Westpac v The Bell Group (in Liquidation): WA Appeal Case Summary

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION : WESTPAC BANKING CORPORATION -v- THE BELL GROUP LTD (IN LIQ) [No 3] [2012] WASCA 157

CORAM : LEE AJA
DRUMMOND AJA
CARR AJA

HEARD : 18 APRIL – 22 JUNE 2011

DELIVERED : 17 AUGUST 2012

FILE NO/S : CACV 52 of 2009

BETWEEN : WESTPAC BANKING CORPORATION
First Appellant

SG AUSTRALIA LTD
Second Appellant

NATIONAL AUSTRALIA BANK
Third Appellant

HSBC BANK AUSTRALIA LTD
Fourth Appellant

STANDARD CHARTERED BANK
Fifth Appellant

COMMONWEALTH BANK OF AUSTRALIA
Sixth Appellant

LLOYDS TSB BANK plc
Seventh Appellant

BANCO ESPIRITO SANTO SA
Eighth Appellant

SEB AG
Ninth Appellant

BANK OF SCOTLAND plc
Tenth Appellant

CREDIT AGRICOLE SA
Eleventh Appellant

UNICREDIT BANK AUSTRIA AG
Twelfth Appellant

CREDIT LYONNAIS
Thirteenth Appellant

DRESDNER BANK AG
Fourteenth Appellant

KBC BANK VERZEKERINGS HOLDING NV
Fifteenth Appellant

SKOPBANK
Sixteenth Appellant

DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFTSBANK
Seventeenth Appellant

CALYON
Eighteenth Appellant

GENTRA LTD
Nineteenth Appellant

THE GULF BANK KSC
Twentieth Appellant

AND

THE BELL GROUP LTD (IN LIQ)
First Respondent

THE BELL GROUP LTD (IN LIQ) as trustee separately for each of DOLFINNE PTY LTD (IN LIQ) INDUSTRIAL SECURITIES PTY LTD (IN LIQ) MARANOA TRANSPORT PTY LTD (IN LIQ) NEOMA INVESTMENTS PTY LTD (IN LIQ)
Second Respondent

BELL GROUP FINANCE PTY LTD (IN LIQ) (RECEIVER AND MANAGER APPOINTED)
Third Respondent

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

BELL PUBLISHING GROUP PTY LTD (IN LIQ)
Fifth Respondent

BELL GROUP NV (IN LIQ)
Sixth Respondent

AMBASSADOR NOMINEES PTY LTD (IN LIQ)
Seventh Respondent

BELCAP ENTERPRISES PTY LTD (IN LIQ)
Eighth Respondent

BELL BROS PTY LTD (IN LIQ)
Ninth Respondent

BELL EQUITY MANAGEMENT LTD (IN LIQ)
Tenth Respondent

DOLFINNE PTY LTD (IN LIQ)
Eleventh Respondent

GREAT WESTERN TRANSPORT PTY LTD (IN LIQ)
Twelfth Respondent

HARLESDEN FINANCE PTY LTD (IN LIQ)
Thirteenth Respondent

INDUSTRIAL SECURITIES PTY LTD (IN LIQ)
Fourteenth Respondent

MARADOLF LTD (IN LIQ)
Fifteenth Respondent

MARANOA TRANSPORT PTY LTD (IN LIQ)
Sixteenth Respondent

WANSTEAD PTY LTD (IN LIQ)
Seventeenth Respondent

WESTERN TRANSPORT PTY LTD (IN LIQ)
Eighteenth Respondent

WIGMORES TRACTORS PTY LTD (IN LIQ)
Nineteenth Respondent

W & J INVESTMENTS LTD (IN LIQ)
Twentieth Respondent

DOLFINNE SECURITIES PTY LTD (IN LIQ)
Twenty-first Respondent

NEOMA INVESTMENTS PTY LTD (IN LIQ)
Twenty-second Respondent

TBGL ENTERPRISES LTD (IN LIQ)
Twenty-third Respondent

WANSTEAD SECURITIES PTY LTD (IN LIQ)
Twenty-fourth Respondent

WAON INVESTMENTS PTY LTD (IN LIQ)
Twenty-fifth Respondent

WESTERN INTERSTATE PTY LTD (PROVISIONAL LIQUIDATOR APPOINTED)
Twenty-sixth Respondent

GEOFFREY FRANK TOTTERDELL in his capacity as liquidator (with ALJ Woodings) of each of the First, Seventh, Eighth, Ninth, Eleventh, Fifteenth, Sixteenth, Seventeenth, Nineteenth, Twentieth, Twenty-second, Twenty-third and Twenty-fifth Respondents
Twenty-seventh Respondent

ANTONY LESLIE JOHN WOODINGS in his capacity as sole liquidator of the Third, Fifth, Tenth, Twelfth, Thirteenth, Fourteenth, Eighteenth, Twenty-first and Twenty-fourth Respondents
Twenty-eighth Respondent

GARRY JOHN TREVOR in his capacity as liquidator of the Sixth Respondent
Twenty-ninth Respondent

THE LAW DEBENTURE TRUST CORPORATION plc as trustee of the BGNV Trusts as defined in the schedule to the writ of summons in CIV 1464 of 2000
Thirtieth Respondent

ON APPEAL FROM:

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram : OWEN J
Citation : THE BELL GROUP LTD (IN LIQ) -v- WESTPAC BANKING CORPORATION [No 9] [2008] WASC 239
File No : CIV 1464 of 2000

Catchwords:
Agency – Implied agency – Imputation of knowledge of agent to principal – Syndicate of banks – Agency of lead bank – Agent for limited purpose – Distinction between imputed knowledge and inferred actual knowledge

Bankruptcy – Statutory claims – ‘Disposition’, ‘settlement’ or ‘alienation’ of property in insolvency – Share mortgages, directions and authorisations to give mortgages, guarantees and indemnities, fixed and floating charges, loan agreements, subordination agreements – Whether ‘property’ – Intent to defraud creditors – Application of Marcolongo v Chen – Proof of conscious wrongdoing not required – Good faith – Valuable consideration – Whether forbearance to sue was valuable in the circumstances – Bankruptcy Act 1966 (Cth) ss 6, 120 and 121

Bankruptcy – Statutory claims – Avoidance – Date at which voidance takes effect – Tracing – Dissipation of property – Effect of Brady v Stapleton – Availability of consequential relief in equity – Corporations Act 2001 (Cth) ss 565, 1400, 1401, 1371 and Part 5.7B – Whether s 565 available to a liquidator of foreign company registered after impugned transactions – Property Law Act 1969 (WA) s 89 – Imperial Acts (Substituted Provisions) Act 1986 (ACT) Schedule 2, Part 7 – Fraudulent Conveyances Act 1571, 13 Eliz 1, c 5

Contracts – Inferred and implied terms – Informal contract of on-loan from issuer of convertible subordinated corporate bonds to parent company – Whether term subordinating right of repayment was included in on-loan – Burden of proof – Objective theory of contract – Scope and utility of extrinsic evidence – Relevance of subjective assent – Contractual purpose – Rationale for treating debt as equity in financial statements – Who bore responsibility for setting the terms – Course of dealing in a corporate group – Turns on own facts – Enforceability by third party beneficiaries – Property Law Act 1969 (WA) s 11(2)

Contracts – Interpretation of contracts – Plain meaning – Resort to extrinsic evidence – Utility of post-contractual conduct

Corporations – Knowledge of – Aggregation of knowledge of employees and agents – Meaning of Krakowski v Eurolynx Properties – Whether it is necessary to identify a guiding mind

Equity – Fiduciary duties – Duties of company directors – Comparison with duties of trustees – Scope and standard of duties to act in the best interests of the company and for proper purposes – Relevance of directors’ subjective judgment – Relationship with equivalent statutory duties – Relationship with the duty to exercise care and skill – Grant of securities by a corporate group in an insolvency context – Effect on individual companies in the group – Role of the interests of creditors – Relevance of directors’ failure to carry out investigations – Relevance of a group context – Utility of the Charterbridge test

Equity – Fiduciary duties – Duties of company directors – Conflicts of interest – Distinction from duty to act for proper purposes – Non-pecuniary interests

Equity – Knowing receipt of property to which fiduciary obligations attach – First limb of Barnes v Addy – Application outside of trust relationship – Scope of property to which fiduciary obligations attach – Standard of knowledge required – Relationship with the standard for knowing assistance – Baden categories (iii) and (iv) – Deliberate abstention from enquiry and reckless indifference – Proof of conscious wrongdoing not required – Distinction between constructive knowledge and inferred actual knowledge

Equity – Knowing assistance in breach of fiduciary duties – Second limb of Barnes v Addy – Effect of Farah Constructions v Say-Dee – Meaning of ‘dishonest and fraudulent design’ – Proof of conscious wrongdoing not required

Equity – Equitable fraud – Imposition and deceit – Fourth limb of Earl of Chesterfield v Janssen – Modern role of – Necessity of identifying offence to public utility – Relationship with bankruptcy laws – Whether equal treatment of creditors is required prior to winding up – Scope of the composition cases – Frustration of a restructure available to a distressed company is not an offence to public utility – Not necessary to establish bad faith – Whether necessary to show that creditors were ‘kept in the dark’

Equity – Equitable fraud – Unconscientious conduct – Necessity of establishing special disadvantage – Extent to which doctrine applies to commercial entities

Equity – Equitable defences and bars to relief – Abandonment – Election – Laches – Ratification – Restitutio in integrum – Set-off – Corporations Act 2001 (Cth) s 533C

Equity – Remedies – General principles – Practical justice – Distinction between disgorgement and compensation – Judicial discretion to deny the right to elect an account of profits – Public interest

Equity – Remedies – Constructive trust – Distinction between institutional and remedial constructive trusts – Tracing impractical on the facts

Equity – Remedies – Equitable compensation – Appropriate rate and period of compensatory interest – Whether deduction for taxation of compensatory interest should be made at each rest for calculation of compound interest

Equity – Remedies – Injunction – Remedial discretion exercised on the balance of convenience – Rights of non-parties

Estoppel – Estoppel by representation, estoppel by convention, equitable (promissory) estoppel – Continuing relevance of doctrinal divisions – Difference between promissory and proprietary estoppels – Promissory estoppel requires a clear and unambiguous representation – Must be made by party against whom estoppel is sought – Failure to show ongoing reliance – Turns on own facts

Evidence – Utility of hypothetical evidence – Rule in Jones v Dunkel

Limitation of Actions – Trusts and equitable causes of action – Whether claims by beneficiaries of constructive trusts are limited – Limitation by analogy – Distinction between fraud in equity and fraud in the common law – Limitation Act 1935 (WA) s 47

Trade practices – Misleading and deceptive conduct – Likely to mislead or deceive – Sophisticated commercial dealing – Mutually understood meaning not deceptive – Trade Practices Act 1974 (Cth) ss 52, 80, 87 – Competition and Consumer Act 2010 (Cth) Schedule 2 ‘Australian Consumer Law’ s 232
Legislation:
Bankruptcy Act 1966 (Cth), s 6, s 120, s 121
Competition and Consumer Act 2010 (Cth), s 232, Sch 2
Corporations Act 2001 (Cth), s 533C, s 565, s 1400, s 1401, s 1371, Part 5.7B
Fraudulent Conveyances Act 1571, 13 Eliz 1, c 5
Imperial Acts (Substituted Provisions) Act 1986 (ACT), Sch 2, Part 7
Limitation Act 1935 (WA), s 47
Property Law Act 1969 (WA), s 11(2), s 89
Trade Practices Act 1974 (Cth), s 52, s 80, s 87
Result:
Appeal dismissed
Cross-appeals allowed in part
Category: A

Representation:
Counsel:
All Appellants : Mr T F Bathurst QC, Mr D E J Ryan SC, Mr H K Insall SC, Mr S Habib SC, Mr M C Goldblatt, Dr R S Derham, Mr D F C Thomas & Ms K F Banks-Smith

First to Fifth,
Seventh to Twenty-eighth
and Thirtieth Respondents : Mr N J Young QC, Mr C G Colvin SC, Mr S M Davies SC, Ms E A Cheeseman, Mr J Barber & Mr D Jackson

Sixth And Twenty-ninth
Respondents : Mr N O’Bryan SC & Mr A A D’Arcy

Solicitors:
All Appellants : Freehills

First to Fifth,
Seventh to Twenty-eighth
And Thirtieth Respondents : Ashurst Australia

Sixth And Twenty-ninth
Respondents : Lipman Karas

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Southern Cross Commodities Pty Ltd v Ewing (1988) 91 FLR 271
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TABLE OF CONTENTS

LEE AJA’S REASONS 28
DRUMMOND AJA’S REASONS 316
CARR AJA’S REASONS 731
ATTACHMENT 1 1020
ATTACHMENT 2 1024

LEE AJA’S REASONS

INTRODUCTION 30
SUBORDINATION 31
Convertible Subordinated Bonds 32
NP Reports 39
Banks’ Pleadings of Subordination in Contract and Estoppel 42
Banks’ Pleaded Representational Documents 43
Banks’ Pleaded Representations 44
Onus of proof on Banks’ Pleadings of Contract and Estoppel 45
Analysis of Banks’ Pleaded Representational Documents 47
Letters dated 11 December 1985, 15 April 1987 from TBGL to the Banks 47
NP Reports 63
a) NP Report 31 December 1985 64
b) NP Reports 30 June 1986, 31 December 1986, 30 June 1987 67
c) NP Report 31 December 1987 68
d) NP Reports 30 June 1988, 31 December 1988, 30 June 1989 72
NP Information Packages 79
Lloyds Information Memorandum 82
Proposal for Negative Pledge Guarantee 85
Three year Business Plan (‘Business Plan’) 88
Other matters referred to by his Honour 92
Accounting records 92
BGF (ACT) Ltd 97
Contracts 100
Contracts inter se 100
a) Inferred contractual term 100
b) Implied contractual term 101
c) Capacity of Banks to enforce contracts ‘inter se’ 103
Contracts inter partes 106
Estoppel 110
Trade Practices Act 1974 (Cth) 129
STATUTORY CLAIMS 133
Dispositions of property with intent to defraud 137
Corporations Act, s 565 137
Property Law Act 1969 (WA), s 89 138
The ACT legislation 138
Onus of proof 139
Applicability of s 565 of the Corporations Act to BGNV Subordination Deed 140
Intent to defraud 142
Good faith 153
Valuable consideration 155
Dispositions by way of settlement 159
Corporations Act, s 565 159
Settlement of property 160
Relevant Transactions 161
a) Share mortgages executed by TBGL as trustee and authorisations executed by beneficial owners 161
b) PSD 165
c) Guarantee and Indemnity 172
d) Mortgage Debentures – Floating Charges 176
Relief on Statutory Claims 180
EQUITABLE FRAUD 190
Claims of respondents other than BGNV 190
Defence of laches 211
Claim of BGNV 215
CONDUCT OF DIRECTORS 216
Nature of fiduciary duties 216
Pleaded fiduciary duties 237
Duty to act bona fide in the best interests of the company by not causing company to prejudice interests of creditors 238
Duty not to exercise powers improperly 239
Duty not to have conflict of interest 241
Breaches of fiduciary duties 242
Duties to act bona fide in the best interests of the company by not causing company to prejudice interests of creditors and not to exercise powers improperly 242
a) Australian directors 242
b) UK directors 264
c) Equity Trust 268
Duty not to have conflict of interest 269
Summary 270
Barnes v Addy 272
OTHER GROUNDS OF APPEAL AND CROSS-APPEALS 280
Loss of right of rescission by election to affirm 280
Rescission not available because restitutio in integrum not possible 282
Funds released by banks to bondholders not recoverable 282
Securities released by banks not recoverable 283
Ratification 284
Limitation 287
Election 292
Set‑off 292
Remedial Trust 296
Denial of right to elect an account of profits 297
Amount of equitable compensation 298
Liability to taxation 303
Injunctive relief 304
ORDERS 308
Generally 308
Costs 309
Orders of this Court 309
SCHEDULE 1 312
SCHEDULE 2 313
SCHEDULE 3 314

