and HSBC lending $955.3 million to enable a buy-back at a discount of the BBHL junk bonds and BRL convertible bonds. This included a request that HKBA release its charge over the BBHL shares. Davis noted that ‘while the BBHL shares may have no value, depending on the timing and the sale price of the breweries there is a possibility that there could be significant value in the BBHL shares’. He went to note that until ‘we are certain of the repayment of our facilities from asset sales … it may be premature to release the BBHL shares at this stage’.
   6647 On 1 March 1990 BRL wrote to NAB regarding the brewery sale agreement. Hill advised Argus (NAB) that BCHL had requested BRL to extend the date for completion of the conditions precedent to the May 1989 brewery sale agreement in order to allow time to obtain the syndicate’s consent to the sale. BRL advised NAB that it had agreed to the extension to 20 March 1990. The agreement reached with BCHL provided that BRL would no longer purchase the US assets and the purchase price was to be reduced accordingly. NAB forwarded BRL’s letter to the BBHL syndicate banks that same day.
   6648 A further review by SocGen was prepared on 16 March 1990, which noted that the value of the deposit securities was uncertain. It was stated that regardless of the uncertainty surrounding the brewery deposit, BRL was solvent. It had relatively little bank debt, approximately $50 million in cash and unencumbered assets comprising the Bass Strait royalty. But it went on to say:
   The company’s future depends entirely on its success in recovering funds from [BCHL]. A wind-up application by [BRL] over [BCHL] goes to Court on 21 March. If the brewery purchase contract is not extended on 20.3.90, [BCHL] will undoubtedly fall into the hands of a receiver or liquidator …
   6649 On 20 March 1990 BRL announced that the time for completion of the brewery sale agreement had been extended. A copy of the announcement was distributed to the Australian banks by Westpac and to the Lloyds syndicate by Lloyds Bank. As a result, the banks knew that negotiations in respect of the brewing deal had not been completed and an extension for negotiations had been agreed. The ‘agreed value of assets’ was described as $1.85 billion at this time.
   6650 On 22 March 1990 BRL sought the approval of the BBHL syndicate to the transfer of shares in BBHL to BRL. In doing so, Hill advised NAB that he wished the syndicate to consider providing sufficient funds to enable BRL and BBHL to come to an acceptable arrangement with BBHL’s debenture holders.
   6651 On 26 March 1990 the suspension in trading in BRL shares was lifted. Also on this date, NAB distributed the BRL interim report for the six months ended 31 December 1989 to the BBHL syndicate. Westpac sent the report to the Australian banks and Lloyds Bank on 17 April 1990. Lloyds Bank in turn circulated this to the Lloyds syndicate banks.
   6652 The interim report substantially repeated the information contained in the 27 February 1990 announcement by BRL to the ASX. BRL had incurred an operating loss for the six months ended 31 December 1989 of $862.5 million, compared to a profit of $76.8 million in the previous corresponding period. Based on the consolidated balance sheet and profit and loss account, the value of the net tangible assets of the group as at 31 December 1989 was $0.45 per share. Significant write downs and provisions had been made to certain assets of the group:
   (a) the value of the brewing deposit had been written down from a figure of $996 million to $491.6 million;
   (b) the value of the amounts receivable from related companies had been written down from $432.6 million to $87 million;
   (c) the value of investments in listed and unlisted related corporations had been written down from $57.2 million to $7.4 million; and
   (d) the value of the amounts receivable from unrelated companies had been written down from $84.3 million to $7 million.
   6653 The report noted the way that the BRL group’s activities were being separated from BCHL. BRL had obtained new premises, employed new staff and established new clerical and accounting systems. The activities of the group over the previous three years, particularly the use of the groups’ cash resources, had been reviewed by the new management and the board, who had been assisted by Deloittes and Freehills.
   6654 In relation to the brewery sale, BRL advised that negotiations were still continuing, but whilst BBHL was in receivership, it was unlikely that an agreement would be finalised between the parties. Agreement had been reached to vary the May 1989 agreement by limiting the assets to be acquired to the Australian assets of BBHL for a consideration of $2 billion. BRL had also agreed to extend the notice period under the agreement from 28 February 1990 to 20 March 1990. Should BRL not proceed with this purchase, the deposit would be repayable in accordance with the terms of the agreement. The interim results had been prepared on the assumption that the brewing purchase would not proceed and the deposit would be due for repayment during the current financial year.
   6655 The value of the deposit, as noted, had been written down to $491.6 million. The report stated that as at 31 December 1989, the securities were estimated to correspond with the value of the deposit, but the information after 30 June 1989 had not been audited. The receivables from the BCHL group were subject to considerable uncertainty and the report noted that they could ultimately realise more or less than the now‑listed amount. The report said that no dividends had been declared but the directors intended to resume paying dividends when the company returned to profitability. This report alone would have indicated to the banks that they could not expect any dividends to have been paid by BRL in the foreseeable future.
   6656 The BBHL syndicate again discussed the brewery deal at a meeting on 28 March 1990. HKBA and NAB confirmed that they had been approached by BRL to fund the buy-back of the BBHL debentures. SocGen’s report of the meeting recorded that at that time ‘no decision had been made and the two banks did not give any indication of their intention’. The note reported further that BCHL’s view of the situation made it clear that ‘the repurchase of the debentures [was] the cornerstone of any arrangement’.
   6657 In mid‑April 1990 BBHL distributed a financial package to the BBHL syndicate to be considered in conjunction with a proposed settlement of the various proceedings and disputes between the NAB syndicate and BCHL and BBHL. The package valued BBHL’s assets on a going concern basis as being between $1.7 billion and $1.85 billion, which assumed that the brewery operations were worth between $1.4 billion and $1.6 billion.
   6658 The latest proposal for the brewery deal, and the associated buy-out of debenture holders, was discussed at the NAB syndicate meeting on 19 April 1990. BCHL’s proposal was to incorporate the funding of the purchase of the BBHL debentures at a discount in order to have the damages claims against the banks, which had ensued following BBHL’s success in challenging the appointment of receivers, dropped. The proposal for the purchase of the debentures included using new bank funds to repurchase bonds and debentures at a discount to face value. This commitment would be conditional upon a minimum acceptance of 66 per cent, which would enable BBHL to amend the trust deed for the debentures. Johnston reported to Edward on 24 April 1990 that:
   From the Bond group’s point of view although they apparently began the negotiations with numerous preconditions. In the final agreement only one condition was left, that being the banks commitment to provide further funding for the repurchase at a discount of the junk bonds …
   BRL it seems had no preconditions although they believed that it was very important to any commercial settlement that the junk bonds be repurchased at a discount. Ultimately it appears that they merely wanted to gain control of the brewing group.
   6659 In early May 1990 the BBHL syndicate moved closer to the completion of a negotiated agreement. A SocGen watch list report dated 1 May 1990 noted that a settlement agreement could be reached by mid-May. Although the terms were not constant, the agreement was essentially to involve:
   (a) a release of legal actions by both parties;
   (b) adoption by BBHL of a business plan;
   (c) appointment of a nominee to monitor the plan;
   (d) payment of interest and fees (in arrears and future);
   (e) NAB and HKBA providing funding to assist in the buy-back of the debentures (with a minimum 51 per cent acceptance condition);
   (f) security over BBHL assets; and
   (g) a new maturity date being 30 September 1989 (if the sale of the BBHL shares to BRL did not proceed) or 1 July 1991 (if the sale did proceed).
   6660 On 8 May 1990 ARH wrote to MSJA on behalf of the BBHL debenture holders stating that it was both proper and necessary to include the debenture holders and the trustee as parties to any settlement agreement reached between the NAB syndicate and the BBHL group. ARH suggested that, at a minimum, they should be provided with a copy of the proposed settlement agreement prior to the settlement agreement being finalised.
   6661 On 18 May 1990 HKBA and NAB advised BRL that they would provide the company with the proposed funding. On 22 May 1990 NAB, as agent for the BBHL syndicate, announced that the action which had commenced in December 1989 by the syndicate against BBHL and its subsidiaries, had been settled. Parties to the settlement included BRL, BCHL, Alan Bond and Dallhold Investments. The main provisions of the settlement with the syndicate were as described above, with the repayment date to be set at 30 September 1990. The sale by BCHL of its shares in BBHL was given the syndicate’s consent but it was subject to certain conditions (see below). Maxsted and Fear of KPMG were appointed by the BBHL group to oversee the group’s activities.
   6662 On the same day, BCHL and BRL issued press releases advising of the agreement reached between the parties. The press release issued by BCHL stated that the date for completion of the BBHL sale had been extended. The sale and purchase were said to be subject to certain conditions precedent, satisfactory finance being arranged by BRL and shareholder approval. BBHL would have access to a line of credit sufficient to enable it to buy-back the BBHL debentures ‘at prices approximately the current prevailing market prices’.
   6663 Westpac received the press releases under cover of a letter from Aspinall dated 22 May 1990, and forwarded them to the Australian banks and Lloyds Bank. Lloyds Bank forwarded the press releases to the Lloyds syndicate banks that same day. Not all syndicate banks discovered copies but it can be inferred that they did receive them.
   6664 On 5 June 1990 Buaud and Johnston reported to the SocGen credit committee of the settlement. They noted that:
   One of the main features of the settlement was that [BBHL] was given until 30th September to pay the debts owed to the syndicate. In order to effect this aim but at the same time preserve the priority agreement between the syndicate and the debenture holders it was necessary to create an artifice whereby the syndicate maintained the acceleration notice, making the debt immediately due and payable, but allowing [BBHL] time – until 30th September, to satisfy this debt. Had the settlement agreement rescinded the acceleration notice, then this may have breached the terms of the syndicate’s priority agreement with the debenture holders, thereby terminating the priority arrangement and allowing the debenture holders debt to rank equally with the syndicates.
   6665 The first buy‑back offer for the US debentures was made at the beginning of June and closed on 3 July 1990. The offer was pitched at a price of 40 per cent of face value.
   6666 Shortly after, the BBHL syndicate was joined as a third party to the litigation that was underway between the Bond group and the US subordinated debenture holders. The initial reaction of the debenture holders was that the buy-back offer was too low and that the company had the ability to offer up to US$0.50 in the dollar. The BBHL syndicate discussed the debenture holders’ court action and interest payments on the debentures at the syndicate meeting on 22 June 1990. Buaud’s report of the meeting stated that, at that time, it seemed as if the court would not agree with BBHL’s position that the payment of interest to the debenture holders was not possible as a result of the receivership. Buaud reported discussion to the effect that it was quite possible that the debenture holders would be in a position the following week to apply for summary judgment and wind up BBHL. The matter was again discussed by the syndicate on 26 June 1990. It was agreed that a meeting would be held between the banks, a representative of the debenture holders and BCHL in an attempt to ascertain an offer price that would be acceptable to all parties.
   6667 Even after the lifting of the suspension in trading and the announcement of the sale agreement, it is apparent that the price of BRL shares did not greatly improve: see Sect 9.16.4. The trading price for ordinary shares just prior to the suspension was 36 cents; preference shares were 33 cents. The highest share price in the period of 26 March 1990 (when the suspension was lifted) to 30 October 1990 was 41 cents per share. Devadason and Love (SCBAL) reported on 30 June 1990 that the shares in BRL were depressed ‘due to the doubt surrounding the proposed sale of BBHL to BRL’. Another SocGen document of that date states:
   The major security held for the $1.2 billion deposit with Bond Corporation is 100% of the shares in Bond Brewing Holdings Ltd. There is still some prospect that Bell Resources will proceed to purchase the Australian brewery assets for $1.8 billion less liabilities attributable to these assets which will partially reduce the outstanding deposit. Failing this it is likely that Bell will recover no more than one third of the deposit through a liquidation of Bond Corporation.
   6668 The ongoing doubts about whether the sale would be completed were also known to Keane at NAB. Oates wrote to him on 11 July 1990, noting the uncertainty about whether the deal would be completed by 31 July 1990 because of the ASX and, more significantly, the debenture holders. A revised offer had been rejected by the debenture holders, who had advised ‘in the strongest terms’ that they would not commence negotiations before certain preconditions had been met, which included the release of interest owing for the periods to 1 December 1989 and 1 June 1990. Since the NAB syndicate’s approval was necessary to release the funds on the former amount, Oates advised that all concerned parties needed to come to the ‘conference table’.
   6669 BRL was unable to hold a meeting of shareholders until after the 31 July 1990 completion date. This was a necessary precondition to completing the brewery purchase. On 20 July 1990 the BBHL syndicate banks agreed to extend the time for compliance to 17 August 1990. This was subject to some conditions, including the requirement that all other conditions precedent to the sale be completed by 31 July 1990 as originally contemplated.
   6670 BBHL again revised its offer to the US debenture holders on 18 July, to approximately US$620 per US$1,000 principal amount. The expiry of the tender offer was extended to 31 July 1990 and unless 51 per cent of the outstanding principal amount of debentures had been validly tendered by 25 July 1990, no funds would be available under the terms of BBHL’s tender offer facility.
   6671 The report by Turnbull (SocGen) on 23 July 1990 still records significant uncertainty as to whether the brewery sale would occur, primarily due to the possible failure of the buy-back offer, which was an essential condition of the sale. The report indicates that if BRL did not complete the purchase, the banks would be faced with two alternatives: negotiate an alternative commercial agreement with BRL or another party, or proceed to wind up BBHL.
   6672 The sale of BBHL was approved at a meeting of the BRL shareholders on 15 August 1990. Lion Nathan obtained sufficient finance to fund a buy‑back of the BBHL debentures at a proposed 70 cents in the dollar. This was the highest offer put to the BBHL debenture holders and by 28 September 1990, it had been accepted by approximately 88 per cent of the debenture holders. On 2 October 1990, the brewery sale agreement was completed.
   6673 What it is to be drawn from these events and communications? In my view at all times from January 1990 to 31 July 1990, the banks could not have had any expectation that BRL would pay any dividends. There was always doubt as to whether the purchase of the brewery assets would actually occur and, even if any bank could have expected it to occur in the near future, it would not have created enough cash flow in a short time to allow the payment of a dividend in the near future (probably at any time during 1990).
   6674 The state of affairs as known by NAB and SocGen must have indicated to them that there were significant and numerous impediments to the brewery sale proceeding. HKBA too knew that the pre-conditions had still not been fulfilled as at 20 July and they also must have had serious doubts as to whether the sale would proceed, or if so, when. The other banks received the interim report to 31 December 1989 issued by BRL, which indicated poor prospects for BRL to improve its share price. They were later informed that an agreement had been reached to purchase the brewery assets and it was expected to be finalised by 31 July 1990. They also knew that it was subject to a number of conditions precedent – most notably an acceptable buy‑back being arranged with the debenture holders. I think it may have been reasonable for these banks to believe that a sale was possible and that it might have restored some value to the BRL shares.
   6675 But for all the banks, at no stage up to 31 July 1990 was there ever any indication that the Bell group could, or indeed intended to, sell its shares in BRL for anything approaching the $1.80 carrying value disclosed in the 31 December 1989 accounts. In addition, there could have been no expectation that this event would have occurred.
   30.6.9. The financial position of BGUK and TBGIL
   6676 I think it is fair to say that, during the relevant period, the banks never considered that the BGUK group companies had assets worth securing or any source of cash flow other than Bryanston. The 20 November 1989 credit application by Lloyds Bank said that BGUK was ‘now merely a shell’. I will have something to say about the investigations by Lloyds Bank and Westpac into the inter‑company lending in the BGUK group in Sect 30.20. I wish only to make a few introductory comments here.
   6677 Lloyds Bank circulated the draft June 1989 accounts for BGUK to the Lloyds syndicate banks on 9 October 1989. Latham described the accounts as very confusing, due to inter‑company loans between BGUK, TBGIL and BIIL.
   6678 The plaintiffs say that aside from Latham’s request to Simpson of 19 October 1989 for full audited financial information on the company (among other things), Latham did not make any inquiries in relation to the aspects of the draft BGUK accounts which he found to be confusing.
   6679 On 4 December 1989 Lloyds Bank distributed to syndicate members the annual report for BGUK for the year ended 30 June 1989. The accounts for BGUK disclosed that a substantial proportion of the total assets of BGUK consisted of investments in redeemable preference shares in Western Interstate. Lloyds Bank’s recognition of this state of affairs is demonstrated by the note of the 8 January 1990 meeting between BGUK, S&M, A&O and Lloyds Bank, where Horsfall Turner inquired as to where the group’s debts flowed. He was advised that the debts flowed into shares held by BGUK in Western Interstate. Lloyds Bank undertook an investigation into the financial position of the BGUK group and was aware that the net worth of BGUK and the BGUK group was dependent on the recoverability of Western Interstate’s loan to BGF.
   6680 The plaintiffs seek to impute the knowledge acquired by Lloyds Bank in the course of its investigations into the financial position of the BGUK group. According to their closing submissions, the plaintiffs only seek to impute Lloyds Bank’ knowledge to the Lloyds syndicate banks, despite the fact that Westpac and Lloyds Bank effectively agreed to divide responsibilities. Westpac undertook to find out certain information about the Australian Bell companies, while Lloyds Bank did the same with the UK companies. It should be noted that P&P discovered a copy of the BGUK directors’ report and financial report for the year ended 30 June 1989.
   30.6.10. Financial position of Bell group after 26 January 1990
   6681 The plaintiffs plead that, prior to the February bank meetings, the banks believed or suspected that the nominated Bell group companies were insolvent or in an insolvency context. But plaintiffs’ case changes from the time of the February meetings to allege that the banks thereafter ‘knew or believed’ those matters.
   6682 Much of this is based on the Garven cash flow, which was produced on 19 February 1990. Garven advised that ‘due to significantly changed circumstances the latest cash flow projections do not allow any debt repayments’. The only new source of cash inflow not referred to in the September cash flow was the ITC contract payment (forecast to be $17 million). On the other hand, refinancing costs of $7.3 million were added. These included management fees from BRL and JNTH while the dividends from BRL (other than on the preference shares), JNTH and GFH were excluded. This resulted in a net loss of operating cash flow between the September cash flow and the Garven cash flow of $154 million.
   6683 The Garven cash flow showed increasing cash deficiencies throughout 1990, with a deficiency of $11.8 million at 31 March 1990, increasing to $58.4 million by 31 December 1990. In his summary, Garven stated that the Bell group could generate sufficient cash from asset sales and loan repayments to support the existing debt structure through to 31 December 1990. He further stated that the period to 31 December 1990 would be used to restore value to Bell group’s 216.7 million ordinary shares in BRL, which would be sold to provide the funds to repay bank borrowings.
   6684 The plaintiffs contend that no events occurred between 8 January 1990 (the commencement of the Scheme period) and 19 February 1990 (the date of the Garven cash flow) that had a further adverse impact on the Bell group’s cash flow.
   6685 I am not sure that much can be read into this episode alone. The question is not so much whether the Garven cash flow revealed new and startling information. Rather, the question is whether it was information that was available and which could have been ascertained had (on the plaintiffs’ case) proper inquiries been made in the period before 26 January 1990. This is part of the ‘calculated abstention’ case, with which I will deal with in a later section.
   30.7. The shape of the next group of sections
   6686 I am presently afflicted by a bout of trichotillomania. When that passes, I will turn my attention to the individual banks and the store of knowledge each of them acquired over the course of the negotiations. But before I do so, I wish to deal with several issues of a more global nature. First, the basis on which legal advice was sought about the alternative structures available for the refinancing arrangements. Secondly, the way in which the terms sheets outlining the conditions of the refinancing developed over time.
   6687 In the third section, I wish to deal with some issues that relate to the Australian banks as a unit. Generally speaking, the Australian banks dealt individually with the Bell group until early October 1989. Accordingly, the story of those relationships is best told on a bank by bank basis. It will be of some utility to deal with meetings held between representatives of the Australian banks, sometimes with TBGL officers in attendance, during the first half of 1990. I will start with the meetings held in Perth in February 1990. These are important events because they occurred so soon after completion of the Transactions. It is also the time at which the banks were presented with the Garven cash flow, the first such document received since the September cash flow. It is also when TBGL first indicated its intention to request a waiver of the cl 17.12 conditions relating to the use of proceeds of asset sales.
   6688 The fourth area relates to the Lloyds syndicate banks. Unlike the Australian banks, the Lloyds syndicate banks were accustomed to dealing with the Bell group through Lloyds Bank. For this reason, it will be convenient to look at some of the earlier dealings between the Lloyds syndicate banks and the Bell group on a global basis before descending into relationships between particular banks and the companies.
   6689 There is another preliminary point to be made about these discussions. While I am aware that the state of mind of the banks has to be judged as at 26 January 1990, I will look at events occurring after that date. I will do so for two reasons. First, to see what, if any, light the later events shed on states of mind held at the snapshot date. Secondly, because they reflect on the steps taken to facilitate and protect the Scheme (as alleged by the plaintiffs in 8ASC par 36APA to par 36APC), namely, to obviate the need for TBGL to advise LDTC of the financial restructure. This is an element of, among other things, LDTC’s equitable fraud claim. It will be convenient to introduce generally the dealings between Westpac and the Australian banks and between Lloyds Bank and the syndicate banks that are relevant to the elements under consideration. A more detailed analysis of those matters will appear in later sections.
   6690 In Sect 30.12 through to Sect 30.16, I will deal with a number of miscellaneous issues that affect the banks globally but which also have a more direct impact on them individually. The issues I have in mind are themes, events and incidents that recur during, or are significant aspects of, the negotiations and which were raised as such during the litigation. I will list the issues and give a fuller introductory account of them at the commencement of the relevant sections.
   30.8. Legal advice and double jeopardy
   6691 The banks (both Australian and overseas) instructed solicitors and counsel because there were concerns about the solvency of the group. I want to spend some time on a couple of instances where this concern arose because it illustrates some of the difficulties that I encountered in dealing with the evidence. One such problem relates to the difficulty for a person (in 2006) trying to remember and discuss something that he or she wrote in 1989. There was another problem that left me with a greater degree of disappointment. In many instances, I was surprised at the tendency for a witness to exercise extreme, even undue, caution in the face of what appeared to me, at least on the surface, to be relatively clear wording in a document. Nowhere was this more so than among the witnesses who were lawyers.
   6692 Over the course of September and October 1989, the lawyers and the banks were assessing the most suitable structure through which the financial re‑arrangements could be implemented. In the early stages, three models emerged. The first was called the ‘repayment/fresh advance structure’. It involved a fresh loan to BPG coupled with immediate repayment of the existing loans by the existing borrowers. The second came to be known as the ‘existing borrower structure’. The existing loans to the existing borrowers would be continued but on a fixed term basis and with fresh securities given by BPG and other group companies. The third model was the ‘novation structure’. In it, BPG would assume the existing borrowers’ rights and obligations and give fresh securities. The novation structure was always the ‘less preferred’ option and was never a serious contender. A fourth possibility, known as the ‘assignment structure’, was added. The banks would assign all their rights under the existing loans to BPG coupled with a deferred purchase price equal to the principal amount of the existing loans, payable by BPG on the repayment date.
   6693 One of the considerations foremost in the minds of the lawyers was the potential for ‘double jeopardy’. It is most easily explained by reference to the fresh advance structure. Under it, the banks would advance moneys to BPG and take security over the assets of that company. BPG would pass the funds across to the existing borrowers for immediate repayment to the banks in discharge of the existing facilities. But if the companies went into liquidation the banks were at risk of having to disgorge the repayment by the existing borrowers that had been funded by the fresh advance. In addition, they would lose the benefit of the securities and would have to prove in the winding up as an unsecured creditor for the amount of the fresh advance. Thus, they were in ‘double jeopardy’.
   6694 On 19 September 1989 a meeting took place attended by Latham (Lloyds Bank) Perry and Horsfall Turner (A&O) and Ladbury and Cole (MSJL). The main purpose of the meeting was to explore structures for the refinancing and to examine aspects of Australian law. Cole made a file note of the meeting. It recorded, among other things:
   JL → says it would be very hard to prove that Co is solvent at present when looking back in 6 months time… Current figures do not give any comfort re solvency.
   6695 Cole and Ladbury included the file note in their respective witness statements without demur as to its content. Cole was cross‑examined about the meeting and the note, and this exchange took place:
   Do you agree with me that in your presence concern was expressed with regard to the solvency of the company, as it’s referred to? Do you agree with that?—I’m not sure that there’s much I can add to the interpretation of what I wrote at the time.
   [A]s you look at your own file note now, it would indicate, would it not, that you were recording information conveyed to you at the meeting with Lloyds Bank, expressing concern about the solvency of the company as you’ve referred to there? Is that correct?—It’s the word ‘concern’ that I’m not certain about. In my view, I was the note taker at this meeting and I’m not sure that the word ‘concern’ represents accurately the sense of what’s being said.
   What word would you choose then, Mr Cole?—A single word – I’m not sure that I can think of a single word to capture the two paragraphs you’re asking me to focus on.
   You can use more than one, of course. What do you think you were recording as the junior solicitor present from Mallesons, getting information if not instructions from the client, Lloyds Bank, about the task that you were to embark upon in giving an advice with regard to solvency issues if it wasn’t to record a concern about solvency of what you’ve called ‘the company’? What else do you suggest?—Sorry, there’s a lot in that question. Can you rephrase it please?
   6696 Counsel declined the invitation to rephrase the question and the exchange ended there. When Ladbury (Cole’s superior) was cross‑examined, he distanced himself from its contents:
   John Latham is recorded in this file note… that it would be very hard to prove that the company is solvent at present when looking back in six months’ time … Do you remember him saying that?—No.
   Do you deny that he said it in your presence?—I just don’t know. I’m just neutral. I don’t know what he did say. What’s the context? I don’t know. What’s it in response to. I don’t know. I don’t know. If you had a file note of everybody at the meeting maybe you would be able to deduce something of what happened but one person’s file note is subjective.
   …
   Do you deny that in your presence the proposition was advanced that the current figures do not give any comfort re solvency?—I don’t recall that and I actually think it’s the sort of thing I would have recalled if it was as bald as that.
   Why do you think you would recall it?—It sounds pretty dramatic stuff. It would have had bells ringing. Sorry, that wasn’t meant to be a pun. You know, if we are going down the route of trying to put a law firm on notice of solvency issues.
   6697 When Latham was cross‑examined about the meeting and was shown Cole’s file note, he confirmed the accuracy of the statement attributed to him. He could not say who made the comment ‘current figures do not give any comfort re solvency’; he said it might have been any one of the lawyers or bankers present at the meeting. He agreed that there was no indication that he challenged the proposition. Latham added that at the time they had not defined clearly what the alternative structures were. The discussions were, therefore, quite abstract and theoretical. The context of the discussion about ‘current figures’ was that they had so little information that they could not get to a point where they could be satisfied on the basis of recent figures about solvency. Not having specific information, it would be extremely difficult to establish solvency six months down the track. This exchange then occurred:
   Although that was to an extent theoretical, you were nevertheless looking at the question of possible structures, were you not?—We were.
   That was in the context of a question mark about the solvency of Bell and Bond, wasn’t it?—We hadn’t I don’t think at this stage.
   No, but the extent to which you explored it was in the context of a question mark over the solvency of Bell. Correct?—It was in the context of the difficulty of finding the right structure, the background being a general concern in this area.
   The topic … was to get a better understanding of the framework of Australian companies law on voidable preferences. Correct?—That’s correct.
   The discussion took place, didn’t it, in the context of a question about the solvency or otherwise of Bell?—It was within the context of trying to structure the taking of security in Australia and the specific subject of that, as you rightly point out, was The Bell Group.
   And the question about its solvency?—The question about how we could make the structure optimal within what we currently understood of The Bell Group and the companies within it.
   In circumstances where there was a question as reflected in those file notes I have referred you to about the solvency of Bell. Correct?—Bell-Bond group … I agree.
   6698 I have to say that I found Latham’s evidence more helpful and more reliable than that of the lawyers in this respect. The problems concerning the 19 September meeting and its immediate aftermath do not end there. Having dealt with the file note of the 19 September 1989 meeting, counsel then put to Cole a note he had made on 21 September 1989 of a telephone conversation with Browning (Westpac). The note includes these comments:
   She is not so worried about the security for the fresh advance … She is worried about repayment … She is looking carefully at the credit side (ie qtn of ‘solvency’ etc).
   6699 The cross‑examination of Cole reveals similar problems. Having established that the reference to fresh securities and repayment may have been to the double jeopardy problem, counsel asked about the reference to a ‘question of solvency’:
   Did you understand from that when you recorded it that at least as Ms Browning was telling you there was a concern that prompted her to carefully look at the question of solvency?—Sorry, are you asking me based on – are you putting to me that I recollect that or interpreting it now?
   …
   As you read it now… it would seem to indicate, would it not, that she was expressing to you a concern with regard to a solvency issue; that is, whether the company or companies were solvent? Is that how you read it now?—The way I would read it now is that she was examining carefully, going to take steps of some kind looking into the credit side. It’s unclear to me what that means and in that context she would look into the question of solvency. It’s unclear to me whether that means she was expressing a concern as to the solvency, interpreting it now.
   6700 My understanding of the events and the significance of the telephone conversation was not improved when the file note was put to Browning. Perhaps I should mention that Browning had included reference to Cole’s file note (without demur) in her witness statement. This exchange occurred:
   It then says, ‘She is looking carefully at the credit side; that is, the question of solvency, et cetera.’ Do you see that?—I see that paragraph, yes.
   You have no reason to doubt the accuracy of that, do you?—Except that I don’t really know what it means.
   Let’s begin at the beginning. You have no doubt to question the accuracy that you told Mr Cole, in his note, that you were looking carefully at the credit side; that is, the question of solvency?—I have no doubt that Mr Cole accurately recorded his perceptions but what I said there I really don’t know.
   It looks as if you said that you were carefully looking at the credit side which included the question of solvency, doesn’t it?—But I’m having trouble when I have read this file note a number of times by knowing what I mean by ‘the credit side’ because clearly I wasn’t part of the credit process and my role was not to consider any credit issues, and I would be speculating if I went further and said what I’m guessing it might mean.
   6701 On 27 September 1989, MSJL provided a letter of advice to Lloyds Bank concerning the consequences under Australian insolvency law of the proposed restructuring of the existing loan to BGF and BGUK. In the letter, MSJL said that they had made two assumptions for the purpose of the advice. First, that every company making a payment or giving a charge as part of the restructuring is, at the date on which the payment was made or the charge was given, unable to pay its debts as they become due from its own moneys. Secondly, that every such entity would be placed in liquidation within six months. The solicitors said they were making the assumptions because ‘we have no way of assessing the existence of the facts which would support or deny [the assumption about insolvency]’.
   6702 The content of the letter of advice is not material for present purposes. It is all standard insolvency law fare. I do not place any weight on the mere fact that advice was sought. Given the fact that relatively complex financing arrangements were being restructured and alternative means of achieving the restructure were available, it was the sort of advice that a prudent banker would seek and a prudent lawyer would give. The advice also reflects the assumptions that a prudent lawyer would make in the circumstances. But I was unimpressed by the tendency of some witnesses to distance themselves from the proposition that the restructure was to take place in circumstances where the solvency of the borrower was an issue. In my view, insolvency was discussed, and it was ‘of concern’ (as per Cole’s cross‑examination) or put another way, there was a lack of ‘comfort’ provided by the current figures (as per the file note).
   6703 On 5 October 1989, A&O wrote to Lloyds Bank and to Westpac in relation to the 27 September 1989 letter from MSJL. A&O said that before definitive advice could be given on the best structure, it was essential that information be obtained from TBGL or, preferably, the auditors. That information included sufficient material to establish whether, at the time of the refinancing and immediately afterwards, ‘the relevant Bell entities will or will not be solvent’. I think it is common ground that the information referred to in this letter was never obtained. In my view this, too, is consistent with the background of a ‘question about the solvency’ of the Bell group companies.
   6704 In their joint memorandum of 13 October 1989, MSJL and A&O made the same assumptions as were made in the 27 September 1989 letter (about the inability of the companies to pay their debts). The assumptions are referred to as a ‘worst case scenario’. In the joint advice, the solicitors recommended against proceeding with the ‘repayment and fresh advance structure’, on the ground of double jeopardy, ‘if the banks have any doubt about the solvency of the existing borrowers’. The lawyers said that retaining the existing borrowers and taking third party security (the existing borrowers structure) would be the ‘most preferred structure if there is any concern as to the solvency of the existing borrowers’. The fact that the banks ultimately adopted the existing borrowers structure suggests that there was at least some concern about the solvency of the borrowers.
   6705 The joint memorandum went through a number of versions. I think the final version is dated 18 October 1989. In it, the solicitors proposed a new alternative, called the assignment structure, which was, by then, the preferred option. But in commenting on one of the other alternatives, namely the existing borrower structure, the solicitors said:
   This was previously the most preferred structure given that there is a real concern as to the solvency of the existing borrowers. (emphasis added)
   6706 Cole accepted that the reference to a ‘real concern’ was to a concern by the banks. There is no evidence that this was anything other than a faithful reflection of instructions given to the solicitors by or on behalf of the banks, or that anyone ever challenged the statement. Perry said that although he could not recall it, he would have sought instructions.
   6707 Stow and Peek (P&P) gave evidence that they had no recollection of the question of solvency of the Bell group companies being an issue that they discussed at around this time. This seems to me to be a little strange given what happened next. In mid‑October 1989, P&P and A&O were asked to instruct Hayne QC and Burnside of the Melbourne Bar to advise on the most appropriate structure. The brief to counsel contains the following comment:
   The banks are concerned that [BGF and BGUK] may become insolvent and may be unable to repay the loans and so they are willing to agree to Bell’s proposal if they are satisfied that security can be taken over assets of [BPG] without prejudicing their existing position.
   6708 In my view, the comment made by the solicitors could only have reflected their instructions and the conclusion they drew from their participation in the meetings with the banks either individually or collectively. I was not able to find any evidence in which an individual bank (at the time) expressed disagreement with that comment.
   6709 Hayne QC and Burnside provided a memorandum of advice dated 27 October 1989. The crux of the advice was communicated orally to the banks almost immediately. The written advice was sent by P&P to Westpac on 30 October 1989. Because of its importance, I have no doubt it was distributed to the other banks or, if not, that all banks were made aware of its contents and of the tenor of the advice contained within it. I would make the same comment about the joint A&O and MSJL advice. Counsel noted that the questions put to them did not arise in a vacuum. They noted that there was considerable publicity about the financial plight of BCHL, of which TBGL was a part. They went on to say:
   Unless certain assumptions are made, the questions are empty. For the purposes of this opinion, we adopt the following assumptions, in an excess of conservatism:
   (a) the security providers are relevantly insolvent.
   (b) the security providers will be wound up.
   We do not know whether either assumption is accurate.
   6710 Counsel advised that the existing borrower structure was ‘more robust’ than the assignment model and was to be preferred. They concluded by saying that if both of the assumptions were correct, either structure would fail.
   6711 This is by no means the entirety of the legal advices provided by the various firms to the banks before 26 January 1990. But I think the examples I have given are sufficient to demonstrate the basis for my findings. I accept what Latham said: as at 19 September 1989, the banks had insufficient information on which they could be satisfied about solvency. But this is a far cry from saying something along these lines: ‘these companies are as safe as the Bank of England; but there is a one in a million chance that they might be insolvent so we should at least explore the alternative structures with that in mind’. That, in my view, is not the way it happened and the tenor of the several advices and opinions cannot be explained away in this fashion.
   6712 The advice was sought against the background of stress and strain in the relationship between the banks and the borrower. The banks were, as Latham agreed in cross‑examination, trying to ‘make the structure optimal within what we currently understood of [the Bell group]’ in circumstances where there was a question, as reflected in the file notes, about the solvency of ‘the Bell-Bond group’. In my view, the evidence establishes that, throughout the negotiations, the banks harboured a concern about the financial condition of the Bell group companies and, in particular, about their solvency.
   6713 I want to make another general comment. One of the witnesses, I think it may have been Browning, said something to this effect: ‘I am a lawyer, not a commercial person; it was for others, not me, to decide the factual question whether or not the borrowers were insolvent’. I think the witness might also have said: ‘we were not in the practice of lending to insolvent companies’. I have no difficulty with any of these statements. The question is not whether the lawyers did, or should have, taken upon themselves the responsibility to decide, as a matter of commercial fact, that these companies were or were not insolvent. The question is whether, and to what extent, the solvency (or otherwise) of the borrowers was a live issue discussed between the lawyers and the banks and, if it was, how they dealt with the issue. It will be apparent from what I have said that, in my view, it was a live issue – more than just live, it was positively squirming – and it was discussed. But it was never resolved; certainly not in the way that (in my view) it should have been.
   6714 It is probably correct to say that, in the end, it is for the directors to ascertain factual solvency. But here the prospect of insolvency had been raised as a live issue. By its very nature, insolvency involves creditors. The lawyers were in no doubt that the directors would have to take into account the interests of creditors. This was made clear in the various letters of advice to the banks. They knew it. In those circumstances, it is inapposite for the banks effectively to wash their hands of the issue and to say it is none of their concern and that it is a matter solely for the directors.
   30.9. The development of the terms sheets
   30.9.1. Terms sheets and their content
   6715 In Sect 4.5.1 I gave a brief outline of the terms sheets passing between the Bell group companies and the banks in the period leading up to 26 January 1990. I now wish to go into a little more detail about those matters. I will not go chapter and verse through each terms sheet. Rather, I will concentrate on a few specific areas that are of relevance in the knowledge case. The following matters are of particular interest:
   (a) the identification of the assets over which security was to be taken;
   (b) the requirement that inter‑company indebtedness be subordinated;
   (c) restrictions on the sale of assets and the use of asset sales proceeds;
   (d) the provision of advice concerning preferences and the bonds; and
   (e) the provision of insolvency certificates.
   6716 The first terms sheet originated from TBGL on 27 July 1989. It proposed an equitable charge by deposit over BPG. TBGL issued a revised version on 11 September 1989, in which security was to be taken by way of fixed and floating charges over assets of the BPG group. Lloyds Bank prepared its own sheet on 11 September 1989: security was to be by fixed and floating charge over all assets of all holding companies, including BPG and WAN. It mentioned a restriction on asset disposals but without referring to the use of proceeds.
   6717 There was an exchange of draft terms sheets between Weir and Latham on 13 September 1989 but their content is not material for present purposes.
   6718 On 19 September 1989 Westpac drafted a terms sheet taking a charge over the assets of BPG and subsidiaries, present and future. It provided for inter‑company loans to be subordinated and restricted asset sales to related companies for values in excess of $20 million without bank consent. The Bryanston proceeds were to be applied to reduce debt or to be held at the lenders option until expiry of the facility. There was a condition that TBGL provide a legal opinion to identify whether or not the banks would have obtained a preference by virtue of the granting of security.
   6719 Lloyds Bank prepared a further terms sheet dated 22 September 1989. This version was sent to Simpson on the same day and then distributed to the Lloyds syndicate banks on 25 September 1989. It extended the security to cover the shareholders of BRL and JNTH and required inter‑company loans of security providers to be converted to subordinated debt or equity. It prohibited asset sales without the banks’ consent and required that sale proceeds (including Bryanston) be used to pay down bank debt pro rata. It had a similar condition as to the advice concerning preferences, and it introduced a condition that various named companies would provide certificates of solvency signed by two directors.
   6720 On 4 October 1989 a meeting was held at which all of the Australian banks and Lloyds Bank were represented. Simpson addressed the meeting on behalf of TBGL and the terms sheets drafted by Westpac and Lloyds Bank were discussed. Reference was made to an opinion received by Lloyds Bank warning on the risk of double jeopardy. There was discussion about the need for TBGL to set up an escrow account to cover the interest shortfall from the cash flow of BPG. Walsh (SCBAL) made a note in which he indicated that Weir (Westpac) would act as a focal point for all banks
   6721 On 9 October 1989 Westpac prepared and distributed to the other banks a revised terms sheet. It was basically in the same form as the Lloyds Bank version but took into account comments that had been made at the 4 October 1989 meeting. The condition relating to preference advice was extended to cover whether the banks would be entitled to be reinstated to the current position should the securities be set aside. The conditions also required the provision of legal advice to the effect that the proposed arrangements were not a contravention of the subordinated bonds. The requirement for the provision of solvency certificates remained.
   6722 I will not mention this on each occasion, but the draft terms sheets were circulated to the banks to provide them with the opportunity to comment, and they generally did so. By way of example, HKBA and CBA responded to the 9 October 1989 draft on 10 October 1989 and NAB and SocGen did so in the following two days.
   6723 On 23 October 1989 Simpson responded to the 9 October 1989 draft. He rejected the idea of extending security over BRL and JNTH, and the idea of TBGL giving a charge. He commented that the asset sale restrictions did not permit sufficient flexibility for the Bell group to meet business opportunities. He said that the banks should not be in a position to determine what was in the best commercial interests of the group. He also queried the need for solvency certificates, saying that the audited accounts should be enough.
   6724 Another meeting of the Australian banks was held on 27 October 1989. The general feeling was that the changes requested by Simpson were unrealistic and should be rejected. The various legal advices were discussed. It was decided to remain with the existing borrower structure (as advised) in order to avoid the double jeopardy problem. According to a note made by Walsh (SCBAL), Edward (SocGen) raised the issue of the financial viability of the whole Bell group, particularly in the context of BRL not declaring a dividend in its most recent loss announcement. Weir said that Bell had advised that BRL preference dividends of $9 million, together with normal management fees payable to TBGL, would be sufficient to meet the December 1989 interest due on the subordinated bonds. The next major bond interest payment would not be until May 1990. Dennis (CBA) recorded in his hand-written note of the meeting that ‘[i]f anything happens within six months group security will be tested’.
   6725 Discussion also covered changes to the terms sheet to require all asset sales proceeds to go towards reducing debt; present and future inter‑company loans to be subordinated; and for no dividends to be paid without the consent of all lenders.
   6726 It will be remembered that the advice of counsel received on 27 October 1989 favoured the existing borrower structure. On 6 November 1989, A&O drafted a terms sheet on that basis. Security was to be taken over the assets of the BPG group, TBGL, TBGIL, BGF, BGUK, the security providers, Western Interstate, the BRL and JNTH shareholders and the shares in Bryanston. The inter‑company debt subordination provision was the same as in the earlier versions. Save for BPG, asset sales were to be restricted to those approved by the banks, with the proceeds used to reduce bank debt pro rata. The condition requiring the provision of advice concerning preferences was deleted but the stipulation about advice concerning the bonds was retained. So too was the requirement to provide solvency certificates.
   6727 The A&O draft was discussed with Aspinall and (or) Simpson on 6 and 7 November 1989. TBGL reiterated the concerns expressed in the 23 October 1989 letter about the lack of flexibility in respect to asset sales and the restriction on the use of proceeds of any such sale. A&O reported to P&P on the progress of these discussions; at this stage, the parties were working to a timetable that would see completion by 30 November 1989. A&O expressed doubt that the timetable could be achieved.
   6728 On 8 and 9 November 1989 A&O provided further drafts of terms sheets taking into account comments made by Westpac and Lloyds Bank. There were no significant changes other than to the restrictions on the sale of BPG assets and the use of the proceeds of those sales. On 13 November 1989 Simpson responded, rejecting the idea of security over the Bryanston shares and some aspects of the revised asset sales restrictions. In relation to the requirement for solvency certificates, Simpson remarked that the security providers would have difficulty giving:
   [A] solvency certificate which projects a view for, say, 12 months without some comfort that their company will be kept in funds by the parent company. A more sensible approach would be for [BPG] to give a solvency certificate relating to the group as a whole.
   6729 A&O prepared a revised draft on 22 November 1989. The security arrangements were changed to provide for the assignment of the benefit of the sale of the Bryanston shares. The asset sales restrictions were changed to permit the sale of assets where the transaction was at arm’s length by companies providing a ‘solvency certificate’. The requirement to provide solvency certificates was to be limited to TBGL, BGF, BGUK, BPG and other nominated entities.
   6730 The notorious events of December 1989 then intervened: see Sect 4.5.1 and Sect 30.6.8.2. I think it is fair to say that from the ‘panic weekend’ of 9 and 10 December 1989 attention shifted from the terms sheets to the drafting of the refinancing documents. A&O advised Lloyds Bank, and P&P advised Westpac, that Oates had agreed that the Bell group would provide securities and guarantees over or from the principal asset holding companies of the BPG group and from the borrowers.
   6731 On 8 January 1990 the ICA and the STD were executed. Negotiations proceeded apace between the solicitors for the banks (mainly P&P and A&O) and the solicitors for TBGL (S&W) about the drafting of the various Transaction documents. Of particular concern were the corporate benefit argument and the drafting of recitals that would support the existence of such benefit. I have gone into some detail about those aspects in Sect 25.
   6732 On 16 January 1990 A&O provided another terms sheet headed ‘Restructured AUD/GBP Loan’. I do not propose to go into much detail about this document because it foreshadows many of the provisions of the Transaction documents. But I note that the requirement for an advice of preferences, which was deleted after the 9 October 1989 version, was not reinstated. The condition about the Transactions not constituting an event of default under the subordinated bond issues was retained. The requirement for the provision of solvency certificates was deleted. This was the last terms sheet to be prepared.
   30.9.2. A particular condition: certificates of solvency
   6733 I want to spend some time on the removal from the terms sheets of the requirement that the Security Providers give certificates signed by two directors as to the solvency of the companies because I think it has particular significance.
   6734 On 5 September 1989 Ascroft (MSJL) made a note of a conversation with Ladbury (MSJL) and Perry (A&O) about Australian insolvency law aspects of the restructure. Ladbury is reported to have said that solvency certificates were needed and to have warned that they had to be careful that if a certificate is asked for, ‘it can be obtained and to ensure that it is obtained from both outgoing and incoming borrowers’. The note continued: ‘We don’t want to be put on notice that the certificate cannot be given because the companies are [insolvent]’. Ladbury said he did not recall saying anything to that effect and that it was not consistent with his practice to have taken that view. He denied the substance of those words.
   6735 On 15 December 1989 Cole made a file note devoted entirely to the question whether to leave the requirement for solvency certificates in the documentation. In the note Cole specified ‘upsides’ and ‘downsides’ of leaving the requirement in. This cryptic comment is recorded: ‘cannot get from all – highlights the deficiencies with ones from whom cannot get’. The conclusion is expressed:
   Take them out. Downside referred to above is clayton’s downside because the same fact would emerge if we left them in and obtained [certificates] from some only.
   6736 Cole reported this conclusion to Latham. In cross‑examination he was asked about the incident. Despite what seems to me to be clear language, Cole could not confirm whether the ‘clayton’s downside’ to which he was referring was the one about highlighting. His other answers were not of much greater assistance:
   This discussion reflected though, did it not, on 15 December 89, a concern that you had that in fact you may not be able to get certificates of solvency from all of the companies?—I can’t recall that. It seems to deal with the possibility that solvency certificates might not be available from all.
   Are you able to recollect whether any particular companies came to your mind within that category; that is, that may not be able to give such certificates?—No.
   6737 Ascroft was asked about her 5 September 1989 file note in cross‑examination. She gave no indication of any concern as to its accuracy, although she did say she was recording a discussion between Ladbury and Perry and had not done any preparatory work. Once again, the attitude of Cole and Ladbury reflects the tendency of some witnesses to distance himself (or herself) from what seems to be to be reasonably clear wording in a document, which (in Cole’s case) was drafted by him and (in Ladbury’s case) was a record of his firm.
   6738 Browning referred to Cole’s note, but only as evidence that there was a debate going on about the solvency certificates. I am not sure that it can be so confined. Latham had agreed that it was common practice in the United Kingdom to require solvency certificates. He said he accepted Cole’s advice in this instance because he thought they were getting ‘something broadly similar’. Quite what the ‘something broadly similar’ was escaped me. He also said that he continued to press TBGL for the provision of certificates (notwithstanding their exclusion from the formal arrangements) but agreed he could not point to any document in which such a request had been made.
   6739 When the solvency certificate condition was first included in a terms sheet (22 September 1989), the refinancing structure had not been settled. The 6 November 1989 version was the first one prepared after the decision had been taken to remain with the existing borrower structure and it still contained the solvency certificate condition. It was put to Perry that the solvency certificate condition was a stand‑alone issue, independent of the particular financial structure chosen for the refinancing. He said he could not recall whether it remained in the terms sheet simply because it was in there (in other words, by accident). Nor could he recall whether MSJL advice was directed specifically to the existing borrower structure as opposed to the assignment, the novation or the re‑borrowing and refinancing structures which were being examined at the time. I doubt that it was left in by accident.
   6740 I should also mention that 15 December 1989 was not the last time the issue was raised. At least one of the syndicate bank members (DG Bank) was still asking for the solvency certificate requirement in January 1990. Clifford Chance (acting for DG Bank) wrote to Lloyds bank on 9 January 1990 with comments on the draft refinancing documents. In the letter they said: ‘As solvency certificates are not now required as condition precedents our clients are concerned that audited accounts… should be required… in order that solvency of the companies can be ascertained, at least as at 30 June 1989’.
   6741 It seems, then, that some time after 15 December 1989 the requirement for the provision of solvency certificates was dropped. It did not appear in the 16 January 1990 version of the terms sheet, nor was it in any of the Transaction documents. None of the witnesses gave any plausible explanation for its removal. The only real attempt to provide explanation was Latham’s statement that he thought the banks ‘were getting something very broadly similar’. When pressed to explain that comment he said that it arose from a series of discussions involving S&M and the UK directors in which they described ‘what was going to be necessary in order for the UK security providers to give security’. He referred to ‘an extended number of conversations and there were various pieces of correspondence’. That is delightfully vague. I presume it means the letters of comfort.
   6742 I do not accept Latham’s evidence that the certificates were not necessary because the banks were getting a similar result through other documents. There are no file notes by Latham recording this as a reason for deleting the requirement for certificates of solvency. There is nothing in the file notes made by the lawyers to that effect. In addition, Latham said that although he was sure the banks were aware of the conversations and correspondence, he did not pass the information on to the syndicate members in any formal way.
   6743 On 22 January 1990, DG Bank (Singapore) advised DG Bank (head office) of changes between the refinancing terms as previously advised and those then in contemplation. The authors noted that the requirement for certificates of solvency had been deleted and said:
   Our agent bank’s lawyers say that Certificates of Solvency would not have been provided by TBGL and each Security Provider in any event. Only some Certificates of could have been provided in which event the absence of a Certificate from those companies which did not supply one would cast doubts on their solvency. It was therefore thought better to delete the requirement altogether.
   6744 I am not sure how or where DG Bank obtained that information. There is another note to similar effect. On 12 January 1990 Peter Edward received an internal memorandum forwarding a terms sheet. I am not sure which one it is but it contains a requirement for solvency certificates for some only of the Bell group companies, identified by name. Edward made a handwritten note: ‘is this feasible?’. While I was generally impressed by Edward’s command of detail, his attempts in cross‑examination to explain the note were not convincing. I think he was aware of the dangers the differential approach posed. In my view the DB Bank memorandum and the SocGen concern are consistent with the terms of the Cole’s file note: ‘cannot get from all – highlights the deficiencies with ones from whom cannot get’.
   6745 I regard this as an important indication of a mindset held by the lawyers. If Lloyds Bank and DG Bank were aware of it, and if SocGen was concerned about differential treatment, I can see no reason why the other banks were not similarly informed and aware. I say this because of the way the banks worked and the relatively free flow of information as events moved towards execution of the refinancing documents.
   6746 The lawyers and the banks were aware there was no certainty the directors could (or would) provide solvency certificates for all of the companies. This issue had been exercising the minds of the MSJL lawyers since 5 September 1989. This suggests to me that the relevant lawyers and the banks suspected that some of the companies could be insolvent or, at the very least, were of doubtful solvency.
   6747 In my view, the absence of a requirement for, and the failure of the banks to obtain, solvency certificates, is significant. There is ample evidence to support a finding that a requirement for certificates of solvency was a normal banking practice, especially where there was some doubt about the financial health of the customer. I mention by way of examples, Simonen (Skopbank), Davis (HKBA), Farstad (Gentra), Latimer (CBA, referring to the Bell group situation as similar to a ‘workout’) and Monahan (Kredietbank).
   6748 In a letter of advice dated 27 September 1989 MSJL had suggested the banks might seek solvency certificates to bolster a later ‘good faith’ defence under Bankruptcy Act s 122. But the solicitors had also said:
   The request for the certificates might be a two‑edged sword in that the request itself could be taken to suggest concern regarding solvency of the existing borrowers. Of course this latter inference could be rebutted if it were shown that a request for such a certificate is common practice whenever an English bank takes security from a borrower.
   6749 I am grateful for the assistance in the first sentence of that quote. Of course, the problem here goes further than the making of the request. If it be the case that the banks had at first proposed to take solvency certificates and then made a deliberate, and unsatisfactorily explained, decision not to do so, I would regard both edges of the sword as having been honed razor‑sharp. It seems to me that this is an apt description of what happened. The requirement was dropped because the banks were aware the directors would not or could not provide them for all companies. As no technical or administrative difficulties were advanced to explain that situation, the only logical reason was doubts about the solvency of the companies concerned.
   30.10. The Australian banks: some global considerations
   30.10.1. The October meetings
   6750 I think it is correct to say that the first time the Australian banks met as a group was on 4 October 1989. I am not sure who first suggested that a meeting be held but it is not of great moment. The meeting was held in Sydney on 4 October 1989. It was attended by Stutchbury and Weir (Westpac), Keane (NAB), Boyd (CBA), Nott and Walsh (SCBAL), Edward (SocGen), McGregor (HKBA), Armstrong (Lloyds Bank) and Simpson (TBGL). Simpson addressed the meeting and then left. The bank representatives discussed the issues and then Simpson returned to the meeting.
   6751 Several topics were discussed. All of the Australian banks (except SCBAL) reported having preliminary credit approvals in place. SCBAL was supportive and did not expect a delay in obtaining approval. The Lloyds syndicate banks were to meet the following week to consider their respective positions. Some of the banks were prepared to proceed with security being limited to the publishing assets. Others wanted, in addition, mortgages over the BRL and JNTH shareholdings. Others wanted a mortgage debenture over TBGL. The evidence (mainly the various file notes that were prepared by attendees) satisfies me that the following matters were also discussed:
   (a) the draft terms sheet and changes that would have to be made;
   (b) whether BPG could service the debt on its own (SocGen appeared to believe it could handle effective net debt of around $200 million);
   (c) the need to prevent cash leakage from the Bell group to the wider BCHL group;
   (d) the double jeopardy problem (which appears to have first been raised by A&O in advice given to Lloyds Bank); and
   (e) the Bryanston sale and the need to isolate the proceeds in an escrow account to be applied in reduction of bank debt.
   6752 When Simpson rejoined the meeting, Weir informed him of the banks’ proposed changes to the terms sheet. Simpson said he would review the conditions and revert to the banks as soon as possible. But he raised a question about preference and said he wanted clarification that the banks would accept the potential preference problem that could arise if the banks took security over TBGL, BRL or JNTH. At least one of the bank representatives is reported to have said that the straight preference risk was acceptable, but that the issue of double exposure was not something they would be comfortable with and that a legal opinion would be sought. The unacceptability of a double jeopardy risk dominated considerations of the legal consequences over the ensuing weeks.
   6753 At the conclusion of the meeting it was generally agreed that Weir would summarise all points, act as the ‘focal point’ for all banks and prepare a revised terms sheet.
   6754 The Australian banks met again at Westpac’s offices in Sydney on 27 October 1989. The meeting was attended by Weir (Westpac), Keane(NAB), Dennis (CBA), Love and Walsh (SCBAL), Edward (SocGen) and Inglis (HKBA). The main subject discussed was the legal advice received from Hayne QC and Burnside: see Sect 30.8. At the meeting the banks decided to seek security over the BRL and JNTH shares as well as the charge over the publishing assets. NAB said it would not press the request for a mortgage debenture over TBGL.
   6755 Questions were raised about the provision of audited accounts. It was reported that some of the Lloyds syndicate banks were insisting on audited accounts prior to formal approval. Weir had been advised by TBGL that the audited accounts would be available within two weeks. The banks decided to resist the Bell group’s request to defer the time for provision of audited accounts from 120 days to 180 days. Instead, they decided to make provision of the audited accounts a condition precedent to the facility.
   6756 There was discussion, apparently initiated by Edward, about the financial viability of the whole Bell group, particularly in the context of BRL not declaring a dividend in its most recent loss announcement. Weir is reported to have told the meeting said that advice from TBGL was to the effect that BRL preference dividends of $9 million, together with normal management fees payable to TBGL, would be sufficient to meet the December 1989 interest due on the subordinated bonds. The next major bond interest payment was not due until May 1989.
   6757 A suggestion was made that the expiry date of the facility be advanced to 31 December 1990, which would give sufficient time for BCHL executives either to get the entire group in financial order or to sell the publishing assets in a reasonable market environment. It was also decided to include a condition requiring TBGL to submit a refinancing plan by 30 September 1990. So far as I can see, neither of those stipulations was included in a terms sheet delivered to TBGL.
   6758 Various other items within the draft terms sheet were discussed. It was decided not to allow asset proceeds to be held in an escrow account but, rather, to require that they be applied in reduction of bank debt. It was also decided to insert a requirement for the delivery of quarterly compliance certificates.
   6759 It was agreed that Weir would submit a final amended terms sheet to TBGL within a week and require acceptance by TBGL no later than 8 November 1898. According to the file note made by Walsh, the banks decided that if commercial terms had not been agreed by 30 November 1989, they would collectively serve a demand. The file notes of Dennis and Keane indicate that there was a ‘deadline’ but they do not go on to specify what would happen if the deadline were not met. It probably does not matter a great deal. As things turned out, the deadline passed without final agreement to the commercial terms and demands were not served.
   30.10.2. The January meeting
   6760 On 24 January 1990 there was a meeting of the Australian banks to consider some of the final changes to the proposed documentation prior to the parties entering into the Transactions. The meeting was held in Sydney and it was attended by representatives of all Australian banks. Browning (Westpac legal officer) and Peek (P&P) attended by telephone for part of the meeting.
   6761 The letter of comfort to be provided by TBGL to BGUK and TBGIL was discussed. It was reported that the letter of comfort had been drafted in terms of the legal advice given to the UK directors. The banks had wanted to limit the letter of comfort by placing a cap on the amount of support. However, they were advised that the UK directors would not accept a cap. The banks agreed to accept an unlimited letter of comfort on the basis that, apart from Bryanston, there were few assets in the United Kingdom and most of BGUK group companies were not trading. They also noted that, under the Transaction documents, the Bell group’s capacity to create further inter‑company indebtedness was confined. It was thought most unlikely that any new party would advance additional funds to the Bell group without security.
   6762 Developments in relation to the proceeds of the sale of Bryanston were discussed. It was reported that an initial payment of £5 million would be made, with the balance of the purchase price to be deferred. Depending on the performance of Bryanston, the balance of the purchase price may not have been payable at all. It was reported that the net proceeds would be deposited into an account controlled by the Security Agent. It had already been agreed that liabilities of up to £1.4 million could be paid out of the deposit account. The balance would remain quarantined, with BGUK having the right to access the account to pay external creditors. The claims of creditors were understood to be in the range of £3 to £5 million. The ‘consensus view’ was that Bryanston would no longer be a source for reduction of the banks’ principal debt.
   6763 The banks discussed and accepted the fact that the UK directors had been unable to obtain the subordination of a number of the inter‑company debts. It was noted that the directors of BGNV had been approached to agree to the subordination of the BGNV on‑loans but had not yet agreed to do so. It was also noted that the directors might refuse to sign on the ground of lack of ‘commercial benefit’.
   6764 It was further noted that, rather than having the subordination of the BGNV on‑loans as a condition of the refinancing, TBGL had offered instead to use reasonable endeavours to procure subordination. I will come back to what was said at this meeting about the status of the on‑loans in a later section.
   6765 Weir tabled a diagram of the main Bell group inter‑company loans. The significance of this diagram will be discussed in more detail in Sect 30.12.2. It is sufficient to say, at this stage, that Weir explained the diagram to those at the meeting. He told them that, in his opinion, if the sale of the newspaper business realised $400 million, the Australian banks would recover roughly 100 per cent of their exposure. This would occur whether or not the banks became secured, and whether or not the Bell group’s debt to the BGNV bondholders effectively ranked pari passu with the Bell group’s debt to the banks. The reason for this view was that loan repayments would accrue into BGF and residual moneys would find their way back up the equity chain to TBGL. There would be a large amount of money in TBGL at the end of the process. The guarantee given by TBGL to support the obligations of the issuer of the convertible bonds was subordinated. Accordingly, there would be sufficient funds residing in TBGL to ensure that the Australian banks were repaid in full. His view was that even on a worse case scenario and without security, the Australian banks would still be paid out in full.
   6766 The meeting concluded by noting that the finalisation was imminent (then expected to be on the following day) but that the banks would need urgently to obtain approval to proceed without the immediate subordination of all intra‑group debts.
   30.10.3. The February meetings
   30.10.3.1. Back ground to the meetings
   6767 I have already described the meetings held in Perth on 22 and 23 February 1990: see Sect 24.1.9.3. In this section I will be concentrating on the meetings from the perspective of the banks.
   6768 On 2 February 1990 Weir sent a facsimile to the Australian banks advising that TBGL was keen to have bank representatives inspect the BPG facilities in Perth. More importantly, several banks had indicated that it would be worthwhile for the banks to meet to discuss ongoing involvement, with particular attention being given to inter‑company loans and their ‘apparent’ effect on the status of the subordinated bonds. Weir added that the banks would be well advised to seek ‘some indication from [TBGL] as to continuing cash flows and how the $25 million interest payment on subordinated bonds would be covered in May [1990]’. On 13 February 1990 Simpson invited Lloyds Bank to attend the proposed meetings.
   6769 Weir’s fax of 2 February 1990 is interesting because it was prepared in close proximity to the execution of the main refinancing documents but before all conditions precedent had been satisfied. There are a couple of points that arise from it. First, it indicates that the on‑loans and the status of the subordinated bonds were live issues. That must have been the case before the Transaction documents were executed because there is no evidence that anything occurred between 26 January 1990 and 2 February 1990 in that respect. Thirdly, the issue of cash flows (which does not seem to have occupied anyone’s attention during November or December 1989 or January 1990) suddenly became an agenda item worthy of discussion.
   6770 Westpac (Stutchbury and Weir), SocGen (Edward), NAB (Keane), HKBA (Baker), SCBAL (Love, Ferrier and Devadason), CBA (Marshall) and Lloyds Bank (Latham) were all represented at the meetings. Aspinall, Simpson and Garven were present on behalf of TBGL at some of the presentations. On 22 February 1990 the representatives of the banks met at the offices of Westpac. That evening, they were entertained by Aspinall at a dinner cruise on the Swan River. On 23 February 1990 the banks’ representatives and the TBGL officers met at WAN’s offices in the city. The banks’ representatives reconvened for further discussions later that day. That evening, they were taken on a tour of the publishing facilities. From the various file notes prepared by those present at the meetings, the following events can be pieced together.
   30.10.3.2. Meetings of bank representatives
   6771 At the meeting attended only by representatives of the banks on 22 February 1990 there was a discussion of the position of the subordinated bondholders. Weir had prepared a diagram of the Bell group inter‑company loans. The conclusion apparently drawn from the diagram was that, on a sale of WAN, approximately $141 million would flow by way of loan accounts to BGF, at which point the bondholders could compete with the banks in a liquidation. The view was expressed that, in order for the banks to be fully paid out of the BPG assets, the newspapers would need to realise $400 million or more. SCBAL, if not others, was of the view that this prospect was unlikely.
   6772 In his later report to the syndicate banks on the results of the meetings, Latham referred to Weir’s diagram. He told the syndicate banks that those present at the meeting had concluded that the subordinated bondholders should rank behind the banks but that the position was presently unknown. Latham stated the position that it ‘may well include interests inimical to our own’ and that at that stage the banks could not rely fully on the securities to place them ahead of the subordinated bondholders among the Bell group creditors.
   6773 Latham made a note at the meeting: ‘May money: need to keep the bondholders sweet. BGP – put money on one side to keep bondholders content? Await company’s … Sale of assets in order to continue to provide cash flow for debt servicing’. In cross‑examination, Latham described it as a lively meeting and that the comment recorded was made by someone else, not by him. He said that there was a commercial dimension; they did not want to trigger an event of default. Thus there was a commercial logic to the approach.
   6774 The banks considered also the position of SGIC as the main subordinated note holder. They concluded that SGIC had the ability to act to put the Bell group into liquidation. The impact of any action by SGIC was to be considered in discussion with the company.
   6775 The bank representatives also discussed what Love recorded as a critical ongoing concern that the banks would face, namely, ‘a cash flow problem and servicing questions’, particularly with the reorganisation of the BRL board. Love also noted that the payment (or non‑payment) of BRL dividends was a critical issue in the cash flow projections.
   6776 Love recorded a comment that ‘when the security documentation was completed … there was a risk that it would not survive the 6 month preference period but advice from lawyers was that it should still be taken to provide the syndicates with ability to act under the security’. This seems to reflect the ‘no worse off’ thesis. Marshall commented that ‘if the group was placed in receivership/liquidation in the short term [it] would undoubtedly result in the recent rearrangement of the syndicated facility being overturned’.
   6777 As it is disclosed in the notes taken by various participants, the February meetings canvassed a whole range of other issues, including:
   (a) the need for TBGL to formulate a strategic plan, with proposals for asset sales and capital budgets;
   (b) identifying the owners of the subordinated bonds and the need for someone to work out the cost of buying back the bonds;
   (c) the possible sale of the publishing assets, with the comment being made that it could not occur within six months as the sale might create an event of default and would ‘impact on subordinated bondholders’;
   (d) the need for Aspinall to address the s 364 demands that had been served by BRL, in particular in relation to the Academy and Actraint transactions; and
   (e) the tax dispute with the DCT relating to assessments from 1982 – 1983 totalling $30 million.
   6778 In relation to (b), doubt was expressed whether the bondholders would agree to a sale prior to the scheduled May interest payment which is in the order of $25 million. In the discussion concerning the tax dispute, some commented that it would involve Newman and RHaC, that the discovery process would be lengthy and that there had been no early movement by DCT to pursue the claims.
   6779 Shortly I will turn to the meetings held on 23 February 1990 between the banks’ representatives and officers of TBGL. But after, and as a result of, that meeting the banks’ representatives met again. They considered the request for the waiver in the context of Bell group’s expressed incapacity to meet bank interest and the costs of the Transactions. The proposal that emerged was as follows:
   (a) the banks would recommend releasing the Bell Press sale proceeds to meet bank interest only;
   (b) the shortfall of $2 million was to be recouped from BCHL; and.
   (c) TBGL was to recover the balance of the BCHL receivable ($5.6 million) by 31 March 1990.
   6780 The bank representatives concluded that they should defer further consideration of whether to allow the release of the balance of the Bell Press proceeds for payment of the May bond interest. It was recognised that, without access to those proceeds, TBGL might not be able to meet that interest payment
   30.10.3.3. Meeting between bankers and TBGL officers
   6781 When the two groups of people came together on 23 February 1990 Aspinall spoke for about two hours on the Bell group’s position. He said that all significant non‑core assets had been disposed of and only a few non‑core assets remained to be sold. The group intended to sell Q‑Net as a non‑core asset. The time frame for the sale was two to six weeks and the expected proceeds were $7 to $8 million. Aspinall said that the Bell group had also identified an apartment in New York that might be sold for around $1.25 million and that there were other minor landholdings which might realise $2 million, subject to zoning changes. The sale process was estimated to take up to 24 months.
   6782 Aspinall reported that TBGL had a lease commitment in the Forrest Centre for 10 years (from 1986) at an annual rent of $2.3 million per annum. They were trying to find a purchaser to take over the lease but it was a difficult prospect. Love’s file note of the meeting records Aspinall as saying words to the effect that the directors were ‘fully aware that their ultimate survival rests on the restoration of value to the Bell Resources Limited company’. Keane records Aspinall as saying that the directors were monitoring developments in the restoration of value to BRL; however, Aspinall said he was not privy to those plans and had ‘no idea on value of the 40 per cent interest – will depend on what evolves with BRL’. The directors of TBGL were waiting for the BRL half‑yearly accounts to be released shortly, which would give a clearer idea of its financial position. The TBGL directors had resolved to sell the BRL shares as soon as possible after restoration of their value in order to reduce bank debt.
   6783 Either Aspinall or Simpson told the meeting that the Academy transaction had been effected on 11 December 1989, but that they ‘didn’t become aware until end of December when BRL started trying to get it unwound’. I think this means ‘didn’t become aware of [the Academy transaction] until end of December].
   6784 Aspinall is reported to have said that since 28 or 29 January 1990 cash control of the Bell group had been placed in his hands and those of Simpson and Garven. I should add that other evidence seems to place the date a little closer to the middle of January than those dates, but it does not matter a great deal. Aspinall or Garven gave the meeting an assurance that there was ‘no way [BCHL] can get hold of TBGL’s cash’. Aspinall said that he had been spending a lot of time on the sale of particular BCHL assets and that some things had been done with TBGL in which he had not been involved. But he said he would be concentrating on WAN from that time on.
   6785 Garven made a presentation on the Garven cash flow. It will be remembered that, in the summary document, Garven noted the main changes in the projections since the September cash flow amounted to a reduction in cash inflows of $154 million. Garven identified other sources of cash receipts, namely, the Bell Press proceeds, the sale of Q‑Net and loan repayments from BCF, JNTH and BRF, totalling $53.9 million. This was the figure of the deficit closing cash balance as at 31 December 1990 in the cash flow spreadsheets. Garven made two textual comments:
   Summarising the position shown in the cash flows, Bell group can generate sufficient cash from asset sales and loan repayments to support the existing debt structure through to 31 December 1990.
   The period to 31 December 1990 will be used to restore value to [the BRL shares] which will be sold to provide the funds to repay bank borrowings.
   6786 The banks noted that the main changes from the September cash flow resulted first in approximately $154 million of cash inflows no longer being available to Bell group and second the additional sources of cash of $53.9 million identified by Garven. In his report to the syndicate banks, Latham said that:
   It was put to the banks that the $53.9 million is necessary in order to keep the Bell group from collapse, and it would therefore be of primary importance to Bell group to retain, rather than repay to the banks, the proceeds of the sale of [Bell Press] and Q‑Net …
   6787 In his file note, Keane (NAB) simply said: ‘To meet commitments, [Bell group] needs to retain [Bell Press] proceeds and Q‑Net proceeds’. Marshall (CBA) noted that the cash flow forecasts indicated an inability to meet interest on the syndicate facility (approximately $4 million) in February 1990 and bondholder interest of $25 million in May 1990. As a consequence, Aspinall had requested that the banks waive the proposed debt reduction on 28 February 1990 and that the Bell Press proceeds be retained on deposit to meet bondholder interest in May 1990. He said that one option was for the banks to reject the request and apply $4 million of the Bell Press proceeds to meet February bank interest, with the balance applied in reduction of principal debt.
   6788 In relation to the Bond receivables, Keane’s note records Aspinall as saying that he was ‘hopeful of getting the BCF loan almost totally repaid within the next week’. He acknowledged the preference problem if BCHL went into liquidation but said there was nothing that could be done about it. Aspinall said that interest on the JNTH loan was being capitalised. If the loan was not repaid, the Bell group could survive until November 1990. Keane also said: ‘By this time, if BRL problem is not resolved, there is no doubt TBGL has a major problem – this is the key to the whole future of TBGL’.
   6789 Aspinall identified as a further benefit a possible payment of up to £7.6 million ($17 million) from the ITC contract. This payment was not certain; the ability of the debtor to pay remained to be tested. According to Love’s note of the meeting, the directors had not previously been aware of this source of funds.
   6790 In his file note, Love also mentioned a discussion about ‘the potential for the [BBHL] legal action in Melbourne flowing on to [BCHL] which would then impact on TBGL and our revamped security’. This led the plaintiffs to advance this contention in their closing submissions:
   Aspinall said the prospects of BCH being liquidated in 2 months were 50/50. Love’s handwritten note recorded this as: ‘2 year facility; BCH liquidation in 2 mths 50/50 D.A. – commercial resources’.
   6791 Love did not include any such comment in his typewritten file note of the meeting, nor was he asked about it in cross‑examination. So far as I can see, the proposition that in February 1990 he regarded the liquidation of BCHL as a 50/50 bet was not put to Aspinall in cross‑examination. While I have taken a relaxed view of Browne v Dunn issues, that would be a significant finding and I am not prepared to make it without having heard from the witness.
   6792 Keane also mentioned that at the meeting, Aspinall said they were looking at the convertible bonds: where they were held and whether it might be viable to repurchase them. Keane also mentioned that the prospective tax liability of $30 million was discussed. Aspinall said that solicitors had been engaged and that the matter was expected to be protracted. It was at that time waiting to go to the Federal Court.
   6793 In his file note, Marshall recorded a conversation in which Aspinall said that the sale of WAN was not feasible at that stage because it would not realise sufficient funds to clear all debts, particularly while the ‘Bond stigma’ remained. A sell down of equity would be considered at that time but in the circumstances it would be difficult to obtain full market value. Both Love and Latham recoded a similar discussion. Latham noted that the discussion included whether, in a sell down scenario, the convertible bonds would be kept in place. Aspinall is reported to have said that the directors had divergent views of that subject and that a paper was being prepared for the board.
   6794 According to Keane’s note, the meeting ended with the syndicate banks being requested to consider allowing the proceeds of asset sales to be retained by TBGL to service their commitments, including the interest due on 28 February 1990. I have already dealt with the other meeting notes relating to the request.