LEE AJA:
INTRODUCTION
1 The basic facts from which the issues in this appeal arise are set out in the reasons of Carr AJA and it is unnecessary to repeat or add to them before dealing with the issues that arise for decision in the appeal and cross‑appeals. In the main, but with some variations or additions, the following reasons adopt the abbreviations, acronyms, initialisms, and defining terms used by his Honour the trial judge set out in Schedules 38.1 and 38.2 of his Honour’s reasons. For convenience and ease of reference amended forms of those Schedules have been included as Attachments 1 and 2 to the reasons of the Court.
2 The case before his Honour concerned the collapse in the early 1990s of a corporate structure known as the Bell group of companies (‘the Bell group’) formed by a corporate entrepreneur, Robert Holmes à Court (‘RHàC’), in the early 1970s. The ultimate holding company of all companies in the Bell group was The Bell Group Ltd (‘TBGL’) of which RHàC was the principal beneficial shareholder. The subsidiaries of TBGL, in the main, were companies incorporated in Australia (‘the Australian companies’), but some companies were incorporated in the United Kingdom (‘the UK companies’) and elsewhere.
3 Expansion of the business operations of the Bell group in that period depended not only upon subscribed and accumulated corporate capital but also substantial borrowings obtained from Australian and international financial institutions (‘the Banks’) and from RHàC and foreign investors as subscribers to ‘convertible subordinated bonds’ (‘Bonds’) issued by TBGL, Bell Group Finance Pty Ltd (‘BGF’) and Bell Group NV (‘BGNV’). Apart from a small overdraft facility provided to West Australian Newspapers Ltd (‘WAN’) the whole of the Bell group indebtedness to the Banks was borne by BGF, Bell Group (UK) Holdings Ltd (‘BGUK’) and TBGL. As at 26 January 1990 that indebtedness stood at approximately $260 million. At the same date the indebtedness of TBGL, BGF and BGNV to the holders of Bonds (‘Bondholders’) was approximately $548 million.
4 In broad terms his Honour had to decide whether the plaintiff Bell group companies and their liquidators (‘the principal respondents’) were entitled to orders that the Banks disgorge moneys obtained from the conversion of Bell group property transferred to the Banks on or about 26 January 1990, the effect of which alienation had been the exclusion of other creditors from access to that property. It was asserted by the respondents that the transfer of that property to the Banks occurred in a situation of acknowledged insolvency.
5 The Banks contested that claim. By a counterclaim based on pleadings of contract and estoppel the Banks submitted that the indebtedness to Bondholders was ‘subordinated’ to the indebtedness to the Banks and that, therefore, in any event, the property alienated to the Banks would have been applied to the discharge of the Banks’ claims even if alienation of that property had not occurred and liquidations of the Bell group companies had been commenced instead.
6 Numerous contests at trial in respect of issues of fact and the construction of documents, required vast amounts of evidence to be examined in detail and resulted in very lengthy reasons for decision being published by his Honour.
7 The ‘subordination issue’ was identified by his Honour as a principal element of the controversy that his Honour had to settle. His Honour said, at [2556], that it ‘permeat[ed] almost every aspect of the case’. His Honour’s reasons for decision applied 440 pages to determination of that question.
8 His Honour accepted significant parts of the Banks’ case on the ‘subordination issue’ but stated, at [4243], that:
had the [B]anks 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 [respondents’] causes of action, would have been unanswerable.
9 The grounds of the cross‑appeal as to whether the ‘subordinated status of the on‑loans as at 26 January 1990’ was duly established, therefore, raised a central issue in the proceeding and it is appropriate to address that question at the outset.
SUBORDINATION
10 It was the Banks’ case that intra‑group loans made by BGNV to TBGL and to BGF from funds BGNV received from the subscriptions by investors to the Bonds it issued were made under contracts of loan in which BGNV agreed to subordinate its right to recover the loans to the rights of other creditors of TBGL and BGF in the event of liquidation of either company.
11 Alternatively, the Banks claimed rights in estoppel by reason of representations, it was said, that TBGL had made to the Banks in respect of the matter of ‘subordination’.
12 As discussed later in these reasons, variations of, or alternatives to, the above were also pleaded but the nub of the Banks’ case was as stated.
13 Before addressing how his Honour dealt with the relevant matters on which issue was joined on the pleadings, it is necessary to provide some background detail in respect of the relationship between the Bonds and the ‘negative pledge reports’ (‘NP Reports’) and to examine his Honour’s understanding thereof, a significant factor in his Honour’s reasoning [4254].
Convertible Subordinated Bonds
14 In the latter part of 1985 TBGL began investigating the merits of issuing Bonds to obtain funds for use in the businesses of the Bell group. TBGL understood that by issuing Bonds to overseas investors, funds could be acquired at acceptable cost provided that payments of interest going offshore were a deductible expense for the Bell group and met the requirements of s 128F of the Income Tax Assessment Act 1936 (Cth) (‘ITAA’) (as it then stood) in respect of the ‘borrowing operation’, and were not subject to withholding tax.
15 TBGL arranged for Bonds to be issued in December 1985, May 1987 and July 1987. The companies involved in the Bond issues were TBGL, BGF and BGNV. With two exceptions, discussed below, the Bonds were issued on European markets to offshore investors.
16 BGNV was incorporated in the Netherlands Antilles on 28 November 1985 as a wholly owned subsidiary of TBGL for the purpose of issuing Bonds to overseas investors [77] and to meet the requirements of s 128F of the ITAA. BGF was incorporated on 11 February 1986, as a wholly owned subsidiary of TBGL, with the intent that BGF act thereafter as the ‘internal financier’ of the Bell group [75, 178]. BGNV became a wholly owned subsidiary of BGF on 25 March 1987 [2781].
17 Other than the Bonds issued directly by TBGL to Heytesbury Securities Pty Ltd (‘Heytesbury Securities’), discussed below, the Bonds consisted of two parts. The first part may be described for the purpose of these reasons as a [Finance] Bond. The face value, or principal amount, of the [Finance] Bond was the sum payable by the issuer of the Bond (‘the Issuer’) to a Bondholder on the date of maturity of the Bond. The second part was a Conversion Bond issued by TBGL which was attached to, and not detachable from, the [Finance] Bond. A Conversion Bond had the same face value, or principal sum, as the [Finance] Bond to which it was attached. Conversion Bonds gave the Bondholder a right to elect, in the period of the Bond, to direct the Issuer to apply the principal sum repayable to the Bondholder on the [Finance] Bond to payment of the balance of unpaid principal of the Conversion Bond to TBGL, thereby obliging TBGL to apply the whole of the principal of the Conversion Bond to acquisition by the Bondholder of shares in TBGL at the price per share (‘Conversion Price’) stipulated in the Bond Issue Trust Deed. Bond entitlements were exercisable by bearer.
18 Upon issue by TBGL each Conversion Bond was paid up to 1 cent per $1,000 of face value (other than in Bond Issue 3 where the paid up amount was £0.01 per £1,000). The balance of principal of a Conversion Bond became payable if the Bondholder exercised a right to elect to convert a Conversion Bond to TBGL shares. If by the maturity date of a Bond the Bondholder had not elected to convert the Conversion Bond to shares in TBGL, TBGL undertook to redeem and cancel the attached Conversion Bond by paying to the Bondholder the amount paid up on the Conversion Bond (i.e. 1 cent per $1,000 of face value).
19 The first issue of Bonds (‘Bond Issue 1’) occurred on 20 December 1985 [309]. The combined principal sum of the issue was $150 million. TBGL and BGNV each issued Bonds worth $75 million. The BGNV‑issued Bonds were sold to overseas investors by underwriters and appointed selling agents and were listed on the Luxembourg Stock Exchange. The TBGL‑issued Bonds did not have an attached Conversion Bond. It was a single Bond which included a right to convert the Bond to TBGL shares. Those Bonds were issued to Heytesbury Securities and were unlisted. Heytesbury Securities was controlled by RHàC, the major beneficial owner of shares in TBGL. The purpose of that placement of Bonds was twofold. First, to protect RHàC’s interests as principal shareholder by providing him with an option to obtain additional TBGL shares by converting the Bonds to TBGL shares and second, to meet the requirements of s 128F of the ITAA. At first it had been intended that RHàC take up $75 million of the $150 million Bonds to be issued offshore by BGNV but upon realisation that exemption from withholding tax would not be granted if an Australian resident subscribed to such a proportion of the Bonds issued, it was determined that RHàC’s requirements were to be met by a separate domestic issue of Bonds by TBGL.
20 Subsequently, Bonds were issued by BGF and BGNV on 7 May 1987 (‘Bond Issue 2’) and by BGNV on 14 July 1987 (‘Bond Issue 3’) [310 ‑ 311]. The principal sum of the Bonds in Bond Issue 2 was $250 million of which $175 million represented Bonds issued by BGNV to offshore investors and $75 million Bonds issued by BGF to Heytesbury Securities. The latter placement had the same purpose as the issue of Bonds to Heytesbury Securities by TBGL in Bond Issue 1. The principal amount of the [Finance] Bonds issued offshore by BGNV in Bond Issue 3 was £75 million. As with Bond Issue 1 the BGNV‑issued Bonds in Bond Issues 2, 3 were sold by underwriters and agents abroad to overseas investors and were listed on the Luxembourg Stock Exchange.
21 The Bonds issued by TBGL and BGF to Heytesbury Securities were originally recorded in short agreements dated 20 December 1985 [TBGL.03393.205] (‘the first agreement’); and 6 May 1987 [TBGL.02127.142; TBGL.02127.142.001] (‘the second agreement’).
22 TBGL was included as a party to the second agreement as issuer of the attached Conversion Bonds and as guarantor of the performance by BGF of its obligation to redeem the Bonds on maturity.
23 Neither agreement included a form of the Bond or set out the terms or conditions thereof. The first agreement provided that the Bonds were identical in all respects to the ‘convertible notes’ issued by BGNV save for differences ‘with respect to rights and other issues, capital distribution and optional redemption as set out in … the Schedule’ to the agreement. The first agreement stated that such differences were ‘in order to comply with the provisions of the [ITAA]’. Why that was so was not made apparent in the content of the Schedule.
24 The differences set out in the Schedule to the first agreement appeared to make the terms of TBGL‑issued Bonds more favourable to Heytesbury Securities as Bondholder than the rights obtained by Bondholders under the terms of the Bonds issued by BGNV. First, the condition for exercise by TBGL of an option to call in and redeem the Bonds in the first five years of the term of the Bonds was more restrictive in that the Schedule provided for the current market price of TBGL shares to be adjusted down for ‘any bonus, rights issues, other cash issues and capital distributions’ making it more difficult for the condition for exercise of the option, namely, that the ‘ordinary share price’ be ‘at least 130 per cent of the conversion price for a period of 30 business days’, to be met. Second, Heytesbury Securities, unlike other Bondholders, had an entitlement to all ‘bonus and rights issues (and) other securities’ issued by TBGL during the term of the Bonds such entitlement to be exercisable upon conversion of the Bonds to TBGL shares. In addition, the Schedule provided Heytesbury Securities with a commission of 2.5% on the principal sum of the Bonds for a ‘management fee’, ‘underwriting fee’ and ‘selling concession’, the effect of which, in the circumstances, was a discount of 2.5% on the cost of the Bonds.
25 The second agreement stated that subject to the terms of the Schedule to that agreement, the terms of the Bonds issued by BGF to Heytesbury Securities were ‘terms which are standard to convertible bond issues in the Euro‑market at this time’. It did not state that differences from those terms were necessary in order to comply with the ITAA. The Schedule to the second agreement provided that Heytesbury Securities was to be paid a commission of 2.5% on the principal sum of the Bonds, but did not repeat the additional benefits recited in the Schedule to the first agreement.
26 It was not until 25 July 1988 that Trust Deeds for the Bonds issued by TBGL [TBGL.00003.003] and BGF [TBGL.00003.002] were executed [313] ‑ [319]. Under those Trust Deeds LDTC was appointed as Trustee for the Bondholder. The Trust Deeds recited that they were restatements of the terms on which the Bonds were held. On a date before 25 July 1988 Heytesbury Securities had transferred its interest in the Bonds to Drayton Capital Pty Ltd (‘Drayton’) and Drayton executed each Trust Deed as the Bondholder. It appears to be assumed that Drayton was controlled by RHàC and that RHàC’s financial commitment to the Bell group was not discharged until 28 July 1988 when the Insurance Commission of Western Australia (‘SGIC’) acquired the Bonds that had been issued by TBGL and BGF to RHàC’s interests.
27 BGNV received the principal amount of the [Finance] Bonds it issued in Bond Issues 1, 2 and 3 less fees and commissions paid to selling agents, underwriters, managers of the Issues, and costs and expenses. The net amounts received were transmitted by BGNV to TBGL in Bond Issue 1 and to BGF in Bond Issues 2, 3 and recorded as loans in the respective accounting records of each company. The differences between the principal amounts of the [Finance] Bonds issued by BGNV and the sums remitted to TBGL and BGF were treated as borrowing costs incurred by BGNV on behalf of TBGL and BGF. Those costs were debited by journal entry to the loan accounts of TBGL and BGF with BGNV. The amount of each loan then matched the principal amount of the [Finance] Bonds issued by BGNV. The amount of the TBGL loan account with BGNV abated with the exercise by Bondholders of the right to convert Conversion Bonds to shares in TBGL. Between 20 December 1985 and 30 June 1988 $14.633 million was added to TBGL share capital and share premium reserves by application of the principal of the Conversion Bonds to the purchase of TBGL shares. At the same time the TBGL loan account with BGNV, $75 million, was reduced by that amount [282.14.0004 Notes 7(e) p 31; 8(i)(a) p 32; 9 p 34; TBGL.03421.050 Notes 7(i)(a) p 21; 8(i)(a) p 22; 22 p 30].
28 Schedule 1 to my reasons sets out details of Bond Issues 1, 2 and 3. Schedule 2 records the progressive liability of BGNV as the Issuer of Bonds. Schedule 3 is a schedule of TBGL’s liability as Issuer and Guarantor in respect of all Bonds issued.
29 Bond Issue Trust Deeds were executed by BGNV as Issuer, TBGL as Guarantor and LDTC as Trustee for the three Bond Issues by BGNV ((1): TBGL.08045.031 [cl 6(A)]; (2): TBGL.04554.001; (3): TBGL.45076.046 [cl 5(A)]). It was provided in each Trust Deed that the rights of Bondholders to be paid the principal sum of the [Finance] Bonds were subordinated to the rights of other creditors of BGNV if BGNV were placed in liquidation. Similarly, Bondholders’ rights against TBGL, as guarantor of the amounts repayable to Bondholders by BGNV were subordinated to the rights of other creditors of TBGL in the event of the liquidation of TBGL, as was a Bondholder’s right to receive from TBGL the paid up amount of a Conversion Bond upon redemption of the Conversion Bond [(1): cl 6(B); (2), (3): cl 5(B)].
30 The liability of TBGL as guarantor was described in the Bond Issue Trust Deeds [(1): cl 5(A), (F), (G), (H); (2), (3): cl 4(A), (F), (G), (H)] as a direct and unconditional obligation by which TBGL accepted liability as if it were the principal debtor, not merely a surety, and as a full liability that applied irrespective of the liability of BGNV or BGF.
31 The Banks’ submissions to his Honour assumed that in addition to subscribing the face value of the [Finance] Bonds, Bondholders also paid the paid up amount of the Conversion Bonds. The Banks relied upon that assumption for a submission that the moneys lent to TBGL (and presumably to BGF) by BGNV contained a component that represented the paid up amount of Conversion Bonds contributed by Bondholders. On the hearing of the appeal counsel for the Banks was asked whether any of the accounting records of TBGL, BGF and BGNV supported that submission but no entry in the accounts to that effect was identified.
32 Counsel for the Banks submitted that moneys contributed by Bondholders as the paid up amount of the Conversion Bonds was ‘subordinated money’ (appeal ts 3494). That description was part of the proposition that underlay all submissions put to his Honour by the Banks on the issue of subordination, namely, that ‘bonds means proceeds’, a proposition examined later in these reasons. The reasoning behind the use of the term ‘subordinated money’ referred to above appeared to be as follows: because the right of a Bondholder redeeming a Conversion Bond from TBGL to recover the paid up amount of a Conversion Bond was, if TBGL went into liquidation, subordinated to the rights of other creditors of TBGL, the paid up amount of a Conversion Bond could be described as ‘subordinated money’. Furthermore, as, so it was put, the paid up amount of the Conversion Bonds was part of the funds lent by BGNV to TBGL (and BGF), it could be assumed that the whole of those loans had been understood by BGNV, TBGL and BGF to be ‘subordinated’ loans at the time they were made. Apart from the fallacy embedded in the description ‘subordinated money’, the following facts show that the foregoing submission cannot be sustained.
33 Under the Bond Issue Trust Deeds [(1):  cl 7(D); (2), (3): cl 6(D)] BGNV and TBGL undertook to issue, and deliver to a stakeholder for Bondholders a Global [Finance] Bond (in the case of BGNV) and a Global Conversion Bond (in the case of TBGL), each to have the same principal sum. The principal sum of the Global Conversion Bond was to be ‘initially paid up as to [1 cent per $1,000 (£0.01 per £1,000 in Bond Issue 3)] principal amount’ upon delivery by TBGL. Under the Subscription Agreements made between TBGL, BGNV and parties undertaking to underwrite and manage the issue of the Bonds (‘the Managers’) [(1): TBGL.00355.012; (2): TBGL.08043.034; (3): 395.22.0034] TBGL and BGNV agreed that BGNV would deliver to the Managers a Global [Finance] Bond for the purposes of the Trust Deeds. That delivery was to be made against payment by the Managers to BGNV of the principal amount of the Global [Finance] Bond less 1.5% discount to selling agents, 1% commission to the Managers and other expenses [cl 6(C); cl 7; cl 6]. There was no provision in the Bond Issue Trust Deeds, or in the Subscription Agreements, for TBGL to receive any payment against delivery of the Global Conversion Bond paid up as to 1 cent per $1,000 (£0.01 per £1,000) of principal.
34 It does not appear from any other material brought to the attention of the court that subscribers to the Bonds made any payment on the Conversion Bonds. If there had been such a payment it would have been necessary for those moneys to be paid to TBGL as part of its capital funds or, if received and retained by BGNV, recorded by BGNV as a loan received from TBGL. There was no record of either event.
35 Indeed the following accounting record in the TBGL journal in respect of Bond Issue 1 demonstrates conclusively that no moneys were remitted to TBGL as moneys subscribed to the Conversion Bonds by Bondholders.
36 The TBGL journal entry [TBGL.02176.184] shows that, as forecast to investors in the Offering Circular [TBGL.08045.024, p 14], $73,025,000, being the net proceeds of the Issue, was remitted to TBGL as a loan. Details were set out in the journal entry of the fees, costs and disbursements deducted from the funds subscribed to the BGNV Bonds, also treated as advances from BGNV to TBGL. The amount of those outgoings was $1.975 million which brought the amount of the loan to $75 million.
37 The journal entry also recorded two further sums brought to account as receipts by TBGL (consistently with the TBGL assurance to the Australian Taxation Office (‘ATO’), described later in these reasons, that BGNV would not obtain an ‘offshore’ profit from the Bond Issue) being interest earned on the funds whilst held as bank deposits between 20 ‑ 23 December 1985 and a foreign exchange gain on that money between the dates of deposit and withdrawal.
38 No part of the moneys accounted for in this journal entry represented a notation of the receipt and disbursement of a sum representing the paid up amount of the Conversion Bonds.
39 Those facts show that as stated in the respective Offering Circulars distributed before each Bond Issue, the Conversion Bonds were issued by TBGL as bonds paid up in the amount specified, and that Bondholders did not contribute that sum.
40 The amount endorsed as paid up on the Conversion Bonds seems to have been treated by TBGL as a nominal sum unnecessary for separate account as to its source from capital reserves pending conversion or redemption of the Conversion Bonds. When Conversion Bonds were converted the entries made in shareholder funds and reserves recorded that the full principal sum of the Conversion Bonds was applied to shareholder funds and share premium reserves [TBGL Annual Report 30 June 1987: TBGL.00008.004, p 31 Note 7(e), p 32 Note 8(i)(a); TBGL Annual Report 30 June 1988: TBGL.03421.050, p 21 Note 7(i)(a), p 22 Note 8(i)(a)].
41 It is obvious that the paid up amount of the Conversion Bonds had no relevance to any proposition that the loans made by BGNV to TBGL and BGF included a term that BGNV’s right to recover the loans was subordinated to the rights of other creditors of TBGL and BGF if those companies were placed in liquidation.
NP Reports
42 Between July 1983 and March 1987, Negative Pledge Agreements (‘NP Agreements’) were made between TBGL and nominated subsidiaries of TBGL (together ‘the TBGL NP Group’) of the one part and members of the Banks of the other [164]. Under the NP Agreements the participating TBGL subsidiaries were described as ‘Indemnifying Subsidiaries’. From time to time Supplemental Agreements added TBGL subsidiaries as Indemnifying Subsidiaries pursuant to cl 12.2 of the Second Schedule of the NP Agreements.
43 Under that clause TBGL undertook to have all wholly owned subsidiaries incorporated in Australia join the NP Agreements as Indemnifying Subsidiaries. Pursuant to cl 9 of the Second Schedule of the NP Agreements, a wholly owned subsidiary of TBGL, incorporated outside Australia, could elect to join the NP Agreements as an Indemnifying Subsidiary subject to two provisos in cl 9 being satisfied.
44 In terms, the NP Agreements executed after the date of incorporation of BGNV contained a warranty by TBGL that BGNV was an Indemnifying Subsidiary and that it was a party to the NP Agreements (Second Schedule, cl 12.1). However, BGNV did not execute any of those NP Agreements nor was it identified in the First Schedule to those agreements as a party to the agreements as an Indemnifying Subsidiary. Although BGNV could have become an Additional Indemnifying Subsidiary bound by the NP Agreements by executing a supplemental agreement for that purpose pursuant to cl 9 of the Second Schedule, that step was not taken.
45 Under the NP Agreements, NP Reports were required to be presented to the Banks each six months. The NP Reports informed the Banks whether ratio limits prescribed in the NP Agreements with regard to assets and liabilities of the TBGL NP Group were being met.
46 The NP Agreements defined ‘Shareholders Funds’ as ‘all paid up capital and reserves appearing in the Latest Audited Consolidated Balance Sheet of [the TBGL NP Group]’ (cl 1.1). At all material times Coopers & Lybrand (‘C&L’) were the accountants and auditors of TBGL. Accounts were audited as at 30 June each year for publication in the TBGL Annual Report. It may be assumed that the parties to the NP Agreements contemplated that a balance sheet prepared at 31 December by C&L as accountants satisfied the requirements of the phrase ‘Latest Audited Consolidated Balance Sheet’.
47 The definition of ‘Total Liabilities’ applied a more expansive concept of shareholder funds by excluding ‘paid up share capital, reserves of any nature or undistributed profits of [the TBGL NP Group]’ (cl 1.1). The principal definition of ‘Total Liabilities’ was ‘the aggregate amount (as disclosed by the Latest Audited Consolidated Balance Sheet) of all secured and unsecured liabilities of [the TBGL NP Group]’.
48 As shown later in these reasons the consolidated balance sheets of the TBGL NP Group between 31 December 1985 and 31 December 1987 treated the amount described as ‘Convertible Bonds’ as part of ‘Shareholders Funds’ for the purposes of the NP Reports and on that basis excluded the amount of that ‘equity’ from the amount of ‘Total Liabilities’.
49 His Honour, at [3223] ‑ [3224], noted that the Banks were bound by the terms of the NP Agreements to receive NP Reports based on accounts prepared by C&L if those accounts did not include liabilities to redeem the Bonds as part of the ‘Total Liabilities’ of the TBGL NP Group.
50 On 30 July 1987 the NP Agreements were replaced by the NP Guarantee [2801]. Termination of the NP Agreements required the Banks to provide formal releases from the covenants of indemnity to all Indemnifying Subsidiaries. Those releases were completed at the end of September 1987.
51 The NP Guarantee restated the ratios to be maintained between assets and liabilities as now defined and redefined the TBGL NP Group as TBGL and ‘Australian Subsidiaries’ (cl 1.01). The expression ‘Australian Subsidiaries’ did not exclude, necessarily, a foreign subsidiary of TBGL. The terms of cl 15.02 of the NP Guarantee permitted TBGL, at any time, to nominate BGNV as an ‘Australian Subsidiary’.
52 ‘Shareholders Funds’ was defined as ‘Total Tangible Assets’ less ‘Total Liabilities’ (cl 1.01). The term ‘Total Tangible Assets’ was defined, generally, as the aggregate of book values of ‘Tangible Assets’ of TBGL NP Group on a consolidated basis. ‘Tangible Assets’, in broad terms, was defined as all assets other than intangible assets according to accounting principles generally accepted in Australia, but subject to the inclusion of intangible assets valued by an independent valuer approved by the auditor (cl 1.01).
53 ‘Total Liabilities’ was now defined as the aggregate amount of all liabilities of the TBGL NP Group on a consolidated basis being liabilities classified as such under accounting principles generally accepted in Australia, including contingent liabilities. The direct inclusion of a contingent liability was a significant change from the definition of ‘Total Liabilities’ that applied under the NP Agreements in which the only contingent liability included was that for which provision for an estimated liability had been made in the consolidated balance sheet. A further significant change from the previous definition in the NP Agreements was the exclusion of ‘non current Subordinated Debt’ from ‘Total Liabilities’ (insofar as that debt would otherwise be included in the aggregate). ‘Subordinated Debt’ was defined as ‘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 Guarantor and/or the Australian Subsidiaries’ (cl 1.01).
54 ‘Borrowing’ was defined to include the ‘obtaining or undertaking of any financing liability’ (cl 1.01).
55 It followed from the foregoing that the liability of TBGL (as guarantor of the obligations that BGF and BGNV undertook as issuers of Bonds) being a liability that would otherwise have been included within Total Liabilities for the purposes of the NP Guarantee was expressly excluded from Total Liabilities as a ‘non‑current Subordinated Debt’. (See: appeal ts 3234 ‑ 3236.)
Banks’ Pleadings of Subordination in Contract and Estoppel
56 It was not the Banks’ case that BGNV was a mere ‘cipher, agent or nominee’ of TBGL or BGF in the borrowing transactions undertaken by BGNV in the Bond Issues (cf Re Polly Peck International plc (in administration) (No 4) [1996] 2 All ER 433, 440 (Polly Peck)). The Banks accepted that all transactions in which TBGL, BGF and BGNV were involved in respect of the Bond Issues took place with legal effect according to the terms recorded in relevant documents and arrangements.
57 The Banks’ pleadings of contract and estoppel were set out in [PLED.010.001, pars 11EA‑11ER]. The Banks pleaded that BGNV agreed with TBGL and BGF, in the contracts of loan made between those companies (described by his Honour as ‘contracts inter se’), that the contracts contained a term to the effect that BGNV’s right to recover loans made to TBGL, or BGF, was subordinated to the rights of other creditors of those companies in the event of either of those companies being placed in liquidation. There was no direct evidence of such a contractual term and the existence thereof was said to be a matter of inference, or implication, made necessary by the circumstances [pars 11EA(a)(1); 11EF; 11EG].
58 The Banks further pleaded that there were contracts (described by his Honour as ‘contracts inter partes’) made in respect of Bond Issues 1, 2 between TBGL and the Banks that ‘the liabilities of TBGL [and BGF] (or TBGL and others) … arising from the raising and deployment of funds’ by those Bond Issues would, on a liquidation of TBGL and BGF, be subordinated to the liabilities of those companies to the Banks [pars 11EA(a)(3); 11EK ‑ 11EP].
59 His Honour rejected the pleading of contracts inter partes. The Banks appeal from that finding. His Honour upheld the pleading of contracts inter se, but found that the Banks lacked capacity to enforce those contracts. The Banks appeal from the latter finding and the respondents cross‑appeal from the finding that contracts inter se contained a term subordinating BGNV’s rights.
60 With regard to the pleading of estoppel, it was submitted that TBGL represented to the Banks, ‘which induced the assumption held by the Banks’ that the ‘liabilities of TBGL and BGF pursuant to the fund raising arrangements’ were subordinated [pars 11EA(a)(4); 11ED(72); 11ER].
61 Alternatively, it was pleaded that BGNV was estopped as against TBGL and BGF from asserting that the ‘on‑loans … [were] unsubordinated’ [pars 11EA(a)(2); 11EJ].
62 The pleadings of estoppel depended upon the same material relied upon to support the pleadings of contract.
63 His Honour upheld the Banks’ pleading of estoppel against TBGL but found it unnecessary to reach a conclusion on the estoppel that the Banks claimed that TBGL and BGF could assert against BGNV. The respondents cross‑appeal from the finding of estoppel and the Banks, by notice of contention, submit that his Honour erred in failing to make a finding on the pleading that TBGL and BGF could assert an estoppel against BGNV.
Banks’ Pleaded Representational Documents
64 His Honour was satisfied that, as pleaded by the Banks, grounds for the findings in contract and estoppel could be found in representations said to have been made in the following documents:
(a) Letters dated 11 December 1985 and 15 April 1987 from TBGL to the Banks [PLED.010.001, par 11ED(17), (43)];
(b) Negative Pledge Reports (‘NP Reports’) [PLED.010.001, par 11ED(62)];
(c) Negative Pledge Information Packages (‘NP Information Packages’) [PLED.010.001, par 11ED(66), (68)];
(d) Lloyds Bank Information Memorandum April 1986 (‘Lloyds Information Memorandum’) [PLED.010.001, par 11ED(27)];
(e) Proposal for Negative Pledge Guarantee (‘NP Guarantee’) [PLED.010.001, par 11ED(59), (59A);
(f) Three Year Business Plan May 1988 (‘Business Plan’) [PLED.010.001, par 11ED(69)].
Banks’ Pleaded Representations
65 The representations said to arise out of the foregoing documents were pleaded by the Banks as follows:
(a) In the letter dated 11 December 1985 TBGL represented that:
(i) ‘the liabilities of TBGL as a member of the [TBGL NP Group], arising from the raising and deployment of moneys in and about [Bond Issue 1] were, or would be, subordinated to the liabilities of TBGL to the [Banks]’ [PLED.010.001, par 11ED(17)(i)];
(ii) ‘[B]ondholder debt was, or would be, subordinated and ranked, or would rank, behind existing and future [B]ank borrowings of the [TBGL NP Group]’ [PLED.010.001, par 11ED(17)(h)];
(iii) ‘[the Bonds issued by TBGL and the Bonds issued by BGNV in Bond Issue 1] were, or would be, identical in terms of effective subordination’ [PLED.010.001, par 11ED(17)(d)].
(aa) In the letter dated 15 April 1987 TBGL represented that:
(i) ‘the liabilities of TBGL and BGF as members of [TBGL NP Group] arising from the raising and deployment of moneys in and about [Bond Issues 1, 2 or, alternatively, Bond Issue 2] were, or would be, subordinated to the liabilities of [TBGL and BGF] to the [Banks]’ [PLED.010.001, par 11ED(43)(k)];
(ii) ‘[B]ondholder debt [in Bond Issue 2] was, or would be, subordinated and ranked, or would rank, behind existing of future [B]ank borrowings of the [TBGL NP Group] in the same manner as [Bond Issue 1] was so subordinated and was so ranked’ [PLED.010.001, par 11ED(43)(j)];
(iii) ‘[the Bonds issued by BGF and the Bonds issued by BGNV in Bond Issue 2] were, or would be, identical in terms of effective subordination’ [PLED.010.001, par 11ED(43)(f)].
(b) The NP Reports from TBGL to the Banks ‘made representations to the Banks … consistent only with the exclusion of liabilities of companies in the [TBGL NP Group] to BGNV in the calculation of Total Liabilities’ [PLED.010.001, par 11ED(63)].
(c) The NP Information Packages from TBGL to the Banks ‘represented that the funds raised pursuant to the issues of … [Bonds] … were, and could be treated as, a form of shareholders’ funds’ [PLED.010.001, par 11ED(67), (68)].
(d) The Lloyds Information Memorandum, prepared from information provided to Lloyds by TBGL, ‘represented that the liabilities of TBGL … arising from the raising and deployment of moneys in and about [Bond Issue 1] were subordinated to the liabilities of TBGL to [the Banks]’ [PLED.010.001, par 11ED(30)(g)].
(e) ‘During the course of the negotiation of the [proposed NP Guarantee] … TBGL represented to the Banks that the [B]onds had created non‑current subordinated debt of companies within the [TBGL NP Group]’ [PLED.010.001, par 11ED(59A)]. [In the further and better particulars of this pleading provided by the Banks the source of the foregoing representation was confined to a letter from TBGL to various of the Banks dated 14 May 1987.]
(f) In the ‘Business Plan’ TBGL represented that ‘the [B]ondholders ranked behind the [Banks] in respect of recovery of moneys from assets of the Bell [g]roup’ [PLED.010.001, par 11ED(70)(e)].
Onus of proof on Banks’ Pleadings of Contract and Estoppel
66 An important part of the respondents’ pleaded case was the challenge to the validity of the ‘Transactions’, including the BGNV Subordination Deed, together said to comprise a ‘Scheme’ by which the Banks obtained rights over property of the Bell group able to be applied to recovery of moneys owed to the Banks by BGF, BGUK and TBGL.
67 The respondents asserted that the BGNV Subordination Deed was an advantage obtained by the Banks at a time when the Banks had knowledge that TBGL, and members of the Bell group, were either insolvent or facing insolvency. The BGNV Subordination Deed was executed by the Banks (by Westpac as the ‘Security Agent’) and TBGL, BGF, and BGNV on 31 July 1990. The alleged advantage obtained by the Banks from the execution of the BGNV Subordination Deed, in which BGNV agreed to its claims against TBGL and BGF being subordinated to those of the Banks, was the priority accorded to the Banks’ claims as creditors of TBGL and BGF over the claims of BGNV as a creditor of those companies.
68 As noted above the Banks pleaded that at all material times the claims of BGNV against TBGL and BGF in a liquidation of those companies, had been subordinated to the claims of the Banks as creditors of TBGL and BGF either by an express term in the contracts of loan made between those companies or by operation of an estoppel that prevented BGNV, TBGL and BGF contending otherwise against the Banks.
69 His Honour at [2701] ‑ [2704] held that the Banks bore the onus of proving their pleading and rejected the Banks’ argument that the respondents had the onus of disproving the Banks’ case as part of the requirement that the respondents prove that the Banks obtained an advantage from the execution of the BGNV Subordination Deed.
70 By notice of contention filed in response to the respondents’ cross‑appeal, the Banks repeated their submissions on the issue of onus of proof.
71 If the Banks had limited their defence and counterclaim to a bare denial that advantage was obtained by the Banks from execution of the BGNV Subordination Deed, that pleading would have been insufficient to disclose the intention of the Banks to present a case based on a claim of prior subordination of rights effected by contract or estoppel. On the material facts pleaded to that point no issue of prior subordination of the rights of BGNV as a creditor of TBGL and BGF would have been raised against BGNV. Necessarily the Banks had to extend the pleading of the defence and counterclaim to assert a positive case based on facts that raised the claim to be made by the Banks that subordination of BGNV’s rights as a creditor of TBGL and BGF had been effected already by contract or estoppel prior to execution of the BGNV Subordination Deed. It followed that the course of the pleadings raised either a direct or an evidentiary onus that the Banks prove the facts they alleged in respect of subordination.
72 His Honour correctly so held and the notice of contention of the Banks in response to the respondents’ cross‑appeal on this question cannot be sustained.
73 It is now necessary to describe in more detail, and to analyse, the pleaded elements of the Banks’ case on the subordination issue.
Analysis of Banks’ Pleaded Representational Documents
Letters dated 11 December 1985 [214.02.0084.4], 15 April 1987 [048.03.0063.1] from TBGL to the Banks
74 The relevant passages in his Honour’s reasons in respect of the pleaded representations said to be contained in these documents appear in [2845] ‑ [2849], [2864] ‑ [2866] and [3569] ‑ [3586].
75 Insofar as representations are said to have been made by TBGL in these letters, it is to be noted that the representations are confined to Bond Issues 1, 2. Where the representation pleaded is that the respective liabilities of TBGL and BGF arising from the raising of moneys in and about Bond Issues 1, 2 were, or would be, subordinated to the liabilities of TBGL and BGF to the Banks that representation recited an existing fact. The liability of TBGL as the Issuer of Bonds and as guarantor of the obligations of BGNV and BGF as Issuers of Bonds was a liability in respect of which the Bondholders had agreed to subordinate their rights to the rights of other creditors of TBGL, which included the Banks. Similarly in respect of the liability of BGF as the Issuer of Bonds, the Bondholder had agreed to subordinate its rights in respect of that liability to the rights of other creditors of BGF which also included the Banks.
76 Similarly the further pleaded representation that ‘[B]ondholder debt’ was subordinated to existing or future borrowings from the Banks was also a matter of fact where the borrowers from the Banks were TBGL or BGF and where ‘[B]ondholder debt’ was understood to be the liability of TBGL or BGF to redeem Bonds as Issuers thereof, or the liability of TBGL as guarantor of the obligations of BGF or BGNV as the Issuers of Bonds.
77 The foregoing representations did not establish a right to relief pleaded by the Banks. Therefore, the claims of the Banks in contract and estoppel rested on the remaining pleaded representations said to be contained in the letters, namely, that the ‘deployment of moneys in and about’ Bond Issues 1, 2 were, or would be, subordinated to the liabilities of TBGL and BGF to the Banks and that BGNV Bonds in Bond Issues 1, 2 were, or would be, ‘identical in terms of effective subordination’ to the Bonds issued to Heytesbury Securities.
78 As discussed later in these reasons, in the course of the trial these claims of the Banks became transmuted into the paraphrases ‘bonds means proceeds’ and ‘effective subordination’.
79 With regard to the reliance of the Banks on a representation said to have been made by TBGL that Bonds issued to Heytesbury Securities were identical with Bonds issued by BGNV ‘in terms of effective subordination’, that argument of the Banks proceeded as follows, as his Honour understood it, at [3250]: because on the liquidation of TBGL or BGF the right of Heytesbury Securities to recover moneys repayable under the Bonds issued to it by TBGL and BGF in Bond Issues 1, 2 was subordinated to the rights of other creditors of TBGL and BGF and the letters from TBGL stated that the Bonds issued by TBGL, BGF and BGNV were in identical terms, it should be concluded that it was represented by TBGL that the right of BGNV to recover loans made to TBGL and BGF from moneys subscribed to the Bonds issued by BGNV was subordinated to the rights of other creditors of TBGL and BGF on liquidation of those companies.
80 The words ‘in terms of effective subordination’ were the words of the pleader. Neither letter contained an expression in those terms and there was no evidence of any discourse between the parties that used or relied upon that expression and able to provide a context that provided a secondary meaning to terms used in the correspondence.
81 In short it was a device used in support of an argument for application of a construction to a document that was not otherwise apparent on the face of the contents of the document.
82 As with the words ‘bonds means proceeds’ the expression ‘effective subordination’ was treated by his Honour as a concept able to be applied as a general aid to construction of the documents that were relied upon by the Banks in their pleadings and as an implied addition to the pleaded representations said to be contained therein [3647].
83 As set out in the reasons that follow, resort to the foregoing concepts pre‑ordained an impermissible process of construction by his Honour in determining the meaning of any representations contended to have been made by TBGL in the documents transmitted to the Banks by TBGL and nominated by the Banks as the source of the representations pleaded, or as those disclosing the contractual term asserted by the Banks in their pleading.
84 The letters forwarded to the Banks by TBGL dated 11 December 1985 and 15 April 1987 did not seek approval from the Banks for TBGL or its subsidiaries to issue Bonds in Bond Issues 1, 2. In each case issue of Bonds was already underway. Completion of that process was not conditioned upon the favourable response of the Banks. The letters requested the Banks to assent to the forecast treatment of the Bonds as equivalent to equity for the purpose of the NP Agreements, that is to say, as an addition to the capital base of TBGL and not as an increase in the gross debt of the TBGL NP Group.
85 As noted by his Honour, at [2720] ‑ [2721], it was the intention of the management of TBGL that the issued Bonds be included in TBGL accounts as part of TBGL shareholder funds. The Bonds were so treated in the first audited accounts prepared thereafter, namely, the TBGL Annual Report 30 June 1986 [TBGL.03474.079] and in the unaudited balance sheet for the TBGL NP Group prepared for the first NP Report presented after the letter dated 11 December 1985, namely, the NP Report 31 December 1985 [TBGL.00808.036]. As recorded earlier his Honour, at [3223] ‑ [3224], posited that the terms of the NP Agreements made it unnecessary for TBGL to seek approval from the Banks for the Bonds to be so treated if C&L were satisfied that the TBGL accounts could be prepared on that basis. That point is of some importance in the context of the Banks’ pleadings of contract and estoppel.
86 In respect of Bond Issues 1, 2, the management of TBGL sought formal acknowledgement from the Banks that the NP Reports would be prepared treating the issued Bonds as TBGL equity. With regard to Bond Issue 3, which took place on 14 July 1987, TBGL did not seek that acknowledgement.
87 Treatment of subscriptions to the Bonds in the accounts of TBGL as equivalent to subscriptions to the equity of TBGL resulted in the liabilities of TBGL, BGF and BGNV, as issuers of the Bonds, being eliminated from TBGL consolidated accounts. The decision of C&L to accept that treatment had to be based on the joint confidence of the directors of TBGL and the auditors that the Convertible Bonds attached to the Bonds would be used by Bondholders to obtain TBGL shares in lieu of payment to the Bondholders of the moneys payable on redemption of the Bonds.
88 The fact that a Bondholder’s right to recover moneys from BGNV (as Issuer), or TBGL (as Guarantor), may become subordinated to the rights of other creditors of BGNV or TBGL in the event of the liquidation of those companies, was not treated by C&L as the basis on which, in advance of the exercise by Bondholders of the right to elect to apply moneys subscribed to the Bonds to the acquisition of TBGL shares, subscriptions to the Bonds could be treated in the accounts of TBGL as equivalent to investment in TBGL share capital. Of course, the latent risk to Bondholders in the potential subordination of their right to recover moneys subscribed to the Bonds, and the length of the period to elapse before the Bonds would be redeemed (10 years), may have been regarded by accountants and auditors as factors that could encourage Bondholders to elect to convert the Bonds to TBGL shares, particularly if the ‘Conversion Price’ remained below the market price of TBGL shares, but that potential subordination was not in itself the ground on which investment in the Bonds was treated as an investment in TBGL equity.
89 From TBGL’s point of view the acceptance by the Bondholders of the requirement that in the event of the liquidation of TBGL the right of Bondholders to recover Bond redemption moneys from TBGL as guarantor would be subordinated to the rights of other creditors of TBGL, would have been regarded as a necessary counterpart to Bondholders being treated by TBGL as deferred shareholders. And Bondholders would have regarded such subordination of their rights as an additional consideration given by them for acquiring the Conversion Bonds as an attachment to the [Finance] Bonds.
90 As his Honour accepted, at [3054] and [3060], Bondholders also provided consideration for the attachment of the Conversion Bonds (otherwise described as the grant of deferred equity) by agreeing to accept a lower rate of interest than that payable on bonds to which no convertible bonds were attached. (See Memo: TBGL (Cahill) to C&L, 17 July 1987 [TBGL.00918.022]). Acceptance of subordination was an acknowledgement by the Bondholders of the equivalence of their position to that of deferred shareholders. It also emphasised that Bondholders regarded it as a benefit to be able to elect to apply the moneys payable on redemption of the Bonds to the acquisition of shares in TBGL at the ‘conversion price’ per share stipulated in the Bond Issue documents. Exercise of that election would have resulted in the replacement of the potential subordination of their rights as creditors of BGNV and TBGL with the subordinated interests they would obtain in the net worth of TBGL as shareholders of TBGL.
91 Although it may be accepted that the Banks would have been comforted by advice that rights of Bondholders would be subordinated to the rights of unsubordinated creditors in the event of a liquidation of either BGNV, TBGL or BGF, the agreement of the Banks to have accounting calculations under the NP Agreements based on an assumption that moneys subscribed to the Bonds could be treated as subscriptions to the share capital of TBGL, required the Banks to make, or rely upon, the assumption made by C&L, namely, that Bondholders could be regarded as deferred shareholders, notwithstanding that an election had not yet been made by the Bondholders to exercise the right to acquire shares in TBGL pursuant to the Conversion Bonds. Of course, as noted above, under the NP Agreements the Banks had agreed that the audited accounts of the Bell group governed the content of the NP Reports to the Banks.
92 The two letters to the Banks were in straightforward terms and were consistent with the information provided in circulars to potential investors or subscribers to the Bonds.
93 The relevant part of the letter dated 11 December 1985 read as follows:
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.
94 A summary of the terms of the Bond Issue was attached to the letter and it set out, inter alia, that Bondholders’ rights were subordinated to the rights of unsubordinated creditors of the Issuer of the Bonds ‘in the manner provided in the Trust Deed’.
95 Relevantly the letter dated 15 April 1987 stated:
[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 price 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.
96 A copy of the ‘offering circular’ was enclosed with the letter. It stated that the last sale price of ordinary shares of TBGL on 8 April 1987 was $10.70. It also stated that the rights of Bondholders were subordinated to unsubordinated creditors of BGNV in the manner provided in the Trust Deed.
97 On the face of the two letters there was no representation as to the terms of any inter‑company loans to be made by BGNV from funds obtained from subscriptions to the Bonds.
98 His Honour, at [3580] and [3586], however, found that in respect of each letter 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’ and that the letters contained the pleaded representation, namely, that ‘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 [Banks]’.
99 The reasoning applied by his Honour included a conclusion, at [3582], that there was an ‘irresistible inference’ to be drawn from the letter dated 11 December 1985 ‘that the issues, being subordinated, would rank behind bank debt’. The support for such an ‘irresistible inference’ was said to be the act of sending the letter to the Banks because ‘it would make no sense to write such a letter if the class of creditors was not to include the banks’.
100 With respect to his Honour, the assertion of the existence of an ‘irresistible inference’ disclosed error. The letter to the Banks explained that the rights under the Bonds were being treated by the Bell group as equivalent to rights in the equity of TBGL and how the ‘balance sheet ratios’ would be affected accordingly. As noted already it may not have been necessary under the terms of the NP Agreement for TBGL to seek any assent from the Banks to that treatment of the Bonds if the auditors were satisfied to proceed in that manner. But such abundance of caution did not permit a conclusion, or raise an ‘irresistible inference’, that the letter could be construed, contrary to its plain terms, to contain a representation unsupported by those terms.
101 For the reasons set out below his Honour erred in concluding that the inference drawn by his Honour was available from the terms of either letter.
102 Insofar as the letter dated 11 December 1985 referred to subordination it did so in the context of discussion of the probability of conversion of the Bonds to equity. The reference to ‘subordinated debt’ was part of the identification of elements that supported the proposition being put by TBGL, namely, that it was likely that the Bonds would be converted to TBGL shares and that, therefore, the Bonds should be regarded as equity. Primarily, the anticipation of conversion of Bonds to shares was said to be ‘[b]ased on past price performance of [TBGL’s] shares’. Indicia said to justify the expectation that investors would exercise the right to convert the Bonds to TBGL shares were summarised in the words, ‘the Bonds are a subordinated debt which will not be payable for 10 years with a strong likelihood of being converted’.
103 A Bondholder could transfer the risk of subordination, and any disadvantage in the length of the term of the Bonds, by selling the Bonds or, alternatively, by exercising the right to convert the Bonds to shares in TBGL. The apprehended future financial benefit available to a Bondholder converting Bonds to shares at a conversion price below market price was said to point to the strong likelihood of exercise of the election to convert and to be sufficient, in itself, to justify treating the Bonds as equity.
104 Although, as discussed earlier, it may not have been necessary under the NP Agreements for TBGL to obtain approval from the Banks to treat the Bonds as equity, the purpose of the letters, on their face, was to ensure that the Banks raised no objection to the Bonds being treated as equivalent to the acquisition of additional share capital by TBGL. The letter purported to say no more about ‘subordination’ than was set out in the summary of the Bond issue details attached to the letter, namely, that BGNV’s obligations to the Bondholders were subordinated to the rights of other unsubordinated creditors of BGNV in the manner provided in the Trust Deed.
105 His Honour, at [3113] ‑ [3114], suggested that the contents of a memorandum dated 3 September 1985 [TBGL.00930.122] prepared by Griffiths as Bell group Treasurer for the consideration of RHàC provided support for the construction his Honour applied to the letters. That memorandum discussed risks and advantages in raising capital for the Bell group by issuing convertible subordinated bonds offshore. His Honour considered that the construction he applied to the letters was consistent with the purpose of TBGL as understood by the author of that memorandum.
106 His Honour then found the foregoing ‘understanding’ to be the actual subsequent intent of TBGL in representations his Honour found to be contained in the letters from TBGL to the Banks dated 11 December 1985 and 15 April 1987.
107 The internal memorandum of 3 September 1985 was prepared at an early stage of the consideration of the use of bonds. The decision that TBGL arrange the issue of bonds was not made by the directors until 8 October 1985 and approval from shareholders was not obtained until 12 November 1985.
108 By 11 December 1985 the ‘understanding’ of TBGL as to the treatment of the bonds as equity had developed well beyond the limited consideration displayed in the Treasurer’s memorandum. That memorandum did not address the entitlement to have the bonds treated as equity based on the degree of likelihood of the bonds being converted to TBGL shares. It was that prospect that was the main thrust of the letters of 11 December 1985 and 15 April 1987 and which, incidentally, brought into play the terms of the NP Agreements which provided that accounting principles applied by the auditors were to govern the extent of the obligations of the TBGL NP Group to the Banks under the NP Agreements.
109 The relevant passage extracted by his Honour at [3114], from the memorandum as that which was said to contain the ‘understanding’ relied upon by his Honour, read as follows:
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.
110 To understand the concept of subordination being suggested in that memorandum, and before any conclusion could be drawn from it as to the intent of any subsequent representation to the Banks by TBGL, it was necessary to have regard to the whole of the relevant passage, which continued as follows:
The 10 year term should enable [TBGL] 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 on the balance sheet or cashflow to prevent the gearing from becoming too high.
111 The Banks would have been quite familiar with subordination according to its ordinary meaning and as at 3 September 1985, as the memorandum appeared to recognise, a more unusual concept of subordination was being suggested for TBGL to put to the Banks.
112 The Treasurer would have understood that whilst the businesses of the companies of the Bell group continued as going concerns the right of a prospective bondholder to receive the amount due on redemption of a bond by TBGL would not be a right subordinated to rights of other creditors of TBGL, and that it would be in TBGL’s discretion whether bonds were redeemed ahead of maturity and ahead of repayment of bank debt.
113 On their face the words ‘achieve subordination for 3 to 4 years at least’ (as used in that memorandum) were not addressing a prospect of being able to have the lender of the funds subscribed to the bonds agree to have the right to recover the funds subordinated to rights of other creditors of the borrower in the event that the borrower was placed in liquidation at some future date. The words raised a different concept of subordination, one of current operation, sufficient to provide comfort to the Banks that capital introduced to the Bell group by the issue of bonds would be kept available to the Bell group ‘for 3 to 4 years at least’.
114 The memorandum appeared to imply that it could be suggested that for ‘3 to 4 years at least’ of the 10 year term of the Bonds the funds would not be removed from the Bell group to be applied to redemption of bonds ahead of the debts owing to the Banks by the TBGL NP Group.
115 Under the Bond Issue documents the option provided to the Issuer to redeem Bonds was not exercisable (save for ‘Tax Reasons’) until two years had elapsed and for the next three years was subject to payment of a premium of 4% on the face value of the Bonds (reducing by 1% per year) and was only exercisable in that time if the price of TBGL ordinary shares for a prescribed period of 30 days was at least 130% of the relevant ‘conversion prices’ under the Bonds. Thereafter, the Bonds were redeemable at any time at face value. These provisions either prevented, or imposed substantial disincentives against, the exercise of the option to redeem Bonds by the Issuer in the first five years of the term of the Bonds, unless the option was used as a lever to encourage conversion and complete commitment of funds to TBGL capital. Such limitations may have been regarded as sufficient to dissuade the Issuer from taking any steps to redeem the Bonds in the first ‘3 to 4 years at least’ of the term of the Bonds.
116 Although Bond Issue 3 provided a put option to Bondholders allowing them to demand that the Bonds be redeemed, that option could not be exercised until five years of the term of the Bonds had elapsed.
117 It follows that his Honour’s conclusion (that this memorandum provided evidence of a TBGL intention conformable with the representations found by his Honour to be contained in the letters to the Banks dated 11 December 1985 and 15 April 1987) was not available on an ordinary reading of the document.
118 But more than that the Treasurer’s memorandum of 8 October 1985 [TBGL.00951.001.017] prepared for the information of directors of TBGL at the meeting of directors held on that day (the meeting at which the directors resolved to approve the issue of bonds) did not present ‘subordination’ as the ‘key to the issue’ and in fact made no reference to subordination in recommending that the proposed issue of bonds proceed.
119 At [3226] ‑ [3243] his Honour set out his reasons for concluding that ‘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’ [3239] and that ‘the intention of the contracting parties, as manifested by their conduct, was to make the on‑loans on a subordinated basis’ [3243].
120 The reasons provided for those conclusions appear to be based on errors of fact as discussed below.
121 To ground the foregoing conclusions his Honour stated at [3228] that the ‘[B]onds, as a debt instrument sound in money … The conversion bonds, on the other hand, do not sound in money’.
122 This statement revisited a comment made by his Honour at [2982], ‘in the [NP Reports] … the [B]onds are treated as sounding in a monetary liability’ and at [3230] ‑ [3231]:
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.
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. …
123 His Honour appears to have overlooked the composite rights entailed in the Bonds and to have focussed on their function as debt instruments. Indeed, as previously noted, his Honour was unable to accept that Bonds could be regarded properly as equity ‘be it deferred, quasi or any other equally inapt description’ [3231].
124 For that reason his Honour appears to have restricted his consideration to the ‘money sum’, or debt component of the Bonds, as the subject for treatment as ‘equity’ [3231].
125 But that approach did not properly address the dual structure of the Bonds for which treatment as equity was proposed.
126 It was not correct to say that the letter dated 11 December 1985 was based on a concept of ‘equity’ that did not represent shareholders funds but instead represented a component of ‘subordinated debt’.
127 His Honour accepted that there was ‘imprecision in describing the money sum for which the debt instrument stands as something that can be regarded as “equity” ‘ [3231]. However, his Honour then stated that such an approach to construction of the letter of 11 December 1985 was justified as the subject of the ‘request for equity treatment’ was ‘an amount of $75 million’ and that figure did not correspond with ‘the obligation of TBGL to redeem the conversion bond’, nor ‘be explained by any other aspect of the conversion bonds’.
128 First, it should be noted that the letter of 11 December 1985 was not a request to treat an amount of $75 million as equity (which sum his Honour regarded as the sum lent by BGNV to TBGL: see [3238]). The letter sought formal accord from the Banks for the treatment of $150 million as equity being the sum of the Bonds issued by BGNV and TBGL. That was the amount treated as equity in the TBGL NP Group balance sheet at 31 December 1985 [TBGL.00808.036] and in the audited Consolidated Balance Sheet in the TBGL Annual Report 30 June 1986 [TBGL.03474.079].
129 Second, his Honour’s reasons, set out in [3227] ‑ [3232], where his Honour separated Conversion Bonds from [Finance] Bonds and stated that the former ‘[did] not sound in money’, misunderstood the operation of the process of conversion provided by the Bond Issue Trust Deeds discussed below.
130 Furthermore, by introducing consideration of TBGL’s obligation to redeem a Conversion Bond, his Honour misunderstood the composite nature of the Bonds and the request being addressed to the Banks in the letter of 11 December 1985 and misdirected himself on the matter of construction of the letters.
131 His Honour stated, at [3232], that ‘[he did] not shy away from the finding that while the likelihood of conversion may have been an important reason [in the justification of the prospect of conversion of the Bonds (see [3195])], it was not the only one’. That statement failed to recognise, or apply, the weight required to be accorded to the extent to which the letters of 11 December 1985 and 15 April 1987 were predicated on a belief in the likelihood of Bondholders converting Bonds to TBGL shares. The requests for treatment of the Bonds as equity were firmly and centrally based on that proposition. Subordination of the rights of Bondholders, and the length of the period of the Bonds before maturity, were no more than incidental matters bearing on that prospect of conversion.
132 If it were thought that regard could be given to any subsequent event to discern what message the foregoing letters conveyed, the most compelling had to be the statement in the TBGL Annual Report 30 June 1988 [TBGL.03421.050] that Bonds could no longer be treated as equity in TBGL accounts because of replacement of an expectation that the Bonds would be converted to shares with the likelihood that the Bonds would be redeemed instead.
133 At [3232] his Honour suggested, indirectly and, with respect, incorrectly, that the amount of equity obtained from conversion of the Bonds could not be matched to the principal amount of the Bonds.
134 This seems to be raised in the following passage in [3228]:
[TBGL] has a right to receive the conversion price … when a bondholder decides to convert … The conversion price (in amount) bears no relationship to the principal sum on the bonds.
and in [3229]:
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.
135 With respect to his Honour those statements reflect a misunderstanding of the operation of the provisions of the Bond Issue Trust Deed.
136 The mechanics of conversion were set out in the Bond Issue Trust Deeds at ((1): cl 11; (2), (3): cl 10). Upon receiving notice of a Bondholder’s election to exercise the right provided by a Conversion Bond, BGNV as Issuer of the [Finance] Bond was required to apply the principal sum payable (by BGNV to the Bondholder) on the [Finance] Bond to the balance of principal payable to TBGL on the Conversion Bond. For that service BGNV, at its discretion, was entitled to deduct from the moneys payable to the Bondholder a commission of 1 cent per $1,000 (£0.01 per £1,000 for Bond Issue 3) [(1): cl 11(16); (2), (3): cl 10(16)] being the sum that would match the paid up amount of each Conversion Bond. Bonds were denominated in amounts of $1,000 and $5,000 (£1,000 and £10,000 in Bond Issue 3). Therefore, the paid up principal of each attached Conversion Bond was either 1 cent or 5 cents (£0.01 or £0.10). The total amount of paid up principal and, therefore, the total amount of commission that would have been payable to BGNV on all of the Bonds that were converted prior to 30 June 1988 would have been $146.33. It does not appear that BGNV exercised the option to retain any commission on Bonds converted. The whole principal sum of the [Finance] Bonds was recorded as received and applied by TBGL, bypassing the need for TBGL to construct an accounting record for the paid up component of the Conversion Bonds.
137 Under the Bond Issue Trust Deeds TBGL was required to apply the whole of the principal amount of the Conversion Bond, being the same principal sum as the [Finance] Bond to which the Conversion Bond was attached, to the purchase of TBGL shares at the prescribed ‘Conversion Price’ per share [(1): cl 11(1); (2), (3): cl 10(1)]. The ‘Conversion Price’ set for each Bond Issue included a premium on the face value of a TBGL share. Therefore, on conversion the principal sum of the Bond was distributed to issued share capital in the amount of the face value of shares issued and the remainder to the share premium reserve account (See TBGL Annual Report 30 June 1987: [TBGL.00008.004, p 32 Note 8(i)(a)]; TBGL Annual Report 30 June 1988: [TBGL.03421.050, p 22 Note 8(i)(a)]; see also Companies Code (WA) s 119).
138 The terms of the Bonds provided that no fraction of a share was to be issued and no cash adjustment was to be remitted to a Bondholder in respect of any fraction of a share that remained after applying the principal amount of the Conversion Bond to the purchase of shares at the Conversion Price [(1): cl 11(14); (2), (3): cl 10(14)]. As shown in the Annual Reports referred to above that meant that residual amounts, if any, were included in amounts credited to the share premium reserve account of TBGL.
139 In other words, the amount available for treatment as equity based on the outcome of conversion of the Bonds was the addition to shareholder capital of the whole amount of the principal sum of the Bonds to issued share capital and the share premium reserve. His Honour’s assumptions were inconsistent with that fact and led to erroneous conclusions by his Honour on the questions of construction and intent of TBGL in the various documents considered.
140 With regard to the letters, the task for his Honour was to identify the plain meaning from the words used. By relying upon the approach to construction put to the court by counsel for the Banks, namely, ‘bonds means proceeds’ and ‘effective subordination’ his Honour was deflected from undertaking proper construction of the letters.
141 The ordinary meaning of each letter was reasonably clear, namely, that there was a high prospect that all Bonds would be converted to TBGL shares and therefore the Banks were asked to ‘agree to treatment of the Convertible Subordinated Bonds’ as equity.
142 At the time the Bonds were issued, the Banks could have anticipated that the parties to whom the funds obtained by BGNV from the issue of the Bonds were lent may not have been confined to members of the TBGL NP Group. A copy of the ‘Offering Circular’ [347.02.0003, p 3] distributed to investors in Bond Issue 2 was attached to the TBGL letter to the Banks dated 15 April 1987 and it stated that the net funds subscribed to the Bonds would be lent by BGNV ‘to members of the [Bell group] for funding the [Bell group’s] business activities’, a group that extended beyond the TBGL NP Group.
143 Furthermore, perusal of BGNV’s Articles of Incorporation [TBGL.08045.006, Art 2] would have shown that BGNV had broad authority to invest funds, obtained from the issue of Bonds, for the purpose of financing directly, or indirectly, the activities of the Bell group.
144 If TBGL, as ultimate holding company in the Bell group, formed the opinion that the business interests of the Bell group would be better served at that time by BGNV lending the funds subscribed to the Bonds to a party external to the Bell group, e.g. an associated company Bell Resources Ltd (‘BRL’) or JN Taylor Holdings Ltd (‘JNTH’); or by placing the funds on deposit with a financial institution, or by allocating the funds to a particular investment (such as a strategic shareholding in a major corporation), or to a particular project (which may include a joint venture with another corporation), then BGNV, if it were satisfied that doing so met the purpose of its Articles, could apply the funds in that way instead of lending the funds directly to TBGL or BGF for those companies to make use of the funds, including further distribution within the Bell group. It is unnecessary to consider the extent to which such use of the funds by BGNV could continue to provide a taxation advantage to TBGL pursuant to the certificate of compliance issued by the Commissioner of Taxation under s 128F(4) of the ITAA (a requirement of which was that the offshore borrowing operation have a purpose of raising money for use in an Australian business). No doubt risk of loss of that advantage would be a matter to be considered by TBGL before it made any request to BGNV to apply the funds to a use other than loans directly to the Bell group.
145 The foregoing provisions set the context in which the Bondholders invested and in which the terms of the Bonds were to be read.
146 The Bondholders accepted that their right to recover the principal of the Bonds was subordinated to the rights of present or future creditors of BGNV (as Issuer) and of TBGL (as Guarantor) in the event of liquidation of those companies.
147 But the Bond Issue Trust Deeds did not require the Bondholders to accept, either expressly or by implication, that BGNV could disadvantage Bondholders by fettering its right to recover debts due to BGNV by subordinating its right to recover those debts to the rights of other creditors of the debtors.
148 On the face of transactions of loan made between BGNV and TBGL and BGF, the same consequences would apply. That is to say, on a liquidation of BGNV, the recoverable assets of BGNV, whether in the form of investments, loans or deposits with an ‘external’ party, or inter‑company loans to Bell group companies, would be available to meet the claims of the Bondholders in that liquidation after the claims of creditors of BGNV, against which the claims of the Bondholders had to be deferred, had been met.
149 As his Honour said, ‘no person actually thought through the implications and mechanics of the on‑loans’ [3225], or, in what his Honour described as a troubling feature of the subordination issue, ‘no‑one actually thought through the mechanics of the on‑loans and the implications of subordination’ [3379]. See also [3133], [3135], [3267] and [3269].
150 A significant reason why the Banks did not examine the mechanics or implications of TBGL NP Group obtaining access to additional capital through loans from an offshore subsidiary may have been that it was thought that the terms of the NP Agreements provided sufficient protection for the interests of the Banks. Under the NP Agreements each TBGL NP Group company had agreed to indemnify the Banks and to pay, when called upon, the whole of the sums advanced to a member of the TBGL NP Group by the Banks, and each TBGL NP Group company had covenanted with the Banks not to compete against claims lodged by the Banks in the liquidation of a TBGL NP Group company. Therefore, if BGNV lent moneys to BGF and TBGL for use in an Australian business of the Bell group (the operators of which were members of the TBGL NP Group) the liquidation of the TBGL NP Group company that had borrowed funds from BGF or TBGL for that purpose could not result in the return of those funds to BGF or TBGL, until the Banks as claimants in that liquidation had recovered from that company, pursuant to the foregoing indemnity, the amounts lent by the Banks to other members of the TBGL NP Group. In those circumstances it can be understood why the Banks did not consider that there was risk for the Banks in BGNV making loans to TBGL or BGF ‘for funding the [Bell] Group’s business activities’ [347.02.0003, p 3] from moneys obtained by BGNV from subscriptions to Bonds issued by BGNV, notwithstanding that BGNV was not an ‘Indemnifying Subsidiary’ bound by the NP Agreements and, therefore, not a company in the liquidation of which the Banks could lodge a claim to displace the claims of the Bondholders. If they had turned their minds to it the Banks may have thought it prudent to seek to be added directly as creditors of BGNV as indemnitees by requesting that BGNV accept the obligations of an ‘Additional Indemnifying Subsidiary’ pursuant to cl 9 of the Second Schedule of the NP Agreements. Fulfilment of that request, of course, would have been subject to the provisos to the clause being met and the directors of BGNV being satisfied that it was in the interests of BGNV to incur those liabilities.
151 In late September 1987, after all Bonds had been issued and all loans from moneys obtained from issue of the Bonds had been made by BGNV, a radical change occurred in the Banks’ arrangements with the TBGL NP Group when the NP Agreements were replaced by the NP Guarantee and the Banks formally released all TBGL NP Group companies from their covenants of indemnity.
152 Proper construction of the letters from TBGL to the Banks dated 11 December 1985 and 15 April 1987 did not permit a finding that the letters contained the representations pleaded or relied upon at trial.
NP Reports
153 Considerable effort appears to have been spent at trial on analysis of these reports which his Honour described, at [2969], as ‘complicated and confusing documents’.
154 Each NP Report was presented in the same form. Appendices C and D of the reports set out respectively the calculations of liabilities and of assets of the TBGL NP Group. All NP Reports were prepared by C&L and adopted and endorsed by directors of TBGL before distribution to the Banks.
155 Preparation of NP Reports by C&L required adjustments to be made to the consolidated accounts prepared for TBGL. TBGL consolidated accounts disregarded balances of net inter‑company liabilities and only included the liabilities of Bell group companies to external parties.
156 Therefore, to prepare accounts and reports for the TBGL NP Group it was necessary, first, to excise that part of the consolidated accounts of TBGL that represented assets and liabilities of a ‘non‑indemnifying subsidiary’ and, second, to include adjusting entries for the assets and liabilities of TBGL NP Group companies that arose as a result of treating the ‘non‑indemnifying subsidiary’ as an external party.