   30.10.4. Further meetings: June 1990
   6795 Two meetings of the Australian banks were held in June 1990. The first occurred on 7 June 1990 at Westpac’s offices in Sydney. All Australian banks were represented. So too was TBGL, through Garven and Simpson.
   6796 Simpson opened the meeting by stating that he had intended to present details of a proposed restructuring but was no longer able to do so. He said that the reason he was unable to give details of the restructuring was that circumstances had changed in the last 24 hours; problems had arisen in obtaining FIRB approval for a transaction involving WAN. Simpson discussed progress in relation to the ITC contract payment, the sale of the New York apartment and of Q‑Net. He said that the July interest payment due to bondholders would be met from these sources.
   6797 In relation to the subordinated bonds, Simpson is reported to have told the meeting that the Lloyds syndicate banks had proposed an interest moratorium but that the Bell group was resisting the idea. Simpson thought there would be little chance of LDTC agreeing to any form of defeasance if the July interest payment was not made. Simpson also provided some information as to the ownership of, and trading in, the convertible bonds. Of the $560 million of convertible bonds, the BCHL group only held $18 million. Approximately $150 million of the convertible bonds were held by SGIC and $320 million were in bearer bonds. TBGL had been approached ‘by someone who says he has [more than] $100 million and who wishes to talk about getting money now rather than later’. There had been some trading in the bonds; the trading was at 10 cents in the dollar, went to 20 cents, and had dropped back to 18 cents. Simpson thought this might have been due to speculation about the restructuring or possible buy‑back of the subordinated debt.
   6798 Simpson is said to have reported that legal approval had been obtained by the BGNV directors to execute the BGNV Subordination Deed; he expected that it would be signed the following week. The meeting also discussed recovery of the JNTH debt, but it was generally recognised that there was little hope of payment in the near future. Simpson also commented on the BRL shares, saying he was ‘fairly confident’ that the investment would increase in value but it depended on other events. According to Keane’s file note, Simpson acknowledged that ‘maintainable earnings are insufficient to service TBGL’s debt burden’.
   6799 Garven presented the 1990 – 1991 budget. In a comment that is indicative of the general tenor of the notes made by other participants, Smith (CBA) said:
   The aim is to clear bank debt before the May 1991 repayment date. This will only be achieved if the proposed restructure of Bell is successful, as Bell, in its current state, is not capable of servicing the existing debt, let alone repaying principal …
   A restructuring of Bell is crucial to its survival; while it has a quality asset in [WAN], its level of debt – bank and notes is plainly too high. The anticipation is that after a successful restructure Bell would be able to service a maximum debt of say $150 million.
   6800 The Australian banks met again on 15 June 1990, as had been proposed by Simpson at the previous gathering. Simpson met with the Australian banks (excluding Westpac) in Sydney. Aspinall met with Westpac and SCBAL in Perth. By this time the proposal for the Mirror group to acquire a 49 per cent stake in WAN had been made public, but so too had the Treasurer’s attitude that he would not allow foreign ownership of more than 25 per cent in an Australian newspaper. The communication from Weir (Westpac) suggests that the purpose of the meeting was to learn of TBGL’s ‘back up plans’.
   6801 At the Sydney meeting, Simpson expressed the view that the Mirror proposal might still gain approval and he summarised its terms. Relevantly, TBGL would negotiate a new $150 million refinancing facility to be taken on by the restructured company holding the newspaper. Westpac had been asked to be the lead manager of the syndicate and all existing banks would be invited to participate in the new facility. The $150 million would be used to pay down existing bank facilities. Maxwell would provide the funds needed to pay out the balance of the bank debt. By this means the Australian banks and the Lloyds syndicate would be cleared, subject to any new commitment to refinance. Maxwell would also arrange a facility for TBGL to buy-back the convertible bonds from all five issues.
   6802 Simpson indicated that the buy‑back of the bonds would involve a ‘deep discount of bills’ and had yet to be priced. While repurchase need only relate to the first issue of bonds, the intention was to approach the holders of all five issues. TBGL assumed that SGIC would not agree to sell other than for ‘100 per cent plus their interest’. Simpson said that he had ‘called on [LDTC] as requested by the Lloyds syndicate for general discussions as to ownership and spread of the European subordinated debt and likelihood of acquisition at a deep discount’. He said that TBGL was aware of a holder who apparently spoke for more than 50 per cent of the bonds and who had made contact with a view to an early reduced payout. Simpson commented that the future of the Bell group relied not only on a successful injection of equity and repayment of debt, but also on its investment in BRL obtaining some value.
   6803 Simpson also reported that ITC had agreed to pay, upon assessment from the Inland Revenue Commissioner, £4 million plus £800,000 in six weeks. TBGL was ‘very confident’ it would get £4 million prior to 13 July 1990, in time to meet the convertible bond interest payment.
   6804 By 15 June 1990, Weir had resigned from Westpac. His place was taken by Youens, who attended the Perth meeting, as did Devadason (SCBAL) and Aspinall. The discussion at this meeting was to similar effect as that in Sydney. Aspinall said that the proposed bond buy‑back would be pitched at ‘something less than 30 cents in the dollar’. He also said that he had been contacted by a holder of $50 million worth of bonds interested in selling at that price. Aspinall described the retainer of LCAS as involving work on a debt for equity swap for the bondholders. He also mentioned the aim of selling enough BRL shares to reduce bank debt to $150 million.
   6805 What is to be taken from the June meetings? If they are looked at in isolation, the answer is; not much. As will appear shortly (Sect 30.11.3), there was a more frenetic pace in the life of the Lloyds syndicate. Perhaps this is simply a function of size: six banks as opposed to 14 and more meetings as opposed to correspondence. Certainly, there seems to have been deeper divisions and a wider range of views among the Lloyds syndicate banks as to how best to proceed.
   6806 A couple of things do emerge from the discussions at the June meetings. So far as concerns the cash flows, not much changed in the period after the February meetings. But the estimates of the debt carrying capacity of a restructured Bell group seem to have been reduced from $200 million to $150 million. This is the note Smith made of the first of the June meetings and there is no reason to believe it was simply his opinion. It must have come from something said by the TBGL representatives at the meeting and no one demurred from it. This is in accord with other evidence that the economy was deteriorating and WAN was finding it more difficult to achieve advertising revenue budgets.
   6807 There was still no comprehensive restructure plan. The BRL situation was still fluid. The equity sell down of the newspaper had at least reached the stage of a letter of intent. According to Simpson the likelihood of acquisition at the bonds ‘at a deep discount’ had been floated with LDTC. But significant aspects, including the price of the buy-back and the willingness of SGIC to participate, had not been advanced. By June 1990, a further ‘crunch date’ (the July bondholder interest payment) was approaching and the identified sources for that payment still had not crystallised.
   6808 While there was some discussion about the need to deal with bondholders, the idea of an interest moratorium does not seem to have occupied the minds of the Australian banks anywhere near as much as did the Lloyds syndicate banks, or at least the dissentients among them. More of that a little later.
   30.10.5. The meetings: preliminary conclusion
   6809 I still need to look at state of mind on a bank by bank basis. But as far as the banks globally are concerned, it is informative to summarise the matters that emerged from the February 1990 meetings.
4. There is a clear reiteration of the ‘no worse off’ thesis. The bank officers present acknowledged that they had gone into the Transactions knowing there was a risk that they might be set aside. This is consistent with a state of mind that there was at least some question about the solvency of the group. It is true that insolvency is not an essential element of all bases on which transactions can be set aside. But the risks that had been pointed out in the legal advice had been predicated on an assumption of insolvency.
5. The prospect that, in a liquidation, the bondholders might rank equally with the banks and that the banks could not (at that point) rely entirely on the securities to ensure they ranked ahead was an expressed concern.
6. The Bell group had cash flow problems and would require immediate access to asset sale proceeds to service debt.
7. There was at least one other substantial creditor (the DCT).
8. Consideration would have to be given to buying back the bonds.
   6810 What strikes me most about the February meetings is that this was the first time at which the banks appear to have given any substantive consideration to these matters, or at least to the last four of them. And the tenor of the discussions belies any indication of shock or surprise at the difficulties that were disclosed. Very little time had passed between the finalisation of the Transactions and the February meetings. There is little or no evidence of substantive disclosures between the Bell group and the banks in the interim that alerted the banks to new and previously unheralded problems.
   6811 One of the best known (and understated) communications of the 20th century involved an unforeseen crisis in the Apollo 13 space mission: ‘Houston, we’ve had a problem here’. There is nothing in any of the communications or other contemporaneous documentation that suggest such a mindset among the banks.
   6812 There is a revealing comment in the file note prepared by Keane (NAB) of the final discussions between bankers on 23 February 1990:
   Further discussion ensued after reviewing the cash flow projections provided by Tom [Garven] and after further discussion with Messrs Aspinall and Simpson the bankers agreed that we were aware that when the original approval was given to take fresh security that the syndicate needed to survive for 6 months to stabilise syndicate positions vis-a-vis the subordinated noteholders.
   6813 This is another aspect of the ‘no worse off’ thesis. Not only was there a perceived need for the syndicate (by which I presume he meant the securities) to survive for six months but the need was brought about by the position of the bondholders. I will mention a little later a memorandum of 2 May 1990 from Davis (HKBA) to his credit committee. It is even more explicit: if the companies go into liquidation any time before 2 August 1990, the securities will be set aside and the bondholders may rank pari passu.
   6814 There is another aspect that I should mention here. The banks contend that the plaintiffs have failed to prove that in February 1990 the Bell group was unable to meet the interest payment due to the banks along with the extraordinary costs of the refinancing. They say that the request for a waiver and for release of asset sale proceeds for that purpose does not mean the companies had no other source of funds from which those commitments could be met. I do not agree with that proposition. There is nothing in any of the file notes made by bank officers who attended the meetings to indicate that Aspinall was saying something to this effect: ‘Look, it would be nice if you gave this indulgence but don’t worry too much about it; if you can’t see your way clear to help us, we will find the money elsewhere’. That is not the tenor of the discussion recorded in the file notes. Nor is there any hint of it in a memorandum that Aspinall sent to Beckwith and Oates on 2 March 1990 recording the (successful) approach to the banks for an initial indulgence.
   6815 In my view, the way events unfolded at the February meetings supports the contention that, prior to 26 January 1990, the level of suspicion harboured by the banks (or at least those who were represented at the meeting) about the solvency of the Bell group companies and about the prospect that the on‑loans might not be subordinated, was greater than acknowledged during the banks’ case. And the level of detail that lies beneath the diagram Weir presented to the Australian banks during the 24 January 1990 meeting shows just how much information the banks had gathered concerning the affairs of the Bell group.
   30.11. The Lloyds syndicate banks: some global considerations
   30.11.1. The purpose of this section
   6816 In this section I will look at the evidence that reflects on the Lloyds syndicate banks’ knowledge as a whole. Some of this comes from material sent to all banks, or said in the presence of all banks, whilst some is derived from the various agency relationships. I should also point out that much of this section discusses action and correspondence involving only Lloyds Bank and it is often blurred as to whether Lloyds Bank was acting in its role as agent or as individual lender.
   6817 As the evidence that goes toward establishing the knowledge of all banks is often intertwined with evidence which only goes toward Lloyds Bank’s individual knowledge, I have on occasion discussed both together, rather than repeating the whole story in the subsequent section on Lloyds Bank. However, I have tried to make it clear whether I am relying on something to establish the knowledge of all Lloyds syndicate banks or just Lloyds Bank. In this section I will also consider in detail the practices of the Lloyds syndicate in seeking information from the Bell group, which is relevant to the question whether the banks engaged in a ‘calculated abstention from inquiry’.
   30.11.2. Events before 26 January 1990
   6818 It will be remembered that the repayment date for the Lloyds syndicate facility was 19 May 1991. In late 1988, TBGL advised the Lloyds syndicate banks that it had elected to roll the full £60 million facility to 31 March 1989. Under its asset sale programme, and in accordance with cash flows that had been provided, TBGL expected to be in a position to repay the entire debt ‘some time before 31 March 1989’.
   6819 Lloyds Bank, on behalf of the syndicate, made significant and extensive requests for information from the Bell group in the first half of 1989. This may have been something of a ‘catch up’ given that some syndicate banks had expressed the view that Lloyds Bank had not been particularly diligent in its role as agent. This changed because of concerns that materialised following the Bell group’s failure to repay by 31 March 1989 as promised. This concern was noted in the contemporaneous notes of a number of bank officers, including Pettit (Gulf Bank) and Rex (Crédit Agricole).
   6820 One of the early requests came in a letter dated 7 February 1989 from Evans (Lloyds Bank) to Devries (TBGL). Evans requested certain information on behalf of the syndicate, including how the proceeds of the Bell asset sales had been utilised. He asked for a ‘best estimate’ of TBGL’s plans regarding the facility, including whether it was still intended to repay the facility in full on or before 31 March 1989 as previously indicated.
   6821 By 24 February 1989 Lloyds Bank had not received a reply to its request and Evans wrote to Farrell (BCHL). Evans also passed on the concerns of some of the syndicate banks that the facility might not be repaid in full on 31 March 1989 and that they were not being treated on an equitable basis vis a vis the group’s other lenders. Evans sought advice on the amount to be repaid and confirmation that the Lloyds syndicate would be treated equally with other lenders. He also asked how $1.8 billion in sale proceeds had been utilised and how they would be used in the future. Evans requested an urgent response, ‘as it is our belief that recent delays in response to our enquiries on behalf of the banks have increased their concerns’.
   6822 Again, Lloyds Bank did not receive a response. On 3 March 1989 Evans wrote to ‘Mr A Owens’ (presumably he meant Oates), advising that some of the banks were ‘very seriously concerned by the lack of any response whatsoever’ to Lloyds Banks’ letters of 7 and 24 February 1989. He noted that these banks were ascertaining what formal steps could be taken toward obtaining repayment of the facility and the Bell group was strongly urged to respond by 7 March 1989 in order to ‘pre-empt any further action by such banks’.
   6823 On 7 March 1989 Farrell advised Evans, by telephone, that there would be no pre‑payment on or before 31 March 1989. He informed Evans that the asset sales had been used to pay short‑term and overdraft facilities, while further asset sales would take some time. Evans advised the Lloyds syndicate banks of these matters in a letter dated 16 March 1989. The banks were informed that the Bell group was proposing to dismantle the negative pledge structure and provide tangible security over Wigmores and the BRL shares. They were told that any repayments would be made pro rata with other lenders. Evans also enclosed financial information for TBGL, BRL and BCHL (which had been provided by Farrell) and advised them of the proposed timing of the Wigmores and Bryanston sales, which were expected to recoup at least $80 million and $60 million respectively.
   6824 Lloyds Bank received copies of the 1988 BRL Annual Report on 15 May 1989. The balance sheet as at 31 December 1988 showed total current assets of $1.12 billion, of which $750.8 million consisted of receivables; non‑current assets of $1.89 billion, of which receivables comprised $248 million; and total liabilities of $1.42 billion, leaving net assets of $1.58 billion approximately.
   6825 The notes to the accounts stated that current receivables included $700 million owing from a related company. Further, non‑current receivables included amounts owing from related companies of $194.5 million. The notes contained no further information concerning those receivables. The loans constituting the receivables were not referred to in the chairman’s report nor in the directors’ report and no related party transaction disclosure statement was contained in the notes to the financial statements. Aside from the inter‑company receivables, the annual report showed that the main assets of BRL also included investments in Central Queensland Coal Associates and the Gregory joint ventures, an interest in the Bass Strait royalty through a shareholding in Weeks Resources Pty Ltd and a shareholding in Lonrho plc. The report indicated that BRL was in the process of selling the Lonrho stake shares.
   6826 The offer of security by the Bell group was discussed at the Lloyds syndicate meeting held on 25 April 1989. The meeting was attended by all syndicate banks except Skopbank. Oates and Raeburn made a presentation, which was followed by a private discussion amongst the banks. Oates told the meeting that TBGL was negotiating a new facility with Westpac, SocGen and some other (non‑defendant) banks, secured against the assets of BPG. He gave an outline of the present state of affairs: the asset sales that had been completed, those that were progressing and the group’s current outstanding level of bank debts. He touched on the value of the group’s main assets (Wigmores, Bryanston, BPG, BRL and JNTH) in both market value and book value terms. He also canvassed the debt servicing capacity of BPG. He noted that the difference between the book value and the market value of those shares was due to the ‘lack of confidence in the group’. Oates informed the meeting of the large inter‑company lending from BRL to BCHL ($600 – $700 million) and said that it had no repayment schedule. He advised that BRL paid dividends and it would continue to do so. Oates mentioned the plans to transfer the brewing assets to BRL and bring it under the BCHL group structure, away from the Bell group. A similar strategy to purchase the Bell group’s shares in JNTH was also planned. Oates said that TBGL was prepared to offer the syndicate security over the Bell group’s shareholding in BRL, which was valued at around $300 million, in exchange for the release of the negative pledge.
   6827 Notes of the meeting taken by various bank officers disclose that, after Oates and Raeburn left, concerns were expressed about the failure of TBGL to repay the facility as promised and the perceived inadequacy of the securities that had been offered. Many banks felt that by giving up the negative pledge, they would have reduced access to the BPG assets, being the most valuable assets of the group. Concerns were also expressed about the value, liquidity and saleability of the BRL shares. I think it is fair to say that the notes indicate a relatively consistent expression of views across the banks. That having been said, some banks were keen to strengthen their position by obtaining security as soon as possible in case the situation deteriorated further. Others did not wish to release the negative pledge until they had further information. The majority view seems to have been that, in the absence of a better offer, the negative pledge should be retained because it was preferable to have access to all group assets.
   6828 Pettit (Gulf Bank) urged the syndicate to act cautiously, gather information, assess the legal position, and then act decisively. According to Pettit’s note, Lloyds Bank shared this view. This resulted in Lloyds Bank putting together an extensive request for information from the Bell group. On 2 May 1989 Lloyds Bank despatched the first of a number of such requests. The information sought included:
   (a) projected cash flows for BRL, TBGL and BPG for the next three years;
   (b) a list of BRL and BPG’s assets (including mastheads), their book and market values and the methodology of assessing value;
   (c) details of the nature and maturity pattern of the inter‑company indebtedness of TBGL, BRL and BPG, and between Bell companies and the Bond group, and of direct and indirect shareholdings of the Bond group in the Bell group, BRL and BPG;
   (d) details of BRL’s debts and creditors, and details of the brewery sale and a timetable for the sale;
   (e) details of the consideration for JNTH’s transfer to BCHL and when it would be received; and
   (f) details of the Bryanston sale and timing.
   6829 In the letter, Tinsley (Lloyds Bank) advised TBGL that the main areas of concern for the syndicate banks included the potential dilution of the NP group assets by payment of dividends or the making of inter‑company loans; the potential dilution of the value of the security offered through the disposal of tangible assets and inter‑company lending; and the ongoing liquidity of the 39 per cent block of BRL shares. Tinsley also made these requests:
   In view of the possibility of a lack of tangible assets remaining in [BRL] could [BCHL] undertake to ensure that tangible assets to an appropriate level be assumed and retained in that company.
   In order to restrict potential leakage from [TBGL] and [BRL] would you agree that (i) the existing £25 million limit applicable to the [NP group] for loans made by them … be reduced and a similar limit be placed upon loans made [BRL] and (ii) some form of restriction be placed on the paying of dividends.
   To avoid dilution of asset value it would seem appropriate that the financial covenants given by the Bell group (Total liabilities not to exceed 65% Total Tangible Assets) be reviewed and similar covenants applied to [BRL].
   Please confirm that Bell Group/[BRL] is not in default under any other agreement.
   6830 On 4 May 1989 Crédit Agricole wrote to Lloyds Bank noting recent press reports of the downgrading of the debt ratings of TBGL, BCHL and BRL and noting the possibility that it could constitute a material adverse change under their facility agreement. They asked that this issue be included as a topic for discussion at the next syndicate meeting. On 23 May 1989 Gulf Bank wrote to Lloyds Bank inquiring whether there had been a material adverse change. Gulf Bank also said that they would ‘seriously question the value of the shares of [BRL] proposed as substitute for the negative pledge … [BRL]… appears to be caught in a web of inter‑company debts between the Bell group, [BCHL] and related companies’. Evans (Lloyds Bank) sent a telex to his colleague Hanley in Sydney on 5 May 1989 asking him to follow‑up Crédit Agricole’s concern:
   We refer to the recent Ratings downgrading of [BCHL], [TBGL] and [BRL] and should be grateful if you will forward to us… a copy of the Ratings report.
   We would also appreciate a copy of an article which we understand appeared in your domestic press today concerning the transfer of a large part of the liquidity of [BRL] to [BCHL].
   6831 On 8 May 1989 Hanley responded by sending the ratings memoranda. It dealt with the reasons for downgrading, including the negative impact of the Lonrho investment, the tribunal announcement (see Sect 9.8.3.1), the financial situation of the BCHL group and the high interest rate environment. The report stated:
   [TBGL], although a separate listed company, is majority owned by [BCHL] and its financial affairs are regarded as being inexorably linked to those of [BCHL]. Accordingly the rate of [TBGL] is also reduced to CCC from B.
   6832 Similar observations were made regarding BRL. Hanley also included a copy of a newspaper article that detailed the restlessness of BRL’s minority shareholders about the loans by BRL to Bond companies. Evans asked Hanley to forward any further articles on ‘Bond/Bell’ that appeared in the Australian press.
   6833 On 9 May 1989 Olex (Lloyds bank) sent a newspaper article to Cruttenden, Armstrong and Tinsley, reporting that Adsteam was considering legal action against BRL over $895 million in loans to BCHL. Olex asked: ‘Can we find out more? Believe we should tell the syndicate in any event.’ So far as I could see from the evidence, Lloyds Bank did not pass on to the syndicate information about the possible Adsteam action or the downgrading in ratings.
   6834 Tinsley then wrote to Oates on 9 May 1989. Tinsley acknowledged the requests in his letter dated 2 May 1989 involved a considerable amount of research, but pressed for a prompt reply in order to satisfy the Lloyds syndicate banks. He added that increasing concern was being expressed about the level of borrowing by BCHL from BRL and he requested assistance to clarify this point. He noted that recent press reports in the United Kingdom had stated that inter‑company lending as at the year end stood at $900 million, rather than $700 million as advised in the April presentation. Tinsley asked for confirmation that the inter‑company lending was at arm’s length and on‑market related terms. He also asked Oates for the urgent despatch of copies of the BRL annual report and accounts and requested full details of the situation between Adsteam and BRL and the threatened legal action.
   6835 Raeburn (BGUK) responded to this letter on 10 May. He said that the loan from BRL to BCHL stood at $700 million as at 31 December 1988 and $900 million as at 31 May 1989. It was on‑market terms and, although technically a demand facility, it had a repayment date no later than 21 September 1989. BCHL had provided various undertakings to the lender, including the maintenance of certain financial ratios and title retention covenants. He said he would forward the BRL annual report as soon as it arrived in London but declined to comment on the Adsteam situation.
   6836 On 11 May 1989 Lloyds Bank asked A&O for advice on the present situation relating to the BCHL and Bell groups. The meeting included Armstrong, Tinsley, Brackenridge and Evans of Lloyds Bank, and Humphrey and Perry of A&O. It does not appear at this stage that Lloyds Bank had undertaken to obtain legal advice on behalf of the syndicate. As noted earlier in the agency case, it was not until 21 July 1989 that Lloyds Bank informed the syndicate that it was incurring legal costs on behalf of the syndicate, for which the syndicate would be responsible if the costs could not be recovered from the Bell group. This was accepted by the syndicate banks. But I do not find that Lloyds Bank was acting in a representative capacity at the time of the meeting on 11 May 1989 because part of the advice sought was about how Lloyds Bank could protect itself as syndicate agent if the Bell group went ‘down the pan’. In any event, it matters little whether knowledge of A&O’s views are imputed to the other Lloyds syndicate banks at this stage because it was preliminary advice.
   6837 Nevertheless, for the sake of completeness, I will mention Humphrey’s advice. Humphrey said that it would be difficult for the syndicate to prove a material adverse change based on the downgrading in credit rating. He suggested that Lloyds Bank should get its best experts to analyse the balance sheets and ‘be like a hawk’, presumably in relation to adverse developments that might put the facility at risk. Humphrey advised Lloyds Bank to ‘formulate a series of questions and hammer home’.
   6838 The plaintiffs say that the reference to the group going ‘down the pan’ indicates they had concerns about solvency. However, I think that at this stage Lloyds Bank was merely seeking to cover all possible bases if the situation deteriorated. I do not think there was a significant concern about the Bell group’s solvency at this stage. Perry’s note of the meeting records that, in the view of Lloyds Bank, ‘Bell Group was at this time quite sound but it was concerned that Bond Group was a “dodgy” parent’. He went on to record that Lloyds Bank ‘were fearful about the dilution of the credit worthiness of Bell group by Bond, but otherwise they had no direct concern regarding Bell group’s capacity to meet its obligations and to repay the loan when due’.
   6839 In light of the unfavourable response to their offer of security at the 25 April 1989 meeting, TBGL did not pursue the proposal. On 12 June 1989 Evans again wrote to Oates and said that, despite the proposal not being pursued, the syndicate would still appreciate a response to the questions.
   6840 Rex (Crédit Agricole) wrote to Lloyds Bank on 26 June 1989 noting ‘with considerable concern’ announcements in the press relating to the suspension in trading of BRL shares due to the company’s failure to provide information to the ASX and the declaration that Bond was not a fit and proper person to hold a broadcasting licence. Lloyds Bank immediately wrote to Oates seeking more information and sent copies by telex to the syndicate banks.
   6841 On 29 June 1989 Oates wrote a letter for distribution to the Lloyds syndicate banks. He noted the outcome of the tribunal proceedings on BML; responded to the ongoing attacks on the group’s financial credibility by Lonrho; and explained the proposed sale of the brewing interests by BCHL to BRL. A copy of the letter was distributed by Lloyds Bank to the syndicate banks on 30 June 1989. It outlined the various reports, meetings and disclosures that the ASX required BRL and BCHL to undertake. This included the provision of an independent expert’s report into the brewing companies and accounts for the past five years. Oates explained that BCHL initially objected to the ASX’s requirements because they were unnecessary, ‘probably misleading’ and would involve expense and delay; but as the ASX had responded by halting trading in shares, the group reluctantly accepted the requirements. The suspension in share trading had subsequently been lifted.
   6842 Raeburn met with Armstrong, Tinsley, Evans and Brackenridge on 29 June 1989. The purpose of the meeting was to gauge Lloyds Bank’s reaction to the Lloyds syndicate participating in a new facility, with a total of around $300 million, to be secured by fixed and floating charge over the assets of BPG. Armstrong expressed Lloyds Bank’s displeasure at the poor level of communication from the Bell group. It was agreed that TBGL would put together a comprehensive package of information for the banks’ consideration.
   6843 This proposal was put by Oates to the Lloyds syndicate at a meeting on 20 July 1989. Oates proposed that the Lloyds syndicate join the six Australian banks in a $250 million facility secured against BPG, but probably not the BRL shares. He said that BPG could service $250 million in debt but the repayment would come from asset sales. The banks were advised that the sale of Bryanston had not been completed and payment of part of the purchase price might be deferred beyond May 1991. Wigmores had been sold for $90 million, due to be received in August 1989. Oates also discussed the ASX suspension of trading in BRL shares and advanced justifications for the BCHL group’s position on that issue.
   6844 Before the meeting, Lloyds Bank had met with the lawyers from A&O. It was agreed, in the words of Armstrong, that:
   [W]e should propose to the syndicate a more definitive approach to this borrower … we would seek ‘reasonable’ information, a failure to produce which could constitute a breach of covenants or which might indicate whether there were grounds for a material and adverse change claim.
   6845 At the meeting, according to a file note made by Harris (Gentra), Armstrong said Lloyds Bank ‘now felt it was necessary to press more firmly for information’ and that a formal request should be made to the borrower under the loan agreement. A Lloyds Bank officer is also recorded as saying that they had not received a response to their letter dated 2 May 1989. However, the questions raised since the 2 May 1989 letter had been the subject of reminder requests ‘by phone six times and by letter’. A number of banks expressed concern about the lack of information being provided. It was decided that Lloyds Bank, as agent, should send another letter to TBGL, setting a deadline for receipt of 21 days. Under the terms of RLFA No 1, failure to provide the information within that time would trigger a further 30 day period within which the borrower was obliged to cure the default. The letter was to be drafted and sent to the Lloyds syndicate banks for comment and approval before being finalised. Some banks expressed the view that, if the information was not received and a default occurred, the syndicate should consider issuing a notice of default.
   6846 Pettit (Gulf Bank) told the meeting that the security offered ‘might be overthrown anyway if Bell was proved to be on the verge of imminent collapse or continuing to trade whilst technically insolvent’. He also said ‘we’d be locked into existing maturity date or longer as they clearly would not be in position to repay at that time’. A representative of Lloyds Bank reportedly said that even if there was an event of default, careful consideration would have to be given as to what action should be taken. It follows from this, as Pettit recognised in his summary of the meeting, that Lloyds Bank did not want to precipitate the collapse of the Bell group.
   6847 Lloyds Bank circulated a draft letter to the syndicate on 25 July 1989 and invited comment. The covering letter suggested that the Lloyds syndicate should be prepared to treat it as an event of default, if the information was not provided after the additional 30‑day period to treat it as an event of default. The final version of the letter was sent to the Bell group on 28 July 1989. A deadline of 21 August 1989 was set. The information required by the 28 July 1989 letter went well beyond that which was the subject of the 2 May 1989 demand. I will not set out in detail the additional matters, but they included:
   (a) detailed breakdowns of total liabilities (including contingent liabilities), total secured liabilities and total tangible assets of BRL and all guarantors;
   (b) details of all redeemable preference shares on issue;
   (c) a list of all assets disposed of to third parties, other than within the group, between 30 June 1988 and 30 June 1989 and confirmation that no transfers were made (other than for full consideration) on an arm’s length basis totalling in aggregate more than $100,000;
   (d) details of any indebtedness incurred other than in the ordinary course of its operating activities and which was not undertaken by a nominated borrower;
   (e) written confirmation that there were no events of default under any financing agreements;
   (f) details of any material litigation or disputes pending or threatened against any member of the Bell group;
   (g) exact details of the Wigmores sale and timing and the group’s intentions regarding the cash proceeds; and
   (h) the three‑year projected cash flows.
   6848 On 28 July 1989 Raeburn provided the package of information that had been promised at the 29 June 1989 meeting with Evans, Farquhar and Brackenridge. This was an update in very general terms on TBGL’s activities, current and projected, financial information including cash flows (the 1 July cash flow) and a terms sheet setting out proposals for rescheduling the bank borrowing. The Whitlam Turnbull valuation of the publishing assets was also provided. This material was circulated by Evans on 2 August 1989.
   6849 Oates replied on 7 August 1989 and addressed most, but not all, of the Lloyds syndicate’s queries. In his evidence, Latham described the response as ‘fairly detailed and helpful but not really weighty’. There was, in Latham’s view, ‘no pattern or sense of where the business was going’. Latham singled out the following statements by Oates as examples:
   (a) the major asset disposals were listed but the consideration was not stated;
   (b) there was reference to a dispute with the DCT but no details other than a bland statement that TBGL was confident that the dispute would be resolved in its favour;
   (c) nothing much was said about the sale of Bryanston Insurance, other than that it was subject to approval by the relevant department; and
   (d) the details that were given of inter‑company loans were insufficient: it was difficult to build up a pattern and the substance of the loans was not explained.
   6850 Latham’s views are, of course, only those of Lloyds Bank, but are nevertheless an indication of how the other Lloyds syndicate banks would have regarded the letter, given that they appeared to share much the same concerns about the Bell group at the syndicate meetings.
   6851 It was through this letter that the Lloyds syndicate were advised that the Wigmores proceeds had been used to ‘reduce debt’ in the Bell group and for working capital. Oates’ letter and the attached financial information was circulated by Evans on 10 August 1989.
   6852 On 16 August 1989 Broom (Kredietbank) wrote to Lloyds Bank commenting on this information. Broom commented that the cash flow forecast for the group was difficult to follow. He suggested that the cash flow should be accompanied by detailed management assumptions and forecast profit and loss accounts and balance sheets for 1990 and 1991. That was particularly important given the substantial increase in ‘cash flow operations’ forecast between 1990 and 1991 for the publishing business. He enquired whether any of the capital expenditure for the publishing business mentioned in the Whitlam Turnbull valuation had been made and, if not, where provision had been made in the cash flow for that expenditure.
   6853 Broom also expressed concern that the Whitlam Turnbull valuation was based on an as yet unattained EBIT figure and that the valuation had been carried out for Bell itself. He considered that an independent valuation for the banks would be preferable. He was also unhappy about relying on the company’s draft balance sheet for 1989 and considered that at the very least the bank should have draft accounts produced by the auditors. Further, he considered there should be income and cash flow statements. He thought more explanation was needed of some of the balance sheet items; for instance, ‘future income tax credit’ and market valuation of the listed investments. Broom also said the banks should be advised of the Bell group’s intentions regarding its non‑publishing assets. He noted that ‘although these may be of questionable capital value particularly [BRL], I would be less than happy if they were charged elsewhere in view of their apparently substantial dividend stream’.
   6854 There are two things to note about the Broom response. First, the concentration on the Whitlam Turnbull valuation has some significance when it is recalled that the free cash flow from the publishing assets was the major source of funds from which debts (including the bank debt) could be serviced. Secondly, at least at this stage, the banks regarded the dividend flow from BRL as a material factor in the Bell group cash flow situation.
   6855 DG Bank also wrote on 17 August 1989 requesting that Lloyds Bank obtain audited financial statements for BPG and a schedule of the assets to be covered under the proposed ‘fixed charge’ provision of the draft terms sheet.
   6856 BfG, too, wrote to Lloyds Bank on 18 August 1989 with a number of requests. Willemse and Wright asked whether it would be possible to obtain an undertaking as to the actual valuation and ‘proficiency’ of the Whitlam Turnbull report. They also asked whether it was possible to establish an account into which the cash flow of BPG could be deposited so that the syndicate might establish a charge over it. BfG also raised a number of questions about BRL, including details of the repayment schedule for the BRL loan to BCHL of $214.8 million and of the $1.2 billion deposit, and the basis of TBGL’s valuation of its shareholding in BRL to be $630 million.
   6857 Lloyds Bank followed up these requests, and added some of its own, by letter to Oates dated 18 August 1989. The background to these requests was that Lloyds Bank had consulted A&O on 17 August 1989 about the Bell group’s responses. A file note by Evans recorded that Horsfall Turner confirmed that the Bell group had provided the majority of the information required and there was nothing to disclose an event of default. Evans recorded that the proposal was still devoid of detailed information such as the projected profit and loss to the maturity date of the loan, balance sheet projections; ‘Bell balance sheet in closing’; information about covenants such as gearing interest rate cover and dividend restrictions; the ‘background to proposals’; and full details of the proposed security package.
   6858 Lloyds Bank asked Oates to address a number of matters. These included the group’s intentions regarding the non‑publishing assets, and the income streams derived therefrom, as well as a ‘full exposition of the objective behind the restructuring to include a reasonable target date for the banks’. Evans noted that the projections were limited to cash flow forecasts and these lacked detailed explanations and management assumptions, including commentaries on working capital requirements and capital expenditure. He felt that ‘the projections should also include draft balance sheets and profit and loss accounts showing the positions of the borrowers and the guarantor if the facility were to be agreed. The projections should also include pro forma balance sheets and profit and loss accounts for 1990 and 1991’. Lloyds Bank also sought estimates of the current third party valuations of the assets to be charged and a detailed description of those assets.
   6859 A reply to this letter was received on 22 August 1989. It was circulated to the syndicate banks and it addressed most of Lloyds Bank’s queries but perhaps not in as thorough a manner as the banks had been expecting. For example, the balance sheets and profit and loss accounts sought by the banks were not given, although an unaudited balance sheet for BPG as at 30 June 1989 and a seven‑year forecast for the publishing group was supplied. The package did not contain explanations about the cash flows. TBGL described the objective behind the restructuring as being to place the Bell group’s current banking arrangements on a medium‑term basis so as to allow the group to get on with running its businesses. In cross‑examination, Latham accepted that this alerted him to the fact that by that stage at least some of the Australian facilities were on demand. But he said that he never addressed the question with TBGL whether they could repay the on demand facilities. He conceded, however, that he came to the view that were the Australian on demand lenders to press for repayment, it would have been hard for the Bell group to find the means to repay the amounts owed. But he did not accept that Lloyds Bank had come to the view that they would have been unable to pay.
   6860 On 22 August 1989, Dresdner sent a telex to Lloyds Bank advising that they had considered the proposal ‘at the highest level’ but would not be able to participate. They asked Lloyds Bank to use best endeavours to find another party to replace them in the new deal. Evans replied the following day, saying he thought it most unlikely any bank could be found to take over Dresdner’s lending.
   6861 There is no evidence that any other of the Lloyds syndicate banks were aware of this development but Evans’ reply, and Dresdner’s subsequent decision to remain in the syndicate, gives some insight into the general tenor of the thinking of those banks at the time. Evans said:
   If you remain unwilling to participate in the restructuring as ultimately negotiated, no part of the restructuring will be able to proceed, and we would expect, as a result, that our syndicate lending will remain unsecured and the domestic lenders will receive a significant element of repayment prior to the syndicate. This must be a worse position than that which can be achieved through a negotiated improvement in terms.
   If the borrower is unable to achieve a negotiated agreement on restructured terms with its various lenders, the chances of a default or, ultimately, failure of the borrower are considerably increased, and whilst Lloyds Bank as a lending bank is prepared to confront that situation if necessary, we believe that it remains in the interests of all lenders amicably to reach a settled and improved position with our present lending.
   6862 Evans made a handwritten annotation on the telex indicating that he discussed this position with Cruttenden, who agreed with the views expressed in the telex. Evans wrote to Dresdner again on 24 August 1989 stating that, according to A&O, there was no event of default under the facility. Therefore Dresdner had to find a buyer for its participation if it did not wish to remain part of the Lloyds syndicate. A revealing conversation took place between Grauer (Dresdner) and Latham on 1 September 1989, which is discussed in the individual sections on Lloyds Bank and Dresdner.
   6863 On 23 August 1989 Lloyds Bank again wrote to BGF, BGUK and TBGL seeking clarification of various matters referred to in the letter dated 7 August 1989. This was circulated to the syndicate the same day. The background to this letter was that Tinsley had gone through the information provided and made a list of omissions. In the 23 August 1989 letter, Lloyds Bank again pressed for balance sheets, profit and loss accounts and details of the assets proposed to be subject to fixed charges, including forced sale values. They also sought a large volume of additional financial information, including:
   (a) the latest audited balance sheet and profit and loss accounts for BPG;
   (b) certificates of solvency from BGUK, BGF, TBGL and BGF;
   (c) a matrix of inter‑company indebtedness, including details of the ‘advances from related companies’ shown in the BPG balance sheet; and
   (d) a more comprehensive explanation of the rationale behind the proposed restructuring, namely, ‘an explanation of the direction that the business is going in the medium and longer term and how the financial restructuring will help serve those objectives’.
   6864 On 25 August 1989 Latham had a telephone conversation with Weir (Westpac). According to Latham’s file note of the conversation, BPG was identified as an asset that BCHL would wish to hold but in case of sale under the present structure, ‘we would have to check on possible upstreaming of sale proceeds, which alone should encourage us to look positively at the proposed restructuring’.
   6865 Two things happened on 30 August 1989. First, Aspinall and Raeburn met with Latham, Tinsley and Evans. It does not appear that anything of great significance was discussed at, or emerged from, the meeting. The only reason I mention it is because it seems to have been the first time Aspinall was involved in substantive discussions with the Lloyds syndicate banks.
   6866 Secondly, Simpson provided a reasonably thorough response to the Lloyds Bank request for information. Simpson’s response was circulated to the Lloyds syndicate the same day (although some of the attachments were not sent until 5 September 1989). Much of the content of Simpson’s reply has been discussed elsewhere; for example, in relation to the banks’ knowledge of the JNTH situation and the banks’ knowledge of external creditors. Simpson said it was ‘totally impractical’ to provide balance sheets for the subsidiaries. He advised that the moneys loaned by BRL to BCHL would only be paid if the brewery sale was approved by shareholders – at the earliest, in late November 1989. In relation to the value of the BRL shares, Simpson informed the banks that the investment had been written down from cost to net asset value as at 31 August 1989.
   6867 Following his discussion with Grauer (Dresdner) on 1 September 1989, Latham wrote to Aspinall and Raeburn informing them that at least one bank was insisting on audited financial information before even an in principle decision would be made. Latham noted that the banks would be ‘reading with some concern the articles which have appeared in the past two days in The Financial Times and elsewhere’ and that it would help the banks to have some comment on this. Latham also enclosed with his letter a suggested list of the contents of the information pack to be provided to the banks. This included information such as group structure, revised terms sheet, financial information for BPG and TBGL, description and values of the assets to be charged. The list also included the background to the restructuring, an overview of strategy for TBGL and BPG in the context of BCHL and an indication of possible consequences if the proposed restructuring did not proceed. Latham also asked for a suggested timetable.
   6868 On 5 September 1989 Latham spoke to Willis (NAB). Latham prepared both handwritten notes of the conversation and typed notes which he circulated. Latham records Willis as saying there was ‘not much logic in not taking security for fear of a voidable preference since all a liquidator could do is put things back to where we are now’. Latham’s note said that this would nevertheless require confirmation from lawyers. There is in this exchange an explicit, and early, indication of the ‘no worse off’ thesis.
   6869 Latham also records Willis as saying that he understood and sympathised with the difficulties faced by the Lloyds syndicate. In their closing submissions, the plaintiffs say that, arising from this note, Latham accepted that there was a concern that come May 1991, insufficient assets would remain to repay the Lloyds syndicate. That is not how I read the note (as to what Willis is recorded to have said) nor how I recall Latham’s cross‑examination. Latham actually said the opposite.
   6870 On 7 September 1989 Latham, Tinsley and Evans met with Raeburn to ‘cover the ground’ prior to the Lloyds syndicate meeting on 11 September 1989. It is another indication of how, prior to October 1989, Lloyds Bank was seeking a large amount of information. This is a position, the plaintiffs contend, that is in stark contrast to what occurred later in the negotiations. Latham recorded in his note of the meeting that:
   It was clear that we would not be getting quite the information document we had intended, and we may get very little more than copies of the newspaper and a booklet together with a background summary.
   6871 Latham prepared a position statement on the advice of A&O that he was to read at the 11 September 1989 meeting:
   We in Lloyds Bank have yet to complete our review and evaluation of the proposition before us. In particular, we wish to be certain that there are no legal or technical impediments to what is proposed. However, subject to satisfaction on such issues and subject also to satisfactory documentation we have no in-principle objection to what is proposed and we believe it to be in the interest of the banks to give the proposal sympathetic and speedy consideration so that we can progress toward documenting a new and well-founded agreement with [TBGL]. We believe it to be important that the syndicate remains on equal terms with the Australian Lenders and we wish to ensure that the subject of our lending can be effectively isolated and that a regular flow of financial information is available to the lenders.
   6872 Simpson attended the meeting on behalf of TBGL. For medical reasons, Aspinall was unable to travel to London. The meeting proceeded with Simpson first giving a presentation on the operations of BPG. The negotiations at this time were still predicated on the idea of obtaining a charge over the assets of BPG. Simpson said that there were expansion and acquisition plans for BPG. Although there were no specific targets, they would probably look to expand overseas because of Australian monopoly restraints. Simpson noted that BPG had an independent valuation of $656 million. He reported that the Australian banks thought that security over BPG was preferable for the banks than for them to have security over the existing negative pledge. If the Lloyds syndicate did not participate in the refinancing, there was a risk of precipitous action by the Australian banks.
   6873 Simpson advised the banks that the operating cash flow of BPG was insufficient in the first year to service interest in full. The shortfall was recorded by Latham as approximately $8 million, while Pettit recorded the amount as $12 million. The shortfall was to be covered by other entities in the Bell group. The intention was to set up something like a blocked deposit or escrow account to meet the shortfall. Simpson expected an improvement in BPG’s cash flow the following year.
   6874 Simpson distributed a package of material that included BPG draft profit and loss accounts for the year ended 30 June 1989. There was considerable discussion about the valuation of the publishing group. Simpson agreed to provide a diagram of the group’s shareholdings and audited figures for the group. He reported that the audited accounts had been delayed because the group was debating its auditors in relation to the valuation of its mastheads and the shareholdings in JNTH and BRL. The auditors considered Bell’s figures to be excessive whereas Bell claimed the figures were based on an independent valuation. It was said that the audited accounts should become available within a few weeks after resolution of the debate.
   6875 Simpson addressed the syndicate about the proposed brewery sale and said that BRL paid $1.2 billion to BCHL by way of deposit. If the deal was unsuccessful, BCHL had 90 days to repay the money. Latham’s memorandum noted that the ‘bank finds it beyond belief’. I take this to be a reference to Lloyds Bank only, contrary to the plaintiffs’ argument that this was a comment by one of the banks at the meeting. There is nothing to suggest that this comment was ever made at the meeting and (or) was anything more than Latham’s own musings. His note went on to say that BRL had paid a sum five times greater than $250 million to BCHL and if ‘the deal were called off, Bond would not be able to repay’. In cross‑examination, Latham said he regarded this event as an ‘unlikely chance’, which he later qualified by saying that ‘were they required to repay cash in full in some protracted set of negotiations, some cash would be found and an accommodation would be found in respect of the rest’. I have difficulty with Latham’s subsequent attempts to explain away his written note. I believe his mindset was that he did not expect BCHL to have the capacity to make any significant repayments of the deposit.
   6876 The notes of this meeting record widespread concern about the group’s solvency. Latham’s handwritten notes of the meeting record comments to the effect that there was a liquidity crisis (although it is not clear whether he is referring to the Bell or Bond groups) and that the urgency of the situation should not be underestimated. His notes also record the following:
   Got the impression … Fiddling while Perth is burning … Res. opinion writing on the wall … Get the deal done.
   6877 It appears from the word ‘Creditanstalt’ above these comments that they may have originated from Crocker. I think Latham accepted this in cross‑examination. Latham also accepted that this meant ‘its fate was sealed’ although he thought that this referred to the Bond group as a whole, rather than just the Bell group. Latham’s notes also say ‘Get secured – every step is a security realisation step’, which, based on the initials ‘JA’ appearing above this statement may have been based on a comment by Armstrong. Latham also recorded Simpson as saying that the Australian banks were more interested in becoming secured than they were in receiving audited figures.
   6878 According to a note made by Livingston (Lloyds Bank), many banks expressed the view that it would be of benefit to enter into the new facility before the date BCHL was required to publish its audited accounts. This was because ‘the majority’ of the banks were of the view that a failure by BCHL to publish its accounts or auditors’ qualifications to any accounts that were published could bring about the collapse of the ‘Bond empire’. Pettit’s note records a similar view. Pettit (Gulf Bank) also said words to the effect that waiting for audited figures ‘extended our risk period as unsecured lenders but that clearly we needed to have some comfort as to the current financial status and assets of the new borrower/guarantors on whom we were offered security and, equally as important, their future business viability’. Bradley (Crédit Agricole) recorded that it was the consensus of the banks that it was only a matter of time before the ‘Bell/Bond group’ collapsed. He also referred to the ‘imminent collapse of the Bond Group’. Kohrsmeier (DG Bank) had the impression that the Australian banks were willing to proceed in principle ‘due to Bell Group’s present inability to repay the loan if it was called’. Jenkins (Gentra) recorded in his note that ‘the sooner the assets of BPG can be changed [sic] to us as lenders the better, in view of the overall precarious situation of the Bell/Bond group’.
   6879 The Lloyds syndicate banks, at this stage, were continuing to press for information. Pettit suggested getting a consultancy report on the BPG group assessing its current business status and future viability, although Simpson felt that the Whitlam Turnbull valuation should suffice. Lloyds Bank was keen to see auditors’ certificates of the Bell group as at year end June 1989. Lloyds Bank emphasised the need for regular financial information, in light of the amount of adverse press speculation. This course of conduct was again conveyed to Raeburn and Simpson by Lloyds Bank after the meeting. Latham’s notes of the subsequent meeting indicate that Lloyds Bank pressed the need for a flow of information to the Lloyds syndicate, particularly the need for audited accounts, in view of continuing press speculation. It again requested validation of the business plan and prospects of BPG (for example, by a major accountancy practice) in order to verify the Whitlam Turnbull valuation, which never eventuated.
   6880 I find the views expressed at the 11 September 1989 meeting to be strong evidence that the Lloyds syndicate banks, at least at this stage, harboured serious concerns about the solvency of the BCHL group and the Bell group.
   6881 On 19 September 1989 Latham and Evans attended a meeting with Ladbury, Cole and Horsfall Turner. Latham was recorded (by Cole) as saying it would be hard to prove solvency at present when looking back in six months’ time. Cole’s note recorded that the ‘current figures do not give any comfort re solvency’ and that there were unlikely to be too many creditors of either borrower, but there will be some. I have dealt with this exchange in Sect 30.8. I take Latham’s comments to reflect the knowledge of Lloyds Bank only. Given MSJL were not retained to advise on the Bell group’s solvency, I would also decline to impute Cole’s statements.
   6882 However, Latham’s note of the meeting records the views of the lawyers as to the possible legal effect of the refinancing, and I think this information does carry over. Part of Latham’s note is based on the assumption that the group does not survive. His note concludes that there was at that time a ‘fairly real risk that payment would be held to be a preference’. Latham said in his witness statement that this was ‘a paraphrasing of a statement made by one of the lawyers on a worst case scenario basis’. Again, I have difficulty with this statement because another part of the note says ‘q. in good faith’, ‘obtain certificates’ and ‘some element from our own analysis’. In other words, I think this shows that Latham and the lawyers were attempting to find ways in which they could establish good faith by taking steps to identify superficial evidence, or any evidence, of solvency on which they could later rely.
   6883 Latham also produced a typed file note of the meeting that is discussed more fully later when I look at the banks’ knowledge of the legal effects of the Transactions. In relation to solvency, Latham stated that even with the solvency certificates there would be a ‘fairly real risk’ that the proposed mechanism would be held to be a voidable preference. He accepted in cross‑examination that solvency was a ‘live issue’ at the time, although he tried to qualify this statement later. In effect, I think Latham was saying that the solvency question was a live issue because it was something they could not rule out due to the limitations on the financial information that was available to them. Again, does not accord with the clear meaning of contemporaneous written record. It may have been a difficult process, but the Lloyds syndicate eventually received answers to most of their questions.
   6884 In fact, Latham wrote to Simpson that same day to pass on some queries on behalf of the Lloyds syndicate. He said:
   It will be very important for the banks to have a detailed understanding of the proposed transaction by which it is, we understand, intended to move the brewing interests of [BCHL] into [BRL]. One bank has stated that these details are a prerequisite for their decision on how to regard the proposed restructuring.
   6885 In my view, this shows that the banks knew that the brewery sale was critical to the worth of the BRL shareholding. Latham accepted this in his witness statement. He went on to ‘re‑emphasise the need for financial information in as detailed a form as possible’ and that ‘this also has a bearing on the question of possible voidable preference, as do the precise arrangements for the proposed drawing (ie in terms of the way in which payments will be deemed to flow)’. Latham said in his witness statement that at this stage he did not fully understand the subsidiary structure or what intervening companies or creditors could emerge as a problem. I accept this.
   6886 In response, Simpson sent Latham a copy of the press release concerning the joint venture between BRL and Lion Nathan, which Lloyds Bank circulated to the syndicate on 21 September 1989. Not all the Lloyds syndicate banks have discovered copies but I would infer that each did receive a copy. The content of this press release has already been discussed. On 20 September 1989 Weir sent Latham and Evans some financial information produced by Westpac.
   6887 A preliminary advice was sent by MSJL to Lloyds Bank on 27 September 1989: see Sect 30.6.9. Latham accepted that when he sought the advice from MSJL, through A&O, he was doing so having raised concerns about the financial viability of the Bond and Bell groups (and having such a concern conveyed to him by members of the Lloyds syndicate). MSJL’s advice was essentially that the banks would find it very hard to convince a court that they had a bona fide belief that the existing borrowers were solvent and the refinancing was not motivated by a belief that the borrowers were insolvent. Again, Latham said that this advice was proceeding on a ‘worst case’ basis. That may be so, but the import of the advice cannot be explained away by that mechanism; MSJL appears to have been advising on what the realistic result of the proposed refinancing would be.
   6888 Lloyds Bank received the draft June 1989 accounts for BGUK and BGF on or about 5 October 1989 and circulated them to the syndicate on 9 October 1989, together with draft financial information for BPG and TBGL.
   6889 On 5 October 1989 Latham and Evans met with the lawyers again. Latham’s note of the meeting is not particularly pertinent but a follow‑up letter from Perry to Armstrong is. Perry wrote that in order to give definite advice, MSJL and A&O required details of the exact shareholding structure of the group, precise details of where the banks’ funds had been on‑loaned and details of how the Bell group was to raise the funds to repay the banks. They would also need precise details of the current creditors of the key companies in the group and any subsidiaries that may act as a conduit for funds being used to pre‑pay the existing facility. Perry said it would be ‘advantageous if it were the case that Bell Publishing Group Ltd was the ultimate recipient’ of the banks’ funds. Finally, Perry sought ‘sufficient information to establish whether, at the time of pre‑payment or the granting or security and immediately afterwards, the relevant Bell entities will or will not be solvent’. This meant ‘being able to pay their debts as they fall due’ and ‘having total assets in excess of total liabilities’.
   6890 The following day, Latham sent Simpson an extract from Perry’s letter setting out the five items of information required by the lawyers. Armstrong added a handwritten note saying that they wanted this information soon to help the lawyers resolve the ‘double jeopardy/disgorgement issue’. Simpson responded to these queries in several subsequent letters. The details of where the funds had been on‑loaned were not forthcoming, apparently due to difficulties in finding staff members with the requisite knowledge. Details of the group’s creditors were provided on 11 October 1989 and are discussed later. The audited accounts of TBGL and BPG were circulated much later, in November and December respectively.
   6891 On 9 October 1989, Lloyds Bank distributed a bundle of information to the syndicate banks, including the Hambros valuation (of BPG), TBGL ‘family trees’, balance sheets for TBGL and BPG, draft accounts and cash flows for TBGL and BPG, and draft reports and accounts for BGUK and BGF for the year ending 30 June 1989.
   6892 At the 13 October 1989 syndicate meeting, the Lloyds syndicate banks renewed their request for the TBGL audited accounts for 1989. It was agreed that the banks should move quickly and be in a position to obtain credit approvals as soon as TBGL had provided its audited figures and the terms sheet had been finalised. This was also the tenor of the advice from Perry at the meeting, in order to minimise preference risks.
   6893 The emphasis placed on the need to proceed quickly occurred in light of the concerns about the solvency of the group. Armstrong said words to the effect that they needed to keep the Bell group going for six months ‘so as to ensure that the new security offered could not be challenged’. Latham’s handwritten notes contain a number of references that refer to the Bell group and (or) the securities being at risk. Farquhar (Lloyds) made a note of the meeting in which this conclusion is expressed:
   With the improvements to the security being taken and the rescheduling of the Australian lenders on to the same term basis as ourselves we probably do not need a provision for this situation at present despite the considerable problems remaining within the [BCHL] generally.
   6894 These concerns about solvency appear to have been inflamed by concern about the health of BRL. Armstrong and Latham recorded that there was discussion about the ongoing position of TBGL given the fall in the market value of the BRL shares. It seems reasonable to presume that the ‘ongoing position’ comment was a reference to their financial viability.
   6895 Perry advised the Lloyds syndicate as to how the proceeds of the banks’ loans had been used in the group. This is discussed more fully in a later section. In short, the banks were told that the money had not been on‑lent to BPG. It was around this time that the banks’ lawyers began recommending the existing borrowers structure as the safest option because of the double jeopardy problem. In other words, if the Transactions were set aside, the banks would be no worse off. It was resolved at the meeting to adopt the existing borrowers structure and to attempt to make those companies subsidiaries of BPG.
   6896 On 19 October 1989 Latham wrote to Simpson seeking the information which was still outstanding following their previous requests. On 24 October 1989 TBGL wrote to Lloyds Bank requesting additional time for provision of its audited accounts. The reason given by Aspinall was that the NCSC enquiry into a number of transactions entered into by the Bond group had had an adverse effect on the group’s management and auditors in terms of time and manpower. This request was considered at the 1 November 1989 Lloyds syndicate meeting.
   6897 Latham’s note of that meeting is not comprehensive but indicates that the issues were becoming more urgent. His note, as well as that of Pettit (Gulf Bank), shows that the banks were contemplating agreeing to the refinancing before the audited figures became available. There was, however, talk of inserting a term that the Bell group provide independent verification of its financial information. Latham’s note goes on to say that they ‘have always been assuming worst case will apply’ (although this could be referring just to Lloyds Bank or the whole syndicate). Armstrong is recorded as saying the banks should start the clock running and in six months they would be ‘home and dry’. In light of the auditor’s reluctance to accept the Whitlam Turnbull valuation, the banks agreed to insert a condition into the terms sheet requiring that an independent valuation of the mastheads be obtained.
   6898 Pettit stated that what mattered at this stage was to take security over tangible assets, so that in the event of a collapse of the group the assets could be sold for the exclusive benefit of the banks. He said the value and accessibility of these securities would partly stand or fall on the solvency of the subsidiaries giving the security. He expressed concern that ‘on the limited data to hand’ the existing borrower may well prove insolvent and, ‘as it has other creditors’, the banks might be forced to negotiate with such creditors or risk a precipitous collapse of the borrower within six months. In such a collapse, some of the banks’ security might be challenged.
   6899 It is apparent that the Lloyds syndicate banks wanted to obtain security as soon as possible in case the group collapsed. They knew that the six‑month preference period could come into play, as well as s 121 of the Bankruptcy Act and were therefore keen ‘to get the clock running’ as soon as possible. The banks were aware that the Bell group might collapse at some stage but they needed to keep for six months after taking security to avoid the Transactions being set aside as a preference.
   6900 At the 1 November 1989 meeting, Pettit expressed concern about the existing borrower structure. He asked that consideration be given to making the TBGL the borrower. On 16 November 1989 MSJL provided an advice (that was distributed to the Lloyds syndicate banks) in which they said that the Gulf Bank proposal could only be achieved by reverting to the fresh advance structure or adopting the assignment structure. The former would raise the double jeopardy spectre, and the assignment structure had been the subject of adverse comment in the opinion from Hayne QC and Burnside.
   6901 On 7 November 1989 Latham and Simpson meet with Cunningham and Crocker (Creditanstalt). According to Latham’s note of the meeting, Simpson told those present that there were parties other than Lion Nathan interested in the breweries and that TBGL would not accept less than $500 million for BPG. The import of what Simpson said was that the Bell group’s two major assets should be viewed positively.
   6902 On 8 December 1989 Adsteam applied for the appointment of a receiver to BRL. The same day, BCHL and Lion Nathan announced that the joint venture for the breweries would not proceed. They advised that an alternative proposal was being negotiated. Both matters received considerable coverage in the financial press. Copies of both announcements were circulated to the Lloyds syndicate banks that day. The material mentioned that there was an NCSC investigation into the brewery transaction.
   6903 Latham called Jenkins (Gentra) on 8 December 1989 to inform him of the Adsteam action. According to Jenkins’ note of the conversation:
   Mr Latham advised that the immediate concern for the syndicate of banks and the Australian lenders is that this will have implications for the security that we are proposing to take over the [BRL] shares and a possible domino effect on the collapse of the [TBGL]/[BCHL] group. He advised that it is imperative that the security documentation relating to the [BRL] shares be signed by all banks by Tuesday at the very latest and that we shall be receiving documents to cover this aspect of our new security over the weekend or by Monday morning at the latest.
   6904 Jenkins went on to say that ‘Latham advised that it is still uncertain what the full implications of Adelaide Steamship’s actions will be however, he is asking all banks be prepared to act with speed over the next few working days’. I infer from this comment, and from a fax by Ascroft to Perry on the same day which stated that Latham had explained the situation to all the Lloyds syndicate banks, that Latham did indeed do so.
   6905 Latham said that his motivations for seeking security immediately was due to the concern that the banks would not be able to control the asset of the Bell group represented by the BRL shares. That is, the shares could either become unavailable to the banks as security or the underlying value of the shares could be detrimentally affected; taking security ensured the banks retained control over the shares. I have difficulty with this evidence for a number of reasons. First, Jenkins’ note indicates that Latham’s concern was not merely limited to control but about the survival of the Bell group as a whole. I do not accept that there could have been such urgency in the banks’ actions unless there was a real fear that the action against BRL could have detrimental effect on the Bell group. Taking security over the shares did not protect them from any decline in value, nor did the appointment of a receiver prevent the banks from later obtaining security over the shares. And the banks were not simply seeking to finalise the securities over the BRL shares, but rather the whole package.
   6906 In their closing submissions, the banks take issue with the description ‘panic weekend’ in relation to 9 and 10 December 1989. I have often remarked that the practice of the law is a seven day a week, 24 hour a day job. But the impression emerging from the contemporaneous documents and the oral evidence of those involved is that ‘panic’ is an apt description of the atmosphere at the time. Even for high‑powered commercial lawyers, the events and activities of that weekend seemed intense. Bank officers and lawyers alike worked frantically to put together the security documentation. In the words of Watson (A&O), the arrangements were ‘an expedient alternative to the original restructuring proposals intended to preserve the interests of the Lloyds syndicate members and the Australian banks to the extent practicable in the circumstances’.
   6907 Latham also had a telephone conversation with Youens and Browning that day. His note asks: ‘Will Bell be there?’ Later it states:
   If we take security now … Not a strong argument – but we risk losing the argument … [TBGL] still there in a week or two.
   6908 All of this indicates that Latham was concerned, not simply about the banks’ access to the BRL shares, but about the precariousness of the Bell group as a whole. Latham also accepted that he was aware of the suspension in trading in BRL shares. In his witness statement he made a statement that I find curious, namely, that he did not see the event as significant, provided the assets they were relying on were not sold.
   6909 On 12 December 1989, just after the panic weekend, A&O wrote to Lloyds Bank advising:
   As we have previously advised, there is a real possibility, for reasons which have been discussed at length and mentioned in Counsel’s opinion, that the security to be granted in relation to the restructuring of the facilities could be impeached, regardless of the course of action taken. Mallesons Stephen Jaques have advised that this risk increases with each adverse change in the financial condition of the [BCHL]/[TBGL] group of companies.
   6910 On 29 December 1989 Lloyds Bank received copies of the announcements regarding the termination of the Lion Nathan joint venture, as well as BCHL’s notice to the ASX that it opposed the appointment of a receiver to BBHL, and Lloyds Bank circulated these to the syndicate banks the same day.
   6911 In December 1989 the Lloyds Bank syndicate abandoned their requirement that the directors provide solvency certificates after being advised that the inability to obtain such certificates from some companies would draw attention to their insolvency: see Sect 30.9.
   30.11.3. Events after 26 January 1990
   30.11.3.1. The February meetings in Perth
   6912 It will be remembered that in mid‑February 1990 Latham prepared an internal report for Lloyds Bank in which he reconciled the Transactions (as finalised) against the terms on which the credit application had been made in November 1989: see Sect 9.14.6. In the reconciliation, Latham foreshadowed the possibility of disruptive behaviour from some of the syndicate banks, ‘especially in relation to income from asset sales’.
   6913 Latham attended the meetings in Perth on 22 and 23 February 1990. Following the meetings, Latham prepared a letter to the Lloyds syndicate banks. It was despatched on 23 February 1990. The banks were provided with the February cash flow forecasts, which had been received from TBGL, and were alerted to the request that was in train for a waiver of the Transaction provisions relating to the use of the Bell Press proceeds. The banks were informed that TBGL would ask that, instead of the proceeds being applied in mandatory reductions of the banks’ facilities, the proceeds be set aside in an account with Westpac. Part of the moneys was to be used to pay the interest due to the banks at the end of February 1990. The balance would be held over until 30 March 1990, by which time the banks would have been able to review the projections provided by the company and reached decisions on the further application of the proceeds. No mention was made, at that stage, of interest due to the bondholders in May 1990 or of any suggestion that the Bell Pres proceeds be utilised for that purpose.
   6914 The letter also indicated that TBGL would be asked to obtain from BCHL about $2 million of the $7.5 million owing by BCF following the Academy transaction and that all remaining funds owed by BCHL be repaid by 31 March 1990.
   6915 The waiver request duly arrived and was despatched to the syndicate banks. By 27 February 1990 all banks had executed a waiver letter by which the terms of ABFA, RLFA No 2 and the ICA were varied so that the moneys in the escrow account (being the Bell Press proceeds) were not required to be distributed at the end of February 1990 to the banks as a pre‑payment. Rather, an amount of $7.7 million was be applied towards satisfaction of costs and bank fees payable by the borrowers under the facility agreements and the payment of interest due at the end of February 1990. The balance of the moneys in the escrow account was to be held and applied before the end of March 1990 as a pre‑payment.
   6916 On 2 March 1990, Latham sent to the Lloyds syndicate banks a copy of his notes of the Perth meetings. He also included the diagram prepared by Weir to describe, as at 30 June 1989, ‘the relationship of outstandings and the position of the subordinated bond issues as these impact on the principal security provider [WAN]’. Latham told the syndicate banks that those present at the meeting had concluded that the subordinated bondholders should rank behind the banks but that the position was presently unknown. He said this ‘may well include interests inimical to our own’ and that at that stage the banks could not rely fully on the securities to place them ahead of the subordinated bondholders among Bell group creditors.
   6917 In relation to BRL, Latham told the syndicate banks that there were complexities in TBGL’s handling of the shares. Aspinall had said the directors of TBGL believed that value could be restored to their holding in BRL and that it could occur within three months, or at least the situation would be clarified within that time. The shares would be sold as soon as possible to achieve repayment of the bank debt.
   6918 Latham told the banks that at the final meeting of banks’ representatives on 23 February 1990 it was viewed as important not to give the company a hint that the banks would be willing to pay the interest due to bondholders in May 1990 from residual asset sales. He said that all banks present were in favour of a waiver mechanism that would provide time for the banks to reflect on what the company was seeking, while ensuring that the company felt the banks did not wish to give significant latitude.
   30.11.3.2. Meeting on 12 March 1990
   6919 A meeting of the syndicate banks was held in London on 12 March 1990. The purpose of the meeting was to allow the banks to raise questions concerning the February meetings and to hear a presentation by representatives of the Bell group. Importantly, the meeting was to discuss a request by TBGL not to distribute the money in the escrow account at the end of March. TBGL (with the assent of Lloyds Bank) invited Weir (Westpac) to attend the meeting. Later (by letter dated 15 March 1990), Weir explained to the Australian banks that the decision for him to attend this meeting was due to concern that certain of the Lloyds syndicate banks wanted unilateral distribution of the Bell Press proceeds held at the end of March 1990. Weir commented in the letter: ‘The consequences of [a distribution] are well known to us all’.
   6920 At the 12 March 1990 meeting Lloyds Bank was represented by Armstrong, Evans and Latham, Westpac by Weir and the Bell group by Aspinall, Edwards, Simpson and Garven. Perry (A&O) also attended. All of the Lloyds syndicate banks, except Skopbank, were represented. The meeting was held in two parts. The representatives of the Bell group were present for the first part, but the second part involved only the bank officers and Perry. Using the various file notes made by bank officers, the following can be pieced together concerning the meetings.
   6921 At the outset, Aspinall addressed the meeting. He said that the programme of selling all TBGL’s non‑core assets was almost complete, with the exception of Q‑Net; that sale would be concluded within six to eight weeks at a price of $7 million.
   6922 Aspinall acknowledged that the survival of the Bell group hinged upon (or was heavily dependent on) the restoration of value to its 39 per cent shareholding in BRL. The BRL shares were, at that time, suspended from trading and it was impossible for them to be sold. BRL did not have the income to pay dividends for the time being. BCHL and BRL were having robust discussions in an attempt to reach a satisfactory commercial decision in relation to the future of the BBHL brewing assets. Aspinall said he was aware of the discussions but not of the details.
   6923 Aspinall also discussed the Academy transaction. He said that Academy, which owned JNTH preference shares as its main asset, had been sold by TBGL to BRL. BRL had taken action to have the sale unwound because it believed it had not received fair value for the price paid. He also acknowledged that money raised by the JNTH preference share issue had been on‑lent to BCHL and the value of those preference shares was uncertain.
   6924 Pettit (Gulf Bank) recorded a comment by one of the Bell group representatives that the management of the Bell group believed WAN could carry between $100 million and $150 million of debt. The aim of the asset sale programme was to reduce debt to that level. I was not able to find a similar recording in any of the other file notes of the meeting and, accordingly, discount it. That having been said, the $150 million figure appears to have reflected a general attitude held by the banks in June 1990.
   6925 It is apparent from the file notes that Garven took those present through the Garven cash flow. There is nothing to indicate that any significant new information was imparted or that there was any material deviation from the text of the cash flow and summary.
   6926 The overall impression left by the file notes is that restoring value to the BRL shares was seen as probably the principal message taken by the bankers. I will give two example of concluding comments made in reports by officers present at the meeting:
   Bell’s principle intention is to realise value in the [BRL] shares in order to pay down the bank debt. It is recognised by the company that failure to do this, at least by the June 1990 year end, will seriously impair the company’s future and bring about its likely collapse. The impression was that we would know sooner rather than later in view of the decision to take the receiver out of [BBHL] and the continued existence of a sale contract, in respect of the brewing assets, between [BCHL] and [BRL]. It was also pointed out that the transfer into [BRL] of the brewing assets was only one of several options.
   The West Australian Newspaper is a profitable paper, however, even with assets sales, the group as a whole may run out of money by as soon as June 1990 and certainly by November 1990 unless value is restored to the [BRL shares] and can be sold. The announcement of the sale of [BBHL] to [BRL] bears favourably upon this.
   6927 The TBGL representatives left the meeting following the presentation by Aspinall and Garven. Perry tabled a memorandum dated 12 March 1990 by A&O entitled ‘The Bell Group Ltd – Review of Subordination Under the Trust Deeds’. It was noted that the subordinated status of around $353 million bonds was not clear.
   6928 Weir is reported to have told the meeting that if the BRL shares were revalued at too low a figure, the Bell group could show negative net worth and be forced into collapse. If this event occurred within six months, the security could be set aside as a voidable preference. The risk of attack under a corporate benefit argument would remain after six months. Weir is also reported to have said that if the balance of the Bell Press proceeds were pre‑paid in reduction of bank debt, the payments could be challenged as avoidable preference. Accordingly, the Australian banks were likely to agree not to distribute the funds to the banks for the time being. I note that this is consistent with the cryptic comment Weir made to the Australian banks in his note of 15 March 1990 to which I have already referred. I note also that following his note of 15 March 1990, on his return to Australia, Weir telephoned each of the Australian banks and gave a verbal report of the meeting.
   6929 There was discussion among the banks about TBGL’s request for the funds being held in escrow to be released to pay bondholder interest, during the course of which the February waiver letter was discussed. It was noted that the escrow account balance was $16.9 million. Under the facility agreement, the sum was to be used to repay bank debt. If the banks did not accede to TBGL’s request for a waiver to enable bondholder interest to be paid, the Bell group could fail. It was possible therefore that the banks’ fixed charges over the company’s assets would be challenged in court as a voidable preference because six months from 1 February 1990 would not have elapsed. Further, if the bond interest was not paid in May 1990, it could have triggered legal action leading to cross‑defaults. In order to pay that interest, TBGL needed access to the money in the escrow account. Perry is recorded as having said that missing the May bond interest payment would trigger default and seriously undermine the banks’ security position.
   6930 Different views were expressed on the application of the money in the escrow account. It seems that none of the Lloyds syndicate banks was willing to accede to TBGL’s request for a waiver at that stage. Most banks said that they wanted to keep TBGL on a ‘short leash’ and put pressure on the group to recover the Bond receivables. It was agreed another meeting would be held in the near future to give further consideration to the request for a waiver.
   6931 In Sect 30.10.5 I mentioned that the impression arising from the Australian banks’ meetings in Perth in February 1990 was that a primary focus was on the position of bondholders in relation to the need for the six‑month period to pass. The same impression arises from reports of the 12 March 1990 meeting of the Lloyds syndicate banks. I will give two examples:
   We are not in a position to accelerate our loan nor would this be advisable considering our efforts to restructure the facility to take security and the unsuccessful court actions of numerous other creditors. The first hurdle for our security is to get past 15August 1990 and we would like to keep the bond holders at bay until that time, however, this is a long way off and we would have to forego any debt reduction. Our security will always remain vulnerable to claims of preference and corporate benefit but as time passes and if we are seen to be assisting a desperate borrower then our case will improve.
   If the interest payment is not made this could cause events of default across all loans and put the company into liquidation. We do not want this to occur before the six months period has finished as the security documentation may not stand up in a court of law. It has now been established that the bond issue is not all subordinated debt. We have been advised by Westpac Bank that the documentation is badly worded and that they would rank pari passu with the banks.
   6932 I do not make anything of the certainty with which the ranking question is expressed in that last quote. The evidence overall does not bear out that in March 1990 the banks had been told (by Westpac or anyone else) ‘the bond issue is not all subordinated debt’ or that the bondholders ‘would rank pari passu with the banks’. For example, the A&O memorandum discussed at the meeting does not say that. And the note made by Halley (BoS) said that ‘the status of around $353 million of subordinated bonds was not clear vis-à-vis its full subordination to senior lenders’. It should be borne in mind that Latham’s 2 March 1990 report of the February meetings indicated that the general view was that the bondholders should rank behind the banks but that the position was presently unknown.
   30.11.3.3. Further meetings: March to June 1990
   6933 There were a number of other meetings of the Lloyds syndicate banks held in the first half of 1990. I will deal with them in a more summary fashion than I have to date because, with the passing of time after 26 January 1990, the probative value (in relation to state of mind as at the earlier date) of the evidence diminishes.
   6934 The next meeting was on 19 March 1990. All Lloyds syndicate banks were represented. Perry (A&O) and Cole and Ladbury (MSJL) attended. The meeting discussed a range of conditions that could be sought for a waiver to 30 April 1990. MSJL addressed the meeting on the risks to the securities by way of challenge as a voidable preference, a voidable settlement and for lack of corporate benefit. It was noted that although there was no time limit on a corporate benefit challenge, the passing of time strengthened the banks’ position. It was agreed that Lloyds bank should seek letters from TBGL and the security providers formally requesting the waivers. The view was expressed that this would assist in establishing corporate benefit. Legal advice was to be sought on the drafting of the letters.
   6935 A file note made by Halley (BoS) records that the subordination question was discussed and that the A&O commentary ‘[appeared] to suggest that the bondholders’ claims [would] be subordinated to [banks’] claims in the event of liquidation’. But it was noted that A&O had not given a formal opinion and that ‘the feeling around the table was that no syndicate members wished to test the point in court. The point was made that the syndicate should not do anything that may convert a diversified group of bondholders into a concentrated group’. Halley also noted that a further interest payment was due to bondholders in July 1990 ‘and it is doubtful if this payment could be made’.
   6936 A meeting was held on 23 April 1990 to consider TBGL’s request for consent to release the remaining proceeds of the Bell Press sale to further permit payment of the May bond interest. All syndicate banks, except Skopbank, were represented, as was A&O (Perry) and BGUK (Edwards).
   6937 Edwards told the meeting that the BGUK group had virtually ceased trading and that the defunct subsidiaries would be wound up in a way that would not affect the banks’ securities. Edwards discussed the BRL half‑yearly accounts (which he described as conservative) and noted that the BBHL receivers had been removed. He was asked about the decision of the TBGL directors to carry the BRL shares at a value of $1.80. He accepted that before a proper assessment could be made about the value of shares in BRL for the future, the current negotiations with BCHL had to be finalised and the stock market had to form its own view of BRL. This, he said, would happen over the medium term. In the meantime, it was difficult to give a realistic value for the BRL shares. In relation to ITC, Edwards said that TBGL had decided to go for a cash settlement of its claim in relation to the ITC payment. ITC had itself provided £3.5 million for the claim and there was doubt as to its capacity to pay the claim. The prospects of receiving the payment within the next four to six months was not high.
   6938 A Lloyds Bank representative said that a decision on TBGL’s request to release the balance of the funds in the escrow account was required by 25 April 1990 and that Lloyds Bank would agree to release the funds. The Australian banks felt the same way. This tactic was to play for time and not to challenge the position of bondholders. Some of the banks expressed concern at the uncertainty of the situation.
   6939 Pettit suggested that TBGL be asked to speak to LDTC to see if a temporary roll‑up or waiver of interest could be negotiated, to allow time for value to be restored to the BRL shares. A Lloyds Bank representative is reported to have said that Pettit’s suggestion was not a good idea. TBGL ‘rightly refused to talk to the bondholders for fear of triggering negative reaction and precipitous action’. Pettit said that if the company and its other creditors were not prepared to work with the banks, there was limited scope for the banks to keep the Bell group afloat. No bank was prepared to advance further cash. Pettit’s suggestion was left to be considered. There was no resolution at the meeting in relation to the April waiver proposal.
   6940 On 3 May 1990 a meeting was held to give further consideration to TBGL’s request for a waiver to permit the money in the escrow account to be released for payment of the May bond interest. A representative of Lloyds Bank said that ‘all members of the Westpac Syndicate had agreed to the release’, except NAB which had ‘signalled their intention to agree’. Most of the Lloyds syndicate banks voted in favour of granting the waiver but four banks (BoS, Creditanstalt, Gulf Bank and Gentra) declined to do so.
   6941 On 8 May 1990, the Lloyds syndicate banks again met to discuss the proposed waiver in relation to the Bell Press sale proceeds and the payment of bondholder interest. The evidence suggests that all the Lloyds syndicate banks were represented. Aspinall and Simpson were in London and had a meeting with Lloyds Bank. The bankers then met (without TBGL representatives) and discussed the arguments for and against the waiver. Lloyds Bank then met again with Aspinall and Simpson before the bankers reconvened in the presence of the TBGL officers.
   6942 According to Latham’s file note, Aspinall told the meeting that he wanted to resolve outstanding matters. He said the bond interest payment had been due the previous day but that there was a week’s grace period. They had met LDTC that morning to explain why the payments had not been made. TBGL’s board had met with its legal advisers to consider what action the board should take and whether the company should be put into liquidation immediately. The board had resolved that if the money in the escrow account was not released, they would appoint a liquidator forthwith. Aspinall then discussed various questions that individual banks had raised about the cash flows. He also discussed the BRL shares and said that the TBGL board did not want to ‘dump’ the parcel on the market. The TBGL board aimed to achieve something close to $1 in the medium term.
   6943 Latham recorded that someone (I think it is most likely to have been Aspinall) said that the Bell group ‘would go to [LDTC] and ask them to call together [the] bondholders’. In that situation, it was said, the banks would ‘get 100%’. But if the money was not released, the bond interest would not be paid and the bondholders would dispute the security interest. TBGL was willing to meet the bondholders but SGIC was a problem. TBGL would approach the trustee seeking a meeting with the bondholders. Aspinall did not see that making the payment would detract from the banks’ security. Latham also recorded that a representative of Creditanstalt said they were trying to encourage a meeting with the bondholders. Someone, again I think it is most likely to have been Aspinall, is recorded by Latham as saying that the Bell group would present a plan to the banks at the end of May for them to consider by mid‑June.
   6944 The meeting then continued in the absence of the TBGL representatives. At least some of the dissenting banks were maintaining their position. No resolution was reached. By 11 May 1990, all the banks had agreed to the waiver. Four of the Lloyds syndicate banks imposed conditions on their agreement to grant the waiver. Three of them (BoS, Gentra and Gulf Bank) insisted that a subordination deed be entered into by BGNV. Two of them (Creditanstalt and Gentra) directed that TBGL should approach LDTC ‘to negotiate concessions (which may include a moratorium acceptable to the banks) with the [bondholders]’. By July 1990, both Creditanstalt and Gentra had agreed to defer the requirement that TBGL negotiate with LDTC until the group’s future strategy had been determined.
   6945 The final meeting that I will deal with in this section was held on 11 June 1990. It was attended by all the Lloyds syndicate banks except Skopbank. Aspinall, Simpson and Garven also attended. According to the file note of Pettit (Gulf Bank), Aspinall reported that a conditional letter of intent had been signed with Maxwell for the Mirror group to acquire 49 per cent of BPG for $250 million. The Mirror group were confident regulatory approvals would be obtained. Aspinall also said that Westpac was negotiating to arrange new syndicated financing to assist in pre‑payment of the existing bank facilities, repurchase of bonds at a deep discount and working capital. The banks would be paid out within three to four months. If the plan failed, TBGL had two back‑up plans that involved the sale or conversion of BRL shares. LCAS had been retained to advise concerning these options and about TBGL’s ‘ongoing viability’. A buy‑back of Bell group’s bonds would be attempted after payment of the July interest instalment.
   30.11.4. The meetings: preliminary conclusion
   6946 I think there is ample evidence to demonstrate that all the Lloyds syndicate banks thought, as at 26 January 1990, there were serious concerns about the solvency of the Bell group. In other words, at the very least they suspected that the relevant companies were insolvent or of doubtful solvency. The meetings alone provide evidence that such a view was held and there was no evidence of any contrary views expressed. The banks knew from the cash flows that the BRL shares were an important income source and the urgency with which they sought to obtain security following the appointment of the receivers to BRL demonstrates a real concern that the Bell group would collapse as a consequence of that development. As at 26 January 1990, the Lloyds syndicate banks were aware that trading in BRL shares was still suspended, the receivers remained in office (although an appeal was pending) and the NCSC was conducting an investigation into the BRL’s affairs.
   6947 For much the same reasons as I have expressed in relation to the Australian banks, there can have been no expectation on the part of the Lloyds syndicate banks that any dividends or management fees would be received from BRL. Furthermore, the prospect of the brewery sale going ahead within a time period soon enough to benefit the Bell group was not strong. With the court action and the suspension, it was questionable whether, and if so when, a sale would occur. The possibility of a sale of those shares never really came up in the contemporaneous documentation and it must have been regarded as a remote occurrence or something that, if occurring, would be too late to fill the deepening hole in the Bell group’s cash flow.
   6948 However, before confirming these conclusions, it is necessary to consider each of the Lloyds syndicate banks in turn to see if there is any reason why the knowledge of a particular bank was not consistent with the conclusions drawn above.
   30.12. The ‘no worse off’ thesis
   30.12.1. The thesis described
   6949 At the outset of the oral opening address, counsel for the plaintiffs said this:
   There’s a theme … which pervades this whole case because the banks were advised before they entered into these transactions that there was a substantial risk that they be set aside and that they were illegal, but they got advice from their lawyers that they would be no worse off if they entered into these transactions, and we will see these words crop up time and time again, and it was one of the driving factors which drove the banks into this transaction because they had been told that the worst that could happen is that they would have to be put back to where they were before the security was given.
   6950 The banks dismiss the ‘no worse off’ thesis as a dithyramb, totally devoid of substance. They say it is nothing more than a catchphrase adopted by the plaintiffs and given a pejorative connotation. The banks also say that the plaintiffs have repeated the catchphrase at every possible opportunity in an effort to give it an air of substance and to avoid having to grapple with principle and authority. Having introduced the topic, I will dispense with the use of quotation marks when employing the phrase no worse off.
   6951 The no worse off thesis arose early in the negotiations. For example, Latham (Lloyds Bank) made a file note of a telephone conversation he held with Willis (NAB) on 7 September 1989 in which he recorded Willis as having said:
   There is not much logic in not taking security for fear of voidable preference since all a liquidator could do is put things back to where we are now. (We will, nevertheless, require confirmation from lawyers).
   6952 The double jeopardy problem (see Sect 30.8) is an example of the no worse off thesis in reverse. For example, under the ‘fresh advance’ structure, if the companies went into liquidation the banks were at risk of having to disgorge the repayment by the existing borrowers that had been funded by the fresh advance. In addition, they would lose the benefit of the securities and would have to prove in the winding up as an unsecured creditor for the amount of the fresh advance. In those circumstances, the banks would be worse off. While the potential risk of a voidable preference was considered, at least by some banks, acceptable, the risk of double jeopardy was not.
   30.12.2. The Weir diagram
   6953 There are many aspects to the no worse off thesis. The main one relates to the possibility that the banks might take security which would later be set aside. But it is not the only one. The no worse off thesis arose at the meeting of the Australian banks on 24 January 1990, primarily in the context of concerns about the status of the on‑loans.
   6954 At the meeting, Weir (Westpac) presented a diagram that he had prepared and which contained a series of calculations. A copy of the diagram is attached as an Annexure: see Schedule 38.24 ‘U’. In his witness statement, Weir said the purpose of the diagram was to assist in explaining to the other banks’ representatives his view that the banks were not exposed to loss. His view was that if a sale of the newspaper business realised $400 million, the Australian banks would recover 100 per cent of their exposure, whether or not they became secured, and whether or not the group’s debt to the BGNV bondholders effectively ranked pari passu with bank debt. As he put it, even on a worse case scenario and without security, the banks would still be paid out in full.
   6955 Weir started with the assumption that the newspaper business could be sold for $400 million. He assumed that this figure would include the subsidiaries and the inter‑company loans between those companies and WAN. He took into account the Whitlam Turnbull valuation, which had placed a value of more than $600 million on BPG. He did not change the figures that Whitlam Turnbull had used in their valuation but had applied a discount to the valuation because it had been done on a going concern basis. Out of the $400 million, debts of $23 million and $19 million owed, respectively, to Western Mail and Bell Press (mistakenly referred to in the diagram as ‘Bell Group Pty Ltd’) had to be paid. He ignored the debt of $46 million that was owed to WAN by BGF.
   6956 Once those debts were paid, the balance of the proceeds would be $358 million. That surplus would flow into Western Mail Operations and then into Harlesden Investments. In his calculations, Weir assumed that Harlesden Investments would then have to repay its debt to BGF of $141 million. After doing so, it would have been left with a surplus of $217 million. That surplus would then have flowed to its parent, BPG, which had only small inter‑company loans. The inter‑company loans would cancel one another out, leaving the $217 million to flowing into TBGL. That asset would then have been available to TBGL’s creditors, namely, the Australian banks ($130 million), the Lloyds syndicate banks ($135 million), BGF ($76 million), BGNV ($64 million) and the TBGL bondholder ($75 million). However, the TBGL bondholder was subordinated to the interests of the other creditors. Assuming the two inter‑company debts were not subordinated, there would have been $405 million worth of creditors sharing in $217 million worth of assets. The calculations are summarised in Table 38.
   Table 38
   CASH DISTRIBUTIONS – TBGL
   CREDITOR CLAIM PERCENTAGE SHARE (OF $217 MILLION) DISTRIBUTION
   Australian banks $130 million 32 per cent $70 million
   Lloyds syndicate banks $135 million 33 per cent $72 million
   BGF $76 million 19 per cent $41 million
   BGNV $64 million 16 per cent $34 million
   Totals $405 million 100 per cent $217 million

6957 Weir also calculated that Western Mail would have net assets of $27 million available for distribution to its creditors, namely, BGF ($21 million) and Bell Press ($6 million). Bell Press would have net assets of $84 million, with creditors of $118 million. BGF’s return from that source would be $77 million.
6958 In summary, he thought that the inflows to BGF would be $141 million from Harlesden Investments, $41 million from TBGL, $21 million from Western Mail and $77 million from Bell Press, making a total of $280 million. The creditors who would claim in the liquidation of BGF would amount to $488 million, namely BGNV ($353 million), Albany Advertiser ($1 million), BPG ($4 million) and the Australian banks ($130 million). Although the BGF bondholder (SGIC) would be owed $75 million, its debt would be subordinated.
6959 The claims of Albany Advertiser and BPG are relatively small and would account for only 1 per cent of the total debts. On this basis, from the $488 million cash inflows, BGNV would receive 72 per cent ($203 million) and 27 per cent ($75 million) would go to the Australian banks.
6960 Accordingly, even without any contribution from other assets, such as the BRL shares and the JNTH shares, the Australian banks would be entitled to $70 million from TBGL and $75 million from BGF. In other words, they would receive payment in full. At that time he understood that the Lloyds syndicate banks had lent money to BGUK, not to BGF. He did not estimate what return the Lloyds syndicate banks would receive from the sale of any other assets owned by TBGL or BGUK. Weir’s approach is summarised in the following paragraph from his witness statement:
As I worked through my diagram and the calculations that went with it, I explained that the banks could still have some confidence in proceeding. The banks were still going to get their money back, even if the on loans from BGNV were not subordinated. As I explained to the Australian banks, if the newspaper realised $400 million, whether or not the BGNV on loans ranked equally with the banks was not going to materially affect our position. Either way, the Australian banks would recover their money on a liquidation.
6961 In cross‑examination, Weir said that he prepared the diagram when he became aware of the argument about subordination of the on‑loans to see what would be the effect on Westpac ‘in the unlikely event that the loans were not subordinated’. He refused to concede that the diagram represented a ‘liquidation scenario’, although he did acknowledge that the sale price for the newspaper business of $400 million was a ‘forced sale scenario’. He said that he made the calculations assuming that:
(a) the on‑loans ranked equally with the banks; and
(b) the Lloyds syndicate banks did not rank equally with the Australian banks in the sense that their facilities had about 18 months to run.
6962 Weir acknowledged that during the entire negotiations he felt there always was a risk that the Bell group could go into liquidation for all sorts of reasons. Some matters were outside their control, such as what was happening to BCHL and events occurring at that level that was affecting the decisions made by banks who were lending to group. Throughout the whole negotiations there was always some risk that the Bell group may go into liquidation, but on balance his view was that it would not. He thought the greatest period of risk was ‘the two week period’ during which BBHL was in receivership because it carried with it the risk that NAB might not participate in the refinancing. I am not sure what he meant by ‘two week period’ because BBHL was in receivership for a lot longer than that and the time during which NAB was vacillating was much shorter.
6963 Despite his refusal to concede the issue, I think the diagram was prepared on a ‘liquidation scenario’. This is not to say that Weir then believed the companies would go into liquidation but the diagram posits a situation where assets are realised, shortfalls are recognised (as, for example, in the case of Bell Press) and net distributions are made. He would not have prepared it in that form unless he thought there was at least some chance that the companies might collapse.
6964 In my view, this is an illustration of the banks reliance on the no worse off thesis. The banks were proposing to take security. In the passage from Weir’s witness statement quoted above, he says that ‘the banks could still have some confidence in proceeding’. Proceeding with what? The answer must be the taking of security. The only logical explanation for this line of reasoning is that in a worse case scenario (where the on‑loans ranked equally, the banks facilities remained unsecured and the companies went into liquidation) the Australian banks would recover their moneys in full. Therefore, the banks could have confidence in proceeding to take security because they would be no worse off.
6965 The other thing to note about Weir’s diagram is that there is no mention of external creditors. There is nothing to suggest that, either in the preparation of the document or in the discussion at the meetings, consideration was given to how other creditors would fare. Nor, it seems, was consideration given to the impact of critical matters relating to group companies, in particular:
• TBGL’s shortfall of $188 million, as per Table 38.
• TBGL’s subordinated debt of $75 million.
• BGF’s shortfall of $208 million.
• BGF’s subordinated debt of $75 million.
• The balance (after the TBGL contribution) of $63 million owed to the Lloyds syndicate banks.
30.12.3. Individual banks and the no worse off thesis
6966 There is ample evidence that each bank was told that it would be no worse off by entering into the Transactions. Not only was each bank aware of it, but I am prepared to draw the inference that each bank relied on it in entering into the Transactions. I accept that, in the language used by counsel for the plaintiffs in opening, it was one of the factors that drove the banks into the Transactions.
6967 There are many different formulations of the no worse off thesis in the contemporaneous documents. For example, on 3 and 4 January 1990, NAB was weighing up the public perception difficulties it may face if it were seen to be attacking BBHL and, at the same time, participating in the financial restructure of the Bell group. Keane made a file note of a discussion with Cicutto and Derham as to whether it would be better for the bank to enter into the refinancing as a means of improving its position. Derham is recorded as advising ‘that we would be in no worse position legally and we may indeed be better off’. Another example arises in a file note made on 13 October 1989 by Latham (Lloyds Bank). Latham said: ‘Don’t want to be in worse position than at present’. In a letter of advice dated 18 December 1989, MSJL noted that the ongoing adverse publicity about BCHL’s financial difficulties increased the risk of a court overturning the securities. But they went on to say: ‘However, in our view, the restructuring will not worsen the present position of the banks’.
6968 In Sect 30.21.2 and following there are many examples of evidence tying individual banks into knowledge of, and reliance on, the no worse off thesis. I have prepared, as Schedule 38.18, a table giving evidentiary references that have led me to the conclusions I have reached.
6969 What, then, is the essential relevance of the no worse off thesis? The banks had been advised that the refinancing may constitute a preference. It may also involve a breach of directors’ duties if there were to be an absence of corporate benefit. The banks decided nevertheless to proceed with the refinancing on the legal advice that even if the Transactions were set aside by reason of being unlawful the banks would be no worse off as they would be merely restored to the position they were in prior to the refinancing. In other words, they were prepared to take a risk because the consequences were manageable. The no worse off scenario continued even after the double jeopardy problem had been cured by adopting the existing borrower structure. The banks were still confronted with the possibility of a voidable preference or the risk of the Transactions being set aside through lack of corporate benefit.
6970 It seems to me that the no worse off thesis is material in at least two respects. First, it is relevant to questions of knowledge in the Barnes v Addy claims. For example, the banks had a store of knowledge of the financial position of the companies and yet they did not press for additional financial information. This may also have an impact on the defences to the statutory claims. Secondly, the fact that the banks went into the Transactions knowing there was a risk but proceeding nonetheless will be a factor to be taken into account in framing equitable relief. As counsel for the plaintiffs put it, these considerations would arise
[I]f for example the banks said, ‘We shouldn’t be required to disgorge all the profits we have made because we’ve proceeded on the assumption that this was legal and we’ve done this and that and we would be prejudiced if we had to disgorge all the profits’. The fact that they went ahead knowing that was a chance and they proceeded on that basis may well be relevant then when you come to fashion the equitable relief.
6971 Counsel for the plaintiffs also submitted that these questions went to establish that the banks acted unconscionably. As will appear when I come to deal with the equitable fraud claim I am less impressed by that approach. The basic thrust of the unconscionability causes of action are beset by difficulties. I will return to all of these issues later.
30.13. The hardening period
6972 Closely related to the no worse off thesis is another theme that was highlighted by the plaintiffs; namely, the concept known as ‘the hardening period’. Counsel for the plaintiffs explained it in the oral opening in these terms:
One of the [themes] is the ‘hardening of the securities’ or the ‘hardening period’. That was jargon used by the banks to refer to, amongst other things, that if six months expired after the securities were granted, then those securities couldn’t be set aside under certain of the statutory provisions relating to preferences.
6973 As early as 27 September 1989, the banks received advice from MSJL that the securities would be vulnerable to attack as a voidable preference if the companies went into liquidation within six months unless it were established the they were solvent immediately after the grant of the securities. Hence the reference to six months as the hardening period. But this was not the only basis on which, and the only time during which, the banks were at risk. Their legal advice also told them that if a company granting a security received no corporate benefit for so doing, the transaction could be set aside and in that instance there was no time limit.
6974 There are two other aspects of this question that merit comment. First, the legal advice contained a warning that it would not be easy, retrospectively, to establish that the companies were solvent when the securities were granted. In the 27 September 1989 advice, MSJL said, (in relation to the good faith defence under Bankruptcy Act s 122:
However, if … the Bell group goes into liquidation in 6 months time, it may at that point in time prove very difficult to convince a court that, notwithstanding the widely publicised current financial turmoil of the Bond/Bell group of companies, as at the date of restructuring, the banks had no ‘reason to suspect’ that the existing borrowers were ‘unable to pay [their] debts as they became due’.
6975 Secondly, the sentiment was expressed several times during the negotiations that the sooner the securities were taken the better. There were many reasons for this and one of them was that the sooner the securities were taken, the sooner the hardening period would begin to run. But there was another reason. The banks had legal advice to the effect that the longer the lapse of time between the restructuring taking effect and an eventual challenge to the securities, the better. In other words, time would work in favour of the preservation of the securities.
6976 This is the underpinning of the plea in 8ASC par 59T. The plaintiffs allege that from mid‑December 1989, the banks believed that the longer the time that elapsed after a Bell Participant entered into a Transaction and before its winding up commenced, the greater the prospect of the banks resisting a claim or allegation that the Transactions were invalid. An example of evidence that supports this plea is a letter of advice from MSJL dated 2 May 1990. The solicitors dealt with a challenge made in circumstances where the winding up commenced within six months of the securities having been taken. They went on to say that to impeach the security thereafter, a liquidator would have to rely on grounds of attack that would raise complicated questions of law and fact. But they also said that the restructuring would ‘look better’ when put before a court after six months, and, in addition:
The expiration of [six months] (or more) will be a form of circumstantial evidence that may assist in establishing that the restructuring satisfied the ‘corporate benefit’ test at the time it was effected (ie, the passing of time will make it harder to argue that the restructuring damaged the financial health of the Security Providers).
In short, it is our view that if six months expires from the date of grant of the security without the Security Providers being subject to an application for winding up, the grounds upon which the security could be attacked will be reduced and, accordingly, the security granted in favour of the Banks will have been strengthened in relative terms.
6977 The MSJL advice was discussed at the Lloyds syndicate banks meeting on 3 May 1990. According to a file note made by Moorhouse and Halley (BoS), all Lloyds syndicate banks were represented at the meeting. I have no reason to doubt the accuracy of the note. The MSJL advice was sent to Westpac and I have no reason to doubt, according to the practice that was then current, that Westpac would have sent copies to the Australian banks.
6978 Accordingly, I find that the banks would have been aware of the general tenor of the advice both before and after January 1990. In my view it is a logical extension of, and follows on from, the advice the lawyers had been giving throughout the negotiations. At one point in the letter, the author said: ‘Throughout the restructuring we have provided the syndicate with ongoing and detailed advice [on the corporate benefit issues]’. On 4 May 1990, MSJL sent a further letter of advice commenting on the corporate benefit argument. The author says: ‘As we have advised on many occasions …’ In the light of this the subject matter would not have come as news to any of the bankers.
6979 I am satisfied that the banks were aware of the Australian insolvency law concept of the voidable preference and of the hardening period that it entailed. I am also satisfied that the banks were aware of the two related matters set out above. I do not think I need to go into the supporting evidence in any detail. Nonetheless, I have attached as Schedule 38.19 a list of references in which each bank has adopted the phrase hardening period or something similar.
6980 The question still remains what, if any, impact does the hardening period issue have in the litigation. I think there is a need for caution in relation to the Barnes v Addy claims. Apart from its obvious connection with the no worse off thesis, it is primarily relevant to the equitable fraud claim. On the plaintiffs’ case, the desire of the banks to perfect the securities, at least by getting past the hardening period, was a primary motivation for keeping LDTC (as trustee for the bondholders) in the dark. According to the plaintiffs, the last thing the banks wanted to do was to spook the bondholders into action or to precipitate an event of default under the bond issue trust deeds while the securities remained vulnerable to attack as a voidable preference.
6981 I have mentioned the hardening period issue here because of its connection with the no worse off thesis and because it was a recurring theme in the refinancing negotiations. I think it lends significant support to the conclusion that the banks were concerned about the solvency of the Bell group companies. This is its main significance for present purposes. I will have to return to it in the discussion on the equitable fraud claim. To set the scene for that discussion, it will be convenient to deal here with evidence of events between February and May 1990.
6982 In February 1990 TBGL requested the banks to release the Bell Press proceeds to enable it to pay fees relating to the Transactions, interest due to the banks at the end of February 1990 and the interest commitment to the bondholders in May 1990. This led to the waivers and release discussed in various parts of the reasons: for example, Sect 24.1.9.6 and Sect 24.1.10.
6983 In my view there is ample evidence to justify the conclusion that a major factor contributing to the banks’ decisions to release the funds was a resolve to preserve the hardening period. By May 1990 the suspicions or concerns held by the banks prior to 26 January 1990 about the precarious financial position of the companies and about the risk of competition from the bondholders had increased markedly. I can deal with the evidence which, in my view, justifies this conclusion, in relatively brief fashion. The evidence, insofar as it affects the Lloyds syndicate banks will be found in Sect 30.11. I need to say something about the Australian banks. All of the communications I am about to mention occurred in the context of the waiver and release discussions.
6984 In relation to HKBA, I refer to the memorandum from Davis to the credit committee of 2 May 1990: see Sect 30.18.8. On 26 April 1990, SCBAL advised SCB that the request should be agreed to. The memorandum said:
Basically, if the subordinated convertible bond interest is not met, the bondholders could take action against the company or the lenders, which could jeopardise the security position achieved by the lenders on in February 1990. We consider that it is better for the lenders to agree to forego the relatively nominal debt reduction from the asset sale proceeds held by Westpac, rather than take the risk that the security recently taken by the lenders will be challenged.
6985 NAB had originally proposed that the retention of the funds by the Security Agent be on a daily basis. On 24 April 1990, Keane sent a memorandum to the Credit Bureau stating:
[T]he proposed terms … met with strong objections from other Banks, with a particular concern being that any Bank, especially any of [the Lloyds syndicate banks] with relatively small exposures could take precipitous action to the possible detriment of all Banks.
6986 I note in passing that in this memorandum Keane also commented that TBGL did not have other readily realisable assets and its major source of ongoing cash flow (the publishing assets) ‘produces insufficient cash to service TBGL’s interest commitments’. The structure of the memorandum suggests that both issues militated in favour of the release. The insufficiency of the free cash flow for the publishing assets was known in January 1990 and the situation had not improved. This, too, is referred to in many sections of these reasons and I regard it as an important consideration.
6987 Some time in March 1990 CBA gave in principle approval to the waiver. In an internal memorandum of 27 March 1990 Smith said:
The Banks are left in a tricky situation. We know from cash flow forecasts that the bond interest payment cannot be met without recourse to the sale proceeds. Therefore, at the end of the day, the Banks will probably have to agree to release the $17.0M if only to preserve the value of the secured assets and stop any pre-emptive action by the bond holders.
6988 Edward (SocGen) wrote to his credit committee on 26 April 1990 recommending the bank grant the waiver. He said: ‘It is important to preserve the status quo through to August 1990 for our secured position to be preserved’.
6989 Not only did Westpac grant the waiver, it encouraged the other banks to do so. In a credit application of 6 March 1990, Weir commented:
From recent cash flows presented to us it would appear we will have little choice but to agree to the group’s request to preserve our security position … Until our security over BPG is perfected, we are vulnerable and some loss could occur, although the complexity of the group makes it extremely difficult if not impossible to forecast.
6990 In his witness statement Weir said his view at the time was that a decision to refuse to release the proceeds to allow the bondholder interest to be paid may well have caused the liquidation of the Bell group.
30.14. Describing the financial position as ‘precarious’
6991 It will be apparent from what I have said about the meetings of representatives of the various banks (see Sect 30.10 and Sect 30.11) that I am satisfied that during the negotiations for the refinancing, the solvency of the Bell group companies was an issue for the banks and it was the subject of discussion. I will go into further detail on this question in the sections concerning the individual banks and the knowledge held by them. At an Indian restaurant, dishes are usually described as ‘mild’, ‘medium’ or ‘hot’, depending on the infusion of chilli during preparation. Applying this classification to the level of concern the banks held about the companies, it certainly was not ‘mild’. It was a least ‘medium’ and might even justify the formulation ‘hot’.
6992 One pointer to the level of concern is the use by many banks of the words ‘precarious’ or ‘parlous’ or ‘fragile’ to describe the financial predicament of the Bell group or of BCHL group (and through it the Bell group). In instances when the description was applied to the BCHL group, it should be remembered that the banks were well aware of the dependence of the Bell group on the broader BCHL group and the impact of the events occurring in BCHL on the Bell group: see, for example, Sect 9.12. As Jenkins (Gentra) put it, BCHL was a ‘contagion of bad news’ for the Bell group.
6993 I will give a couple of examples of instances in which the financial plight of the relevant corporations is described using language of this nature. On 11 September 1989 all of the Lloyds syndicate banks were represented at a meeting with Simpson and Raeburn (BGUK). Bradley (Crédit Agricole) made a file note of the meeting in which he recorded that BPG did not have enough cash flow to cover interest in the first year. He also noted that ‘all banks are in agreement that security must be taken at once to give the syndicate a better position’ and that it was ‘only a matter of time before the Bell/Bond group collapsed’. He also spoke of the ‘imminent collapse of the Bond group’. In a covering note to the relevant officers in Paris, Bradley referred to the ‘perilous position of the whole Bond/Bell group’.
6994 The file note made by Jenkins (Gentra) concludes with these words: ‘everyone endorsed the view that the sooner the assets of [BPG] can be charged to us as lenders the better, in view of the overall precarious situation of the Bell/Bond group’.
6995 There are other file notes of the 11 September 1989 meeting that disclose concerns about many matters including:
(a) the pending release of the BCHL annual financial statements and the potential for the auditors to qualify the report, with a consequent impact on future business viability;
(b) difficulties being experienced by BCHL, including questions about the brewery deposit;
6996 In my view, the content of the file notes generally, and the fact that at least two of the participants commented on the ‘perilous position’ or ‘precarious situation’ of the Bell group and the BCHL group make it likely that this was the tenor of the discussion at the meeting.
6997 On 12 September 1989, Johnson and Weeks (SocGen) made a report to their credit committee on the status of the refinancing proposal after having ‘actively sought to canvass the views of other lenders’. In it, they referred to the demise of the BPG club facility proposal stemming ‘largely from the parlous financial position’ of BCHL. They also referred to the ‘precarious position in which the Bell group finds itself’. I think it is likely that, in the course of the active canvassing of the other Australian banks, SocGen expressed those sentiments to the other banks. There is no evidence that any of the other banks sought to distance themselves from that description of the group’s financial position. A similar report made on 15 December 1989, again after canvassing other lenders, repeats the sentiments.
6998 I have attached, as Schedule 38.20, a list of other evidentiary references tying some banks to expressions of a view that the financial position of the Bell group was precarious or parlous. Some of these references relate to the period after 26 January 1990. But they are sufficiently proximate to maintain relevance. I do not believe that anything occurred in the short period after 26 January 1990 to worsen the position for the group.
6999 In their closing submissions, the banks characterise these statements as benign. The banks say that the statements such as these should be understood as:
(a) merely a reference to the fact that the Australian banks’ facilities were on demand;
(b) not indicative of a view that the collapse of the BCHL group or the Bell group would collapse, or would collapse in the short term;
(c) presented in dramatic terms to elicit a prompt from the decision‑maker within the bank; and
(d) based on press reports indicating that the BCHL group was in some financial difficulty that may have an impact on the Bell group;
7000 In my view, the banks’ submissions are at odds with the plain meaning of the words and downplay the significance of these exchanges. Among the meanings ascribed to the word ‘parlous’ in The Oxford Dictionary are perilous, dangerous and risky to deal with. ‘Precarious’ is defined to mean ‘dependent on chance; insecure, unstable’. Keane (NAB) is one of the bank officers who used this terminology and I have no reason to believe he did so other than in accord with its customary meaning. Throughout the period of the negotiations of the refinancing transaction, it was Keane’s view that the Bell group’s cash flow position would be precarious in the absence of significant contributions from its associated companies. He understood that both asset sales and the financial position of the BCHL group were of importance to the financial position of the Bell group.
7001 The banks pointed out that the note in the SocGen credit application of 12 September 1989 referred to the ‘precarious position in which the Bell group finds itself’ and not to the ‘precarious financial position’ of the group. I think that is a strained interpretation. In my view, the banks had real concerns about the ability of the BCHL group to survive. A failure of the BCHL group would have had an adverse impact on the Bell group. That, coupled with the acknowledged cash flow problems of the Bell group (where BPG free cash flow could not cover interest, at least for the first year), explains the many references to a parlous financial state and its similes.
30.15. The CBA demands
7002 The plaintiffs’ case for the insolvency of BGF and TBGL relies, in part, on the fact that in September and December 1989 two Australian banks, (namely, CBA and SCBAL) served demands for repayment on BGF. The plaintiffs allege that BGF was unable to meet the demands. This has an obvious impact on the knowledge case insofar as it affects the bank making the demand. But the plaintiffs say that it has a similar impact on those of the other defendant banks who knew about it.
7003 On 6 September 1989 CBA served a notice of demand for payment no later than 13 September 1989 of the $12.8 million owed by BGF. On 14 September 1989, CBA issued a formal demand on TBGL under the guarantee, seeking payment by 21 September 1989. The demands were withdrawn on 20 September 1989. The course of events is described in Sect 24.1.3.4 and in Sect 30.21.3.
7004 The plaintiffs submit that each Australian bank, except NAB, knew of the demands. It is not claimed that the Lloyds syndicate banks knew of the demands. Knowledge of the CBA demands is not sought to be imputed via Westpac’s agency.
7005 The banks accept that SCBAL and Westpac knew of the demands but dispute how that knowledge was perceived. In effect, it is argued that they thought it was merely to put pressure on the Bell group and that CBA were never going to carry through to a final demand. Walsh (SCBAL) was informed by Simpson on 15 September 1989 of the CBA demand. He was also told that Westpac were planning to convince CBA to join the syndicate. Walsh’s file note was circulated to SCBAL officers Patten, Nott and Brookman. Nott recorded that the consensus view in SCBAL was to support CBA.
7006 Weir testified that had CBA ‘jumped ship’ it would probably have been fatal to the proposed refinancing. But he added that the other banks may have been willing to pick up an additional $12.5 million (CBA’s lending) to keep the deal alive. This may be a triumph of optimism over realism given the general distaste many of the banks had for the Bell group by that stage. In any event, Westpac sought to persuade CBA to change its mind about its actions. Weir spoke to Latimer on 18 September 1989 and Spring called Latimer the following day. On 20 September 1989 a ‘very senior officer of Westpac’ spoke to Payne of CBA, who in turn asked Poulter to ‘have another look at it’.
7007 The plaintiffs say that SocGen’s knowledge can be inferred from the SCBAL file note of a conversation on 18 September 1989, where Brookman (SCBAL) spoke with Weeks of SocGen. Brookman records Weeks as saying he was aware that Westpac would try to persuade CBA to ‘stay in’ the proposed refinancing. While it may seem unlikely, given SCBAL’s knowledge of the demand, that Brookman discussed CBA’s intention to withdraw from the refinancing without mentioning the existence of the demand, the file note does not mention it. It speaks in terms of CBA’s decision to decline to participate in the syndicate. CBA’s reluctance to extend financial accommodation to the Bell group was well known.
7008 In addition, I note the evidence of Edward, who said he did not know of the demand, and that of Auxenfants, who said that if Weeks learned of such an event, he would expect to have been informed. Even though Weeks was not called, I am not prepared to infer that SocGen knew of the CBA demands.
7009 The plaintiffs contend that HKBA’s knowledge can be inferred from the fact that Simpson told Walsh (SCBAL) that he would call either Strang or McGregor of HKBA. But he also told Walsh he would ‘call back to advise on their positions’, which does not appear to have happened. On 18 September 1989, Strang and McGregor reported to Townsend that CBA ‘appears likely to refuse to participate in any refinancing’ but that it was unlikely any bank would take ‘precipitative action’. Simpson, Strang and McGregor were not called as witnesses. The evidence therefore indicates a possibility that HKBA was informed. But this conclusion is difficult to reach given that Davis testified he was unaware of the demands and expected that he would have been told if Strang or McGregor had acquired that knowledge.
7010 Latimer’s diary note of 7 September 1989 actually indicates that the Australian banks may have been informed of the CBA demand well before the dates mentioned above for each bank. The note states:
Simpson has just had another round of discussions with BG’s domestic bankers and called to report the current position.
There have been no positive developments with respect to these banks and he said that, if anything, the other lenders have hardened their attitude to the proposal to pay out CBA in isolation.
7011 It may be inferred from Westpac’s steps to dissuade CBA from pursuing its demands that Westpac at least apprehended that CBA was determined to pursue its proposed course of action. If Westpac had perceived the demand as an empty threat, it would not have undertaken such a course of action. Latimer’s note of his conversation with Weir appears to reinforce this view. It states that:
Should CBA’s debt not be cleared, then consideration would be given to further action. However, it was made clear to Mr Weir that CBA wanted out and, if necessary, the hard decisions would be made to achieve this objective.
Mr Weir said that he understood our position and, as some of the other lenders have indicated that they would seek repayment if CBA is paid out, it was therefore highly unlikely that all lenders would pursue recovery through legal recourse should CBA initiate such action.
7012 From this, Westpac may well have believed it was a possibility that CBA would press on with its demands if not repaid and this would likely precipitate the collapse of the Bell group. It is therefore also arguable that Westpac communicated this concern to the other banks it was in contact with.
7013 But in contrast Weekes and SocGen were apparently of the view that CBA was not likely to withdraw from the negotiations. It is not clear whether Brookman (SCBAL) shared the view of Weekes expressed in their conversation. Walsh gave unchallenged evidence that he doubted CBA would be prepared to push for a final demand and he was reassured by Westpac’s promise to speak to CBA. But the fact that SCBAL expressed support for CBA’s position indicates that SCBAL perceived the demand to be genuine, not merely a device to put pressure on the banks. But in any event SCBAL later received advice that CBA intended to withdraw the demand by 20 September 1989.
7014 It follows, then, that in my view only CBA, Westpac and SCBAL were aware of the demands. I have not placed much weight on the CBA demands for any purpose other than as part of the background facts to the negotiations and also to explain the attitude of some senior CBA officers who, essentially, lost interest in the project after the withdrawal of the demands: see Sect 30.21.3.
30.16. The SCBAL demands
30.16.1. The issue and withdrawal of the demands
7015 In December 1989, SCBAL issued formal demands to BGF and TBGL for repayment of the facility. Because of the significance that I attach to the SCBAL demands, I need to set out the course of events in detail, even though in doing so I will be repeating some of what is contained in other sections, for example Sect 24.1.3.6. The SCBAL demands are of particular importance for the on‑loan controversy. But it is not the only reason why they are significant in this litigation. The demands are also alleged to constitute an event of default under the BGNV trust deeds. The non-payment by BGF and TBGL is also said to provide evidence of insolvency.
7016 Walsh (SCBAL) had initially recommended SCBAL’s participation in the refinancing on 12 October 1989. This was approved by Patten and Minogue. But on 1 December 1989 SCB requested SCBAL to issue demands on the facility. Minogue wrote to Knox noting that SCB had reviewed its policy of lending to Bond related companies. This came as a result of the attempts by BCHL to sell its interests in Austotel. SCB advised that it made sense to have all lending to BCHL related companies controlled centrally and that they wished to exercise this control. Accordingly, they said their interests were best served by making a formal demand and, if necessary, the appointment of a liquidator.
7017 As can be seen from this short recitation, the impetus for these demands came more from SCB than from SCBAL. There were intra‑bank negotiations for SCB to indemnify SCBAL in relation to the Bell group exposure and in relation to the demands.
7018 On 4 December 1989, SCBAL served a demand on BGF for immediate repayment of the amount of its facility, namely $15.3 million. The demand was not met. On 7 December 1989, SCBAL served on BGF a notice under s 364 of the Companies Code requiring payment of that amount. On 8 December 1989 made formal demand on TBGL as guarantor and followed it up on 11 December 1989 with a s 364 notice.
7019 Aspinall and Simpson made written and oral approaches to SCBAL protesting about the bank’s actions and seeking to have the responsible officers change the decision. The essence of the appeal was that the Bell group could do nothing to meet its obligations to SCBAL until the refinancing had been completed, at which time it would again continue to meet its interest commitments.
7020 SCBAL resisted these pleas, reiterating its prerogative to exercise its legal rights. But during the discussions either Aspinall or Simpson suggested that the bank was obliged to support it and that legal consequences might flow if they failed to do so. This caused SCBAL to seek legal advice from MSJA as to whether there was any potential legal exposure for the bank consequent upon the service of demands and its decision not to proceed as a participant in the refinancing arrangement. In their draft legal advice, received on 7 December 1989, the lawyers said they could not discern any basis on which BGF could sue successfully in damages for the bank’s failure to proceed with the refinancing structure.
7021 On 6 December 1989, Walsh sent a fax to Farrell (BCHL) stating that SCBAL would not grant any further extensions of the repayment date. On the same day, Love reported to the Adelaide office that at the meeting the preceding day Simpson had acknowledged that, on the cash flow projections, interest payments could not be met on the total level of debt of approximately $260 million from funds generated from the newspaper operations alone.
7022 On 8 December 1989 and 14 December 1989, Aspinall wrote a further letter to SCBAL decrying the bank’s ‘untimely and inappropriate action’ and pointing out that it would frustrate the refinancing and could lead to events of default under all banks’ facilities and under the convertible bond issues. As Aspinall put it, ‘events of this kind will seriously jeopardise your bank’s position as an unsecured lender’.
7023 Compared to CBA and its demands, SCBAL displayed more intent to follow through on the non‑payment. When made aware of the possibility of causing events of default, SCBAL sought legal advice as to how this could be avoided, but was not willing to negotiate further if it risked losing part of the 21 day period that had to elapse before enforcement action could be commenced. The statutory period commenced to run from the date of service of the s 364 notice. In a letter dated 15 December 1989, Farmer (SCB) instructed Love (SCBAL) that:
Our basic position is that the Bank continues to make the determination we would rather have independent parties managing these companies. Therefore, we would be perfectly prepared to continue with the 364 notice, together with the appointment of the receiver which will result in the disposal of The West Australian in the short term rather than the long term. In view of this, we do not have much of a problem with events of default under facilities extended by other parties.
7024 I will have more to say about the 15 December 1989 letter in Sect 30.18.3 because, in it, Farmer told Love that Aspinall had raised with him the prospect that the bondholders might not be subordinated. He asked Love to ‘confirm this is not the case’. This is the genesis of the controversy over the status of the on‑loans.
7025 Aspinall denied ever saying such a thing and pointed to his subsequent letter dated 18 December 1989 in which he stated that the banks would rank ahead of the bondholders in a liquidation. But regardless, this concern appears to have been a major factor in SCBAL’s subsequent backdown. SCBAL immediately sought legal advice about the subordination question. It also sought further information from the Bell group as to how the demands could create events of default. The legal advice received on 18 December 1989 was tentative and preliminary but it confirmed that there could a problem.
7026 On the same day, Minogue (SCB) advised Knox (SCBAL) that the demands should be withdrawn. It is clear from Minogue’s fax that the argument concerning the position of the bondholders was a persuasive factor in SCBAL’s decision. This was confirmed by Walsh in cross‑examination:
You learned, did you not, that the reasons why SCB in London instructed Mallesons to withdraw the demands was because they were concerned that the bondholders might rank equally with SCBAL if they proceeded with the demands?—Yes, while there was still potentially a risk outstanding it was felt appropriate to withdraw the demands.
30.16.2. The lawyers’ knowledge of the SCBAL demands
7027 In Sect 30.5.4 I discussed whether the several firms of solicitors were the agents of the banks for relevant purposes. I think it is appropriate that I set out here some findings about factual matters within the knowledge of the lawyers and thus capable of imputation to the principal.
7028 The knowledge of the banks’ lawyers is broadly illustrated by the fact that the recitals to some of the transaction instruments were altered after the making of the demand. One example is recital E, the changes to which are illustrated in Table 39 below.
Table 39
DRAFTING CHANGES – RECITALS
DATE OF DOCUMENT DOCUMENT REFERENCE RECITAL E
14 December 1989 [TBGL.04911.047] The Australian banks’ loans are presently repayable on demand, although none of the Australian banks has yet demanded repayment
25 January 1990 [TBGL.35608.076] There are no outstanding demands by the Australian banks’ loans which are presently repayable on demand

7029 It is clear P&P were informed of the SCBAL demands. The changes to the recitals as discussed above were made after Peek of P&P sent a draft to Peter Watson (S&W) on 14 December 1989. Next to the recital, Watson wrote: ‘Not so’, indicating that he knew it was not correct to say that no bank had made a demand, presumably having been informed by the Bell group. Handwritten amendments were made on P&P’s copy of the draft shortly thereafter. This copy is dated 15 December 1989 and next to the relevant recital it says ‘except in cases where such demands have been withdrawn’. It therefore seems likely that these comments were written sometime after 18 December 1989, the date the demands were withdrawn. Although Peek denied ever knowing of the demands, it seems improbable, particularly given her central role in the inter‑firm communications discussed below. Given the circumstances, someone at P&P with the authority to amend the documents must have known.
7030 Similarly, the knowledge of A&O can be inferred from amendments to the recitals of LSA No 2. Perry of A&O sent a draft of LSA No 2 to Peek and Stow P&P on 19 December 1989, containing his handwritten note next to the relevant recital (Recital I) which said ‘P&P to review’. His handwritten notes were dated 18 December 1989. The recital was subsequently amended, presumably by P&P, to remove the assertion that no demands had been made by the Australian banks. Similar amendments were also made to the subordination agreement. Perry conceded it was likely he was made aware of the demand.
7031 The banks’ submissions, in effect, amount to the proposition that someone changed the recitals in each of the relevant transactions, but no‑one actually knew who was pushing for these changes and why. Given the high degree of communication and information sharing between the various firms, I have difficulty with the proposition.
7032 The knowledge of MSJL may be inferred from the fact that they were sent a draft of ABSA by P&P. On 24 January 1990 Ascroft wrote to Peek asking about the relevant recital (Recital E): ‘Why has original paragraph E been deleted?’ Cole and Ascroft could not recall being informed of any demands, but this seems unlikely for the reasons just described.
7033 MSJ in Perth, Sydney and London had knowledge of the demands as they were advising SCBAL on the matter. But knowledge is only imputed to a principal where the agent acquires the knowledge when acting within the scope of its agency. If MSJ were agents, this was not knowledge acquired in the course of its representation of the Lloyds syndicate banks. Willis, the MSJL partner in London who advised SCBAL, knew of the demands but there is no evidence that he told the other partner, Ladbury.
30.16.3. Other banks’ knowledge of the demands
7034 The plaintiffs only plead that Westpac and HKBA had direct knowledge of the demands. But they seek to impute the information to all banks via their lawyers as agents. The banks admit knowledge by HKBA and SCBAL and deny the agency allegations and the knowledge alleged to have been held by Westpac.
7035 Davis (HKBA) was aware of the demands but apparently did not know if SCBAL would follow through on them.
7036 It appears that S&W, rather than Westpac, may have been the original source of knowledge about the SCBAL demands. But I have no doubt that once the lawyers knew, Westpac was also informed. In an exchange with me, Weir said that he was aware SCBAL had taken ‘an extremely strong position’ but did not know whether they actually issued a formal demand. SCBAL had undertaken no action, other than the issuing of formal demands, which could be described as ‘taking an extremely strong position’. Nonetheless, the mere fact that Weir referred to SCBAL as taking a ‘strong position’ does not mean he must have known that formal demands were issued calling up the facilities and threatening winding up proceedings.
7037 The plaintiffs also rely on the evidence of Browning. She said she could not recall being informed of such a demand, but did not discount the possibility. She reviewed the recitals of ABSA (date unclear) and acknowledged she would have recognised that there had been an amendment to the recital. Browning acknowledged she would have been aware of the amendment and ‘probably’ would have sought ‘information’. But, again, I am not sure this means she would have enquired into and been given detailed information as to the full import of the SCBAL demands.
7038 There is also a fax which was sent by Walsh to Weir on 13 December 1989. It said:
Standard Chartered Bank has received today a letter from Parkers dated 11 December with various attached draft documentation.
SCBAL is discussing its position generally with our Solicitors and we hope to be able to contact you shortly.
7039 This communication occurred in the following context. Armstrong had travelled to Perth and was there from about 13 to 18 December 1989. Following the ‘panic weekend’ beginning 8 December 1989, Lloyds and Westpac were trying to conclude the Transactions as soon as possible and draft documentation had been circulated. The SCBAL demand had been initiated just prior to the Adsteam application but had been pursued by SCBAL afterward. Walsh’s comment that SCBAL was reviewing its position ‘generally’ arguably reveals that SCBAL was debating whether to participate in the refinancing at all. But it is such a vague comment I hesitate to rely on it to establish Westpac’s knowledge of the SCBAL demands.
7040 On 18 December 1989, Walsh sent a handwritten note to Thompson and Stumbles (MSJA). The note included these entries:
Bob Weir/Jonny Armstrong

• all syndicate banks
• inter creditor agreement
• security trust deed
  Told them I could not comment on the docs in accordance with my earlier fax to BW. They were surprised & Armstrong indicated he would ring Farmer/Minogue.
  7041 I think it highly likely that this discussion involved a mention that SCBAL might be having second thoughts about its participation in the refinancing. All the evidence I have mentioned in establishing Westpac’s knowledge is circumstantial. While I have no doubt that there was a free flow of information between the lawyers and Westpac, I do think it is sufficient to enable me to infer that Westpac was aware of the demands and all that this would entail. Weir became aware of the on‑loan issue shortly after it was first raised with SCBAL: see Sect 30.18.3. It is at least possible, but I am not prepared to say probable, that when Weir acquired that knowledge he was also informed of the context in which it first arose, namely, a response by Aspinall to SCBAL following the issuing of demands.
  7042 Because I am not sure exactly what the lawyers knew about the communications between SCBAL and TBGL in December 1989, I am not prepared to find it falls squarely within the scope of both the lawyers’ retainers and Westpac’s agency obligation to inform the Australian banks of the legal risks and issues arising from the proposed refinancing.
  7043 There is no evidence that Lloyds Bank had knowledge of the demands, so the only way that knowledge can be imputed to the Lloyds syndicate banks is via the alleged agency of MSJL or A&O. The same problem arises.
  7044 This does not mean the SCBAL demands are without significance. This incident reflects directly on SCBAL’s knowledge of the financial position of the Bell group companies. I acknowledge that it was SCB, rather than SCBAL, that was driving the hard line represented by the issue of the demands. Nonetheless, SCBAL was acting with legal advice. I think it can be taken that MSJA would have been aware of the line of authority that the commencement of winding up proceedings for an improper purpose, such as to collect a disputed debt, is an abuse of process: L&D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180. In other words I doubt it is a step that would have been taken lightly and without a concern about the solvency of TBGL and BGF.
  7045 HKBA’s knowledge of the SCBAL demands is a factor (I would put it no higher than that) adding to the factual matrix from which that bank’s appreciation of the financial predicament of TBGL and BGF falls to be determined.
  30.17. Knowledge of the status of the bond issues
  30.17.1. Some introductory comments
  7046 If it is not already apparent to the reader that the status of the BGNV on‑loans and what various parties knew about that status are some of the most significant issues in the litigation, then I have failed dismally in my attempt to present a comprehensible analysis of the dispute.
  7047 One of the few things that is clear in this dispute is that as between the issuer of the convertible bonds and the bondholders, the indebtedness was subordinated. The directors of the Bell group companies (both before and after the BCHL takeover) knew it, the banks knew it and LDTC knew it. But who (if anyone) knew whether the on‑loans were subordinated or unsubordinated? In relation to the banks, what knowledge did they have about that issue and when did they acquire it? That is the subject matter of Sect 30.18. It is relevant for the purposes to which this Sect 30 is directed and it relevant also to the equitable fraud claim.
  7048 However, to appreciate the controversy about the on‑loans, the reader must first understand the nature of the bond issues that are the source of funds from which the loans were made. That is the subject matter of this section.
  7049 For each of the BGNV bond issues, there was an offering circular and a trust deed. Details of the issues and a description of the documents can be found in Sect 4.3.2.1.
  30.17.2. Knowledge of the terms on which the bonds were issued
  7050 As will appear from later sections, at the time refinancing was being negotiated, individual banks had differing ideas about the nature and extent of subordination of the convertible bonds. The plaintiffs submit that at the relevant time the banks had no assumptions or beliefs as to whether the bonds were subordinated and the terms of the subordination. That cannot be correct insofar as it relates to the fact of the subordination. The bank were aware of that fact from the letters of 11 December 1985 and 15 April 1987, among many other documents. It may be true about the terms of the subordination.
  7051 Lloyds Bank obtained copies of the trust deeds from TBGL in November 1989 and forwarded them on to A&O. Latham (Lloyds Bank) denied looking at them in any detail but admitted that, at the time extracts were sent to Crocker (Creditanstalt) in November 1989, he knew that if interest was not paid on the bonds, the bondholders could call a default. But his evidence was that his knowledge went no further than that. In particular, he said he believed that the bondholders would rank behind the banks and other creditors in the event of liquidation.
  7052 Weir (Westpac) inspected the bond trust deeds in early December 1989. He said he went to an office which was not Westpac’s (probably TBGL’s, although Weir could not confirm this), looked at the table of contents and went directly to the sections dealing with subordination. His actions were, according to his evidence, precipitated by the events of the ‘panic weekend’ in the preceding days.
  7053 I have some difficulty with this aspect of Weir’s evidence. There is no evidence that, before 12 December 1989, the prospect that bondholders might rank pari passu with the banks had not been raised with any of the Australian banks. That was to occur later in December 1989. I acknowledge that in a memorandum to the Chief Credit Manager on 12 December 1989, he said a perusal of the TBGL balance sheet and the trust deeds left no doubt that the bonds were subordinated to all creditors. But his initial evidence was that he no independent recollection of reading the bond trust deed. He then said he remembered going out of the office to another office (probably TBGL’s) to read it. In the light of that, I am not convinced he could have a recollection of the parts he read and the purpose for which he read them (12 years earlier) to justify a conclusion that he was only aware of the subordination provisions. Weir may have looked at the subordination provisions but I doubt his enquiries stopped there. Stow’s letter of 19 December 1989 (see below) canvassed events of default and was prepared with the assistance of information given to him by Weir.
  7054 The subject of the bonds had been raised by bank officers prior to December 1989. But the queries related to whether the taking of security by the banks might be a default under the terms on which the bonds had been issued. In my view, there is ample evidence that the agent banks (Westpac and Lloyds Bank) and the banks’ lawyers at various times before 26 January 1990 reviewed the BGNV trust deeds and knew what matters constituted events of default under the terms of the bonds. The banks knew the default provisions in the trust deeds were a matter relevant to the proposed refinancing. This was why the terms sheet included a condition precedent that the banks obtain a satisfactory legal opinion that the Transactions would not give rise to an event of default under the bonds. This condition made its way, materially unaltered, into ABSA and LSA No 2.
  7055 HKBA was one bank pushing for such a condition, as evidenced by its letter to Weir on 20 September 1989. Weir said he understood this as a concern that the proposed arrangements may create an event of default under the bond trust deeds.
  7056 This issue thus moved into the hands of the lawyers. An issue arose as to whether the advice, pursuant to the terms sheet condition, would be supplied by TBGL and its advisers or the banks. Ascroft’s note of the 1 December 1989 meeting between Lloyds Bank, A&O and MSJL indicates that TBGL was reluctant to provide such advice. The note also records that MSJL was to prepare the draft opinion, and they were subsequently sent copies of the trust deeds. But on or around 7 December 1989, it was agreed that A&O, rather than MSJL, would provide the opinion, given that the bond issue trust deeds were governed by English law.
  7057 In a letter dated 19 December 1989 to Perry (A&O), Stow (P&P) discussed the issue of whether an event of default under the proposed facilities would cause cross‑defaults across the Bell group, in particular under the terms of the BGNV bonds. This was based on information provided by Weir and referred to a page (59) of the first BGNV trust deed. In the letter, Stow expressed the opinion that the occurrence of an event of default would not, itself, cause a problem because no moneys would be due and payable unless and until a demand had been issued.
  7058 On 1 February 1990, A&O provided the legal advice that had been contemplated in the terms sheets. They discussed whether the Transactions would breach the terms of the bond trust deeds. Although this advice is after 26 January 1990, it is likely A&O had the factual knowledge upon which the advice was based well before that date. Perry’s evidence is that the bond trust deeds were reviewed for this purpose in the period December 1989 to January 1990. A&O’s advice can be considered to be for all banks, in light of the informal load sharing which occurred between the banks. In the same way that P&P was entrusted to draft the subordination documents, this task was assigned to A&O. P&P did not do the same thing on behalf of the Australian banks because it was always contemplated that the A&O advice would be available to all banks.
  7059 The plaintiffs also rely on MSJ’s knowledge acquired in the course of advising SCBAL. MSJA, as solicitors for SCBAL, specifically reviewed and had knowledge of the events of default in the second BGNV offering circular. But this knowledge could be imputed to SCBAL only, since MSJ was not acting in for all banks.
  7060 Given the agency duties of Lloyds Bank and Westpac to obtain legal advice and their incidental duty to determine the factual matters relevant to that advice, I think that the discussion by A&O and P&P of this issue can be imputed to all banks via the agent banks. In any event, given they knew of the potential problem and the fact that both Westpac and Lloyds Bank had in their possession (or had access to) the relevant provisions of the bond trust deeds, I think the suggestion that they did not know the substance of those provisions is implausible.
  7061 The banks deny that the knowledge held by the solicitors carries over to the principals. They say that ascertaining the events of default under the trust deeds was not within the scope of their retainer. For the reasons described earlier, I do not think this is correct. In my view, the retainer can be framed much more broadly than as described by the banks. It is also said that the fact that A&O and P&P ‘had regard to’ or ‘were considering’ the terms of the bond trust deeds is not a fact capable of imputation. But the terms of the trust deeds clearly formed a basis for the legal advice. They had factual knowledge of the terms and this is capable of imputation.
  7062 It follows that if the banks knew of the terms of the bond trust deeds, they knew that a failure to pay a demand by one or more banks would constitute an event of default. This seems to have been assumed by Stow in his letter dated 19 December 1989.
  30.17.3. Knowledge of LDTC’s capacity to wind up the issuers
  7063 The next question is whether the banks knew that if LDTC accelerated the bonds, BGNV and TBGL could not pay; a matter pleaded in 8ASC par 59B(g). A further question is whether the banks knew that if interest was not paid, LDTC would wind up TBGL and BGNV; as pleaded in 8ASC par 59C.
  7064 This is based on knowledge of insolvency. Although it is not put this way by the plaintiffs, it could be argued that knowledge of TBGL and BGNV’s inability to pay could have been known even if the banks’ knowledge did not amount to knowledge of insolvency. The banks knew there was a recurrent cash flow problem, they knew that if any bank made a demand the Bell group could not pay. As a result, it could be assumed that likewise the banks knew that the Bell group could not pay the bondholders. I do not think I need to go that far. I have found that the companies were insolvent and this is the issue to which the question of knowledge attaches.
  7065 The Weir diagram (see Sect 30.12.2) does not give much comfort that if push came to shove all claims against the Bell group companies would be met in full. I acknowledge that the diagram proceeds on the basis of a sale of the publishing assets for $400 million and does not bring to account any proceeds from the sale of shares in BRL and JNTH. On the other hand, nor does it provide for payment in full of either the Lloyds syndicate banks or the BGNV bondholders. And no provision is made for any payment to SGIC as the holder of the domestic bonds. In my view, the banks knew that that if LDTC accelerated the bonds, BGNV and TBGL could not pay.
  7066 The banks say there is no basis for the allegations in 8ASC par 59C. But it seems to me to be a reasonable conclusion, even if the knowledge of the banks falls short of insolvency. It is accepted by both parties that if the banks made demand, the Bell group could not pay and the cascading demands would cause the liquidation of many of the group companies. As a matter of logic, any demand by LDTC would have similar effect. The waivers given by the banks in May 1990, which were designed (at least in part) to avoid precipitating an event of default which could lead to a liquidation within the six month preference period, lend support to this conclusion.
  7067 Of course, evidence that post‑dates the taking of securities, such as that relating to the waivers, is of limited utility in determining the banks’ knowledge at 26 January 1990. The banks counter by saying that LDTC did not, as a matter of fact, take any action in 1990 despite knowing that securities had been granted to the banks. But this is a different issue. Whether or not LDTC was ignorant of the dealings with the banks (a question to which I will return in Sect 31), it is not hard to imagine that if an interest instalment were missed LDTC would have taken steps to press for payment. An unmet demand could conceivably have led to liquidation proceedings. The banks also contended that the waivers were given for the purpose of allowing time for a restructuring, rather than out of fear of causing a default. I will deal with this question in detail a little later. For present purposes it is sufficient to say that in my view an understanding that failure to pay the bondholders could precipitate action by LDTC was also a motivating factor.
  30.18. Knowledge of the status of the on‑loans
  30.18.1. A summary of the arguments
  7068 Again at the risk of tedious repetition, I want to start with a summary of the respective positions of the parties about knowledge of the status of the on‑loans. The simplest way to do this by reference to the pleadings but in this instance I will not identify relevant the clause number. The plaintiffs case demonstrates the close connection that they say existed between what the directors knew and what the banks knew. The plaintiffs say:
  (a) the directors knew, believed or suspected that the BGNV on‑loans were or might be unsubordinated;
  (b) if the directors believed the BGNV on‑loans were not subordinated, then such a belief would not have been held by an honest and intelligent director;
  (c) the banks knew, believed or suspected that this was the directors’ state of mind;
  (d) if, which is denied, after 1985 the banks operated under the assumption that all funds raised via the subordinated bonds would rank behind the debts due to them, they ceased to do so at some time prior to entering into the Transactions; and
  (e) the banks knew, believed or suspected that the BGNV on‑loans were or might be unsubordinated and that, in a winding up of TBGL or BGF, BGNV (and hence the bondholders) might compete pari passu with the banks.
  7069 In summary, the banks say that, while they were aware of an argument that the on‑loans might not be subordinated, it was only an hypothesis and no banks actually held that belief. The banks say:
  (a) the directors believed and were entitled to believe that the BGNV on‑loans were subordinated;
  (b) the banks believed, or were reasonably entitled to believe, that the directors believed and were entitled to believe that the BGNV on‑loans were subordinated;
  (c) the banks believed, or were reasonably entitled to believe, that the BGNV on‑loans were subordinated;
  (d) those beliefs were rationally held; and
  (e) from 1985 until late 1989 or early 1990, the banks conducted (and were entitled to conduct) their banking relationships with the Bell group on the basis that all funds raised via the subordinated bonds would rank behind the debts to the banks.
  30.18.2. 1985 to the SCBAL demands: the banks’ assumptions
  7070 It will be apparent from what I have said in Sect 16 and Sect 17 that I accept that in 1985 and 1987, officers of the Bell group represented to the banks that the on‑loans were subordinated and that the banks relied on those representations. I accept that the banks believed that the BGNV on‑loans were subordinated and that they conducted their banking relationships with the Bell group on that basis. The question is whether that belief subsisted at the time of the Transactions in January 1990. Apart from the delivery of the negative pledge reports, there is no evidence of any communications on this question until the commencement of the refinancing negotiations in July 1989.
  7071 The status of the bonds was raised by SocGen, SCBAL and NAB during the early meetings in July 1989. Simpson wrote to Walsh (SCBAL) on 24 July 1989. He acknowledged SCBAL’s request for information and said:
  We are able to confirm that the convertible bond issues are subordinated and are postponed to the claims of all other creditors outstanding at the commencement of a winding-up. We trust this answers your query.
  7072 A similar response was given to Willis (NAB) on 26 July 1989. Edward (SocGen) asked Simpson for information about TBGL’s contingent liabilities. Simpson replied that ‘there is also a guarantee of the convertible bonds of $530 million … this guarantees the punctual payment of principal, premium and interest on the convertibles’. Edward’s memorandum to SocGen’s credit committee demonstrates he was under the incorrect belief at the time (which he confirmed in cross‑examination) that the bondholder’s debt stood ‘behind the senior bank debt for both principal and interest’.
  7073 Latham testified that he regarded the bonds as debt ranking behind the bank debt whatever the complexities of their structure. Other banks’ witnesses gave similar evidence: they were told that the bonds were fully subordinated and it never crossed their minds that the inter‑company lending might somehow affect the relative status of any of the bondholders.
  7074 At least at this stage, the banks were therefore operating without knowing of the possibility that the bondholders may be able effectively to compete with the banks in a winding up of BGF or TBGL. As I have found in Sect 16 and Sect 17, the effective subordination of the bonds was a causative factor in the banks agreeing to treat the bonds as equity under the NP agreements. For the reasons discussed in Sect 13, there is no reason to suppose that the banks knew (or suspected) that the interposition of a Netherlands Antilles issuing company for tax purposes would somehow negate the subordinated nature of the bonds.
  7075 The evidence of the various bank witnesses, which does not need to be repeated here, is consistent in that they were all surprised when it was brought to their attention that the on‑loans might not be subordinated. This is verified (to a limited degree) by the contemporaneous documents. All of this will emerge in the subsequent analysis of the evidence, in particular following the SCBAL demands. There is no evidence to suggest anything to the contrary and I would therefore see no reason to disbelieve the testimony of any bank officer or lawyer on the question whether, prior to December 1989, they knew or suspected that the on‑loans were, or might rank pari passu with bank debt.
  7076 The statement in the preceding sentence has to be qualified in relation to CBA. The plaintiffs contend that CBA knew as far back as 1985 that the BGNV bondholders would, or would in all likelihood, rank equally with the banks in a winding up. In a memorandum by John Sim on 19 December 1985, he wrote:
  In the event of default by the issuer, all bondholders would rank equally with the banks. However, given the standing of the group it is considered unlikely this would happen.
  7077 At first glance this does some damage to the bank’s case. Sim was not called to give evidence and I will proceed on the basis that it accurately sets out what he then believed. But there are at least three things to be said about the memorandum. First, Sim was a relatively junior officer and his views would not bind the banks. Secondly, the context is the application by the Bell group to have the first BGNV bond issue and the TBGL bond issue treated as equity. It deals with the group as a whole and there is nothing in the wording to suggest that Sim drew any distinction between the BGNV bond issue, the on‑loans and the domestic bond issue. Thirdly, it proceeds from an erroneous base. The statement that all bondholders would rank equally with the banks is wrong. Regardless of what view is taken about the BGNV bond issues and the on‑loans, it could never have been the case that the domestic bondholders would rank equally with the banks.
  7078 There is no evidence that any officer of CBA said to Sim something to this effect: ‘Hang on, that’s wrong; do it again’. But nor is there any evidence that the bank proceeded thereafter on the basis that ‘in the event of default by the issuer, all bondholders would rank equally with the bank’. While I can see why the plaintiffs brought the 19 December 1985 memorandum to my attention, on balance I do not think it shows that CBA knew the on‑loans were unsubordinated.
  7079 The plaintiffs also contend that Latham’s review of the draft 1989 BGF accounts did, or should have, revealed that BGNV’s lending was on the same terms as the other company lending. Although with hindsight it is easy to say that a conclusion of that type might be drawn, it is another thing to suggest that any person should have had made the connection between the inter‑company lending and the possible effect on the status of the bond issues. There is no evidence that Latham, or anyone, else did.
  7080 I think the first time the subordination issue was raised with Lloyds Bank was on 16 October 1989 when Crocker (Creditanstalt) wrote to Latham. In the letter, Crocker’s primary concern was whether the Lloyds syndicate banks might have been in a better position than the Australian banks and whether that advantage would be lost if they proceeded with the refinancing. This thesis was based on the mistaken understanding that the Australian banks, at that time, did not have a guarantee from TBGL. But in the letter Crocker also said he was ‘interested in investigating further what role [BGF] has played in the group’s bond issues in recent years’. It is evident from the documents attached to the letter that Crocker had done some research into the terms of the BGNV bond issues and apparently wanted to see if the BGF bonds were of similar import. He sent to Latham extracts from the second BGNV offering circular and an extract from the TBGL 1988 Annual Report. In this latter document, Crocker highlighted the description of the first BGNV bonds and underlined it as follows:
  The rights of the Bondholders are subordinated in right of payment to the claims of all other unsubordinated creditors of the Issuer in the manner provided in the Trust Deed.
  7081 The inference that the plaintiffs ask me to draw is that Crocker knew, or more likely perceived of the possibility, that the rights of the bondholders were only subordinated vis a vis the issuing company and not necessarily other companies in the group. Thus, it is said that Crocker ‘appreciated that the issue for the Lloyds syndicate was whether the bonds were subordinated to the rights of the syndicate as creditors of BGUK’. But as the banks point out, Crocker appeared more interested in the BGF bond issue. This is because he was concerned to ensure that the BGF bond issue, which was placed with interests associated with RHAC, was not made on different terms, possibly more favourable to RHAC, than was the case with the other bond issues. I do not believe Crocker had any awareness of the on‑loan issue at this stage. This is supported by his memorandum of 20 September 1989 which stated:
  Even if the first legal charges are overturned, [Creditanstalt] would only lose its element of control, the syndicate would still rank ahead of all subordinated creditors and shareholders in any distribution…
  7082 Nor was there any mention of a problem with the subordination of the bonds in the 16 November 1989 credit application. In his witness statement Crocker said that, although he could not recall how or when, at some stage he became aware of the fact that the BGF bond issue did rank behind the bank. This further negates the suggestion that he either was, or should have been, aware that the on‑loans had a different status.
  7083 On 19 October 1989 Lloyds Bank wrote to TBGL enclosing an ‘updated survey of information required’. The survey included a request for detailed terms of the subordinated bonds. As Lloyds Bank had not requested this information from Simpson on 6 October 1989, it is most likely that this was a request made in response to the issues raised by Crocker. But even if Crocker did have any knowledge of the on‑loan issue at this time, there is nothing to suggest he communicated this concern to Latham.
  7084 The subsequent investigations into the issue of subordination are revealed by the evidence only in a piecemeal form. Ascroft’s note of a meeting on 31 October 1989 with Latham, Perry and Ladbury describes one of the subjects discussed as being ‘Subordination Documentation of inter‑company debt’ and noted that P&P were to draft the subordination documentation. The following day, 1 November 1989, Latham met with the Lloyds syndicate banks and took notes. The note first appears to acknowledge the need for further information about the bond issues, but it goes on to say:
  Seek local legal view of bonds. Are they, or not, fully subordinated. Get info from another party. Poss[ible] time bomb.
  7085 Immediately preceding this section it says ‘Funds flow in Bell Group’. There is no evidence that this was a matter raised at the meeting and in the absence of such evidence, it can only be taken to reflect Latham’s state of mind. But it arguably shows Latham appreciated the potential problem created by the BGNV on‑lending. He testified that he simply meant he was concerned whether the bonds themselves were fully subordinated (presumably against the issuer) but comments were made in the course of a discussion about the flow of funds in the Bell group, which may indicate they had considered the on‑lending. In his witness statement, Latham said that he understood that if the bond interest was not a subordinated obligation then the bondholders could potentially threaten the stability of the Bell group. In the absence of any other evidence, for example, the file notes of other bank officers who attended the meeting, I do not believe this note is a sufficient basis for a finding that the status of the on‑loans was referred to in the discussions. But I think it is clear that, in Latham’s mind, warning bells were beginning to tinkle.