a) NP Report 31 December 1985 [TBGL.03389.024.001]
157 The report was dated 30 April 1986. The commencing figures used in App C for the calculation of non‑current and current liabilities were those set out in an unaudited consolidated balance sheet of TBGL at 31 December 1985 [TBGL.00733.053]. When prepared that balance sheet did not treat the Bonds issued on 20 December 1985 as TBGL ‘equity’. TBGL and BGNV each had a liability of $75 million to redeem the Bonds they had issued on that date and accordingly the amount of non‑current liabilities set out in that balance sheet included $150 million for those liabilities. However, by April 1986, when the NP Report and the Lloyds Information Memorandum were prepared, variation to the treatment of the Bonds in the Bell group accounts was underway as the following ‘Note’ to an Attachment to the Lloyds Information Memorandum recorded [TBGL.03796.065]:
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] 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.
158 The ‘consolidated balance sheet at 31 December 1985 (attached)’ referred to in the Note was item (b) of the Attachment and was the unaudited consolidated balance sheet of TBGL referred to above.
159 As indicated in the Note, the ‘restated net worth … of A$650 million’ referred to in the Note was the net worth (rounded up) obtained by adding $150 million (treated as equity) for the Bonds issued in December 1985, to the $496 million for share capital and reserves set out in that consolidated balance sheet of TBGL at 31 December 1985.
160 Item (c) of the Attachment was an unaudited balance sheet for the TBGL NP Group at 31 December 1985 [TBGL.00808.036] prepared for the NP Report. Notwithstanding the stated understanding of the author of the Note as to ‘Australian accounting practice’, that balance sheet treated the Bonds issued by BGNV and TBGL (described therein as ‘Convertible Notes’) as TBGL shareholder funds and, therefore, excluded liability on the Bonds ($150 million) from non‑current liabilities of the TBGL NP Group.
161 The change in accounting treatment of the Bonds recorded in the balance sheet for the TBGL NP Group at 31 December 1985 from that contained in the consolidated balance sheet of TBGL at 31 December 1985 was ultimately reflected in the NP Report.
162 The NP Report should have applied a commencing figure for non‑current liabilities in App C that was a net sum after the Bond redemption liabilities had been excluded, being the amount shown in the TBGL NP Group balance sheet at 31 December 1985. However, the NP Report applied the figure set out in the consolidated balance sheet of TBGL at 30 December 1985 which, as noted above, did not record the Bonds as equity. As noted later in these reasons the NP Reports that followed, up to and including 31 December 1987, applied a commencing figure for non‑current liabilities that automatically excluded Bond redemption liabilities, because the consolidated balance sheets of TBGL, on which the NP Reports for the TBGL NP Group were based, treated subscriptions to the Bonds as equivalent to subscriptions to TBGL share capital and, therefore, excluded from liabilities the cost of Bond redemptions.
163 The first adjustment made to App C was a purported deconsolidation of ‘non‑indemnifying subsidiaries’. Deducted from the amount of non‑current liabilities was the liability of BGNV to pay $75 million to redeem the Bonds it had issued. Added to App C as a non‑current liability was a sum of $75 million, described as a ‘liability arising from reversal of inter‑company accounts on deconsolidation of non‑indemnifying subsidiaries’ being the liability of the TBGL NP Group to BGNV. That adjustment operated as an offset and had no effect on the net amount of non‑current liabilities in App C which, according to the TBGL NP Group balance sheet at 31 December 1985, remained inflated by $150 million.
164 App C was then further adjusted by deducting $150 million from non‑current liabilities. On its face that adjustment deducted BGNV and TBGL Bond redemption liabilities because the funds subscribed to the Bonds and convertible to TBGL share capital in that amount had been treated as ‘equity’ as set out in the TBGL NP Group balance sheet at 31 December 1985.
165 His Honour, at [2946], said that he was satisfied that the words used in the NP Report to explain the deduction of the Bond redemption liabilities meant what they said. The relevant words of the explanatory note read as follows:
$75,000,000 Convertible Note borrowings of [TBGL] plus $75,000,000 Convertible Note borrowings of [BGNV] on‑lent to [TBGL] treated as equity.
His Honour said:
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.
166 The latter statement suggests a misunderstanding of the explanatory note. The note recognised that, in accounting terms, it was appropriate, at that time, to have regard to the probability that the funds subscribed to the Bonds would be applied by Bondholders to the acquisition of shares in TBGL and that moneys would not be returned to Bondholders in redemption of the Bonds. Accordingly, as forecast at the time of issue of the Bonds, as had been agreed by the Banks and as set out in the TBGL NP Group balance sheet at 31 December 1985, the NP Report treated the funds subscribed to the Bonds as capital funds of TBGL, thereby eliminating any liability TBGL or BGNV had to repay the Bonds and, derivatively, any liability TBGL may have had to BGNV in respect of the amount recorded in the BGNV accounts as a loan to TBGL.
167 It could not be the ‘inter‑company liability owing by TBGL to BGNV in respect of the on‑loan of the proceeds of the bond issue by BGNV’ that was ‘regarded as equity’ by the directors and accountants. It was the acceptance of the probability that Bondholders would forego the right to redeem the Bonds and, instead, exercise the right provided by the Conversion Bonds issued by TBGL to acquire shares in TBGL that permitted TBGL, and its accountants, to treat subscriptions to Bond Issue 1 as equivalent to a subscription to TBGL share capital and part of shareholder funds in the preparation of the NP Report. Of course, as a forecast event taken to be sufficiently certain to justify such an accounting treatment, subsequent events could alter that judgment, but as at the date of the NP Report, it stood as stated. In no sense could it be said that the ‘on‑loan’ was treated by the directors and accountants as a subscription to capital. The words ‘on lent to [TBGL]’ as included in the explanatory note of the NP Report were merely descriptive. That construction was confirmed in the NP Reports that followed.
b) NP Reports 30 June 1986, 31 December 1986, 30 June 1987
168 The audited Consolidated Balance Sheet in TBGL Annual Report 30 June 1986 [TBGL.03474.079, p 29] and the balance sheet of the TBGL NP Group attached to the NP Report 30 June 1986 [TBGL.00733.038] treated the funds subscribed to Bond Issue 1 (described as ‘Convertible Notes’ in the former and as ‘Convertible Bonds’ in the latter) as equivalent to share capital and as part of Bell group shareholder funds. As a consequence, the commencing figure for non‑current liabilities in App C of the NP Report, being the amount for that item set out in the audited Consolidated Balance Sheet in TBGL Annual Report 30 June 1986, did not include any liability for BGNV, or TBGL, to redeem the Bonds those companies had issued [2951].
169 It is not clear why App C of this NP Report then purported to ‘deconsolidate’ non‑current liabilities of the TBGL NP Group by deducting a BGNV liability for Bond redemption ($75 million) as a non‑current liability of a non‑indemnifying subsidiary when that sum was not included as a liability in the amount from which it was being deducted. The purported ‘reversal of inter‑company accounts on deconsolidation’ by adding a TBGL liability to BGNV in the like amount ($75 million) meant that the final amount in App C was not distorted but the recorded steps of deconsolidation were unnecessary.
170 The outcome of the NP Report matched that of the preceding NP Report 31 December 1985, namely, that by reason of the acceptance that moneys subscribed to the Bonds could be treated as equivalent to share capital of TBGL the liability of BGNV and TBGL to repay moneys to Bondholders could be treated as extinguished.
171 The foregoing comments made in respect of the NP Report 30 June 1986 apply equally to the NP Reports 31 December 1986 and 30 June 1987.
172 Nothing in the foregoing NP Reports provided support for an argument that a loan contract between BGNV and TBGL contained a term that BGNV’s entitlement to recover that loan on liquidation of TBGL was subordinated to the rights of other creditors of TBGL, nor did the NP Reports contain a representation to that effect.
c) NP Report 31 December 1987 [360.02.0038]
173 This NP Report, dated 12 February 1988, was the first presented under the NP Guarantee. Notwithstanding the share market collapse in October 1987, preparation of the NP Report continued the assumption that subscriptions to the Bonds could be treated as equivalent to subscription TBGL shareholder funds. Therefore, no liability to redeem the Bonds was included in the commencing figure for non‑current liabilities set out in App C of the NP Report. See [2960].
174 As discussed above, the NP Reports 30 June 1986, 31 December 1986 and 30 June 1987 had made necessary deconsolidation adjustments to the commencing figure for non‑current liabilities set out in App C by purporting to deduct BGNV liability for the redemption of the Bonds it had issued, offset by the addition of a TBGL NP Group liability for sums borrowed from BGNV by TBGL and BGF. The NP Report 31 December 1987 ceased that practice and restricted deconsolidation adjustments instead to non‑current assets in App D.
175 The non‑current assets of BGNV, represented by the sums receivable from TBGL and BGF, were addressed for the first time and stated to be an amount of $406.3 million. That sum was deducted from non‑current assets in App D. That figure appears to have been taken from the TBGL unaudited consolidated balance sheet 31 December 1987 [TBGL.00841.049], and the TBGL NP Group unaudited balance sheet 31 December 1987 [TBGL.00837.046], each of which included ‘Convertible bonds’ in share capital and reserves at a figure of $556.3 million. Deduction from that sum of $150 million for the Bonds issued by TBGL ($75 million) and BGF ($75 million) provided a balance of $406.3 million as the amount outstanding on Bonds issued by BGNV and, therefore, as the amount advanced by BGNV to TBGL and BGF.
176 How the figure of $556.3 million was calculated for the foregoing balance sheets at 31 December 1987 was not explained. As at 31 December 1987 the remainder of the loan owing by TBGL to BGNV from Bond Issue 1, after taking into account the Bonds actually converted to TBGL shares, was $61.3 million. $175 million was the amount lent to BGF from funds subscribed to BGNV Bond Issue 2. The balance of the sum of $406.3 million, $170 million, appeared to be an A$ value ascribed to the £75 million loan to BGF from BGNV Bond Issue 3. That represented an historical Sterling exchange rate that would have been applicable at or about the date of the issue, 14 July 1987, but it was not the rate applicable at 31 December 1987.
177 As at 31 December 1987 the cost to BGF of repaying £75 million would have been $193.4 million, a difference of $23.4 million. Therefore, as at 31 December 1987 the principal sum owing on the Bonds was $579.7 million and the liability of TBGL and BGF to BGNV as borrowers was $429.7 million.
178 Indeed $429.7 million was the sum added to App D as a TBGL NP Group non‑current asset in reversal of the deconsolidation effected in App D by deducting the BGNV asset of $406.3 million described above. That step, of course, provided a net increase of $23.4 million in TBGL NP Group assets in App D.
179 To offset that notional increase in group assets completion of the deconsolidation adjustment appears to have been made in App C by adding $23.4 million to the non‑current liabilities of the TBGL NP Group.
180 In [2961] his Honour stated that he was not at all sure what the amount of $23.4 million added to non‑current liabilities in App C was intended to represent. His Honour noted that the expert accountant called by the Banks, Scudamore, had ‘opined that the amount of $23.4 million may have represented current liabilities of TBGL and BGF to BGNV at 31 December 1987’. Properly, his Honour doubted that was so given that App C dealt with current liabilities under a separate heading.
181 His Honour correctly rejected Scudamore’s proposition set out in par 5.22 of the report of that witness [WITD.030.003]. Indeed, in a supplementary report dated 12 January 2006 [WITD.030.015, par 19] Scudamore withdrew that opinion. That withdrawal, of course, exposed errors in pars 5.22 and 5.23 of Scudamore’s original report in which Scudamore provided the further opinion that the sum of $23.4 million did not relate to loan indebtedness of TBGL and BGF to BGNV.
182 Of course, the thesis constructed by Scudamore and accepted by his Honour that the NP Reports supported an argument that loans from BGNV to TBGL and BGF were subordinated, relied on an assertion that the loan indebtedness to BGNV had not been taken into account in the preparation of this NP Report because it had been treated as a ‘non‑current Subordinated Debt’ within the terms of the NP Guarantee. As set out above that proposition was not correct.
183 Surprisingly by notice of contention filed in response to the respondents’ cross‑appeal the Banks asserted that his Honour erred in failing to find that the sum of $23.4 million referred to above was a sum of ‘current liabilities’ owed by TBGL and BGF to BGNV.
184 Several comments should be made on this contention. First, his Honour did not make a finding of fact on that issue. Second, although a finding of fact was available to his Honour on the evidence before him, it was contrary to the finding contended for by the Banks. Indeed, the witness on whom the Banks relied for their contention had resiled from the proposition and the contention should have been withdrawn.
185 As set out above the whole of the NP Report had to be considered to understand what that figure represented. The amount of $23.4 million shown in App C as an additional non‑current liability was the net amount owed to BGNV by TBGL and BGF that resulted from the shortfall in the amount deducted in non‑current assets in App D as the amount receivable by BGNV for moneys advanced to TBGL and BGF. Those adjustments had no net effect on the outcome of the NP Report which was based on treatment of the Bonds as commitments to TBGL shareholder funds. The NP Report provided no evidence of a contract or representation in the terms alleged by the Banks.
186 The audited annual accounts of TBGL published in the TBGL Annual Reports 30 June 1986 [TBGL.03474.079] and 30 June 1987 [282.14.0004] informed the public that for the purpose of preparing those accounts funds subscribed to the Bonds had been treated and accounted for as equivalent to subscribed shareholder capital of the Bell group. That, of course, carried an implied representation that treatment of the Bonds in that manner was consistent with Australian accounting and auditing standards.
187 A similar statement to the public was made in the audited accounts published in the BRL Annual Report 30 June 1987 [TBGL.30759.045] in respect of the treatment of Convertible Subordinated Bonds issued by BRL in that financial year.
188 His Honour, at [2982], stated that preparation of the foregoing NP Reports by including moneys subscribed to the Bonds as TBGL shareholder funds and eliminating Bond redemption liabilities, would have been inconsistent with reality, thus suggesting that some other form of accounting method had to be relied upon to explain the NP Reports. That statement, in effect, repeated an observation his Honour had made earlier in his reasons, at [2710], namely, that funds subscribed to the Bonds created debts to Bondholders that were not extinguished until a Bondholder elected to convert Bonds to shares and shares were issued. As a statement of legal principle that was correct, but it did not address the relevant issue, namely, how were the NP Reports prepared and was the method of preparation only consistent with a term in the loan contracts, or a representation by TBGL, that BGNV’s right to recover loans made to TBGL and BGF were subordinated to the rights of other creditors of TBGL and BGF in the event of liquidation of those companies.
189 His Honour, at [2982], stated that neither TBGL, nor C&L, recognised that the Bond proceeds had been treated as converted to capital in preparing the NP Reports, and that C&L had made no suggestion in their documents that they had prepared the NP Reports on that assumption.
190 The error in that statement appeared to be recognised by his Honour subsequently, at [3223] ‑ [3224], when his Honour accepted that if C&L were satisfied that accounting principles permitted the Bonds to be treated as equity in the TBGL accounts it followed that Bond liabilities were excluded from ‘Total Liabilities’ under the terms of the NP Agreements.
191 His Honour’s statement in [2982] was contradicted by the introductory remarks of each NP Report which carried an acknowledgement by the directors, which repeated the words used by C&L in presenting the NP Reports to the directors, that the NP Reports were based on the audited (or unaudited) consolidated accounts of TBGL (e.g. [370.10.0351]; [TBGL.03389.017]; [462.04.0006]; [275.08.0002.2]). Until 30 June 1988 the consolidated accounts of TBGL treated the moneys subscribed to the Bonds as part of the shareholder capital of TBGL and the accounts were prepared by excluding liabilities to meet the cost of redeeming the Bonds from non‑current liabilities of TBGL and its subsidiaries. Therefore, his Honour’s conclusion that NP Reports based on those accounts did not recognise the treatment of subscriptions to the Bonds as equity (and thereby eliminated redemption liabilities for the Bonds), was a clear error. Equally, the statement by his Honour, in [2982], that ‘the Bonds are treated (in the NP Reports) as sounding in a monetary liability’ was also incorrect if the use of those words by his Honour was to be understood as a statement that the NP Reports prepared between December 1985 and December 1987 were not based on accounts that treated sums obtained from the issue of Bonds as part of shareholder funds of TBGL.
192 As far as the above NP Reports were concerned, they were prepared on the basis that TBGL accounts treated the Bonds as equivalent to subscriptions to TBGL capital. TBGL’s requests to the Banks that they agree that in the NP Reports the ‘[Bond] issues … be treated as equity’ were consistent with that process.
d) NP Reports 30 June 1988, 31 December 1988, 30 June 1989
NP Report 30 June 1988 [360.03.0071]
193 This NP Report was based on the audited consolidated accounts of TBGL set out in the TBGL Annual Report 30 June 1988 [TBGL.03421.050]. The accounts were approved by the auditors on 21 October 1988. In Note 22(b) of the Notes to Accounts of that Annual Report the effect of the stock market collapse of October 1987 was acknowledged and the previous accounting treatment that accepted subscriptions to the Bonds as equivalent to subscriptions to share capital of TBGL was abandoned, it being considered by the directors (and auditors) that there was no longer any likelihood that Bondholders would elect to exercise the right to direct TBGL, BGF and BGNV to apply funds payable on redemption of the Bonds to the purchase of shares in TBGL. Obviously ‘subordination’ of the liability of the Issuers, or of the Guarantors, of the Bonds was an irrelevant consideration in that determination.
194 Therefore, in the TBGL Annual Report 30 June 1988 [see Consolidated Balance Sheet p 15; Notes to Accounts 20, 22; pp 30 ‑ 32], the redemption cost of the Bonds ($585.2 million) was included as a non‑current liability. For the first time, part of that redemption liability included provision for the risk of exercise of the ‘put option’ granted to Bondholders in Bond Issue 3. The option was exercisable at a premium of 123.125% to the face value of the Bonds. The appropriate provision in respect of the premium was calculated at $37.5 million (at the current conversion rate for Sterling), on the assumption that all Bondholders in Bond Issue 3 would exercise the put option. In other words, the accounting method that accepted a probable outcome to justify inclusion of funds subscribed to the Bonds as shareholder funds of TBGL was now applied to create an added limb of TBGL liability. Of the sum of $585.2 million, $150 million represented the liabilities of TBGL ($75 million) and BGF ($75 million) for redemption of the Bonds those companies had issued to Heytesbury Securities. The balance of $435.2 million was the redemption liability of BGNV for the Bonds it had issued, an amount that included the provision of $37.5 million for the ‘put option’ premium. That provision, of course, was not part of either the TBGL or BGF loan debt to BGNV. It was, however, part of TBGL’s separate liability as guarantor of BGNV’s obligations under the Bonds BGNV had issued. It should be noted that the BGNV Financial Statements 30 June 1988 [TBGL.08013.030] recorded BGNV indebtedness on the Bonds at $443.9 million (converted from USD at 0.7953 AUD/USD), an apparent overstatement of $8.7 million.
195 By adopting the sum of non‑current liabilities set out in the audited consolidated accounts of TBGL as the commencing figure for non‑current liabilities in App C, the NP Report duly included the amount of the redemption liabilities set out in those accounts in the process of calculating the ‘Total Liabilities’ of the TBGL NP Group. The terms ‘Total Liabilities’, ‘Subordinated Debt’ and ‘Borrowing’ as defined in the NP Guarantee [TBGL.03393.067] have been set out earlier in these reasons.
196 Given that BGNV was not an ‘Australian Subsidiary’, and had not been nominated to be included as one as permitted under cl 15.02 of the NP Guarantee, perhaps a formal record should have been made in App C of offsetting transactions to effect the deconsolidation of BGNV as a ‘non‑Australian Subsidiary’ by deducting the non‑current liabilities of BGNV for redemption of Bonds and by adding appropriate reversing entries for TBGL and BGF liabilities to BGNV that arose as a result. Those steps were not taken.
197 It would then have been necessary to adjust the amount of non‑current liabilities in App C by deducting ‘Subordinated Debts’ as defined in the NP Guarantee.
198 His Honour, at [2970], suggested that perhaps the error made in this NP Report in failing to record offsetting deconsolidating and reversing entries to deconsolidate BGNV items from non‑current liabilities in the NP Report could be attributed to confusion arising from the variable methods of representation of Bond liabilities in the preceding NP Reports, namely, sometimes as part of non‑current liabilities and sometimes as shareholder funds. But with respect to his Honour that was not an available explanation. As his Honour had acknowledged at [2951] and [2960] until this NP Report 30 June 1988, no NP Report after the first NP Report 31 December 1985 had included Bond liabilities as a non‑current liability of the TBGL NP Group. Indeed all NP Reports, including the first NP Report, had treated the subscribed Bond funds as equivalent to subscribed capital of the Bell group in the relevant TBGL NP Group balance sheet. And as already discussed, the first NP Report was, in substance, consistent in method and outcome with the subsequent NP Reports in that it was based on recognition of an addition to equity and elimination of the Bond redemption liability from non‑current liabilities.
199 The NP Report proceeded, correctly, to deduct a sum of $585.2 million from App C as ‘Subordinated Convertible Bonds’. Deduction of that sum was the correct course if it is taken to represent the ‘Subordinated Debts’ of $150 million of TBGL and BGF as Issuers of Bonds in Bond Issues 1, 2, (being expressly subordinated debts under the relevant agreements for the issue of those Bonds to Heytesbury Securities), and $435.2 million as the contingent liability of TBGL as guarantor of the liabilities of BGNV under the Bond Issue Trust Deeds 1, 2 and 3, also an expressly subordinated debt under the Trust Deeds. As indicated above the contingent liability of TBGL as guarantor fell within the definition of ‘Total Liabilities’. As noted earlier the Banks accepted that that liability was required to be excluded from ‘Total Liabilities’ as a ‘non‑current Subordinated Debt’ being a ‘Borrowing’ of TBGL as that term was defined, the guarantee by TBGL of BGNV’s financial obligations as an Issuer of Bonds being the ‘undertaking of (a) financing liability’ by TBGL.
200 There was no foundation for a conclusion that it was the TBGL and BGF loan accounts with BGNV that had been treated in this NP Report as expressly subordinated debts as defined in the NP Guarantee and that it was those liabilities to BGNV that had been deducted under the heading ‘Subordinated Convertible Bonds’ in App C. His Honour, at [2973], seemed to suggest that the BGNV loans to TBGL and BGF fell within the meaning of ‘non‑current Subordinated Debt’ as defined in the NP Guarantee and to raise the implication that the audited accounts and NP Report could have been prepared in some way to reflect that. That reasoning is difficult to follow. First, those liabilities were not the ‘Subordinated Convertible Bonds’ described in the NP Report. Second, the definition of ‘non‑current Subordinated Debt’ would have required the auditors to be satisfied that the borrowings had been ‘expressly defined as subordinated and expressed in (their) terms to rank after all unsecured and unsubordinated debt’ of TBGL or BGF. There was no evidence before his Honour that TBGL had provided instructions to the accountants and auditors in or before October 1988 that in the relevant contracts of loan BGNV’s right to recover the loans had been expressly defined as subordinated and expressed in its terms to rank after all unsecured and unsubordinated debt of TBGL and BGF.
201 Furthermore, as at 30 June 1988 the loan accounts stood at $60.4 million for TBGL and $337.3 million for BGF, a total of $397.7 million. No part of the provision for the ‘put option’ premium ($37.5 million), a sum for which BGNV was liable as Issuer of the Bonds in Bond Issue 3 and treated in the accounts as part of BGNV’s liability on the Bonds, was able to be treated as moneys advanced by BGNV to TBGL or BGF. The amount deducted from App C ($435.2 million), therefore, exceeded the loan indebtedness of TBGL and BGF ($397.7 million) by $37.5 million. However, as noted above, $435.2 million did match the contingent liability of TBGL as guarantor of BGNV’s redemption liability, which as also noted above, was a ‘Subordinated Debt’.
202 In addition, the TBGL and BGF loan accounts with BGNV appear to have been dealt with separately in the NP Report as an offset of assets under App D in application of the process of deconsolidation and the sum offset did not match the figure of $435.2 million.
203 $406.4 million was the sum deducted from non‑current assets in App D as the asset of a ‘non‑Australian Subsidiary’ BGNV. That sum was the amount included in the non‑current assets of the BGNV Financial Statements 30 June 1988 as the amount of the loans receivable by BGNV from TBGL and BGF. It overstated the indebtedness of BGF to BGNV according to the TBGL Annual Report 30 June 1988, by $8.7 million, the same amount of overstatement that was applied in the BGNV Financial Statements 30 June 1988 to the Bond redemption liability of BGNV noted earlier.
204 The offset to the foregoing deduction was then made in App D by adding as a non‑current asset of the TBGL NP Group the same sum of $406.4 million as an asset ‘arising from reversal of consolidation journals on deconsolidation of non‑Australian Subsidiaries’, namely, BGNV.
NP Report 31 December 1988 [333.04.0006 and 333.04.0006.1; 275.08.0002.2]
205 This NP Report followed the same method as NP Report 30 June 1988.
206 The commencing figures for liabilities in App C and assets in App D were those set out in the TBGL unaudited consolidated balance sheet 31 December 1988 [TBGL.03817.001] and the amount of non‑current liabilities in App C included $578.9 million as the redemption liability for Bonds issued. As in the prior NP Report this NP Report did not effect deconsolidation adjustments to the non‑current liabilities of App C by deducting the liabilities of BGNV as a ‘non‑Australian Subsidiary’ and adding TBGL NP Group liabilities to BGNV as a reversing entry. Instead deconsolidation of BGNV items was restricted to the assets in App D by deducting the non‑current assets of BGNV and adding a reversing entry for non‑current assets arising therefrom in the TBGL NP Group.
207 Non‑current liabilities in App C were reduced by deducting the whole of the redemption liability of $578.9 million as ‘Subordinated Convertible Bonds’. That figure carried forward provision for the ‘put option’ premium at the 30 June 1988 figure, $37.5 million. As explained in respect of the previous NP Report the sum of $578.9 million may be taken to represent the combination of $150 million for the Bond redemption liabilities of TBGL and BGF and $428.9 million for the Bond redemption liabilities of BGNV for which TBGL had a subordinated liability as guarantor. The loan indebtedness of TBGL and BGF to BGNV at that date stood at only $391.4 million.
NP Report 30 June 1989 [364.06.0065]
208 This NP Report was based on the audited accounts published in the TBGL Annual Report 30 June 1989 [TBGL.00008.002].
209 The commencing figures for non‑current liabilities in App C and non‑current assets in App D of the NP Report were those set out in the Consolidated Balance Sheet of the TBGL Annual Report 30 June 1989.
210 The figure for non‑current liabilities in App C included $546.2 million for Bond redemption liabilities. That sum included $7.2 million as the amount applied to amortisation of the ‘put option’ premium provision in the Bell group consolidated accounts in the previous financial year. As at 30 June 1989 the balance of the unamortised ‘put option’ premium provision ($30.3 million as at 30 June 1988) was $28.3 million at the 30 June 1989 Sterling/AUD exchange rate. However, in the TBGL Annual Report 30 June 1989 [see Consolidated Balance Sheet p 25; Notes to Accounts 20, 23; pp 37, 38] the risk provision for the ‘put option’ premium was abandoned and the balance of the unamortised sum was deleted from the BGNV Bond redemption liability.
211 The NP Report added a sum of $504.3 million to App C for non‑current liabilities, said to be a sum ‘arising from the reversal of inter‑company accounts on deconsolidation of non‑Australian subsidiaries’. However, the subsidiary, or subsidiaries, were not identified and the only amount deducted from non‑current liabilities as ‘Non‑current liabilities of all non‑Australian subsidiaries’ to raise a requirement for a reversing entry was a sum of $3.1 million attributed to the Bell Group International Ltd (‘TBGIL’).
212 How the sum of $504.3 million was calculated was not explained. The covering letter of the auditors dated 29 November 1989 attached to the report to the Directors [TBGL.03023.058.001] provided no details. If the sum of $504.3 million purported to include TBGL NP Group loan indebtedness to BGNV ($389 million) there should have been a corresponding deduction of BGNV liability for Bond redemption to offset the reversal entry and to avoid improper inflation of TBGL NP Group liabilities. BGNV redemption liability as at that date was $396.2 million (if the $7.2 million applied to the TBGL consolidated profit and loss account 30 June 1988 to amortise the ‘put option’ premium referred to earlier were included) [see TBGL Annual Report 30 June 1988 TBGL.03421.050, Item 22(b)(ii), p 32].
213 The NP Report again purported to deduct from non‑current liabilities full Bond redemption indebtedness of TBGL, BGF and BGNV under the heading ‘Subordinated Convertible Bonds’. The amount deducted was $574.5 million which overstated the actual redemption liability ($546.2 million) recorded in the TBGL Annual Report 30 June 1989 [Note 20; p 37] by $28.3 million, that sum being the remainder of the amount of the unamortised ‘put option’ premium which, as noted above, was deducted from Bond redemption liability in the TBGL Annual Report 30 June 1989, a fact apparently overlooked (and therefore an error) in the preparation of this NP Report.
214 In App D partial deconsolidation of BGNV assets and liabilities was effected by deducting a BGNV non‑current asset of $409.8 million and adding a non‑current asset of $396.2 million as a reversal entry. As set out above that latter amount represented BGNV’s redemption liability on the Bonds (if the amount of $7.2 million already applied to the TBGL profit and loss statement in amortisation of the abandoned ‘put option’ premium provision were included) but it did not represent the loan indebtedness to BGNV of TBGL and BGF.
215 The TBGL and BGF loan accounts stood at $389 million according to the audited BGNV Financial Statements 30 June 1989 [TBGL.06718.148].
216 The sum of $409.8 million appeared to be a combination of two amounts, $396.2 million and $13.6 million. In App C $13.6 million had been deducted from current liabilities as a liability of BGNV, presumably interest due to Bondholders. No reversing addition to current liabilities was made in App C, that omission thereby offsetting the $13.6 million deflation of assets in App D effected by the deduction of $409.8 million as a non‑current asset for which in respect of the $13.6 million (presumably current interest due from TBGL and BGF) there had been no reversing entry in App D for deconsolidation of that BGNV item.
217 It seems that the deduction of $409.8 million from non‑current assets in App D treated the $13.6 million interest payable to BGNV by TBGL and BGF as a deferred sum and it was not deducted as a current asset in App D as would normally have been the case.
218 This NP Report reflected various errors in its preparation but neither this NP Report nor the two preceding NP Reports provided any support for a proposition that contracts of loan between BGNV, TBGL and BGF contained a term of subordination nor did the NP Reports contain any representation by TBGL to that effect in the terms pleaded in [PLED.010.001, par 11ED(63)].
NP Information Packages
219 The NP Information Packages comprised three documents dated 6 November 1987 [207.17.0014.7]; 27 November 1987 [201.17.0017.2]; and 29 February 1988 [207.17.0021].
220 The paragraphs in his Honour’s reasons that dealt with these documents are [3564] and [3596].
221 The NP Information Packages appear to have been prepared to provide supplementary information to the Banks immediately after the onset of the effects of the stock market collapse of October 1987. The information in the documents was directed to assuring the Banks with regard to forecast trading results for cashflow and profit. The documents also provided current and projected balance sheets, reported on the sale of assets and identified assets considered to be ‘saleable’.
222 All three documents, consistently with NP Reports as at the relevant dates, recorded the Bonds (described as ‘Convertible Notes’ or ‘Convertible bonds’) in the current or projected balance sheets as part of shareholders funds and accordingly eliminated liabilities of the TBGL NP Group in respect of the Bonds.
223 The pleaded representation in respect of these documents was that TBGL represented that the funds received pursuant to the issue of the Bonds were able to be treated as a form of shareholders’ funds.
224 Insofar as the documents represented that the ‘Convertible Notes’ or ‘Convertible bonds’ issued had been treated, and were able to be treated, as TBGL equity it was statement of existing fact both as to the content of audited and unaudited accounts and as to the principles being applied by accountants and auditors.
225 At [3564] his Honour acknowledged that the NP Information Packages did not make ‘reference to the bond issues being subordinated’. On its face that element was irrelevant to the representation pleaded but as indicated in the following passage it appears that his Honour had in mind that ‘bonds mean proceeds’.
226 At [3596], his Honour accepted the Banks’ submission that ‘the treatment of the bond issues as a form of shareholders funds’ in the NP Information Packages was, ‘in the context of the letters of 11 December 1985 and 15 April 1987, the Lloyds Information Memorandum, the letter dated 14 May 1987 and the definitions of Total Liabilities and subordinated debt in the NP Guarantees, … a representation that the bond issue proceeds were subordinated debt of the [TBGL NP Group]’.
227 The argument accepted by his Honour rested on the same propositions advanced in respect of all of the pleaded material relied upon to support the contentions of contract and estoppel by the Banks, namely, that wherever the Bonds were referred to, it was not a reference to the Bonds per se or to the legal relationships established thereby, but a reference to the moneys subscribed to the Bonds, and presumably, to moneys attributable to those subscriptions when received by a member of the TBGL NP Group.
228 As discussed earlier, the submissions ‘bonds means proceeds’ and ‘effective subordination’ and the failure of the Banks to address the core facts that bore upon construction of the documents relied upon by the Banks to support their pleaded case led his Honour away from ascertaining the proper meaning of these documents.
229 Any representation said to have been made in those documents had to be determined in the context first, of the NP Agreements, and subsequently, the NP Guarantee.