  7086 Latham pursued his mission to obtain more information from the Bell group. On 3 November 1989, he telephoned Simpson to ask for, among other things, copies of the trust deed and the issuing prospectus for the bond issues, as well as a ‘history of where the money went’. It may be that this latter point related to the question whether the bonds were subordinated – it could indicate Latham had begun to appreciate the structural issue. The call was made at 3am, which indicates that Latham wanted Simpson to gather the information before flying to London for their scheduled 6 November meeting.
  7087 The vague trail of evidence continues on 6 November 1989 when Crocker and Latham communicated by telephone. Latham’s note included a comment: ‘Obligations of issuer should be subordinated to others [equally] obligations of [guarantor] to all others’. In their witness statements, Crocker and Latham shed no more light on what was discussed. The same day, Latham sent extracts from the trust deeds to Creditanstalt, presumably from materials supplied by Simpson at their meeting earlier that day. The extracts enclosed were the subordination clauses and the covenants clauses from the three BGNV bond issue trust deeds and the terms and conditions from the first BGNV bonds.
  7088 Crocker said that he could not recall asking for or receiving those documents. He said that he did recall wanting to have ‘some understanding’ of the nature of the bond issues. He also said that he recognised that subordination could vary according to whether the interest payment obligation was deferred and whether the subordination operated only on liquidation. He said he ‘wanted to establish what form of subordination this was’. In cross‑examination he said that this was the intention of getting the prospectuses. It was to begin the process of research into ‘bringing the bondholders to the table’.
  7089 The fact that Crocker canvassed the possibility of ‘bringing the bondholders to the table’ reveals that he did not assume that the bondholders were effectively out of the picture by virtue of subordination. But nor does it necessarily mean that he thought this was due to the on‑loans being unsubordinated. He may simply have recognised the possibility that the bondholders had the capacity to affect the fortunes of the Bell group due to their interest entitlements.
  7090 Latham also forwarded copies of the bond trust deeds to A&O. Perry said that, as far as he could recall, the only reason A&O were sent the trust deeds was ‘to enable it to establish whether or not an opinion could be given as to whether or not the entry into of the restructuring documents … would trigger an event of default under them’. The plaintiffs contend that Perry’s explanation is implausible, since the issue was raised at the 1 November 1989 meeting as to whether the bonds were fully subordinated and it was, in Latham’s words, a possible time bomb. Such a review would quickly have confirmed that the bonds were not subordinated in respect of the obligation to pay interest and that the subordination did not operate until a winding up. This may be a logical conclusion and the course of conduct which a prudent lawyer would take, but it really adds little in terms of illustrating any knowledge or belief on the part of A&O (or anyone else) about the status of the on‑loans.
  7091 The plaintiffs rely on the requirement in the terms sheets that all inter‑company debt be subordinated as evidence that the banks knew the BGNV on‑loans were not subordinated. The banks say they are merely boilerplate clauses. I am not sure that I agree with that proposition. As I understand it, boilerplate refers to the standardisation of a legal document’s structure and language by the development (and use) of apparently routine and often pre‑printed provisions that are rarely changed. A term that all inter‑company indebtedness be subordinated hardly fits that description. But this provision was included in the terms sheets prepared by Westpac on 19 September 1989, well before there was any suggestion of a problem with the then status of the on‑loans.
  7092 Nevertheless, the subordination of the intra‑group debt can only have been designed to avoid, in a liquidation, money flowing out to any external creditors via the various Bell subsidiaries. As discussed later, the banks appear to have had a belief, but not specific knowledge, that there were likely to be at least some (although minor) external creditors who might rank equally with the banks’ lending in a liquidation. They hoped to exclude at least some of these by effecting intra‑group subordination. But it was not the case that this clause in the terms sheet was directed at BGNV and the bondholders. On the contrary, the evidence shows that BGNV had not been considered at all at this stage. Indeed, as is discussed below, the wording of the draft subordination deed did not cover BGNV’s lending to BGF. This supports the proposition that no particular thought was given to this lending at the time.
  7093 A&O reviewed the bond issue trust deeds in November 1989, pursuant to the condition precedent in the terms sheet, to establish whether the Transactions could constitute an event of default. The plaintiffs contend that this investigation took on a broader scope and revealed, or should have revealed, the on‑loan issue. This is not supported by the correspondence surrounding the advice. In an internal memorandum, Perry asked a colleague to ‘examine the note trust deeds and review the position regarding subordination and cross‑default’. Read in context, I believe he is referring to the subordination of the convertible notes. This is a consequence of the concerns raised by Crocker and does not relate to the on‑loan subordination. Other file notes made early in December 1989 are to similar effect. They suggest that the investigations into the trust deeds and the nature of the subordination was focussed on events of default. For example, the enquiry was to encompass the question whether the trust deeds contained a negative pledge that would be breached by the taking of security.
  7094 Latham had analysed the inter‑company loans involving BGF and would therefore have known of the $352 million debt to BGNV, but the knowledge of this fact alone could not be said to lead to any conclusions about the status of the on‑loans.
  7095 The plaintiffs also point to an undated note by Perry that said: ‘Can BGNV subordinate its loan to BGF?’ The plaintiffs argue that this question is one which would only arise if there was an understanding that the BGNV on‑loans were not subordinated. The plaintiffs say this note must have been written prior to 10 December 1989, given the contents of Perry’s letter to Horsfall Turner and Nicholas Watson on that date, where Perry noted Watson’s preliminary view that the bond trust deeds contained no negative pledge. But Perry’s note appears to address a slightly different question. He is not asking whether the bond trust deeds contained a negative pledge but rather if the transaction breached the (existing) negative pledge agreements.
  7096 It can be seen that there are a number of documents which allude to the possibility that Lloyds and (or) A&O were beginning to investigate the effect of the inter‑company lending on the status of the bondholders. But I do not believe that the documents demonstrate any particular degree of knowledge of this issue. They go no further than to suggest that the problem, by then, had arisen as a possible consideration.
  7097 Latham’s comments about a possible ‘time bomb’ in the 1 November 1989 note and the apparent consideration in the 6 November 1989 note of the effect of inter‑company lending support this view. In addition, I again note that Latham, in his investigations into whether the bonds were subordinated, sought details of the inter‑company lending. All of this, taken together, appears to indicate that Latham had begun to consider what effect the inter‑company lending might have on the status of the on‑loans.
  7098 There are two other pieces of evidence that also support the view that the on‑loan issue had arisen as a consideration in or about November 1989. They will be discussed in succeeding sections. First, on 20 December 1990 Perry told Ferrier (SCB) that the on‑loan problem had been ‘on the back burner’ for some time. Secondly, Jessett (Dresdner) made an annotation on his copy of legal advice received from A&O on 2 May 1990. Beneath the statement ‘it is most likely that these loans were made by BGNV to [TBGL] and [BGF] on an unsubordinated basis’, he wrote ‘this is what I said 6 months ago’.
  7099 The plaintiffs rely on Weir’s review of the bond trust deeds in December 1989. But Weir’s evidence, which was not seriously challenged, is that he only considered the nature of the subordination between the bondholders and the issuing company. He had no reason at that stage to consider the on‑loans. While I think the review may have been a little wider than that (to include, for example, events of default) there is no other evidence to support the proposition that in early December 1989 he had any knowledge of a problem with the on‑loans.
  30.18.3. The SCBAL demands
  7100 The cathartic event in this analysis is the issue of the SCBAL demands on 7, 8 and 11 December 1989: see Sect 24.1.3.6 and Sect 30.16. As indicated in the first of those sections, I have no doubt Aspinall put to an officer or officers of SCBAL or SCB the proposition that on a liquidation the bondholders might rank equally with, or even ahead of, the banks. Quite how they could have ranked ahead of the banks is something of a mystery but that is of no moment for present purposes. And nor is it of any moment that, according to my findings, Aspinall did not believe in the substance of the argument. He raised it as a lever to win ground in a commercial negotiation. Many metaphors and similes spring to mind as to how Aspinall’s statement affected events in the days and weeks after this conversation, but cats being among pigeons will do.
  7101 Farmer (SCB) wrote to Love on 15 December 1989. This was the first time in which the possibility of the bonds not being effectively subordinated was raised in explicit language. Farmer said:
  Aspinall, in a conversation earlier today, claimed that subordinated debt would either share in any receivership or liquidation on the same level as the existing bank debt or would rank ahead of the existing bank debt. Can you confirm this is not the case?
  7102 There is evidence that Aspinall’s conversation involved at least Altringham and possibly others, but this is of little consequence. The conversation evidently sparked SCBAL into renewed action. MSJA, who had already been engaged to advise SCBAL on its demands, was thus engaged in respect to this issue as well. Stumbles (MSJA) was sent a copy of Farmer’s letter, while Walsh sent a fax to Thompson (MSJA) containing the cover page and some extracts from the second BGNV offering circular (which included the provisions relating to status, guarantee and events of default). Walsh also reviewed the offering circular for the BGNV bond issue and the negative pledge documentation.
  7103 Walsh also sent to MSJA a handwritten note which contained a diagram and related notes containing his rough thoughts about what would happen in a winding up of the group. The notes appear to treat BGNV as competing pari passu with the banks. Only the Australian banks figured in Walsh’s calculations as I think he still assumed the Lloyds syndicate banks had not lent funds to BGF. Walsh obtained the figures from the 1989 mid‑year accounts. He evidently forecast a return to the Australian banks of about 34 cents in the dollar. This was a rough estimate: he assumed that if BGF called on its inter‑company debts, it would receive only $500 million. He also appeared uncertain about how much would be forthcoming from TBGL.
  7104 Aspinall, by letter to Altringham dated 18 December 1989, referred to their conversation on the 15 December 1989 and added:
  You should note that the rights of the bondholders are subordinated in right of payment to the claims of all other unsubordinated creditors of the issuer. This means that the banks would rank ahead of the bondholders in a liquidation. However, as the banks are unsecured creditors we are of the view that any liquidator would look at the rights of all creditors including the bondholders before any decision was taken as to any creditors [sic] entitlement.
  One of the purposes for the extension of the existing facilities is to enable the banks to become secured creditors, a position all view as more preferable.
  7105 This is a somewhat differently worded discussion of the subordination issue than Farmer’s paraphrasing of the conversation in his letter to Love. Minogue (SCB) London wrote to Knox (SCBAL) on 18 December 1989 and said:
  As discussed over the phone we have spoken to Aspinall at Bell Group.
  Aspinall has sought to suggest that if Bell Group is liquidated now (i.e. the refinancing does not go ahead and the bank’s security does not harden) we would have to share with the subordinated debt holders on a pari passu basis. His arguments do not seem to be very strong or he would have used them more powerfully but some element of doubt must be entered here.
  7106 It seems that some confusion remained at this time. The correspondence does not distinguish between the BGNV bondholders and the other bondholders. Aspinall denied ever expressing the view attributed to him by Farmer on 15 December 1989. He admitted raising the position of the bondholders but it was to note ‘what would happen if the house of cards fell down, ie, they would sit there with everybody else and the fight would begin’. I have dealt with this in Sect 24.1.3.6. I believe Aspinall did raise the issue but I think it was in the context of the subordinated status of the bonds, rather than the on‑loans.
  7107 As for the letter, Aspinall said it was drafted by ‘one of the legal people’ and although he signed it as being a commercial bargaining position he could put forward in a time of extreme urgency, he denied ever thinking other than that the bondholders would rank behind the banks in a liquidation.
  7108 But whatever Aspinall meant to say, it was evidently interpreted by SCBAL to mean that, or alerted them to the fact that, the BGNV on‑loans might not be subordinated.
  7109 By fax dated 18 December 1989, Stumbles responded to SCBAL’s request for urgent advice and noted:
  We would like to see the documentation regarding the subordinated debt before we opine conclusively on the issue. However we suspect that whilst it is unlikely that the subordinated debt will rank ahead of unsecured creditors, there is a risk that it may rank equally with unsecured creditors notwithstanding the subordination arrangements.
  7110 From this it can be concluded that SCBAL and MSJA (as solicitors for SCBAL), were aware that the on‑loans might not be subordinated and that the BGNV bondholders might compete pari passu with the banks. It is a reasonable inference that the status of the on‑loans was the reason MSJA expressed the conclusion mentioned above. Having made the demands and having seen the materials transmitted to them by Walsh, they would have been aware the bonds themselves were subordinated. They were not merely raising a British Eagle concern about the subordination, as is reflected in subsequent communications. Walsh acknowledged that he read MSJ’s advice as indicating there was a risk that the bondholder’s debt may rank equally with the banks and that this was the reason for the withdrawal of the demands the same day.
  7111 In light of this, Walsh’s testimony that he could not recall requesting or receiving any more conclusive advice, having any further discussion with MSJA about the issue, or making any enquiry of MSJA as to what further documents they required seems surprising. This is underlined by the fact that SCBAL contemplated the possibility of pursuing its demands following further investigations into the on‑loans.
  7112 Up until this time, SCB and SCBAL had taken the view that they should not advise the other banks about the demands. As Walsh put it, issuing the notices was a banker–client issue as opposed to a creditors–client issue. In his view, advising the other banks that SCBAL had issued a notice of demand risked inspiring at least some of those other banks to take a similar course and, if they did, the process was likely to become irreversible. It seems, however, that HKBA became aware of it: see Sect 30.21.4. In any event, on 18 December 1989, the SCBAL demands were withdrawn and the possibility that the bonds might not be effectively subordinated became common knowledge.
  7113 Following receipt of the legal advice, Walsh spoke separately to Weir and Stow on 19 December 1989. Stow agreed to ask A&O for comment. Walsh could not recall specifics, but gave evidence that he would have identified the risk that the subordinated debt issued by BGNV might rank equally with the banks. This is also evident from the fax sent by Walsh (signed by Love) to Farmer the same day, which also shows that Walsh thought Weir did not seem to appreciate the risk and he had no previous knowledge of the issue. It was always expressed as a ‘risk’ rather than a ‘fact’ that the on‑loans were unsubordinated.
  7114 Weir said in evidence that he could not recall when he first became aware of the on‑loan issue. He said he had no recollection of the 19 December 1989 conversation with Walsh. He agreed that he understood the problem at least by 9 January 1990 upon reading the Chadwick credit application, but on cross‑examination said he thought he first became aware in the last few days of December 1989 or the first few days of January1990. I am satisfied Weir was told by Walsh on that date, but it is possible that he did not grasp the full significance of the on‑loan issue at the time. It seems likely that Weir was the source of Chadwick’s knowledge of the problem. I note in passing that, unlike the SCBAL correspondence, Chadwick’s credit application does not express the on‑loan subordination problem as a ‘risk’. It puts it in more definite terms.
  7115 As promised, Stow discussed the matter with A&O. Stow sent a fax to Perry that day:
  The position he [Walsh] sees is that in fact it does not get the entire subordination of every debt in the Group on an inter‑company basis and in particular he is concerned that the Bell Group NV debts which resulted from an issue of bonds by Bell Group NV… [are] not subordinated.
  Could you in particular look at Recital E in the subordination clause and see whether you agree with that comment. It particularly relates of course to the trustees in the UK and whether in fact we can make that loan by BGNV up to BGF subordinated. He advised me that the total liabilities of BGF is, in addition to the BBNV money of $346,000,000 as follows…
  7116 It is not easy to interpret or understand this communication. Recital E stated that the subordinated creditors (which included BGNV) had received direct or indirect financial support from the borrowers. I am not sure why this issue only arose when they were told about the on‑loan problem. It must have been evident that, regardless of the status of the on‑loans, BGNV had lent money to BGF, not the other way around. Recital E was also wrong, on the same basis, because BPG and WAN were creditors of BGF.
  7117 Stow gave evidence that he now read his fax as asking whether there was anything in the trust deeds that would preclude subordination of the on‑loans. He also said that he was expressing Walsh’s concern that the draft subordination deed only referred to loans made by BGF and not loans made to BGF and thus would not cover BGNV’s lending to BGF. This is a reasonable point – it would be possible to query whether BGNV’s lending was covered by the subordination deed without any particular concern as to possible competition from the bondholders.
  7118 The banks say that this is supported by Walsh’s letter to Weir and Browning of 20 January 1990 in which he commented that the recital did not appear to represent the BGNV situation because BGNV had lent money to the borrowers, rather than borrowed money from them.
  7119 If the draft subordination deed was limited to loans made by BGF and not loans made to BGF, it seems to be at odds with the draft terms sheets. For example, the A&O draft of 22 November 1989 said that all inter-company loans to the security providers (including the existing borrowers) from related corporations as defined in the Companies Code should be converted to fully subordinated debt. BGF was an ‘existing borrower’ and BGNV, while not a member of the NP group, was a related corporation. Initial drafts of the subordination agreement included BGNV as a subordinated creditor.
  7120 Although it is possible to read Stow’s note as saying Walsh was concerned that the BGNV on‑loans are ‘not subordinated’, in the context of the memorandum it is arguable that he meant to say the BGNV loans to BGF are not subordinated under the deed as it then stood; that is, the draft deed did not effectively capture that lending. There was some debate about whether the phrase ‘and in particular’ was conjunctive or disjunctive; that is, whether Stow was elaborating on his previous comment or was introducing a new concern. I believe it should be read disjunctively. Stow had mentioned Walsh’s concerns with the drafting of the deed and was then explaining the reason why it was important. Given the evidence I have previously discussed, Walsh was aware of the on‑loan issue and it seems unlikely that he would have raised a concern about the drafting of the subordination deed without mentioning to Stow the reason why it was so important to capture the BGNV on‑lending within the subordination deeds.
  7121 In his evidence, Perry said he could not specifically recall reading or understanding Stow’s letter. His explanation as to his current reading were the same as Stow’s. But other aspects of his evidence suggest another construction. In cross‑examination, this exchange occurred:
  The reference then of concern to Mr Walsh that The Bell Group debts which have resulted from an issue of bonds is not subordinated. Do you see that?—Yes.
  You would have understood that, I take it, to be the BGNV debts, to wit the lending by BGNV of the money obtained from the bond issue to other members of The Bell Group. Is that correct?—Yes.
  That would be picked up in your understanding, or introduced in your understanding, by the reference to the subordination of every debt on an intercompany basis. Is that correct?—Yes.
  7122 I think Perry can be taken to have understood the letter in the manner attributed to Stow above. As this cross‑examination shows, the fax explicitly raised the concern that the ‘Bell Group NV debts which resulted from an issue of bonds by Bell Group NV… [are] not subordinated’. This would have alerted Perry to the importance of the question as a matter of substance. I think that in this respect, Perry’s evidence should be regarded as reconstruction. Additionally, given Perry accepted that Stow was asking if there was anything in the trust deeds which might prevent a subordination of the BGNV loans to BGF, the only real reason why this would be a concern is if there was an assumption that the on‑loans may not have been subordinated.
  7123 Ferrier (SCB) wrote an internal memorandum to Love (SCBAL) on 20 December 1989 in which he said:
  I today spoke [to] Damien Perry of [A&O] The intention of this call was to ask him for a copy of the Subordination Agreement, however I took the opportunity to discuss the subordination issue in a wider context. Apparently this has been an issue on the back burner with the various lawyers involved with this deal for some months and they are all well aware of the fact that the intercompany claims of the various issuers effectively defeat subordination. As a result of this, they have proposed this Subordination Agreement which stems from the Covenant in the Agreement that all intercompany debt will be subordinated. Clearly this subordination will not be truly effective until a six months time period has passed and, even then, there will be a constant lingering doubt in view of the fact that there is an argument that the lack of corporate benefit in giving these Subordination Agreements would defeat the subordination. Damien Perry made the point that this issue affects the Lloyds Group slightly less than it does the Australian lenders, given that they are lending to a company to which the public debt issuers did not lend funds themselves. (emphasis added)
  7124 This memorandum is unequivocal in its terms and I see no reason to question its accuracy. Perry said he could not recall any conversation. He said that the only subordination issue that had been on the ‘back burner’ for some months was the subordination of inter‑company debts in the BGUK group. But in light of the evidence previously discussed, I have difficulty with this explanation. The work being carried out by Latham and A&O indicates that there was at least a suggestion that the subordination questions would need to be investigated. Ferrier’s memorandum goes further and suggests that the entire reason for the proposed subordination agreement was the BGNV on‑loan issue. I do not think this is so. The draft subordination deed, in its early form, did not cover BGNV’s lending to BGF.
  7125 Looking at the memorandum in its entirety, Ferrier and Perry could not have been talking about anything else other than the on‑loan issue. Ferrier was not called to give evidence and his absence was not explained. It is apparent that Perry told Ferrier that the Lloyds syndicate banks were in a better position than the Australian lenders because (to paraphrase), it was believed at the time that the syndicate banks had not lent to BGF (only BGUK). This was not something Ferrier was likely to have been told by anyone else other than Perry, and as the plaintiffs rightly point out, it is not a judgment one could form off the cuff. It shows Perry had thought about the issue for some time.
  7126 Nonetheless, Perry’s knowledge still only remained at the level of suspicion, possibility, or at most, a perceived likelihood that the on‑loans were unsubordinated. Perry, in both his witness statement and cross‑examination, stated that at 20 December 1989 he did not know one way or the other whether the BGNV on‑loans were subordinated and that it was not a matter to which he turned his mind at all. I am comfortable with the first part of those claims, but not the last. In cross‑examination, Perry said that he proceeded on the assumption that the on‑loans were not subordinated and that the claims of BGNV would rank pari passu with the banks.
  7127 According to Perry, his role was to achieve the subordination of all relevant intra‑group debts as required by the banks and it was unnecessary to investigate whether the BGNV on‑loans were in fact subordinated. There is some force in that assertion. The drafting of the subordination deeds did not strictly depend on the factual state of the on‑loans. In his conversations with Stow and SCBAL, Perry was never asked to advise on the factual position of the on‑loans. He was only informed that it was possible the on‑loans were unsubordinated to ensure that the subordination deeds could still be executed as planned. He said he did not have the requisite information from the Bell group to reach a definitive conclusion and he did not make further investigations. I accept that he did not have the information necessary to reach a firm conclusion. But he knew enough to advise Lloyds Bank to proceed on the assumption of pari passu competition.
  7128 Browning’s evidence is similar to Perry’s. She said it was likely she received and read Stow’s fax at some stage. Upon re‑reading the document, she said she could not understand Stow’s point and she denied having any recollection about whether the BGNV bondholders were effectively subordinated. There is no other evidence of her knowledge at this stage and it probably does not matter greatly since Weir’s knowledge is a sufficient guide to Westpac’s position.
  7129 The paper trail shows that Farmer (SCBAL) contacted Perry to obtain a copy of the proposed subordination agreement. Perry obtained the document from Stow and passed a copy on to SCBAL. It appears from a fax of 21 December 1989 from Stow to Perry that Perry looked at the subordination issue at Stow’s request and reported back to Stow
  7130 After the withdrawal of the SCBAL demands, a decision was made to proceed with subordination deeds for all the key companies, on the assumption that the on‑loans may be unsubordinated. Walsh accepted this and also noted that they proceeded on the basis that there was a ‘real risk’ the subordinated bondholders of BGNV ranked equally with the banks. It appears from a memorandum of 22 December 1989 from Walsh to the Adelaide office that SCBAL decided that, given the risk of competition, participating in the Transactions was the only reasonable way to protect its position and it proceeded to withdraw its demands. The argument contended for by the plaintiffs, that SCBAL withdrew its demand because it knew the on‑loans were unsubordinated, is not supported by the evidence.
  7131 That was not the end of the consideration of the subordination problem. Further discussions took place involving the Bell directors, certain of the banks and the banks’ lawyers. SCBAL pressed TBGL for further information, such as any written documentation on the on‑loans. Aspinall wrote to Ferrier on 21 December 1989 informing him that he and Simpson were pursuing the issue. He also stated that ‘[SocGen has] raised the same issue today after conversations with your bank’. I accept this as being sufficient to establish knowledge on the part of SocGen.
  7132 Simpson sent a fax to Ferrier the next day advising him that they had been unable to find anything relevant to the issue in their Perth offices but had requested copies of minutes from BGNV and any other documentation they may have. From this I would conclude that Aspinall and Simpson were aware of the issue. Aspinall claimed to have no recollection or comprehension of such an issue and maintained it was always his belief that the bondholders were subordinated. But Aspinall’s initial communication to SCBAL and his follow‑up correspondence to Ferrier portray an understanding.
  7133 If there was any doubt about Aspinall and Simpson’s comprehension of the precise nature of the issue, it is dispelled by the subsequent enquiries made by Mary Tagliaferri (a Bell group or BCHL legal officer) to Equity Trust. On 22 December 1989, Tagliaferri wrote by fax to Pim Ruoff (the sole director of Equity Trust) asking him to check the minute books to see if the on‑loans had been minuted. Tagliaferri explained the purpose of the request:
  The information is required to enable us to reply to a query raised by our banks as to whether or not the loans from [BGNV to BGF and TBGL] were subordinated to creditors of The Bell Group Ltd group of companies…
  7134 In Sect 28.3.1 I have set out Taglieferri’s letter in full and explained its significance. It should be noted, however, that although this letter was sent, there is no evidence that it was actually received or responded to by Equity Trust. Nor is there any evidence that the request for information was renewed, either by the banks to the TBGL directors or by the TBGL directors to Equity Trust.
  7135 On 21 December 1989 Stow and Walsh had a telephone conversation. Stow made a note of the conversation but it is a little too cryptic for comprehensible reproduction here. It is sufficient to say that the note appears to show a real comprehension of the BGNV on‑loan issue and the seriousness of the potential consequences for the banks. It is a further communication which suggests that Walsh had more than a tentatively held view that the BGNV bondholders might compete pari passu for BGF’s assets. It could probably be classified as a belief that such competition was ‘a real risk’. I would also attach a similar state of mind to Stow and P&P. In his witness statement Stow said that he was unable to say, on present recollection, what the note meant. But in cross‑examination he effectively conceded that there was no other interpretation other than it displayed a suggestion by Walsh that BGNV’s debt to the bondholders might rank or compete with the banks’ debts.
  7136 SCBAL’s views are even more clearly shown by two internal memoranda dated 22 December 1989. The first, from Ferrier to the SCB credit committee, states that the bank has little alternative other than to participate in the refinancing since ‘the bank debt currently ranks pari passu with the subordinated debt’. The second, from Patten to the London Director of SCBAL, states that, following Farmer’s letter to Love of 15 December 1989, they had ‘investigated Aspinall’s claim that the subordinated debt would share in any liquidation on the same level or ahead of existing bank debt, and found this to be the case’. These communications suggest a firming of the belief within SCBAL that the on‑loans were unsubordinated. Walsh asserted that this was merely a standard practice of taking the most conservative route (that is, a worst case scenario approach). I think a better explanation would be that these were preliminary views. It appears that the bank still did not appreciate the difference between the BGNV bond issues and the BGF and TBGL issues. Nor had they completed the full investigations into the existence of any documentation held by BGNV. Nor is there anything to show that these statements represented the views of Walsh, the key figure in the negotiations.
  7137 In this instance, I think the apparently plain wording of the documents has to be discounted when taken in the context of the evidence as a whole. SCBAL’s account report as at 31 December 1989 refers to ‘our uncertain position regarding inter‑company loans/Bell Group NV $385 million subordinated Bonds’. I think this demonstrates that the communications of 22 December 1989 were not necessarily authoritative of SCBAL’s views. Nevertheless, I doubt that SCBAL, in internal correspondence, would have greatly misstated their views. I think the evidence as a whole, particularly these two letters and Walsh’s conversation with Stow, shows that SCBAL regarded the possibility of competition from the BGNV bondholders as a real risk.
  7138 MSJL was also aware of the problem. Ascroft made a note of a 21 December 1989 conversation with Stow and Peek in which she recorded, among other things, ‘Dutch money not subordinate’ and ‘doubt about it being subordinated’. In oral evidence, neither Peek nor Ascroft could shed much light on the meaning of the note or the substance of the conversation. But Ascroft did recall ‘being told something about the subordination of either the BGNV bonds or another loan made to or from BGNV’. In light of her note, the only reasonable conclusion is that they were informed that the BGNV on‑loans may not be subordinated.
  7139 I think A&O and Lloyds Bank had a similar state of knowledge. Perry and Latham conversed on 21 December 1989. Again Latham’s note is a little too cryptic to warrant reproduction. But I believe the note shows Latham had been informed of the on‑loan issue. This seems highly likely since Farmer and Perry had discussed the same issue the previous day. Perry and Latham discussed whether the proposed subordination deed would be effective. This suggests that they recognised the potential competition of the BGNV bondholders and regarded a subordination deed as a possible way around this. The reference in the note to ‘two Australian banks’ reinforces the earlier comment by Aspinall (in his letter dated 21 December 1989) that the issue had been raised, not only by SCBAL, but presumably also by SocGen.
  7140 Latham’s note also demonstrates that consideration was directed to whether the proposed refinancing structure would trigger an event of default under the bond issue trust deeds. Perry said he had no recollection of the conversation, but on his present reading, the conversation was about whether the refinancing would be lawful or breach any covenants in the bond issue trust deeds. He did not address the other issues raised in the note.
  7141 This note also reinforces Latham’s knowledge of the issue. It is hardly likely, given the apparent subject matter of the discussion, that Latham was not informed at this time. Latham said he had no recollection of the conversation but his reconstruction was that the conversation was about whether there was anything in the trust deeds which might prevent the BGNV lending to BGF being subordinated. Yet under cross‑examination, he accepted that the following were elements of the conversation:
  (a) the subordinated convertible bonds;
  (b) that BGNV was the issuer of those bonds;
  (c) that there was a loan from BGNV to BGF;
  (d) the proposed subordination deed;
  (e) whether the subordination of the loan from BGNV to BGF would cause a problem or be effective;
  (f) a reference to two Australian banks, one of which was SCBAL;
  (g) SCBAL had raised a concern with the solicitors as to whether the subordination deed dealt with the loan from BGNV to BGF;
  (h) whether the subordination of the loan from BGNV to BGF might cause an event of default under the terms of the bonds;
  (i) the trust deeds for the bonds did not contain a negative pledge; and
  (j) the cross‑default provisions in the trust deeds.
  7142 If Latham considered all of these things he must, as a matter of logic, also have considered the status of the on‑loans. I think it highly likely that given A&O’s knowledge, Latham and Lloyds Bank also knew at this time. Although Latham said in his witness statement that he had no recollection of being informed about the on‑loans prior to February 1990, he accepted in cross‑examination that by December 1989 or January 1990 he knew that there was no positive evidence that the BGNV on‑loans had been subordinated and, absent such evidence, they had to proceed by seeking subordination of those loans.
  30.18.4. The events of January 1990
  7143 It is to be remembered that on 28 December 1990, NAB was successful in an application to have a receiver and manager appointed over BBHL. On or around 3 January 1990, NAB decided to postpone indefinitely its participation in the Bell group refinancing and informed Weir of the decision. One reason was a public perception issue if the bank were to enter into a transaction with one part of the BCHL group while forcing another part (BBHL) into receivership. But this was not the only reason. NAB held concerns as to the financial viability of the BCHL group, following the appointment of receivers and the flow‑on effect on the viability of the Bell group. NAB recognised that TBGL’s ability to service its facility was at least partly dependent on TBGL being able to recover dividends or fees from BRL, JNTH and GFH, all of which NAB considered ‘doubtful’.
  7144 Consequently, NAB decided that it would ‘not sign any documents for the time being’. At a meeting between Weir, Stow, Peek, Browning, Peter Watson (S&W) and Ian Morison (S&W) on 3 January 1989, Weir is reported to have said that ‘NAB won’t sign until the outcome of present proceedings are resolved and may never depending on the outcome’. Weir must have obtained that information from Keane. Weir could not recall specifically, but agreed it was likely that given the importance of NAB’s decision, he would have informed the other Australian banks and Lloyds Bank. It is clear that SocGen, SCBAL, CBA and HKBA were all informed that NAB was refusing to sign anything until the BBHL court action was resolved. P&P, MSJ and A&O were also informed.
  7145 It is clear from the subsequent communications that NAB became aware of the on‑loan issue and that it influenced its subsequent behaviour. Weeks (SocGen) telephoned Keane to discuss NAB’s motivations. As recorded in Keane’s file note, Weeks informed Keane on 3 January 1990 that SocGen had taken the view that it would be no worse off and possibly better off by entering into the transaction. According to the note, Weeks told Keane this was especially so because of the potential claim of $30 million by the DCT and
  potential problem with validity of subordination of a large portion of the [convertible bonds], as some of the bonds were issued by [BGNV] then on‑lent to [BGF] – the bonds would be subordinated to creditors of BGNV but not necessarily to those of BGF. Therefore, the funds … may rank pari passu with the bank debt, and this could seriously erode the previously assumed asset cover.
  7146 Keane replied that he ‘was not aware of this problem and that it may impact upon [NAB’s] position’. Keane then took up the issue with Weir who
  confirmed the problem as far as they and [P&P] could tell from the available documentation, and added that this was a reason that other banks were eager to sign up. [Weir] explained that the problem had only been found late in the previous week and he had thought that we were aware of it.
  7147 This helps to pinpoint the date Weir became aware of the issue. These communications also reinforce the view that SocGen was also aware of the on‑loan issue. Keane consulted NAB’s legal officer, Derham, who ‘confirmed the problem from the information available and subject to a review of the documentation’. Keane testified that he was distinctly unamused by the revelation that the BGNV bondholders might rank pari passu with the banks.
  7148 NAB asked Westpac whether there was any documentation of the on‑loans and, like SCBAL, came to the realisation there was, at that time, nothing available to ease the concerns. In light of that realisation, Keane (with the agreement of Derham and Frank Cicutto) decided that NAB would be better off participating in the refinancing. In cross‑examination he accepted that the on‑loan issue was the most significant reason that changed NAB’s mind. The public perception problem mentioned earlier caused NAB to take advice from senior counsel representing them in the BBHL action. Counsel proffered the opinion that it created no legal problems and NAB decided that it was ultimately better to rejoin the refinancing.
  7149 In his witness statement Keane included a passage setting out his comprehension of the significance of the on‑loan issue:
  The doubts about the effectiveness of subordination of the bondholders’ debt did not affect my assessment of TBGL’s financial position … However the news did impact upon my assessment of the consequences for NAB of pursuing the alternative courses of action. If the bondholders’ debt was not effectively subordinated to the banks’ debt, then, in my view, pursuing a demand on the Bell Group through to the liquidation of the Group carried a greater risk of NAB incurring a loss on the loan.
  7150 I am not entirely sure I understand the distinction. Perhaps he was saying the ability of the companies to pay their debts as they fell due was not affected by the treatment of the bonds as subordinated or unsubordinated. The second part of the quote seems clear enough. If the banks and the bondholders ranked equally in a liquidation there was a risk of a shortfall. But the reason for him saying it would not affect his ‘assessment of TBGL’s financial position’ is not clear to me. Be that as it may, the evidence leads me to conclude that NAB knew, as did the other banks already discussed, that the risk of competition from the BGNV bondholders was a real possibility.
  7151 The subordination problem was the subject of specific consideration when the Australian banks gathered on 24 January 1990. On that date, all Australian banks were represented at a meeting during which the on‑loan problem was discussed: see Sect 30.10.2. Weir presented his diagram: see Sect 30.12.2. Weir said the purpose of the diagram was to assist in explaining to the other banks’ representatives his view that the banks were not exposed to loss. On his calculations, the Australian banks would recover 100 per cent of their exposure, whether or not they became secured, and whether or not the group’s debt to the BGNV bondholders effectively ranked pari passu with bank debt. It is inconceivable that the last point would have been raised without some discussion as to what it meant.
  7152 This is particularly important in relation to CBA, for whom there is very little other evidence of their knowledge. Smith’s note of the meeting does not display any detailed understanding of the on‑loan issue. In relation to subordination, it merely notes the change in tack which was decided, namely, to get a separate subordination deed for certain companies (including BGNV) and the change in TBGL’s obligation in that respect. Smith, along with the other CBA witnesses (Latimer, Poulter, Payne and Dennis), maintained that he was never aware of the on‑loan problem and always believed that the bonds were effectively subordinated behind the claims of the banks in a winding up. He did not recall ever being told otherwise.
  7153 The banks contend that whatever may have been discussed at the 24 January 1990 meeting, Smith did not understand or recognise the issue, and this is reflected by his failure to mention it in his note of the meeting. This may be so, given he was relatively inexperienced and not as familiar as the other banks’ officers with the Bell group (he took over the file from Dennis on about 20 December 1989). But it seems to me that the discussion which took place presupposed knowledge of the basic issue by each of the banks. I do not accept that Smith failed to understand what was discussed.
  7154 This conclusion is supported by Weir’s letter dated 2 February 1990 to all banks (discussed below). In it, Weir referred to ‘the inter‑company loans and their “apparent” effect on the status of the subordinated bonds’. Weir’s language indicates that all the Australian banks were already aware of this issue and it had been discussed at some stage prior to 26 January 1990. Given the significance of the issue, and the tenor of the discussions between and within, for example, SocGen, NAB and Westpac, it is probable that CBA would have been apprised of developments. I draw a similar inference in relation to HKBA.
  30.18.5. The Westpac credit applications
  7155 On 8 January 1990, Westpac’s position as Security Agent was formalised in the ICA and the STD. I wish, therefore, to spend a little time on the 9 January 1990 credit application (or review) prepared by Chadwick and submitted to the Corporate Banking Division.
  7156 Chadwick had not been involved in the negotiations for the refinancing. He was the Chief Manager of Corporate Banking for New South Wales and, according to Weir, was in Western Australia to provide head office in Sydney with an independent report on the position of TBGL and BCHL. The credit application was essentially a report to the Chief Manager, Credit, on Westpac’s exposure to the BCHL group generally. One of its purposes was to advise whether Westpac ought to make a provision for loss in respect of such exposure. As the banks rightly note, the report recommended no provision be made and as such called for no decisions to be made. But it nonetheless was an important document which exposes the thinking of a senior Westpac official. As a result, I would not lightly discount the views expressed in it.
  7157 In the review Chadwick ran some calculations based on TBGL’s balance sheets as at 30 June 1989. Assets were recorded at $1.6 billion and liabilities at $600 million, producing a surplus of $1 billion. On this basis Chadwick concluded that ‘prima facie, bank facilities $260 million appear safe even on a pari passu sharing with all other creditors’. But these calculations did not take into account the possible competition from BGNV, as he went on to note:
  There are some complications which cloud this view.
  (a) Approximately $416M of [convertible bonds] have been issued by [BGNV] and on lent to
  (a) TBGL and
  (b) BGF.
  Whilst subordinated at the issuing company level, in a wash-up, the loans to TBGL & BGF in fact rank equally with Banks and other creditors at the level of TBGL & BGF.
  7158 He also commented that the balance sheet values of the BRL, JNTH investments and the WAN masthead were too high based on current market values. Chadwick then adjusted his previous calculations to allow for all the following matters:
  A 1606 – 446 – 187 = 973
  L 600 + 416 = 1016
  D 43
  7159 The figures of $446 million and $187 million were subtracted from the previous figure of total assets to allow for Chadwick’s re‑evaluation of the values of BRL, JNTH and WAN. The additional liability of $416 represents the on‑loans from BGNV. It seems, therefore, that in his calculations Chadwick was assuming that the bondholders would recover in full. I note in passing that if total liabilities ($600 million) are subtracted from the total assets ($973 million), there would be a surplus of $373 million in which the banks and the bondholders would share pari passu. That would not have been sufficient to have allowed full recovery by the banks and the bondholders if they were competing on an equal footing.
  7160 Although the wording of Chadwick’s comments about the on‑loans is expressed in unequivocal terms, it is prefaced by the comment that it ‘clouded’ the balance sheet situation, as if there were some uncertainty about it. Chadwick went on to conclude that ‘in light of this [the] banks have moved to strengthen their position and have negotiated the following securities’. He described the proposal to move to a secured position as ‘simply a self‑defence mechanism’.
  7161 In cross‑examination, Weir accepted that he spoke to Chadwick about the on‑loan situation and said that, although he could not be sure, he believed that Chadwick had no other sources of information on this topic other than through him and his colleagues in Perth. Weir denied ever telling Chadwick as a matter of fact that the on‑loans were unsubordinated and maintained that he always had some doubt about the matter. Yet he also accepted that he did not write anything disagreeing with what was contained in the credit application.
  7162 Weir signed Westpac’s 6 March 1990 credit application and review. In it, Chadwick’s paragraph (stating that the on‑loans were not subordinated) was adopted verbatim. Weir said he could not recall whether he actually drafted the application (Youens may have done so), although I do not think it matters much, since Weir was ultimately responsible for the content. He testified that his practice at the time was to concentrate on new developments and as nothing had changed in relation to the status of the on‑loans he would not have concentrated on that section. Further, he said that, if the memorandum had been drafted by someone else, he would not usually change the drafting and would concentrate only on the main message. I accept this explanation and conclude that the paragraph was copied without any (or much) independent thought.
  7163 The same comments were included in remarks made by Weir and Stutchbury and attached to the 22 March 1990 and 20 April 1990 credit applications and reviews. Spring added comments to the latter application and noted that ‘the bonds [issued by the Bell group] are subordinated in name only and service of these is a key issue to the ongoing business of the borrower …’ This may have been correct in relation to those bonds issued by BGNV, but Spring failed to note the differences between the BGNV issues and those issued by BGF and TBGL.
  7164 Despite the apparently unequivocal language used by Chadwick, and repeated by Weir, I do not believe that it establishes that Westpac knew, as a fact, that the on‑loans were unsubordinated. Prior to 9 January 1990 the views expressed were tentative. I accept that by 24 January 1990 Weir held the view that there was a problem with the status of the bondholders, but I do not believe his diagram and presentation to the meeting disclose knowledge of the fact. I do, however, believe, that as January wore on, and then passed into February, March and April, the tentative views about a ‘possible problem’ firmed into a ‘real risk’, of the type discussed in relation to Walsh and SCBAL. I think the characterisation of the position of Weir and of Westpac as knowledge of a ‘real risk’ was present by 24 January 1990 and thus pre‑dates the Transactions.
  7165 It is debatable whether these matters would fall within the scope of Westpac’s duties as agent. The fact that the on‑loans may be unsubordinated and the bondholders may compete pari passu is a matter which would fall within Westpac’s duty to obtain legal advice and communicate that advice back to the Australian banks. But the views expressed in the legal advice appear to be to the effect that the on‑loans may be unsubordinated. For Westpac to go further and treat this as an established fact was a matter for its judgment on facts which were (or should have been) available to all Australian banks. Insofar as it was Westpac’s commercial interpretation of the available material, I do not regard it as falling within its duties as agent. Forming a judgment as to how significant the risk of pari passu competition may be was a matter which fell within the scope of each bank’s individual capacity to make commercial decisions.
  30.18.6. Some issues affecting Lloyds Bank
  7166 I have previously classified Lloyds’ knowledge as being a belief that competition from the BGNV bondholders was a real possibility. That level of knowledge is confirmed, and perhaps became more conclusive, around 16 January 1990. On that date, Armstrong sent a memorandum to Cruttenden setting out his reasons why Lloyds Bank should make a provision of £1 million (20 per cent of its exposure of £5 million) in its accounts. Armstrong reported that, under the existing facilities, they could expect to see receivership proceedings initiated by one of the Australian banks. This would trigger a default under the Lloyds syndicate banks facility. He said:
  Our syndicate would then be faced with maintaining its position amidst claims from all the Australian bank lenders, a relatively small element of third party trade creditors, and the note holders (in Bell Group). Though these latter are theoretically subordinated to ourselves under the existing agreement, our lawyers advise that the claims of such parties would be likely to be strongly advanced and that we would be hard put to avoid pari passu status. Thus, in the context of the existing facility, asset cover looks very adequate at first but is liable to much stronger creditor claims than we can accurately foresee.
  7167 In cross‑examination, Armstrong accepted the natural meaning of his memorandum but said that this note explored the worst possible case. He said ‘we didn’t think, and I don’t say here, that the note holders in particular would achieve pari passu status’. He went on to say that although he regarded the bonds as being subordinated, ‘some lawyers might try to change that and assert pari passu status’. He recommended that the bank include a provision for the costs and interest charges in defending such a claim, rather than the bondholders actually taking the share. Although that may have been a reasonable concern, it nonetheless cannot change the plain words: ‘we would be hard put to avoid pari passu status’.
  7168 I do not believe Armstrong was limiting his concern to defending a spurious action – he saw the claims of the bondholders as having a reasonable basis, and he felt that they might prevail. In effect, the memorandum suggests he saw this as a real likelihood. He also described the security structure as a ‘carefully woven network of guarantees, share mortgages, subordination agreements and fixed and floating charges’. This, the plaintiffs argue, supports their ‘Scheme’ allegations.
  7169 Latham was given the Armstrong memorandum in order to prepare some attachments. One attachment, which looked at the asset coverage of the Bell group, stated that the bonds ‘may rank pari passu in liquidation’. It also contained a calculation which was labelled as ‘conservative’ and allowed for a 20 per cent shortfall on the explicit assumption that the bondholders ranked pari passu. On this ‘conservative analysis’, assets were $948.6 million compared with $767.6 million in liabilities. It appears, however, that Latham treated all the bonds in this way, not merely the BGNV issued bonds. This suggests that the analysis was not necessarily based on an understanding of the on‑loan problem. Latham denied that, at the time of writing the attachment on asset cover, he had been told by the lawyers that the bondholders might rank equally in a liquidation. He maintained that he was aware of a general concern about the legal effectiveness of subordination. Armstrong’s memorandum, with the attachments, was sent on 19 January 1990. It seems that by this time a decision had been made not to raise a provision.
  7170 It is not clear whether this view was Lloyds Bank’s own interpretation or if it was formed on the basis of legal advice. Perry accepted that he told Lloyds to proceed on the assumption that the BGNV debt might compete pari passu with the banks and he recalled telling Latham by telephone. There is no documentary evidence around that time to confirm the exact content of Perry’s advice. Perry’s evidence in cross‑examination was not entirely clear. When asked whether he was the source of Armstrong’s view, his replies were a mixture of denial and lack of recall. Essentially, I think Perry was trying to say that given his prior stance on the on‑loan issue, he would not have advised Lloyds Bank in such direct language and ultimately Armstrong’s views did not accord with his (Perry’s) state of mind at the time.
  7171 Armstrong specifically attributes the views in the memorandum to the lawyers. There is no documentation to indicate any other firm or any other area from which the information might have come. I think, therefore, that it is most likely that A&O were the source of Lloyds Bank’s views as expressed in the Armstrong memorandum. Perry also accepted that he was away until 6 or 7 January 1990, when the BBHL dramas began and NAB’s withdrawal sparked the lawyers into a search for any on‑loan documentation. It is quite possible, then, that Horsfall Turner or Nicholas Watson gave advice on the on‑loan issue in his absence.
  7172 Armstrong said that Latham was probably the source of his information as to the effect of the legal advice. I think it most likely that the legal opinion was conveyed to Latham and he in turn informed Armstrong. However, this does not necessarily mean Latham’s message was the same as that expressed in Armstrong’s memorandum. Latham denied being the source of Armstrong’s strong views about the on‑loans and regarded them as ‘potentially misleading’. Latham agreed that he understood Armstrong’s memorandum as saying the syndicate lawyers had expressed a view that ‘the claims of the bondholders would be likely to be heavily pressed on a pari passu basis and it would be difficult to repel such claims’. He said he could recall speaking to Armstrong and telling him that this was not how he understood the legal advice. This was not mentioned in his witness statement or in Armstrong’s evidence.
  7173 I have some difficulty with Latham’s evidence in this respect. He displayed (not surprisingly) a lack of recall on other key matters and I am not sure why this particular conversation was more firmly implanted in his mind. As indicated previously, I do not accept that Latham was unaware of the on‑loan issue prior to February 1990. There are some inconsistencies in his evidence. He said, for example, that he knew around December or January that there was no documentation of the on‑loans. Given the legal advice received following the SCBAL demands, it is unlikely that Latham would have been looking into the nature of the on‑loans unless he was also aware of the possibility of bondholder competition. This is even more so given my earlier findings that in November and early December 1989, Latham and A&O had begun to consider the on‑loan issues. I am not saying that they then knew there was a likelihood of pari passu competition. But I believe both Perry (and possibly Horsfall Turner and Watson) and Latham were aware that, in relation to the effective subordination of the bonds, all might not be well.
  7174 I do not believe Latham ever expressed a contrary view to Armstrong and I regard Armstrong’s memorandum as accurately representing the state of mind of Lloyds Bank. They did not know, as an established fact, that the bondholders would rank equally with the banks. But they proceeded on the assumption that pari passu competition from the bondholders was ‘likely’. I think the reasoning I applied in relation to Westpac applies in a similar way to Lloyds Bank. The memorandum is part of the formal record of the bank and should not be dismissed lightly. There is no other contemporaneous evidence which suggests that this should not be taken at face value.
  7175 If, as I think is the case, Lloyds Bank’s views were not entirely their own creation but were based on legal advice emanating from A&O, it would fall within the scope of the bank’s agency. Lloyds Bank was obliged to pass on any significant opinions from A&O or MSJL that related to the drafting and legal implications of the Transactions and thus the lawyers’ views on the on‑loans can be imputed to the other syndicate banks.
  7176 I am not able to say why Lloyds Bank did not pass on the information about the possible pari passu ranking of BGNV. They knew this information had affected the actions of two Australian banks and the issue had occupied a lot of the lawyers’ time. It may have been because of a desire to expedite the process of completing the refinancing arrangements.
  30.18.7. January 1990 and the BGNV Subordination Deed
  7177 As at 22 January 1990, the draft version of the Principal Subordination Deed still included BGNV as a proposed subordinated creditor. By 23 or 24 January 1990 the banks (more specifically, their lawyers) had come to realise that obtaining a subordination deed from BGNV may not be as straightforward (relatively) as it would be for the other Bell group companies. The drafting of the main refinancing documents was almost complete but the participation of BGNV would require the consent of its independent director. That consent had not then been obtained.
  7178 TBGL first approached Equity Trust for consent by letter dated 24 January 1990. Equity Trust responded on 26 January 1990, saying (in effect) that it had no problem in principle, although it wanted to see a draft agreement. The decision was taken to deal with the subordination of indebtedness to BGNV separately and to proceed with the other Transactions immediately, rather than delay the entire package.
  7179 Consequently, by 24 January 1990 the draft agreements had been amended so that the subordination of BGNV’s debts was no longer a condition precedent to the refinancing agreements. The precise wording of the clause in the final version of ABFA, which was not materially different from that appearing in the 24 January draft, is as follows:
  [TBGL] undertakes to use its reasonable endeavours to procure that [BGNV] convert all Financial Indebtedness provided by it to any Security Provider into subordinated debt which is fully subordinated to all Financial Indebtedness owed by such Security Providers under the Financing Documents by entering into a Subordination Agreement in a form and substance satisfactory to the Facility Agents being substantially in the same form as the [Principal Subordination Deed] save as necessary to make such Subordination Agreement appropriate having regard to the place of incorporation of [BGNV], the nature of the debt to be subordinated and any changed circumstances then pertaining.
  7180 The plaintiffs allege that the bank’s insistence in January 1990 that TBGL procure the conversion of all debts owed by security providers to BGNV into subordinated debt indicates that the on‑loans were not then considered to be subordinated. The argument is that a debt cannot be ‘converted’ to a subordinated status unless it is unsubordinated to begin with. I acknowledge the force of that argument as a matter of language. But in the circumstances as they prevailed in January 1990, I do not place much store on the precise language of the clause. It has to be remembered that, while the lawyers and some of the bank officers had seen the bond issue trust deeds and the offering circulars, no‑one had seen any documentation relating to the on‑loans. TBGL had been asked to provide information but had not, at that stage, responded. Indeed, as late as 2 May 1990, A&O sent an advice to the banks saying ‘although we have not seen the terms of the inter‑company loans it is most likely that these loans were made by BGNV to TBGL and BGF on an unsubordinated basis’.
  7181 The drafting of the document has to be seen in context. The concept of ‘conversion’ was used by the banks almost from the outset. The first version of the terms sheet prepared by Westpac on 13 September 1989 required TBGL to ‘covenant that intercompany loans will be subordinated to the security lenders group’. The use of ‘will be’ is consistent with the obligation to convert. The first version prepared by Lloyds Bank (at around the same time) contained this clause:
  The remaining loans to the borrower or any security provider from related corporations … shall be converted to fully subordinated debt or preference share capital and shall not be repaid or redeemed until repayment in full of the Facility.
  7182 Similar wording carried through into other versions of the terms sheets as they were revised and developed: see, for example, the 2 November 1989 draft. The final version of ABFA and RLFA No 2 is of similar import. The whole of cl 17.6 proceeds on the basis that the loans were to be converted, through the Principal Subordination Deed (cl 17.6(a)), or through procuring the BGUK group companies to subordinate their debts (cl 17.6(c)). It must also be remembered that there were other, admittedly few, instances of subordinated lending within the group instances: see Sect 13.2.6.2.
  7183 The on‑loan problem only became apparent in late December 1989. As events unfolded in January 1990 there seemed little prospect of the banks and their lawyers receiving sufficient information to decide the substantive question one way or the other. That having been said, there is no evidence of any concerted efforts by the directors or by the banks to pursue the search for relevant information. The existing wording prevailed. While I do not think the use of the word ‘convert’ in the documents has any real significance, the manner in which the banks sought the BGNV Subordination Deed reveals other aspects that support the plaintiffs’ case.
  7184 Inglis (HKBA) provided a memorandum to his credit committee on 24 January 1990. In it he said that the directors of BGNV ‘may claim there is no commercial benefit to them and decline to sign’. The banks assert that the question of commercial benefit existed regardless of any concern about the status of the on‑loans. I think that is right. It seems strange that, despite talking about how the proceeds of the BGNV bond issue were on‑lent to BGF, the note does not mention the possible risk of the on‑lending being unsubordinated. But in the context of the note, Inglis’ concern about a possible lack of commercial benefit appears to be linked specifically to the execution of the subordination deed. As the plaintiffs rightly note, if the BGNV loans were already subordinated (or more accurately, the banks believed this to be the case), why was the BGNV director being asked to agree to subordination of the loans and how could a question of commercial benefit arise?
  7185 If Inglis had this concern about corporate benefit, it must have been on the basis that he assumed the on‑loans were unsubordinated and Equity Trust, by executing the subordination deed, was taking a step that might compromise BGNV’s position. This suggest to me that HKBA held the belief that the on‑loans may not be subordinated and the banks faced possible competition from the bondholders. This is consistent with the view expressed by Keane in his witness statement: see Sect 30.18.4.
  7186 The Australian banks met on 24 January 1990 to finalise the Transactions. Walsh’s note on the meeting includes the following:
  [T]he consensus of the banks was that … obtaining the subordination of the [BGNV] convertible notes may not occur, and that in any event requiring [BGNV] to subordinate its loan to [BGF] was a case of ‘bolting the barn after the horse had left’ … Bob Weir of Westpac submitted a diagram of the known inter‑company loans within BGL/BPG/BGF. According his rough estimate, if the WA newspaper was sold for $400 million, then the banks would be paid out roughly 100% of the facility irrespective of the claims from [BGNV] ranking equally with the syndicated financing …
  7187 While giving evidence Weir read Walsh’s note of the meeting. He took issue with a couple of minor points but they did not relate to the matters included in this part. Walsh said that his comment meant ‘that the banks had lost the opportunity to get BGNV to execute a subordination deed simultaneously with the execution of the other refinancing documents’. I do not think this explanation fits with the plain meaning of the words used. The words ‘in any event’ indicate that Walsh was talking about a new topic; namely, his suggestion that obtaining the BGNV Subordination Deed somewhere down the track might be futile or pointless. He was questioning the worth of getting the subordination deed at all. There are a few reasons for this. The most likely reason, as the plaintiffs submit, is that the banks understood that if their securities were challenged, the position of all creditors would be assessed at the time the securities were granted, so any subsequent change in the status of a creditor would be otiose. As Inglis wrote in his note of the meeting that
  once the refinancing documentation has been signed and the initial six month period has passed, our secured creditor status will render irrelevant whether or not inter‑company debt is subordinated.
  7188 In oral closings, counsel for the banks proffered this explanation of the statements: ‘if the securities given in January and February are good, it’s academic what happens at the level of BGNV, whether the on‑loans were previously subordinated or not’. This may explain Inglis’ comment, but it is more difficult to make it fit the words used by Walsh. In my view, in referring to escaping horses and bolting barn doors Walsh meant it is futile to try to stop something bad happening when it has already happened and could not be changed.
  7189 Another issue broached in the course of discussions about obtaining the BGNV Subordination Deed was whether the subordination might breach the undertaking of BGNV in the trust deeds that it would conduct its affairs in a ‘proper and efficient’ manner. In Peek’s undated note, which she believed to have been made on 24 or 25 January 1990, she posed the question: ‘is subordination of its only asset conducting [its affairs in such a way]’. This is similar to the ‘corporate benefit’ issue that I discussed in the context of the Inglis note. The comment presupposes that BGNV was an unsubordinated credit or and was being asked to change the status (and therefore the possible worth) of its only asset. Peek recognised that execution of the subordination deed was not simply a formality, since (in those circumstances) BGNV would have been changing its legal position.
  7190 Nevertheless, in light of previous evidence, I would still regard Peek’s comments as being based on an assumption that the on‑loans were unsubordinated, as opposed to a certainty. Even if the person thought there was only a slight risk that the on‑loans were unsubordinated, it would still be a prudent question for a lawyer to ask. If the on‑loans were unsubordinated, there could easily be a corporate benefit problems or a possible breach of the trust deeds.
  7191 Peek testified it was most likely this information came from someone on the other side of the transaction, that is, S&W or the TBGL directors. By her own account, Peter Watson (S&W) was the most probable source. Peek was, at this time, the senior P&P lawyer representing the banks, and her knowledge can therefore be taken to be that of P&P for relevant purposes.
  7192 There was some debate as to whether this issue was resolved prior to the banks executing the Transactions. Peek’s recollection was vague but she assumed that it had been resolved or the banks would not have gone ahead. It seems that Peek did not inform anyone, including Westpac, about the issue. Browning expected she would have been told if it was an issue, unless it was merely part of Peek’s own thought process. But Peek said she saw it as an issue between S&W and BGNV and she assumed that, since she did not hear anything further from Watson, the matter had been resolved in‑house. I see no reason not to accept this explanation.
  7193 The plaintiffs press me to draw all sorts of conclusions from this. They submit that the issue was not resolved prior to the execution of the Transactions and that Peek was duty‑bound to inform Westpac about it. There is no evidence of direct knowledge on the part of any other party, although A&O’s opinion of 1 February 1990 did conclude that the Transactions would not cause an event of default under the bond issue trust deeds. The question arises whether it can be imputed to the Australian banks through P&P’s agency (or possibly imputed to Westpac and in turn to the other Australian banks). The answer to this depends on whether Peek was duty‑bound to inform the banks of this issue. Given that I accept Peek’s evidence that the issue was probably resolved between Watson and the Bell group, I do not regard this information as falling within P&P’s agency.
  7194 In any event, I do not see this issue as being particularly significant since the Australian banks were already aware of the ‘corporate benefit’ problem and I think the ‘proper and efficient’ clause was, in effect, the same issue but phrased in a different way. Both issues required a determination as to whether the transaction was in the interests of BGNV. Based on their knowledge of the possible lack of corporate benefit on the part of BGNV, even if the concern conveyed to Peek could be imputed to the Australian banks, it would add little to what the Australian banks already knew.
  30.18.8. The period after 26 January 1990
  7195 In ascertaining the state of mind of bank officers as at 26 January 1990 I have to approach events occurring after that date with caution. The hindsight problems have been discussed at length in earlier sections: see, for example, Sect 9.2.5. Although it may be that the state of mind of the banks after this date can be taken to indicate a similar state of mind prior to that date, it is not necessarily the case. Furthermore, there is also a risk that the banks may have exercised greater care in the formulation of comments to minimise possible liabilities if the Transactions were later challenged by a liquidator.
  7196 By fax on 2 February 1990, Weir wrote to the other Australian banks and suggested a meeting to discuss their ‘ongoing involvement, with particular attention being given to inter‑company loans and their “apparent” effect on the status of the Subordinated Bonds’. Prima facie, this indicates that the status of the on‑loans remained, as it had been previously, a matter of some uncertainty. But it also confirms that each Australian bank was already aware of the problem.
  7197 Details of the meetings held on 22 and 23 February 1990 are set out in Sect 30.10.3. Latham (Lloyds Bank) was invited to attend. Latham’s note of a conversation with Weir on 12 February 1990 indicates that he was informed, at a very basic level, of the subject matter of the meeting. Latham accepted that he was informed that the meeting would include a discussion of the subordinated bonds, preference issues and the next interest payment due to the bondholders.
  7198 Edward (SocGen) gave evidence that upon being told in the February meetings about the possible lack of subordination of the on‑loans, he was ‘incredulous’. While this may have been Edward’s first exposure, SocGen’s corporate knowledge had already been established via the discussion between Weeks and Keane (NAB) and through attendance at the 24 January 1990 meeting.
  7199 Weir again presented the diagram he had circulated at the 24 January 1990 meeting (although it also included annotations of the debts owed to the bondholders). Latham added his own annotations which showed the various inter‑company shareholdings. He said he took from the diagram ‘that the funds available to the Bell group would cover the banks regardless of whether default was called by the bondholders’. Latham also said at this time that Weir raised an issue with him about the standing of the bondholders and recalled being ‘surprised’ by it. As I have already indicated, I do not believe this was the first time Latham was informed of the on‑loan issue. In cross‑examination, Latham accepted that what caused his surprise may have been Weir’s proposition that the banks would recover their debts even if the bondholders ranked pari passu. I think this is the far more likely explanation.
  7200 When asked whether he agreed with Weir’s analysis, Latham said he could not recall, but probably would have resolved to form his own view, on the basis that he would have to meet the syndicate after his return. Latham sent a memorandum to Cruttenden on his return from Australia. He said:
  The Subordinated Bonds featured in the discussions held between the banks on Thursday … and we concluded that an attempt by the unknown holders of those bonds issued by [BGNV] to [BGF] could represent a threat to the extent of AUD 143 million … It is not possible, however, to take much comfort in this since an attack on our security could possibly be carried to the point where we are unable to rely on capturing the residual value in The West Australian … following its sale for, say, AUD 400 million.
  7201 This comment appears to treat the BGNV bonds as a separate case from the other bond issues. This indicates that Latham was discussing a scenario in which the banks faced pari passu competition from the BGNV bondholders. The nature of the language and lack of explanation indicates prior knowledge on the part of Cruttenden. The memorandum also indicates that Lloyds Bank did not place great confidence in Weir’s more optimistic assessment on the banks’ chances of recovery.
  7202 This is confirmed by Latham’s letter to the syndicate banks of 2 March 1990 in which Latham reported on his meetings in Australia:
  The conclusion reached by the banks at the meeting was that whilst we anticipate that the subordinated bondholders should rank behind us they are presently unknown, and may well include interests inimical to our own. At this stage we cannot rely fully on our security to place us ahead of the subordinated bondholders among Bell group creditors. This is arguably most important in relation to West Australian Newspapers, since (probably diverse) bondholders have as their borrower [BGNV] which is owed money by creditors of West Australian Newspapers. In any winding-up such creditors could threaten our ability to realise the value of West Australian Newspapers.
  7203 Again, the specific reference to BGNV demonstrates Latham’s understanding of the situation. In light of the knowledge already exhibited by Lloyds Bank, the language of this communication seems vague and does not mention the real problem; namely, that BGNV may have been an unsubordinated lender to BGF (and the implications of that situation). Lloyds Bank appear to have been trying to avoid dissension within the syndicate. Latham had to provide a reason for the syndicate banks to approve of the release of asset sale proceeds to allow the Bell group to meet its interest commitments. The possible competition from a section of the bondholders would provide such a reason. But Latham may have been wary of disclosing Lloyds Bank’s prior knowledge about the status of the on‑loans given they had not informed the syndicate of that issue before the execution of the Transactions. In any event, I think this letter shows that Lloyds Bank did not place great weight on Weir’s optimistic assessment of recovery.
  7204 Evidently, the vague allusions to the on‑loan issue in the letter to the syndicate were enough to spark the interest of DG Bank, which wrote to Lloyds Bank on 6 March 1990. This letter indicates a lack of prior awareness that there was any possibility of competition from the bondholders. The response from Latham on 20 March 1990 was vague and placatory. He noted that ‘the nature of the subordination mechanism and the variety of issues and issuers mean, however, that the position is not as clear and uncomplicated as we would all wish’. It is surprising that Lloyds Bank did not mention BGNV’s on-lending to BGF and the possibility of pari passu competition, because it was an important fact and DG Bank obviously did not know about it.
  7205 On 8 March 1990, Latham met with A&O (Perry and Horsfall Turner) and MSJL (Ladbury and Cole) to prepare for the syndicate meeting of 12 March 1990. Cole’s note records that someone (most likely Latham) said:
  [BGNV] has lent money to [BGF] (not, subordinated). [BGF] owes WAN. However, WAN owes [BGF] money. Ultimate [guarantor] of all notes is TBGL. (emphasis in original)
  7206 Cole’s note also records that at the meeting someone said:
  Take 17 million now … Default will follow … If will rank ahead of Bondholder – then no reason not to go straight in … [BGF] à subordination. à to what extent.
  7207 Although the former comment indicates the on‑loans were considered to be unsubordinated, the second comment demonstrates that there was still doubt. Cole said he could not recall the meeting. The phrase ‘no reason not to go straight in’ was put to Cole in cross‑examination. He said he could not put a meaning to the words. I believe the words have the meaning put to Cole by the cross‑examiner:
  [I]f the banks ranked ahead of the bondholders, there was an argument that there was no need to cater for the payment of interest to the bondholders and the banks could simply take the 17 million that was in the escrow account and if need be, if there was an event of default, go straight in; that is, enforce their rights …
  7208 In his evidence Latham said he could recall Perry expressing the view to him in or around March 1990 that ‘any failure on the part of Bell group to have a document expressing the subordinated status of the on‑loans was certainly a mistake and that an unsubordinated on‑loan did not represent what was intended in the course of the issue of the convertible subordinated bonds’. Latham said that he was of the same view. His witness statement goes on to say that he could recall discussing the subordination issue with Perry, Ladbury and Cole in April or May 1990 and that he understood from them, as he had always understood, ‘that it was clearly the intention of the bond issues that the bondholders’ debt was subordinated to that of the banks’. This evidence speaks for itself, but I do not think it is of much assistance in characterising the banks’ knowledge before 26 January 1990.
  7209 The plaintiffs devote some time in their closing submissions explaining why Latham’s evidence that the non-subordination of the on‑loans was a mistake cannot be believed. I do not share their concerns. As Latham’s evidence establishes (along with other bank witnesses), the original expectation would have been that the on‑loans were subordinated. If this were not the case, the effective subordination of the bonds would be defeated.
  7210 At the 12 March 1990 meeting of the Lloyds syndicate banks, the question whether to release funds for the interest on the bonds was discussed. The nature and extent of the subordination was discussed in this context and with the benefit of the A&O opinion of the same date. A&O had concluded that the subordination of the bonds only occurred in a liquidation and as a result, interest was payable on an unsubordinated basis. This obviously affected the banks’ decision‑making process about whether to allow the Bell group to access the Bell Press proceeds.
  7211 Banco Espírito’s note of the meeting stated:
  It has now been established that the Bond Issue is not all subordinated debt. We have been advised by Westpac Bank that the documentation is badly worded and they would rank pair-passu with the banks.
  7212 Interestingly, the other notes of that meeting do not make the same point and only speak of the limited nature of the subordination. It is possible, then, that Banco Espírito had been informed separately by Westpac.
  7213 I want to make here a point that is of more general significance. The tenor of Perry’s advice to the 12 March 1990 meeting was that, whatever may have been the position with the face value of the bonds, the right of the bondholders to receive interest was not subordinated behind the banks other than in the event of liquidation. Therein lay a problem. If the banks insisted on their rights to a pre‑payment of principal and thereby deprived the bondholders of their interest, a preference problem could arise.
  7214 In their evidence one or two of the bank officers said that they had thought it was a complete subordination, that is, that interest as well as principal was deferred. I have difficulty understanding how they could have come to that view. The bondholders had been receiving interest since December 1986. They continued to receive payments after the Australian banks’ facilities were placed on an at call basis. This was the position in December 1989. Before 26 January 1990 the banks knew that a further interest payment was due in May 1990 and they knew that the Bell group could not meet it without access to asset sales. They knew that the effect of the Transactions was to give them, rather than the companies, control over the capacity of the companies to meet the bondholder interest commitment. This is relevant to the question whether the banks knew that the Transactions would prejudice other creditors.
  7215 The subordination issue was considered again at the 19 March 1990 syndicate meeting. It was resolved that any release of the proceeds from the sale of Bell Press would be subject to a condition that BGNV should enter into a subordination deed by 9 or 16 April 1990. It was not until A&O’s advice of 2 May 1990 was circulated amongst the syndicate banks that those banks were told explicitly about the on‑loan situation. A&O advised that although they had not seen the terms of the inter-company loans, BGNV’s on-lending was ‘most likely… on an unsecured and unsubordinated basis’ and the ‘liabilities owed to BGNV would therefore rank pari passu with the claims of the banks against [TBGL] and [BGF] as unsecured creditors’.
  7216 In cross‑examination, Latham took issue with the phrase ‘most likely’ and said he ‘would have queried’ it. But he was sent a draft of the advice prior to circulation. The final form of the advice circulated to the syndicate banks contained a number of changes to the draft sent to Latham, but no change was made to the passage referred to in the preceding paragraph. Although Latham said he may not have noticed, it seems reasonable to conclude that Latham’s views accorded with A&O on this issue.
  7217 Furthermore, there is nothing in the evidence to suggest that in the period following 26 January 1990 new information was delivered which caused A&O’s views to change. They may well have developed and hardened as more thought was given to the significance of the issue, particularly in the light of the waiver problems. It is to be remembered that at around this time Perry noted, and passed on the Lloyds Bank, that the cl 17.12 might itself raise preference issues. This may well have influenced his thinking on questions surrounding the subordination of the on‑loans. Nonetheless, I think it is likely that this was A&O’s view at the time of the execution of the Transactions – it merely became necessary to air those views in March in order to persuade the Lloyds syndicate banks to agree to the waiver.
  7218 Both Latham and Perry gave evidence, which seems logical, that they were attempting to illustrate the worst possible position and focus on the negatives in order to persuade the syndicate banks. But it was never suggested that they were putting forward an inaccurate view and indeed if they were, it throws the credibility of their other evidence into doubt. The assertion that pari passu competition was ‘most likely’ effectively accorded with the view expressed in Armstrong’s memorandum that the banks would be ‘hard pressed’ to avoid this situation. Accordingly, it seems that Lloyds Bank’s state of mind was consistent and settled (to the extent that there can ever be a settled view of the level of doubt about a particular matter) in January 1990 and in the months following.
  7219 Jessett (Dresdner) made an annotation on the 2 May 1990 A&O legal advice. Beneath the statement ‘it is most likely that these loans were made by BGNV to [TBGL] and [BGF] on an unsubordinated basis’, he wrote ‘this is what I said 6 months ago’. This suggests Dresdner had knowledge around November 1989. Jessett denied this in his evidence. The Dresdner 15 November 1989 credit application, of which Jessett was one of the signatories, stated that in a ‘worst case scenario, ie liquidation/receivership the banks are preferred creditors [and] all other creditors are subordinated’. I doubt, therefore, that Dresdner knew about the on‑loan problem at that time.
  7220 But the ‘six month’ comment must mean something. Jessett’s attempts in cross‑examination to explain away the ‘six month’ statement were not particularly inspiring. He must have formed a view about the on‑loans before the May 1990 meeting but it is difficult to say precisely when. The plaintiffs suggest he worked it out for himself. Perhaps he did. It might have been as a result of Latham’s report concerning the February meetings. But that is only a little over two months – not six months – before May 1990. If it were before 26 January 1990, it is difficult to pin‑point the precise knowledge which Jessett had, and which can be attributed to Dresdner, at that time. But Jessett knew something about the on‑loan problem.
  7221 Davis (HKBA) sent a memorandum to Townsend on 2 May 1990. Davis mentioned the subordination problem in a way that suggests that this was not a new revelation so far as HKBA was concerned. This fits with what Inglis had told the credit committee on 24 January 1990. The Davis memorandum ties in the subordination issue with the voidable preference question and with the waivers. He said:
  If [TBGL] went into liquidation now the syndicate banks would expect to rank pari passu with the unsecured creditors as it is expected that a liquidator would set aside the present security arrangements as a voidable preference in a liquidation prior to 2 August 1990.
  However, it is not clear if, as a result of not obtaining subordination agreements from [BGNV], our debt would rank with that of the subordinated bondholders. It is precisely due to this legal uncertainty that we do not want the security position challenged by a liquidator or in the courts prior to 2 August 1990. Hence our recommendation to release the deposit.
  7222 In the paragraph of his witness statement dealing with the memorandum, Davis refers to a legal opinion about subordination. He does not identify the opinion. He downplays the worth of the advice saying that ‘any legal opinion one receives in which a subordinated bondholder is involved will tend to qualify the issue by stating that the subordination may be at risk’. That is a convenient generalisation and I give it no weight in assessing what HKBA knew.
  7223 Copies of the A&O advice of 2 May 1990 were discovered by P&P and Westpac. Given the way materials were being disseminated in the first half of 1990, the drama that eventuated when some of the Lloyds syndicate banks continued to oppose releases of the Bell press proceeds and the obvious significance of the subordination question at the time, I think it is reasonable to infer that the advice would have been distributed to the other Australian banks.
  7224 Finally, Perry’s letter to Latham and Peek on 3 July 1990 states that, under Netherlands Antilles law, it was likely that a court appointed trustee acting for the creditors of BGNV would be successful in having the BGNV Subordination Deed set aside. Therefore, the liquidators of BGF and TBGL would have to treat BGNV as ranking pari passu. This necessarily implies a danger that the Subordination Deed may not be in the interests of BGNV, alternatively the bondholders. Latham said that he still, at the time, held the belief that the on‑loans should have been subordinated ‘back-to-back’ with the bond issues.
  7225 The plaintiffs argue that if Latham had any such belief, the solicitors would have been instructed accordingly and the matter would have been referred to in the BGNV subordination deed. The deed, as executed, made no reference to any past intention or mistake in the terms of the on‑loans, which may well have been a way around some of the legal difficulties of subordination. I am not sure this is right. The actual status of the on‑loans still had not been determined. Given that Perry’s views were based on apparently recent information about Netherlands Antilles law, I do not regard this letter as being of much use in demonstrating any such knowledge prior to July.
  7226 Taking all of this evidence together, in my view it is reasonable to infer that by May 1990 the suspicions and concerns that the banks (or most of them) had harboured prior to 26 January 1990 about the status of the on‑loans had hardened. So much so that I find that by May 1990, and at all time prior to the execution of the BGNV Subordination Deed on 31 July 1990, the banks believed that pari passu competition with the bondholders (to the extent of the on‑loans) was ‘most likely’. Further, this was a reason to continue pressing for BGNV to subordinate the on‑loans and not to force the companies into liquidation in the meantime.
  30.18.9. Knowledge of the status of the on‑loans: conclusions
  7227 Many of the bank officers who featured in the written evidence discussed above were not called by the banks. I am not sure if this is a direct application of Jones v Dunkel, but it seems to me reasonable to proceed on the basis that had they been called they would not have demurred from the plain meaning of what they had written at the time. This applies to Chadwick, Ferrier, Altringham, Farmer, Love, Weeks, Cicutto, Derham, Inglis and Cruttenden, in particular.
  7228 What the banks knew about the status of the on‑loans and when they gained that knowledge is a significant issue in the litigation. I make no finding that the banks knew, as an established fact, that as at 26 January 1990, the on‑loans were unsubordinated. But I do find that they knew this may be the case and that the prospect of pari passu competition was not fanciful conjecture. It was a serious risk. Indeed, some banks had formed the view that it was likely. My conclusions can be summarised as follows.

1. No bank or bank agent had any knowledge, belief or suspicion that the on‑loans may not have been subordinated at the time the refinancing negotiations commenced. They did not consider this issue at all and were operating under the belief (reasonably held at the time) that all the bondholders would be subordinated behind the banks in a liquidation.
2. Latham, and hence Lloyds Bank, had begun to detect there may be a problem some time in November 1989. Even if this is not so, by 21 December 1989, he was aware of the argument that the bondholders may not be effectively subordinated. From around 16 January 1990, Lloyds’ state of mind had developed to the point where they regarded pari passu competition from the BGNV bondholders (in a liquidation) as likely.
3. Perry, and hence A&O, knew that the on‑loans may not be subordinated from about mid November 1989; or if not, he obtained this knowledge on or around 19 December 1989. Stow also became aware of the risk on 19 December 1989. From around 16 January 1990, A&O regarded pari passu competition from the BGNV bondholders (in a liquidation) as likely.
4. Farmer, Love, Altringham and Walsh (SCBAL) were informed of this issue on or around 15 December 1989 and it was confirmed by 18 December 1989 at the latest that there was a risk that the on‑loans were not subordinated. By 22 December 1989, their views had solidified to the extent that they regarded pari passu competition from the BGNV bondholders in a liquidation as a real risk. The risk was serious and likely.
5. MSJA were informed of this issue on or around 15 December 1989, but only in their capacity as solicitors for SCBAL (rather than the Lloyds syndicate banks). This knowledge cannot be imputed to any other bank. Ascroft was informed of the on‑loan issue on 21 December 1989 and this was on behalf of MSJL, as solicitors for the Lloyds syndicate banks.
6. Weir was informed of this issue on 19 December 1989, but I doubt that he understood the full import of the problem at the time. He certainly knew of the risk that the on‑loans might not be subordinated by late December 1989. This knowledge would fall within the scope of Westpac’s agency. From around 9 January 1990 Westpac’s state of mind had developed and it regarded it as likely that the BGNV on‑loans were unsubordinated. Weir, Chadwick, Stutchbury and Spring all held this view or something similar.
7. SocGen knew of this issue by 21 December 1989; or, if not, it is clearly evident by 3 January 1990. So, too did NAB, through Keane.
8. HKBA and CBA had actual knowledge of the issue by 24 January 1990 at the latest.
9. Initially, SocGen, NAB, HKBA and CBA may only have known of a risk. However, the tenor of the discussions at the 24 January 1990 meeting suggests that the risk of pari passu competition from the BGNV bondholders in a liquidation was a serious one.
10. Prior to 26 January 1990 the Lloyds syndicate banks (excluding Lloyds Bank and possibly Dresdner) had no direct knowledge of the problem concerning the on‑loans or of the risk that the bondholders might rank pari passu with the banks in a liquidation. Lloyds Bank knew from around November 1989 that there might be a problem. It featured in the legal advice being sought from A&O. By 26 January 1990, Lloyds Bank knew that the risk of pari passu competition was a serious one.
11. By 2 March 1990 the Lloyds syndicate banks had been informed that they could not be sure that they would rank ahead of the bondholders in a liquidation. By 2 May 1990 that they were more specifically informed of the reason for such a problem, namely, that it was ‘most likely’ that the BGNV on‑loans were unsubordinated and thus the BGNV bondholders might compete pari passu with the banks in a winding up. Banco Espírito may have known this slightly earlier (12 March 1990).
12. However, as this was germane to the legal advice Lloyds Bank was taking, the Lloyds syndicate banks can be fixed with Lloyds Bank’s knowledge at all times.
13. By May 1990, particularly in the light of the A&O advice and generally as a result of discussions and communications concerning the release of the Bell Press proceeds, all banks believed that the risk of pari passu competition with the bondholders arising from the status of the on‑loans was most likely.
    30.19. Knowledge of other external creditors
    7229 In 8ASC par 59J the plaintiffs plead that the banks knew that a consequence of the Transactions was that all significant and worthwhile assets of the Bell group would be made available to the banks in priority to all other creditors or future creditors. I think this goes without saying. The banks had carefully identified the assets of the Bell group companies and, save for the Bryanston instalment, nothing of any value was omitted from the arrangements. Leaving to one side issues of prudential control over assets, the whole point of taking security is to establish a priority ranking should the need arise. But the next question is what steps the banks took to ascertain whether there were other creditors who might have claims against the companies.
    7230 I have already dealt with the banks’ knowledge as to whether the BGNV bondholders might compete with them in a liquidation. In this section I will discuss the banks’ knowledge of other external creditors. One issue raised by the pleadings is whether the banks knew that by executing the Transactions, they were gaining a more advantageous position relative to other external creditors. The issue of what the banks believed about the existence of external creditors who may be prejudiced by the Transactions is a matter of controversy. The plaintiffs claim that the banks proceeded with the knowledge, belief or assumption that there were other external creditors.
    7231 The banks, on the other hand, claim that they operated under the assumption that the only external trade creditors were those of the BPG group, and that those creditors would be protected by the group continuing as a going concern, or by the sale of the group. Further, the only external creditor (other than trade creditors) of any significance (if, indeed it was a creditor at the time) was the DCT. The banks say that they believed that the tax debts were disputed and that the dispute would be resolved in favour of the Bell group. There were, therefore, no external creditors who would be prejudiced by the Transactions.
    7232 There can be little doubt that the banks knew there were external trade creditors. Westpac and P&P analysed balance sheets of the BPG group and certain other companies such as Western Interstate. From this they knew that these companies had relatively small sums owing to external claimants. These were mainly debts to trade creditors, lease liabilities, provisions for tax and bank overdrafts. TBGL’s 1989 accounts disclosed liabilities of a similar ilk.
    7233 In a letter dated 7 August 1989 TBGL advised the Lloyds syndicate banks that there were outstanding claims by the DCT in respect of the 1982 income year. The assessments and the accrued interest were in the order of $26 million. According to Raeburn, the directors of TBGL had sought legal advice and were confident that the dispute would be resolved in favour of the company. This advice was repeated by Simpson in his letter to the Lloyds syndicate banks dated 30 August 1989. He went on to say that there were no liabilities of TBGL or BRL which exceeded $5 million other than those already recorded in the accounts.
    7234 In a schedule to a credit application dated 31 August 1989, Westpac noted that TBGL had trade creditors at $72 million but no amount was included under ‘other creditors and accruals’.
    7235 Simpson told the Lloyds syndicate banks at the 11 September 1989 meeting that he was not aware of any contingent liabilities and that the only debt of the Bell group was that owing to the Lloyds syndicate banks and the Australian banks. However, a file note of 21 September 1989 made by Cole (MSJL) contains a comment about $7 million being owed to trade creditors, which is apparently attributed to Browning (Westpac).
    7236 In a discussion with Latham (Lloyds Bank) on 25 September 1989, Weir raised the question whether there were any creditors of BPG who might challenge the granting of security. He noted that trade creditors were ‘minimal’.
    7237 Simpson’s letter to Armstrong of 11 October 1989 enclosed details of current creditors of BPG and BGUK. Simpson advised that there were no creditors over $1 million for TBGL or BGF. Creditors for BPG, as at 30 September 1989, included Westpac (approximately $39.4 million), the DCT ($1 million) and a newsprint supplier ($1.1 million). Creditors of BGUK totalled £3.7 million in accruals.
    7238 The plaintiffs argue that Lloyds Bank and MSJL specifically considered TBGL’s tax liabilities in identifying the creditors who could be affected by the Transactions. Cole made a note of a meeting he had with Latham on 10 October 1989. Under a heading: ‘Other creditors’, Cole wrote: ‘O/S tax – See back of p 29 of accounts’. This comment was presumably made by Latham.
    7239 The day before, Cole had a telephone conversation with Collinson in which, according to Cole’s note, Collinson expressed a view that the phrase ‘other creditors’ would be wider. The context of this statement is not clear, although it seems to have followed a meeting on 5 October 1989 at which Lloyds Bank and A&O asked MSJL to look more closely at whether anything could be done to remove the risk of the repayment being held to be a preference. Cole had asked Collinson for assistance in relation to three questions. First, if there were no ‘other creditors’ of BGF, could they assume there would be no question of preference under Bankruptcy Act s 122? Secondly, would that assumption apply if BGF had borrowed from BPG? Thirdly, if there were a possibility of preference over BPG, could it be overcome by BPG subordinating its rights to those of the banks?
    7240 On 8 January 1990 Morison (S&W) told A&O that, according to his instructions, the Bell group had no external creditors. Perry (A&O) expressed surprise about this proposition, noting it was contrary to information previously provided by TBGL, upon which they had been basing their drafting of the facility documents. As this information was communicated to both A&O and P&P, it can be imputed to all banks through Westpac and Lloyds Bank. This raises the question whether receipt of this information from S&W did, or should have, changed the belief of the lawyers and the banks. I think the preferable view is that A&O and P&P proceeded on their existing assumption that there were (or may be) external creditors. I say this because A&O advised that it was still necessary to obtain shareholders’ resolutions and include minuted references to consideration of the interests of creditors. These items remained in the final versions of the Transactions.
    7241 In Sect 30.18.4 I mentioned the conversation between Weeks (SocGen) and Keane (NAB) on 3 January 1990. One of the arguments advanced by Weeks in his attempt to persuade NAB to reverse its decision not to participate in the refinancing was the existence of a ‘possible claim by the Tax Dept of $30M +’. Keane regarded it as an ‘uncertainty’. Morison’s note of the 3 January 1990 meeting (in the presence of Weir, Stow, Peek and Browning at the relevant time) records that the ‘Aust banks want some info re tax information’. Weir’s evidence is that he was not sure whether he held a concern about the $30 million tax claim at that time but he knew ‘at some stage or other [that] there could be a claim’ and Morison’s note ‘probably’ indicated that he was aware of it.
    7242 In Sect 30.12.2 I have dealt with the Weir diagram presented to the meeting of the Australian banks on 24 January 1990. Weir said he believed Westpac would be paid out in full irrespective of whether the Transactions were executed and irrespective of the subordination issue. He assumed WAN could realise $400 million, the banks would recover all their debts and the taking of security would not therefore alter the banks’ position vis a vis other creditors of the Bell group. Nor, he claimed, did he turn his mind to identifying trade creditors because he believed that trade creditors would continue to be paid for the foreseeable future.
    7243 I have no difficulty with this proposition insofar as it relates to trade creditors of the publishing businesses. All of the material pointed to the fact that the publishing assets formed the basis of a viable business that was paying, and would continue to pay, its trade creditors. A more difficult question is whether the same can be said for external creditors other than trade creditors of the publishing businesses.
    7244 If the banks believed that there were no external creditors, it is not easy to understand why there was such anxiety about moving to a secured position and doing so promptly. I believe the banks were concerned that there may have been at least some other external creditors who may emerge to share in the fruits of a liquidation. This is particularly so given the complexity of the Bell group. It is not uncommon in large corporate liquidations for creditors to emerge who do not appear on existing balance sheets. Claims for damages can arise, for example, where liquidations lead to defaults under lease agreements. Davis (HKBA) acknowledged as much, accepting that, although many spurious claims arise, other creditors may be entitled to prove.
    7245 Inglis’ memorandum dated 6 November 1989 to the HKBA credit committee shows that HKBA appreciated that there were other creditors of Bell group who might be prejudiced by the securities, including $72 million of trade creditors of TBGL and $38 million in provisions. In his evidence, Davis agreed that these amounts could not be regarded as ‘de minimis’. He initially said they were not of concern because they would be paid out on a sale of the publishing assets as a going concern. In cross‑examination he conceded that this was not necessarily so – it would depend on what the creditors and provisions were and how they related to a consolidation of the BPG group.
    7246 Monahan (Kredietbank) made similar acknowledgements to Davis. When asked if it was a significant risk that the bank would find itself competing with other creditors, he replied: ‘That was a risk. Absolutely, yes’. He also confirmed the views expressed by Broom, in an internal commentary dated 14 November 1989 on the proposed Transactions, that Kredietbank was owed money by the holding companies only and might find itself ranking behind other creditors of other companies in the group. He accepted that by executing the Transactions, the bank thereby improved its position. Likewise the banks, as experienced commercial entities, must be taken to have known that the Transactions would ensure they had priority over any future debts created by the Bell group.
    7247 I think the beliefs of the banks can accurately be described by reference to a comment made in a file note of a meeting on 19 September 1989 between Latham, A&O and MSJL: ‘Unlikely to be too many creditors of either – but there will be [some]’. This appears to be the only inference which a reasonably competent business person could have drawn from the material available to the banks throughout the period up to 26 January 1990.
    7248 In relation to the specific issue of the tax assessments, the highest at which any lack of knowledge on the part of the banks could be put is exemplified in this exchange during the cross‑examination of Weir:
    Did you know that there may be a tax claim of [around $30 million]?—I knew at some stage or other there could be a claim. Whether I knew at that time I don’t know. The previous note would probably indicate that I may have been aware of it. That note from one of the solicitors indicates that I may have been aware of it at that time but I’m not exactly sure when.
    7249 The phrase ‘at that time’ refers to 3 January 1990. Whatever the situation may then have been, by 26 January 1990 the banks knew of the possibility of a claim by DCT.
    30.20. Knowledge of inter‑company lending and corporate benefit
    30.20.1. Some introductory comments
    7250 I think it is clear that the banks knew a lot about the corporate structure of the Bell group. Charts setting out the basic corporate structure of the Australian Bell group companies and of the BGUK group were included as schedules in ABSA and LSA No 2. The accuracy of that information was warranted by TBGL. The banks must be taken as having understood the terms of the agreements they signed.
    7251 The more important issue to be considered here is what the banks knew about the pattern and detail of inter‑company lending within the Bell group. The manner in which the facilities provided by the banks had been on‑loaned within the group is relevant to whether there was a corporate benefit in the Transactions (and the banks’ beliefs as to whether there was a corporate benefit in the Transactions).
    7252 Of particular importance in this respect is whether the banks believed BPG and WAN had a real interest in granting security over their assets. A belief by the banks that BPG and WAN had received the proceeds of the banks’ facilities would strengthen the argument that those companies had an interest in preventing a series of cascading demands requiring them to repay the moneys. Alternatively, if the banks were aware that there were no outstanding debts from the publishing companies to BGF, the argument that they had a genuine belief there was any benefit or consideration for those companies granting security over their assets would be diminished.
    7253 The creditor and debtor relationships between BGF and the publishing companies are described in Sect 9.18.3.2.
    7254 In this section I also intend to deal with a related topic; namely, whether the banks sought up‑dated cash flow projections to explain how anticipated deficits would be covered.
    30.20.2. Corporate benefit revisited
    7255 I have had a lot to say about the corporate benefit question: see Sect 25. However, I need to explain why I see it as relevant to issues concerning knowledge of corporate structures and inter‑company lending.
    7256 An important part of the plaintiffs’ case is the lack of corporate benefit in the Transactions. This claim is probably strongest when looking at the publishing group companies. The plaintiffs argue that the companies which were part of the BPG group gained no benefit from the Transactions because they did not obtain the benefit of the Bell group’s borrowings. In other words, these were profitable companies which did not owe debts to any of the borrowers (particularly BGF) and hence had no interest in preventing the banks from precipitating the liquidation of those companies.
    7257 Corporate benefit is asserted by the banks on the basis that the interests of the group coincided with those of each individual company. That is, each security provider had an interest in giving security to avoid setting in motion a series of cascading demands. Prima facie, this must be assessed by looking at the SNAs for each company in the BPG group and establishing whether it was a debtor or creditor of BGF. Unless it owed money to BGF, the arguments in favour of corporate benefit become problematic. The banks’ objections to the book value SNAs do not include any of the publishing group companies.
    7258 The existence (or absence) of corporate benefit would need to be assessed separately for each company. But, because of the complexity of the intra-group dealings, it is not enough to look at each company’s direct debts or credits to BGF. I will explain what I mean by posing a hypothetical example. Assume WAON owes $10 million to BGF. If it its assets were worth less that $10 million, WAON would have a liquidity problem if BGF called on its loan to it. WAON may have a legitimate interest in giving security to prevent the banks calling in the facilities, so as to prevent a flow‑on demand by BGF. But assume WAON is also owed $30 million by Neoma and that Neoma, in turn, is owed $50 million by BGF. This, in effect, means BGF owes money to WAON, not the other way around. WAON could call on its loan to Neoma, which in turn could make demand of BGF. The end result is a net flow of funds of $20 million to WAON from BGF.
    7259 In other words, the direct debtor and creditor relationship reflected in the books of WAON and BGF do not show the whole picture. To assess net lending it is necessary to follow dealings through the group. And this is a necessary exercise in assessing corporate benefit for individual companies.
    7260 I will come back to knowledge of the corporate benefit in Sect 30.23, particularly in the context of the recitals in the refinancing documents, the minutes of directors meetings and the Bell group restructure plans.
    7261 There is a parting comment I wish to make about corporate benefit. On 19 July 1989, Farquhar (Lloyds Bank) presented an analysis of the Bell group situation to Cruttenden and Armstrong. This report was peremptorily dismissed by Latham in his evidence as having been based on inadequate information. I am not sure that I accept that but in any event Farquhar’s memorandum contains a telling suggestion:
    Would it be better to agree a larger facility (so long as other/new participants were prepared to find the extra) in order to refinance the short term debt? This would help to ensure that short term lending is kept in and not reduced to the detriment of the Lloyds syndicate.
    7262 In other words, give them a little more money. Had that happened there is a respectable argument that, although the companies would still have failed, these proceedings would never have eventuated. This brings to mind the old saying: ‘Don’t spoil the ship for a ha’peth of tar’.
    30.20.3. Acquiring knowledge: debts, credits and benefits
    7263 At the Lloyds syndicate meeting on 11 September 1989, Simpson told the bank representatives that the two borrowing companies were ‘shells’ and that the assets were owned elsewhere. Simpson and Raeburn agreed to provide the banks with details about how the original funds had been on‑lent to other Bell companies.
    7264 The banks appear to have been under a misapprehension at this time that the money lent by the banks, and other funds, had flowed through the borrowers and on to BPG. Pettit expressed the view (as recorded in his note of the meeting) that:
    At the moment we were unsecured to shell holding companies with limited access via their unspecified intercompany loans (hopefully) to operating companies that held some tangible assets.
    7265 This misapprehension was corrected at the syndicate meeting on 13 October 1989, when A&O and MSJL corrected Simpson’s earlier information, saying that the proceeds of the Lloyds syndicate facility had not been on‑lent to BPG, but instead had gone primarily to the international side of the Bell group. Hall (DG Bank) said in his note of the same meeting:
    It has now come to light that the loan made [BGUK] may not have been on‑lent within the group. This results in a proposal that the restructured loan should be to the existing borrowers.
    7266 At the Lloyds syndicate meeting on 1 November 1989, A&O or MSJL advised the syndicate banks that the shares in BRL were held by various subsidiaries of TBGL. There was an extensive discussion of Pettit’s suggestion that TBGL assume the restructured debt. This must have been put forward on the basis that the assets were held in subsidiary companies which had not received the benefit of the banks’ lending. Pettit’s rationale was to ‘avoid having to crystallise security over Bell’s operating subsidiaries or put it to the test in the short term’, apparently recognising concerns about corporate benefit for those companies.
    7267 Evidence of knowledge of the inter‑company equity and debt structure of the BPG group also lies in the analysis conducted by Weir and P&P of the inter‑company equity and debt structure of the BPG group in October 1989. Weir obtained, either directly or via P&P:
    (a) the draft 1989 financial statements for the BPG group;
    (b) a spreadsheet containing the details of assets and liabilities of BGF and BPG as at 30 June 1989 (the former also including details of all BGF’s inter‑company loan balances);
    (c) draft accounts for Western Interstate for the year ended 30 June 1989;
    (d) a spreadsheet containing details of the assets and liabilities of Western Interstate, BGF and BGUK as at 30 June 1989;
    (e) a spreadsheet containing details of the inter-company lending between members of the BPG group, TBGL, BGF and BCHL; and
    (f) the annual reports for the BPG group companies.
    7268 In his affidavit, Paterniti said he could not recall what conclusions he drew from this material. He stated that he never received a complete or up to date set of accounts for all the companies in the Bell group and never fully understood the complex web of inter‑company lending. This is not surprising. But there was certainly enough material to give an adequate understanding of the key inter‑company loans of the main companies in the group, as the following discussion demonstrates.
    7269 Weir made annotations on the 30 June 1989 accounts for the members of the BPG group. The balance sheets which he received included single figures for ‘receivables’ and ‘creditors and borrowings’ and did not contain an itemisation as to which companies had borrowed or lent to the subject company. Weir’s annotations on the accounts list the major borrowings and loans and reveal he had received additional details as to the inter‑company lending within the publishing group. The WAN balance sheet, for example, contains an annotation which notes BGF’s $45 million debt (as it was at that time) to WAN. Weir acknowledged in cross‑examination that from this he was able to identify the ‘flow of funds within the various parts of the group… between [BGF] and [WAN]’. I was not able to ascertain from the evidence exactly when Weir came to realise that BGF was indebted to WAN. Paterniti assumed he would have reviewed these documents.
    7270 The analysis of the inter‑company lending in the publishing group (and insofar as it involved BGF) was included in the schedule to the draft brief to counsel prepared by Paterniti on 19 October 1989. The schedule recorded the debtors and creditors of each company in the BPG group, as well as BGF. The defendants point out that Paterniti recorded that WAN and BPG were debtors of BGF in the sum of $46 million and $3.5 million, respectively. But the headings in this document are misleading. For example, the entry for BGF reads:
    Bell Group Finance Pty Ltd
    Debtor of:-
    Bell Group Press Pty Ltd 108,481,127
    Western Mail Pty Ltd 70,257,874
    Western Mail Developments Pty Ltd 88,042,000
    Harlesden Investments Pty Ltd 141,378,520
    Creditor to:-
    Bell Publishing Group Pty Ltd 3,473,318
    Albany Advertiser Pty Ltd 1,423,354
    West Australian Newspapers Ltd 45,749,967
    7271 The natural meaning of the words used suggest that BGF owed money to (that is, was a debtor of), for example, Western Mail, and was owed money by (that is, was a creditor of) BPG and WAN. The same formatting is used for other companies in the publishing group. But Paterniti had reviewed the material with Weir and it is clear they knew who the intra‑group debtors and creditors of BGF were and how this related to companies in the publishing group. Paterniti must have intended to show the opposite result and the format of the document must be regarded as a mere quirk. If not, at the very least it can be said that Paterniti and Weir ought to have known the correct situation.
    7272 As mentioned, the schedule describes the inter‑company loans for each company in the publishing group. It is not particularly difficult to track the passage of funds through the group to determine which companies would have been affected by a demand made by the banks on BGF. It is apparent that the flow of funds only went through part of the publishing group. Of those companies which received the benefit of the borrowings, Bell Press was the only operating company. None of the others had operating assets. It is also apparent that the companies with the bulk of the substantial assets, including BPG and most prominently WAN, were not debtors of BGF.
    7273 Weir’s annotated accounts were given to Lloyds Bank who, in turn passed them on to MSJL. The documents were reviewed by Latham so Lloyds Bank must be taken to have known of the true situation. I believe the contents of the documents can be imputed to the other banks as a result of falling within the limited scope of Westpac and Lloyds’ duties as agent banks.
    7274 The banks submit that this information was acquired by each of Lloyds Bank and Westpac for their personal benefit and did not fall within the scope of its agency. The evidence shows that Westpac and Lloyds Bank had responsibility to circulate only those pieces of information specifically given to them for the purpose of distribution amongst the banks, and each bank retained responsibility for financial assessment of the Bell group. But Westpac and Lloyds Bank did undertake to obtain information about the internal debts of the Bell group.
    7275 Westpac and Lloyds Bank had also undertaken to instruct P&P and A&O about the proposed Transactions and instruct MSJL in order to obtain counsel’s opinion. Information about the inter‑company lending was pertinent to obtaining proper legal advice and relevant to the other banks’ understanding and interpretation of that advice. The fact that the information was acquired in the course of discussions with P&P, whose work was effectively for the benefit of all banks, makes the case for imputation stronger. If this knowledge is imputed to all banks, it also follows that all banks can be taken to have known that counsel were not instructed with this information and therefore proceeded on erroneous assumptions.
    7276 In any event, Westpac knew of the true position with respect to inter‑company lending and had appreciated the significance of debtor–creditor relationships to the ascertainment of corporate benefit for many companies in the BPG group (particularly WAN). Based on the open communication between the banks, it seems highly likely these views were shared with the other banks and the lawyers. Cole (MSJL) noted in a fax to Latham (Lloyds Bank) and Perry and Watson (A&O) on 8 December 1989 that there was no evidence of a debt owing to BGF from BPG yet counsel had been instructed on that basis.
    7277 In their advice to Lloyds Bank of 8 December 1989, MSJL expressed the view that the absence of a BPG debt to BGF was significant and made it difficult to see any corporate benefit for the BPG group and recommended that the full facts be obtained before proceeding. A copy of this advice was sent to P&P and, once again, I think it can be imputed to all Australian banks.
    7278 The banks contend that this comment was no more than an interim view expressed by Cole and, further, it was incorrect (on the basis that subsidiaries of BPG owed debts to BGF) and did not form part of MSJL’s ultimate views, as expressed in their advice delivered on 18 December 1989. But a close reading of the final 18 December 1989 advice does not support this argument. It does not deal with individual companies. It states ‘[t]he only security providers with a tenable corporate benefit argument are those companies which have been on‑lent the proceeds of the existing Australian facilities by way of inter‑company loan from [BGF] at call’. As I have noted, it either was apparent, or should have been apparent, that many of the BPG group companies, including most of those with the valuable assets, had not received the proceeds of the existing facilities. There is no evidence that anyone followed up the MSJL recommendation that the full facts be obtained before proceeding.
    7279 This is confirmed by the records of a telephone conversation involving Perry, Ascroft, Ladbury, Stow and Cole in mid‑December 1989. Ascroft’s note appears to question why the directors of BPG would want to grant security over the group’s assets. She noted that WAN was indebted to BGF in the amount of $35 million but I assume she meant the reverse. This would appear to fall within the scope of the solicitors’ retainers and can be imputed to the Lloyds syndicate banks.
    7280 The banks argue that Lloyds Bank still retained a belief that there was a corporate benefit for the companies in the BPG group. Latham wrote a comment on the MSJL 8 December 1989 letter saying ‘NB, group companies do [owe debts to BGF], even if holding company doesn’t’. In cross‑examination, Latham said that he assumed that even if BPG did not owe money to BGF, then at least some of BPG’s subsidiaries did. He also said that he saw this as a matter of concern for the directors, not the banks. The tenor of Latham’s evidence in his witness statement and cross‑examination suggests that he saw the problems of the Bell group not being limited to the borrowers but infecting the group as a whole.
    7281 But I have some difficulties with Latham’s expressed position. Upon receiving the letter from MSJL, Latham sent to Cole the accounts for BGF containing his handwritten notes. Latham’s notes showed that Bell Press, Harlesden Investments and Western Mail had received loans from BGF, but WAN and BPG had in fact lent money to BGF. Cole’s response on 9 December 1989 indicates that he maintained MSJL’s earlier views and that he and Perry did not share Latham’s optimism. In the letter, Cole stressed that they had very limited information and as such were unable to find an obvious argument for corporate benefit in relation to any security provider except TBGL. Latham placed a tick next to this passage on his copy of the MSJL missive.
    7282 MSJL repeated in its advice of 18 December 1989 (quoted more fully above) that there was ‘little or no’ corporate benefit for any subsidiaries which had not received the proceeds from the bank facilities. From his handwritten notes, Latham must have known this applied to WAN and BPG. Ascroft’s note of a meeting between herself, Latham, Perry and Ladbury on 31 October 1989 states ‘Principal security holder is creditor to borrower – WAN’, which suggests that Lloyds Bank, MSJL and A&O were aware that WAN was a creditor to BGF rather than the other way around.
    7283 In a communication to Lloyds Bank of 15 November 1989, Simpson acknowledged that the terms sheet required him to provide the banks with the accounts of each of the 28 proposed security providers. Simpson said he thought this would make an extremely bulky package and was unnecessary. He proposed to deliver only the accounts of BGF, TBGL and BPG. In cross‑examination, Latham acknowledged that if they had pressed for the accounts and received them, it would have helped them resolve the corporate benefit issues raised by their solicitors.
    7284 The Australian banks and Lloyds syndicate banks were consistently advised of the dangers of the Transactions being set aside for lack of corporate benefit. In both his witness statement and in cross‑examination, Latham acknowledged having been aware that corporate benefit had to be established for each security provider as a separate legal entity.
    7285 Yet it appears that the lawyers only came to advise that there may be a lack of corporate benefit for many of the security providers on 8 December 1989. It was only at that time that Latham provided them with the information on the inter‑company liabilities between BGF and the BPG group. The plaintiffs submit that he had this information well before 8 December 1989 (they say by 19 October 1989). Latham said he provided this information in response to an enquiry, yet it seems more likely that he did so because of the unfolding events in Australia that led to control of BRL being wrested from the hand of BCHL which, in turn, led to the panic weekend and efforts to finalise the securities quickly.
    7286 Further, in his fax of 8 December 1989 to Perry and Latham, Cole wrote: ‘If at all possible we should put pressure on Bell to provide us with full facts by Monday/Tuesday of all indebtedness between all the security providers which directly or indirectly ultimately leads back to BGL, WAN or [BGF]’. Latham also put a tick next to this passage. Yet there is no evidence that Lloyds Bank ever followed this up.
    7287 Against that background, I have difficulty accepting that Latham thought the fact that some subsidiaries of BPG had received money from the borrowers was sufficient to resolve corporate benefit problems. Lloyds Bank knew that WAN and BPG, in particular, had not received money from the borrowers and as such, based on the advice from MSJL, the arguments in favour of corporate benefit were weak. As for the other companies in the group, Lloyds Bank had been advised to make further investigations to determine the situation with more certainty. They knew that they could take the risk of getting security over the WAN assets because if the securities were later set aside due to a lack of corporate benefit, they would be no worse off.
    7288 In any event, even if Latham genuinely believed there was a corporate benefit in relation to the publishing companies, it can be characterised as a personal views only. The views of MSJL could still arguably be imputed to the other syndicate banks. The Lloyds syndicate banks received copies of the draft BGF accounts to 30 June 1989 around 9 October 1989 and the section on related company loans revealed the true picture. As mentioned earlier, while many companies in the publishing group had substantial debts owed to BGF (including Bell Press and Harlesden Investments), BPG and WAN were creditors of BGF.
    7289 The banks submit that the fact the WAN and BPG were owed money by BGF gave them a corporate benefit in granting security over their assets, in order to protect their receivables from BGF. I do not accept this argument. It could not be said that either WAN or BPG in a better position by putting their assets at risk of being called on by the banks. In any event, in terms of knowledge and state of mind, there is no evidence that any bank officer or their lawyers ever contemplated this argument as a basis for establishing corporate benefit.
    7290 Lloyds Bank undertook similar analysis of the BGUK group in January 1990. In a letter to Latham dated 2 January 1990, Richard Breese explained the relationship between BGUK and TBGIL and included the mid‑year 1989 accounts for both companies. He noted that the majority of the operating assets had been sold (with the exception of Bryanston) and there was little point in obtaining security with TBGIL. Breese appeared open to providing further information as required by Lloyds. On 23 January 1990 Breese sent a letter to Lloyds Bank providing further information on the BGUK group including:
    (a) an intra group balance elimination schedule supporting the 30 June 1989 BGUK consolidation;
    (b) a consolidation pack dealing with the Swiss subsidiaries (in Swiss francs); and
    (c) statutory accounts for two other subsidiaries.
    7291 By fax on the same day, Breese sent to Armstrong a list of the intra‑group balances which he anticipated the group would be unable to subordinate. This list was sent to Weir (Westpac). Some time in January 1990, Lloyds Bank also received a hand‑drawn diagram of the corporate structure of the BGUK group. A copy was also sent to Westpac. All this material demonstrated that although there was little in the way of assets left in the BGUK group, there remained significant inter-company debts.
    7292 The knowledge of the Australian banks is reinforced by Weir’s diagram: see Sect 30.12.2. In my view the diagram reflects the position as it existed before the Transactions, or as if the Transactions were not going to occur. The diagram shows BGF, TBGL, BGNV and the publishing group companies. For each company, it lists total assets, total liabilities and a surplus. It also shows the flow of inter‑company debt among these companies. Although the sums reflected in Weir diagram are slightly different to those I have set out in my analysis of the inter‑company lending in the publishing group (as to which see Sect 9.18), the basic picture is the same.
    7293 Many of the various refinancing models that emerged during the negotiations and in the legal advice deal expressly or by necessary implication with the risk of lack of corporate benefit. This is particularly so in relation to BPG and its valuable subsidiaries (notably WAN) which had not received the benefit of the banks’ lending. For example, in the joint memorandum issued by A&O and MSJL in October 1989, the fresh advance structure and assignment structure predicated on the need to deal with a possible lack of corporate benefit in giving security over the publishing assets.
    7294 In my view, by 16 January 1990, all banks knew of:
    (a) the need for corporate benefit for each security provider as a separate legal entity;
    (b) the true position in relation to inter‑company lending within the BPG group and between members of the BPG group and BGF; and
    (c) the connection between the inter‑company lending and the establishment of corporate benefit.
    7295 They knew, ought to have known or had the means to know, about the type of analysis which I have carried out in Sect 9.18.3 concerning the debtor and creditor relationships within the BPG group. The result of that analysis is that, based simply on inter‑company lending, it might have been possible to base a corporate benefit argument for giving security in relation to some, but not all, sub‑group members. For some companies in the publishing group, no benefit was obtained by providing security over their assets or by guaranteeing the debts of other Bell group companies. And this applies, in particular, to WAN (the direct repository of the most valuable assets) and BPG, the holding company for the sub‑group.
    7296 A real difficulty arises once one or more companies in the group is found not to have a corporate benefit in undertaking a Transaction. Because of the complex web of intra‑group dealings, it becomes increasingly difficult for the overall structure to survive once there is a break in the chain. In my view, this difficulty applies in relation to the Bell group generally and the BPG sub‑group in particular.
    30.20.4. Knowledge of the cash flow position of the companies
    7297 One of the criticisms that the plaintiffs lay at the feet of the banks is that, leaving to one side the July cash flow and the September cash flow, the banks did not obtain updated cash flows from the Bell group companies before entering into the Transactions. This is something they should have done and, in not doing so, they failed to make enquiries that a reasonable banker would have made in the circumstances.
    7298 This is part of the allegation to which 8ASC par 58 and par 59TA is directed. It leads to the allegation, as contained in the particulars, that such enquiries would have been made by honest and reasonable persons in the position of the banks who did not already have the information or who did not already know or believe that the financial position of the Bell Participants was as pleaded. It is a mix of the second and third categories of Baden knowledge, shorn of any imputation of dishonest conduct. It also contains elements of the fourth category.
    7299 I am satisfied that the banks did not seek updated cash flows. There were requests, especially from some of the Lloyds syndicate banks, for material of this type but they were not followed through. From time to time information may have been delivered about the performance of the publishing assets and this may have included projections. But it was understood by the banks from an early time that that the free cash flow from the BPG group would not, of itself, be sufficient to cover the interest due to the banks, and would not enable the group companies to meet their other commitments. As a broad generalisation, the banks’ answer to the criticism about not obtaining updated cash flows is that they had enough information and did not need to go into cash flow detail.
    7300 I do not intend to provide a detailed list of evidentiary references that support the broad conclusions mentioned in the preceding paragraph. They are many and varied and appear throughout these reasons. In any event, I do not think the proposition that the banks did not have updated cash flows (apart from those developed for the publishing businesses) would be controversial.
    7301 There is, however, one aspect of this issue that warrants further comment because it goes to the basis of a finding on all or any of the second, third and fourth categories of Baden knowledge. There was a line of cross‑examination common to many of the bank officers designed to show that in the events that occurred between about August 1989 and January 1990, the banks knew or should have known there were large ‘holes’ in the cash flows they had been given. Further, they should have enquired of the Bell group directors how the holes would be plugged. I can best explain the identification of the ‘holes’ by reference to the July cash flows and my findings as to disputed items. My analysis is set out in Table 40 below.
    Table 40
    CASH FLOW HOLES
    Closing cash balance (30 June 1990) $6.35 million
    Less:
    Management fees (BRL and JNTH) ($27.3 million)
    Dividends (BRL, JNTH and GFH) ($55.83 million)
    Bryanston proceeds ($18.26 million) ($101.39 million)
    Interim shortfall ($95.04 million)
    Add back:
    Capital reductions not required $30 million
    Shortfall ($65.04 million)

7302 These are all approximate figures. For greater accuracy I think the figures should be pitched at May 1990 (rather than June 1990) when the bondholder interest fell due. If this were to be done the deductions would be reduced by $7.66 million for a GFH dividend due June 1990 and capital reductions would be $20 million rather than $30 million as the last payment was scheduled for June 1990. There are two other matters that this exercise does not take into account. First, the banks were aware that there would be a need to provide for costs, expenses and stamp duties of the refinancing (not provided for in the July cash flow). These eventually came in at about $7.3 million. Secondly, if the scheduled capital reductions were not made the interest expense would increase.
7303 Not all of the items in Table 40 were put to all bank officers with whom the line was raised. Often, the ‘hole’ (before setting off the $30 million capital reduction) was put as being around $60 million. This line of argument is exemplified by the cross‑examination of Moorhouse (BoS). In particular, this exchange occurred:
You would want a good explanation of how The Bell Group could make up that income to know that – if there was concern of it being insolvent. That would be your practice?—Generally we would want to know how they were going to fill the gap.
Yes. That’s basic banking, is it not? If there’s a doubt about a gap existing, you want to know how they’re going to fill the gap, do you not?—We would want to know what their proposals were.
…
I am asking you about your practice, about finding out how the gap would be filled. You want details of who was putting the money in, when and how much, would you not?—In the general terms, yes.
You would want to know the underlying information about any such prediction, would you not?—Generally we would look to understand where the funds were coming from.
7304 I do not read much into the qualifications implicit in the word ‘generally’ and the phrase ‘in general terms’ in those answers. I do not think it goes much further than to recognise the obvious, namely, that each customer is different. But I accept this as evidence of standard banking practice. Other examples supporting this conclusion can be found in the evidence of Laubrecht (BfG), Armstrong (Lloyds Bank), Jonker (DG Bank) and Simonen (Skopbank).
7305 It seems to me that this is strong evidence in support of the abstention from enquiry aspect of the plaintiffs’ claim. I would also place in this category the decision not to insist on the delivery of certificates of solvency: see Sect 30.9. It will be apparent from findings made in various parts of Sect 9 that the plaintiffs’ allegations concerning items that constitute the cash flow ‘hole’ have been made out. The evidence in this Sect 30 generally satisfies me that the banks were aware of the likely absence of those items from cash inflows and of the effect this would have on the financial position. In particular, they were aware that in the absence of those items, the Bell group companies would be reliant on asset sales to meet interests and other commitments, in the light of the cl 17.12 regime, and made no enquiries to ascertain how that that would occur.
7306 In relation to BGUK, I am satisfied as to the matters set out in PP par 58(c)and (d). In particular, the banks knew that the UK directors would be reliant on funds from TBGL or BGF to meet its commitments. The banks and (or through) their lawyers were also aware of the matters set out in Sect 30 about the financial information that BGUK had concerning TBGL’s position and that BGUK had nothing more than a letter of comfort on which to rely.
30.21. Individual banks’ knowledge: Australian banks
30.21.1. Introduction
7307 So far my analysis about the banks’ knowledge of the financial position of the Bell group companies has been largely, although not entirely, objective. It has focussed on what the banks knew or must be taken to have known about the group’s cash flow, particularly the contentious or important or doubtful items in the cash flows. I wish now to turn to more specific, subjective views of individual banks regarding the solvency of the companies and related matters. This goes to whether key figures in the various banks knew, believed or suspected that the Bell group companies were, or would likely become, insolvent. To some extent, I have already touched on these matters in discussing the file notes made by bank officers of the several meetings of the syndicate banks.
7308 Much of this material also has relevance for the later discussion on abstention from enquiry. The subjective views of the key bank witnesses provide the foundation for the argument that the banks suspected the Bell group was insolvent, but did not make the enquiries that an honest and reasonable person would have made in the circumstances. This is an application of the third species of Baden knowledge, without any imputation of dishonest conduct. In this section, I have (once again) generally preferred the contemporaneous documentary evidence to the subsequent testimony of the witnesses.
7309 A history of the dealings between each bank (or the Lloyds syndicate) and the Bell group is to be found in Sect 4.2 and Sect 4.2.8. I will not repeat the material in those sections but it needs to be borne in mind when considering the position of the individual banks.
7310 I do not think that many issues arise as to whether a particular bank officer’s state of mind can be taken to represent that of ‘the bank’, at least whether they had sufficient capacity. Generally speaking, all of the main participants on behalf of the banks were of such seniority and possessed sufficient responsibility in relation to the facilities with the Bell group that they can be considered to be the directing mind and will in relation to the Transactions.
7311 This is not, of course, universally so. Some of the more routine work was done by officers without any particular level of authority. But I do not think there is any individual bank in respect of which I felt the evidence did not permit me to make appropriate findings because of the level of authority of persons expressing views or delivering information to those who actually made the decisions.
7312 Certain issues may arise as to whether SCB officers can be considered to represent SCBAL’s knowledge. Issues may also arise where different officers within a particular bank appear to have had conflicting views. But these issues will be resolved as and when they arise.
7313 To understand what decisions each bank made and how they came to be made, it is necessary to appreciate the decision‑making structure of the bank concerned. I have dealt with this in Sect 11.
7314 The final introductory comment is to say that, unlike the Australian banks, the knowledge of the individual Lloyds syndicate banks came much more from Lloyds Bank and from syndicate meetings. This explains why the sections on the Lloyds syndicate banks (other than Lloyds Bank itself) are, in the main, slightly shorter than those for the Australian banks. These sections are also structured in a different way, being more closely related to events surrounding the syndicate meetings. The reason why the Lloyds Bank section is more voluminous is because it was the focal point through which information was disseminated and it had more direct dealings with the lawyers. It is therefore necessary to understand more of what Lloyds Bank knew to appreciate the way in which the other Lloyds syndicate banks came to their respective positions.
30.21.2. Westpac
The period before the Transactions
7315 Westpac’s facility to BGF was due for repayment on 16 September 1988. Shortly before the due date, the bank approved an extension of the facility to 31 December 1988. Westpac, as far back as the 2 December 1988 credit application, had regarded the Bond group as having an uncertain future. Westpac’s recommendation at that time was to lend to the group only where the funds could be quarantined from the rest of the group and where adequate watertight security was provided, over assets sufficient to service and repay the debt. At this time, the banks’ understanding (according to Stutchbury) was that the Bell group would not be in a position to repay the facilities prior to 31 March 1989. The Bell group had a programme of asset sales planned, but Stutchbury thought that there was considerable uncertainty as to the returns that would be generated to the company. Accordingly, Stutchbury’s team kept close tabs on the asset sale programme. As a result, Stutchbury had concerns by the end of 1988 as to TBGL’s ability to repay the debts.
7316 The board credit committee resolved on 22 December 1988 that it wished to see its outstanding loans to the Bell group run‑down, ‘but if opportunities to enhance security backing to the Bank’s exposure were presented through other financing possibilities then they could be investigated’. This was, in effect, Westpac’s mission when Weir stepped into the fold as Manager of Corporate Banking in WA in December 1988. On the same day, Westpac agreed to extend repayment of the $50 million facility to 31 March 1989. This was done on the basis that the Bell group had no immediate capacity to repay the facility without recourse to another lender at that time. The understanding that the Bell group’s debts would be substantially reduced via asset sales remained.
7317 Particulars of the planned asset sales, as represented to Westpac, can be found in the letter dated 29 December 1988 from Devries to Youens (which was read by Weir). Up to 31 March 1989, TBGL expected to receive around $228.4 million (from Waugh & Josephson, Wigmores, Bryanston and Dewey Warren Holdings plc) which would reduce its total bank debts to $131.7 million. After 31 March 1989, further asset sales were expected to realise $133 million – enough to eliminate the remaining debt.
7318 On 10 January 1989, Farrell wrote to Weir proposing that a $250 million facility be granted to BPG. The proposal was predicated on the assumption that all banks would be repaid by 31 March 1989. Westpac was not opposed to the idea but wanted security. Westpac was first notified of the Bell group’s inability to meet the 31 March 1989 target on 3 March 1989, via a letter from Farrell. It was at this time that the Bell group sought the lifting or variation of the negative pledge arrangements to enable the assets of BPG to be used as security. Farrell reported that there had not been a satisfactory resolution of the Wigmores and Caterpillar situation. Bryanston had been sold and the proceeds were to be directed to existing lenders pro rata.
7319 This proposal ultimately took shape in the 23 March 1989 credit application. The head office credit committee was asked to consider deferring the $50 million due on 31 March 1989 to allow for repayment of $25 million on 31 May 1989 and the other $25 million by 30 September 1989. The Bell group also sought variation of the negative pledge arrangements to allow it to grant security over BRL shares. Weir endorsed the application on the understanding that the first tranche of $25 million would be covered by the imminent receipt of the Bryanston proceeds and the Qintex receivable. The second tranche of $25 million would be covered by the Wigmores proceeds and the refinancing of BPG group debt. Since the sale of Wigmores and the refinancing of BPG were not ‘entirely definitive’, the Bell group offered the BRL shares as security.
7320 There is mention of the ‘serious financial problems facing the Bond group’ in numerous pieces of Westpac’s correspondence to this point. For example, the 3 February 1989 credit application described its position as ‘precarious’. Westpac knew there was an NCSC investigation into certain transactions by Bond group and the way in which they had been recorded. Westpac was also aware TBGL’s credit rating had been downgraded to ‘B’. It became apparent to Weir at this time that the Bell group’s asset sales were not realising the amounts expected and the group was using some of the proceeds to pay interest rather than retire debt. It is apparent from the 23 March 1989 credit application that Weir understood the remaining saleable assets would be insufficient to repay the outstanding bank debt. This was the reason why a refinancing of BPG was proposed.
7321 The BPG facility proposal made its way through the usual channels at Westpac, and was subject to another credit application on 7 April 1989. But it had little support and was rejected on 10 April 1989 by the Credit, Corporate Banking section. Spring identified the following as the main reasons for the rejection:
(a) Westpac already had a lease facility of $45 million to BPG; another $50 million would not be consistent with the board credit committee’s policy on the Bond group relationship;
(b) there was nothing (other than the directors’ integrity) to prevent ‘upstreaming’;
(c) the profitability of BPG was thought to be overstated – it had been making a loss and if it had to service a large syndicated loan, it would take some time to return to profitability; and
(d) the limited ability to estimate and realise the value of the mastheads as security.
7322 Weir supported the proposal and debated it with Spring via correspondence. The decision stood. Weir then prepared an amended proposal (dated 21 April). This proposal was not much different. The primary change was the reduction in total bank borrowings from $250 million to $200 million. There were additional safeguards built in to prevent dilution of assets and ‘upstreaming’ of the funds. This application was rejected before ever reaching the head office or board credit committees for formal consideration. Daglish sought a preliminary opinion from his superiors as to whether the credit application stood a chance of progressing if it measured up on credit grounds, or if it would be withdrawn regardless, as a matter of policy. The reply came that ‘in view of the media reports over the past few days, viz downgrading by Aust Ratings, extensive inter‑company lending by Bell group, the ABT hearings, the time is not right to go back to the board with a recommendation for further involvement with this group’. I cannot identify the author of the note but I do not think it matters a great deal.
7323 That having been said, I find it interesting that Westpac was not prepared to countenance such a proposal at this time, yet was significantly more open to the refinancing in October 1989 onwards. By 26 May 1989, Westpac’s policy (as evident in an internal memorandum of that date) not to consider any further proposals and instead seek a reduction in its facilities at every opportunity. This advice was in light of the reasons which were briefly noted above (as well as the share price fluctuations in TBGL, BCHL and BRL. Yet by October 1989, Westpac was prepared to negotiate to take security. This was despite continued deterioration of the Bell group’s financial position. They maintained a willingness to proceed despite a further downgrading in credit rating to ‘C’ in December 1989. In my view this indicates that Westpac was motivated by the no worse off thesis. It sought to protect itself against losses by obtaining security coverage regardless of the Bell group’s financial position, rather than basing its decision on any real analysis of the financial position and credit risk of the borrowers.
7324 On 18 May 1989, Weir and Stutchbury wrote to Spring discussing a number of developments. Weir had earlier been informed about the application of the Qintex receivable from Farrell. The authors expressed concern that the banks had not been repaid pro rata as promised and that asset sale proceeds had been utilised to cover interest payments and some working capital requirements which Weir believed to be ‘somewhat abnormal’. Weir and Stutchbury concluded, in effect, that the Bell group’s problems had been sensationalised in the media (my words, not theirs) to the point where any evidence of a default by any subsidiary or related company would be catastrophic (by which he meant possible liquidation) for the entire ‘group’, regardless of cross-guarantees or cross‑defaults. But they still regarded their unsecured borrowers as having sufficient resources to meet their commitments.
7325 It is not clear from the memorandum whether Stutchbury and Weir were contemplating liquidation for the Bell group, or merely the BCHL group in the limited sense. According to Stutchbury’s evidence (which I see no reason to doubt) he meant liquidation for the BCHL group, and he was uncertain as to what impact this would have on the Bell group. The Bell group’s failure to abide by the agreement to reduce bank debt pari passu was again made evident to Westpac on 25 May 1989, when they were told about the application of the Wigmores proceeds. Weir testified that he reacted with some anger to this.
7326 Weir received a copy of the letter from BRL to the ASX dated 16 May 1989. It noted the existence of the $700 million receivable (as it then was) due to BRL from BCHL. BRL also explained the details of the securities and undertakings given by BCHL in return. The description of the securities did not have the ring of gilt‑edged, risk free proportions: ‘first ranking mortgages over certain promissory notes, receivables, shares and securities of the BCHL Group’. There was a provision for security to be substituted from time to time. The letter also advised that non‑current receivables of $194.5 million comprised unsecured debts due from the Bell group and the BCHL group, but had no fixed repayment dates.
7327 It must be remembered that Westpac received the notifications issued by BRL about the proposed sale of the breweries to BRL, as well as the 1988 and 1989 Annual Reports for BRL: see Sect 30.6.8.
7328 Further internal correspondence was circulated in May and June 1989. It reveals a detailed understanding of the problems facing BCHL. Weir accepted that the Bell group and the BCHL group were in a ‘desperate’ situation at the time. By late June it had emerged that the Bell group could simply not repay without receiving further financing. Thus, Westpac turned back to considering refinancing proposals involving the club facility for BPG.
7329 On 5 July 1989 Weir and Youens sent a report to Spring setting out a brief review of Westpac’s exposure to the Bond group. In the context of a discussion about both the Bell group facility and the banks’ wider Bond group exposure, they said: ‘Our actions over ensuing months will need to be very circumspect and to ensure we could not be deemed to be receiving payment as a preferred creditor (should a worst case arise)’.
7330 In cross‑examination, Weir said that the references to a ‘preference’ and a ‘worst case’ scenario were not references to any concern about solvency. I prefer to rely on what I regard as the plain meaning of the words. A preference only arises if the borrower is insolvent. I have no difficulty with the proposition that a prudent banker will take precautions to avoid difficulties in a ‘worst case scenario’. I am not saying that the memorandum indicates that Weir and Youens knew that the companies concerned were insolvent. But it does indicate that they were on guard and harboured concerns. Weir was familiar with the law of preferences and his use of the term carried a precise meaning. The concern that taking security might be deemed a preference if the company went into liquidation in the short term was again noted in Weir’s 4 August 1989 note of his discussions with Aspinall.
7331 On 11 July 1989, Spring sent Weir and Youens’ memorandum to Thompson, along with his own analysis. He endorsed the approach to apply pressure for prompt repayment without precipitating a counter‑productive market reaction to a Westpac call.
7332 Weir accepted that he thought it would be ‘extremely difficult’ for BCHL to repay the deposit if the brewery sale did not proceed. Even if it did, he thought that that might result in BCHL having a problem servicing its debts if it could no longer rely on income from the brewery businesses. Similar concerns were expressed in Weir’s fax to Deer of 26 June 1989. Weir also knew of the NCSC inquiry into the BRL loans to BCHL and that it related to directors’ duties. Westpac had previously granted a $4 million overdraft facility to BRL. Westpac’s 31 August 1989 credit application noted that the facility had been cancelled but the exposure remained despite requests for clearance. The credit application stated that there was no doubt that the immediate future of BRL was dependent upon the ability of the BCHL group to effect transfer of its brewing assets to BRL. The $1.2 billion deposit had already been paid by BRL to BCHL and, if both groups could not have obtained shareholder approval to the transfer, it would have been extremely difficult, if not impossible, for BCHL to have raised sufficient funds to repay the BRL deposit. Failure to do so would have wiped out BRL shareholder funds and, while a secured lender would be covered, the same could not have been said for unsecured lenders, including Westpac. In his report to the board credit committee, which approved the 31 August 1989 credit application, Spring described the transaction as ‘controversial and as having ‘the appearance of a hastily conceived lifeboat loan to the holding company’. Spring proffered the view that the ability to consummate the deal to BRL’s benefit That the deal will ever be consummated ‘must be suspect’.
7333 The credit application dated 31 August 1989 was prepared by Weir and co‑signed by Stutchbury, who also included his own comments. Weir said that BGF was not in a position to repay the bank’s facility (obviously on the assumption that the banks would be repaid pro rata). Stutchbury, in his comments, identified two options available to the bank. First, to serve demand and proceed to liquidation which would obviously have major ramifications for the Bond group as a whole. Secondly, to get the facility secured to allow time for either an orderly sale of the BPG assets or a refinancing of the facility at a later time when the company expected its present problems to have been resolved. The climate might then be right to take the refinancing to the market.
7334 The refinancing was approved by Westpac’s credit committees on the basis of this application. However, this credit application did record TBGL as having a clear surplus of assets over liabilities. Stutchbury commented that the cash flow of BPG virtually covered only interest and the repayment of principal would depend on asset sales or refinancing. He also accepted that the asset sales were likely to fall short of the target of repaying the facility. The credit application referred to and incorporated the 1 July cash flow.
7335 The application also included a summary of the balance sheets of some of the key companies, including that of BPG. The summary showed a deficiency between assets and liabilities that was attributed to excluding the value of the mastheads from BPG’s balance sheet. This was in line with bank practice. The treatment of mastheads as an intangible (and its consequent exclusion from the balance sheet analysis) led Stutchbury to conclude that the report grossly understated the true net worth of the business. The mastheads were valued at $387 million in the preliminary audited consolidated balance sheet as at 30 June 1989. In arriving at this figure, the directors relied on the Whitlam Turnbull valuation. That amounted to an increase of $291 million from the value of the mastheads as stated in the accounts for the year ending 30 June 1988. According to Stutchbury’s analysis:
In isolation from the Bond Group, we believe lending to BPG to be an attractive lending proposition. We will be secured, albeit a portion is by way of intangible assets but this is mitigated by the monopoly of the Group in what is an essential industry with barriers to entry extremely high.
Cash flows are assured, and while we are reliant on Group estimates of improved profitability from relocation and rationalisation to service facilities, we are satisfied that the history of profitability of [WAN] … provides ample scope for Group projections to be achieved. (underlining in original)
7336 Stutchbury also said that financial covenants would isolate and prevent cash leakage to associated companies, including BCHL itself. Westpac would be lending to a discrete group ‘which we believe would find a ready buyer in view of its dominant position’. However, he expressed a concern about ‘the further cash requirement of approximately $50 million per annum needed to service [TBGL] subordinated convertible bonds’. He said that, as total group cash flow demonstrated, that requirement would be accommodated from management fees or dividend flows from BRL, JNTH and GFH totalling the sum of $80 million. He also said that group executives had acknowledged his concerns as to the reliability of these receipts but saw management of the inter‑group transfers as a separate issue outside the financing of BPG assets. Spring continued: ‘It must be acknowledged that all debt has been serviced to date and we are satisfied we can isolate debt and attendant servicing to the assets and strong cash flow of the [BPG]’.
7337 Weir and Stutchbury frequently expressed their confidence in BPG and WAN as strong operating companies, both during the refinancing negotiations and in their oral evidence. The credit application proceeded on the assumption that the new facility would isolate the assets of BPG. Accordingly, if the Bell group subsequently went into liquidation because it was unable to pay debts, such as interest due to the bondholders, Westpac would be able to recover its debt from the realisation of its security over the assets of BPG.
7338 Hogan was a member of the board credit committee but was absent on 31 August 1989 meeting at which the committee approved the 31 August 1989 credit application. Nonetheless, he formed the view (at around this time) that TBGL was close to insolvent and that it was a ‘reasonable expectation with a high probability’ that TBGL would become insolvent. Hogan was more sceptical than Weir or Stutchbury about the accuracy of the figures that had been provided to Westpac from the Bell group. For example, he regarded the revaluation of the mastheads as at 30 June 1989 as an optimistic assessment on the part of the company and potentially included a significant element of ‘blue sky’. I will come back to Hogan’s evidence shortly.
7339 White, the former managing director of Westpac, and another member of the board credit committee, understood the credit application as raising the possibility of liquidating BGF. This was because a view had been formed that it could not pay its debts then due from its own money.
7340 Stutchbury could only have put forward the option of liquidating the Bell group if he thought the borrowers were insolvent, or he harboured concerns that this was the case. Thompson speculated that Stutchbury ‘may have felt it worthwhile putting up one option when he favoured the other in order to put the second option into relief’ and refused to accept that there was a real possibility that the Bell group may go into liquidation. But I do not accept that Stutchbury would have idly put forward such an option in an important submission such as a credit application unless he thought it was a serious course of action. Hogan and White’s evidence supports this.
7341 Stutchbury accepted in cross‑examination that TBGL had few assets left to sell other than the BRL shares, the JNTH shares and the newspaper business. He also accepted that the group’s cash flow was reliant upon the management fees and dividends from BRL and JNTH. Weir, too, recognised this and accepted that the management fees were not a reliable source of income at the time.
7342 Spring notified Stutchbury on 14 September 1989 that the board had approved the application. I accept that Weir and Stutchbury may not have shared Hogan’s pessimistic views at the time. But the application refers to liquidation. They knew that the cash flow position was difficult. When they subsequently found out that the Bell group would not receive the Bryanston proceeds, the management fees nor the dividends as expected, they must have harboured real concerns about the solvency of the Bell group companies.
7343 Spring enclosed a presentation that he made to the board credit committee. In the presentation, Spring said: ‘Our efforts to obtain retirement of facilities have clearly reinforced our view that this group of companies is illiquid, dependent on the forbearance of its financiers pending asset sales to repay debt’.
7344 It is apparent from the rest of the document that Spring, and Westpac as a whole, resolved to take security as it was the ‘only effective course to enhance the banks’ position’. Spring also expressed doubt as to whether the Bell group could truly repay as promised. He noted that Westpac had an exposure of $76.8 million to the Bell group. This included equity leases over two printing presses of $45 million and an overdraft of $5 million to WAN. Of the remaining $27 million, Spring noted that ‘no further asset sales are in prospect sufficient to clear this which is part of the rump of remaining debt of the group of $264 million’. But he said he regarded the value of WAN as sufficient to cover loan principal and ‘core service cash flow’.
7345 On 21 September 1989, Weir prepared a handwritten diagram in which he set out his understanding of the flow of funds if the banks were to make a fresh loan to BPG. The funds would be used by BPG to repay part of the debt of $270 million it then owed to BGF. Weir sent the diagram to Latham (Lloyds Bank), who passed it on to A&O. As the banks were to discover in December 1989, that information was wrong. BPG was a creditor, not a debtor, of BGF. This was to have ramifications for the argument as to whether the arrangements conferred a corporate benefit on companies that had no pre‑existing debtor–creditor relationship with the banks but which were nonetheless granting securities.
7346 Westpac was instrumental in arranging the meeting of the Australian banks (attended by Armstrong of Lloyds Bank) in Sydney on 4 October 1989 and in drafting and disseminating a revised version of the terms sheet to incorporate the matters discussed at the meeting.
7347 On 25 October 1989 Weir sent a report to Spring on the preliminary results announced by BCHL, BRL and TBGL. The report incorporated further comments by Stutchbury. While Stutchbury had no actual recollection, he agreed on reading the report (in 2005) that it seemed the question of solvency or insolvency was a live issue at the time (1989). It seems, from both the line of questioning and the particular comment in the report which was referred to, that Stutchbury was referring to the solvency of the Bell group, rather than the wider Bond group.
7348 In his comments, Stutchbury’s said that ‘as was expected, recently announced results show how precarious the financial health of this group has deteriorated’. In this instance, I think his reference to the ‘group’ is to the Bond group. Correcting the grammar, I think he was conveying his assessment that the financial health of the Bond group was precarious and that it was deteriorating. Stutchbury also commented that the group’s convoluted accounting methods and structures rendered it difficult to make a full and accurate assessment of its financial position and future. He said: ‘However, [the] position is obviously extremely delicate and consummation of the partial sale of the company’s Australian brewery assets is considered to be critical for group’s survival prospects’.
7349 On 12 November 1989, Weir sent a memorandum to the banks. It certainly went to all the Australian banks and, I think, to Lloyds Bank. In relation to BRL, Weir had this to say:
We refer to our previous fax of 8th Nov. regarding treatment of any cash which could eventuate from sale of [BRL] shares. Two banks have expressed some concern at the proposed treatment; i.e. cash being retained for 6 months in [an] escrow account …
As a compromise, it is suggested that mandatory pro rata reduction to 200M be effected, with balance being retained in an escrow account for reduced period of 3 months. This would provide company with flexibility to arrange refinancing at a figure which most agree [BPG] can support but at the same time, allowing any bank to exit completely if they so desired at the end of 3 months …
We apologise for what appears protraction on agreement on term sheet, but you will be aware from press reports as to what may be a new situation regarding [BRL] shares. We certainly didn’t expect any repayment from this source during term of facility. (emphasis added)
7350 The italicised portion is important but it requires some explanation. The term of the facility referred to was, according to Weir, through to May 1991. It is not entirely clear what Weir meant. One interpretation (which flows from the use of the past tense) is that Westpac had not previously expected the BRL shares to be a source from which principal reductions would be made within the life of the facility, that is, before May 1991 but that in light of the new situation this might be possible. Another interpretation is that at not time had Westpac expected a reduction from that source and, although there had been a new development, nothing had changed in that respect. Weir’s cross‑examination is not enlightening. He seems to have been reasonably clear that up to this time (12 November 1989) there had been no expectation of a repayment sourced from the BRL shares. He could not remember what the ‘new situation’ (to which he referred) actually was. But it is apparent from the 8 November 1989 fax that the press reports to which he was referring concerned the joint venture bid for BRL. If Weir had not expected any return from the BRL shares; but in light of the joint venture arrangement, felt it was now a possibility, then, as a matter of logic, once the joint venture agreement fell over, he could not have had any continuing expectation of TBGL receiving any value for its BRL shares during the term of the facility. This is consistent with the view expressed in the 12 December 1989 memorandum discussed below. If the ‘new situation’ made no difference to the pre‑existing expectation, the same result ensues.
7351 Stutchbury and Youens sent a memorandum to McCorkell on 5 December 1989. The authors noted that for the banks’ security to be effective, BPG would need to remain viable for at least six months. ‘Due to prevailing extraneous influences’, they could not be certain of ongoing viability however ‘given the nature of the business and its monopolistic position in this state’ they did have ‘a certain level of comfort’. According to Stutchbury, the ‘extraneous influences’ were the uncertainties surrounding the possible receipt of management fees, dividends and the Bryanston proceeds. In relation to the BCHL group, the authors said:
[The group is] currently under extreme pressure on a number of front …
It would be extremely optimistic to suggest that BCHL will still be operating in six months time. This sentiment is reflected in current share price which is at an all time low …
Continued delays and revised deadlines with the Lion Nathan brewing deal are currently major negative influences on the group and with the further passage of time sale appears less likely to proceed.
7352 Similar sentiments were expressed in a further credit application dated 6 December 1989. It dealt more with the BCHL group rather than the Bell group and listed a large number of problems facing the group, many of which I have already mentioned. The summary stated that collapse (of the BCHL group) in the immediate future was a ‘very strong possibility’.
7353 The 12 December 1989 memorandum from Weir and Stutchbury to Spring was more specifically directed at the Bell group and came following the Adsteam action to appoint a receiver to BRL. As it duplicated much of the material in the 31 August 1989 credit application (repeated in the 9 January 1990 application), I will not spend much time describing it. There was further mention of the need to avoid the group collapsing within the six‑month preference period. It was noted that the group had three main assets:
(a) BPG, which Westpac thought had been overvalued but to which it still ascribed a value of $400 million;
(b) Bryanston, on which Westpac placed no value in light of the provision for insurance claims; and
(c) the investments in BRL and JNTH. Weir and Stutchbury regarded them as being difficult to value and thought the stated value of $275 million was excessive. They thought the shares had a value of $150 million at most.
7354 The assessment of the value of the BRL shares seems to have been made on the assumption that the brewery sale would not proceed. I say this because the authors reported that if neither the sale nor the return of cash from BCHL occurred, and BRL was broken up, ‘we value BRL at $400 @ 39% say $150’. This also indicates that no material value was attached to the JNTH shares.
7355 In the conclusion to the memorandum it was stated that ‘there is little margin for error in our assessment of the position but we believe we have been conservative in our approach and still consider we will not [lose] any principal should [TBGL] proceed to liquidation within six months of taking security’. The ‘current position of BCHL Group may lead to collapse of the entire structure which, if occurring within six months of our taking of security, could lead to security being challenged by a Receiver/Liquidator’. It follows that, at this stage (December 1989), liquidation within six months was still being contemplated as a possibility.
7356 Stutchbury gave evidence that by ‘little margin for error’ he meant that if his personal assessments as to the value of BRL and WAN were out and their value was in fact less, there would be insufficient funds to pay out the bank lenders. It would be a ‘close run thing’ as to whether the Bell group could pay out its bank lenders.
7357 In my view, Weir and Stutchbury maintained a belief that the Bell group had a surplus of assets over liabilities. But in December 1989 and January 1990, they understood that the receivership proceedings in relation to BBHL was a complicating issue. Stutchbury was aware that since the BCHL directors had lost of control of the board of BRL, management fees would no longer be paid. Weir recognised that ‘the real concern with [TBGL] is that the [BPG] is reliant on dividend income stream from BRL, which is now cast in considerable doubt’.
7358 On 2 January 1990, Weir provided a memorandum to Spring regarding the situation following the appointment of a receiver to BBHL and its subsidiaries. Weir noted that the position was uncertain but the bank’s exposure had not materially changed from that prior to the appointment of the receiver. The reasons he gave for this conclusion were that the bank’s exposure to BBHL was nominal and the bulk of its exposure to BCHL was secured. Later, he addressed the impact on the Bell group:
Despite no direct exposure to [BBHL], the outcome of receivership hearings will ultimately influence the value of BGL, via the transfer of brewing assets to BRL, a 39% subsidiary of BGL. If this occurs, $1.2 billion deposit from BRL to BCHL will crystallise and add real value to BRL and hence value to BGL. Ultimately this will improve the Bank’s position in relation to the BGL $25.0 unsecured facility.
7359 This seems to me to indicate that, providing the receivership application was resolved favourably to BBHL, Weir had at least some belief that the brewery sale might go ahead. He testified that he always remained confident that the brewery sale would proceed because all parties to the transaction, as well as Adsteam and the public authorities, had good reason to see the deal completed. He thought there was a real chance that the receivership appointment would be overturned. I generally accept Weir’s evidence but I question whether the degree of confidence was quite as high as he maintained. The documentary evidence shows that he and other officers regarded it as being very doubtful. Accordingly, I would put Westpac’s belief of the sale proceeding as being no higher than a possibility.
7360 Early in January 1990, Chadwick visited Western Australia. Thompson had asked him to use the visit to provide an independent view of the relationship. Chadwick completed a credit application and review to the head office credit committee and the board credit committee on 9 January 1990. His analysis in the credit application began with the ‘prima facie’ view that ‘bank facilities $260 million appears safe even on a pari passu sharing with all creditors’. The consolidated balance sheet showed a surplus of $460 million. But there were ‘some complications which cloud[ed] this view’. This included:
(a) the possibility that the BGNV on‑loans ranked equally with banks and other creditors;
(b) the value of the Bell group’s share holdings in BRL and JNTH was listed in the balance sheet at $546 million, while Chadwick attributed to them a market value of just $100 million; and
(c) WAN was valued at $387 million which Chadwick thought ‘may be high’ (he said ‘we will take’ at $200 million).
7361 Adjusting for the balance sheet to allow for those matters led to a deficiency of assets over liabilities of $43 million. This led to a discussion of the proposed securities. The refinancing was said to carry a number of risks to the bank’s position, including:
(a) security being disturbed by creditor pressure for liquidation within the period necessary to protect the securities;
(b) similar pressure from the subordinated convertible note holders that would leave the banks with little option but to approach the court for the appointment of a liquidator and to proceed to recover what they can, in which case some loss would eventuate;
(c) the cash flow deficits were such as to force the banks and other creditors to seek to wind up the group;
7362 Chadwick commented that the proposal to move to a secure position was ‘simply a self defence mechanism’ and Westpac’s facility would become an ‘asset based transaction that might not be supported by cash flows’. He stated that so far the Bell group had met all its obligations. ‘Cash flow deficit’ was difficult to determine but the next crunch period would be in May when further interest payments were due to the bondholders. Significantly, he stated it might be necessary for the banks to consider meeting part of the interest payments in order to allow time for its security to mature.
7363 Chadwick identified another risk that the secured assets would not support the banks’ debt; namely, the prospect of BCHL or BRL entering into receivership or liquidation. He echoed the auditors’ concerns about the Bond group’s ability to continue as a going concern. However, he thought that provided the security documentation was in place and the group could be maintained as a going concern for six to twelve months, Westpac could be satisfied that the assets representing WAN alone would cover the banks’ debt.
7364 Westpac proceeded with the Transactions in light of Chadwick’s report. Nevertheless, these observations must be tempered by the fact that Chadwick’s report was to enable Westpac to decide whether or not to make a provision for loss. He ultimately recommended that no provision be made, although this was to be re‑evaluated if security documents were not signed by 31 January 1990. I think it likely that Chadwick did not see the risk of the securities being set aside within six months as huge, but nonetheless there was a risk.
7365 Hogan’s evidence on this document is significant. When asked if it disclosed a deterioration of the group’s financial position, Hogan said ‘yes’ but then added that it was not really a deterioration because even the previous credit application demonstrated that the Bell group’s position was ‘abysmal’. He then accepted that he thought the group was ‘a dead duck’. According to Hogan’s evidence, the level of exposure at that stage left it below the level of the head office credit committee. The decision‑making function lay with the Western Australian corporate banking division, headed by Stutchbury. But he said that the board credit committee could have intervened had they wished.