230 As his Honour opined, at [3223] ‑ [3224], recognition by the accountants, with or without the accord of the Banks, that the likelihood of exercise by Bondholders of a right to convert debt to equity in TBGL justified treatment of subscriptions to the Bonds as equivalent to a subscription to TBGL share capital, had the result under the NP Agreements that the Bonds could not be treated as liabilities for the purposes of the TBGL NP Group relationship with the Banks. That meant that whilst the NP Agreements were on foot and whilst C&L accepted that the Bonds could be so treated, there were no liabilities for the TBGL NP Group arising from the issue of Bonds by TBGL, BGF or BGNV.
231 That circumstance provided a clear context in which to discern the meaning of the various documents relied upon by the Banks, in particular, the letters 11 December 1985 and 15 April 1987, the Lloyds Information Memorandum, the NP Reports and the NP Information Packages. That context provided no foundation for a proposition that the stated treatment of Bonds as equity was a representation that moneys lent to TBGL and BGF by BGNV was to be treated as ‘equity’ (apparently because of subordination of the lender’s right to recover the debt) and that the liabilities of TBGL and BGF under the loans had been excluded as liabilities of the TBGL NP Group under the NP Agreements on that basis. It was obvious from the relevant material that the directors and auditors were not treating funds subscribed to the Bonds as TBGL equity grounded on an understanding that the loans made by BGNV from those funds included a term of subordination of the right to recover the loans.
232 The directors, and C&L, determined that as at 30 June 1988 TBGL accounts could no longer be prepared on the assumption that the likelihood of conversion of the Bonds to shares permitted the inchoate rights of the Bonds to be treated as TBGL equity. Thereafter, TBGL accounts, and subsequent NP Reports based thereon, were prepared on the basis that the whole of the indebtedness to Bondholders under the Bonds had to be treated as liabilities in TBGL accounts and as part of the aggregate of Total Liabilities under the NP Guarantee. TBGL had liability for the whole of the indebtedness arising under the Bonds. In addition to its liability as an issuer of Bonds, TBGL had liability as guarantor for the Bonds issued by BGF and BGNV, which in the latter case included liability for payment of a ‘put option premium’, for which provision was made in the TBGL Annual Report 30 June 1988 and included as part of the liability under the Bonds. As noted earlier, that latter amount, of course, was not part of moneys lent by BGNV to either TBGL or BGF and the only explanation for inclusion of that sum as a TBGL NP Group liability is TBGL’s liability as guarantor for the payment of that sum.
233 As also previously explained, pursuant to the NP Guarantee the liability of TBGL was able to be excluded from the aggregated liabilities as a ‘non‑current Subordinated Debt’ as defined.
234 There was nothing in the content of the NP Information Packages capable of supporting a representation in the extended meaning applied by his Honour and his Honour erred in failing to apply the plain meaning of those documents.
Lloyds Information Memorandum [333.02.0081; TBGL.03796.065; TBGL.03779.137; TBGL.00733.053]
235 The principal paragraphs in his Honour’s reasons that deal with this document are [2852] ‑ [2863], [3195] ‑ [3197] and [3587] ‑ [3590].
236 The Lloyds Information Memorandum was prepared by Lloyds Bank, with TBGL’s authority, and was distributed to proposed members of the Lloyds Syndicate Banks in April 1986. It proposed that Lloyds Syndicate Banks provide a loan facility of up to £60 million to BGF and/or BGUK.
237 As noted earlier, the Banks pleaded that this document contained the representation pleaded as being made in the letters dated 11 December 1985 and 15 April 1987, namely, ‘that the liabilities of TBGL arising from the raising and deployment of moneys in and about the [B]ond issues were subordinated to the liabilities of TBGL to [the Banks]’.
238 An Attachment [TBGL.03796.065] to the Memorandum contained an unaudited TBGL Consolidated Balance Sheet at 31 December 1985 and a TBGL NP Group balance sheet at the same date. It also contained a report by TBGL to The Stock Exchange of Perth Ltd dated 25 March 1986 [TBGL.03779.137]. That report contained the following statement:
During the period under review the [Bell] Group has raised additional capital amounting to $181m. Of this sum $150m was raised through the issue of subordinated bonds, due 1995, convertible into ordinary shares of [TBGL], and $31m through the issue of 2,620,000 fully‑paid ordinary shares. All proceeds from these issues were received on 23rd December 1985.
239 The Memorandum made the following comment on TBGL’s borrowing and debt policy (at p 2):
There are strict limitations on lending down through associated or subsidiary companies – of course this is subject to the negative pledge arrangements where cross indemnities are given by certain subsidiaries and [TBGL].
240 The following statement was made in respect of the Bonds (at p 2):
Under the convertible bond issue A$75 million [was] raised by [TBGL] and A$75 million by [BGNV]. In this regard it should be noted that existing bankers to [TBGL] have agreed to treat this issue as equity and participants in this facility will likewise be requested to so treat it.
241 A similar statement (at p 28) concluded the Memorandum.
242 There was a list of significant events that had occurred since 30 June 1985, in which the foregoing account of the issue of Bonds was recited in the following form (at p 23):
(5) In December, 1985 [TBGL] raised A$150 million in subordinated convertible bonds maturing 1995. Interest payable on the bonds is 11% per annum. 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.
That list of events was completed by this paragraph (at p 23):
The impact of the above post-30th June events has been a substantial increase in the consolidated net worth of the Company 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.
243 The words emphasised in the above extracts were underlined in the document exhibited.
244 The calculation of the net worth of TBGL by the inclusion of ‘convertible bonds’ was further explained in the Note to the Attachment. Although the Note has been set out earlier in these reasons, it is convenient to repeat it:
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 The Bell Group Ltd 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.
245 As discussed earlier in these reasons at [157] ‑ [161] the Note explained why the Memorandum in the text at p 23, and the attached balance sheet for the TBGL NP Group at 31 December 1985, departed from the TBGL Consolidated Balance Sheet at 31 December 1985 [TBGL.00733.053] which had not treated the Bonds issued in December 1985 as part of TBGL equity.
246 The TBGL NP Group balance sheet at 31 December 1985 [TBGL.00808.036] (which was included as item (c) of the Attachment to the Memorandum) treated the Bonds (described as ‘Convertible Notes’) as part of TBGL shareholders funds and did not include any liabilities in respect of the Bonds as TBGL NP Group liabilities.
247 As the Note explained it:
The justification for treating this item as capital is that [TBGL] current share price is higher than the conversion price and conversion can be currently exercised.
248 The representation which the Banks contend was contained in the Memorandum was the same representation that the Banks asserted was made in the prior letter 11 December 1985 and in the subsequent letter 15 April 1987 and the reasons provided earlier as to why his Honour erred in finding such a representation to have been present in those letters apply equally to his Honour’s conclusion that the same representation was expressed in the Memorandum.
249 As his Honour, at [3608], acknowledged, there was no evidence of a representation having been made in communications between TBGL and the Banks, either orally or in writing, in the terms pleaded by the Banks. However, at [3197] (repeated at [3588]), his Honour stated a conclusion that the Note and the explanation it provided for the accounting treatment of the Bonds described on p 23 of the Memorandum meant that a person reading that material ‘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’.
250 His Honour continued that he accepted that it was ‘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 then stated that he had come to the conclusion, on balance, that the foregoing meaning was ‘sufficiently clear for these purposes’. Given the acknowledgement of lack of clarity the finding ‘sufficiently clear for these purposes’ would not seem adequate to meet the requirement of a clear and unambiguous representation in the terms alleged.
251 His Honour conceded that the meaning of the Note in the Attachment did not support the foregoing conclusion but said that as the Note was ‘expressly tied to p 23 of the Lloyds Information Memorandum and therefore to item (5)’, he could conclude that, because in item (5) the word ‘subordinated’ in the description ‘subordinated convertible bonds’ was underlined and because ‘there [was] no mention in item (5) of convertibility in connection with the treatment of bonds as equity’, the meaning of all relevant passages was as he had stated.
252 The reasoning relied upon by his Honour for reaching his conclusion as set out in [3195] ‑ [3196] errs in its treatment of the relevant material.
253 Insofar as the Note was ‘expressly tied’ to any part of p 23 of the Memorandum it was tied to the passage the Note itself expressly identified, namely, ‘Restated net worth including convertible bonds is in excess of A$650 million’. In that passage the amount of net worth is underlined; there is no mention of subordination; it is ‘convertible bonds’ that are included in the net worth and the Note describes the justification for treating the ‘convertible issue’ as capital as the degree of likelihood of conversion of the Bonds.
254 The plain meaning of passages relied upon in the Lloyds Information Memorandum cannot support the pleading made in respect of it and the construction put to his Honour by the Banks and accepted by his Honour should have been rejected.
Proposal for Negative Pledge Guarantee [042.05.0018.2; 443.13.0001.1; 443.13.0001.2]
255 The Banks pleaded that by a letter to various banks dated 14 May 1987 TBGL ‘represented to the Banks that [Bond Issues 1, 2] had created non‑current subordinated debt of companies within the [TBGL NP Group]’.
256 The proposal to the Banks that an NP Guarantee replace the NP Agreements began in early 1987. In February 1987 TBGL wrote to the Banks [294.08.0004] suggesting that the NP Agreements needed to be replaced with a ‘parent guarantee from [TBGL]’. TBGL had informed the Banks that the NP Agreements restricted TBGL’s ability to issue ‘bearer instruments in domestic and international Markets’ in that it was not feasible to assign the benefit of the NP Agreements to each purchaser of a bearer instrument and whilst the NP Agreements remained on foot, bearers of those instruments would be subordinated to the interests of the Banks in respect of the assets of TBGL subsidiaries because of the superior position of the Banks by reason of the covenants of indemnification given to the Banks by Indemnifying Subsidiaries under the NP Agreements.
257 Although the letters to the Banks dated 14 May 1987 were not identical in form and content, the part relied upon by the Banks for the pleaded representation was common to all, namely, advice that the definitions of ‘Total Liabilities’ and ‘Total Tangible Assets’ would be replaced with ‘more general definitions’ with the result that the ‘non‑current Subordinated Debt’ would be excluded from ‘Total Liabilities’, the reason for that being ‘to exclude from Total Liabilities subordinated debt such as the subordinated convertible bonds which … [the Banks] … [had] already agreed to treat as equity for liability ratio purposes’.
258 A TBGL proposal for replacement of the NP Agreements and release of the covenants of Indemnifying Subsidiaries constituted a substantial variation in existing arrangements with the Banks. The proposed exclusion from ‘Total Liabilities’ of ‘non‑current Subordinated Debt’ went further than provided by the NP Agreements. Under the NP Agreements once the accountants and auditors treated the Bonds as TBGL equity (by reason of the likelihood of conversion of the Bonds to TBGL shares), it necessarily followed that any liabilities on the Bonds were no longer recognised as Bell group liabilities. That was because of acceptance by the accountants and auditors that the prospect of conversion of the Bonds to TBGL equity was so high that the funds subscribed to the Bonds could be treated as subscriptions to TBGL capital. Of course, the decision of the accountants and auditors to treat the Bonds as TBGL equity was not based on any provisions in the Bond Issue documents as to subordination of the rights of Bondholders to recover moneys payable under the Bonds. ‘Subordinated Debt’ was not a defined term and not a liability able to be excluded under the NP Agreements.
259 The Banks put to his Honour, therefore, that it was not a representation by TBGL in the letter that ‘on‑loans’ were subordinated per se but a representation (applying the ‘bonds means proceeds’ thesis) that the Banks had been able to treat the ‘on‑loans’ as TBGL equity by reason of there being a term of subordination in those loans.
260 That seemed to be a submission of refined circularity that finessed relevant facts.
261 The published accounts of TBGL, audited by C&L, were prepared until 30 June 1988 on the basis that all bonds could be treated as equity because of the expectation that all bonds would be converted. The following note in the TBGL Annual Report 30 June 1988 [TBGL.03421.050 – Note 22 at p 32] confirmed how the accounts had been prepared:
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 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 be ultimately converted into ordinary shares.
In 1988, following the fall in world stock market prices since October, 1987, the expectancy is that redemption is more than likely and for that reason the Directors now believe it to be prudent to show the Convertible Bonds as subordinated debt in Non‑Current Liabilities.
262 The NP Reports at relevant times were prepared by C&L (for adoption by TBGL directors) and were based on the TBGL accounts prepared by C&L (eg, [369.05.0052]; [370.10.0351]).
263 His Honour’s conclusions on this pleading were as follows, at [3592]:
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.
264 As noted already, the ‘more general definition’ of ‘Total Liabilities’ forecast in the letter 14 May 1987 would include contingent liabilities and would exclude non‑current Subordinated Debt, a term to be the subject of express definition.
265 As already discussed, those definitions provided for the exclusion of TBGL’s liabilities under the Bonds in the event that the Bonds ceased to be treated as TBGL equity because the liability of TBGL for the whole of the principal sum of the Bonds issued would now be defined as a non‑current Subordinated Debt to be excluded from the Total Liabilities of the TBGL NP Group.
266 His Honour should have found that insofar as the letter made a representation as to past or current events the ordinary meaning of the words used did not constitute the representation pleaded.
267 Furthermore, insofar as the letter made a representation as to future events the words used were clear in their meaning and, to the extent that those words met the ordinary meaning of the representation pleaded, it provided no assistance to the Banks’ case in contract or estoppel.
268 Where the Banks submitted to his Honour that the pleaded representation raised a latent or ancillary representation relied upon by the Banks his Honour should have rejected that submission and should have found in any event that the ordinary meaning of the letter contained no such representation.
Three year Business Plan [TBGL.03870.001] (‘Business Plan’)
269 His Honour’s consideration of this document is contained in [3206] ‑ [3208], [3220] ‑ [3221], [3565] and [3596] ‑ [3601].
270 The ‘Business Plan’ was dated 13 May 1988, a date subsequent to RHàC’s sale of his beneficial interest in shares in TBGL to Bond and SGIC, but before the National Companies and Securities Commission (‘NCSC’) inquiry was instituted (19 May 1988) and before Bond undertook to make a takeover bid for the whole of the shares in TBGL (5 June 1988).
271 His Honour found that the ‘Business Plan’ was prepared to provide an assurance to the Banks as to the future of TBGL after the reverse suffered as a result of the collapse of the stock market in late 1987 [3207]. Indeed, C&L had been commissioned to prepare the plan immediately after the stock market collapse of October 1987 [207.17.0017.2, p 1].
272 In March 1988, an attempt had been made to merge the interests of BRL and TBGL by the sale of the RHàC controlling shareholding in TBGL to BRL as part of a BRL takeover of TBGL. That proposal had been thwarted by commercial adversaries of RHàC who made a bid for shares in Bell Resources Ltd (‘BRL’) conditioned upon the BRL merger with TBGL not proceeding. Thereupon the merger proposal was abandoned by the management of BRL and TBGL. Instead, in April 1988, the RHàC interest in TBGL (c. 40%) was sold in two parcels to Bond and SGIC.
273 RHàC, however, remained Chairman of TBGL until 21 October 1988. Bond appointees, Oates and Mitchell, did not take office until 2 August 1988 [121] when the Bond takeover of TBGL was completed by Bond obtaining approximately 80% of TBGL shares. At that time management and treasury functions were taken over by Bond [124]. RHàC‑appointed representatives on the board of TBGL resigned on 26 August 1988 [123].
274 At 5 May 1988, however, when the Banks were advised that a three year plan was being prepared and would be distributed to them, [126], RHàC‑appointed officers, in particular the Bell group Treasurer, familiar with the history of TBGL financial affairs were in office [3207]. The ‘Business Plan’ was forwarded to the Banks on 17 May 1988. At that point, RHàC‑appointed officers were well advanced in a substantial ‘asset sale and debt reduction programme’ [84], [367].
275 The ‘Business Plan’ was not prepared as a plea to the Banks for time to pay the debt owed to the Banks but to reassure the Banks that the orderly sale of assets undertaken would enable TBGL to reduce the debt owed to the Banks without the need to make any current provision for the redemption of Bonds. The reasoning of the ‘Business Plan’ was that maturity of the Bonds would not occur until December 1995 and May and July 1997, by which time it was anticipated that additional Bonds would have been converted to TBGL shares and that future profitable conduct of the TBGL business, after reduction of debt and receipt of dividends and management fees from businesses of the associated companies, would provide access to funds in later years sufficient to meet the redemption cost of the Bonds, or to secure a loan facility to discharge that liability.
276 Of course, if any of the Bondholders in Bond Issue 3 exercised the available ‘put option’ in July 1992, TBGL would have been required to redeem those Bonds at that time. That prospect was not separately addressed in the ‘Business Plan’ but it was taken into account in the PP Corporate Advice Limited Valuation of TBGL (4 March 1988) [TBGL.35708.063] to which the ‘Business Plan’ referred.
277 As at May 1988, by sale of substantial assets, the associated companies of TBGL had achieved substantial liquidity and the belief stated in the ‘Business Plan’ that those companies could maintain dividends and remit management fee income to the Bell group appeared to have reasonable grounds. The associated companies in which the Bell group held substantial investment and for which TBGL provided management services were BRL and JNTH. By May 1988 BRL held liquid funds of about $1.2 billion [32] and JNTH had realised $640 million from asset sales [346] and had net assets in cash or equivalent that exceeded $200 million. (By 30 June 1989, however, after the BCHL takeover of TBGL shareholdings in BRL and JNTH, the whole of the cash assets of JNTH had been lent to BCHL companies [1450] and the BRL funds of $1.2 billion had been transferred to BCHL and accounted for as a deposit on the purchase of BCHL’s brewery interests [1513].)
278 The argument in the ‘Business Plan’ for continuing to exclude the Bonds as a liability and for treating funds subscribed to the Bonds as equivalent to shareholder funds of TBGL appeared to rely on a combination of two factors. First, the length of term before the Bonds became repayable and, second, a belief in the continuing prospect of conversion of the Bonds to a shareholding in TBGL.
279 Reference to the length of term before maturity of the Bonds reflected a belief that the drawdown of funds to redeem the Bonds would not be required until well beyond the discharge of Bank facilities so that funds would be available to reduce Bank debt whether or not Bank facilities were treated as current or non‑current liabilities.
280 With regard to the prospect of the conversion of Bonds to shareholdings, the ‘Business Plan’ (page 16) set out projections based on a belief that a high proportion of Bonds would be converted. At May 1988 approximately 20% of the BGNV Bonds in Bond Issue 1 had been converted. None of the BGNV Bonds in Bond Issue 2 or Bond Issue 3, which became convertible in July 1987 and October 1987 respectively, had been converted.
281 In the ‘Business Plan’, under the heading ‘Convertible Bonds’, it was stated that: ‘All bonds are fully and explicitly subordinated to all unsubordinated debt’ (p 16). That statement was correct insofar as the rights of Bondholders against BGNV, TBGL or BGF as Issuers of the Bonds, and against TBGL as guarantor of the Issuers, were subordinated to the rights of all other unsubordinated creditors of BGNV, TBGL and BGF upon liquidation of those companies. Neither that statement, nor the surrounding context of the ‘Business Plan’, represented that there was a contractual term in contracts of loan made between BGNV and TBGL or BGF providing for the right of BGNV to recover those loans to be subordinated to the rights of other creditors of those companies upon liquidation.
282 As set out earlier in these reasons the Banks had pleaded that the Business Plan represented that ‘[B]ondholders ranked behind the Banks in respect of recovery of moneys from assets of the Bell [g]roup’.
283 Bondholders of Bonds issued by TBGL and BGF did rank behind the Banks in the distribution of assets in a liquidation of TBGL or BGF. Bondholders of Bonds issued by BGNV ranked behind other creditors of BGNV in the event of liquidation of that company. BGNV was part of the Bell group but not part of the TBGL NP Group and therefore the Banks had no claims against BGNV behind which the claims of those Bondholders could be ranked. However, if those Bondholders, through the Trustee, sought to recover moneys owed to them by BGNV by proving in the liquidation of TBGL as guarantor of BGNV, the Bondholders would rank behind the Banks in that liquidation.
284 The result of the foregoing would have to be a finding that the pleaded representation said to have been contained in the Business Plan did not advance the case in contract or estoppel contended for by the Banks.
285 His Honour, at [3597], however, determined that the Business Plan contained the following representation:
[T]hat if a liquidation of TBGL, BGF or other [TBGL NP Group] company were to occur, the [B]anks would rank ahead of liabilities arising from the issue of the [B]onds and the use of proceeds thereof by such companies.
286 It appears that his Honour understood the pleaded representation to involve some concept of ‘running subordination’ that appeared to have characteristics akin to those of a constructive trust in that it attached funds subscribed to the Bonds so that whenever use of those funds could be followed to an advance of funds by a company in the TBGL NP Group to another company in the TBGL NP Group, the Banks’ claims as creditors of the latter company would rank ahead of a claim by the former company for recovery of the funds advanced.
287 Apart from that conclusion going well beyond the pleaded case of the Banks, as discussed earlier in these reasons his Honour’s approach to construction of the Business Plan failed to consider the ordinary meaning of the words used and introduced an impermissible application of the extraneous constructs put forward by counsel for the Banks, namely, ‘bonds means proceeds’ and ‘effective subordination’. His Honour erred in finding that a representation was made in the Business Plan in the terms set out by his Honour.
Other matters referred to by his Honour
Accounting records
288 The Banks did not seek to prove that the rights of TBGL and BGF to recover inter‑company loans made by TBGL or BGF to other companies of the Bell group were subordinated to the rights of other creditors of the borrowing companies in the event of liquidation of the borrowers where those loans had been made from funds advanced to TBGL or BGF by a lender whose right to recover those funds advanced had been subordinated to the rights of other creditors of TBGL or BGF. Indeed there was no evidence to suggest that loans made by TBGL or BGF from such funds were made other than in the ‘normative, ordinary course of inter‑company lending within the Bell group … on an unsubordinated basis … [this being] the conclusion to be reached from the primary accounting materials and the treatment in the annual accounts of various group companies’ [3258].
289 That meant that subordination of a lender’s right to recover funds lent to TBGL or BGF was irrelevant to the terms of inter‑company loans made by TBGL and BGF from those funds. Examples of funds advanced to TBGL and BGF with subordination of the lender’s right to recover the funds, and from which it was intended that inter‑company loans within the Bell group would be made by TBGL and BGF, included the Bond subscriptions received by TBGL from Heytesbury Securities in Bond Issue 1; the Bond subscriptions received by BGF from Heytesbury Securities in Bond Issue 2; and the loan facilities provided to BGF by Heytesbury Holdings Ltd (‘HHL’) and by Bell Resources Finance Pty Ltd (‘BRF’) referred to below. It follows that there would be no expectation that inter‑company loans from BGNV to TBGL or BGF would be on terms that BGNV’s right to recover the loans would be subordinated.
290 Whilst his Honour, at [3258], acknowledged that the ‘normative, ordinary course of inter‑company lending within the Bell group was on an unsubordinated basis’ his Honour then suggested that a contrary conclusion could be reached in the case of the loans by BGNV to TBGL and BGF because ‘the office of the chairman and the Treasury were intimately involved in the whole of the arrangements for this fundraising’. By that his Honour meant involved in the issue of the Bonds. His Honour stated that he could ‘see no reason why that [involvement] would not also extend to the arrangements by which the bond issue proceeds, having come into BGNV, made their way into the [TBGL NP Group]’.
291 But no evidence that described involvement by ‘the office of chairman and the Treasury’ in arrangements concerning the loans, or that was capable of supporting an inference that such involvement occurred for the purpose of effecting variation in the usual terms of inter‑company lending, was identified by his Honour. Therefore, in respect of the BGNV loans, there appears to have been no evidence inconsistent with, or capable of displacing, evidence that reflected the ‘normative, ordinary course of inter‑company lending’.
292 His Honour, at [3269], stated that his conclusion was that the ‘absence from the accounting documents of an explicit acknowledgement that the loans [were] subordinated’ was ‘outweighed by the probative force of the other documentary evidence that [he had] outlined’.
293 That documentary evidence must be taken to be the documents referred to by his Honour and dealt with above, none of which spoke to the loan contracts between BGNV and TBGL or BGF. As stated in the analysis of that material none of those documents contained evidence of probative force able to displace the clear inference provided by the accounting records that the ‘normative, ordinary course of inter‑company lending’ was followed in the loans made by BGNV to TBGL, BGF.
294 His Honour acknowledged, at [2702] and [3259], that the accounting records of the Bell group provided three instances of inter‑company loans where the right of the lender to recover the loans had been subordinated to the rights of other creditors of the borrower. In each case, subordination was contained in a written agreement and appropriate notations were made in the primary accounting documents of the borrowing entity.
295 The first example concerned BGUK and its wholly owned subsidiary TBGIL. A Deed [TBGL.07043.068] dated 30 June 1987 recorded a loan from BGUK to TBGIL in an amount of £100 million for use as working capital, free of interest, for a term of 19 years. The Deed provided that the loan had a character of deferred capital in that BGUK was given the right to convert the amount of the loan to shares in TBGIL. Furthermore, BGUK agreed that its right to recover the loan was subject to the consent of bank lenders to TBGIL and, in the event of liquidation of TBGIL, was subordinated to the rights of all other creditors of TBGIL, and in particular, the bank lenders.
296 Relevant published accounts of TBGIL at 30 June 1987 [TBGL.00909.014] 30 June 1998 [TBGL.03613.040] and 30 June 1989 [TBGL.04070.007] recorded the loan as a ‘Subordinated loan’.
297 The second example was a loan facility of $500 million granted to BGF by HHL, the ultimate major shareholder of TBGL representing the interests of RHàC [65]. The loan facility was for a term of five years from 17 August 1987 [TBGL.02132.034; TBGL.00902.059]. The terms of the loan were restated in writing on 27 November 1987 [TBGL.04817.098; TBGL.04817.099] when the amount of the facility was reduced to $145 million. The borrowing was guaranteed by TBGL and bore interest at 2% above bank rate. HHL’s right to recover the sum advanced was subordinated to the rights of all other unsubordinated creditors in the event of the liquidation of BGF or TBGL. The facility, drawn‑down to $100 million, was discharged by two equal payments on 27 and 28 April 1988. It was recorded in the journals and ledgers of BGF as a ‘subordinated loan’. It was not suggested that the use of those funds by BGF as the group financier for loans to other Bell group members would have been on other than usual terms, that is, without subordination of BGF’s right to recover those loans.
298 The third example was the replacement of the HHL/BGF facility referred to above. By letter dated 27 April 1988 [TBGL.01034.126] BRF, a wholly owned subsidiary of the associated company BRL, agreed to lend BGF $100 million. Interest was payable at a bank rate plus 1.5% and TBGL guaranteed performance of BGF’s obligations. BRF agreed that its right to recover the sum advanced was subordinated to the rights of all other unsubordinated creditors of BGF and TBGL in the event of the winding up of those companies. The funds were drawn‑down in two equal amounts on 27 and 28 April 1988 and presumably applied to discharge the borrowing from HHL.
299 The loan was recorded in the BGF ledger as a subordinated loan. That detail was not reported in the BGF Annual Accounts 30 June 1988 [TBGL.03403.068] where it was merely described as an amount owing to an associated company. However, in the TBGL Annual Report 30 June 1988 the parent company recorded the liability of its subsidiary in the Consolidated Balance Sheet of TBGL and the Notes to the Accounts recorded the liability as an ‘Unsecured subordinated loan’ [TBGL.03421.050, p 30 Note 20].
300 In the BGF Annual Accounts 30 June 1989 [TBGL.03341.015, p 10] Note 12(v) of the Notes to Accounts stated that the company had ‘repaid its unsecured unsubordinated loan from [BRF]’ in May 1989.
301 Having recited the foregoing as the sole instances of subordinated loans in the accounting records of the Bell group, his Honour then stated, at [3267], that it would have been better had the journal and ledger records of loans from BGNV to TBGL and BGF ‘contained a clear statement that the debts were subordinated, as they did in relation to the three loans [described above]’. Of course, if the right to recover the loans was not subordinated then the journal and ledger entries, and the treatment in the accounts, were all consistent with that lack of subordination, as was the absence of any written acknowledgement or minute of such a circumstance.
302 His Honour speculated, at [3267], that a purpose of stamp duty avoidance may have caused no formal agreement for the BGNV on‑loans (presumably including a term of subordination) to be brought into existence. There was no evidence that a written agreement for loan made and retained in Netherlands Antilles would bear stamp duty and, of course, stamp duty considerations had not impeded the formation of a written record of each of abovementioned subordinated loans.
303 His Honour stated, at [3268], that the absence of record of ‘the on‑loans as subordinated liabilities’ in the primary accounting records of journals and ledgers ‘could not be dismissed as an immaterial consideration’, but then added, ‘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’. The reasoning relied upon to support the latter comment is not readily apparent. The primary accounting documents contained no record of subordination and, therefore, no foundation existed for the annual accounts of TBGL to state that loans from BGNV to TBGL and BGF were subordinated. The description of subordination of rights of Bondholders in the relevant notes to the annual accounts ‘relating to convertible bond issues’ said nothing about subordination of BGNV’s rights under loans made by BGNV to TBGL or BGF.
304 Not only were the primary accounting records not able to be ‘dismissed as an immaterial consideration’, they had to be regarded as the material consideration unless other cogent dispositive evidence existed. The absence of that evidence dictated a conclusion that the ‘normative, ordinary course of inter‑company lending … on an unsubordinated basis’ applied to the loans made by BGNV to TBGL and BGF.
305 His Honour then said, at [3268], that he noted 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’. With regard to that loan the primary document in the form of the BGF ledger recorded that the lender’s rights were subordinated and the published accounts of the public company of which BGF was a wholly owned subsidiary disclosed the existence of a subordinated loan to a subsidiary by an associated company. It is difficult to see what lack of consistency of any substance his Honour perceived in the foregoing, certainly nothing to justify attributing lack of weight to the clear terms of the accounting records.
306 Finally, his Honour said, at [3268]: ‘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’. The date of this document [610.44.0056] was 5 February 1988.
307 First, it is apparent that the ‘1988 borrowing position spreadsheets’ were not source material in the sense of a primary accounting record. Second, the items in the spreadsheet document that his Honour said ‘[fell] to be read as encompassing the on‑loans’ were items listed under the heading ‘Subordinated Borrowings’ of the TBGL NP Group. They comprised three liabilities described as ‘Convertible Bond’s and a liability headed ‘Subordinated Loan – Heytesbury’ being the loan from HHL to BGF referred to above.
308 On its face, therefore, the spreadsheet document did not record loans from BGNV to TBGL and BGF as ‘Subordinated Borrowings’. As discussed earlier ‘Subordinated Borrowing’ was a defined term in the NP Guarantee and the stated borrowing position set out in the spreadsheet document was prepared for the purpose of the NP Guarantee. ‘Total Liabilities’ of the TBGL NP Group as defined in the NP Guarantee included the contingent liability of TBGL as guarantor for the three Bond Issues and the direct liabilities of BGF and TBGL as Issuers of Bonds, all of which were within the defined term ‘Subordinated Borrowings’ in the NP Guarantee. The liability of TBGL as guarantor of BGNV and BGF arose under borrowing transactions effected by the issue of the Bonds and the ‘undertaking of [a] financing liability’ by TBGL. That undertaking of a financing liability was expressly defined as a subordinated liability in the Bond Issue documents. The spreadsheet document duly reflected that circumstance.
309 It was not open to his Honour to disregard the clear meaning of the spreadsheet document. The document did not record recognition of the subordination of BGNV’s right to recover the loans BGNV had made to TBGL, BGF.
BGF (ACT) Ltd
310 The remaining part of his Honour’s reasons on the question of subordination that requires consideration is his Honour’s treatment of correspondence from TBGL to the Banks in September 1987 in relation to the consent of the Banks to a subsidiary of BGF being included as a Nominated Borrower under the NP Guarantee.
311 It was not contended by the Banks that the correspondence contained a representation that contracts of loan between BGNV and TBGL, BGF included a term subordinating BGNV’s right to recover those loans. As his Honour put it, at [3016], the main relevance of the correspondence was ‘in relation to questions of reliance and detriment in the [B]anks’ estoppel case’.
312 It followed that if the representations pleaded as constituting the estoppel case were not made out relevance of the correspondence fell away.
313 The first letter was dated 3 September 1987 addressed to Lloyds Bank. It was not sent to the Australian Banks. The letter was signed by S Wilson as Corporate Solicitor. The letter advised that the Bell group was considering issuing ‘long term unsecured subordinated notes convertible into shares in [TBGL]’, described as ‘Convertible Notes’, and that forming a subsidiary of TBGL in the Australian Capital Territory to issue the notes was an option being considered. The letter invited comments on the suggestion.