7366 It therefore emerges that there was a difference between the views of Hogan, White and Chadwick and those of Weir and Stutchbury, the latter being much more favourably disposed to the Bell group. The former were more senior, but the latter had more direct contact with the Bell group and its financial information. Spring seems to have been somewhere in between. But there is no need to confront the problematic issue of establishing corporate knowledge where different officers believe different things. While Weir and Stutchbury were, on the documentary evidence discussed so far, reasonably confident that the Bell group had sufficient asset coverage, this does not mean they had an understanding that group was solvent. In fact, they never really considered this issue except to note the risk to the bank if the Bell group collapsed within six months of them taking security. None of the contemporaneous evidence reflecting the views of the other Westpac witnesses contradicts the views expressed by Hogan. But, having said that, I do not believe that the views of Weir and Stutchbury, in particular, were as certain as Hogan’s on this matter.
7367 I believe Weir and Stutchbury regarded it as a reasonable possibility that the Bell group would be wound up within six months of Westpac becoming secured. But they were influenced by the consideration that the bank would be no worse off by proceeding with the Transactions. I have already mentioned some evidence from which it appears that Westpac was influenced by the no worse off thesis. It is further supported by Westpac’s operating policy at the time. Westpac’s Legal Administrative Reference Book, in a section dealing with the avoidance of preferences, stated that the fact that a debtor, whose debt is unsecured, is thought to be insolvent need not deter the bank from taking security, because if the transaction is set aside the bank will be no worse off.
7368 Stutchbury signed a ‘bad and doubtful debt certificate’ dated 16 January 1990 in respect of the BGF facility. In accordance with the banks’ usual practice, a certificate of this type was issued if there was a reasonable doubt that the facility would be repaid and the bank might have to write off part of the debt. The certificate recorded:
If documentation is executed it will not be totally effective for 6 months. In a worst case scenario the above $25.0 would rank with other unsecured creditors and given the extremely complex group structure and intercompany loans we are unable to estimate potential loss, if any at this time.
7369 Ultimately, Stutchbury and Weir were not able to counter the ‘hole in the cash flow’ argument. Weir accepted in cross‑examination that by December 1989 he would have been ‘very sceptical’ about the likelihood of the receipt of dividends from BRL, JNTH and GFH. He also accepted that these dividend receipts were ‘an important component in the cash flow projections’ that the Bell group had given them. However, when asked specifically about GFH, he said he could not recall whether he had considered their position and he thought the Bell group did get ‘some cash flow’ from GFH in December 1989. He also agreed that, before 26 January 1990, he knew that:
(a) the BRL and JNTH management fees would not be paid;
(b) the BRL and JNTH ordinary dividends would not be paid;
(c) the Bryanston sale proceeds would not be received; and
(d) the company would be liable to pay bank fees, stamp duty and legal fees not included in the September cash flow in the order of $7 million.
7370 I do not think Weir, on any of the other bank officers who were cross‑examined about the ‘holes in the cash flow’, handled the issue well. On a rough calculation, adjusting the September cash flow to allow for the changes in (a) to (d) above, the positive closing cash balance at 30 June 1990 of $29.7 million would have become a deficit of $41 million. That is a material change in any language. I accept that it is not the full picture because the September cash flows also showed principal repayments of $30 million (which by that time Weir knew would not be made). I accept also the general proposition that a cash flow does not necessarily include all possible inflow sources. Nonetheless, it still exhibits negative cash flows. When questioned about it, Weir sought to transfer attention from the ongoing cash flow implications to the need for a restructure. This exchange is an example:
As they [the likelihood of receiving dividends and management fees] got slimmer and slimmer, the capacity of the Bell Group as projected in the cash flow to service the interests was getting dimmer and dimmer. Do you agree with that?—It was getting more and more important that they had to effect some of the restructuring that I suggested to you yesterday.
7371 Whether or not a restructuring could be effected is, in my view, a different question from that relating to the ability (or inability) of the Bell group to service its known commitments, including interest obligations to the banks and to bondholders. Those obligations would remain regardless of the refinancing. On a cash flow basis, the Bell group was, at 26 January 1990, subject to considerable doubt as to whether it could meet its debts as and when they fell due. Weir accepted that liquidation was a possibility, but thought it ‘much more likely that the Bell Group would survive and prosper’. Again, I think Weir did have that overall view at the time, although I doubt he embraced it with the degree of certainty that his evidence suggests. He had said in his 26 May 1989 memorandum that the Bell group would ‘most probably’ survive but the contemporaneous documentary evidence indicates that this confidence must have diminished in the later months of 1989.
7372 The banks rely quite heavily on the presentation Weir made at the 24 January 1990 meeting of the Australian banks: see Sect 30.10.2. At the meeting he presented a diagram and some rough calculations which led him to conclude that the Australian banks should recover all of their exposure, regardless of the ranking of the BGNV bondholders, regardless of whether they became secured and without any reliance on the BRL shares: see Sect 30.12.2. But again, the fact that the Bell group may have been able to satisfy one group of creditors in full does not necessarily make it solvent. The publishing assets were not realisable in the short term and were the only source of cash flow from which the group could service interest obligations. Accordingly, Weir’s belief in a positive balance sheet, at least so far as the Australian banks were concerned, does not counteract the recognised cash flow problems of the group. In any event, the calculations (which, admittedly, do not value all assets) do not show an overall excess of assets over liabilities.
7373 I have already mentioned how Stutchbury was concerned about the reliability of the cash flows arising from management fees and dividends. Stutchbury agreed that there were a number of uncertainties with the cash flow projections and that over the period September 1989 to January 1990, he would have come to the view that the cash flow projections showed that the group would not be able to meet bondholder interest payments during 1990. This is, in effect, an acknowledgement of a material risk of insolvency. Perhaps the group would have survived at that point if the banks had assisted in the payment of the bondholders, but this simply created a further burden down the line which the group still had to find ways to meet.
7374 Stutchbury knew that the September cash flow had to be revised to take into account of increased interest payments due to the banks, as a result of the Bell group’s failure to meet its repayment targets. They knew the proceeds of the Bryanston sale had been eliminated for the purposes of the Bell cash flow, as stated in the 12 December 1989 memorandum from Stutchbury and Weir to Spring. The 5 December 1989 memorandum by Stutchbury and Youens to Spring expressed uncertainty about the ongoing viability of the Bell group. Stutchbury accepted that the factors which could detrimentally affect the group’s viability included the cash flows that might be expected from BRL; the possibility that dividends from JNTH would not be forthcoming; and the possibility that management fees from BRL and JNTH may not materialise.
Conclusions
7375 Even looking at only the witnesses most favourable to Westpac, it still emerges that, as at 26 January 1990, there was at least a suspicion that the Bell group might be insolvent. If Hogan’s views, as expressed at the time, are anything to go on, it was much more than a suspicion. Those views might not have been shared by the other witnesses to the same degree but the evidence, looked at in its entirety, presents a compelling case that relevant officers within Westpac harboured a suspicion that the companies were insolvent or, at best, were of doubtful solvency. The uncertainty remained because no‑one really knew what would happen with the BRL situation. I acknowledge Westpac did not have as much information as the BBHL syndicate banks but still more than the other Australian banks. But they could not have placed any expectation on receiving dividends from BRL, and even if the brewery sale went ahead, it would be some time before the Bell group could realise any cash from that asset. I am also satisfied that Westpac knew that the relevant companies were, at best, of doubtful solvency or nearly insolvent.
7376 By August Westpac knew that BGF was not in a position to repay the bank’s facility. The board and head office credit committees approved proceeding with the refinancing proposal knowing or believing that this was the case and that if it demanded repayment the Bell group companies would go into liquidation. The bank believed that it had no alternative but to proceed with the proposed refinancing with the intention of improving its position as against other creditors of the Bell group if the group was wound up.
7377 In December 1989 the board and head office credit committees accepted a recommendation that the bank take steps to run off its exposure to BCHL group companies and push towards finalisation of the BPG security documentation because the BCHL group was such pressure that collapse within the immediate future was a very strong possibility.
7378 In January 1990 respectively the credit committees accepted a report Chadwick’s report ‘prima facie, bank facilities of $260 million appeared safe even on a pari passu sharing with all creditors, there were some complications clouding that view. Chadwick said the adjusted balance sheet reflected a deficiency of assets over liabilities of $43 million and the secured assets could not support the banks’ debts. There were cash flow deficits that might force the banks to wind up the group. There was a risk of loss from competition with other creditors. The risks would be heightened if BCHL or BRL went into liquidation.
7379 Before the Transactions were entered into, Westpac was aware of numerous things about the financial predicament of the Bell group companies, including:
(a) that the Bell group was unlikely to receive management fees and dividend income or the use of the proceeds from the sale of Bryanston (other than to meet claims by creditors of the BGUK group companies after the Transactions had been entered into);
(b) the events that occurred in late 1989 that adversely affected the financial position of the BCHL group and the Bell group and that led to believe or suspect that BCHL group would or might collapse in the immediate future;
(d) that the only prospect or probable prospect of its facility being repaid was by it and the other banks taking security over the assets of the Bell group and realising on that security;
(e) that it was unlikely that the Bell group would be able to pay interest to bondholders in May; and
(f) that the Bell group suffered from a deficiency of assets over liabilities.
7380 Westpac knew that the companies were of doubtful solvency. At the time of the Transactions Westpac had a strong suspicion that the Bell group companies, were insolvent or nearly so, or that there was a reasonable possibility that they would become insolvent. To my mind, this conclusion emerges from evidence which is specific to Westpac, but that evidence cannot be considered in isolation. The conclusions I have drawn are supported by the evidence I have discussed earlier in relation to the documentary material, legal advice and records of meetings which are common to all banks.
7381 Westpac went into the Transactions with that store of knowledge and harbouring those strong suspicions. It did so having received legal advice that it should adopt the existing borrowers structure. The bank knew that the structure was intended to avoid a double jeopardy so that the banks would be no worse off if the proposed securities were set aside. In my view this explains the lack of enquiry as to the solvency of the companies and related questions. The bank did not need to determine the factual solvency (or otherwise) of the group companies because it was determined to embark on the refinancing in any event. This was because the bank believed it had no realistic alternative in order to secure repayment of its facilities and, in any event, it would be no worse off.
7382 The conclusions that I have just announced reflect matters of direct knowledge or inferences of the same. Before coming to a final view as to the liability of Westpac under Barnes v Addy principles it will be necessary to consider related matters such as abstention from enquiry and knowledge of breaches of duty by the directors. I think it is more appropriate to complete the bank by bank recitation of the evidence before I canvass those topics. I will therefore defer that exercise to a later part of the reasons: see Sect 30.23, Sect 30.24 and Sect 30.25. I will not repeat this in the sections concerning the other banks.
The period February 1990 to July 1990
7383 As I will explain later, the period after the main refinancing documents were executed is of marginal probative value in relation to the Barnes v Addy causes of action. But it is significant for the equitable fraud claim. I will therefore canvass briefly the events of that period.
7384 Following the meetings on 22 and 23 February 1990, Weir sent a memorandum to the banks dated 26 February 1990. Weir said:
Following meeting of banks last week and presentation of cash flows we require waiver for Westpac not to distribute proceeds from sale of Bell Group Press Pty Ltd assets as at 28/2/90 in terms of clause 17.12(a)(ii) …. In addition, we will also require authority/waiver to deduct an amount from these proceeds to cover 28/2/90 interest.
…
We will then need to consider the wider ramifications of groups request regarding retention of balance of proceeds to meet subordinated bond holders interest payment in May together with repayment of Bond Corp debt of $7.6M by say 23rd March 1990. My thoughts at this time are that the balance of Bell Group Press proceeds $16.6 (after deducting above $7.7) together with Bond Corp debt repayment of $7.6 which we would require being repaid prior to 23/3/90 be retained in a separate account to meet May 1990 bond interest payment. (underlining in original)
7385 On 26 February 1990 P&P sent a fax to all the Australian banks and Lloyds Bank, enclosing the letter of waiver that had been approved by Westpac. In cross‑examination, Stutchbury refused to accept the proposition that it was an extraordinary or unusual event that TBGL had to ask Westpac to release funds to meet February interest payments within three weeks of entering into the Transactions. I had difficulty understanding his rationale for this statement.
7386 Weir sent a memorandum dated 4 March 1990 to the Australian banks and sought advice about the conditions under which they would be prepared to allow the balance of the proceeds from the sale of Bell Press to remain on deposit. Weir said:
Westpac’s position is that we are prepared to allow funds to remain on deposit provided intergroup loan of $7.6 million due by [BCHL] is repaid and placed in a separate deposit account as part provision for the May payment to bondholders. Loan to be repaid prior to 26 March, 1990. We are not prepared to commit $17m to bondholders at this stage by clearly this will need to be considered prior to 30/4/90 distribution date.
7387 Westpac’s credit application dated 6 March 1990 was prepared by Weir and supported by Stutchbury. It proposed that an exposure report be rendered on a monthly basis, or as otherwise requested by the chief manager of credit in the Corporate Banking Division. Spring said he held this position at the time. The application stated that Bell Press had sold the assets of one of its non‑performing divisions and that Westpac, as Security Agent, held the funds due to distribution on 31 March 1990. With regard to holding the funds as part provision of the interest payment to bondholders, Weir said:
While not wishing to commit ourselves to this course of action at this time, we are prepared to allow funds to remain on deposit pending further assessment of the position prior to 30/4/90.
From recent cash flows presented to us, it would appear we will have little choice but to agree to the Group’s request in order to preserve our security position.
7388 Stutchbury agreed in cross‑examination that the reference to ‘we will have little choice’ meant that if the bondholder interest was not paid, there was a risk that there would be an event of default and the trustee might put the company into liquidation. Weir listed a number of factors that showed that until the bank’s security was perfected, ‘we are vulnerable and some loss could occur’. These factors included the subordinated convertible bonds issued by BGNV, which were repeated in a further credit application dated 20 April 1990. In relation to TBGL’s financial position, Weir said:
It is quite apparent the survival of [TBGL] in the long term is dependent upon its getting value for its 39% interest in BRL which may well depend upon what value if any, BRL can extract from BCHL for it’s $1.2bn deposit on the breweries. … Directors advise they intend selling the BRL stake when they consider optimum value has been restored. They have no illusions as to the fate of [TBGL] if this does not occur.
In summary, we consider the position far too fluid to recommend any provisioning at this time but this could well change as the BRL/BCHL imbroglio evolves over the coming weeks.
7389 Spring considered a credit application on 8 March 1990 and he made this handwritten note: ‘Report by 31/3/90 must again address provisioning’. Dudgeon, a member of the credit committee, noted his approval on the application on 13 March 1990.
7390 On 15 March 1990 Weir sent a circular fax to the Australian banks, advising that he had been invited to attend a meeting of the Lloyds syndicate banks to be held in London the following Monday. Weir sent a further circular fax to the Australian banks on 29 March 1990 in relation to the request for waiver. He said:
We have a problem!!!!!
Discussions with National Australia Bank indicate that they will not consent to waiver unless during the period 1st April through 30th April any bank has the sole discretion to insist upon distribution at any time during the month.
The company if not prepared to accept this condition and we understand they will be having discussions with [NAB] today.
For our part as security agent we believe such a condition is unworkable and makes our position untenable. Instructing banks do of course have the right to instruct us to distribute at any time.
Unless we have waiver from all banks opening our time tomorrow we will be distributing funds currently held by us. May we suggest you alert your credit committee accordingly as to ramifications this will have on the 7th May 1990 and effect on our ‘security position’. (underlining in original)
7391 On 11 April 1990 JNTH announced that no dividend would be paid on cumulative preference shares in the period ending 31 March 1990. On 17 April 1990 Simpson sent Weir financial information including TBGL’s accounts to 31 December 1989, BPG’s balance sheets to 31 December 1989 and 28 February 1990, a stock exchange announcement by JNTH and BRL’s results to 31 December 1989. Weir sent this information to the Australian banks and Lloyds Bank the same day. Peek wrote to Weir on 19 April 1990 in relation to the letter of waiver:
The letter of waiver follows the form of the letter prepared by Mr Perry as at 30 March 1990 and provides that the balance of the [Bell Press] disposal proceeds will be repaid to [TBGL] for application by [TBGL], BGF and BGNV due on 7 May 1990 in respect of the conversion bonds currently on issues by those companies.
7392 Weir prepared another credit application on 20 April 1990 that was also supported by Stutchbury. It is similar to the 6 March 1990 application but includes current information concerning the negotiations. Spring considered it on 23 April 1990 and it was noted by Dudgeon on 3 May 1990. Spring’s annotation to the application identified two issues for approval, including the ‘release of our share… held against the account of [TBGL] to allow these funds and repayment (as a precondition) of $7 [million] from BCHL to be used for “subordinated” bond status’. The application was signed by the head office credit committee on 9 May 1990. It was also circulated to the Westpac board and executive committee.
7393 On 30 April 1990 Garven sent a fax to Youens, enclosing information required under ABFA cl 17.4. The information included a report signed by the auditor and a report from C&L which was required under ABFA cl 17.4(c). None of the banks have discovered the C&L report. It may well be that this document was not forwarded to them. A draft letter prepared by Youens outlines his reasons why the banks should provide funds to enable TBGL to pay the bondholders’ interest. Youens said:
Unless the payment is made to the Bond holders within the 7 days of grace period … there will be an event of default which will lead in all probabilities to the collapse of [TBGL]. It is also highly possible that the collapse of [TBGL] will lead to collapse of its parent [BCHL] …
We have requested legal advice which states in effect that the Australian Banks and the Lloyds Bank Syndicate would rank as unsecured creditors if [TBGL] is subject to formal wind up proceedings. This is because inter alia securities executed in February have not been effective for at least 6 months.
From all the Banks’ viewpoints to stand in a windup as an unsecured creditor is not in any way desirable. … It is our firm view that all the banks must work together to ensure that [TBGL] remains as a viable entity for the immediate future and at least until our position as a secured creditor can be assured.
Unless all Banks agree to release of the AUD $17.4M within the next day or so the fate of [TBGL] and possibly the whole Bond Group is uncertain.
7394 Further, in a draft letter sent to Spring on 8 May 1990, Youens considered the issue that the securities might be set aside:
It is the advice of [MSJ] that if [TBGL] and the other Australian Security Providers were placed in liquidation… within six months of the date of grant of … security (i.e. prior to 1st August, 1990), there is a significant risk that some or all of security would be rendered void and unenforceable under Australian law on one or more of the following grounds:

1. as a voidable preference
2. as a voidable settlement; and/or
3. for want of sufficient corporate benefit.
   …
   It follows that the position of the Banks in seeking to uphold the validity of the Australian security will thereupon be strengthened in relative terms. Furthermore the passage of this six month period could assist in negating the allegation of insufficient corporate benefit referred to in 3 above.
   7395 On 9 May 1990 Latham sent a facsimile to Youens which provided an update on the position of the four dissenting banks. On 11 May 1990 Latham advised Youens that the ‘recalcitrant’ banks had agreed to the waiver. I do not think that Youens sent a final version of his draft letters to those banks.
   30.21.3. CBA
   The period before the Transactions
   7396 As I have previously said, the wider RHaC group was a significant customer of CBA. However, the evidence suggests that CBA had a long‑standing antipathy to Alan Bond and his companies. It was the bank’s policy during the relevant period to avoid exposure to companies associated with him. They passed up a number of opportunities to participate in Bond’s debt‑driven expansion. Furthermore, they were running down their existing exposure to Bond‑related companies, including facilities to Bond Brewing NSW Ltd, Ambassador Nominees and BGUK. This relatively hard line approach is most evident in the demands which were issued on 6 September 1989.
   7397 As at 1 January 1989, BGF owed CBA $25 million. On 5 December 1988, Devries told CBA that their facility would be cleared from asset sales by 31 March 1989. However, on 3 March 1989, CBA was advised that the asset sales had not progressed as planned and BCHL requested an extension for six months. CBA declined and sought to be paid out ahead of other lenders. On 29 March 1989, Beckwith again pressed for an extension, noting that all lenders other than CBA and Citibank had agreed. Poulter accepted that the Bell group could not repay at the time and agreed to accept on behalf of CBA a reduction of $12.5 million on 31 March 1989 with the balance to be paid progressively by no later than 30 June 1989. BCHL initially agreed to repay the second tranche by 30 April 1989, which CBA accepted, but contacted CBA on 26 April 1989 to ask for an extension to the original date of 30 June. The first $12.5 million was paid on 31 March 1989.
   7398 At some time between 14 June 1989 and 30 June 1989, Oates sought CBA’s participation in the proposed BPG club facility (described above in relation to Westpac). The letter included financial information about BPG. The proposal was passed on to Hade, a Manager in Corporate Banking Services, who conducted an analysis (dated 27 June 1989) for the benefit of Latimer. Hade addressed both the positive and negative aspects of the proposal. The positives essentially related to the profitability and the strong future of WAN as a business. The negatives were more numerous and included the observations that accounting profit after tax would be negative for the first two years; operating cash flow would be ‘tight’ over the early years; the mastheads comprised 54 per cent of the total assets; and there would be a need to quarantine BPG from TBGL (particularly given the £60 million facility maturing in May 1991). Hade noted several other factors, which were also addressed in his conclusions:
   It is considered that there is not enough ‘fat’ in the operations of BPG with which to handle the level of debt being taken on.
   Moreover the interest coverage and current ratios are too low in the initial two years as to offer real comfort to lenders. In other words if they were broken then it would be too late.
   The query over the apparent [omission] of income tax expense may be explained away, however, if correct would render the proposal unworkable.
   The proposal does not provide the CBA with the degree of comfort which it would normally seek and accordingly it is recommended that the business be allowed to pass.
   7399 Latimer agreed with Hade’s assessment that the proposal did not provide CBA with a sufficient degree of comfort. He passed the memorandum to Poulter, who also agreed that the facility should be declined, but authorised extending the clearance date to 31 July 1989. Poulter was hoping that extension would give the Bell group time to find someone to take CBA’s place. He accepted that they were aware that the group did not have the money to repay CBA on 30 June 1989.
   7400 On 20 July 1989, Simpson contacted Strange to canvas a further extension. They met the following day and Simpson indicated that it was unlikely CBA would be repaid on 31 July 1989. Simpson outlined his proposal that all the banks should grant secured facilities until June 1991. Strange indicated that the proposal was unlikely to be considered favourably and this was confirmed by Latimer and Poulter. Notification was given to Simpson on 25 July 1989 by the Chief Manager in Perth, (Prentice), who noted that the proposal had been considered at the highest level in CBA and the bank still required repayment by 31 July 1989.
   7401 Aspinall met with Poulter and Latimer the following day and reiterated that the group did not have the funds to repay CBA by 31 July 1989. Latimer’s diary note records that if repayment was not made, then the group would have to face up to a default situation. He thought he left Aspinall with no doubt that given this scenario, CBA’s position was irreversible. Aspinall provided CBA with information on BPG, the July cash flow and a terms sheet which outlined a proposal for a new facility to BGF and BGUK for $130 million plus £60 million, to mature on 19 May 1991 and to be secured by a deposit over BPG. Aspinall asked Poulter and Latimer to consider the information provided and they agreed to do so. In his diary note, Latimer recorded that he had looked at the papers and that Aspinall would be told that the decision conveyed that day would stand. I accept that Latimer gave at least some consideration to the documents.
   7402 The Bell group was ultimately notified of CBA’s decision. Repayment did not occur on 31 July 1989. On 1 August 1989, a Notice of Dishonour was sent to TBGL. In his witness statement, Poulter said that following the meeting with Aspinall he was ‘no longer, at that stage prepared to agree to any further extensions because [he] was tired of the Bell group’s continued requests for extensions and [he] felt that it was time to “test the water” ‘. He thought that ‘the Bell group either did not have the money to repay the bank or else it had the money, but was using it for another purpose, such as paying its other creditors, and the only way to find out if it really did have the money was to issue a demand’.
   7403 CBA held off making a formal demand because the Bell group was approaching other banks to see if they were interested in taking over CBA’s facility. On 4 August 1989, Aspinall made another request to Latimer for an extension, this time for two weeks. Latimer declined. Simpson met with Latimer on 8 August 1989 to inform him that the other banks were not interested in increasing their lending. He explained to Latimer how CBA could be paid out, if the other banks consented, from the sale of Wigmores and Bryanston. Simpson advised that he would make further contact on 11 August 1989. Simpson did so, and Latimer’s note of that conversation stated:
   All local banks were said to hold the philosophical view that it would not be appropriate for the CBA to be paid out ahead of other lenders. While understanding this view, I reiterated CBA’s position and it would therefore be a matter of the other lenders having regard to the wider implications if CBA, for its relatively small amount, is not to be cleared in the short term.
   7404 Latimer also noted that SocGen had indicated it understood CBA’s position and was trying to come up with a solution to the problem. He said he told Simpson that as current arrangements with lenders did not preclude TBGL from making payments in whatever manner or order it saw fit; as a ‘backstop’, CBA would be looking for the full proceeds of the Wigmores settlement on 13 September 1989 as a first instalment. The balance would have to be cleared from the Bryanston sale. He also told Simpson that CBA ‘would keep all options open and should satisfactory progress/responses not be achieved meanwhile, the way would be open for service of demand’. He recorded that Simpson understood CBA’s position and would contact the bank again on 18 August 1989.
   7405 In effect, Latimer was asking Simpson whether it was worth not paying out a relatively minor creditor and thereby running the risk that CBA would initiate legal action which could bring the Bell group down. It appears from Latimer’s testimony that he was prepared to push for payment regardless of the other banks and he did not see that this required any apology to the other banks. Simpson and Latimer spoke again on 18 and 25 August 1989. Latimer was informed that the Bryanston sale had been concluded on 17 August 1989 and payment, following DTI approval, was expected within six to eight weeks. The Wigmores settlement was still expected on 13 September 1989. Latimer repeated to Simpson that if they did not receive the Wigmores proceeds then a demand would be issued.
   7406 On 1 September 1989, Simpson indicated to Latimer that the Wigmores proceeds had been disbursed and nothing would be available to repay CBA. The sale of Bell Press to News Limited was mooted which, along with the Bryanston sale, would go a long way to clearing bank debt. But Latimer noted in his diary that a deal with News Limited was ‘at best uncertain’ and that the Bryanston sale was still conditional on DTI approval. Latimer felt that CBA needed to take ‘a stronger line’ and resolved to issue a demand. He thought ‘the management of TBGL could not be relied upon’ and he ‘decided to issue a demand because [he] wanted CBA to be repaid’.
   7407 Poulter concurred and on 6 September 1989, CBA served a notice of demand on BGF for payment of around $12.7 million plus interest. The letter informed BGF that CBA expected payment to be made by no later than 4pm Perth time on 13 September 1989. BGF failed to comply with the demand. On 14 September 1989, CBA proceeded to serve a notice of demand on TBGL as guarantor for payment of BGF’s debt. The letter informed TBGL that BGF had failed to pay the amount due and CBA expected payment to be made by TBGL no later than 4pm Perth time on 21 September 1989.
   7408 By 7 September 1989, some of the other banks had become aware of CBA’s demands. Latimer’s note of a discussion with Simpson of that day records that the other lenders had ‘hardened their attitude to the proposal to pay out CBA in isolation’. Latimer also recorded that there was nothing in sight to indicate that CBA’s demand could be met and that ‘this view is also held by [Beckwith]’ but that the company was hopeful that ‘something will turn up’ to resolve the present impasse. Latimer expected to receive a request from the company for CBA to reconsider its stand. In cross‑examination Latimer agreed that at the time he did not pin much on the hope that ‘something [would] turn up’. In my view this evidence is consistent with an acceptance by Latimer of the reality that the Bell group most likely did not have the capacity to meet CBA’s demand and could not repay the facility.
   7409 Simpson provided Latimer with an estimated balance sheet for TBGL and subsidiaries as at 30 June 1989. The annotations on the document reveal that it was considered by Latimer. In particular, it is worth mentioning that the balance sheet recorded the BRL shares at a value of $630 million. Latimer marked the document to say that based on the current share price (80 cents), these assets would be worth only $173 million. He testified that this was a ‘very worst case situation’.
   7410 I accept the evidence led on behalf of CBA that by issuing the demand, it was merely exercising one of its possible options to obtain the earliest possible payment from the Bell group. It was an action more of hope than of expectation. The action has to be seen against the background set out in the first paragraph of this section: CBA had no love for the BCHL group and no desire to continue an exposure to it. The responsible officers had been frustrated by a series of broken promises concerning repayment. The key lies in what Poulter said in his witness statement: the Bell group either did not have the money to repay the bank or was using its money to pay other creditors, and the only way to find out if it really did have the money was to issue a demand. I do not believe CBA was seriously planning to proceed to a final demand at this stage. This conclusion is supported by the fact that CBA was, after issuing the demand, still conferring with its lawyers about its possible courses of action. This is not to say that proceeding to a final demand was never in contemplation; it was an the option that could have been pursued. But in my view the demands were merely, at that stage, a testing of the waters, again to use the words of Poulter. CBA hoped it would create pressure for at least a partial repayment, or a more concrete promise of repayment, supported by evidence of where the money would come from. Poulter also hoped the demand would enable them to know where the asset sale proceeds were being directed.
   7411 The plaintiffs made repeated attempts to impute to CBA from its demands the view that the recurring failure by the Bell group to repay as promised indicated its insolvency. There is some force in this argument, but only to a limited extent. I accept Poulter’s evidence that at the time of issuing the demands they were hoping, via the demand, to gain more understanding of how the Bell group was using its sale proceeds. But he accepted that by September 1989, following the issue of the demands, he came to understand that the Bell group did not have the money to repay them at the time. When asked if he agreed that it looked, at the time, as if the company was in fact having trouble meeting its promises, Latimer said ‘from my re‑reading of the papers that could well have been the case’. He accepted that the group had a liquidity problem. But his note of the 1 September 1989 conversation demonstrates he believed there was at least some possibility of the Bell Press and Bryanston sales going ahead, and that this would have gone a long way towards clearing bank debt. He did not necessarily believe that the liquidity problem was terminal.
   7412 On the other hand, CBA must, given the prolonged and ongoing failure to repay as promised, have had at least some doubt as to whether they would ever be repaid – in other words, that the group might be insolvent. Poulter agreed that it was not a good signal that the Wigmores proceeds had been used for running expenses, including newsprint suppliers, and that it was ‘unusual’. He later agreed that there had been a history from late 1988 to the middle of 1989 ‘where the company seemed to be unable to meet its promises to repay at least the Commonwealth Bank’ and that this would have alerted him to the fact that there was a real question mark as to whether CBA was going to be able to be repaid notwithstanding the service of a notice of demand. Latimer, too, accepted that if CBA wanted out from the facility, which was likely to lead to two other banks also seeking repayment, then it might lead to the collapse of the group.
   7413 On 8 September 1989, Simpson again approached CBA to participate in the refinancing with the other banks and again CBA refused. On 13 September 1989, Aspinall informed Latimer that BGF would not be able to comply with the demand by the due date. Latimer was told that the other banks were unhappy with the prospect of CBA being paid out early but he said that CBA remained ‘firm in its resolve’. Accordingly, they proceeded to issue demand on TBGL as guarantor on 14 September 1989.
   7414 On 18 September 1989, Latimer received a call from Weir (Westpac). Weir sought to persuade CBA that the proposed refinancing had adequate security coverage. Westpac did not ‘want to take action that might have adverse repercussions throughout the Bond group’. Latimer said he made clear to Weir that ‘CBA wanted out and, if necessary, the hard decisions would be made to achieve this objective’, which I take to mean a winding up. Weir replied that if CBA proceeded with its demands, all lenders would likely pursue recovery through legal recourse.
   7415 On 20 September 1989, Weir pursued the matter by sending to CBA the latest terms sheet. The demands were withdrawn on the same day. This turnaround can be explained as follows. It seems a very senior officer of Westpac contacted Ian Payne, a member of CBA’s board credit committee. Payne asked Poulter to have another look at the proposal and see if he could find a way for CBA to participate. Payne said that Westpac and the other major lenders to the Bell group would appreciate it. Poulter was also approached by Oates that day. In his evidence, Poulter said the reasons for withdrawing the demands were twofold. First, it became apparent that the Bell group had insufficient incoming funds to satisfy the demand and the only alternative to the proposed refinancing was to proceed to liquidate the group. Secondly, the other banks would not have agreed and CBA would have incurred their ire. CBA did not want to cause trouble with its inter-bank relationships, particularly since CBA was a relatively minor player in the Bell group financing.
   7416 Poulter claimed that he made no assessment of the Bell group’s creditworthiness in coming to such a decision. His note of the decision records that:
   It is only too apparent that the group is unable to clear CBA’s loan of $12.5 m so it becomes [a] matter of next best choice. In my view that is to participate in the proposed Australian lenders syndication where formal security is to replace our current Negative Pledge facility. This course of action is approved.
   7417 Poulter spoke to Knox at SCBAL that day. Poulter’s note of the conversation indicates that SCBAL’s position was similar to CBA’s in that clearance was the objective. Poulter told Knox that CBA thought the most feasible choice was to participate in the proposed syndication lead by Westpac, as the probable alternative was to bring the group down. According to Poulter, Knox did not favour the credit but thought that SCBAL might also go along with the syndication.
   7418 Thus, I see CBA’s knowledge in the following way. They knew that the Bell group did not have the capacity to repay CBA’s debt at the time or in the immediate future. They must have regarded it as doubtful whether the group was solvent or, if it was solvent, whether it would remain so. But I also accept they did not have a strong understanding of the group’s true financial position, particularly in relation to any assets that might be sold in the future.
   7419 The plaintiffs assert that CBA decided to participate in the Transactions despite Hade having earlier concluded that BPG could not support a $200 million facility. I accept Poulter’s explanation of this. Hade did not say that BPG could not service the interest payments, but when he said ‘there was not enough fat’, Poulter took him to mean there was an insufficient margin for comfort. By ‘margin’ he meant a margin to allow for the possibility of a reduction in BPG’s operating profits. This was combined with the fact that under the proposed BPG facility, CBA was to take an increased exposure: going from $12.5 million to $67.5 million.
   7420 Poulter accordingly left it to Latimer and his staff to work out the ‘nuts and bolts’ of the refinancing. He would not have expected Latimer to trouble him with the details, as long as the bank’s position ‘did not deteriorate, for example, by a “watering down” of any of the terms of the refinancing transaction’.
   7421 CBA, all along, had been alert to the possibility that the Bell group companies might be insolvent. But they ultimately did not embark on any real investigation to gain a better understanding of whether this was in fact the case. They ‘wanted out’. When they realised this was not possible, they sought security. According to Latimer, taking security was the ‘next best choice’ to being repaid and that the security would be taken ‘more or less… come what may’. It was ‘fairly pointless’ to consider the financial affairs of the group. Latimer testified that CBA did not really look at the asset backing and whether it would cover the debt, nor did they look at whether the cash flow could service the refinancing debt. He also said that he regarded it as the bank’s ‘entitlement… irrespective of other creditors’ and whether they might be prejudiced.
   7422 Latimer testified that he understood at the time that directors’ duties in circumstances of a suspected insolvency the duties of the directors would be directed to the best interests of the company, including creditors. He agreed that he pursued the bank’s interests, and was authorised to do so, irrespective of this understanding he had of directors’ duties. Nor did he look into how the group was proposing to meet the interest payments. In closing submissions, the banks contend that his answers to these questions were qualified. I am not sure I grasp that point. It seems to me that Latimer’s evidence supports the view that CBA was at best indifferent to the legal consequences of the refinancing, including the solvency of the group and whether any directors’ duties may have been breached. As the banks note, there was no express indication that Latimer possessed any facts which indicated a breach of duty had occurred, but nevertheless he accepted in substance that in a suspected insolvency context, directors’ duties might come into play. In other words, he knew that the directors might be breaching duties by committing to the refinancing but he did not pursue the matter.
   7423 This is borne out by CBA’s subsequent behaviour. They produced just one credit application in relation to the facility, dated 4 October 1989 and prepared by the Perth lending office. In some respects it was already out of date by the time it reached Latimer. It had been drafted primarily on information provided around 20 September 1989 and after this date, additional securities over the Bryanston, BRL and JNTH assets were agreed upon. Nor did the credit application include participation by the Lloyds Bank syndicate. The application included balance sheet reports for BPG and a consolidated report for the Bell group for the periods ending 30 June 1987, 30 June 1988 and 30 June 1989.
   7424 Latimer’s evidence is that he reviewed the application but at the time thought the review was essentially academic because the decision that CBA would participate had already been made. He testified:
   On the figures presented, the Bell Group was solvent and could pay its commitments. I had no way of determining how accurate the figures were. I did know, however, that the Bell Group owned The West Australian newspaper, which was a substantial asset, a large parcel of [BRL] shares, printing assets, which were mooted as being sold to News Corporation for around $32 million, and Bryanston Insurance Company, which I thought was to be sold for $39 million. I did not know what the future of the Bell Group was. It did have assets and it was not an empty shell. Nevertheless, the decision had already been made to participate in the BPG facility so that any analysis of the financial future of the Bell Group did not seem to me to be necessary. I did not perform any such analysis.
   7425 The difficulty I have with this evidence is that it pieces together the few positive features that could have been garnered from the store of information that CBA had. It ignores the history of the relationship which, as I have said, contains indicators that, at very least, put solvency in the questionable category. I accept Latimer could not be said to have ‘known’ the Bell group was insolvent but it was a real possibility. Even if Latimer’s expression of views is accepted, by 26 January 1990 his doubts about the solvency of the group must have become stronger as it became evident that management fees and dividends from JNTH and BRL would not be received, nor proceeds from Bryanston. I place little weight on the credit application and Latimer’s testimony arising from it because it was apparently a token step with little in-depth analysis of the group’s cash flow situation. The only analysis of the cash flow position read:
   Servicing of the proposed syndicated facility ($137M @ say 20.25% = $27.74M) cannot be established from the [BPG] cash flow. However, the facility will be guaranteed by Bell and as such has been brought to account in Bell’s cash flow which after allowing for servicing of all Bell’s commitments shows a surplus for Y/E 30 June 1990 of $29.7M. In addition, proceeds of $30M [annotated by Latimer to say $39 million] from sale of Bryanston … will be utilised to either reduce the facility, or alternatively will be held on deposit by the Security and Facility Agent.
   7426 The credit application stated that CBA did not have a clear picture of the Bond group’s financial position and its viability, but there was no doubt that the application was in the high risk category. No conclusions were made about the Bell group’s viability.
   7427 The fact that no further credit applications were drafted, even after the existing borrowers structure was adopted, is indicative of CBA’s mindset held once their commitment to the refinancing had been made. In Latimer’s cross‑examination, the following exchange occurred:
   Surely it mattered to you whether upon entering the transactions the company would be able to meet the obligations that it had undertaken?—I don’t think so.
   According to the ordinary standards of banking at the time, do you think it ought to have mattered to you?—This was an extraordinary case.
   Does your answer mean that it was on the cards when CBA entered into this transaction at the end of January 1990 that within a month or two the company might be unable to meet the obligations which it had undertaken pursuant to those transaction documents?—It was a possibility.
   Was it a risk that you were prepared to take?—It must have been.
   7428 Latimer confirmed on several occasions that it was a possibility in his mind that the Bell group would become insolvent. But it was not something that mattered to him.
   7429 The banks contend that I should give little weight to Latimer’s position as it is explained by the fact that he had delegated responsibility for the refinancing and the associated negotiations and moved on to other things. There is some force in this argument but it does not change the fact that the critical decision to proceed was made with knowledge that the group may be, or may become, insolvent and that the security would be obtained regardless of any issues as to directors’ duties and the position of other creditors. In any event, Latimer’s subordinates still reported to him and were ultimately under his supervision. These officers were Boyd (from about 4 to 18 October 1989), Dennis (until about 20 December 1989) and Smith (until the group’s liquidation commenced).
   7430 Boyd attended the 4 October 1989 Australian banks’ meeting and followed the changes to the terms sheets during this period. Boyd, too, understood that the group’s cash flow was tight and noted that ‘a 10 per cent depreciation in the AUD will add $2.3 million to interest costs and $13.7 million to principal’ and that this was ‘not insignificant’. Latimer seems to have agreed with Boyd’s comments as he noted on the terms sheet, ‘this is the Banks’ only opportunity to obtain the best outcome – confirmed’.
   7431 Although the decision to participate ‘come what may’ had been made, Dennis was still an active participant and contributor in the negotiations. He regularly made notes at the banks’ meetings and annotated documents which were circulated. For example, Dennis considered the joint memorandum of 18 October 1989 from A&O and MSJL, indicated as he marked it in a number of places. Many of the markings are in relation to comments about what could happen to the securities in the event of a liquidation. This suggests that they were the parts of most interest to him. He underlined the sentence which noted that ‘there is a real concern as to the solvency of the existing borrowers’. This accords with his evidence in court. He accepted that there was a real concern about the solvency of the existing borrowers, even before the existing borrower structure was chosen.
   7432 A similar pattern emerges from his copy of the opinion from Hayne QC and Burnside. The majority of the annotations and underlining centre around the passages that express doubt about the survival of the securities. Dennis gave evidence that although he thought it was possible for TBGL to go into liquidation ‘at some time in the future’, he also thought it was possible for TBGL to survive the term of the proposed facility. It is difficult to convey fully the impression gained from reading these documents. But it seems to me from all the evidence (including but not limited to all the documents annotated or produced by Dennis), that Dennis was concerned that Bell group was not going to survive and he was looking at ways to minimise legal risks and protect the assets. Overall, I think that relevant officers of CBA harboured significant doubts as to the Bell group’s solvency at the time of the Transactions.
   7433 It does not appear from the evidence that CBA gave any great consideration to the value of the BRL shares and the possibility of the brewery transaction going ahead. This is, of course, consistent with their ‘come what may’ policy. On 12 November 1989, CBA received a fax from Weir which I have quoted at length in the section on Westpac. In essence, the fax stated that two banks had raised a concern about the proposed treatment of the proceeds of sale of BRL shares (cash being retained for six months in escrow account) and it was suggested that there be a mandatory pro rata reduction to $200 million, with the balance being retained in escrow for three months.
   7434 In his evidence in chief, Dennis said that he would have understood, at the time, Weir to be saying that there was now some prospect of value being restored to the TBGL’s shareholding in BRL as a result of negotiations for the sale of the BBHL into BRL. But in cross‑examination, Dennis agreed that this might overstate what was said in the letter. Dennis accepted that the letter did not create a very strong basis for having confidence in value being restored to BRL.
   7435 As I have noted above, Weir’s fax was not clear. Ultimately for CBA’s purposes, I do not rely on it, or Dennis’ testimony about it, to further the case against CBA. Whatever knowledge they received about BRL, I do not think CBA gave much thought to what might happen. Based on the CBA witnesses’ evidence about their practice of reading the Australian financial press (discussed previously), I find that CBA would have been aware of the well‑publicised developments such as the change in board, the suspension in trading and the receivership of BBHL. Weir’s fax to Latham, which was circulated to the Australian banks on 3 January 1990, mentions the ‘BBHL liquidation’. Smith acknowledged that he was aware of the appointment of a receiver to BRL. The fact that there was no commentary on the BRL situation in any of the discovered documents indicates that CBA simply did not turn its mind to the question in any material way. It was of little consequence to their ultimate decision.
   7436 On 15 November 1989, CBA received copies of the TBGL’s 1989 Annual Report and accounts in both its Perth and Sydney offices. The version of the 1989 Annual Report sent to CBA’s Sydney office was addressed to Poulter. His evidence was that he received it and would have passed it on to Latimer after a cursory reading the letter. He could neither confirm nor deny whether he flicked through it. He would have expected Latimer to have someone analyse the financial information and document the analysis.
   7437 Someone made some annotations on the balance sheet, adjusting the figures. Total assets had declined from $1605 million to $804 million, apparently on the basis of discounting ‘investments’ entirely (which would exclude the BRL and JNTH shares) and by removing $200 million from the $416 million allowance in the balance sheet for ‘other’ assets (which would include mastheads). Total liabilities were reduced by $546 million. This left a net surplus of assets of $205 million. However, the $546 million reduction in liabilities seems to have come from the exclusion of the subordinated convertible bonds. Therefore, these appear to be calculations to determine the bank’s asset coverage. A surplus of $205 million would not be sufficient to cover the bondholders. The plaintiffs contend that the annotations were made by Latimer. The annotations look similar to those on There is a similarity between the to those on TBGL’s estimated balance sheet as at 30 June 1989, which was identified by Latimer as being his. There is no evidence that Dennis reviewed the annual report, although from his participation in the meetings he must have known of its existence.
   7438 Dennis went on leave on 20 December 1989 and the file was passed to Smith. Dennis prepared and circulated a diary note, which seems to have been intended to assist Smith in understanding the background. It was also reviewed by Latimer. He opened by saying:
   Matters have progressed much more slowly than anticipated because of the need to carefully structure the transaction to obtain the optimum position for both groups of lenders … having regard to the possibilities that:
   (1) the security providers are presently insolvent; and/or
   (2) the security providers will be wound up.
   In structuring the transaction, assumptions were made that such factors were present.
   7439 Dennis then analysed the various structures that had been proposed and explained why the existing borrowers structure had been adopted. He noted that an advantage of the structure was that each security would have to be set aside one by one and the avoidance of one security would not directly affect any other security. This structure was ‘(comparatively) much more robust and at least has a chance of surviving’. The note displays an understanding and agreement that this structure was preferable because the banks would be no worse off. However, he noted that it must be ‘recognised that if the assumptions mentioned earlier are correct, either structure is likely to fail’. The comments about corporate benefit and avoidance are essentially an echo of the legal advice and I will not repeat them. CBA had decided to rely on the banks’ collective lawyers and not to seek separate legal advice.
   7440 Dennis then referred to a discussion with Stow (P&P) who advised CBA not to change from a fully drawn facility to a bill facility. Stow reportedly said that ‘the banks are, after all, scrambling around trying to get security and if a liquidation is the ultimate outcome, the first thing the liquidator will be looking at is how to attack the securities now being sought by the banks’. Dennis was also advised by Stow that it was likely that the Bell group would have a stamp duty liability of $3.5 million in connection with the revised documentation, in addition to all the legal and other expenses incurred in putting the transaction together. Dennis said he ‘asked [Stow] straight out whether he thought the documents would eventually be executed by the Bell Group (and whether all the costs and fees would be paid) to which he was, understandably, fairly non‑committal’.
   7441 Consistent with CBA’s policy, Smith said that it was not necessary for him to conduct any analysis of the Bell group’s financial position in order to complete the refinancing and it was unlikely he ever did so. He attended the final banks’ meeting before the execution of the Transactions (on 24 January 1990) and made a diary note of the meeting. He therefore knew that the Bryanston funds would not be directed to the banks.
   Conclusions
   7442 In September 1989, CBA made formal demands on TBGL and BGF for repayment of its facility to BGF. Subsequently, CBA decided to proceed with the proposed restructuring of the facilities and withdrew the demands on 20 September 1989. This was not a popular decision with some of the senior officers who had been managing the exposure and I think it is fair to say that those people lost interest in the project.
   7443 At the time that CBA withdrew the demands, CBA knew or believed that BGF and TBGL could not repay its facility from its cash or other resources and that if CBA pressed its demands the Bell group would or would most likely go into liquidation. Further, the only prospect or probable prospect of its facility being repaid was by it and the other banks taking security over the assets of the Bell group and realising on that security.
   7444 The relevant CBA officers knew of the ‘holes’ in the cash flow. They knew of all of the individual matters I have set out in the conclusions to the section on Westpac’s knowledge. CBA, too, proceeded because they were determined to take security and it did not matter whether or not the Bell group companies were insolvent. The bank would be no worse off.
   7445 From all this I conclude that CBA had serious doubts as to the solvency of the Bell group companies as at 26 January 1990. Put in terms of the pleadings, they knew the companies were of doubtful solvency and they suspected (to a high level) that the relevant companies were insolvent or nearly so. In my view, the degree of suspicion was material. They made no real effort to pursue the matter or to satisfy themselves, one way or the other, on the question. They had resolved to take security no matter what, because they had come to the view that proceeding with their demands was futile. I find that, Hade’s work to one side, no real analysis of the cash flows was ever conducted.
   7446 Both Latimer and Dennis accepted that it was normal practice for the bank to consider whether a borrower’s cash flow was sufficient to service the debt. Although in mid‑1989 there was a perfectly good reason for this (they intended to push the Bell group to pay them out), by October 1989, the situation was different. CBA had doubts about the solvency of the Bell group companies but did not take any steps to determine whether this was the case. I do not accept the evidence of CBA witnesses that it was too complicated to determine the group’s solvency, or that they were too busy to do so.
   The period February 1990 to July 1990
   7447 On 26 February 1990 Marshall faxed to Head Office Sydney a report concerning the meetings of 22 and 23 February 1990. He included the Weir diagram and the Garven cash flow summary. Marshall’s report noted Aspinall’s request that the Australian banks waive the proposed debt reduction of $25 million on 28 February 1990 from the proceeds of the Bell Press sale, and to retain the funds to meet interest due to bondholders in May 1990.
   7448 Marshall stated that ‘all in all it is an extremely untenable position with it difficult to believe that the major adverse variations in the cash flow have only come to light a few days prior to the proposed reduction in the syndicated facility’. Marshall said it appeared that the syndicate had two options: to apply the Bell Press proceeds in payment of interest and reduction of the banks’ debt; or for part of the Bell Press proceeds be applied in payment of interest due to the banks and the balance be paid to convertible bondholders in May 1990. The consensus of the Australian banks was to consent to a waiver of the proposed $25 million reduction in the facility and direct $2 million of the Bell Press proceeds to meet payment of interest on the syndicated facility.
   7449 On 6 March 1990 Smith prepared a memorandum which reviewed Marshall’s report. This memorandum attached a copy of Westpac’s fax to CBA dated 4 March 1990 which requested a waiver of Westpac’s obligation to distribute the Bell Press proceeds. Smith noted that the release of $7.8 million for payment of legal and other costs had been agreed:
   The reality is that Bell does not have the internal cash flow to meet this payment without recourse to the sale proceeds. With the recent Bond dilemma in mind, the non-payment of the interest could see overseas note holders taking court action and with the weak preference position the Banks are in a tricky situation.
   …
   The fate of the $17.0 million depends on Bell’s efforts to secure repayment of the [BCHL] loan. If the company is able to demonstrate its willingness/ability to run its own show, the banks can then look at the next step of allowing Bell to use the funds to meet the bond interest. There is no commitment and the agreement of all Banks will be required.
   It is recommended that CBA goes along with the Westpac proposal.
   7450 Latimer reviewed the 6 March 1990 memorandum and approved his recommendation on 7 March 1990, as recorded on Smith’s memorandum. Smith sent a fax to Westpac on 7 March 1990 and advised that CBA would agree to a further deferment, subject to the BCF loan being paid in full or significantly repaid by 26 March 1990, and there being no commitment given to later deferments.
   7451 Smith sent a fax to Weir on 26 March 1990 and asked: ‘What is the present position concerning the deferment of the distribution to the banks of the $17.0 m due on 31 March 1990 – have all the banks agreed, will [BCHL] loan be repaid?’ On 27 March 1990 Smith prepared a further report concerning the waiver. He noted that:
   The Banks are left in a tricky situation. We know from cash flow forecasts that the bond interest payment cannot be met without recourse to the sale of proceeds. Therefore, at the end of the day, the Banks will probably have to agree to release the $17.0M if only to preserve the value of the secured assets and stop any pre-emptive action by the bond holders.
   7452 Smith gave evidence in his witness statement that his comment regarding the value of the secured assets related to a concern that, in a liquidation, the banks could receive a lesser return on sale. He also agreed in cross-examination that he was concerned that if the bondholders were to move because their May interest was not paid they could represent direct competition with the Australian banks.
   7453 Also in his memorandum of 27 March 1990, Smith proposed that CBA waive the 30 March 1990 distribution but defer decision on whether to commit to a further waiver until the next distribution date. Latimer reviewed Smith’s note and noted against the recommendation to defer the decision until the receipt of full information and financials. Otherwise he agreed with Smith’s recommendation. Latimer gave evidence in cross-examination that ‘it was desirable’ to get through the six month preference period. On 2 April 1990 Smith recorded on a fax from Weir, dated 29 March 1990, that ‘NAB reluctantly agreed our waiver was activated on 30 March (late Perth time)’.
   7454 On 2 April 1990 Weir wrote to CBA and asked what additional financial information was required to make a decision about the release of proceeds. On 4 April 1990 Smith informed Westpac that CBA required the interim half yearly trading results to 31 December 1989, management’s trading results for the nine months to 31 March 1990, consolidated balance sheet of the group as at 31 March 1990 and, if possible, management accounts and up to date cash flow forecasts for the consolidated group as at 31 March 1990. I note, once again, that CBA had not requested new cash flows before 26 January 1990.
   7455 CBA received a fax from Simpson on 11 April 1990 which enclosed a copy of a press announcement, a financial summary letter and a document entitled ‘group results’. Latimer and Smith reviewed the results, and Latimer recorded on the letter from Simpson that ‘When we receive interim balance sheet information within the next week or so, it will be interesting to assess a real net worth for this group after allowing for the market value of the [BRL] investment’. CBA also received some financial information from Westpac during this time, including a letter dated 12 April 1990 which contained responses to information requested by each bank. Further on 12 April 1990, CBA received more financial information from Westpac, including the Bell Press and BRL balance sheets to 31 December 1989.
   7456 Smith reviewed the financial information. On 18 April 1990 he sent a fax to Weir and requested further details about the investments of $510.8 million and amounts receivable from associated companies of $38 million. Smith stated that: ‘CBA’s concern lies with the ‘real value’ of the security and if preserved, what are we likely to realise if we reach crunch time. The level of investments in mainly related / associated companies is hardly reassuring’. On 23 April 1990 CBA received details of the assets held by TBGL from Simpson.
   7457 Smith prepared a memorandum dated 24 April 1990 and recorded that ‘the banks have little choice but to agree to release the sale proceeds to [TBGL]’. Based on his memorandum, it is clear that Smith read all the financial information provided to CBA in detail. He said that:
   In the result, there is real doubt (and in fact no doubt) that the realisable value of investments in BRL and any of the other associated companies will be anything like the present book value. In effect, the only asset of any worth is the West Australian Newspapers.
   The latest cash-flow forecasts are not impressive and confirm that without release of the sale of proceeds by the banks that the interest payment cannot be effected. In fact the forecasts indicated that future trading performance is inadequate to meet the group’s commitments.
   Distribution of the $17.4M approximately would result in CBA receiving $850,000 against its debt of $12.5M. If the bond holders took action to wind-up [TBGL], it is difficult to determine what the banks would obtain as the new security arrangements would not be preserved.
   It is therefore recommended that CBA agree to the request subject to:
4. the waiver documents being acceptable as to its terms and conditions;
5. funds not being released by Westpac until the interest payment dated and only on the bases that:
   • April’s interest payment to the banks have been made; and
   • the loan to [BCHL] of $7.6M has been repaid in full.
   I understand Westpac has already agreed to the request while the Lloyds syndicate has indicated a positive response. NAB could be ‘one-off’ although Bob Weir at Westpac Perth now anticipates a positive reaction.
   7458 Smith also recorded on the memorandum in handwriting that ‘at the end of the day it is the “value” of the assets that the banks must ensure is maintained’. Smith’s memorandum was reviewed by Cleary, the general manager of CID, on 26 April 1990. Cleary noted his assent to the recommendation that day.
   7459 On 24 April 1990 Smith sent a fax to Westpac advising of CBA’s agreement to the waiver, subject to the letter of waiver being acceptable, funds being released by Westpac on the date the interest was paid, confirmation that the loan by TBGL to BCHL had been repaid and payment of TBGL’s April interest on the syndicated facilities. On 26 April 1990 Smith spoke to someone at Westpac about BGNV’s subordination deed. He sent a fax to Westpac on the same day stating ‘we would be interested to learn whether any developments have occurred in having this company execute a subordination agreement’.
   7460 On or about 9 May 1990 Smith prepared a note for Latimer and reported in a phone call from Youens (Westpac), he had been advised that the interest payment had not yet been made and that four Lloyds syndicate banks had not agreed to the waiver. Smith stated that: ‘Unless the matter is resolved by 14 May 1990, Bell will be in default in respect of the interest payment with court action to wind-up a serious option. As security arrangements will not technically be preserved until early August, the Syndicate Banks will stand as unsecured creditors’. Latimer initialled the document on 10 May 1990.

30.21.4. HKBA
The period before the Transactions
7461 At the outset, there are two important things to note about HKBA’s relationship with the Bell group. HKBA was one of the banks most supportive of the Bond and Bell groups. They did not have the same reserve about dealing with those groups as many of the other Australian banks had. Secondly, HKBA acquired considerable knowledge in the course of its participation in the BBHL syndicate. It was probably better informed about the Bond group as a whole than any of the other banks.
7462 Given its participation in the BBHL syndicate and the knowledge it possessed through that source, I doubt that HKBA could have had, at 26 January 1990, any reasonable expectation of value being restored to the BRL shares within a period that was going to solve the Bell group’s cash flow problems. If the July and September cash flows are re‑examined by excluding value derived from the BRL shares, the conclusion of insolvency or near insolvency becomes a distinct possibility.
7463 As I noted in Sect 4.2.3, by late 1988 the Bell group owed $115 million to HKBA due 31 December 1988. The HSBC banking group also had significant exposure to the Bond group including Dallhold, BBHL and BRL, much of which remained throughout 1989. The HSBC banking group, including HKBA, also gave assistance to BCHL for its takeover of the Bell group (the Actraint No 72 facility). As at October 1989, $139 million was still outstanding on this facility.
7464 HKBA therefore had a significant exposure to BCHL group companies and it had to deal with the exposure. Davis testified that he did not spend much time on the Bell group facility because he regarded it as relatively simple in comparison to the bank’s other facilities with the Bond group. The Bell facility was being serviced and, in Davis’ view, there was adequate asset coverage. I accept the broad thrust of this statement.
7465 On 8 December 1988, Devries requested a partial extension of the Bell group facility. He proposed that $90 million be repaid on 20 December 1988 and that the remaining $25 million be extended to 31 March 1989. HKBA agreed without much fanfare the following day. The sum of $90 million was repaid as promised. The other $25 million was not. An extension was granted to 30 April 1989 to allow time for the completion of certain asset sales. A further extension was requested and granted to 31 May 1989. On 26 April 1989, HKBA was asked to grant a further extension of the $25 million facility. The Wigmore’s sale was due to be completed on  May 1989 and HKBA was told that its facility would be reduced by $12.5 million from that source on 12 May 1989. The balance of $12.5 million was extended to 30 June 1989 to be repaid from the sale of Bryanston. The Wigmores settlement was again delayed and the sum due on 12 May 1989 was again extended, on this occasion to 19 May 1989. HKBA had not previously complained (to any marked degree) about the delays in payment. But on this occasion it expressed its disappointment. The Actraint No 72 facility was also extended on several occasions in this period.
7466 Around the middle of May 1989, HKBA began to consider a possible involvement in the BPG club facility. Townsend gave in principle support for HKBA’s contribution of $85 million to the $250 million club facility, subject to repayment of the Actraint No 72 and BGF facilities in full, with certain restrictions on the BPG group’s capacity to borrow and make inter‑company loans and the giving of nominated securities. It appears from the correspondence that HKBA regarded it as a ‘sound transaction’ because it was ‘well secured’ and ‘would be repaid from the cash flow of Bell Publishing and not be dependent upon the cash flow of the rest of the Bond Group’.
7467 The $12.5 million due on 19 May 1989 was not repaid. Davis wrote to Beckwith and Farrell on 19 May 1989 to express his ‘distress’ and said that the failure to repay was ‘contrary to previous undertakings given’ and ‘unacceptably inconsistent with all of the concessions which have been provided to Bell group on this facility’. Nevertheless, a few days later HKBA confirmed its in principle approval for a participation in the BPG club facility, subject to certain conditions ‘still to be advised’.
7468 On 23 May 1989, Inglis and McGregor sent a fax to Parkinson at BCHL seeking financial information in relation to BPG and TBGL, including information in relation to cash flows and the position in respect of the Bryanston sale. A further fax was sent to Parkinson the following day seeking further information, including details about inter‑company debt and the group’s projected debt position. HKBA sought confirmation of its understanding that GFH was owned by BCHL and ‘from a commercial viewpoint has no real value’. A cash flow to 30 June 1990 was also requested.
7469 On 24 May 1989 Parkinson replied to Inglis and McGregor. Parkinson attached balance sheets, asset sale information and a rough diagram of the shareholdings in the Bond group which included BCHL, TBGL, BCIL, BRL and JNTH. Parkinson also noted that an offer had been made and rejected for Bryanston and a further offer was expected in the near future. The sale of Wigmores had been completed and had yielded $58 million. Parkinson confirmed that GFH was a Bond subsidiary and the investment was in the form of cumulative redeemable preference shares and provided a commercial rate of return. I do not think this would have given HKBA much confidence in that investment. Finally, Parkinson also provided details of inter-company loans to and from BPG. Parkinson’s letter also says: ‘Projected cash flow is to follow’. The copy discovered by HKBA includes next to that sentence a handwritten note ‘When?’. I am not aware of any evidence that the cash flow requested by HKBA (other than a cash flow for BPG) was provided prior to delivery of the July cash flow. It is to be remembered that HKBA received a different version of the July cash flow to that distributed to the other banks.
7470 HKBA’s apparent frustration was compounded by a request for a further extension of the Actraint No 72 facility to 30 June 1989. Approval was ‘reluctantly given’. Nevertheless, several documents dated late May or early June 1989 expressed confidence in the Bond group’s survival and ability to fulfil its obligations, provided it had the support of its banks.
7471 HKBA’s participation in the BPG club facility was the subject of a credit application dated 9 June 1989 from Inglis and McGregor to the credit committee. By this stage, the HSBC banking group’s proposed participation had been reduced to $66.7 million of a total $200 million. It was suggested HKBA put forward $25 million with Singapore to fund the remaining $41.7 million.
7472 The main source of debt servicing and repayment was to be the operating cash flow of BPG. A base case cash flow projection demonstrated that BPG would be able to cover all necessary operating costs, capital expenditure, working capital movements, lease obligations, interest payments and principal repayments from operating cash flow ‘except for a cash flow deficit of $8.1 million forecast after amortising the proposed facility by $10 million in the period ending 30 June 1990’. The proposal suggested the deficit would be covered through inter-company borrowings, aggressive management of working capital or the deferral of non‑essential capital expenditure. Two ‘sensitivity’ projections had been undertaken, assuming a five per cent and 10 per cent fall in revenue. In both cases there would have been a need for support from TBGL or BCHL.
7473 The proposal acknowledged the ‘inherent difficulty in valuing mastheads’ in discussing the valuations in the Hambros and Whitlam Turnbull reports. It also provided a summary of major risks, including a collapse of the Bond group, competition, disruption to supply of newsprint and labour unrest. The proposal stated:
Bond Group is continuing asset sales to reduce debt and improve public perception. The collapse of the Bond Group is unlikely. However, it would have no impact on the facility other than to precipitate the sale of Bell Publishing. The facility is very comfortably secured and even a forced sale would realise well in excess of AUD200 million. The facility is self servicing and there is minimal reliance on Bond Group for principal repayments.
7474 Additionally, it was stated that the facility would provide assistance to an important client, the Bell group, to restructure its debt position.
7475 A report by the Specialised Lending Department was attached to the proposal and contained the projections mentioned in the credit application. The base case projected cash flow projected a deficit of $12.1 million in 1990 for BPG. Under ‘sensitivity 1’, the deficit increased to $19.7 million. A balance sheet for BRL was also included and the inter-company receivables from BCHL were valued at $894 million. In relation to JNTH, it was stated that:
Following asset sales in 1987 and 1988 JN Taylor is cashed up with minimal debt. In its unaudited accounts as at 31 December 1988 JN Taylor reported total assets of AUD235 million (of which cash totalled AUD188 million) and net assets of AUD227 million …We understand that the cash holdings are now largely inter-company receivables.
7476 In relation to GFH, it was said that ‘the market value of the investment is unlikely to be significant and has been assumed to be nil for the purpose of analysing the value of Bell Group’s investments’. Finally, the report stated that once the sale of Bryanston had been completed ‘Bell Group will be purely a holding company… [and] future performance, excluding any contribution from Bell Publishing, will rely on dividend and management income offset almost completely … by interest costs’. It should also be noted that the report referred to receivables in TBGL’s balance sheet which included management fees and accrued dividends from BRL and JNTH of $18 million.
7477 Strang and Davis recommended the facility in a memorandum dated 14 June 1989 to Townsend (copied to Hale) because ‘[i]n addition to providing a high yielding well secured facility, the proposed facility to Bell Publishing will result in an immediate net reduction of $27 million in HKBG exposure to the Bond Group’. Dickinson made a similar recommendation on 15 May 1989. By telex dated 16 June 1989 Townsend informed Strang and Davis that participation in the BPG facility was approved, subject to conditions. Townsend said that the Lloyds syndicate should be informed of the proposed security and receive a ‘clear legal opinion that the security structure as proposed is enforceable and not capable of challenge in the courts by lenders to Bell Group’.
7478 HKBA confirmed its participation in the BPG club facility with TBGL on 22 June 1989. The term of the facility was for three years, maturing on 30 June 1992. The conditions precedent to the facility included a reduction in the Actraint No 72 facility to not more than $75 million and repayment in full of the BGF facility. At this time, there was still $135 million outstanding on the Actraint No 72 facility. But by 26 June 1989 it had already become apparent to Davis and Inglis that BCHL could not reduce the facility to $75 million by 30 June 1989. The following day they wrote to Farrell indicating that they would be prepared to agree to an extension to 31 December 1989 given certain conditions, including additional security.
7479 On 30 June 1989, Dickinson and Davis sent a long analysis of developments in relation to the Bond group to Townsend. In essence, it shows that HKBA were still supportive and optimistic about the Bond group but it was in a ‘hostile environment’ and the loss of support by some of the banks was a ‘major risk’. An attachment to the memorandum contained an analysis of the value of the securities held pursuant to the Actraint No 72 facility. The authors concluded that there was a $43.6 million shortfall. Notably, the shares held by the BCHL group in TBGL were given a nil estimated realisable value. This suggests that, at least for the purposes of this analysis, the authors did not consider that the Bell group had a surplus of assets over its liabilities. Further, it was estimated that, based on a ‘rough worst case estimate’, BRL would recover only 20 cents in the dollar in respect of the deposit from the brewery sale. If that were the case, after paying its other external debts, assets of $532 million would be available to repay convertible bonds in the total sum of $560 million. Again, if that is correct BRL was considered to have negative shareholders’ funds. This must be qualified in some respects. The authors went on to say that the numbers were a rough guide only and some figures seemed inconsistent with previous analysis. As the banks note, only three weeks earlier Davis had described BRL as having ‘the best credit of the Bond Group at present’.
7480 Approval was given to roll over the BGF facility for a further month on 30 June 1989. Townsend’s internal telex asked his officers to advise what was happening with the sales of Wigmores and Bryanston and why it was taking so long to complete sales which had been described as imminent in March 1989. HKBA’s agreement to extending the facility to 31 July 1989 was conveyed to Farrell on 3 June 1989.
7481 In July 1989, HKBA conducted a full review of the BCHL exposures and developed a plan for procuring repayment of the facilities. The review was entitled ‘Project Occam’s Razor’. Caution must be exercised before reading too much into code words or titles given to projects or reports. But if my understanding of Occam’s Razor as a tenet of the reductionist philosophy of nominalism is correct, it suggests that the bank was endeavouring to reduce the number of assumptions and variables in its decision‑making process.
7482 The Occam’s Razor report was produced by Davis, McGregor and Inglis. The background to the plan was that the HSBC banking group had recently provided two facilities to BCHL. The first was a HK$300 million facility, provided for one month (from 3 July 1989) to meet urgent working capital requirements. It had an undefined repayment source. The second was a HK$270 million facility, drawn on 7 July 1989, to enable BCHL to repay an inter‑company loan to BCIL. Repayment was to come from a proposed dividend payment of BCIL on 4 August 1989. Other correspondence indicated that these facilities were provided as a matter of urgency, without the normal analytical credit review which would be usual for an HSBC banking group facility. It was a condition of these facilities that HKBA, in conjunction with BCHL, undertake such a review and make recommendations on an asset rationalisation and realisation programme as a matter of priority. This was what Project Occam’s Razor was designed to do. The report said:
Following our review of the 12 month cash flow of the Bond Group and our analysis of the financial status of the same, we have concluded that the Bond Group has a satisfactory future provided that it can consummate the asset sale program discussed below. The resultant composition of the Bond Group is difficult to define at this stage due to the potential accounting permutations which arise depending on the order and timing of asset sales.
We have therefore developed, in conjunction with BCHL, an asset sales program with the primary objective of repaying all current debt, other than the Heileman lenders and Bell Group lenders, both of which it is anticipated can be rearranged on a long term basis. By achieving this, BCHL has considerable flexibility in restructuring the Group on a basis which maximises its earnings potential and reflects a structure commensurate with its capital base.
7483 This plan involved the provision of an $200 million facility, a ‘standby facility’ to enable the group to meet cash flow shortfalls pending the completion of the asset sale programme. This facility would include the HK$570 million already lent and would result in an increase in HSBC banking group’s exposure of approximately $105 million. It was to include security.
7484 The BCHL’s group’s assets were placed in various categories which related to their saleability and their priority for sale. BPG was categorised as a ‘back‑up asset sale’, defined as those available for sale if the higher priority asset sales were not achieved within reasonable time frames. A main risk identified in the document was ‘recalcitrant banks’. It stated that the Bell group lenders were unlikely to precipitate action but their patience was wearing thin. The report also contained detailed financial information about various companies in the BCHL group, demonstrating HKBA’s access to such information. It is also important to note that a feature of Project Occam’s Razor was an acknowledgement that BRL and JNTH did not have the power to pay dividends without HKBA’s approval.
7485 By fax dated 19 July 1989 to Townsend, Hale and Dickinson, Davis noted that the Wigmores sale had been completed, but expressed his scepticism that the Bryanston sale would be completed in the near term. He said ‘realistically, the facilities to Bell group will either be repaid (from the sale of Bell Publishing) or refinanced (by a corporate refinancing)’.
7486 On 25 July 1989, HKBA had been advised that all Bell group lenders had been approached about participating in a facility secured against BPG. HKBA’s facility was due to expire on 31 July 1989 and Townsend approved a further extension to 31 August 1989. The Actraint No 72 facility was extended on the same day until the earlier of 31 December 1989 or the receipt of sales proceeds in respect of certain nominated assets. Certain other conditions were imposed, including a requirement that the facility be reduced to $100 million no later than 31 October 1989.
7487 On 4 August 1989, the BCHL group drew down HK$204 million on the Occam’s Razor facilities. HKBA closely monitored how the cash was to be used. On 12 August 1989, a further drawdown was sought. A lot of correspondence was circulated in late August 1989. It is complex and not particularly relevant to this case, but some points should be noted. The BCHL group’s asset sales had not progressed as well as planned and HKBA was beginning to look at the sale of the ‘back up’ assets, including BPG. HKBA was taking an active role in managing the Bond group’s financial problems (although obviously with a view to being paid out) including putting forward suggestions about asset sales and the ordering of the group’s finances. Davis recommended allowing the further drawdown ‘to enable BCHL to survive’. Townsend expressed concerns about this:
We are not prepared to put up further funds in the absence of first class tangible security …
Despite the dedication and industriousness of the team led by Davis, they and we remain uncertain as to the long term cash-flow. Putting in further cash only to discover in 3 weeks time that the sum is insufficient to keep the ship afloat, is contrary to our interests.
7488 Authorisation to make further draw downs was ultimately declined. But Davis proposed that a smaller facility of $50 million be provided to enable BCHL to complete its asset sales.
7489 The Bell group sought a further extension of the BGF facility through to 29 September 1989. By memorandum dated 29 August 1989 to Yonge, Davis said that ‘unsecured lenders to Bell group (total of approximately AUD260 million) could be paid in full from the sale of Bell Publishing (AUD350 million+) and the sale of Bryanston (GBP20 million)’. In relation to the situation facing the Bell group convertible bondholders, it was said:
Recoverability depends on the value of Bell Publishing and any residual value in BRL shares. Assuming Bell Publishing is worth AUD400 million and the sale of Bryanston is completed, convertible note holders would receive approximately 30 cents in the dollar plus any value in BRL shares. BRL shares need to be worth approximately AUD1.71 per share to enable repayment in full.
Position of convertible note holders may be best secured by using the Bryanston sale proceeds to reduce debt and let BGL continue as a going concern to enhance the value of Bell Publishing and allow maximum value from the BRL shares.
7490 On 1 September 1989, Davis advised Townsend that the Wigmores proceeds had been primarily used for BCHL cash flow purposes and would not be used to reduce debt owing to Bell group lenders. Also around this time, HKBA were told that the banks were unlikely to receive anything from the Bryanston proceeds.
7491 The proposed BPG facility was the subject of a detailed credit application dated 25 September 1989, prepared by Inglis, with considerable input from Davis. The authors indicated that the proposal was essentially an extension of the existing facility for 18 months, with security and a change in borrower. It would give TBGL the opportunity to concentrate on implementing a viable business plan ‘instead of having to divert resources to deal with its bankers on virtually a daily basis’.
7492 HKBA had earlier obtained its own valuation of BPG, dated 16 June 1989, by its investment banking arm, Wardley James Capel Corporate. It placed BPG in the range of $300 million to $330 million ‘for mortgagee purposes’. The credit application also noted that an offer from Murdoch at $350 million had been rejected and there was interest from another party at a possible price in excess of $400 million.
7493 Inglis then performed a balance sheet analysis in which he compared the estimated balance sheet for the Bell group prepared by BCHL with two other scenarios. First, an adjusted balance sheet in which mastheads had been revalued in line with Wardley James Capel’s valuation and in which certain receivables were ignored. Secondly, an adjusted balance sheet in which the same methodology was applied but in which the group’s investments in BRL and JNTH were shown at their market values. These adjusted balance sheets produced surpluses of assets of $589.4 million and $438.2 million respectively, but the bondholders’ debt (or any other creditors) were not factored in.
7494 Two cash flows were annexed to the credit application: a Base Case projection based on information provided by the Bell group, and amended according to HKBA’s assumptions on interest and exchange rate movements, and an Adverse Case projection which assumed that TBGL did not receive any dividends or management fees from BRL, JNTH or GFH. The credit application concluded that the review of the projected cash flows indicated that BPG’s cash flow alone might be insufficient to service bank debt and it might be necessary for TBGL to support the servicing requirements of the facility. Yet the Base Case projection demonstrated that TBGL’s cash flow was dependent on management fees and dividends from BRL.
7495 In the Adverse Case scenario, the banks would have had little alternative but to realise their security and sell BPG. However, the credit application expressed some confidence that the sale of the shareholding in Lonrho would result in a net cash inflow to BCHL and BRL of some $300 million and would enable BRL to pay dividends and management fees, subject to it effecting the rest of its asset disposal programme. Both cash flow cases incorporated the sale of Wigmores and Bryanston (despite having already received strong indications that these sums would not be available for repayment of the banks’ facilities), but did not include the possible sale of Bell Press. The major risks in the transaction were identified as being:
(a) a risk that BPG’s earnings would be adversely affected by competition, industrial action or a disruption to newsprint supplies;
(b) the ‘upstreaming’ of the Bell group’s resources to BCHL, which would be made more difficult by the new facility because of covenants forbidding the granting of financial accommodation to BCHL;
(c) the collapse of BCHL which would jeopardise the Bell group’s inter‑company receivables and have an adverse impact on the market price and saleability of TBGL’s investments in BRL, JNTH and GFH; and
(d) the failure by BRL to pay dividends or management fees to TBGL.
7496 The credit application recommended the approval of the facility for a number of reasons. Failure to support TBGL would have a serious detrimental effect on both TBGL and BCHL and adversely affect HKBA’s relations with the other banks. If HKBA were to insist on repayment, it would prompt similar actions from the other Australian lenders and this would necessitate the sale of BPG for less than market price. The ‘effect on the balance sheets of BGL and BCHL could be drastic’. The proposed security would sufficiently underpin the existing bank debt and the extension would give the Bell group time to reorganise its operations. Hale and Townsend approved the proposal on 28 September 1989.
7497 On 23 October 1989, Strang and Inglis sought approval for the BGF facility to be rolled over on a monthly basis until the refinancing was completed. French, an officer at a similar level to Townsend and who stepped in from time to time if Townsend was unavailable, was against giving an open-approval for continual rollover. Instead, the facility was extended, on a demand basis, to 1 December 1989.
7498 On 24 October 1989, Edward (SocGen) wrote to Susan Young (Wardley) expressing real concern about the financial health of BRL due to problems concerning the brewery ‘deposit’ and the resultant NCSC investigation: see Sect 30.6.8.3. A handwritten note on the letter indicated that Young sent it to Davis saying: ‘Could we please discuss this’.
7499 On 26 October 1989, Strang and McGregor sent a report on the Bond group to Townsend. In relation to the Bell group, they said:
News Corporation have done their due diligence on [Bell Press] and agreement has been reached for News Corp to print Bell Group’s magazines. Bell Group is currently negotiating with News Corp to print the latter’s Sunday newspaper.
The sale of Bryanston, which was scheduled to be completed at the end of this month, has slipped to November due to delays in obtaining Department of Trade and Industry approval. The latest date for DTI approval is mid-December. Bell Group advises that the purchaser remains committed to the acquisition.
The Bell Group refinancing is proceeding with all banks, other than [SCBAL] and the Lloyds syndicate having obtained approval. Some legal difficulties have been encountered, primarily in relation to the risks if Bell Group goes into liquidation within 6 months of drawdown. The syndicate’s lawyers are working on minimising the risks.
7500 There was a lot of additional correspondence about the Bond group facilities but I do not think there is much in it that is of significance, other than that BCHL failed to reduce the Actraint No 72 facility to an amount less than $100 million as promised.
7501 By this time, the negotiations between the Bell group and the banks to facilitate the refinancing were well underway. In a memorandum dated 6 November 1989 to the credit committee (which included Davis, Dickinson, Strang, Yonge and Roxburgh), Inglis reported on developments that had occurred in these meetings and sought their consent for a number of the terms and conditions originally imposed by HKBA in its dealings with the Bell group:
As approved, [BPG] was to be the borrower. In the light of legal advice on the proposed borrowing structure, it is now proposed that the existing borrower, [BGF] continues as borrower. Within the overall tailoring of a security sharing deed, common terms and conditions, common loan documentation and prohibition on lenders agreeing to waive or amend terms and conditions without other lenders consent, each lender will continue its existing facility. The syndicate’s lawyers have confirmed that this structure is less fraught with potential legal problems than other structures.
A risk remains, however, that if the borrower and security providers go into liquidation within 6 months of the refinancing, a liquidator may set aside the security arrangements as constituting a voidable preference. There are, however, few creditors that are not subordinated or participating in the refinancing.
7502 He also noted that ‘BGL has not yet agreed to the proposed terms but the attitude of the lenders is that BGL will have to accept the terms if the refinancing is to proceed’. Bryanston was still relied on as a source of repayment at this stage. But TBGL’s ability to make repayments in excess of asset sale proceeds depended ‘entirely on the level of dividends and management fees paid by Bell Resources and JN Taylor which cannot at this stage be quantified with any certainty’. Inglis then noted that in return for HKBA accepting amendments to its terms and conditions, legal mortgages over the JNTH and BRL shares would be given, meaning that ‘virtually all of [TBGL’s] useful assets will be charged to the syndicate’.
7503 On 9 November 1989, it was confirmed with HKBA that only £6 million would be received on settlement for Bryanston, with the balance being held to meet the book debts of Bryanston, which could take up to two years to work out. In a telex on the same day, Inglis and Strang told French, Hale and Dickinson they still expected the sale of Bell Press to conclude in the near future but that the price would be nearer to $30 million rather than $40 million as previously expected. They also said: ‘Proceeds of all asset sales including [Bell Press] and Bryanston must be used to reduce the financing facility’. The significance of this is, of course, that there is no suggestion of any arrangement or understanding that the Bell Press proceeds could used by TBGL to satisfy recurrent commitments such as debt servicing.
7504 It was around this time that the BBHL syndicate banks, of which HKBA was one, began to contemplate taking action against BBHL. I have already discussed the knowledge derived by the BBHL syndicate banks and will not repeat it here, except to repeat the finding that the BBHL syndicate banks could not have had, as at 26 January 1990, any real expectation of the brewery sale proceeding.
7505 Also in November 1989 HKBA expressed concern about the progress of its Project Occam’s Razor plan. The asset sale programme had not been proceeding as planned and, where it had proceeded, the Bond group (including Dallhold) had ‘little focus’ on reducing HSBC facilities. Nonetheless, HKBA seems to have regarded the brewery sale as achievable at this stage. In a letter to Oates, Yonge commented:
The only conclusion to which we can come is that major assets still need to be sold. We note the progress that has been made, albeit lacking finality, in relation to the sale of the Australian Breweries which, even if completed, will not overcome the existing problem of the Bond Group which has too much debt and too little cash flow. In order that we can progress a consideration of the provision of another AUD50 million we require a detailed cash flow to 30 June 1990 and clear notes as to additional asset sales including timing of completion of sales and achievability. The longer that the BCHL Group delays in completing asset sales, the smaller the residual worth of the BCHL Group will obviously be due to the erosion of credit by interest costs.
As you are aware, I am fundamentally concerned that diminution of the residual amount of time, available to find solutions to what appears to be imminent cash flow difficulties, is accelerating in a manner that is disproportional to the quantum of these short-term requirements. I am as noted in the preceding paragraph, unable to turn my mind to the longer term requirements until such time as we have received and considered your 1990 cash flows, resolved the difficulties that are described in the first sentence of this letter, and agreed with you and my superior officers upon a future course of action.
7506 HKBA’s concerns about the Bond group’s future are quite clearly expressed in Davis’ report to Townsend dated 14 December 2007. I will set out some passages in full because they are a self‑contained summary.
The Bond Group appears to be running out of time as its creditors are running out of patience. Asset sales are stalling, cash is running out and grace periods for rectification of facility breaches, particularly in the case of BBHL, are drawing close to expiry.
While we considered Project Phoenix, at the request of Bond senior management, we believe the lending proposal cannot be recommended and this simply reinforces our previous conclusion that there appears to be no ‘bank-led’ solution to the Bond Group’s problems. In the short term, the determination of the BBHL syndicate to take official action after 22 December, if breaches are not rectified, represents the most significant threat to the Bond Group’s continued existence. As mentioned below, only an unconditional sale of the Breweries, probably to BRL, will halt the inevitable.
In the longer term, asset sales, debt retirement and deep discount repurchase of subordinated debt remain the key ingredients.
In view of the above and the failure of November interest to be paid on the Actraint 72 and AUD50m Overdraft facilities, we are reassessing the previous attitude that the HKBG would not be the first party to take precipitous action against the Bond Group.
7507 In relation to BCHL, Davis went on to make some comments directed at the status of the asset sales programme:
The status of asset sales is unchanged since our report of 21 November 1989. Attention appears to have been directed to the Adsteam problem and asset sales have suffered as a result.
The sale of the breweries has stalled also. The BBHL Senior Debt syndicate have served default notices on BBHL and propose taking action on expiry of the notices on 22 December 1989. We consider that the only event which will stop the syndicate taking action is a clean sale to a third party or to BRL. We are uncertain whether BCHL can achieve this in the time frame available.
7508 Davis went on to describe the developments involving BRL, including the changes to its board as a result of the Adsteam and NCSC action. In relation to the Bell group, he noted that SCBAL had made a s 364 demand but he was not certain whether they would carry it through. He advised ‘it would be in the best interests of all Bell group lenders to expedite execution of documentation, but unfortunately Westpac as arranger does not appear to have the same sense of urgency’.
7509 There are two things to note about these matters. First, HKBA seems to have been one of the few banks that knew about the issue of the SCBAL demands. In his oral evidence, Davis said he could not recall how he came to learn of the demands. However, he said he regarded SCBAL as a wild card and the bank most likely to make demand and call up its facility, which he thought would have led to the ultimate liquidation of TBGL in 1990. As well as the SCBAL demands, SCB issued demands on Dallhold over the Greenvale nickel project. HKBA had refinanced the SCB exposure, resulting in withdrawal of the demands.
7510 The second point is Davis’ reference to an apparent lack of urgency on Westpac’s part. I find this a little curious as it followed closely on the ‘panic weekend’. In cross‑examination, he denied that he made this statement because he had concern about the financial position of the Bell group. He said it was ‘just a statement of our understanding at the time’. It was them put to him that if there was no concern about the financial position of the Bell group, he would not have had a sense of urgency about expediting execution. It evoked this response: ‘We were keen to see this go ahead because of course it was the first step of a potential restructure of the Bell group’. He added that HKBA was concerned that as a number of the banks’ loans were on demand, the potential was there for one of them to call their loan and have an official appointment to Bell group. Given the circumstances at the time (including the problems between Adsteam and BRL, the state of the brewery transaction and the looming prospect of action by the BBHL syndicate and the existence of the SCBAL demands) I think this underestimates the position. It is an example of a witness engaging, albeit without meaning to obfuscate, in reconstruction rather than recollection.
7511 On 27 November 1989, the maturity date of the BGF facility was extended from 1 December 1989 to 2 January 1990. By 29 December 1989, the documentation had been mostly prepared but still not competed, and HKBA approved a roll‑over until the end of January 1990 to enable the refinancing to be completed.
7512 McGregor wrote to the credit committee on 12 December 1989 to recommend downgrading of the BCHL, Dallhold, Actraint and BGF facilities from grade one to grade three:
The downgrading is recommended given the uncertain future of the Bond companies and Dallhold and, in relation to the facilities provided to BCHL and Actraint No 72, the non payment of interest for the month of November 1989.
It should be noted that, in the event of a default, recovery in full of each of the above facilities is expected.
7513 The banks say that a downgrading to category three did not indicate that recovery was doubtful. Farr testified that the system ranged from one to five, with one being the best grade and five denoting ‘a doubtful or unrecoverable facility’. But there is a difference between a doubt about the recoverability of a facility and a doubt about the future viability of the company. In my view the plain reading of McGregor’s words indicates that she did not give the BCHL group facilities a rating of four or five because HKBA still expected to recover in full, even in the event of a liquidation. The fact remains, and Farr’s evidence does not change this, that McGregor regarded the BCHL companies as having an uncertain future. This is confirmed by a subsequent memorandum written by McGregor dated 10 January 1990, where she speculates that ‘unsecured creditors to BCHL may receive around 20‑50 cents in the dollar’.
7514 In early January 1990, HKBA together with MSJ started to prepare draft notices of demand on various BCHL group companies. By telex dated 3 January 1990 to Townsend (copied to Hale in Singapore and Dickinson), Strang reported that negotiations for the sale of Bryanston for a price of £20 million were nearing completion. Negotiations for the sale of Bell Press were continuing but no formal agreement had been executed.
7515 The following day Davis reported to Townsend on a number of matters including the progress of the BGF refinancing:
[E]xecution of documentation did not proceed yesterday as NAB, who would participate for AUD20 million, refused to sign. Westpac as arranger are pushing NAB to execute. It is in all Bell Group lenders’ best interests to execute and we find NAB’s reluctance to execute puzzling.
7516 HKBA discovered a copy of a letter from JNTH to the ASX dated 3 January 1990. In it, JNTH disclosed that it had substantial loans outstanding to it by Dallhold and BCF (totalling $82.9 million and $99.9 million respectively). This supports that the conclusion that I have previously expressed concerning JNTH. Based on HKBA’s well-documented knowledge of BCHL and Dallhold’s lack of cash flow, HKBA could not have had any real expectation of management fees or dividends being received from JNTH.
7517 HKBA’s final opinions expressed on the BBHL proceedings before 26 January 1990 reveal that they thought that ‘at this stage, it would appear that it is going to be a bloody fight to the death’ (memorandum from Davis to Townsend dated 9 January 1990). Davis also advised Townsend on 10 January 1990 that the outcome of the court proceedings were ‘likely to be of academic interest only’ because BBHL’s bondholders had made a formal demand; even if BBHL succeeded in its claim, the bondholders would likely appoint their own receiver or liquidator. Davis concluded that in light of this, ‘BBHL will not be able to return to its former self’.
7518 This memorandum still expressed a view that a small amount of cash from the sale of Bryanston would be forthcoming. But by 18 January 1990, Inglis told Peek (P&P) that there was a strong possibility that HKBA would not receive much of the Bryanston sale proceeds during the term of the facility. The strong likelihood that no proceeds from the sale of Bryanston would be forthcoming to the Bell group was confirmed at the 24 January 1990 meeting of the Australian banks. It was further highlighted in Inglis’ memorandum to the credit committee on the same day. This memorandum also expressed disappointment that the directors of TBGIL and BGUK had been advised by their lawyers that, duties on them, they should seek strongly worded comfort letters from TBGL. This meant that these companies might be able to make future claims against TBGL. He went on to say that this would be unlikely to have an impact once the six month period passed because TBGIL and BGUK would only rank as unsecured creditors.
7519 This development, in relation to BGUK and TBGIL, required HKBA to approve the waiver of a covenant in relation to the subordination of the inter‑company loans. After giving approval, Townsend commented that, given the bank was likely to ‘see nothing from Bryanston’, they obtain an updated assessment ‘of how we get repaid’.
7520 By fax dated 25 January 1990 to Baker, the State Manager of HKBA in Perth, Inglis authorised Baker to proceed with signing the facilities and supplemental agreements.
7521 In my view, HKBA seems to have avoided addressing the solvency of the Bell group in its contemporaneous correspondence. Yet it was clearly contemplated as a possibility, given the sense of urgency and the concern about the six month preference period. I infer from these evenly that HKBA’s aim was to obtain security as soon as possible, regardless of the financial position of the Bell group. Davis was asked about the risk of the Transactions being overturned as a voidable preference. He answered that it was a potential risk involved in the renewal of such a facility and the bank obviously thought it was a risk worth taking. The banks say that Davis was not aware of the legal bases on which a transaction might be set aside on the grounds of voidable preference. This seems to come from Davis’ answer to a question from me, in which he said that he was not sure if insolvency was the only ground upon which a transaction could be set aside as a voidable preference. But I do not think that is an accurate representation of the exchange. Davis’ earlier testimony and the contemporaneous correspondence, as well as the fact that he was a trained lawyer, suggests to me that he had a grasp of the basic principles of insolvency law. The question which I mentioned arose in relation to a fax from Davis to Townsend dated 2 May 1990 in which Davis wrote:
If BGL went into liquidation now the syndicate banks would expect to rank pari passu with the unsecured creditors as it is expected that a liquidator would set aside the present security arrangements as a voidable preference in a liquidation prior to 2 August 1990.
7522 Once the decision had been made to proceed with obtaining security, HKBA did not carry out any significant financial analysis of the Bell group’s affairs. This was so even after HKBA came to the realisation that management fees and dividends from JNTH and BRL would not be forthcoming and, later, that the Bryanston proceeds would not be available. Nor, it seems to me, did HKBA seek information about how the Bell group planned to restructure its liabilities. This is despite Davis accepting that one of the challenges the Bell group companies faced was whether they could meet their debts as and when they fell due from their own resources, a problem which could only have been cured by some form of financial restructuring. In fact, the publishing assets were one of the assets designated as one of the ‘Back‑Up Asset Sales’ in Project Occam’s Razor.
7523 I think there is force in the plaintiffs’ argument, based upon words contained in the HKBA report on the Bond group dated 1 November 1989, that the only reason it was not sold was because of a fear that ‘to seek purchasers of Bell Publishing would undoubtedly be sufficient catalyst for lenders of Bell Group and, most likely BCHL, to call an event of default’. I acknowledge that this was preceded by a statement confirming that the ‘refinancing of Bell Group’s debt against Bell Publishing is proceeding’. But this does not necessarily suggest that a ‘restructuring’ would follow, and does not explain why the refinancing (with security) was preferred over a sale of BPG in the first place.
7524 HKBA must have been aware of a significant ‘hole’ in the Bell group’s cash flow for which there was no demonstrated solution and which rendered it of at least doubtful solvency as at 26 January 1990. This emerges from the evidence of Davis when he was taken through the Base Case and Adverse Case cash flow projections which HKBA had prepared. Davis accepted that if the $40.6 million Bryanston receipt and $65 million management fees and dividends were eliminated, there would be a ‘serious problem’ due to ‘large deficits in the projected cash flow’. Davis was then asked whether this would call into question the Bell group’s solvency. He replied that if the income stream was not as predicted, then the repayments would not be as aggressive as recorded in the cash flows. This may be so, but if repayments were not made then the interest bill would increase, placing further pressures on the group’s cash flow.
7525 HKBA also received a BCHL group cash flow dated 21 November 1989. TBGL’s closing cash balance at the end of December 1989 was forecast at negative $29.77 million, which was more than double the negative $14.58 million predicted for the same period in the Adverse Case cash flow. This shortfall was noted by Davis and McGregor in their report to Townsend (copied to, among others, Hale and Dickinson). A copy of the cash flow was attached to that report. There is no evidence that HKBA made any enquiry as to how that deficiency would be covered, nor is there any evidence they learnt how it was covered by the Academy transaction.
7526 Davis accepted in his witness statement that it was unlikely the Bell group would receive dividends and management fees from BRL. He agreed that the change in the BRL board meant that no management fees would be expected to be paid. He also accepted that JNTH’s only assets were receivables from Bond group companies and that, as a result, he thought that ‘the ability of JNTH to pay management fees and dividends to TBGL was dependent on JNTH receiving funds from the Bond group, which was dependent on the sale of assets by the Group’. It must also be remembered that BRL and JNTH could not pay dividends without HKBA’s consent. The correspondence discovered by HKBA about the progress of the Bond group’s asset sales reveals it was highly unlikely that it would generate enough cash to repay JNTH. Even if it did, the repayment of JNTH would hardly be the highest priority for either HKBA (who wanted repayment itself) or the Bond group (who had to keep the banks at bay).
7527 Even if only the dividends and management fees were to be excluded, leaving the Bryanston proceeds as an available receipt, Davis accepted that HKBA’s Adverse Case cash flow showed a deficit of $14 million in December 1989, increasing to $26 million by April 1990 and $51 million by May 1990. Nor did the HKBA cash flows make allowance for the costs of the refinancing. Davis then accepted that, if faced with such a hole in the cash flow, HKBA would want to know how it was to be covered.
7528 None of the HKBA witnesses offered a satisfactory response as to how this could be done. Davis’ witness statement contains an explanation of how he saw the Bell group surviving. He mentioned several possibilities: an inter‑company loan or repayment from BCHL; an arrangement with the bondholders such as a moratorium on interest or a debt for equity swap; an injection of equity by a joint venture partner in BPG; a further injection of funds from the bank if it was in the banks’ interests or a sale of assets, such as Bryanston, Bell Press and Q‑Net.
7529 It will be apparent from what I have already said that I do not think the bank could have held much of an expectation of funds being made available by BCHL. The ‘squeaky door’ analogy was given an airing during Davis’ testimony. There is no doubt that BCHL engaged in that practice, for example, the allocation of proceeds of the Wigmore’s sale in 1989. But where the financial position of companies in a group is, or is bordering on, insolvency, there are distinct limits on the availability of oil to quieten down the squeaky door. I do not think this analogy presents a legitimate means of improving the Bell group’s outlook. A probably insolvent group cannot go on indefinitely shifting funds around between sub‑groups to the company with (today’s) greatest need in order to disguise its illiquidity. It will be apparent from that I have already said that there can not have been a reasonable expectation that the nominated asset sales would solve the problem. In any event, it runs up against the cl 17.12 problem. There is no contemporaneous evidence that by January 1990 any of the other posited solutions had been considered or developed to an extent that would permit a reasonable assessment of their feasibility.
7530 Some officers within HKBA may have retained hope that value could be restored to the BRL shares if the brewery sale was completed, thus allowing the shares to be sold. Davis testified that in December 1989 and January 1990 he saw a brewery sale as inevitable. But as at 26 January 1990, the evidence shows HKBA regarded BBHL’s troubles as ongoing, regardless of the resolution of the then-existing court proceedings. This would have been a major inhibition to the successful completion of the brewery sale in the near term. Even if the sale eventually went ahead, it would be some time before value was added to the BRL shares and there would be a lapse of time before the Bell group could avail itself of cash generated from a sale of the BRL shares. If the sale did not go ahead, Davis accepted there was a risk that Manchar securities would not cover the indebtedness. BRL would find itself in the position of an unsecured creditor of BCHL for at least some part of the $1.2 billion deposit.
Conclusions
7531 I have reached the same conclusion in relation to HKBA as I have with Westpac and CBA. HKBA at least suspected, and the degree of suspicion was high, that the Bell group companies were insolvent or nearly so as at 26 January 1990. HKBA certainly knew the companies were of doubtful solvency. In terms of what happened in the immediate aftermath of the execution of the Transaction documents, I could see little in the HKBA correspondence to suggest there was any significant change in these perceptions. Indeed, subsequent correspondence confirms these conclusions.
7532 Strang and Inglis sent a telex to Townsend on 30 January 1990. They reported on the potential sources of repayment for the BGF refinancing. These included operating cash flow, future refinancing and asset sale proceeds. They considered it unrealistic to expect any substantial repayment to come from BPG’s operating cash flow, given the need to pay interest to the group’s other creditors. In regard to future refinancing, Strang and Inglis commented that ‘the success of a refinancing will depend largely on the future performance of [BPG]’. The third option, asset sales, was regarded as representing the most likely source of repayment of the facility. They were aware that TBGL and Murdoch were continuing to negotiate over the sale of Bell Press at a price of around $25 million and were also aware of an interest in purchasing BPG at a price in excess of $300 million. They expressed concern about the limited number of repayment scenarios and remained of the view that the refinancing would enhance the position of the existing lenders. This indicates to me that the primary goal of the refinancing was the taking of security rather than the identification of sources of eventual repayment.
7533 Townsend’s letter to Yonge of 27 February 1990 questions whether any sums from Bryanston or from BRL or JNTH in management fees would be received. Townsend’s ignorance of these matters does not, in my view, alter HKBA’s knowledge, which had previously been established on the part of the officers who dealt with the Bell group more closely. The unavailability of these sources was confirmed to Townsend by Davis on 5 April 1990.
The period February 1990 to July 1990
7534 On 27 February 1990 Davis and Heaseman sent a telex to Townsend, Hale and Dickinson regarding TBGL’s request that HKBA waive the requirement that all the Bell Press proceeds be applied towards repayment of the Australian banks. The telex noted that:
The cash flow information indicates that TBGL has insufficient internal resources to meet tomorrow’s interest payment and, therefore, it will be necessary to release a portion of the [Bell Press] sale proceeds to meet this requirement to avoid an event of default. It is our concern that failure to meet this payment may prompt banks in the Lloyds Syndicate to precipitate downfall of the entire Bell group. There are also legal expenses which now fall due for payment together with recurring newsprint and other working capital payments which are pressuring [TBGL’s] overdraft facilities.
…
At this preliminary stage it appears that payment of the coupon on subordinated bonds will have to be sourced from the BGP sale proceeds/[BCHL] repayment. However, this preliminary view is subject to our review of the [TBGL] cash flow and we will advise you of our conclusions in a separate report to follow shortly.
7535 On 27 February 1990 Townsend telexed Yonge and agreed to the release of funds from the Bell Press sale proceeds. Townsend said he was concerned that ‘[BPG] are so short of funds as to require the release and await your analysis of the company’s cash flow’. Townsend asked a number of questions in relation to the release, including: ‘Are we to see any proceeds from Bryanston? When and how did [BCHL] effect the intercompany debt repayment?’
7536 On 7 March 1990 Davis sent Inglis a fax regarding Westpac’s request to allow $17 million of proceeds to remain on deposit past 31 March 1990. A copy of the fax was sent to Townsend. Davis stated that:
Irrespective of the outcome of [their review of TBGL’s cash flow] we do not see any downside in ‘rolling over’ the deposit on 31 March 1990 and believe that [the Bell group] should make every effort to achieve repayment from [BCHL] of the intercompany debt. Realistically, however, we hold doubts as to [BCHL]’s capacity to repay and are pursuing this matter.
7537 The same day, Davis sent a report to Townsend, and noted the following in relation to TBGL:
Our initial concern is that [BCHL] has taken too much cash out of [the Bell group] and that, if the coupon payment of AUD$25 million is made to [the Bell group] convertible note holders in May, it may be at the risk of adversely affecting the liquidity of [the Bell group]. It will be a difficult decision as to whether the syndicate should take action and not allow such payment to convertible note holders and thereby risk the appointment of a liquidator to [the Bell group] prior to the expiry of the preference period for the security taken in February.
7538 On 5 April 1990 Davis sent a memorandum to Townsend. He advised that an initial payment of £5 million had been paid for Bryanston, with the right to use those funds given to TBGIL to satisfy external creditors. Davis said a second payment was due to the bondholders in July 1990 and noted that: ‘This payment will be critical in order that [TBGL] does not default prior to 2 August 1990 and the Banks’ security therefore tested’.
7539 Richard Groves, a bank officer at HKBA, sent a memorandum to Davis on 23 April 1990 and recommended that HKBA approve the release of the deposit held by Westpac on behalf of the banks. The memorandum noted that:
[I]f the borrower or security providers go into liquidation within 6 months of the refinancing, a liquidator may set aside the security arrangements as constituting a voidable preference.
The major risk in this respect pertains to the Subordinated convertible bonds issued by [TBGL]. If the coupon payments are not made on time the Bondholders could/would place [TBGL] in default. This would then result in a ‘testing’ of the legality of the syndicate’s security. Therefore, it is essential that such an event does not occur prior to 02 August 1990 (ie six months after the date of the completion of the refinancing agreement).
…
It is recognised that [TBGL] will be unable to meet the payment to the Bondholders without the release of Westpac deposit. Although the Bondholders debt is subordinated to that of the bank it is of the utmost importance that [TBGL] avoids liquidation prior to 02 August so that the effectiveness of the syndicate’s security (the fixed and floating charges) is not tested. After that date the syndicate security position will be strengthened substantially.
…
Whilst it is unfortunate that the funds have to be released to [TBGL], it is recommended as being necessary to protect the syndicate’s security. This recommendation is given on condition that the [BCHL] loan will be repaid prior to the release of funds and that all syndicate banks are unanimous in their approval.
7540 On 1 May 1990 Dickinson wrote a letter to Townsend and referred to TBGL’s request for release of the Bell Press sale proceeds. Dickinson said ‘the release of a deposit is necessary for [TBGL] to make coupon payments to Bondholders. If these payments are not met, Bondholders could easily liquidate [TBGL] thus jeopardising the efficacy of our security’. Attached to Dickinson’s letter was a facilities review dated 30 April. The review recommended release of the proceeds as: ‘Failure to pay coupon may cause bondholders to liquidate [TBGL] and hence jeopardise the validity of our security’.
7541 Richard Orgill, an HKBA general manager, sent Yonge a telex on the same day. The telex stated that Head Office was reluctant to authorise the release of any funds to be paid to third parties and requested a chart of the Bell group and its subsidiaries be provided, showing ‘who is owed what by whom and where they would rank in a liquidation’. On 2 May 1990 Davis sent a fax to Townsend. The fax was further copied to Hale. Davis said he was reluctant to authorise the release of the funds but believed that this action ‘will serve the best interests of the syndicate banks at the present time’. Davis continued:
If [TBGL] went into liquidation now, the syndicate banks would expect to rank pari passu with the unsecured creditors as it is expected that a liquidator would set aside the present security arrangements as a voidable preference in a liquidation prior to 2 August 1990.
However, it is not clear if, as a result of not obtaining subordination agreements from [BGNV], our debt would rank with that of the subordinated bondholders. It is precisely due to this legal uncertainty that we do not want the security position challenged by a liquidator or in the courts prior to 2 August 1990. Hence our recommendation to release the deposit.
…
It must be emphasised that the benefit for the banks on the refinancing of the facility was the strengthening of the banks’ security position. [TBGL] has some good assets including The West Australian, which given an orderly disposal could achieve significant repayments for the syndicate. The prospect of a liquidation, a forced sale of assets and ranking as an unsecured creditor is not to our advantage at the present time. Whilst we are giving up AUD1.75 million on a possible distribution from the Westpac deposit in the longer term the release should be to our benefit provided [TBGL] does not default prior to 2 August 1992.
7542 I will have more to day about Davis’ 2 May 1990 memorandum in a later section. Townsend telexed Yonge on 3 May 1990 and stated that due to the inability of HKBA to accurately inform HSBC what the position of other creditors in a liquidation would be, HSBC agreed that ‘the risks outweigh the benefit of the [$175 million] we are foregoing’. On 4 May 1990 Davis sent a telex to Townsend, which was further copied to Hale and Dickinson. Davis said:
If the deposit is not released, [TBGL] will be unable to meet the coupon payment which will be an event of default. It is anticipated that one or more of the Bondholders will then move to place [TBGL/BGF/BGNV] into receivership. Given that the syndicate’s security will be treated as a voidable preference the banks will rank as unsecured creditors. The question of whether the subordinated noteholders will rank pari passu with the unsecured creditors remains a question for the courts to decide.
…
As a matter of principle we strongly believe that all the banks should be unanimous on this issue taking a pro-rata element of the risks involved. For their own individual benefit the four banks are attempting to force the hands of those other banks (having a larger exposure to [TBGL]) who do not wish to see their security position challenged prior to 02AUG90.
To take a strong line with these four banks and to insist on unanimity will mean that we either ‘call their bluff’ and obtain their consent or cause the entire deposit to be withheld resulting in [TBGL] defaulting on its coupon payment… if the bondholders were found to rank equally with the unsecured creditors in a worst case scenario we would be looking at a loss or at least 50 per cent of our principal debt. Whereas, after 02AUG90 with an improved security position we would expect a full recovery of our principal.
In our view, the commercial benefit of preventing [TBGL] being forced into receivership outweighs the principle involved in consenting to the four banks retaining their share of the deposit (a distribution to them would equate to a pre-payment of their existing exposure).
7543 Davis advocated a partial release of the deposit to the four dissenting banks, provided TBGL could make up the shortfall to fund the interest payments to bondholders. On 5 May 1990, Burnett sent a telex to Townsend and said he recommended HKBA’s proposed course of action as it was ‘essential to prevent default prior to 02 August 1990’.
30.21.5. NAB
The period before the Transactions
7544 In July 1988, TBGL was indebted to NAB in an amount of $156 million. The due date for clearance was progressively extended during the second half of 1988. On 27 October 1988, TBGL told NAB that all asset sales were expected to be finalised by 1 December 1988, realising $1,437 million, which would be sufficient to clear all senior debt. The company proposed to collect all proceeds and pay lenders out in full at the same time. NAB informed TBGL that ‘whilst it was [NAB’s] definite requirement that [it] wanted these lines cleared in full, [it] would be prepared to continue lines to [31 December 1988] to allow rationalisation programme to be finalised’.
7545 On 9 December 1988, Devries wrote to NAB proposing that instead of paying out the facility in full by 31 December 1988, TBGL repay $106 million on 20 December 1988, with the remaining $50 million to be repaid by 31 March 1989. Devries mentioned in his letter that it was TBGL’s intention to put in place a medium‑term facility based on ‘predictable cash flows of [BPG] and that a proposal would be presented to the banks in early 1989. On 15 December 1988, the board considered and approved the application for the extension on the basis that $112 million would be paid in December and the balance of $44 million by 31 March 1989. NAB insisted on receiving a proportional reduction from the Wigmores sale and other nominated proceeds.
7546 Early in March 1989, Farrell wrote to NAB telling them that asset sales had not been completed and requesting a six month extension for payment of the $44 million. NAB refused. On 28 March 1989, Farrell wrote again, changing the request so that the facility would be cleared within three months, or on the receipt of nominated sale proceeds (or refinancing) if earlier. There was flurry of internal communications and correspondence with TBGL. In the end, the bank ‘reluctantly agreed’ to extend the facility that the bills would not be rolled over but, rather, transferred to an overdraft facility. Of the $44 million, NAB was to receive $17.2 million immediately from the Qintex receivable, with the balance of $26.8 million due on 30 June 1989.
7547 TBGL paid part of the Qintex receipt in reduction of facilities due to CBA and Citibank. NAB received nothing and was none to pleased about it. Willis had recently become the relationship manager. On 11 April 1989 he wrote to Oates demanding that $14.7 million be paid the following day. Oates responded, saying that if NAB persisted with its demand for ‘priority treatment’ TBGL would have to advise all unsecured lenders and it would almost certainly lead to some of them calling up their facilities. Willis rejected the claim that the bank was seeking ‘priority treatment’.
7548 On 13 April 1989, Willis reported the failure of TBGL to honour the commitment in relation to the Qintex receivable to the Credit Bureau. He reported that Westpac, ANZ and SocGen were considering granting a $350 million facility and that the Wigmores proceeds ($467 million) were due on 7 May 1989. He recommended that the $44 million facility be extended to 30 June 1989, with progressive reductions during May and June from funds held on deposit and the Wigmores proceeds.
7549 Early in May 1989, BML advised NAB that it was ‘experiencing difficulty in meeting current accounts in view of inaccuracies in cash flow documents’ previously submitted to the bank and seeking an additional short‑term advance of $6 million. The letter said:
The current atmosphere in the market relating to Bond certainly causes sensitivity, and if we are unable to quickly resolve our present difficulty with you, there is no doubt word will get out in the market place that we are ‘slow paying’ and there will be severe damage to our credibility.
7550 The BML short‑term facility was granted. On 9 May 1989, Willis wrote to Farrell requesting detailed financial data, including provision on a monthly basis of consolidated financial statements and management accounts together with detailed schedules and notes of components for a number of companies to which the NAB had exposures, including BCHL, BBHL, TBGL and BRL.
7551 On 24 May 1989 Willis made a file note that was widely distributed within the bank. In it he noted that a $22 million reduction to the facility had been made on 19 May 1989 and the balance was $22.8 million. He also noted that a further reduction of $8 million was anticipated within a week upon receipt of funds from the sale of a BCHL group property in Hong Kong. He said that TBGL had advised that three offers had been received for Bryanston and a decision was expected that week. Proceeds from the sale would see a clearance of NAB’s exposure by no later than 30 June 1989. Diplock responded, saying:
Notwithstanding the fact that we are to shortly receive $8M, it was always intended that we would receive these funds from the Qintex receivable and subsequently, the $24M deposit held with [SocGen]. Accordingly, we ask that you unequivocally convey our concern and disappointment at the way this matter has been conducted by them and the apparent disregard from previous undertakings given to the bank concerning clearance of this exposure.
7552 NAB convened a meeting with BCHL executives on 5 June 1989 to discuss a number of concerns in respect of the banking arrangements. Willis prepared an agenda for the meeting. In the preamble he said that NAB did not wish to increase its exposure at present but would ‘seek to work with the Group in this difficult period, but cannot and will not tolerate the position when arrangements are broken or not kept’. The agenda noted in relation to the Bell group that a number of undertakings to clear the facility had not been kept and the use of the Qintex receivable was not in accordance with a specific agreement. It went on to say that if clearance of the facility was not effected by 30 June 1989, NAB would call up its loan. It also noted that total bank debt of $138 million was due prior to 30 June 1989.
7553 The meeting was attended by Argus, Ryan and Willis, on behalf of NAB, and Alan Bond and Oates on behalf of the BCHL group. NAB expressed its displeasure at the broken arrangements. Bond is said to have acknowledged the broken arrangements but referred to the good progress being made to deal with the situation. NAB was told that clearance of the TBGL facility by 30 June 1989 would be provided from pro rata proceeds from the Bryanston sale and (or) the BPG refinancing that was presently being arranged but that the projected receipt of $8 million from Hong Kong would not be forthcoming.
7554 The plaintiffs point out that this shows that NAB was dealing with Alan Bond in relation to a range of matters, including TBGL, when Bond was not a director of TBGL. In my view NAB regarded TBGL and the various other facilities or entities as forming part of a collective group that could be dealt with across the group by BCHL executives.
7555 On 29 June 1989, Willis prepared a file note concerning NAB’s exposure to the BCHL group. He noted, in particular, that there was pressure on BCHL, TBGL and BRL with significant loans now due on demand and that ‘with the absence of sustainable cash flow to meet its obligations’ and reliance on asset sales to meet debt the companies were ‘exposed to the demands of [their] lenders and in the present adverse environment for “Bond Risk” this must be regarded as precarious’. Another document prepared around the same time expresses doubts on information being supplied by the companies.
7556 The balance outstanding on the overdraft account ($22 million) was not paid on 30 June 1989 as promised. Nor had interest been paid for the months of April, May and June totalling a little over $2 million. On 4 July 1989, Willis wrote to Farrell asking for clearance of the interest charges. He added: ‘Notwithstanding the payment of interest, this facility remains overdue and on demand and the Bank is presently considering its position’.
7557 On the same day, NAB instructed MSJA to ‘prepare and hold on file a pro forma notice of demand in relation to the Bell group facilities’. On the following day, MSJA advised NAB that, on the basis of documents they had seen, TBGL’s failure to pay the facility constituted an event of default.
7558 There was a further meeting on 7 July 1989 between senior management of NAB and Oates which covered a wide range of topics concerning the BCHL group generally. In relation to TBGL, Oates advised that Wardley and SocGen had offered a facility of $130 million but security arrangements had been complicated by the refusal of the Lloyds syndicate banks to consent. Oates also said that TBGL was negotiating the sale price of Bryanston at £24 million but that it ‘may be some time away’.
7559 On 13 July 1989, Diplock (Credit Bureau) sent a memorandum to the board Committee saying the BCHL group was ‘exhibiting clear signs of financial stress, both in regard to private arrangements with the bank and public commitments’. It went on to say that that the position had deteriorated to such an extent that Credit Bureau had reservations that the group would or could respect loan covenants in finance documentation. Further, there was a concern that precipitous action may be instituted by a nervous lender. The author said: ‘We consider it prudent, in consultation with other major lenders, to arrange a moratorium on credit facilities for 3 months with the appointment of an Investigative Accountant to report the true financial position to lenders’. The note also sought approval (failing agreement to a moratorium) for the service of demands at the discretion of executive management and for repayment of our facilities on nominated companies, including TBGL.
7560 The plaintiffs submit, I think correctly, that by this time NAB was concerned not only about the quality and integrity of the information it was receiving. It was also concerned that the various events happening around the BCHL group were diverting the directors and management of the group away from the asset disposal programme which was identified by the banks as being critical to the survival of the group. It seems the board Committee noted the report but decided that demands should not be served without reference to the Principal board.
7561 By mid‑July, neither the principal nor the accrued interest had been cleared, despite further requests, particularly in relation to interest. On 17 July 1989, NAB received the 1 July cash flow and an information memorandum concerning TBGL and BPG. On 21 July 1989, BCHL sent to NAB an information package. It caused Willis to comment to Ryan that it showed how dependent BCHL was on asset sales. At around the same time, MSJA was finalising the pro forma demand notices. On 27 July 1989, Diplock sent another memorandum to the board repeating the thrust of the comments in the 13 July 1989 communication. He added that the cash flows provided by the group highlighted the need for the disposal of assets to meet obligations ‘as and when they fall due’ but that there were concerns the sales would be delayed due to the adverse market sentiment surrounding the group. He said: ‘Any delay in the asset disposal programme would manifest itself by way of a severe lack of liquidity’. The board considered the report and gave approval for management to issue demands and petition for the winding up of the companies if necessary to protect the bank’s position.
7562 On 20 July 1989, Simpson met Willis and discussed the situation in general. Willis told Simpson that NAB did not want to remain a lender to the Bell Group; this was a ‘strong view’ held by the bank and conveyed to TBGL since June 1988. Willis also complained that various undertakings regarding the payout of NAB had been broken and that security was fundamental to any further arrangement to extend the facility. On 27 July 1989, Aspinall sent to Willis a draft terms sheet regarding the refinancing proposal. The security offered per medium of the terms sheet was an ‘equitable charge by deposit over [BPG]’. At around the same time, TBGL sent to NAB an unaudited, estimated balance sheet for the consolidated Bell group.
7563 Early in August 1989, Keane reviewed the 1 July cash flow and the other financial information that had been provided by TBGL. He prepared a list of questions, including queries in relation to the BRL management fees, Wigmores sale, the JNTH dividends and the Bryanston sale. Simpson responded on 4 August 1989. He said, among other things, that there were no contractual obligations concerning the BRL management fees or the JNTH dividends. Gorrie (a manager in Credit Bureau) and Keane examined the response. Gorrie had previously indicated to Diplock his view that quality of the cash flow was critical and that there was little point agreeing to the syndication if TBGL still could not service the debt. He said: ‘All that probably would be achieved (effectively) is that TBGL would have bought themselves some time’.
7564 In relation to the 4 August 1989 materials, Gorrie sent a memorandum to Diplock referring, among other things, to doubts about the projected $15 million Wigmores proceeds and a $16 million dividend receipt from BRL, due in December 1989. He also made these comments:
Quite clearly, the survival of the group is reliant on asset sales which is no great revelation except that the cash flow gives us some idea of the extent that they are reliant. The qualification however is that the cash flow does not include any priority asset sales so it is difficult to determine the extent of the cash flow deficiencies. … In summary, the information is informative but in no way does it give any comfort as to the group’s ability to survive as it is all reliant on its ability to sell assets and settle as soon as possible which is not that easy in the present climate.
7565 I have no doubt that at this time the relevant officers within NAB appreciated that the survival of the Bell group depended on its ability to sell assets in a timely manner and at fair prices. This is made apparent by Diplock’s response to Gorrie’s note. In cross‑examination, Keane agreed that the issue of asset sales was very much at the fore of his consideration of the position of the BCHL group and the Bell group. Those officers were also aware that reliance on receipt of dividends from BRL was ‘questionable’.
7566 On 24 November 1989 the board considered a memorandum from Diplock in which he referred to the outstanding TBGL facility of $24 million and to the fact that all existing lenders were being offered security. He said: ‘The proposed restructure cannot proceed without unanimous agreement of lenders and at this stage, some are resisting and instead, are seeking clearance of their exposure. However, in our view, the latter is not achievable as the company does not have funds available’. This is one of the early acknowledgements in the contemporaneous documentation of a realisation by NAB that the Bell group simply did not have the funds to meet the claims of lenders who might seek immediate repayment.
7567 Keane, supported by Willis, prepared a credit analysis for Diplock on 24 August 1989. He also prepared a draft memorandum to go to the board Committee. Keane noted that despite completion of the major planned asset sales, TBGL did not have the capacity to clear debts as had previously been anticipated. It was therefore trying to put in place a longer term facility, to be serviced and partly amortised from operating cash flow of BPG. NAB had been requested to participate to the extent of its current debt outstanding. The alternative was to serve a demand on the company in the hope that NAB would be repaid from other sources.
7568 The analysis referred to the value of BPG and BRL but advised caution in approaching the company’s published figures because of the valuation techniques that were used and the general sentiment regarding the BCHL group. In relation to cash flow, Keane said that the funds anticipated from BRL were critical but that receipts from BRL, JNTH and GFH were uncertain. In a handwritten annotation, Willis calculated the combined management fee and dividend income as $83.13 million for 1990 and $69.6 million for 1991, and added the words ‘is dubious’. Keane noted that both the servicing and amortisation of the facility would depend on asset sales to supplement the cash flow from BPG, ‘the group’s only significant operating entity’. He emphasised that primary reliance would be on the first ranking security over the publishing assets (the performance of which was expected to improve significantly over the ensuing years) and that because of the number of banks involved, negotiations were likely to be protracted. He concluded:
Clearly, the current position for all lenders is tenuous with significant facilities on demand and with little prospect of early clearance. Whilst provision of a term commitment is not desirable given the history of this exposure and with the current sentiment towards members of the Bond Group, we see little realistic alternative, and considering that the proposal before us represents a reasonable risk, albeit with serviceability and repayment being contingent to some extent on asset sales together with cash flow from other members of the Bond Group.
The proposed security position is considered satisfactory given the level of debt proposed against the assessed value of the asset, although this value should be discounted to some extent from the Bank’s viewpoint given the subjective method of assessment and the specialised nature of the business which may limit its potential market for sale.
Nevertheless, the proposal represents a more favourable position for the Bank, and is recommended on this basis.
7569 Willis added a note to the effect that he supported the application provided that all existing lenders agreed to participate. The short draft memorandum to the board Committee was to similar effect. Rex, a senior manager of the Credit Bureau, reviewed the analyses and supported it on the basis that NAB had no realistic alternative but, given potential preferential payment problems, NAB should know the full cash flows and should consider the legal implications.
7570 The board Committee approved the application on 30 August 1989. They did so on the basis that:
(a) the bank obtain legal advice confirming that the refinancing did not give the bank a preference over other creditors within six months before the commencement of a winding up; and
(b) the syndicate should receive quarterly compliance certificates regarding covenants and undertakings pertaining to TBGL.
7571 It seems clear to me that at this stage the NAB was a reluctant bridegroom, being dragged kicking and screaming to the altar. Indeed, I think that could be said of most, if not all, of the banks. NAB agreed because it believed there was no realistic alternative. It appreciated that the Bell group did not have the funds to repay lenders who demanded repayment of their facilities. It also appreciated that TBGL had only one significant operating entity (BPG) and that the free cash flow from that source would be insufficient to service the debts, let alone provide a source of funds for eventual repayment of principal. It would therefore have to rely on asset sales. NAB also appreciated that there were doubts about the reported cash flow information, particularly the management fees and dividends.
7572 Advice was sought from the bank’s in‑house legal department. The conclusion reached was that the bank was not receiving a preference but that a liquidator might still argue to the contrary. The Credit Bureau (Gorrie and Rex) considered the advice and gave approval to the Institutional Banking division to proceed with the refinancing. Gorrie’s view was that the bank should press forward with the restructure: ‘If we need to defend our position then we will, but if we lose the argument then essentially all that we have lost is time’. Rex said he did not believe the bank’s position would deteriorate and that perhaps, it would be enhanced. On 12 September 1989, Diplock gave Willis final approval to proceed with the refinancing.
7573 On 19 September 1989, Weir (Westpac) sent a draft terms sheet to Willis, who gave it to Keane for comment. One of the conditions precedent refers to receipt of a legal opinion identifying whether or not the banks would have obtained a preference by virtue of taking security. On NAB’s copy there is some handwritten comments (which I accept were made by Keane) saying: ‘Would be better not to have this’. This is a curious note, especially in light of the fact that board Committee approval had been given on the basis that an opinion to that effect be obtained. In cross‑examination, the only explanation Keane was able to offer was that the an in-house opinion had already been received. This does not explain why it would be ‘better not to have’ an opinion. It suggests to me a mindset similar to that which resulted in the condition relating to insolvency certificates being omitted from the terms sheets prepared in and after December 1989 and from the final version of the main refinancing documents: see Sect 30.9. When the double jeopardy problem was raised by Lloyds Bank at the 4 October 1989 bankers’ meeting, Keane’s file note suggests that the requirement for a legal opinion was restored to centre stage.
7574 It is common ground that NAB received a copy of the September cash flow but I could not locate any evidence as to how it was dealt with or what (if anything) the bank took from it.
7575 Through October 1989, Institutional Banking discovered that its direct exposure was to BGF, rather than to TBGL. This caused the officers to revisit the identity of the securities to be taken. The double exposure problem was clearly agitating the bankers and a note was made to the effect that P&P were obtaining senior counsel’s opinion, which ‘should be sufficient’.
7576 By the end of October 1989, NAB knew that the published BCHL results would show a deficiency of shareholders funds, although BCHL executives had commented that the group had assets that were ‘significantly undervalued’ and which, on revaluation, would restore shareholders funds to a positive position.
7577 Keane attended the Australian banks’ meeting on 27 October 1989, at which the opinion of Hayne QC and Burnside was discussed. In cross‑examination, Keane agreed that at the end of October 1989, NAB was concerned that there was a prospect that BF and BGUK might become insolvent. In the light of what NAB knew about the Bell group, it is difficult to see how (if they thought there was a prospect that the companies might become insolvent) the bank could have had any mindset other than that as at that stage the companies were, at best, of doubtful solvency.
7578 In the first half of November 1989, energies were directed at reviewing the impact of the legal advice, considering the securities structure and looking at the overall coverage of the exposure. Keane reconstructed the TBGL balance sheet, writing down the investments in BRL (by $281 million), JNTH (by $70 million), BPG (from $617 million to $350 million) and Bryanston (from $63 million to $40 million, or £20 million). Keane reported that on this basis there was a net worth of $33 million. This caused Credit Bureau (Waller) to comment that ‘cover at least of a present bank value basis is still reasonable’.
7579 On 13 November 1989 Keane wrote to Weir saying that NAB remained unmoved from its previously advised stance that sale of assets (including BRL) should give rise to mandatory pre‑payment of the facility on a pro rata basis between all lenders. Keane reaffirmed the sentiment in a letter to Weir of 16 November 1989, in which he said that NAB had no difficulty with TBGL and (or) BPG disposing of minor assets within the normal course of business up to prescribed limits. But, he said, the sale of other assets must give rise to mandatory pre‑payment of the facility. He added: ‘This aspect is not negotiable, and which we understand the company has already agreed to’. This is not consistent with the idea that there was any understanding that asset sale proceeds would be made available to the Bell group to meet recurrent commitments if necessary.
7580 There is ample evidence in the internal communication of NAB that the bank was concerned that the refinancing proceed as quickly as possible and that this was made clear to officers of BCHL and of TBGL on a number of occasions. I am not aware of any specific evidence as to NAB’s knowledge of plans and activities leading up to, and including the ‘panic weekend’, but I have no doubt that they were aware of what was transpiring. Because of their position in the BBHL syndicate, NAB would have been well aware of what was happening to BRL at the time.
7581 Early in January 1900, the relevant officers of NAB reconsidered their participation in the refinancing. This was due largely to the stance that the bank had taken in relation to BBHL but was not confined to that issue. On 2 January 1990, Keane sent a memorandum to Cicutto (Credit Bureau) in which he said that, given the appointment of the receiver to BBHL, ‘the continued viability of [BCHL group] (including TBGL) in the short term must be considered questionable’. He also said that the capacity of TBGL to service the facilities was contingent to an extent on dividends and management fees from BRL, JNTH and GFH, ‘all of which must now be considered most doubtful’. It should be remembered that in his note of 24 August 1989, Keane had commented that the ability of TBGL to meet its interest commitment was dependent on each of those companies paying the amounts stated. There was an exchange in cross‑examination in which Keane initially refused to accept that his use of the phrase ‘most doubtful’ meant it was likely they would not be refused. He then said: ‘Well, if you want to put that interpretation on it, that’s okay; that’s up to you’. It is now up to me and that is the interpretation I place upon the words used in the contemporaneous document.
7582 On 2 January 1990, Keane, Cicutto and Willis agreed that NAB should not sign any documents for the time being and on the following day, Keane advised Weir of this decision. Later that day, Keane received a call from Weeks (SocGen) who sought clarification of the reasoning behind NAB’s stance. Upon explanation by Keane, Weeks said he accepted NAB’s position, but told Keane that SocGen had taken the view that they would be no worse off and possibly better off by entering into the Transactions, especially in view of the concerns regarding a potential problem with validity of subordination of the on‑loans. It seems that this is the first time that anyone at NAB had known of this problem. Keane discussed the issue with Weir, then with Cicutto and in‑house lawyers. They discussed whether it would be better for the bank to enter into the Transaction as a means of improving its position. Keane’s file note of 4 January 1990 referred to a ‘significant change in circumstances’, which he agreed in cross-examination was the fact that the bank may be competing with the on‑loans.
7583 The Legal Department advised that NAB would be in no worse position legally, and may be better off by entering into the Transactions. There remained a public perception problem with the bank entering into a transaction with one part of the BCHL group while forcing another part (BBHL) into receivership. Cicutto sought a copy of inter‑company loan documentation between BGNV and BGF to ascertain whether effective subordination existed, and also asked that MSJA advise on this point. But the head of the Legal Department in NAB, preferred to consult Hulme QC (who was leading in the BBHL receivership action) rather than MSJA. Upon being asked whether anything in the BBHL action would affect the TBGL deal and vice‑versa, Hulme QC is said to have advised he saw no reason not to sign.
7584 Cicutto was told of the advice and said that while he (and Argus) were still concerned with public perception, he was happy for the bank to proceed with the Transactions. Keane reported this decision to Weir and asked Westpac to get the documentation ready for execution as soon as possible.
7585 On 24 January 1990, the Australian banks including NAB (Derham) met with P&P. The question whether or not the on‑loans were subordinated and whether remediation of that position was required was discussed. It was agreed that TBGL would be required to undertake to procure the subsidiaries, including BGNV, to enter into subordination deeds as required subsequent to the date of sign off of the Transactions.
7586 Westpac submitted a diagram of the main inter‑company loans within TBGL, BPG and BGF. According to Weir’s rough estimate, if WAN was sold for $400 million, then the banks would be paid out approximately 100 per cent of the facility, irrespective of the claims from BGNV ranking equally with the syndicated financing.
7587 In cross‑examination, Keane conceded that if the dividends and management fees referred to earlier were removed from the cash flows, there would have been a $60 million deficit. He said he had not considered whether the companies were or were not insolvent but he had considered their financial position. In doing so he paid regard to the question of TBGL’s investment in BRL and whether or not value could be added to BRL. If value could be added to BRL, the enhanced value would flow through to TBGL through its investment, either by dividends or indeed the capacity to be able to deal with the shares. I asked Keane about that position:
Given the knowledge that you had about the receivership of BRL at the time, what view did you form about the likelihood of the brewery transaction being completed? We’re talking about in January and prior to 26 January?—It was obviously uncertain. There was a court case going on involving all the relevant parties. However, I believe that the BRL directors were very keen to have the transaction proceed and had approached the bank syndicate with that view.
Did you turn your mind to the question whether or not it was likely that that brewery transaction or a brewery transaction could be completed by 30 June 1990?—I don’t recall whether any specific time was put in place in terms of that and at the time I guess it was a moving feast as well in terms of what was happening, so it was quite uncertain but I viewed it as not being impossible.
7588 I am afraid that I view this as closer to reconstruction than recollection. As at 26 January 1990, the receivership proceedings were in full flight and there were all the other contingencies and difficulties mentioned earlier. To describe the possibility of a brewery transaction being finalised in a reasonably short time as ‘uncertain but not impossible’ is unduly optimistic.
7589 In cross‑examination, Keane was pressed as to whether he had suspected the Bell group or individual companies in it might be insolvent. This exchange occurred:
I suggest to you in view of that degree of uncertainty, as at 26 January 1990 – this is while the receiver is still appointed – you suspected the Bell group or the individual companies in it might be insolvent?—No.
That was no? It didn’t cross your mind?—I didn’t say it – I didn’t say that, no. I didn’t say I formed the view that they’d be insolvent.
But my question was about whether you suspected?—I don’t recall whether I had those suspicions at the time.
Conclusions
7590 In my view, the possibility of insolvency must have crossed Keane’s mind. The memoranda of 24 August 1989 and 2 January 1990 are of particular significance. When they are viewed against the other information available during the period, I am satisfied that as at 26 January 1990, Keane knew that the Bell group companies were, at best, nearly insolvent or of doubtful solvency, and had a strong suspicion that they were insolvent. I am also satisfied that Gorrie, Rex and Cicutto (Credit Bureau) and Willis (Institutional Banking) were of a similar view. These views are sufficient to establish the state of mind of NAB at the time of entry into the Transactions.
7591 In my view, NAB was aware of, and acted on, the individual matters that I have outlined in the conclusions relating to Westpac. NAB had additional knowledge arising from its position as leader of the BBHL syndicate and of the troubles confronting the BCHL group as a result.
7592 The events of February 1990 do little to alter the conclusion that I have just expressed. Keane acknowledged that the non‑inclusion in the Garven cash flow of the dividends, management fees and Bryanston proceeds would not have surprised him. Keane prepared a memorandum to Credit Bureau after the February meetings He noted that NAB had received forward cash flow projections over the period of the facility. They indicated a cash flow position which varied significantly from projections included in the 24 August 1989 credit application. Keane said that the major variances ‘clearly indicate the company’s precarious cash flow position in the absence of significant contributions from associated companies’. In recommending that NAB agree to grant the waiver, Keane described the position as ‘most unsatisfactory, although not unexpected given the previously known reliance on funds from inter‑group companies to service the company’s commitments’.
7593 In cross‑examination, Keane agreed that the view he expressed, namely, that the cash flow position was precarious in the absence of significant contributions from associated companies, was not a new in February 1990. He had known of it in August 1989. In January 1990 he reaffirmed that he knew from at least 24 August 1989 the matters expressed in his 26 February 1990 memorandum. Keane also conceded that from at least 24 August 1989 he held the view expressed in his report to the general manager of Credit Bureau dated 24 April 1990 that TBGL did not then have other readily realisable assets and its major source of ongoing cash flow, the West Australian, could not have produced sufficient cash to service TBGL’s interest commitments.
The period February 1990 to July 1990
7594 On 26 February 1990 Weir sent a fax to all the Australian banks requesting a waiver so that Westpac did not have to distribute the Bell Press proceeds. The same day Keane sent a memorandum to the general manager of NAB’s Credit Bureau. He noted that NAB had received a presentation from TBGL outlining their current position and forward cash projections. Keane said:
Proceeds of asset sales are currently pledged to repayment of Syndicate debt under the documentation, and we have no desire to release these funds for [TBGL’s] unsupervised use … However, it would be strongly desirable that [TBGL] continued to operate in view of the short term that the facility and the associated security have been in place – our legal advice confirms this view.
…
Obviously, the position is most unsatisfactory, although not unexpected given the previously known reliance on funds from inter-group companies to service [TBGL’s] commitments.
7595 Keane proposed that NAB agree to waive the requirement that proceeds from the sale of Bell Press be distributed to the Australian banks. On 27 February 1990 P&P sent the Australian banks the letter of waiver to be signed and returned. Donhardt sent a letter to Keane on behalf of the Credit Bureau authorising the waiver on 28 February 1990. Keane returned the signed letter of waiver to P&P the same day.
7596 Keane prepared a handwritten file note dated 28 February 1990 and referred to the use of the asset sale proceeds to meet interest in lieu of reducing principle:
[D]ue to the not unexpected failure to receive dividends, management fees et cetera from other group members. Alternatives are few but include proceeding against our security which was taken recently. This would not seem in our best interests because of the Bank’s involvement with other Group members.
7597 Keane recommended that NAB’s position be protected as best it could. In his evidence in chief, Keane said that in regard to the request for waiver, ‘the only other option to NAB… would have created severe cash flow difficulties for TBGL and could well have resulted in the failure of the Bell group, which at that stage did not appear to be in anyone’s interests’. Further, Keane said:
Although the banks had taken security on the refinancing, at this time it was still within six months of the taking of that security. As I understood the law at the time, the security was not yet effective, because if a liquidator was appointed to the Bell group within that six month period, the liquidator would set aside those securities.
7598 On 4 March 1990 Weir wrote a memorandum to NAB. He noted the balance of funds from the sale of Bell Press was $17 million and that company executives were due to attend a Lloyds syndicate bank meeting to present a proposal for distribution of the proceeds. On 7 March 1990 Keane sent a memorandum to the Credit Bureau regarding TBGL’s proposal to use the funds held by Westpac to pay the bond interest due on 7 May 1990. He said:
We consider that it would be in the best interests of the Bank to apply as much pressure as possible on the Company to finance their ongoing obligations from sources other than funds intended for principal reduction of the Syndicate Banks debt, including repayment of all loans from other Bond Group companies. Accordingly we intend advising that at this stage we insist that a principal reduction be made at the end of March, although we may be prepared to reconsider the position immediately prior to that time should circumstances change in the meantime. It may become necessary to extend the retention period to the end of April and ultimately release the funds for the interest payment in May in order to protect our position however we should not be committed to that action unless absolutely necessary.
7599 On 9 March 1990 the Credit Bureau accepted Keane’s recommendation. On 13 March 1990 Keane wrote to Weir and advised that NAB was not prepared to approve retention of deposited remaining proceeds from the sale of Bell Press and that the bank considered that a principal reduction be made at the end of March. The Lloyds syndicate banks and the Australian banks were sent the letter of waiver by A&O on 27 March 1990.
7600 On 28 March 1990 Keane and Willis wrote a memorandum to the general manager of the Credit Bureau. They said that Westpac had been advised that NAB was not prepared to allow retention of funds on deposit as requested by TBGL:
The Agent Bank and all other Banks in the syndicate have agreed to the retention of these funds until the 30th April 1990 without commitment to release the funds for the subordinated Bond interest payment. We have indicated to the Agent Bank that our Bank is prepared to consider retention of funds on a daily basis only. We recommend that we advise the Agent Bank that the funds should be held by the Agent Bank and subject to notice by any Bank requiring proceeds to be distributed as a principle reduction of the company’s debt.
7601 On 29 March 1990 Weir sent a note to the banks, including NAB, in which he indicated there was a problem with this proposal.
7602 On 30 March 1990 Keane faxed Weir the letter of waiver signed by NAB. Keane indicated on the fax cover sheet that he would write to Westpac separately about NAB’s view of the disposal of the funds at 30 April 1990. Weir wrote to the banks on 2 April 1990 and requested they tell him what information they would require when considering TBGL’s request. Keane sent Westpac a letter enclosing the original signed letter of waiver on 3 April 1990 and confirmed NAB was not prepared to approve the release of funds ‘at this stage’. Attached to the letter was a list of matters to be raised with TBGL, including a requirement for an updated detailed cash flow.
7603 On 9 April 1990 Keane sent Westpac a signed letter of waiver. On 11 April NAB received from Simpson a stock exchange release and press announcement for TBGL in relation to TBGL’s half-yearly results. On 12 April 1990 the Credit Bureau sent Willis a memorandum confirming the course of action recommended in the 28 March 1990 memorandum; namely that Westpac hold the Bell Press sale proceeds, subject to notice by any bank. On 17 April 1990 Westpac sent NAB and the other Australian banks copies of financial information for TBGL and Bell group subsidiaries. On 19 April 1990 Keane sent Weir a letter asking questions with regard to TBGL, including the basis on which loans were made to BRL and JNTH, and information regarding BRL dividends. Simpson provided answers to Keane’s questions on 20 April 1990.
7604 On 23 April 1990 P&P sent the Australian banks a draft of the letter of waiver and a letter of acknowledgment to be executed in April 1990. Keane made a handwritten note on the fax dated 24 April 1990: ‘Westpac advise that a revised draft is to issue, incorporating provision for the Agent Bank to control the flow of funds to the [convertible bondholders] rather than release them to [TBGL]’. On 24 April 1990 Keane sent a memorandum to Cicutto about the retention of the funds by Westpac. Keane comments:
As far as we can ascertain, TBGL does not presently have other readily realisable assets and its major source of ongoing cash flow, the West Australian newspaper, produces insufficient cash to service TBGL’s interest commitments.
Should the Banks refuse to release the funds as sought, then in all likelihood TBGL would be unable to meet its interest commitment on the Convertible Bonds leading to a default which would undoubtedly lead to wind up action against the Company. In this situation the strength of the security held by the Banks (which was executed with an effective date of 1/2/90), and the ranking of the Bank debt vis à vis inter-company debt owing by Bell Group Finance (our borrower) to Bell Group NV would be likely to be tested. Our advice is that this would not be desirable at this time.
Accordingly, we recommend that the Bank consent to the waiver request, subject to:

• all other Banks consenting to the waiver.
• funds owed by Bond Corporation Finance being repaid prior to 30/4/90.
• the Agent Bank controlling the dispersal of funds for the payment of interest on the Convertible Bonds.
  7605 Keane was cross‑examined about his advice that it was not desirable that the securities be tested at the time this memorandum was produced. Keane said that ‘the position that the bank saw the best prospects for repayment were for the company to continue to operate’. Keane accepted that the risk of securities included their constituting a preference, therefore being vulnerable and liable to be set aside.
  7606 The memorandum of 24 April 1990 was signed and supported by Willis. A handwritten note appears on this memorandum which said: ‘Yes. We don’t have much in the way of an option – not until 1/5/90 at least’. PC May, a NAB general manager, prepared a memorandum on 26 April 1990 which included a summary of the position of BCHL for the NAB board. On 27 April 1990 Willis sent Westpac an extract from the letter of waiver executed by NAB. The original letter was sent to Westpac on 30 April 1990. Keane received a circular fax from Westpac on 1 May 1990 enclosing a letter from TBGL formally requesting the release of funds held by Westpac from the sale of Bell Press. Keane commented on the fax that NAB would only consent to the release of the sale proceeds on the condition that BCHL had paid all of the money that it owed to TBGL.
  7607 On 2 May 1990, P&P distributed a letter of waiver to the Australian banks. On 4 May 1990 Keane wrote to Browning and enclosed an extract of the letter of waiver executed by NAB. Keane noted in the letter that while NAB had signed the letter of waiver, ‘this should not be taken to constitute an acknowledgment on our part that the Instructing Banks have the power to direct the Security Agent to apply the Balance Proceeds… in a manner other than that set out in Clause 6(d) of the Inter-Creditor Agreement’. Keane sent Browning an executed copy of the letter of waiver by fax on 7 May 1990.
  30.21.6. SocGen
  The period before the Transactions
  7608 In this section, the abbreviation ‘SG Paris’ will refer to Secteur Asie in the International Department of the bank’s head office in Paris, unless otherwise specified. It will sometimes be necessary to differentiate between the Melbourne and Sydney offices of SocGen.
  7609 The SocGen officer who was most closely involved with the Bell group facility was Peter Edward. Before joining SocGen, he had been an employee of TBGL under the RHaC regime and was keen for SocGen to increase its business relationship with the group. SocGen had a revolving cash advance facility with BGF which stood at $30 million when initially due for repayment on 31 July 1988. That amount remained outstanding as at 26 January 1990. In the period from November 1988 to March 1989, much of the same commitments were made to SocGen as were made to other banks to clear the facilities from asset sales (mainly Wigmores and Bryanston). On 14 July 1989, a request to extend the repayment through to 31 July 1989 was refused. The $30 million facility was placed on 11am call and it remained so as at 26 January 1990.
  7610 SocGen was a major player in the proposed BPG club facility that was being negotiated in the first half of 1989. On 17 March 1989, SocGen sent an indicative offer to BCHL setting out the terms on which it would participate, to the extent of $83.5 million, in the $300 million club facility.
  7611 On 22 March 1989, Weeks prepared, Weeks and Johnson signed and Edwards approved a credit application proposing that SocGen participate in the proposed BPG facility to the extent of $85 million, but with the intention of selling down the interest to $50 million. The application was forwarded to the Sydney Credit Committee. The two other participants were to be Westpac and ANZ. Had the proposal been implemented, SocGen’s exposure to the Bell group would have increased to $134.5 million. The application set out a lot of detail about the asset sale programme (both completed and continuing) and noted that after the rationalisation programme had been completed, TBGL would be left with its core assets; namely, the interests in BPG, BRL and JNTH. The money lent pursuant to the facility, together with that arising from other assets sales, was to be used to repay existing bank lines of $362 million.
  7612 TBGL had provided SocGen with BPG cash flows to 1995. The application indicates that the cash flows had been analysed closely. The end result was an opinion expressed by the authors that, at best, the operating cash flow of BPG in the years ending 30 June 1990 and 1991 would be sufficient to service a facility of $250 million but there would be little or no residue available to service other debt across the Bell group as a whole. The credit application also highlighted the need for strict covenants to ensure that secured assets were retained within the group and that the cash flow was dedicated towards servicing interest and repayment of principal. There was a concern on the part of the authors that cash could be removed from BPG and turned over to other companies in the BCHL group. Certain covenants were recommended but it is unnecessary for me to list them here.
  7613 The Sydney Credit Committee referred the application to SG Paris for approval. I do not know whether the Sydney group supported the application or made any comments. In any event, on 28 March 1989, Bogusz (SG Paris) sent a telex saying that Secteur Asie did not ‘feel very strong about this credit’ for a number of reasons, including lack of information about previous losses and about the ‘basis for the evaluation of cash flow projections’. This caused Edward to make a note that the history of BPG ‘could kill this credit’ even though the newspaper had never lost money. He told Johnson that they would have to provide more back up on the 1988 results and the 1989 EBIT figure ‘to demonstrate a fair basis for the projections’. This exchange suggests to me that both SocGen and SG Paris had subjected the BPG financial information to a good deal of scrutiny.
  7614 During April and the early May there was further correspondence and documentary exchanges between TBGL and SocGen and between SocGen and SG Paris. On 9 May 1989, SG Paris approved participation in the BPG club facility to the extent of $85 million but with a ‘final risk’ of $35 million. By this time the proposal was for $200 million in working capital finance and $50 million of standby finance. Further correspondence occurred between SocGen and TBGL concerning the terms and conditions of the facility offer.
  7615 During May and June 1989, the existing facility was further extended. The contemporaneous documents indicate that the BPG club facility was primarily for repayment of the existing bank debt, including SocGen. In June 1989, problems surfaced because Lloyds Bank refused to relax the negative pledge arrangements so as to permit the club facility participants to take security over the BPG assets.
  7616 On 7 July 1989, Edward wrote to Oates saying SocGen would not keep open its offer in relation to the BPG club facility past 14 July 1989 unless they received information, including detailed cash flows to 31 December 1989, details of inter‑company indebtedness between the Bell group and the BRL group and the BCHL group. SocGen also required a reduction in the existing facility to $15 million to restore pari passu status with other lenders. Some information was provided. The requirement for a reduction in the facility was repeated on 13 July 1989.
  7617 Around this time, probably on 13 July 1989, a conversation took place between Edwards, Johnson and Oates, in which Oates told them that TBGL would not be able to repay SCBAL’s facility by 14 July 1989 nor would it be able to reduce the amount of the facility by $15 million. Oates said that TBGL would not be able to repay $15 million in reduction of the facility because he considered that to do so would trigger a demand for repayment from the other banks for all or part of their facilities to be reduced and TBGL was not in a position to make those payments. Simpson sent the 1 July cash flow to Edward. He gave it close consideration and made several notes on it. He made four comments that are significant:
  (a) the cash flow ‘tells us little we did not already know. It merely confirms the Bell group is not viable if there are no dividend flows and management fees from associates’;
  (b) ‘this demonstrates clearly that if Bell corporate cash flow does not materialise debt costs of Bell group cannot be serviced’;
  (c) ‘We must press for security regardless. The crunch will come when interest on convertible bonds is due 12/89 and 5/90’;
  (d) ‘Management fees are ridiculous. Bell group will be charged equivalent figure’.
  7618 I will return to the significance of these notes a little later. By about 19 July 1989, the last rights were pronounced in relation to the proposal and attention returned to refinancing the existing facility.
  7619 In his evidence in chief, Edward said that he was comfortable with the position of TBGL in July 1989 for a number of reasons. There were asset sales contemplated which would reduce bank debt to a manageable level. He was familiar with the company and its operational history and had confidence that TBGL would successfully trade through. So far as he was concerned, SocGen held senior debt because the convertible bonds were subordinated. In this respect, I note that Edward ceased employment with the Bell group in 1983 and thus was not involved in any of the bond issues. Edward said the degree of comfort he felt with TBGL’s position was enhanced by the fact that the security being offered to the banks gave them the required prudential supervision and ensured greater control over the use of assets and proceeds from asset sales. He also noted that the proposed refinancing was medium to long-term. He said that unless he thought TBGL had reasonable prospects of surviving in the long-term, he would not have extended, or been prepared to discuss the extension of, the facility to TBGL on a secured basis or any other basis.