314 The letter also included the following sentence:
Monies received by the Canberra company would be onlent to BGF, again on a subordinated basis.
315 On 4 September 1987 Wilson provided a copy of that letter to Cahill, Assistant Treasurer of the Bell group. His Honour, at [3019], described this copy as a further draft but it was, in fact, a copy of the letter sent to Lloyds by Wilson.
316 On 7 September 1987 Cahill made changes to that letter by omitting some words and paragraphs and adding new paragraphs and by putting the new draft in his name. He did not remove the sentence relating to the on‑lending of moneys to BGF on a subordinated basis but did remove the word ‘again’ from that sentence. A copy of that redraft was sent to Wilson.
317 On 10 September 1987 Cahill produced another draft of the letter which increased the scope of the object of discussion in the letter from convertible notes to ‘debt instruments such as debentures and convertible notes’. It deleted the statement that on‑loans to BGF would be on a subordinated basis. The draft was given to Wilson for perusal who apparently wrote several minor changes in wording on the draft that were incorporated by Cahill into the letter which he sent to Lloyds Bank and to the Australian Banks on 11 September 1987. That letter stated that TBGL would use BGF (ACT) Ltd to issue debt instruments and formally nominated BGF (ACT) Ltd as a ‘Nominated Borrower’ under the NP Guarantee.
318 Cahill gave evidence as a witness called by the Banks. When asked in cross‑examination about Wilson’s letter to Lloyds Bank Cahill could not explain why the Corporate Solicitor had been ‘sounding out the Banks’ on financial arrangements.
319 No evidence from Wilson was provided to his Honour.
320 Although, at [3024], his Honour stated that the letters ‘were not determinative of the question whether the BGNV on‑loans were subordinated’, he expressed the opinion, at [3025], that the letter dated 3 September 1987, was ‘consistent with the view that relevant officers of Bell believed (in September 1987) that the on‑lending of funds that had come from a subordinated source was itself subordinated’. Mistakenly his Honour thought the ‘draft’ dated 4 September 1987 was a separate and further expression of such a view and that it reinforced the opinion his Honour had formed. As noted above it was merely a copy provided to Cahill on the following day of Wilson’s letter to Lloyds Bank dated 3 September 1987.
321 As set out earlier in these reasons, the records of the Bell group in respect of inter‑company loans did not show that any on‑loans of funds received from a ‘subordinated source’ had been subordinated. That would contradict a supposition that the foregoing correspondence could reflect a view of ‘relevant officers of TBGL’ that such on‑loans were subordinated.
322 His Honour, at [3025], then stated that the terms of the letter dated 3 September 1987 ‘support[ed] the proposition that the BGNV on‑loans … were made on a subordinated basis’ and that changes made in the letter dated 11 September 1987 ‘[did] not detract from that proposition’.
323 His Honour’s reliance on the letter prepared by Wilson as representing the belief of relevant officers who were involved in the raising of funds for the issue of Bonds and who dealt with the Banks in respect of those matters was misplaced in the absence of any evidence that Wilson was one of those officers. The terms of Cahill’s letter dated 11 September 1987 did not confirm such a belief of relevant officers either at the time the contracts of loan were made or at the time of the representations said to be made by TBGL as pleaded by the Banks.
324 Insofar as the questions of reliance and detriment were concerned, Wilson’s letter, which went only to Lloyds Bank and sought comment on a prospective proposal, was overtaken by Cahill’s letter of 11 September 1987. That letter was distributed to all Banks and sought approval of an actual proposal. It followed that no reliance or detriment on the part of the Banks in respect of the pleaded representations could properly be attributed to the letter dated 3 September 1987. Where his Honour took into account the contents of the drafts referred to, that material could not have been relevant to determination of issues of reliance and detriment on the part of the Banks, and if used for that purpose it involved error.
Contracts
Contracts inter se
a) Inferred contractual term
325 No formal contract was created for the loans made by BGNV to TBGL or BGF. It was not in issue, however, that a relationship of lender and borrower had been established between those parties. That is, contracts of loan were able to be inferred from evidence of conduct and the evidence contained in documents.
326 The content of an inferred contract is ascertained by determining the extent of the mutual assent of the parties, that is, the actual intent of the parties manifested by their words, acts and conduct. See Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539, 570 (Deane J); Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410, 422 (Brennan CJ, Dawson and Toohey JJ).
327 Given the acceptance of the contracting parties that BGNV was not to receive any profit from the contracts of loan, the basic terms of the contracts able to be inferred related to the duration of the loans, repayment of principal and payment of interest that were consistent with BGNV’s obligations to Bondholders.
328 As already noted in these reasons, his Honour found that neither party gave any consideration to subordinating BGNV’s right to recover the loans from TBGL and BGF to the rights of other creditors of TBGL and BGF.
329 That finding should have dictated the further conclusion that ‘it [could not] be inferred or assumed as a matter of actual fact that the parties ever directed their minds to that question or that … there was any actual joint intention which [could] be expressed as a contractual term’: Griggs v Noris Group of Companies [2006] SASC 23; (2006) 94 SASR 126, 135 (White J) (Perry J agreeing).
330 However, by construing documents by use of the constructs ‘bonds means proceeds’ and ‘effective subordination’, his Honour found, at [3242], that the request of TBGL to the Banks to treat the Bonds as equity was to be read as a request to have the sums borrowed by TBGL and BGF from BGNV treated as equity.
331 From that conclusion his Honour then found he was able to infer that it was a term of the contracts of loan between BGNV and TBGL and BGNV and BGF that BGNV’s right to recover the loans was subordinated to the rights of the creditors of TBGL and BGF, the content of that term being ‘the terms and conditions applying to the bonds per se’ [3286].
332 As explained earlier in these reasons, the meaning applied by his Honour to the word equity in relevant documents was not the proper meaning of the word as used therein and led his Honour to form conclusions on the content of the foregoing contracts of loan that involved error.
333 It follows that there was in fact no evidence from which his Honour could properly infer that there had been mutual assent between BGNV and TBGL and BGNV and BGF that BGNV’s right to recover loans made to TBGL and BGF respectively was subordinated to the rights of other creditors of TBGL and BGF, in particular the Banks.
334 The cross‑appeal from the finding that the contracts of on‑loan contained such an inferred term must be upheld.
b) Implied contractual term
335 His Honour, at [3332], stated that if necessary it would be open to imply a term to the same effect.
336 As acknowledged in Breen v Williams [1996] HCA 57; (1996) 186 CLR 71, 91 (Dawson and Toohey JJ), ‘The line between inference and implication will not always be easy to draw’.
337 Whereas the terms of an inferred contract represent a conclusion as to the actual intent of the parties, an implied term is the finding of a presumed or imputed intention of the parties made necessary to provide for the reasonable or effective operation of a contract for which the parties have not attempted to spell out the full terms. See Hawkins v Clayton (573) (Deane J); Byrne v Australian Airlines (422) (Brennan CJ, Dawson and Toohey JJ; (442) (McHugh and Gummow JJ).
338 The contracts of loan between BGNV and TBGL and BGF were not within a class of contract where such a term was to be implied as a necessary legal incident of the class: Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555, 576 (Viscount Simonds). Therefore, the implied term relied upon was said to be one required to provide business efficacy to the contracts.
339 His Honour’s finding that no party considered any ramifications arising from loans by BGNV to TBGL and BGF militated against a finding of an implied term as pleaded. In the instant case, as his Honour accepted, inter‑company loans did not, as a matter of course, include a term subordinating the right of the lender to recover the loan to the liabilities of the borrower to other creditors. Obviously it was not necessary to include such a term to make the contracts of loan effective.
340 It may be accepted that if there is a need to imply a term to make a contract effective that need will have arisen from the failure of the parties to turn their minds to the inclusion of that term: Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 346 (Mason J). But the failure of the parties to consider whether it was appropriate to add the term to their contract does not in itself make that term a term to be implied as part of the presumed intention of the parties in respect of the content of their contract.
341 Although the task of considering whether a term is to be implied in an informal contract may receive some assistance from the criteria identified in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 as those to be satisfied before a term is implied in a formal contract in which the parties have attempted to set out agreed terms, a term will only be implied in an informal contract where it can be seen that it is necessary to do so for the effective operation of the contract or it is a term that is so obvious in the circumstances that it goes without saying. See Byrne (442) (McHugh and Gummow JJ). The second criterion may be taken to have a necessary connection with the first.
342 Although dicta of Lord Hoffman included in an advice of the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 [21] ‑ [27] cautioned against criteria such as those set out in BP Refinery being given ‘a life of their own’ (presumably a warning against treating those requirements as restrictive) implication of a term in an informal contract is not a licence to improve a contract without regard to the need to restrict implication of a term to the extent necessary to give business effect to the contract and thus the presumed intent of the parties. See also Cifuentes v Fugro Spatial Solutions Pty Ltd [2009] WASC 316; Hughes v St Barbara Mines Ltd [No 4] [2010] WASC 160; Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd [2009] NSWSC 676. It is not permissible to imply a term merely because it appears reasonable to do so: Codelfa Constructions (346) (Mason J).
343 The contracts of loan made between BGNV and TBGL and BGF did not require inclusion of a term that BGNV’s right to recover the loans be subordinated to the rights of other creditors of TBGL or BGF for the operation of the contracts to be effective. Furthermore, by no means was such a term so obvious in the circumstances that it went without saying.
344 His Honour should have concluded that the term pleaded by the Banks was not a term able to be implied in those contracts of loan and the cross‑appeal from his Honour’s foreshadowed finding should be upheld.
c) Capacity of Banks to enforce contracts ‘inter se’
345 As noted earlier his Honour, at [3361], found that the Banks could not enforce the foregoing contracts ‘inter se’ because the terms of s 11(2) of the Property Law Act 1969 (WA) (‘PLA’) did not apply to an informal contract.
346 The Banks contend that his Honour erred in law in that application of the PLA. The Banks submitted that the proper construction of s 11(2) of the PLA was one that permitted enforcement of a contractual benefit intended to be conferred upon a third party, regardless of whether the contract was formal or informal.
347 His Honour found that if s 11(2) of the PLA did apply to such contracts the requirements of the section would have been satisfied to enable the Banks to enforce the contracts. The respondents, and BGNV, did not raise a notice of contention in respect of that finding although in their submissions on the Banks’ grounds of appeal the respondents contended that his Honour should have found that the Banks were not sufficiently identified for the purposes of s 11(2). BGNV submitted that his Honour erred on various grounds in finding that the requirements of s 11(2) were otherwise satisfied by the Banks.
348 Relevantly, s 11(2) of the PLA reads as follows:
(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.
349 As his Honour said, at [3348], there is an absence of direct authority on the construction of this provision of the PLA. Given that 40 years have elapsed since enactment that fact is, perhaps, surprising. After reviewing extrinsic sources for assistance in constructing s 11(2), including the pre‑legislative history, his Honour concluded that the preponderant view was that s 11(2) of the PLA only applied to contracts in writing. See Cheshire and Fifoot’s Law of Contract in Australia (8th Aust ed, 2002) 7.16; Grieg and Davis, The Law of Contract (1987) 1045; Bradbrook, MacCallum, Moore, Australian Real Property Law (3rd ed, 2002) [18.02]; GD Samuels QC, ‘Contracts for the Benefit of Third Parties’ (1968) 8 West Aust L Rev 378; Beswick v Beswick [1967] 3 WLR 932; Coulls v Bagot’s Executor & Trustee Co Ltd [1967] HCA 3; (1967) 119 CLR 460. In reaching that conclusion his Honour necessarily had regard to the terms of s 32 of the Interpretation Act 1984 (WA) which provides that the headings of parts, divisions and subdivisions form part of the written law to be construed. Section 11(2) of the PLA is within Part II that has the heading ‘Deeds and Other Instruments’. His Honour noted that every section in Part II deals with written agreements and there was nothing in the Act to indicate that ‘instrument’ was intended to have a broader meaning than its ordinary meaning.
350 As Kennedy J pointed out in Westralian Farmers Co‑operative Ltd v Southern Meat Packers Ltd [1981] WAR 241, 250, the expressed purpose of the PLA was to consolidate and amend the law relating to property. Section 11(1) of the PLA was concerned with instruments relating to land or other property and, historically, had its genesis in a provision concerned with indentures. On the other hand, s 11(2) was a provision ‘concerned essentially with the law of contract rather than with the law of property’. As his Honour stated there was ‘no doubt that the application of s 11(2) is likely, in particular cases, to pose questions and difficulties’.
351 That comment by Kennedy J in 1981 was echoed in the same year by a report on Privity of Contract: A Report by the Contracts and Commercial Law Reform Committee (Wellington: Department of Justice, 1981) which identified a ‘difficulty’ in the Western Australian provision in that the use of the word ‘expressly’ in its terms indicated that only written contracts were addressed by the subsection.
352 It can be seen that s 11(2) as a provision applying to the law of contract generally and using the broad descriptive term ‘contract’ may be thought to reduce the weight able to be given to the heading ‘Deeds and Other Instruments’. But the words ‘expressly in its terms’ as used in s 11(2) act as a qualification upon the form of contract referred to in the subsection and suggest that the contract with which the subsection is concerned is a formal contract within the contemplation of the heading Deeds and Other Instruments. Furthermore, s 11(2) and the heading to Part II were part of the original enactment and, therefore, no argument arises that s 11(2) was introduced to the Act by an amendment that, by oversight, failed to recognise the need to amend the terms of the heading of Part II.
353 The law reform occasioned by the introduction of s 11(2) in 1969 was a reform of revolutionary effect according to a view expressed by the House of Lords in the year before the enactment. See Beswick v Beswick [1968] AC 58. Perhaps it can be assumed that the Western Australian Parliament was only prepared to apply a reform of revolutionary character to formal contracts so that the terms of contracts to which the reform applied would be patent at the outset and, in particular, would show that the parties to the contract had clearly identified the person nominated by the parties to receive an enforceable right under the contract.
354 As stated in Westina Corporation Pty Ltd v BGC Contracting Pty Ltd [2009] WASCA 213; (2009) 41 WAR 263 46 (Wheeler, Newnes JJA agreeing), s 11(2) looks to express terms in the contract and not the acquisition of a right by implication and confers only limited recognition of third party rights.
355 No error was demonstrated in his Honour’s approach to the construction of s 11(2) of the PLA by having regard to the meaning conveyed by the context in which it appeared and by referring to such extrinsic material as was available to obtain assistance in resolving any ambiguity. The limited meaning of the subsection as construed by his Honour did not provide an absurd result.
356 This ground of appeal must be dismissed.
Contracts inter partes
357 Under this heading the Banks pleaded that three separate contracts existed, confined in operation to the disposition of funds derived from Bond Issues 1, 2. The first contract was said to have been made with the Australian Banks (other than Hong Kong Bank Australia Ltd (‘HKBA’)) [PLED.010.001, pars 11EK and 11EL], the second contract with the Lloyds Syndicate Banks [PLED.010.001, pars 11EM and 11EN] and the third contract with all Banks (apparently other than Skopbank) [PLED.010.001, pars 11EO and 11EP].
358 The parties said to have contracted with the Australian Banks (other than HKBA) in the first contract were pleaded in the following alternatives:
(i) TBGL, TBGL NP Group and BGNV
or;
(ii) TBGL
or;
(iii) TBGL and BGNV
or;
(iv) TBGL and TBGL NP Group.
359 The parties said to have contracted with the Lloyds Syndicate Banks in the second contract were said to be alternatively:
(i) TBGL, TBGL NP Group and BGNV
or;
(ii) TBGL
or;
(iii) TBGL and TBGL NP Group
or;
(iv) TBGL, BGF and BGUK
or;
(v) TBGL, BGF, BGUK and BGNV.
360 In the third contract the alternative parties said to have contracted with the Banks were pleaded as:
(i) TBGL, TBGL NP Group and BGNV
or;
(ii) TBGL
or;
(iii) TBGL and TBGL NP Group
or;
(iv) TBGL and BGF
or;
(v) TBGL, BGF and BGNV.
361 The Banks pleaded that the first and third contracts were responses to ‘requests’ contained in the letters to the Banks from TBGL dated 11 December 1985 and 15 April 1987. It was pleaded that formation of the second contract occurred ‘in the circumstances’ of the preparation and distribution to Lloyds Syndicate Banks of the Lloyds Information Memorandum ‘prepared by [Lloyds Merchant Bank Limited] and TBGL’.
362 According to those pleadings each contract was said to represent the agreement of the respective Banks to ‘treat the liabilities of TBGL, as a member of the [TBGL NP Group], arising from the raising and deployment of funds in and about [Bond Issues 1, 2] as equity when considering balance sheet ratios for the purpose of banking covenants’ in consideration of the ‘promise’ of the party or parties contracting with the Banks that ‘the liabilities of TBGL … arising from the raising and deployment of funds in and about [Bond Issues 1, 2] would in the event of liquidation of TBGL be subordinated to the liabilities of TBGL to the [Banks]’.
363 Several comments are required in respect of that pleading.
364 First, as pointed out earlier in these reasons his Honour, at [3223] ‑ [3224], appeared to accept that under the NP Agreements the Banks were bound to accept NP Reports prepared by the auditors for the TBGL NP Group ‘when considering balance sheet ratios for the purpose of banking covenants’ if those accounts treated the Bonds issued in Bond Issues 1, 2 as an addition to the equity of TBGL and not part of the ‘Total Liabilities’ of the TBGL NP Group.
365 Second, neither TBGL nor BGF as debtors could promise to subordinate a liability in the event of liquidation of either company. Only the creditor could do so. Therefore, unless that creditor was a party to the agreement, there would be no consideration in the terms defined in the pleading.
366 At [3391] ‑ [3416], his Honour set out his findings on these pleadings. His Honour accepted the argument advanced by the respondents that no intention to create a legally binding contract between the Banks and TBGL, BGNV and the TBGL NP Group was demonstrated in the letters dated 11 December 1985 and 15 April 1987, and the Lloyds Information Memorandum. His Honour found, first, that it was to be inferred from the formal contracts that comprised the various facility agreements, the NP Agreements, and the NP Guarantee, that these documents were intended to comprise the entire contractual relationship between the Banks, TBGL, and the TBGL NP Group [3404]. Second, statements made in the letters and Lloyds Information Memorandum relied upon were representational only, and not promissory in character [3401], [3405]. Third, the contracts as pleaded lacked certainty because of the inability to identify the entities said to be contracting with the Banks [3412] ‑ [3413].
367 On appeal, the Banks submitted that his Honour erred in finding there was no intention to create legal relations concerning the pleaded contracts inter partes.
368 The Banks submitted that varying degrees of formality had been used to record the facilities between the Banks and the TBGL NP Group and, therefore, it was open to his Honour to have concluded that documents relied upon by the Banks in their pleading were capable of reflecting an intent to create legal relations. If there were any merit in this submission it was overtaken by two factors. First, it was open to his Honour to find that the banking arrangements between the parties that formed the entire contractual relationship between the Banks and the TBGL NP Group were to be found in the documents specified by his Honour [3404].
369 Second, as found by his Honour, at [3401] and [3405], the letters dated 11 December 1985 and 15 April 1987 and the Lloyds Information Memorandum were, at best, representational in character and were incapable of forming the contracts pleaded.
370 As stated by Gibbs CJ in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 61:
A representation made in the course of negotiations which results in a binding agreement may be a warranty ‑ i.e. 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.
371 The letters 11 December 1985 and 15 April 1987, as found by his Honour at [3405], contained no more than statements of existing fact in the representation that ‘the Bonds are a subordinated debt’ and no promissory component of a contractual character. Furthermore, as noted by his Honour, at [3405], the purpose of the letters as outlined therein was not promissory in nature. It was a bare request that the Banks confirm the treatment of the Bonds as equity for the purposes of banking covenants. Similarly, his Honour, at [3406], correctly assessed the lack of promissory character in any statements in the Lloyds Information Memorandum.
372 With regard to his Honour’s implied finding, in [3412] ‑ [3413], that the pleaded contracts lacked certainty as to the parties bound thereby, no error in that finding was demonstrated. The Banks’ case as pleaded, [PLED.010.001, par 11ED(72)], relied upon proving that TBGL had authority to make binding promissory commitments on behalf of other members of the TBGL NP Group, or BGNV or BGUK for any of such entitles to be shown to be a contracting party in addition to TBGL. His Honour, at [3412] ‑ [3413], appeared to be unpersuaded that the Banks had satisfied that onus or that the material presented suggested that there could have been another contracting party other than TBGL.
373 The Banks’ grounds of appeal in respect of his Honour’s findings must be dismissed.
Estoppel
374 The Banks pleaded, [PLED.010.001, par 11ER], that all respondents were estopped from denying that ‘the liabilities of TBGL and BGF pursuant to the fundraising arrangements’ (i.e. as debtors to BGNV) ‘were subordinated on the terms set out in [PLED.010.001, par 11EE(2) ‑ (4)]’. The estoppel was said to apply to the ‘fundraising arrangements’ of Bond Issues 1, 2 and 3.
375 His Honour derived from the Banks’ pleadings and submissions that three alternative forms of estoppel were relied upon: estoppel by representation; estoppel by convention and equitable estoppel.
376 His Honour at [4262] found that estoppel by convention was overtaken by equitable estoppel in that the foundation of all of the pleaded estoppels was the representational character of statements made by TBGL. In other words it was not a case of mutual assumption as to a state of affairs or relationship from which an estoppel by convention arose but representation by TBGL as to future conduct that provided the promissory character of equitable estoppel which also absorbed any argument for common law estoppel by representation. His Honour was careful to distinguish between the nature of promissory estoppel, per se, and promissory representations displaying contractual intent or purpose. See Equititrust Ltd v Franks [2009] NSWCA 128; (2009) 258 ALR 388 [70] ‑ 73.
377 The representations relied upon to support the pleading of estoppel, all of which were said to be contained in documents, have been set out earlier in these reasons at [65]. As already explained, the representations pleaded cannot be found in the documents identified by the Banks.
378 However, his Honour was satisfied that the Banks (other than Skopbank and Standard Chartered Bank Australia Ltd (‘SCBAL’)) had made out a defence of estoppel. Skopbank and SCBAL appeal from the finding that they had no estoppel rights to enforce against BGNV [APPA.000.097, Gd 143].
379 The respondents by cross‑appeal submit that his Honour erred in fact and law in finding that estoppel had been established.
380 Before considering his Honour’s findings on estoppel it should be noted that the Banks’ contention that the liquidators of TBGL, BGF and BGNV would be bound by those findings may not be free of doubt. See Re Exchange Securities Financial Services Ltd (in liq) [1988] Ch 46, 59 ‑ 60 (Harman J); Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; (1990) 169 CLR 332, 339 ‑ 340 (Brennan and Dawson JJ); Webb Distributors (Aust) Pty Ltd v Victoria [1993] HCA 61; (1993) 179 CLR 15, 37 ‑ 38 (Mason CJ, Deane, Dawson and Toohey JJ).
381 A claim by the Banks that the liquidators of TBGL or BGF were bound by estoppel to administer the assets of those companies without regard to claims in those liquidations by BGNV may face the response from the liquidators that, having regard to their statutory duties to duly administer those liquidations, they were not bound by such claims of estoppel if they formed the view that acts of TBGL unjustly prejudiced the interests of BGNV as a creditor in those liquidations.
382 The Banks also pleaded [PLED.010.001, pars 11EA(a)(2), 11EJ(2)] that BGNV would have been estopped from asserting against TBGL or BGF that loans to those companies were ‘unsubordinated’. His Honour at [4258] found it unnecessary to consider that defence because he had found that the contracts of loan between BGNV and TBGL and BGF contained a term that the loans were ‘subordinated’, notwithstanding that the Banks had no standing to enforce those contracts.
383 The Banks by notice of contention say that his Honour erred in not finding that the pleaded estoppel was available to TBGL and BGF. It is difficult to see how that contention can be made out by the Banks.
384 Quite apart from TBGL being the author of the representations said to ground the equitable estoppel available to TBGL and BGF against BGNV there was a lack of utility in his Honour making a finding in the terms pleaded, namely that BGNV was estopped ‘as at’ or ‘up to 1990’ from asserting that it had a right, unsubordinated to the rights of other creditors, to prove in the liquidations of TBGL and BGF in respect of the indebtedness of those companies to BGNV.
385 As at the date of the Transactions, 26 January 1990, the Banks may not have been satisfied that undertakings from TBGL and BGF (that they would assert rights in estoppel against BGNV if BGNV sought to prove in the liquidations of those companies for the moneys owing on loans advanced) would bind the liquidators of TBGL and BGF. Instead the Banks obtained an undertaking from TBGL that it would use its best endeavours to have BGNV execute the BGNV Subordination Deed prepared by the Banks in which BGNV would grant subordination in terms required by the Banks in respect of BGNV’s right to recover the loans advanced to TBGL and BGF.
386 On 31 July 1990, at the request of the Banks, TBGL, BGF and BGNV altered the terms of their relationship as borrowers and lender by becoming parties to, and executing, the Deed prepared by the Banks in which BGNV and TBGL and BGF agreed that the right BGNV had to recover loans advanced to TBGL and BGF would be subordinated to the rights of the Banks. Thereafter, any finding that ‘as at’ or ‘up to 1990’ TBGL and BGF had a right to assert an estoppel against BGNV became moot.
387 Execution of that Deed provided TBGL, BGF and the Banks with enforceable rights in contract and of a defence of estoppel against BGNV continuing for the benefit of TBGL and BGF thereafter. An order against the Banks preventing them relying on a voidable Deed would not reinstate rights that the Banks had caused TBGL and BGF to replace with rights perceived as improved or superior rights. The adoption of such an inconsistent position is to be taken as a waiver of the prior position. See Wilson v McIntosh [1894] AC 129; The Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394, 481 ‑ 485 (Gaudron J); Badat v DTZ Australia (WA) Pty Ltd [2008] WASCA 83 [148] ‑ [156].
388 In addition to the foregoing, all estoppels pleaded by the Banks were based on the same alleged representations by TBGL and stood or fell together.
389 The case of the Banks in estoppel sought to avoid ‘pari passu’ distribution with BGNV in the liquidation of TBGL and BGF that would follow if the right of BGNV to recover loans made to TBGL and BGF were not subordinated to the rights of other creditors of TBGL and BGF. The Banks did that by pleading that in letters from TBGL to the Banks dated 11 December 1985 and 15 April 1987 [PLED.010.001, pars 11ED(17)(h), (43)(j)] TBGL represented that ‘bondholder debt’ ranked ‘behind … bank borrowings of the [TBGL NP Group]’ or, more particularly, that in the foregoing letters and the Lloyds Information Memorandum April 1986 [PLED.010.001, pars 11ED(17)(i), (30)(g), (43)(k)], ‘liabilities of TBGL and BGF … arising from … deployment of moneys in and about the … [Bond Issues 1, 2] were … subordinated to the liabilities of those companies to the [Banks]’. In other words the meaning of subordination understood by TBGL and BGNV and the subject of representation to the Banks, was not the subordination described in the Bond Issue documents but another concept of subordination directed specifically to the interests of the Banks. That is to say the representation made to the Banks with the intention that the Banks act on it, was that in the making of the loans from BGNV to TBGL and BGF the interests of the Banks had been considered and the loans contained a provision that protected the Banks from any adverse consequence. As discussed later in these reasons that argument became difficult to sustain when his Honour found that no person had considered whether any implications arose from loans made by BGNV to TBGL and BGF.
390 His Honour stated, at [3608], that there was no express representation in the terms pleaded by the Banks. Whilst his Honour, at [3242], acknowledged that ‘[c]onsiderable difficulties are presented … about construction of the language and the concept involved in capital raising practices using unsecured notes, convertible notes and the like’ his Honour went on to find that ‘in the end I find myself satisfied that the thesis “bonds means proceeds”, as contended for by the Banks, [has] been made out’, and then, at [3650], stated that he ‘accepted the [B]anks’ arguments concerning the concept of effective subordination’.
391 At the outset three points can be made about the use of the foregoing theses as an aid to construction of words used in relevant documents. First, they involved application of asserted meanings to displace the ordinary meaning of the terms used in the documents.
392 Second, they disregarded the separate legal personalities of BGNV, TBGL, and BGF, and the separate character and consequences of the legal relationships between BGNV, TBGL and the Bondholders under the Bond Issue documents on the one hand, and between BGNV and TBGL and BGF under the contracts of loan on the other. In the arrangements under the Bond Issue documents the detriment to the Bondholders in subordination of the right to recover moneys due to them under the Bonds in the event of liquidation of BGNV or TBGL, was a price paid by Bondholders for the grant of the benefit of the attached Conversion Bond in which the Bondholders obtained the right to elect to convert the Bonds to shares in TBGL. The loan transactions between BGNV and TBGL and BGF, were discrete and unaffected by the respective rights and obligations of BGNV and the Bondholders under the Bond Issue documents, save, perhaps, for the understanding between BGNV and TBGL and BGF that terms of the loan contracts had to be consistent with maintenance of BGNV’s ability to perform its obligations under the Bond Issue Trust Deeds. The statement contained in the offer document prepared for circulation to prospective investors for each Bond Issue advising that BGNV would lend the ‘net proceeds’ of the Bond subscriptions to TBGL, or to the Bell group, carried no representation that it would be a term of those loans that BGNV’s right to recover those loans would be subordinated to the rights of other creditors of the borrowers.
393 Third, the words ‘subordination of the Bonds’ wherever used in the Bond Issue documents could only refer to subordination of the rights of Bondholders to the rights of other creditors of BGNV, in the event of the liquidation of BGNV, as expressly provided in the Bond Issue documents. That provision could not ground an assertion that the right of BGNV to recover loans made to TBGL and BGF, was subordinated to the rights of other creditors of TBGL and BGF, in the event of liquidation of those companies. Moneys subscribed to the Bonds were not subject to some concept of ‘running subordination’. The legal relationships established by the relevant facts were not able to be ignored and they circumscribed the legal arguments available in respect of matters arising out of them (Polly Peck (444)).
394 His Honour seems to have been led into error by the evidence of Scudamore from which his Honour extracted the proposition, at [2982], that ‘the bonds [were] treated as sounding in a monetary obligation’. Thereafter, this statement was extrapolated to ground a conclusion that the words ‘bonds treated as equity’ and ‘subordinated bonds’ were to be read as ‘on‑loans treated as equity’ and ‘subordinated on‑loans’. These conclusions introduced a flaw in his Honour’s reasoning on the issue of subordination.
395 In addition his Honour, at [2993] ‑ [3007], placed reliance on the contents of letters from TBGL to the ATO dated 25 November 1985 [TBGL.00930.010, 011] and from C&L to the Deputy Commissioner of Taxation (‘DCT’) dated 5 December 1986 and 15 April 1988 [TBGL.00560.007; TBGL.00353.023; TBGL.00353.006] which sought exemption from the incidence of taxation in respect of payments of interest going out of Australia. Whilst his Honour, at [3007], stated that he did not regard the letters as ‘determinative’ in that ‘they [did] not establish, conclusively, that the on‑loans were subordinated’ nonetheless, in his Honour’s view, the letters were ‘consistent with the proposition that the intention was to on‑lend on a subordinated basis and thus they support[ed] the [B]anks’ case’.
396 In their cross‑appeal the respondents contended that his Honour erred in the construction his Honour applied to this correspondence.
397 The principal letter relied upon was a letter to the ATO dated 25 November 1985 [TBGL.00930.010, 011] from the Office of the Chairman of TBGL under the hand of the Company Secretary. The letter advised the ATO that TBGL intended to make a ‘Euro‑Issue’ of Convertible Subordinated Bonds through BGNV and attached a ‘summary of the terms of this issue’.
398 The relevant part of the letter read as follows:
It is proposed that the funds raised from this issue will be lent by [BGNV] to [TBGL] on the same terms as the issue. [BGNV] 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 [BGNV]. It is proposed that [BGNV] have an issued capital of US$10,000.00.
399 The assurance that ‘the Group would receive no taxation benefit’ appears to be a statement to the ATO that the structure was not a device to divert profit to an entity in a ‘tax haven’ [e.g. TBGL.00858.001]. That is, to make it clear that as a ‘financing intermediary’ BGNV would not earn a profit from the loan transactions.
400 It would seem to be clear from the paragraphs of the letter set out above that terms of the proposed loan from BGNV to TBGL would, in effect, mirror terms applicable to the Bonds as far as interest and maturity dates (or dates of repayment of principal) were concerned. The words ‘on the same terms as the issue’ were so clarified in the final paragraph of the letter which stated that ‘the above financing structure … will result in annual interest and any redemption payments, on the same terms as the issue, … to be made by [TBGL] to [BGNV]’.