  7620 Edward also said that he regarded BPG as a valuable and profitable asset worth around $500 million. He thought the Whitlam Turnbull valuation was too high but the audit qualification, which appeared in November 12989, gave him confidence in his assessment of the value. He acknowledged that the value of the BRL asset was unknown because it depended on recoverability of the brewery deposit. But he still regarded it as a valuable investment and noted that the auditors had not qualified the carrying value in the accounts of TBGL or of BRL. He also thought that the market value of BRL shares in the second half of 1989 was too low and did not give adequate consideration to the net tangible asset backing (calculated from the published accounts of around $1.75. This paragraph from his witness statement summarises his evidence about his state of mind as at January 1990:
  My view by January 1990 in relation to the viability of TBGL was that it might have problems servicing its debt over the next 12 months from its projected cash flow and would therefore need to dispose of some assets such as [Bell Press] to cover interest payments over that period. I believed the sale of TBGL’s non core assets would cover any shortfall over the next year. [SocGen’s analyses] had indicated to me that the company would survive until December 1990 without having to deal with its major undertakings. I thought that over the term of the refinancing facility, which was until May 1991, that TBGL would have to restructure its debt by either selling its investments in its associates, BRL and [JNTH] or purchasing its bondholder debt at a discount, or both. I thought that this was achievable.
  7621 He also said that he thought the sale of BRL shares was always an option, depending on value being restored through a brewery sale in 1990. If the shares could be sold for 80 cents, they would produce $200 million. He said that he thought that the banks would allow the sale of the BRL shares if they were required to make interest payments into 1990 or if the proceeds could be used to buy-back bondholder debt, provided the publishing assets were performing strongly. Alternatively the proceeds from the sale of BRL shares could be used to reduce bank debt. There is a similar statement in another paragraph of his witness statement where he said that the terms sheet and facility documents were drafted with tight and onerous terms to enable the exercise of greater prudential control. But he went on to say: ‘The terms could always have been modified or reduced in tightness by agreement between the banks’.
  7622 I have set out these aspects of Edward’s evidence in chief in some detail because I think he was one of the more impressive witnesses called by the banks. His coverage of the material was thorough. Nonetheless, he was a former employee of the Bell group under that RHaC regime and was anxious to further the banking relationship between SocGen and the group. Despite my generally favourable view of Edward, he was not immune to the problems of reconstruction. I was left to wonder, for example, whether he had actually contemplated the release of the Bell Press proceeds in the way mentioned, especially given the treatment in the main refinancing documents. I also unsure as to the effect on his thinking of the metaphorical sign on TBGL’s front door: ‘under new management’.
  7623 It is clear that in July 1989 Edward recognised the reality that the Bell group was not in a position to repay SocGen’s facility nor to repay any of the facilities of the other Australian banks. This realisation continued throughout the remainder of 1989 and was extant in January 1990. He believed that the proposed facility for BPG was the only source of repayment of SocGen’s facility and that if one lender demanded repayment, there would be a succession of calls. He was also aware that TBGL was not in a position to meet such demands without recourse to part or all of the publishing assets or the investment in BRL. In the light of all of this it is necessary to examine what Edward said in his written and oral evidence against the contemporaneous documentation and the course of events during the second half of 1989.
  7624 I referred earlier to the notes made by Edward on or in relation to the 1 July cash flow. The plaintiffs submitted that the notes disclosed a view that the financial position of the BCHL group was such that TBGL would be unlikely to continue to receive dividends and management fees as projected (or the benefit of the cash from management fees) and might not be in a position to pay interest to bondholders due in December 1989. It was for that reason that he considered that the Bank must obtain security ‘regardless’ of the cash flows; that is, because he was not persuaded that they demonstrated that the Bell group could service and repay SocGen’s facility. I think that is correct. Edward said (and I have no reason to doubt) that around this time (July 1989) he was concerned about possible cash leakage to from the Bell group to the wider BCHL group.
  7625 On 2 June 1989 (after receiving the TBGL balance sheet as at 31 May 1989), he wrote to BGF stating that the loans to related companies of $206 million appeared to be a contravention of the undertakings given in August and September 1988 to impose a $25 million ceiling. TBGL responded with a denial that there had been a breach. But Oates came to see Edward on 5 June 1989 to discuss his concerns. In his witness statement, Edward said he was aware of the $1.2 billion brewery deposit. He was also concerned about the early repayment of the $100 million subordinated loan from TBGL to BRL: see Sect 9.11.2. He was further concerned about the purchase of GFH by TBGL. He thought that if SocGen were to participate in any refinancing, it would have to be on terms that prevented TBGL from incurring further debt and from passing funds on to other BCHL group entities.
  7626 On 19 July 1989 he sent a memorandum to the Sydney Credit Committee. The memorandum referred to the then current status of the BGF facility, which suggests that by this time the BPG club facility proposal was dead. Edward told the Committee that that facility was being rolled over on a daily call basis. The Bell group was approaching all bankers to have them agree to extend the facilities to 30 June 1991, ‘basically under the present negative pledge structure’, a proposal with which he (Edward) did not agree. He recommended that SocGen continue with the daily rollover through to 31 July 1989, by which time the position of all banks should have been clarified.
  7627 In the memorandum, Edward said that he had received cash flow projections for the Bell group that showed the capacity to reduce its Australian bank debt by 50 per cent by April 1991 without selling any of its publishing assets. However, surplus cash flow (by which he meant cash flow that was not dedicated to the repayment of bank debt) relied on dividends and management fees from associated companies, including BRL, and ‘in the absence of this income Bell group would have difficulty meeting its obligations’. Edward continued: ‘This said, I should point out that a major expense is servicing of subordinated debt ($50 million per annum) which of course stands behind the senior bank debt for both principal and interest’. He said that Bell had ‘no problem in servicing bank debt with the cash flow from [BPG]’.
  7628 In cross‑examination, Edwards said he could not recall why he had made the comment about the ranking of the subordinated bonds but that he was probably speaking of a default situation, that is, a liquidation. But he also said that he had no recollection of having any understanding that the subordinated bondholder interest could be suspended and not met in the normal course while the company was a going concern. This exchange then occurred:
  Well, will you agree with me that on your evidence the only reason why you would have been raising that matter, the ranking of the bondholders, in this memorandum was because you had a concern that TBGL could go into liquidation?—No, that’s not correct.
  I will ask you one more time. Are you able to give any explanation as to why you would have raised that matter in this memorandum to the credit committee?—It’s just something which right through that period I always looked at the position of the banks in relation to the equity of the company and the subordinated debt.
  7629 He agreed that in the 19 July 1989 memorandum he was not talking about the equity of the company. Looking at the evidence overall, while I do not think that in July 1989 Edward thought that the financial collapse of the Bell group companies was inevitable and imminent, the possibility of failure must have occurred to him. There is no other rational explanation as to why he would have mentioned the bondholder ranking in this context. On the other hand, it is clear evidence (which I accept) that Edward thought the ‘subordinated debt’ was subordinated. In the 1 July cash flow (which precipitated this memorandum), no distinction was drawn between the convertible bonds and the on‑loans.
  7630 I should also mention that in the concluding paragraph, Edward proffered the opinion that SocGen was ‘not exposed on this facility. The major asset is unencumbered and is very saleable’. The ‘major asset’ must be a reference to BPG. The wording suggests to me that the conclusion the bank was not exposed rested on the saleability of the ‘major asset’. In other words this, too, refers to the default situation or liquidation.
  7631 In late July and early August 1989, there was a series of meetings and correspondence between TBGL officers and SocGen. Edwards made a note that he was not comfortable with certain corporate matters within the Bell group and the BCHL group. This is probably a reference to the leakage of cash problems that came to his notice early in June 1989. Aspinall told Edward that CBA did not want to participate and asked that SocGen increase the facility to enable CBA to be taken out. SocGen rejected the request.
  7632 On 7 August 1989, SocGen wrote to Simpson with an indicative offer (subject to credit committee approval) to extend the facility for 12 months, with security over BPG, Bryanston and Wigmores. They also requested further information, including cash flows for BPG, TBGL, BRL and BCHL and a schedule of related party transactions. Some of that information (including TBGL and BPG cash flows) was provided on 17 August 1989. On 29 August 1989, SocGen wrote to TBGL again, saying, among other things, that the revised cash flow projections demonstrated that:
  (a) BPG’s cash flow of $16.5 million for the 1989/1990 financial year would be inadequate to meet debt servicing of $44.4 million; and
  (d) the proposed transaction was not feasible with debt service inextricably linked to the financial performance of BRL and to a lesser extent, JNTH.
  7633 The bank sought further material, including information to support the dividend payments and management fees from BRL, JNTH and GFH for the 1989/1990 financial year. In cross‑examination, Edward acknowledged that this material was never received.
  7634 On 5 September 1989, Simpson delivered to Weeks a copy of the September cash flow. On 13 September 1989, Johnson and Weeks prepared a credit application and an accompanying memorandum with respect to SocGen’s $30 million participation in the $260 million facility proposed by TBGL to refinance its debt. In the memorandum, the authors said the bank had requested repayment of facility but had been advised that the company was not in a position to repay. They explained the company’s rationale that if the company paid one lender in preference to others it would have precipitated demands by all lenders, which the company would not have been able to meet.
  7635 Reference was made to the earlier club facility proposal and to the fact it had failed due to extreme difficulty encountered in attracting a third underwriter. That difficulty was said to stem largely from the ‘parlous financial position of Bond Corporation’ and that ‘the general perception of Bond Corporation’s worsening financial position had been further exacerbated by a continuum of adverse publicity surrounding the group and Alan Bond himself’. It then referred to the ‘precarious position in which the Bell group [found] itself’ and that this explained the present proposal. The memorandum continued:
  Whilst it would undoubtedly be preferable for [SocGen] to be repaid, this is clearly not achievable, the refinancing option appears to be the most palatable solution.
  7636 The authors also noted that it might be seen as deferring the problem for a year because the cash flows indicated that, on maturity, the company would not be in a position to meet the repayment in full. Nonetheless, there were several reasons why participating in the refinancing and taking security was preferable: In summary, by taking security, SocGen’s position would be strengthened as the bank would rank ahead of trade creditors and would be protected against any potentially competing claims that might arise from contingent liabilities crystallising a liquidation. Although repayment in full would not be achieved on maturity, an estimated $110 million could be repaid to the banks on a pro rata basis depending on the progress of asset sales. The authors also noted that the release of the annual accounts for BCHL and BRL were scheduled for the end October and that this was ‘something of a watershed for the group in terms of its survival’. They concluded:
  In summary, we are not supportive of this transaction on the basis of the underlying credit risk, however given the company’s inability to repay lenders at the present time coupled with the unsecured status of [SocGen’s] existing exposure we believe there is merit in contemplating such a structure.
  7637 They also said that if the refinancing were to proceed, it was imperative for the banks to gain access to security as soon as possible because the looming delivery of the financial statements ‘may be a strong determinative of the group’s ongoing viability’.
  7638 The credit application commented that the transaction was originally envisaged as ‘captive’ (that is, the banks could rely solely on BPG for both security and servicing) but it could no longer be so described. BPG’s cash flow had deteriorated from the position advised in support of the club facility proposal and the bank would have to look to the broader Bell group for debt servicing. The primary source of debt servicing would be BPG but there would be a shortfall of $5.2 million. TBGL’s cash flow showed income of $160.6 million, but $50 million came from Wigmore’s and Bryanston (which was allocated to a reduction of bank debt) and $83 million from management fees and dividends. In relation to the latter, the authors remarked that the items were subject to some uncertainty (because of the dependence on the financial position of the BCHL group) and they had not been able to satisfy themselves as to the validity of the projected receipts. Outgoings (including interest due to the bondholders) was $122.8 million, leaving a surplus of $37.8 million.
  7639 The authors of the credit application also noted that operating cash flow would only be sufficient to meet debt servicing. Repayment on maturity was expected to come from asset sales, including Bryanston, Wigmores, Bell Press. On this aspect, they concluded that if all sales occurred at the anticipated values during the life of the facility, SocGen’s exposure would be reduced to $14 million and total bank debt to $143 million. Free cash flow from BPG would then be sufficient to service that level of debt.
  7640 In relation to security, it is clear that the authors regarded the charges over the BPG assets as the primary collateral. Their charges over TBGL’s interests in BRL and JNTH were ‘highly questionable’ and should be viewed as makeweights only. The recommendation was framed in these terms:
  On strict credit grounds we do not recommend this transaction for the following reasons:
  • the inability to structure the transaction as a strictly captive risk against [BPG] due to the increased level of debt and updated cash flow;
  • the consequent financial linkage to [BCHL] due to reliance on dividend income and management fees received from [BRL and JNTH] as a source of cash flow for Bell group to service the debt;
  • the inability of the company to meet repayment from cash flow. Amortisation of [SocGen’s] commitment is reliant upon asset sales, the timing of which was uncertain;
  • uncertainty surrounding TBGL’s long-term viability.
  However, in view of the company’s inability to repay [SocGen] we believe the most appropriate alternative in the interim is to take security premised on the realisable value of the assets of [BPG].
  7641 On 13 September 1989, the credit application was approved by the Sydney Credit Committee and forwarded to SG Paris for consideration. This was done on the following day. The application was accompanied by a further memorandum from Johnson and Weeks which proffered the view that if the proposed refinancing did not proceed, SocGen’s position was still relatively safe. This was because the publishing assets had a realisable value of $350 million, sufficient to cover bank debt of $260 million. The only other source of finance was the convertible bonds of approximately $545 million. They were subordinated in status and could not be redeemed until 1992 at the earliest.
  7642 There are several things that I take from this evidence. SocGen had built up a vast store of knowledge, which was more than most other banks, of financial matters affecting the Bell group. In this respect they had the advantage of the materials presented (and analysed) in relation to the BPG facility proposal. They were aware of the breaches of the September 1988 undertakings, even though Edward may have been mollified a little by Oates’ explanation. Nonetheless, he still harboured concerns about corporate matters within the Bell group and the BCHL group. SocGen was yet another reluctant participant in the refinancing. They knew that the BPG free cash flow could not service the bank debt and that the ability to meet outgoings (other than bank debt) was highly dependent on the receipt of management fees and dividends. They acknowledged the uncertainty of these receipts. It is interesting that when the SocGen officers looked at BRL and JNTH for their security value, they described them as ‘highly questionable’ and, as securities, as ‘makeweights’. In relation to asset sale, and Bell Press in particular, it is important to note that the reference in the September 1989 documents to the use of the proceeds was for repayment of the principal sums on maturity. There is no suggestion of any agreement or understanding that the proceeds might be available for debt servicing along the way.
  7643 The SocGen officers were concerned about the long-term viability of the groups. It must follow that they at least considered the possibility that the Bell group companies might not survive; that is, that their solvency was at least questionable. They knew that if the BPG assets were sold (and the proceeds used to pay down bank debt) there would be nothing (other than the management fees and dividends) from which to pay other creditors. The positive comments about the realisable value of the BPG assets has to be seen in that light. On the other hand, there is a clear indication in the September 1989 documents that SocGen thought there was $545 million of subordinated debt due to bondholders. Again, no distinction was drawn between the bonds and the on‑loans.
  7644 During the second half of September 1989, correspondence was exchanged between Secteur Asie and SocGen, with the former seeking further cash flows and an outline of the assumptions on which management fees and dividend income were based. They also sought a repayment scenario and further cash flow. The tenor of the responses to Secteur Asie was that, under the circumstances, it was not feasible to provide the requested information. On 29 September 1989, Secteur Asie sent a telex to SocGen agreeing with the proposal advanced in the 13 September 1989 credit application, on the condition that all existing lenders agreed to participate.
  7645 On 23 October 1989, Farrell sent the BCHL preliminary financial statements and dividend announcement to SocGen. Edward appended a note that it was apparent the auditors would attach heavy qualifications to the BCHL and TBGL accounts. He also said: ‘The Bond directors maintain their solvency but it is clear that the sale of the Australian brewery is now imperative. Otherwise [BRL], the effective lender of last resource for Bond may call its loans with NCSC direction’. It was around this time that Edward corresponded with HKBA concerning the BRL aircraft lease. He commented that the financial condition of BRL had deteriorated significantly since December 1988 and that SocGen believed there had been a breach of the ‘material adverse change provision in the lease.
  7646 Edward attended the meeting of the Australian banks held on 27 October 1989. The file note made by Walsh (SCBAL) recorded that Edward had raised ‘the issue of the financial viability of the whole Bell Group, particularly since BRL did not declare a dividend in their most recent loss announcement. In cross‑examination, Edward stated that he had no recollection of the meeting and could not recall raising the issue of the financial viability of the Bell group. He did not deny that he may well have raised that issue. The fact that it is coupled with a comment about the dividend (a matter stressed in the September documents) suggests to me that it is he might well have done. It must also be remembered that this was the meeting at which the advice from Hayne QC and Burnside (based on an assumption of insolvency) was considered. I am prepared to accept that Walsh’s contemporaneous note of the meeting is an accurate record and that Edward did make the statements attributed to him.
  7647 The 29 September 1989 approval for Secteur Asie had been for a 12 month extension. During November 1989, the terms sheets indicated a common maturity date between the Australian banks and the Lloyds syndicate banks. So that there would be ‘consideration’, the proposal changed to effect a 31 May 1991 expiry date. This meant that SocGen had to seek a fresh approval from Secteur Asie. On 7 December 1989, Johnson and Weeks wrote to Simpson seeking a lot of additional information to assist with the renewed application. They asked, for example, for an outline of the commercial justification for TBGL charging management fees to BRL and JNTH. Surprisingly, the request did not extend to further updated cash flows for TBGL. Simpson responded on 13 December 1989 and said among other things, that the charging of management fees was likely to be reviewed after 31 December 1989 and certainly once the brewery transaction had been finalised.
  7648 On 15 December 1989, prepared a further credit application seeking approval for the later extension date. They acknowledged that the question whether or not to grant the longer extension was a vexed one ‘given the precarious financial position of the Bond/Bell empire and its impact on [TBGL’s] viability’. They also said that while ‘several of the lenders including [SocGen] are uncertain as to the corporate viability of [TBGL] we see the taking of security as a positive interim action’. They commented that the travails of the BCHL group meant that likelihood of TBGL receiving the projected management fees and dividend income was ‘extremely uncertain’.
  7649 The application also included a debt servicing analysis showing that the shortfall from the BPG free cash flow had doubled to $10.8 million and that a greater degree of reliance would have to be placed on cash flow from other sources within the Bell group. The application also contained an analysis of the TBGL cash flows, based on the September cash flow (the bank not received or recently sought an updated version). It repeated the income figures that had been included in the September 1989 application; namely, a total of $160.6 million, which included $50 million from Wigmores and Bryanston and $83 million from management fees and dividends. The outflows were said to be $133.6 million (including a $50 million bank debt repayment), leaving a surplus of $26.9 million. The application acknowledged that if the management fees and dividends were disregarded, there would be a deficiency of $56.2 million. This could be even higher because of complications concerning the sale of Bryanston. If only £5 million were received from Bryanston, the deficiency would increase to $86.2 million. On that basis, even if the repayment of bank debt were not made, the deficiency would still be $36.2 million.
  7650 This caused the authors to comment that there was significant doubt over the cash flow of the Bell group. By this time, SocGen had become aware that there might be taxation liabilities relating to profits earned on the sales of shares in Ansett and TNT. On 7 December 1989, Newman had written to Edward asking for his assistance in relation to the disputes concerning the income tax assessment; presumably because Edward had firsthand knowledge from his time as an employee of the Bell group. This may explain how SocGen came to learn of the matter. There is a reasonable amount of detail in the application as to the substance of the dispute. It was raised in the context of a discussion about the possibility of the securities being set aside as a voidable preference – a risk that the lawyers had attempted to minimise, but could not negate. The taxation liabilities and contingent liabilities arising after the balance date were said to constitute claims that might rank equally with the banks if the securities were set aside in a liquidation. Nonetheless, the authors recommended acceptance of the proposal:
  Whilst there is an element of commercial risk attaching to the taking of security by virtue of voidable preference, in a worst case scenario we can only be relegated to a position of ranking, as an unsecured creditor, which is exactly the same as our current position.
  7651 In a watch list report, also of 15 December 1989, Edward repeated the doubts about the ability of BRL to pay dividends sufficient to permit TBGL to service its subordinated debt interest obligations. It must be remembered that SocGen was a part of the BBHL banking syndicate and would have been well aware of all of the machinations concerning BRL. Edward also repeated his earlier concerns about the corporate viability of the Bell group unless it could buy-back the bonds at a deep discount or sell out of its investments. He continued: ‘Nevertheless the bank’s senior debt remains on an acceptable footing and at this stage we continue to recommend [SocGen] proceed to take security’.
  7652 On 18 December 1989 the application was sent to the Sydney Credit Committee and approved by them. On 21 December 1989 it was approved by SG Paris.
  7653 Auxenfants was involved in the consideration of the December 1989 credit application by SG Paris. He agreed in cross‑examination that he was aware the financial position of Bell group was deteriorating and that it was important for the bank to take security as soon as possible. He was aware of the concerns expressed in the application as to the ability of the Bell group to continue as a going concern. He agreed that if the dividends and management fees were excluded (and on the basis of the application, their receipt was unlikely) the Bell group could not have paid the bondholder interest other than by asset sales. Bell Press and Bryanston were the only asset sales mentioned in the application and there was no reference to any plan by which the company proposed to find money to be able to pay bondholder interest.
  7654 Keane (NAB) made a note of a telephone conversation he had with Weeks on 3 January 1990. Weeks had sought clarification of the reasoning behind NAB’s decision (communicated to Westpac) not to participate in the refinancing. Keane recorded a comment by Weeks that SocGen had taken the view that they would be no worse off, and possibly better off, by entering into the transaction. There were two reasons: one was a possible claim by the DCT of approximately $30 million; the other was a potential problem with validity of subordination of the BGNV, on‑loans. The bonds would be subordinated to creditors of BGNV but not necessarily to those of BGF. The on‑loans might rank pari passu with the bank debt, and this could seriously erode the previously assumed asset cover.
  7655 Weeks was also present at the Australian banks’ meeting on 24 January 1990 at which this issue was discussed, as was the request for BGNV to enter into a subordination deed. Edward gave evidence that he was not aware of the subordination issue until the meetings on 22 and 23 February 1990. Given the general evidence about the banks working practices, I am satisfied that Weeks would have spoken to Edward about it and that Edward was aware of the problem before 26 January 1990.
  7656 Edward attended the February 1990 meetings on behalf of SocGen. On 27 February 1990, he sent a memorandum to the credit committee seeking approval to the proposed waiver. He noted that it was ‘important to preserve the status quo for the next six months’. The waiver was granted, as were the successive similar indulgences as 1990 wore on. In the various watch lists, status reports and memoranda from Edward in the period to June 1990, there are repeated references to concerns about the future solvency of TBGL, particularly in light of the interest commitment to bondholders. Edward recommended that the bank agree to the requested waivers and almost always included in the reasons for that action the necessity to preserve the status quo.
  7657 At the time he signed the 30 March 1990 waiver letter, Edward understood that if the funds were not used in May to pay interest to bondholders, there would then be an event of default under the relevant trust deed and bond documents for the bond issues. This would entitle the trustee for the bondholders to accelerate payment of principal and interest on the bonds. He also understood that the trustee would be entitled to also make demand for repayment and that in those circumstances neither TBGL nor BGNV would have been in a position to meet the demands.
  7658 It seems that Edward never changed his view that the taking of security placed the banks in a strong position (so long as they were not set side – hence the need to preserve the status quo). In a status report of 30 June 1990, Edward said that the banks’ security position was strong and BPG was generating sufficient cash flow to service bank debt. Nonetheless, there was concern about the future solvency of the Bell group because of the subordinated debt interest. He said that future asset sales would be necessary, and most likely to be part or all of the shareholding in BRL. He also noted that in May 1990 the Mirror Group plc had announced it would purchase 49 per cent of the Bell group’s interest in BPG for $250 million. The sale was subject to government approvals which Edward thought were problematic. The status report described group liabilities as $265 million in bank debt and $550 million in ‘subordinated debt’. This suggests to me that Edward continued to espouse the view that the on‑loans were subordinated (although there is no doubt in my mind he was aware that it might not be the case). The thrust of 30 June 1990 status report is summed up in this comment:
  Security was taken in February 1990. The six month voidable preference period expires in August 90 after which time we can exercise our security with impunity.
  7659 There is not much in the contemporaneous documentation that links SocGen with discussions as to whether or when TBGL should approach LDTC, as trustee, concerning the convertible bonds. There was some discussion about the need to deal with bondholders, particularly at the meetings on 7 June 1990 and 15 June 1990. But, as I said in Sect 30.10.4, the idea of an interest moratorium does not seem to have occupied the minds of the Australian banks anywhere near as much as did the Lloyds syndicate banks, or at least the dissentients among them.
  7660 Generally speaking, the conclusions I reached in relation to SocGen’s state of knowledge around the time of the September 1989 credit application continued to apply to the period through December 1989 and January 1990. Johnson, Weeks, Edward and Auxenfants were all aware of the critical nature of the projected receipts (dividends and management fees) from BRL and JNTH. They knew that there was no realistic prospect of receipts from these sources. In fact, the language used to describe it had changed from ‘subject to some uncertainty’ to ‘extremely uncertain’. SocGen had requested, but had not received, further cash flows from BCHL, BRL and JNTH to support the projections for management fees and dividend income. Nor had they been provided with an explanation as to why that material was not available. This was information of a kind that would ordinarily be available to the bank according to its normal practice and experience in commercial lending. Without it, the bank was unable to test the assumptions underlying the July and September cash flows.
  7661 They also knew (in December) that the projected receipt from Bryanston was only $10 million. By 26 January 1990, they were aware that the £5 million Bryanston receipt was to be earmarked for creditors of TBGIL. Further, they knew that there would be no additional payments coming from the Bryanston sale before June 1990. The relevant officers of SocGen could not have had any reasonable expectation of any, or any significant, cash flow from the Bryanston source.
  7662 As had been indicated in the December credit application, without the dividends and management fees, by 30 June 1990, the Bell group would have a cash flow deficiency of around $56 million and it would rise to $86 million if the Bryanston proceeds were also excluded.
  7663 In his witness statement, Edward said that he regarded the figures in the December 1989 credit application as conservative and that he regarded the true cash flow deficiency by 30 June 1990 as between $1 million and $8 million. This, he said, was ‘manageable’. I have difficulty with that evidence of a present recollection. It is not supported by any of the written materials he created at the time. I was not able to find, for example, any note or record indicating the view expressed by Edward; that the banks would agree to relax the regime, then set out in the terms sheets for the use of asset sale proceeds, particularly the Bell Press proceeds. The contemporaneous documentation, insofar as it refers to these matters, does so in the context of the use of the proceeds to repay (not service) bank debt.
  7664 Edward seems to have been of the view that the long-term viability of the Bell group depended on the ability to sell the BRL shares and to buy-back the convertible bonds ‘at a deep discount’. He knew that the ability to deal with the BRL shares depended on the restoration of value to the company. This depended on getting something for the brewery ‘deposit’. He was aware of the problems with the Manchar securities and the dangers to the ongoing viability of the BCHL group. Accordingly, the restoration of value to the BRL shares was dependent on finalisation of the brewery transaction. SocGen was a member of the BBHL syndicate and Edward knew exactly what was going on in that regard. He must have harboured considerable doubt as to the ability of the parties to complete the brewery transaction by 30 June 1990 or even by the end of 1990.
  7665 There is no evidence that by 26 January 1990 anyone within the Bell group had started seriously to put together a plan to buy‑back the bonds. If there were such plans, there is no evidence that they were communicated in detail to Edward. He must have been aware that this would be an exercise of some complexity, and not one that could be finalised in the short term. I do not think that, in January 1990, Edward could have held the view that buying back the convertible bonds at a discount was a means by which the Bell group could manage the cash flow problems it would face up to June 1990 and for the remainder of the year.
  Conclusions
  7666 By July 1989, SocGen knew or believed that BGF and TBGL could not repay its facility or any of the Australian banks’ facilities. SocGen also knew that if any of the Australian banks made a demand for repayment of their facilities, TBGL and BGF and other Bell group companies would or would most likely go into liquidation.
  7667 By September 1989, SocGen knew or believed that its only or only likely prospect of having its facility repaid was to take security. At that time SocGen regarded the publication of the annual accounts for BCHL and BRL as being a watershed in terms of the survival of the BCHL group. It also knew that:
  (a) projected dividend income and management fees in the July and September cash flows were subject to some uncertainty;
  (b) management had been unable to provide cash flows for BCHL, BRL or JNTH to support the projected payments;
  (c) those responsible for preparing the credit application had been unable to satisfy themselves as to the validity of the payments;
  (d) the value of the Bell group’s shareholdings in BRL and JNTH on a realisation basis was highly questionable; and
  (e) the proposed transactions could not be recommended on ordinary credit grounds including uncertainty surrounding TBGL’s long‑term viability.
  7668 In October 1989, SocGen knew or believed that the financial position of BRL had deteriorated significantly since December 1988. It further believed that the events that had caused or evidenced that deterioration constituted a material adverse change for the purposes of the bank’s exposure to BRL under the aircraft lease. By December 1989, SocGen knew or believed that:
  (a) there was no prospect, or it was unlikely, that TBGL would receive management fees and dividend income in 1990;
  (b) TBGL and BGF could not pay interest due in 1990 on the bonds that they had issued and could not pay interest due on their loans from BGNV;
  (c) the Bell group suffered from an serious illiquidity that could not be overcome by selling assets;
  (d) if the Bell group was to meet its liabilities it would be necessary for it to restructure its financial position and that any restructure would take time, require the cooperation of the banks and the bondholders and involve the bondholders and other creditors compromising their rights and entitlements.
  7669 By December 1989, SocGen decided to proceed with the Transactions and enter into the Scheme in the belief that it would be no worse off if the securities taken were subsequently set aside in a liquidation of the Bell Group. The bank knew that in doing so it would obtain priority in a winding up over other creditors.
  7670 I am satisfied that, as at 26 January 1990, SocGen knew the companies were of doubtful solvency and at least suspected (and the level of suspicion was high) that the Bell group companies were insolvent or nearly insolvent. They did little, if anything, to investigate the matter and confirm, one way or the other, the true position.
  The period February 1990 to July 1990
  7671 On 26 February 1990 Westpac sent a fax to SocGen requesting a waiver of its obligation to distribute the proceeds from the sale of Bell Press. It also sought a waiver to allow part of the proceeds to be applied in payment of bank interest for February 1990. On the same day, Edward signed a letter of waiver that had been sent by P&P to SocGen.
  7672 On or about 27 February 1990 Edward provided a memorandum to SocGen’s credit committee regarding the waiver. He recommended that the bank grant the waiver for the following reasons:

1. It is important to preserve the status quo for the next 6 months.
2. The $7.7m abnormal expenses could not reasonably be expected to be funded out of cash flow from operations.
3. The newspaper operations continue to trade profitably and our underlying security values preserved.
   7673 The decision sheet for the SocGen credit committee records that Denis, Ponsard and Johnston approved the recommendation made in Edward’s memorandum on 27 February 1990. On 4 March 1990 Weir wrote to the Australian banks seeking advice as to the conditions under which each bank would be prepared to allow the proceeds of the sale of Bell Press to remain on deposit. SocGen responded to Weir’s fax and advised that it was prepared to allow the funds to remain on deposit to 31 March 1990, subject to no commitment being made to make interest payments to bondholders and there being repayment or part repayment of the BCHL loans by 26 March 1990. This response was noted in a fax from Weir to TBGL on 9 March 1990.
   7674 On 16 March 1990 Edward prepared a status report concerning TBGL which notes a significant deficit in the cash flow projections for 1990 due to subordinated debt obligations. Consequently there was some concern about the future solvency of TBGL. Edward commented that some assets sales would be necessary in the short tem, with disposal of the investment in BRL once value was restored to the shares:
   Ultimately and probably before year-end the West Australian newspaper interests will either be sold or refinanced to clear the existing bank debt. Precise timing will depend largely on the fortunes of [BCHL] given its controlling 75 per cent shareholding in [TBGL].
   7675 The status report was placed on file. Edward gave evidence this action was so that other bank officers who wanted to review the position in respect of the accounts could conveniently look at the reports.
   7676 On 26 March 1990 Weir sent a fax to the Australian banks which attached a letter from Lloyds Bank to TBGL. The Lloyds Bank letter contained a list of items to be resolved before Lloyds Bank would be willing to consider whether to grant a further waiver to allow Westpac to retain the remainder of the Bell Press sale proceeds. On SocGen’s copy of the fax next to a requirement that the subordination deed be executed on 16 April 1990 Edward noted ‘not possible?’ In cross‑examination he was unable to recall why he questioned the feasibility of a deed being executed.
   7677 On 30 March 1990 Edward signed a letter of waiver relieving Westpac from the obligation to distribute the Bell Press funds the next day. He gave evidence that he understood if the funds were not used to pay interest to the bondholders, there would be an event of default which would entitle the trustee of the bondholders to accelerate payment of principle and interest on the bonds. Further, he understood the trustee would be entitled to demand repayment which TBGL nor BGNV would be able to provide.
   7678 Edward’s comments in the memorandum of 16 March 1990 were reproduced in a further status report of 31 March 1990. On 12 April 1990 Westpac distributed to the Australian banks a copy of TBGL’s letter to Westpac dated 12 April 1990. This letter responded to the information requested by various banks to consider whether to allow the proceeds from the sale of Bell Press be used to pay bondholder interest in May 1990. TBGL advised it was unlikely that the subordination deed would be executed within the timeframe requested by Lloyds Bank. Edward noted this item ‘unlikely!’ Again, I am not sure what Edward had in mind in making this comment. On 24 April 1990 Johnston sent Edward a memorandum that stated a proposed commercial settlement for BBHL was tabled at a creditors meeting. Johnston noted the elements of the proposed settlement, including the syndicate being able to exercise a degree of control over BBHL.
   7679 On 26 April 1990 Edward sent a memorandum to the SocGen credit committee regarding the use of the proceeds from the sale of Bell Press to pay interest to bondholders on 7 May 1990. Edward recommended the waiver for the following reasons:
4. It is important to preserve the status quo through to August 1990 for our secured position to be preserved.
5. Cash flow projections earlier this year showed there would be a shortfall in May and banks have been on notice of this.
6. The newspaper operations continue to trade profitably and there had been no major variance in operations cash flow to date from that budgeted.
7. [BCHL] is required to pay in full its inter-company debt with [TBGL] (current amount outstanding is $5.8 million).
8. Interest due to banks has been paid in full up to 31.3.90 and is due monthly.
9. The prospects of realising value from the security held over 40 per cent [BRL] has been greatly enhanced with recent commercial initiatives concerning [BCHL]’s controlling shareholding in [BBHL] and Bond Media. Sale of the 40 per cent controlling shareholding in [BRL] may be a significant source of funds for early repayment of the banks this year thus improving the prospect of long term solvency for [TBGL].
   7680 The credit committee accepted Edward’s recommendation by a note on 26 April 1990 memorandum. On 3 May 1990 Edward signed the formal waiver that was faxed to Westpac.
   30.21.7. SCBAL
   The period before the Transactions
   7681 In February 1989, SCB had an exposure of about £309 million to the BCHL group. Like the other banks, SCBAL had been on the receiving end of a series of broken promises from the executives of the BCHL‑controlled Bell group about repayment of its $15 million facility. For both SCB and SCBAL, patience was running thin. On 24 February 1989, SCBAL ‘reluctantly and in deference to the overall connection with the SCBAL group’, agreed to a further extension of the clearance date to 7 April 1989.
   7682 On 3 March 1989 Farrell (BCHL) wrote to SCBAL saying that certain asset sales had not eventuated and requesting a further six month extension. Peter Cameron (Managing Director, SCBAL) wrote to SCB pointing out that this was the fourth request to extend the facility since the bank had been advised on 21 November 1988 that the facility would be repaid on 31 December 1988. He advised that SCBAL was not fully aware of the company’s financial position but ‘the warning bells were sounding that all may not be well with the company’. He said that given the uncertainty with respect to the company’s financial position and the small size of the facility in relation to total borrowings of the Bell group, SCBAL was not prepared to recommend a further extension of the facility and proposed advising the company that it wished to be repaid on 7 April 1989.
   7683 Cameron went on to enquire whether, if SCB wished SCBAL to maintain the facility, it would provide an indemnity to cover SCBAL’s exposure. In cross‑examination he agreed that this all pointed to a serious concern on his part in March 1989 as to BGF’s ability to repay the loan. He also agreed that he would not have sought an indemnity unless he had a real concern about being repaid. In my view, Cameron believed that BGF was unable to pay the facility. In March, SCB told SCBAL that it would not provide an indemnity and was not insisting that SCBAL stay its hand. This caused Goddard to make a note saying: ‘I would like to see the colour of Bond/Bell money for once and thus reduce our overall exposure’.
   7684 Cameron left in July 1989. But while I am mentioning his involvement I should move to a more general matter on which he gave evidence. SCBAL received the 1 July 1989 cash flow and the September cash flow. In the relevant period they did not receive, or ask for, other group cash flows. During cross‑examination Cameron agreed that where a proposal was under consideration for a company carrying an internal bank rating of B6 it would be important for the bank to possess a detailed understanding of the cash flow capacity of the borrower. Further, he said that the bank would require more than the assumptions underlying the projections. In his words, the bank would require clear indicators of how that cash flow was to be generated. Cameron also agreed that if the cash flow assumptions were to change and indicate a deterioration in the anticipated cash flow, he would expect the account officers to communicate to their superior officers in the bank. There is very little indication that these practices were adhered to in late 1989.
   7685 The rating B6 is described in an internal bank schedule, as is the rating B7 to which the Bell group was reduced a little later. All I need say is that these ratings denote a company in distress.
   7686 On 29 March 1989 Farrell wrote to Walsh requesting an extension of the date for repayment of the facility by 90 days from 7 April 1989. On 4 April 1989 SCB conditionally approved the issuing of a demand by SCBAL on BGF provided that it did not ‘trigger off other calls through cross default clauses etc thus perhaps precipitating collapse of Bell or even Bond’. On the same day Farrell met with Owen to discuss the request for a further extension. Farrell apprised Owen of developments with asset sales and said he anticipated that the facility could be cleared by 30 April 1989. Farrell acknowledged that all banks had been applying pressure to have their debts repaid and he appreciated that SCBAL also required an early resolution.
   7687 This led to the preparation of a credit application (application for limits) by Walsh and Patten on 6 April 1989. It proffered the view that BGF could repay the facility but the timing was uncertain. It recommended that the facility be extended until 15 May 1989. Cameron passed the application on to SCB with a recommendation that it be approved. After some hesitation, SCB agreed and on 7 April 1989 SCBAL approved the extension until 15 May 1989 provided BGF gave an undertaking that the bank would be repaid from the sale of Wigmores. I do not think there is much doubt that at this time SCB and SCBAL were concerned about the financial condition of the BCHL group and about SCB’s exposure to the group.
   7688 In late April and early May correspondence occurred between Farrell and Walsh in which it became clear that the facility would be cleared only in part from the Wigmore’s sale and that the bank would be asked to carry $7.5 million through to 30 June 1989. Walsh passed this request on to SCB but the latter expressed disquiet. Walsh sought advice from MSJA. On 11 May 1989 Walsh wrote to Farrell saying the bank that it would not grant any further extension of the repayment date of the facility and that ‘all moneys presently outstanding under the facility will fall presently due and payable on 15 May 1989’. At this stage Farrell had promised clearance of the facility through the Wigmores and Bryanston sale proceeds.
   7689 In a memorandum to Cameron on 11 May 1989, Walsh recommended that without agreeing to any extension, SCBAL should charge a default interest rate and indicate it expected payment of $7.5 million on 19 May 1989. At the same time, SCBAL could commence documenting an assignment in conjunction with other lenders over the Bryanston sale proceeds. If the Wigmores proceeds were not made available on 19 May 1989 for any reason, SCBAL could proceed to issue a s 364 notice and request the Bell group hold a joint meeting of all bankers to advise details of the Bryanston sale and to ensure that all banks were being ‘told the same story. Cameron agreed and sent a memorandum to that effect to SCB, in which he pointed out Walsh’s comment about the possibility of a preference. The reference to a preference is, in my view, strong evidence that both Walsh and Cameron were concerned about a possible insolvency of the BGF.
   7690 Walsh advised Farrell on 18 May 1989 that the facility would be extended on a rolling 24 hour basis. On the same day, he instructed MSJA to prepare a letter to BGF setting out the basis of the extension. The formal letter of extension stated that the repayment date of the facility was extended to such date as SCBAL in its complete and unfettered discretion thought fit and all moneys outstanding from time to time under the facility were repayable on demand by SCBAL. The sale of Wigmores was settled on about 19 May 1989 but none of the proceeds made their way to SCBAL.
   7691 When Walsh discovered that some banks had been repaid from the Wigmore’s proceeds he was less than impressed and remonstrated with Farrell. He mentioned that his concerns were ‘aggravated by the lack of meaningful information being provided by you that would enable us to place your request in a proper perspective’. Correspondence flew thick and fast between SCBAL and BCHL and on 25 May 1989 Farrell wrote this:
   The cold fact of life is that the Bell Group does not have any funds of its own to make any further retirements until the receipt of the Bryanston moneys or the draw down of the Bell Publishing facilities. Therefore the Bell Group has to look to its parent, Bond, and the reality there is that we do not have great amounts of cash until we receive the settlements from the various transactions announced recently.
   7692 Farrell also said that a major problem was that all banks ‘expect to receive every cent that comes out of asset sales and does not take into consideration that the cash flows from the remaining businesses fluctuate at times dramatically during the year. Given the timing, it is most likely that the reference to ‘various transactions announced recently’ is to the brewery deal.
   7693 At around this time Peter Beckwith (BCHL) entered negotiations. On 2 June 1989 SCBAL confirmed that the repayment date would be varied to 30 June 1989 with $5 million to be repaid on 15 June 1989. The confirmation was predicated on Beckwith’s assurances that the loan would be cleared by 30 June 1989. By mid June 1989 it was clear this was not going to happen and various proposals were floated, all of which centred on a payment of $5 million on 30 June 1989. That did not happen. Various proposals were discussed during July 1989 with SCBAL offering to extend the facility to mid‑September 1989 on conditions, including an assignment of the benefit of real estate contracts.
   7694 Whether or not Walsh believed that the failure of BGF to repay SCBAL between late 1988 and mid‑1989 arose from an unwillingness, rather than an inability to do so, does not seem to me to matter much, although I think I was the latter. By the end of July 1989 Walsh knew that BGF was unable to do so.
   7695 By late July 1989 Aspinall and Simpson had taken over responsibility for negotiations with the banks. This is when the negotiations for what turned out to be the January 1990 refinancing began in earnest. In the early part of August 1989, SCBAL had still been expecting a reduction of either $2.5 million or $5 million in their facility. It did not eventuate. On 23 August 1989 Walsh sent to Knox a memorandum outlining the position in respect of the refinancing proposal. The memorandum noted that:
   The other banks in the proposed deal (HKSB, SocGen, Westpac, NAB, CBA, Lloyds) are in principle agreeable to the secured transaction except for CBA (which I understand does not have a major exposure to the Bond Group).
   7696 Walsh sought approval to ‘indicate to [BGF] that we are prepared to participate in the facility in the full amount of $15 million subject to satisfactory credit approvals and acceptable documentation’.
   7697 Patten carried out an analysis of the proposal. He remarked that he could not see how the Bell group could service the proposed borrowings of $260 million and it would be necessary to see the actual results for the 12 months to 30 June 1989 and compare those with budget. Details of cash flows and timing of the impending asset sales needed to be clarified and as the Bell group could not service debt of $260 million, the proposed asset sales would need to be used to reduce debt by much more than the $60 million offered.
   7698 Patten’s analysis was sent to Minogue. On 25 August 1989, Minogue responded saying he agreed that the basic question was the level of debt that the Bell group could stand and that the answer would have two parts: the first dealing with security and the second dealing with servicing. The bank needed a fairly comprehensive picture of the Bell group to answer the question.
   7699 On 1 September 1989 Walsh sent a memorandum to Patten indicating that, at that stage, Sydney was not in a position to make a definitive recommendation in respect of the refinancing proposal. The reasons for that were the fact that CBA were still requiring repayment whilst NAB and SocGen wanted a complete charge over all of TBGL’s assets. Walsh stated:
   Our view of the financial and other information provided to us by Bell Group leads us to the conclusion that debt servicing for Bell Group Ltd’s overall financial obligations is extremely tight and that they would probably need to resort to additional asset sales in order to meet ongoing commitments. We believe that when secured over all of Bell Group’s assets, that there would be sufficient asset protection to the banks in an overall liquidation scenario.
   Any participation, therefore, by SCBAL in the proposed club deal would be done on the basis that we are protecting our current position rather than willingly participating in a standalone acceptable credit
   7700 It follows that at this time SCBAL was still not comfortable with the debt servicing capability of the Bell group. There was particular concern about CBA’s attitude and about CBA refusing to participate in the refinancing. There was a further question about the identity of the security. All of this caused Patten to remark, in a 1 September 1989 memorandum to Minogue, that the banks stood more chance of recovering their debts from a liquidation ‘now rather than at some time in the future’.
   7701 The application for limits of 7 September 1989 is a significant document in the chronology of events. It should be remembered that at this stage the proposal involved a new facility to BPG. Walsh prepared part 2 of the document. It contained this information.
10. The principal risk to the facility was the ability of BPG to generate the cash flow necessary to service the financing.
11. Cash flows presented by TBGL indicated an ability to meet its financial commitments subject to a number of ‘key qualifications. The cash flows showed that BPG had to rely on income generated by TBGL’s other businesses to service debt.
12. The required additional income would come from interest earned on the Bryanston sale and dividends and management fees earned by TBGL from BRL. In 1991, debt repayment would come partially from overall asset sales and increased profitability.
13. Given the overall uncertainty surrounding BRL and BCHL the continuation of the BRL dividends and management fees was ‘a big question mark’. A positive aspect was that the Bryanston proceeds would give TBGL a reasonable degree of liquidity should unforeseen events occur which impacted on BPG’s performance.
14. The Whitlam Turnbull valuation of the publishing assets was optimistic but at worse gave the proposed syndicate a starting point.
15. By controlling the assets it was possible to consider BPG’s position in isolation away from the ‘hype’ surrounding BCHL. If the cash flows did not secure the debt the secured lenders had the ability to take control of the company.
    7702 It is clear from his ultimate recommendation that Walsh believed that if SCBAL and, by inference, any other Australian bank, issued a demand the Bell group companies would go into liquidation. He said:
    Participating in this transaction means we have a very well secured facility to a borrower in marginal financial condition with an indeterminate repayment capability. However, it significantly improves our current position which is as an unsecured lender in a very uncertain environment. To not participate probably means liquidating BGL with repayment not eventuating for at least another six months and selling assets into a very weak and declining market. This action has obvious implications for SCB’s worldwide exposure to Bond Corp and related entities.
    7703 Brookman prepared part 6 of the document. There is some confusion in this part of the application for limits because all pages, other than the first, are headed ‘part 2’. That seems to be an error. In his oral evidence Walsh sought to distance himself from much of what is in part 6. But there is nothing in the contemporaneous record to show that Walsh held that view at the time or that he sought to correct any misinformation or wrong impression arising from part 6. I do not accept his evidence in this respect. I think part 6 stands for what it says. Brookman made these points.
16. It was an emerging view among the proposed syndicate members that the BPG cash flow was extremely tight to service the proposed facility but that there was also an ‘unofficial view’ emerging that little could be achieved at this time without security. In short, if TBGL’s banks were to demand repayment that could have an inevitable ‘ripple effect’ through the Bell group to BCHL.
17. There was a collective approach emerging that the current weaknesses on the basis of cash flow criteria should be suffered in the short term in the interests of obtaining immediate full security from the Bell group.
18. The gearing of the Bell group was influenced by the value attributed to the mastheads and the true worth of its shareholdings in BRL and associates such as JNTH. Current market values were significantly less than the values attributed in estimated balance sheets provided by TBGL.
19. On a balance sheet adjusted by SCBAL, the Bell group had a negative net worth of $113 million.
20. TBGL had other unsecured creditors of $283 million and in excess of $1 billion worth of total liabilities.
21. Unless the syndicate was able to secure its facility with charges over all the assets of the Bell group, and not just BPG, participation in the syndicate could not be justified on purely credit grounds.
22. TBGL’s own estimates of its cash flow were extremely tight.
23. The continuing ability of TBGL to meet all future commitments as they fell due was suspect and the absence of the full support of the proposed syndicate could lead to liquidation ‘but the syndicate support did not ensure that liquidation could be avoided’.
24. There were legitimate arguments to seek the early sale of the Bell group’s key trading asset (the publishing assets) but if that course was not possible then as a matter of urgency the fullest possible attempts should be made to secure the position of the bank with complete security from the Bell group and with such security to include the strict loan covenant controls.
25. BCHL and BRL could not be divorced from the banks’ perception of TBGL. That was not simply ‘in terms of the common thread of share equity but also in terms of both the commonality of senior management and also in terms of the perception, if not the reality, that here was a group of companies seeking to postpone their inevitable collapse and break up’.
26. The common management of the BCHL and Bell group were increasingly involved in crisis management.
    7704 All of this shows a clear appreciation on the part of SCBAL of, among other things, the precarious financial position of the BCHL group and the Bell group; the inability of BPG alone to service debt; doubts about the security position; doubts about the continued receipt of dividends; and the likely domino effect of a failure of the Bell group into BCHL and (it can be inferred) vice versa.
    7705 On 12  September 1989 Patten sent a memorandum to Walsh in response to the application for limits. It can only be described as expressing strong disquiet. Patten felt the available information was deficient. He said he could not subscribe to the contention that the bank’s position would be significantly improved if it continued to support the Bell group and took a floating charge. The only benefit to be gained from the floating charge would be to ‘gain control and need over the assets and, more to the point, the cash flows’. He expressed concern that the banks could be shown to place themselves in preferential position knowing that the likelihood of failure was high and that would be particularly pertinent if other investors or creditors were subsequently drawn in. He also made the comment that as the other major creditors were subordinated (that is, the bondholders) he could not see that a secured position gave the banks any benefit other then the ability to appoint a receiver.
    7706 Walsh and Brookman prepared and sent a response to Patten’s memorandum of 12 September 1989 on the following day. They acknowledged that ‘on a complete independent credit review basis Sydney branch’s recommendation would be to decline participation in the club deal and seek immediate repayment’. They repeated that cash flow was tight and that the ability to meet bondholder interest was dependent on other cash flows such as dividends and management fees. But there were three alternatives: serve demand for immediate repayment; agree to TBGL’s terms; or participate in the refinancing with full security and very strict controls over cash flow. The recommendation was in these terms:
    Our considered opinion weighing up all the alternatives is that in isolation, SCBAL should seek immediate repayment of its current facility, ie. serve appropriate s364 Notices, subject to SCB London’s concurrence and/or their direction on any other stance to be taken by SCBAL
    7707 In his witness statement Walsh said that memorandum was evidence of a view he held in late 1989 that the proposed facility would give the Bell Group a period of stability in which it could meet cash flow expectations and realise the asset sale programme. The plain meaning of the words in the memorandum lead me to reject Walsh’s evidence that he held that state of mind at the time.
    7708 In memoranda sent by Patten to Minogue at around this time, Patten reiterated his disquiet at the proposal and said that sooner or later SCBAL would be obliged to vote on the arrangement.
    7709 On 15 September 1989 Simpson told Walsh that CBA had issued formal demands. Nott made a note: ‘The consensus view is we support CBA. Better tell Simpson’.
    7710 No final decision had been made at the time Walsh (accompanied by Nott) attended the Australian banks’ meeting in Sydney on 4 October 1989. That meeting is sufficiently covered in Sect 30.10.1. It is clear that the prospect of the banks receiving a preference was discussed. As I have said on many occasions, it is unlikely the preference question would have been raised unless there was a concern about solvency. After that meeting Weir distributed a draft terms sheet and it was considered by SCBAL.
    7711 On 12 October 1989 a further application for limits was prepared. It consisted of a two page part 1, a revised terms sheet and a 5 page part 2. The application did not include a fresh part 6. Walsh prepared part 2. It contained the following points.
27. The principal risk associated with the refinancing was the ability of BPG to generate sufficient cash to service the facility. Unless the facility was reduced to $200 million from $260 million BPG revenue would not service interest.
28. The banks recognised that the key issue was the level of and control over the cash flow emanating from BPG. Payments would be monitored on a periodic basis and no payments to BCHL associated companies would be allowed.
29. The proceeds from the sale of Bryanston would reduce bank debt and would have an immediate impact on debt servicing requirements. A similar provision would apply in relation to the sale of Bell Press.
30. Assuming both sales occurred, bank debt could be reduced to $200 million which could then be adequately serviced by BPG’s estimated average operational cash flow and TBGL’s obligations to meet subordinated debt servicing would have to come from non‑BPG revenues.
31. There was uncertainty as to the ongoing receipt of BRL and JNTH management fees and dividends given the overall uncertainty surrounding BRL and BCHL, the continuation of ‘BRL dividends, management fees, etc is of course a big question mark’.
32. Whatever transpired, the brewery deal meant that the BRL management fees would definitely be lost to TBGL.
33. No amortisation (beyond Bryanston and Bell Press sale proceeds) could occur during the proposed facility term.
34. The facility suffered from an obvious preference problem.
35. The banks, including SCBAL, believed that the risk was worth taking.
36. By participating in the refinancing, the bank would have a reasonably well secured facility to a borrower in current marginal financial condition with indeterminate repayment capacity other than by complete and managed liquidation of assets.
37. Taking security significantly improved the bank’s current position which was as an unsecured lender in a very uncertain environment. If the ban did not participate TBGL would probably be wound up. Assets would have to be sold into a very weak and declining market and repayment not would not eventuate for at least another six months.
38. That action would have obvious implications for SCB’s worldwide exposure to BCHL and related entities.
    7712 Walsh conceded in cross-examination that he was aware prior to receipt of the 18 October 1989 joint memorandum of advice from A&O and MSJL that securities could be set aside if the directors granting security were not acting in the best interests of the companies.
    7713 Walsh said that he did not recall learning in October 1989 that BRL and JNTH would not issue dividends on ordinary shares. He conceded that, assuming those matters were reported in the financial press, he would have noted them. He also agreed that those matters would have been of concern to him, going as they did, to TBGL’s ability to meet its cash flow projections.
    7714 On 19 October 1989 Patten sent the application for limits to Minogue. Patten remarked that the securities being offered were a vast improvement on the previous proposal. He also commented that it was an understatement to say that the operating cash flow was tight but assuming that the debt could be serviced, the 30 day rollover bills would assure a reasonably early alarm was given. Nevertheless, Patten’s prime concern remained what happened when the facility expired and it was not sufficient to merely reschedule the debt without some form of debt reduction programme. He recommended approval in principle subject to certain qualifications.
    7715 At around this time Patten learned of the BCHL results and the significant operating losses that were reported. He passed this information on to other officers, including Minogue. It caused Brookman (manager, credit risk) to question whether it was realistic to accept that TBGL had ‘on‑going viability’.
    7716 Walsh represented SCBAL at the 27 October 1989 meeting of the Australian banks. This meeting is covered in Sect 30.10.1. It is to be remembered that at this meeting Edward (SocGen) expressed concern about the viability of the whole Bell group. In his evidence Walsh accepted that he would have been aware from what was said at that meeting that there would be a shortfall in the Bell group’s cash flow according to the projections made in the July and September cash flows. He understood that the capacity of BRL to pay dividends and management fees ultimately came back to the BCHL group by way of the brewery deal deposit. He also understood that the ability of JNTH and GFH to pay dividends and management fees in the future was tied to the capacity of BCHL group to meet its debts to those companies. On 30 October 1989 Walsh sent to Patten his report of the 27 October 1989 meeting.
    7717 In a memorandum dated 31 October 1989 dealing with the Hayne QC and Burnside opinion Love commented that: ‘It would seem we have no alternative unless we wish to immediately precipitate the fall of Bond’. In cross‑examination Walsh conceded that he ‘understood as a result of this memorandum that in Love’s opinion it was reasonable to assume that entities within Bell group were insolvent’. Although Walsh said he disagreed with that conclusion reached by Love, he could not recall ever taking steps to disabuse him of that view.
    7718 On 31 October 1989 Walsh received from Patten comments on the file note relating to the 27 October 1989 meeting. In this communication Patten observed that it appeared to him that the management of the Bell group seemed ‘unaware of their perilous financial position’ which did ‘not auger well for the future of this rescheduling’. In cross-examination Walsh agreed that he knew that Patten held these views and agreed that he did not take steps to correct them. This exchange then occurred:
    If you thought that you had information which meant that his view was erroneous, then you would have provided him with that information, would you not?—If there had been some specific information, yes, I probably would have. Again this was his opinion and I had a different view.
    7719 I prefer to rely on the contemporaneous record. In the early part of November 1989 correspondence was passed between Westpac and SCBAL concerning aspects of the draft terms sheet. In November 1989 SCBAL learnt that only £5 million of the Bryanston proceeds would be received in the near term, with the balance of £15 million to be received ‘at a later date’. In correspondence with Westpac, SCBAL continued to insist on a mandatory requirement, or at least a trigger for potential review by lenders, to require BPG to reduce the facility amount to a level complementary to the BPG cash flow by an agreed date. On 22 November 1989, Patten wrote to Minogue to advise him that the BCHL and TBGL shares had been suspended from trading for failure to lodge annual returns. On 24 November 1989 SCBAL received a copy of the 1989 TBGL annual report.
    7720 On 30 November 1989 Love and Walsh met with Simpson. The purpose of the meeting was to discuss SCBAL’s requirement that there be mandated reductions in Bank debt. Walsh’s file note of the meeting disclosed that Walsh and Love were advised that the final settlement of the Bryanston sale would probably take between 12 and 18 months to complete and that no firm agreement had been reached in relation to the sale of Bell Press. Government approval of the Bryanston sale remained outstanding but £5 million would be received upon approval.
    7721 Following the meeting with Simpson, Walsh recommended that SCBAL agree to relinquish its requirement that there be mandatory debt reductions on the basis that none of the other Australian banks had insisted on such a term and they had been satisfied by the level of control over the proceeds of asset sales that was offered.
    7722 Early in December 1989 SCBAL issued formal demands for repayment of the facility. The circumstances in which the demands were issued and the withdrawn and the associated issue concerning the possible lack of subordination of the on‑loans is covered elsewhere: Sect 30.16, Sect 30.18.3; Sect 32.6.2.
    7723 On 22 December 1989 Walsh prepared a further application for limits. It did little more than convey to head office (Adelaide) and SCB a copy of the terms sheet. In his evidence Walsh said nothing else was required because all relevant information had been sent in previous submissions. In a memorandum accompanying the application, Walsh said:
    Given events occurring over the past three weeks (and various discussions between SCBAL, SCB) and our evaluation of our current lending position (ie. pari passu with at least $360 million of what we thought was subordinated debt), the consensus view is that SCBAL must join the syndicate in order to protect and improve its debt tanking. Michael Ferrier has verbally confirmed to me that he agrees with this position. Our endeavours over the past few days has been to ensure that documentation at least is acceptable. Today, our final comments were sent to Westpac (after discussions with Ferrier). … Therefore, formal approval of SCBAL participation I the proposed BGF refinancing is requested.
    7724 In a note to the SCB credit committee on 4 January 1990, Farmer advised that the equal ranking of the BGNV bonds gave the bank little alternative to participation in the refinancing. On 10 January 1990 the application for limits of 22 December 1989 was returned to Walsh with a signed part 1 as approved. The form of the terms sheet that was transmitted with the application on 22 December 1989 and then approved included as a condition precedent the provision of solvency certificates.
    7725 Walsh attended the 24 January 1990 meeting of the Australian banks on behalf of SCBAL: see Sect 30.10.2.
    7726 Before the refinancing documents were executed, SCBAL knew that the £5 million Bryanston payment was to be set aside to satisfy creditors of the BGUK group companies. The banks also knew that the remaining £15 million was unlikely to be received in the life of the extended facility.
    7727 It must also be remembered that SCB was a member of the BBHL syndicate led by NAB. Information held by SCB in that capacity cannot necessarily be imputed to SCBAL. Nonetheless it is reasonable to assume that, because SCB was intimately involved in the decision making process concerning the Bell group facility, officers of SCB would have known what was transpiring on that front and would have advised SCBAL officers accordingly.
    Conclusions
    7728 SCBAL considered that the repeated failure of BGF to repay its facility as promised at the end of 1988 and in the first months of 1989 sounded warning bells that all might not be well with the Bell group. By mid‑March 1989 Cameron thought that BGF could not then repay the facility. In late March 1989 SCBAL sought approval from SCB to issue a demand for repayment of its facility. SCB agreed provided that calling the facility did not trigger off other calls through cross‑default clauses that could precipitate a collapse of the Bell Group or even the Bond Group.
    7729 By May 1990 SCBAL was aware (courtesy of Farrell) of ‘the cold fact of life’ that the Bell group did not have any funds at the time to make any further retirements of debt until the receipt of the proceeds from the sale of Bryanston or the drawdown of the BPG facilities.
    7730 When the refinancing proposal was first put Patten advised that he did not consider that the cash flow of BPG was sufficient to service all of the banks debts. The credit application in September 1989 remarked that if the Australian banks were to demand repayment it could have a ‘ripple effect’ through the Bell group to Bond. It also noted that the adjusted balance sheet disclosed a negative net worth of $113 million. Further, TBGL’s own estimates of its cash flow were extremely tight and its ability to meet all future commitments as they fell due was suspect. Liquidation of the Bell group and the BCHL group was a real prospect.
    7731 In December 1989 SCBAL issued demands on BGF and TBGL. The demands were withdrawn because SCB and SCBAL concluded that BGNV would or might rank equally with the banks in a liquidation of TBGL and BGF. Again, I am satisfied that SCBAL was aware of each of the individual matters that I have set out in the conclusions in the Westpac section, including the cash flow ‘holes’ and the impact of the no worse off thesis.
    7732 I have reached the same conclusion in relation to SCBAL as I have with the other banks. SCBAL at least suspected, and the degree of suspicion was high, that the Bell group companies were insolvent or nearly so as at 26 January 1990. SCBAL certainly knew the companies were of doubtful solvency. They did little or nothing to allay the suspicions they harboured.
    The period February 1990 to July 1990
    7733 On 23 February 1990 Love prepared a file note of the discussions that occurred at the 22 February 1990 meeting of the Australian banks. In the file note Love refers to the recommendation that Westpac retain all Bell Press proceeds and grant a waiver to TBGL/BCHL:
    In view of the timing of the meeting on Friday and the need to, under existing documentation, pay to the individual syndicate banks the amount of any capital assets sales it is critical that the Bank provide Westpac, as the syndicate manager for the Australia banks, confirmation for Westpac to retain the $25.5 million flowing from the Bell Group Press sales to cover immediate interest payments for the month of February only and provide for the May subordinated note holders payment of approx $25 million which is the next critical point the bank group needs to address prior to May.
    7734 This memorandum was forwarded to Knox, Ferrier, Nott and Patten. In a separate file note of 26 February 1990 Love reported that, in the 22 February 1990 meeting, consideration was given to the ongoing risk of the grant of a waiver, including the ‘effect of security on subordinated debt in particular through BGNV subsidiary’. Love said:
    It was recognized when the security documentation was completed that there was a risk that it would not survive the 6 month preference period but advice from lawyers was that it should still be taken to provide the syndicates with ability to act under the security.
    It was also recognised that the critical on-going concerns we would face would be a cash flow problem and servicing questions, particularly with the reorganisation of the [BRL] Board (Managing Director, Bell Group Finance Ltd, David Aspinall removed from the [BRL] Board with the appointment of Geoff Hill as ‘independent’ Chairman).
    7735 On 27 February 1990 a memorandum prepared by Love and Devadason was sent to SCB London seeking approval to waive the distribution of asset sale proceeds to repay part of the banks’ debt. The memorandum notes that BRL’s cash flow position had significantly deteriorated from the cash flow projections offered to the Australian banks in September 1989, and that the banks would only obtain a very short gain if the funds held by Westpac from the sale of Bell Press were used to repay bank debt:
    We have always understood the position to be tight and have made this clear in the past, however the key for maximum recovery is to keep the borrower liquid until August 1990, to strengthen our newly created security by getting past the six month limit of preference claims which the subordinated debt holders could claim under.
    7736 The authors recommended the waiver and on the basis that it would not adversely affect the SCBAL’s position:
    In summary we believe the proposed course of action does not adversely affect our position but offers the opportunity for the borrower to sustain what is a reasonably solid newspaper group for a sufficient period of time to:
    (a) Allow the bank group time to consider the wider ramifications regarding the retention of proceeds to meet the subordinated bondholders interest payment in May (A$25 million)
    (b) To ensure that the [BCHL] debt to the Bell group of $7.6 million is repaid by the end of March 1990.
    7737 Patten reported in a memorandum dated 28 February 1990 and sent to SCB London that it was ‘hardly encouraging that the company’s cash flow projections provided in September 1989 have deteriorated so quickly’.
    7738 On 5 March 1990 Devadason faxed Weir (Westpac) for precise details of the subordinated debt in BGNV and a corporate chart detailing the Bell group subsidiaries’ holdings. Devadason sent a memorandum to Love on 7 March 1990 which contained a brief review of the balance sheets of JNTH and BRL as at 30 June 1989. Devadason says: ‘The BRL Balance Sheet and Profit and Loss accounts are as at 30 June 1989 so far from the present position of the company that analysis appears fruitless… The key to any worth being restored to BRL is of course the recovery of the $1.2 billon deposit paid for the Brewing assets or the completion of the sale of the Brewing assets to BRL’.
    7739 On 9 March 1990 SCBAL gave conditional approval to Westpac for the waiver. On 14 March 1990 SCBAL prepared a memorandum that stated that:
    In addition to the approximate $266,500,000 syndicate exposure to Bell Group there is a tier of ‘subordinated’ debt ($546 Million) which appears not to rank in a subordinated position to the syndicated debt. We are presently exposed for a period of 6 months from 1st February 1990 to possible claims that our recently granted security was taken preferentially. It is therefore considered important that we do as little to upset the boat as possible, without prejudicing our rights, to pass the 1st August deadline. (underlining in original)
    7740 On 26 March 1990 Weir’s memorandum regarding a further request for waiver was circulated to the Australian banks.
    7741 Devadason and Love prepared an account report as at 31 March 1990 in relation to BGF, which noted that if the subordinated debt holders successfully challenged the securities on grounds of preference, the banks would suffer a maximum 51 per cent loss worst case, and no more than 19 per cent loss in a best case, scenario. Further, the future viability of TBGL was assured if reasonable value could be restored to its shareholding in BRL with shares sold to reduce debt to more manageable levels. The memorandum restated the reference to the subordinated debt quoted above from the 14 March 1990 memorandum. Devadason agreed in cross-examination that he had not expressed any opinion as to the likelihood of value being restored to the BRL shares.
    7742 In a file note of 24 April 1990, Devadason reported on a conversation with Garven (BPG) in relation to the March cash flow forecasts. The file note says that, assuming BPG’s asset sales and cash loans can be settled, the company could maintain itself until November 1990: ‘It is recognized by all, including [the Bell group] of companies that by November [BRL] shares must have re-achieved value and be sold’.
    7743 Devadason and Love sent a memorandum to Knox on 25 April 1990 reporting on the position in respect of the BGF facility. The memorandum states that the key for maximum recovery for the bank is the Australian bank’s ability to realise under its securities. Therefore it is critical to allow the company the opportunity to stay solvent until the passing of the six month preference period. SCBAL discovered an annotated version of this memorandum with the following comment: ‘If it fell over today then we may be in difficulty. It will collapse at some stage… SCB guarantee presently a substitute for SCBAL capital if 50 per cent provision is done’.
    7744 On 27 April 1989 Ferrier wrote a memorandum to Williamson (SCB) noting that a 50 per cent provision was appropriate for the BGF account. On 23 May 1990 Ferrier advised Patten that SCB had decided to make a provision of 50 per cent of the group’s exposure in relation to the BGF facility.
    30.21.8. Some observations
    7745 At the beginning of this section, I indicated that there were recurring themes that would arise in examining the state of knowledge of each bank. As I have also said, it would not be possible to identify a common list of pure factual questions and check each of them against each bank. As in so many other parts of this case, there is no serious dispute about what occurred; the difficulty lies in determining what to make of events. The preceding narration of what each bank knew does lend itself to the summation set out in Schedule 38.21.
    7746 Of the seven themes I identified in Sect 30.1, the seventh is a conclusion about the state of each bank’s knowledge. That is something that I will express in words. The remainder may be tabulated so as to show whether and, if so how strongly, that factor was present in relation to that bank. The descriptions I gave earlier of each theme are too wordy to use them in column headings in a table, so I have used numbers only. To save the reader from having to refer to my earlier recitation, the following are shorthand repetitions of the six tabulated factors:
39. Store of historical knowledge
40. Knowledge of January 1990 position
41. Concerns about the Bell group and BCHL.
42. The no worse off motive
43. Concern for the status of the on‑loans
44. Refraining from enquiring.
    7747 Those are the column numbers. The entries in each row express the extent to which each theme resonated with each bank. The number of bullets indicates the strength of the finding, on the balance of probabilities, that a factor was present. My assessment shows that each bank had at least significant knowledge of each of factors 1, 2 and 3; that each bank had concerns about the status of the on‑loans; that each was aware of and motivated by the no worse off principle; and that each refrained from making further enquiries that might have been made about the finances of the borrower.
    7748 I need to add a note of caution about Schedule 38.21. The conclusions that I have reached are, in the main, inferences from an accumulation of material. That is what I have tried to reflect in the table. But there is no substitute for going to the material – that is where the probative value lies. The Schedule has been prepared to assist the reader but it is no more than an aid.
    30.22. Individual banks’ knowledge: Lloyds syndicate banks
    30.22.1. Some introductory comments
    7749 At the end of Sect 30.21.1 I explained that, compared to the knowledge of the Australian banks, the knowledge attributed to the individual Lloyds syndicate banks is derived much more from information they received from Lloyds Bank and from their participation in syndicate meetings. This is because the Lloyds syndicate was a genuine syndicate. There were limitations on Lloyds Bank’s agency and it could not bind the individual members, except in the limited areas that I discussed in Sect 30.5.3. But it was the leader of the syndicate and there was an identifiable process of disseminating information acquired by Lloyds Bank to the syndicate members.
    7750 The dissemination of information primarily occurred at syndicate meetings, although there were post‑meeting communications between Lloyds Bank and various syndicate banks. Information received at the meetings was relayed by those present to the decision‑makers in the individual banks. The decisions of the individual banks were, in return, communicated to Lloyds Bank as syndicate leader and then to the syndicate members.
    7751 In the sections on the Australian banks I have included a brief recitation of events relating to the waivers in February 1990 and following. I do not think I need to do so for each of the Lloyds syndicate banks because these events are adequately covered elsewhere: for example, Sect 24.1.10 and Sect 30.11.3.
    7752 I have organised this part of my reasons by reference to the dates of the meetings of the Lloyds syndicate and, where necessary, I mention briefly the main issues discussed at that meeting. My concern in this section is to identify what happened to the information given to syndicate members at the meetings; how it was passed on through the individual banks; and how it was acted upon by those banks. I mention instances when significant information was available to one bank, but not passed on to the syndicate. I also identify the date on which each bank fixed its participation in the refinancing.
    7753 The reader should consider this section in conjunction with Sect 11, which describes the decision‑making structures and the relevant personnel within the banks’ hierarchies. It is necessary for me to devote more attention to Lloyds Bank’s knowledge because it was the bank that communicated directly with the Bell group (there is the odd exception to this, which I will identify).
    7754 Before embarking on the discussion I should remind the reader of the matters described in detail in Sect 30.6.6. In late 1988, the Bell group promised that the existing Lloyds syndicate facility, which was originally due to expire in May 1991, would be repaid by end of March 1989. Lloyds Bank had advised all the syndicate banks that this would occur, but it did not happen. Instead an approach was made first by Farrell (BCHL) through Evans (Lloyds Bank) to the syndicate to dismantle the existing negative pledge structure and provide security in a tangible form over Wigmores Tractors and the BRL shares. This was the reason for the first meeting of the syndicate banks in 1989.
    7755 As the refinancing proposals progressed, more meetings of the syndicate members were held. The first meeting was held on: 25 April 1989. Further meetings were then held on 20 July 1989, 11 September 1989, 13 October 1989, 1 November 1989, 8 January 1990, 12 March 1990, 19 March 1990, 23 April 1990, 3 May 1990, 8 May 1980 and 11 June 1990. All of the syndicate banks attended each of these meetings with the exception of Skopbank, which was absent from the first meeting on 25 April 1989, and the meetings on 12 March 1990 and 11 June 1990.
    7756 Oates addressed the meeting of the Lloyds syndicate banks on 25 April 1989 in his capacity as head of finance and administration for BCHL. He was assisted by Raeburn, the chief finance officer of BGUK. They explained BCHL’s desire to restructure the Bell group’s indebtedness to the banks. The bankers present all recorded that Oates said that BCHL was suffering from a ‘credibility problem’ due to the size of the company’s debt and adverse press coverage. The company re