401 The role of the final paragraph of the letter 25 November 1985 in defining the use of the words ‘on the same terms as the issue’ appears to have been overlooked in the process of construction applied by his Honour.
402 As was made clear in that paragraph, the effect of the contract of loan would be to match the payments of amounts of interest and payments of principal to be made under the contracts of loan with those made under the terms of the Bonds so that no profit would accrue to BGNV.
403 It may be noted that officers of the Office of the Chairman of TBGL had had their attention drawn to appropriate terms for such a contract of on‑loan earlier that year. On 27 May 1985 a memorandum [TBGL.00816.005] from an Accounting Officer in the Office of the Chairman addressed to another Accounting Officer and to a Treasury Officer within that Office discussed appropriate accounting treatment for ‘Convertible Notes’ and attached an extract from the Consolidated Balance Sheet of Elders IXL Limited at 30 June 1984 as an illustration of how such finance arrangements could be recorded in company accounts. The extract stated that ‘convertible bonds’ issued by Elders NV, a subsidiary of Elders IXL Limited, had been included as part of ‘shareholders’ equity’ of Elders IXL Limited and the following statement, which appeared as a Note to the Elders IXL Limited accounts was included in the extract:
The proceeds of the convertible bonds have been on‑lent to Elders IXL Limited on the following terms and conditions:
(a) Elders IXL Limited has agreed to reimburse Elders NV with all costs, charges, fees and expenses incurred by Elders NV for the purposes of, or in any way in connection with, the bonds or the arrangements relating to the issue thereof; and
(b) Elders IXL Limited has agreed to repay principal and pay interest and other expenses to Elders NV in such amounts, at such times and in all respects and in such manner as will enable Elders NV fully and promptly to discharge all of its obligations to pay or repay monies in respect of or in any way in connection with the bonds.
404 The letter dated 5 December 1986 from C&L to the DCT on behalf of TBGL sought the issue of a withholding tax exemption certificate pursuant to s 128F(4) of the ITAA, at about the time the first payment of interest to Bondholders in Bond Issue 1 became due. C&L requested that withholding tax exemption apply to the interest payment to be made by TBGL to its offshore subsidiary BGNV in order that the amount received by BGNV to pay interest to Bondholders would not be reduced by the impost of withholding tax on TBGL. The letter set out details of Bond Issue 1 and enclosed relevant documents in respect of the Issue.
405 The part of that letter construed by his Honour read as follows:
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.
406 The letters dated 15 April 1988 were in similar terms seeking withholding tax exemption certificates for BGF and were sent by C&L to the DCT in respect of impending interest payments by BGF to BGNV on‑loans made by BGNV to BGF from funds received by BGNV from Bond Issues 2, 3.
407 His Honour, at [3003] ‑ [3004], appears to have accepted submissions made by counsel for the Banks, that the three later letters assisted construction of the letter dated 25 November 1985 from TBGL to the ATO in that, so it was submitted, they made it clear that the words ‘on the same terms as the issue’, extended to ‘the term of subordination’. It was submitted, apparently, that the description ‘Convertible Subordinated Bonds’ used in the letter dated 25 November 1985, and occurring in the heading to the summary attached thereto, was a reference to a ‘term of subordination’ to be taken to be within the expression ‘on the same terms as the issue’.
408 The foregoing approach adopted by his Honour to the construction of the letter dated 25 November 1985 appeared to be influenced by what his Honour, in [3005], had regarded as a ‘logical difficulty’ for the respondents in that letter from TBGL to the ATO. The ‘logical difficulty’ his Honour considered existed reflected a misunderstanding on his Honour’s part of the respondents’ argument on construction of that letter.
409 The respondents’ case was that the words ‘on the same terms as the issue’ were confined by the purpose of the communication, namely, to satisfy the ATO that the ‘financing structure’ of the Bonds was not designed to transfer profit offshore to BGNV and that the requested ‘taxation clearance’ could be granted. This was made clear in the particulars of the respondents’ reply to the amended defence and defence to counterclaim [PLED.007.001, par 3.2].
410 That contention appeared to have been acknowledged by his Honour, at [2999], where it was stated that the respondents’ submission was that the words concerned were to be understood as referring to terms that were ‘relevant to the taxation clearance required by TBGL’. The respondents submitted to his Honour that as the letter, and a summary of the terms of the Bonds Issue attached to the letter, made no mention of ‘subordination’ it must follow that a term of subordination was not included within the phrase ‘on the same terms as the issue’.
411 The respondents’ closing submissions at trial [SUBP.R06.004.002, pars 480, 583], whilst reiterating that construction of the letter was limited by the purpose of obtaining a ‘taxation clearance’ went on to state, perhaps a little loosely, that the expression ‘same terms’ was limited to the terms enumerated in the attachment to the letter which did not include subordination. That submission was not an abandonment of the case particularised by the respondents but it led to a responsive argument based on the ‘convertibility’ of the Bonds referred to in the attachment.
412 Counsel for the Banks submitted to his Honour that reliance by the respondents on the contents of the attachment necessarily brought with it acceptance of ‘conversion’ as a term of the contracts of loan.
413 The argument of the Banks built on that assertion by then submitting that the terms of condition 3 endorsed on the Bonds meant that a ‘term of subordination’ had to follow as a term of the contracts.
414 Condition 3 of the Bonds consisted of an undertaking by TBGL and BGNV that they would not create or have outstanding (or additionally in TBGL’s case would not guarantee) 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 then being issued by BGNV and guaranteed by TBGL. The Banks submitted to his Honour that that condition of the Bonds would be breached by a ‘term of conversion’ in the on‑loan contracts unless the contracts also included a ‘term of subordination’.
415 It was out of this submission that his Honour formed the view that the argument of the respondents faced a ‘logical difficulty’ in the content of the letter of 25 November 1985. As his Honour put it, at [3005],
The [respondents] 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).
416 His Honour, at [3217] ‑ [3219], considered that support for the foregoing approach was to be found in an internal TBGL memorandum dated 26 August 1987 forwarded by TBGL’s Assistant Treasurer to Treasury and Legal officers which read as follows:
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. (Condition 3, Undertaking, Terms and Conditions of the Bonds).
417 His Honour, at [3218], appears to have accepted the Banks’ submission that the foregoing sentence constituted acknowledgement by TBGL officers that indebtedness of BGF and TBGL as borrowers from BGNV had to involve subordination of BGNV’s right to recover those loans to meet the Condition 3 of the Bonds.
418 As can be seen the memorandum did no more than recite the Bond conditions as part of a request for advice on a possible future finance proposal.
419 The memorandum made no reference, express or implied, to loans from BGNV to TBGL and BGF. The submission that the literal meaning of the words (or ‘the unvarnished approach’) could be replaced by a ‘contextual treatment’ and a ‘gleaned’ meaning obtained by use of ‘commercial reality’ as put by counsel for the Banks (appeal ts 3484; 3487 ‑ 3489, 3491) (and the plain meaning of words ignored if necessary) was inapposite and should have been rejected by his Honour.
420 It seems that the additional context relied upon by his Honour to apply a construction beyond the terms of the words used in the memorandum were the circumstances of ‘logical difficulty’ discussed above.
421 Although his Honour did not decide that it was a term of the contracts of loan between BGNV and TBGL and BGF that BGNV could convert the loans to equity in TBGL, his Honour appears to have concluded that if officers of TBGL held such an understanding it had to follow that they understood that it was a term of the loans that BGNV’s right to recover the loans was subordinated to other creditors of TBGL and BGF.
422 It was obvious that the memorandum was dealing with the limitations imposed by an undertaking not to create more indebtedness superior to the indebtedness owed to the Bondholders where that additional indebtedness included a right in the new creditor to convert the debt into TBGL shares.
423 Mere contracts of loan between BGNV and TBGL and BGF were not contemplated by the memorandum. There was nothing to support a suggestion that those contracts of loan contained a term that BGNV could convert the loans to TBGL shares by directing TBGL and BGF to apply the loan moneys to the purchase of TBGL shares and the Banks did not plead that loan contracts contained such a term.
424 The summary attached to the letter referred to a term of the Bonds providing for conversion of the Bonds to shares in TBGL. The relevant term in the Bonds was the tripartite arrangement between Bondholders, BGNV and TBGL in which TBGL issued Conversion Bonds for attachment to Bonds issued by BGNV.
425 On their face the loan contracts between BGNV and TBGL and between BGNV and BGF were bare informal contracts recording the terms of loan and repayment of moneys lent and payment of interest thereon, such terms to be consistent with BGNV’s obligations under the Bonds and to satisfy the requirements of the ATO for the issue of a ‘taxation clearance’.
426 There was no evidence before his Honour that TBGL had provided an undertaking to issue Conversion Bonds, or to convert its debt to BGNV to shares in TBGL. Of course, in respect of the loan contracts between BGNV and BGF, TBGL was neither a party to those contracts nor had it given any undertaking to issue shares in TBGL if BGNV sought to convert the debt owed by BGF to shares in TBGL. Neither BGNV nor BGF was able to direct TBGL to issue shares.
427 The loans from BGNV to TBGL and BGF did not become convertible into equity by reason of the right of Bondholders to convert debts owed to them by BGNV to equity in TBGL and the submission of counsel for the Banks (appeal ts 3489) that the loans could be regarded as indebtedness ‘which, as a matter of commercial practicality’ could be converted into shares in TBGL was not a submission of substance ignoring as it did the confines of the legal consequences of the relevant arrangements.
428 It should have been apparent that a term providing for conversion by BGNV of loan debts of TBGL and BGF to equity in TBGL would have been neither necessary nor appropriate to gain the ‘taxation clearance’ sought.
429 The content and purpose of the correspondence made the Banks’ submission on the construction thereof untenable. The correspondence with the ATO sought to state no more than that the loan arrangements between BGNV and TBGL and BGF were on terms that gave equivalent effect in the contracts of loan to the interest and principal repayment provisions of the Bond Issues so that no profit would be retained by BGNV from the loan contracts made with TBGL and BGF.
430 The erroneous construction applied by his Honour to the correspondence removed any foundation for his Honour’s conclusion that the letters were evidence of consistency of intention on the part of TBGL and that they provided material that supported the Banks’ case.
431 His Honour’s conclusion as to a ‘logical difficulty’ failed to properly apply the respondents’ case and his Honour erred in accepting the Banks’ submissions on construction of the letter dated 25 November 1985.
432 This ground of the respondents’ cross‑appeal must be upheld.
433 As noted above, his Honour, at [3133] and [3379], found that no person, including Bank officers, gave any consideration to the terms or implications of loans made by BGNV to TBGL and BGF. It may be said that the overwhelming content of the relevant evidence required such a conclusion. That evidence, and his Honour’s finding, made it most improbable that additional findings could be made that either TBGL made a representation as to the legal implications of loans made by BGNV to TBGL or BGF, or that the Banks formed an understanding as to the legal implications of those loans based on a representation made by TBGL. There was a paucity of material capable of supporting such additional conclusions. Documents that had not been received by the Banks could not assist a contention that a representation had been made or relied upon. Furthermore, in the absence of supporting contemporaneous material little weight could be given to evidence adduced from witnesses as to views now held having considered the issue, or now considered they would have formed at the relevant time had it been necessary to consider the question and form a view.
434 Notwithstanding those limitations, however, his Honour, at [3647] and [3650], found that a representation of ‘effective subordination’ had been made and, with several exceptions, had been relied upon by the Banks. The question now is not whether the conclusion of his Honour was less compelling than competing conclusions available, but whether on the evidence, it was a conclusion rationally open to his Honour or was beyond the capacity of the available evidence to support.
435 On the evidence adduced and having regard to his Honour’s foregoing findings of fact, it was not open to his Honour to reach the conclusion that such a representation had been made upon which the Banks relied and changed their position to their detriment by reason of that reliance.
436 It is noteworthy that where there was evidence of a Bank officer becoming aware that there was a prospect that BGNV’s right to recover loans made to TBGL and BGF may rank equally with the rights of the Banks on liquidation of those companies, that knowledge did not result in either:
(a) a claim by the Banks that a contrary representation had been made by TBGL; or
(b) a claim by the Banks that they had relied on such a representation to their detriment.
437 To the contrary the only reaction of the Banks was consideration of the steps to be taken to address an acknowledged oversight. For example, on 9 January 1990 when Chadwick, then Chief Manager of the Corporate Banking Division at the NSW Branch of Westpac was commissioned to provide a report on the benefit to the Banks of obtaining security from the Bell group, he stated that whilst the Convertible Subordinated Bonds issued by BGNV were subordinated ‘at the issuing company level, in a wash‑up, the loans to TBGL and BGF in fact rank equally with Banks and other creditors at the level of TBGL and BGF’ [081.01.0001, p 8] (underlined in original).
438 Whilst his Honour suggested that Chadwick’s knowledge of the problem of the ‘on‑loan issue’ [7114] would have been received from another source, namely, Weir (Manager, Corporate Banking Division, WA), the ‘officer of Westpac most closely involved with events, in terms of his knowledge and dealings with the Bell group’ [2172], it should not be overlooked that Chadwick occupied that position, (Manager, Corporate Banking Division, WA) from 1983 to 1988 and would have been very familiar with TBGL’s account with Westpac that, relevantly, being the period in which all Bonds were issued by the Bell group.
439 Equally significant was the reaction of SCBAL which had served a demand on TBGL on 4 December 1989 for the repayment of the amount advanced by that bank thereby precipitating the prospective liquidation of TBGL. On 15 December 1989 Aspinall spoke to officers of the parent company, Standard Chartered Bank (‘SCB’), who recorded that Aspinall had suggested that if TBGL were placed in liquidation as a result of SCBAL’s demands, the Banks would have to share ‘pari passu’ with the ‘subordinated debt holders’, that is to say, the Bondholders.
440 On 18 December 1989, SCBAL obtained urgent advice from its solicitors which stated that there was a risk that the ‘subordinated debt … may rank equally with unsecured creditors’. The solicitors requested to see further documents before providing a more definitive opinion.
441 No further instructions were provided by SCBAL and the notice of demand was withdrawn on that day.
442 His Honour, at [7111], said that the failure of SCBAL to provide further documents to or to obtain definitive advice from its solicitors, seemed surprising. No contention was raised by SCBAL that any contrary representations had been made by TBGL between 1985 and 1987.
443 The general spread of knowledge in the Banks of a real risk that, indirectly, Bondholders may share ‘pari passu’ with the Banks through the right of BGNV to recover in a liquidation of those companies loans made to TBGL and BGF brought no claims by the Banks of misrepresentation by TBGL. See [TBGL.30644.018], [7147] ‑ [7148], [7154], [7145], [7166] ‑ [7169], [091.07.0040]. All this evidence suggested late recognition of a problem rather than belief as to a state of affairs brought about by misrepresentation by TBGL.
444 His Honour, at [9723], found that the Banks ‘had no clear idea what their rights were’ and the possibility that BGNV would receive ‘in pari passu’ distribution from the liquidators of TBGL and BGF ‘frightened the [B]anks’ and ‘made them determined to proceed with the refinancing’.
445 Such a conclusion is some distance from a finding of a clear and unambiguous representation by a representor that caused a firm belief in a representee as to the existing state of affairs between representor and representee or as to future conduct by the representee.
446 The inherent problem for the Banks in the loans made by BGNV to TBGL and BGF did not become a live issue for the Banks until the Banks replaced the NP Agreements with the NP Guarantee and the obligations of all TBGL NP Group companies as ‘Indemnifying Subsidiaries’ ceased, the consequences of which have been discussed earlier in these reasons. The problem was not recognised until, in the course of the Banks requiring the provision of security by the Bell group, the issue arose as to whether BGNV’s right to recover loans made to TBGL and BGF would be subordinated to the rights of the Banks in a liquidation of those companies. At that point the Banks became aware that if BGNV’s claims against TBGL and BGF ranked equally with those of the Banks upon liquidation of TBGL and BGF, then, because the indemnity obligations of the TBGL NP Group had been dismantled, part of the funds that would otherwise have been available to be applied to the discharge of TBGL NP Group indebtedness to the Banks could flow in repayment of inter‑company loans to TBGL and BGF and from there, by way of in pari passu distribution with the Banks, to BGNV in repayment of loans provided by BGNV to TBGL and BGF.
447 It appears that his Honour, at [3225], was satisfied that no relevant officers of TBGL, BGF, BGNV or the Banks gave any attention to, or understood the significance of, BGNV not being an ‘Indemnifying Subsidiary’ at the time loans were made by BGNV to TBGL and BGF, or addressed whether there were legal implications for the Banks in those loans. Furthermore, having regard to the absence of any suggestion in either a contemporaneous document or record that the loans were on terms other than the usual terms of inter‑company loans for the Bell group, it was improbable that the loans could be regarded as other than usual inter‑company loans and equally improbable that the loan contracts contained a specific express term intended to meet a circumstance not considered by any party, namely, that BGNV’s right to recover loans made to TBGL and BGF may disadvantage the Banks unless those rights were subordinated to the rights of other creditors of TBGL and BGF in the event of liquidation of those companies.
448 It was not contended by the Banks that inter‑company on‑loans made by TBGL and BGF from the moneys subscribed to the Bonds issued by TBGL and BGF to Heytesbury Securities were made on other than usual terms. That is, the loans contained no term subordinating the lenders’ right to recover the loans to the rights of other creditors of the inter‑company borrower. Thus the latent representation with regard to subordination, claimed to be present in the TBGL letters to the Banks dated 11 December 1985 and 15 April 1987 which sought confirmation of acceptance of the treatment of all Bonds issued by TBGL, BGF and BGNV as part of the equity of TBGL, was a representation that was selective and particular in that it was to be taken to refer only to the inter‑company loans made by BGNV from moneys subscribed to Bonds issued by BGNV.
449 In the light of the foregoing, an assertion that TBGL represented on behalf of BGNV that contracts of loan made between BGNV and TBGL or BGF included a term in which the right of BGNV to recover the loans was subordinated to the rights of other creditors of TBGL and BGF in the event of liquidation of those companies required cogent and unambiguous evidence to support it. Particularly in the face of the finding that the circumstance said to require the inclusion of that term, namely, the prospect of adverse legal implications for the Banks arising from these loans, was neither considered nor anticipated by any party.
450 At [4242] ‑ [4270] his Honour recapitulated conclusions on the ‘subordination issue’. In particular, at [4253] ‑ [4254], his Honour provided the following reasons for finding subordination of BGNV’s right to recover the loans it had made to TBGL and BGF:
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.
451 Apart from what has been stated already in these reasons on the distinction between the rights of BGNV and Bondholders under the Bonds on the one hand, and the rights of BGNV as lender and TBGL and BGF as borrowers under inter‑company loans on the other, the following comments must be made on the two principal points relied upon by his Honour in those paragraphs.
452 First, the ultimate beneficial owner of the ‘domestic Bondholder’ referred to was RHàC and if he had perceived that his interests were at risk and warranted action, he was in a position in December 1985 and May 1987 to have had BGNV consider and, if it agreed, record express subordination of its right to recover the loans to be made by it to TBGL and BGF. That step was not taken.
453 Second, where his Honour stated that ‘the commercial purpose of the project (injecting funds into the [TBGL NP Group] as equity rather than as debt) would be at risk’ if ‘proceeds from the bonds’ were not subordinated and that such a risk would be ‘illogical and lacking in commercial reality and effect’, the relevant facts do not support his Honour’s reasoning.
454 As stated earlier, C&L accepted that the proceeds of Bond Issues 1, 2 and 3 were to be accounted for in the TBGL NP Group as contributions to Bell group capital by reason of the degree of prospect that the whole of the moneys subscribed to the issued Bonds would be applied to the acquisition of shares in TBGL thereby providing an accretion to share capital or reserves of TBGL in the same amount. That was the manner of injecting funds and was the statement made to the public and to shareholders and prospective investors in TBGL by C&L as the accountants and auditors involved in overseeing the TBGL published accounts.
455 As set out earlier in these reasons, C&L did not apply different accounting principles to the preparation of accounts for the purpose of the six‑monthly NP Reports. The accounts for those reports adopted expressly the consolidated accounts prepared for the Bell group with such adjustments as were required for deconsolidation of companies that were not within the TBGL NP Group.
456 As the Notes to the TBGL Annual Accounts 30 June 1988 made clear, treatment of the subscriptions to the Bonds as equity could no longer be made once the prospect of conversion of those funds to the share capital of TBGL became unlikely. That was the only ‘risk’ to be considered in determining whether Bonds were able to be treated as equity instead of debt. Obviously, the question whether, in respect of inter‑company loans made from moneys subscribed to the Bonds, the lender subordinated its right to recover the loans to the rights of other creditors of the borrower was irrelevant to the determination of that risk.
457 Where his Honour, in [4254], suggests that the NP Reports do not support a distinction between ‘bonds and proceeds’, this appears to be a reiteration of a mistaken understanding that it was not the anticipated exercise of the rights of Bondholders to convert the Bonds to shares that was treated as an addition to the equity of TBGL in the audited accounts but the amount of the loans obtained by TBGL and BGF from BGNV.
458 As already discussed that was not, and could not have been, the basis on which the TBGL accounts were prepared.
459 His Honour, in [4254], states that it was the oral evidence of people such as Griffiths (Treasurer) which compelled his Honour to conclude that the on‑loans were intended to be, and were subordinated. However, the relevant evidence identified was at best equivocal and incapable of permitting the plain meaning of correspondence and documentary records to be displaced.
460 At [2999] ‑ [3000], his Honour records the outcome of cross‑examination of Griffiths on the absence in the TBGL letter to the ATO dated 25 November 1985 of any suggestion that subordination of BGNV’s right to recover on‑loans was a term of the contracts of loan. Griffiths accepted that neither the letter nor the attachment identified subordination as a relevant term for the on‑loan, but Griffiths suggested that ‘subordination’ was raised in the letter and the attachment by its appearance in the description of the Bonds as ‘convertible subordinated bonds’.
461 Where his Honour, at [3000], stated that ‘he 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’ for the purpose of the terms of the on‑loan from BGNV to TBGL, it is quite improbable that his Honour could have regarded the foregoing oral testimony as compelling his Honour to find that the on‑loans were subordinated.
462 At [3176], his Honour recorded that Griffiths had agreed in cross‑examination that the statement by C&L in a letter to directors of BRL dated 3 February 1988 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’ was an accurate statement ‘certainly for accounting treatment’.
463 Again that passage of oral testimony could not have been regarded by his Honour as compelling a conclusion that treatment as equity depended upon ‘subordination’.
464 As far as other oral testimony was concerned, it appears that his Honour accepted, in [3178] ‑ [3179], that Cahill (Assistant Treasurer) agreed that convertibility alone was the reason for treating Bonds as equity.
465 Apart from the lack of cogency in the oral evidence referred to, this was not an area in which the advantage enjoyed by his Honour in respect of such testimony was likely to be of much assistance. His Honour had found that no officer at relevant times had given any consideration to the ramifications of on‑loans by BGNV nor distinguished such loans from the usual manner of conduct of inter‑company lending.
466 Reconstruction by witnesses, rather than actual recollection of events that occurred some 20 years earlier and to which events, it was conceded, no consideration had been given at the time, was unlikely to help his Honour in the construction of relevant documents or be able to displace the otherwise plain meaning discernible on the face of correspondence or other contemporary documents.
467 Analysis of the material relied upon by the Banks for the claims in estoppel shows no foundation for the case pleaded and the respondents’ grounds of the cross‑appeal on those findings should be upheld and the grounds of appeal of Skopbank and SCBAL dismissed.
Trade Practices Act 1974 (Cth)
468 As an alternative to reliance on a defence of estoppel the Banks, by counterclaim, sought orders under s 80 (Injunctions) or s 87 (Other Orders) of the Trade Practices Act 1974 (Cth) (‘TPA’) in respect of conduct of the respondents (other than the liquidators) that was said to be misleading or deceptive and to have contravened s 52 of the TPA.
469 The TPA was amended by the Trade Practices Amendment (Australian Consumer Law) Act (No 1) 2010 (Cth) and Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth) and the short title to the Act became the Competition and Consumer Act 2010 (Cth) (‘CCA’). The transitional arrangements included in the amending legislation preserved the operation of the TPA in respect of events prior to the commencement of the amendments, save for injunctive relief which then became governed by the terms of s 232 of the Australian Consumer Law which the amending legislation established as Schedule 2 of the CCA. See Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352; (2011) 195 FCR 1 [20] ‑ [23].
470 The elements of the conduct relied upon for the pleading of a contravention of s 52 of the TPA were the statements and representations said to have been made by TBGL in the representational documents relied upon by the Banks for the pleaded defence of estoppel.
471 His Honour, at [4272] ‑ [4279], found it unnecessary to make any determination on the entitlement of the Banks to the relief sought pursuant to that pleading having found that in the contracts of on‑loan BGNV had agreed to subordinate to the rights of other creditors its right to recover the loans.
472 By notice of contention the Banks claim that if the respondents succeed in their cross‑appeal against his Honour’s finding on the issue of subordination that the claim of the Banks under the TPA should be upheld and appropriate relief granted.
473 Establishing misleading or deceptive conduct for the purposes of s 52 of the TPA may not be as onerous as establishing a defence of estoppel based on representations as to past or future conduct. The purpose of the statutory right of action created by the TPA in respect of misleading or deceptive conduct by a corporation in trade or commerce is to enforce a standard of conduct by corporations that meets community expectations of fair dealing in business activity. The statutory right of action that provides an entitlement to obtain a remedy in a private cause is a means adopted by Parliament to advance the public good and stands in lieu of the imposition of a penalty upon a corporation for non‑compliance with the Act: Fencott v Muller [1983] HCA 12; (1983) 152 CLR 570, 599 (Mason, Murphy, Brennan, Deane JJ).
474 Under s 52 the conduct of a corporation is measured against an objective view of what constitutes fair dealing in trade or commerce in the given circumstances. Such conduct for the purposes of s 52 is not confined to the making of a representation and is a term of wide import: Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357 [19] ‑ [23] (French CJ, Kiefel J).
475 The use of such a right of action to enforce a statutory norm expressed in broad terms suggests that the right of action is likely to cover circumstances beyond the confines of a claim at law or in equity, at least insofar as that right of action relates to conduct that is misleading or likely to mislead: Campomar Sociedad Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45 [97] (Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne, Callinan JJ).
476 Whilst it is not a requirement of s 52 that it be proved that a person has been misled or deceived by the conduct of a corporation it must be shown, in respect of the target of the conduct, that the conduct was likely to mislead or deceive and was thereby inconsistent with the object of the TPA. A fundamental requirement of the TPA as set out in s 52 is that there be a likelihood that the conduct of a corporation would be misleading or deceptive having regard to all relevant circumstances.
477 Such contravening conduct by a corporation may include a failure to act where disclosure of further information would have been a realistic and reasonable expectation arising out of the particular circumstances of the dealing in trade or commerce in which the corporation was involved or engaged: Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31, 40 ‑ 41 (Gummow J); Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458, 475 ‑ 476 (Gleeson CJ); Miller & Associates [19] ‑ [23] (French CJ, Kiefel J).
478 The width of the infringing conduct may extend to circumstances that involve representations made to the public at large amongst whom gullible and unworldly persons will be included and the capacity of that conduct to mislead or to be likely to mislead will be taken to be more obvious: Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177, 202 ‑ 203 (Deane, Fitzgerald JJ).
479 In the instant case the conduct the subject of the claim by the Banks occurred as part of a relatively sophisticated commercial dealing between experienced and knowledgeable business personnel. That is not to say that the party to whom the conduct was directed was well able to identify and counteract sharp practice but it does mean that both parties to the dealing shared a mutual degree of knowledge and awareness of the field of commerce in which they were engaged and the party to whom representations were allegedly made was neither gullible or unintelligent. In such circumstances ‘superior smartness in dealing’ (W Scott, Fell & Co v Lloyd [1906] HCA 79; (1906) 4 CLR 572, 580 (Barton J)) or hardness or obliquity in the bargaining process (Poseidon Ltd v Adelaide Petroleum NL [1991] FCA 663; (1991) 105 ALR 25, 26 (Burchett J); Miller & Associates [21] (French CJ, Kiefel J)) remain part of the armoury of commercial intercourse and do not infringe the requirements of s 52.
480 The Banks did not plead conduct that went beyond the making of representations, being the representations already relied upon for the pleading of estoppel. Therefore, the misleading or deceptive conduct alleged was confined to those alleged representations and the Banks had to show that in the context of the dealings in which the Banks and TBGL were engaged, and having regard to the experience and competence of the personnel involved, that representations in the terms pleaded were made by TBGL and that those representations were likely to mislead or deceive the Banks.
481 As set out earlier in these reasons, where the pleaded representations by TBGL were express statements, the Banks failed to show that they were other than statements of fact without capacity to mislead. Where it appeared to be contended that the pleaded representations were implied or latent representations, the Banks failed to show that the pleaded documents used terms that the parties mutually understood expressed secondary meanings that made the representations contained therein conduct by TBGL that was misleading or deceptive in the circumstances.
482 The sub‑textual meanings the Banks sought to attribute to the statements made by TBGL in those documents depended upon the use of processes of construction and reasoning that were inconsistent with the plain meaning of the terms used and unsupported by context.
483 Although his Honour, by reason of the finding that the pleading of estoppel had been established, may have been persuaded that a contravention of s 52 of the TPA had been made out he was not satisfied that the Banks were entitled to the relief sought under the TPA. His Honour had in mind that any consequence of the contravening conduct had been overtaken and dissipated by implementation of the Transactions and Scheme in and after January 1990.
484 It is unnecessary to resolve that issue being satisfied that the pleaded claim of contravention of s 52 of the TPA, and therefore the notice of contention in that regard, cannot be sustained.
STATUTORY CLAIMS
485 The respondents sought declarations, and consequential relief, that certain Transactions were either void under s 565 of the Corporations Act (as dealings equivalent to settlements of property under s 120 of the Bankruptcy Act 1966 (Cth) (‘the Bankruptcy Act’) or dispositions of property made with intent to defraud creditors under s 121 of the Bankruptcy Act) or void under s 89 of the Property Law Act 1969 (WA) (‘the PLA’), or Pt 7 of Sch 2 of the Imperial Acts (Substituted Provisions) Act 1986 (ACT) (carried forward by the Law Reform (Miscellaneous Provisions) Act 1999 (ACT) and Civil Law (Property) Act 2006 (ACT)) (‘the ACT legislation’) as dispositions of property made with intent to defraud creditors.
486 His Honour upheld some of the respondents’ claims and dismissed the remainder. The respondents cross‑appeal from the orders of dismissal.
487 The Banks in their grounds of appeal challenge the findings made by his Honour that upheld the respondents’ claims and by notices of contention submit alternative grounds for the findings of his Honour challenged by the respondents in their cross‑appeal.
488 Before dealing with the issues raised in the appeal and cross‑appeal, some introductory remarks are required to explain the nature of the rights and remedies provided by s 565 of the Corporations Act.
489 Whilst the parties accepted that for the purposes of argument the claims made under s 565 of the Corporations Act could be described as claims made under ss 120 and 121 of the Bankruptcy Act, they were, of course, rights of action granted under and governed by the terms of the Corporations Act. See Kennedy v Australian Securities and Investments Commission [2005] FCAFC 32; (2005) 142 FCR 343; R v Frawley [2005] NSWCCA 66; (2005) 152 A Crim R 336. It followed that the Corporations Act defined the scope of remedial orders available to courts provided with jurisdiction to determine claims made under s 565.
490 As at 28 October 2008 s 565 of the Corporations Act read as follows:

565. Undue Preference
     (1) A settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, before 23 June 1993, by a company that, if it had been made or incurred by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator.
     (2) For the purposes of subsection (1), the date that corresponds with the date of presentation of the petition in bankruptcy in the case of a natural person is the relation back day.
     (3) For the purposes of this section, the date that corresponds with the date on which a person becomes a bankrupt is the relation back day.
     (4) Subject to Part 5.3A, a transfer or assignment by a company of all its property to trustees for the benefit of all its creditors is void.
     491 A statutory right to have an ‘undue preference’ set aside had been available to a liquidator under prevailing companies legislation over many years. It was expressed as a right of the liquidator to have an act by or against a company held void if that act done by or against an individual would have been held void in the bankruptcy of that person.
     492 The form of the right as it appeared in the uniform Companies Acts enacted by the States in 1961 was carried forward and repeated in substantially the same terms under the heading ‘Undue Preference’ in subsequent co‑operative or national legislation schemes that replaced the Companies Acts of the States: (Companies Act 1961 (WA), s 293; Companies (Western Australia) Code 1981 (WA), s 451; Corporations (Western Australia) Act 1990 (WA) (Corporations Law 1990, s 565); Corporations Act 2001 (Cth), s 565).
     493 The Corporations Law operated as a national scheme under legislation of the States and Northern Territory which applied as a law of the States or Territory the ‘Corporations Law’ applied to the Australian Capital Territory by legislation enacted by the Commonwealth Parliament (Corporations Act 1989 (Cth) as amended by the Corporations Legislation Amendment Act 1990 (Cth)). Part 5.7B of the Corporations Law (inserted by Corporate Law Reform Act 1992 (Cth)) commenced operation on 23 June 1993 to provide a more extensive class of rights able to be prosecuted by a liquidator to recover property or compensation in an insolvent liquidation in respect of transactions that had been detrimental to the interests of creditors. Thereafter, s 565 of the Corporations Law only applied to events that had occurred prior to 23 June 1993 and Part 5.7B applied to subsequent events.
     494 In 2001 the Corporations Act 1989 (Cth), and thus the Corporations Law, was repealed by the Corporations (Repeals, Consequentials and Transitionals) Act 2001 (Cth). Simultaneously the Corporations Act came into force to substantially re‑enact the terms of the Corporations Law in a Commonwealth statute that provided direct national coverage by the Commonwealth of the field of corporate regulation. This occurred after the High Court had declared invalid that part of the national scheme of Corporations Law under which the State legislatures had purported to confer state jurisdiction on federal courts. See Re Wakim; Ex parte McNally [1999] HCA 27; (1999) 198 CLR 511.
     495 Complementary legislation was enacted by States and Territories in a Corporations (Ancillary Provisions) Act 2001. Section 7(2) of that Act provided that if a person acquired, accrued or incurred a right or liability in substitution for a pre‑commencement right or liability, the pre‑commencement right or liability was cancelled at the date of commencement of the Corporations Act and ceased to be a right or liability under a law of the State or Territory.
     496 Replacement of the Corporations Law by the Corporations Act required important transitional provisions to be enacted in respect of the rights and liabilities cancelled by State laws and replaced by rights and liabilities provided by the Commonwealth.
     497 Accordingly, s 1400 of the Corporations Act provided as follows:
     (1) Subject to subsection (4), this section applies in relation to a right or liability (the pre commencement right or liability), whether civil or criminal, that:
     (a) was acquired, accrued or incurred under a carried over provision of the old corporations legislation of a State or Territory in this jurisdiction; and
     (b) was in existence immediately before the commencement.
     However, this section does not apply to a right or liability under an order made by a court before the commencement.
     (2) On the commencement, the person acquires, accrues or incurs a right or liability (the substituted right or liability), equivalent to the pre‑commencement right or liability, under the corresponding provision of the new corporations legislation (as if that provision applied to the conduct or circumstances that gave rise to the pre‑commencement right or liability).
     (3) A procedure, proceeding or remedy in respect of the substituted right or liability may be instituted after the commencement under the new corporations legislation (as if that provision applied to the conduct or circumstances that gave rise to the pre‑commencement right or liability).
     498 Section 1371 of the Corporations Act defined ‘carried over provision’ as a provision of the Corporations Law of a State that:
     (a) was in force immediately before the commencement of the Corporations Act; and
     (b) corresponded to a provision of the Corporations Act.
     499 Upon commencement of the Corporations Act (15 July 2001) s 565 repeated the terms of s 565 of the Corporations Law, save for insertion of the words ‘before 23 June 1993’ in replacement of the words ‘before the commencement of Part 5.7B’.
     500 Section 565(2) was amended by the Corporations Amendment (Insolvency) Amendment Act 2007 (Cth). The amendment came into force on 31 December 2007. The amendment appeared to be an attempt to clarify the operation of the subsection rather than a substantive alteration to the operation of the section. It was not contended that s 565 of the Corporations Law did not ‘correspond to’ s 565 of the Corporations Act in its amended form and that, therefore, it was not a ‘carried over provision’.
     501 The statement in s 1400(3) that a ‘procedure, proceeding or remedy in respect of the substituted right or liability may be instituted after the commencement [of the Corporations Act] (as if that provision applied to the conduct or circumstances that gave rise to the pre‑commencement right or liability)’ made it clear that the terms of the Corporations Act defined the scope of the remedy applicable in respect of a substituted right provided by s 565.
     Dispositions of property with intent to defraud
     Corporations Act, s 565
     (Bankruptcy Act, s 121)
     502 The Transactions impugned under s 565 of the Corporations Act as dispositions of property with intent to defraud, were the deeds of guarantee and indemnity, mortgage debentures, share mortgages, directions and authorisations concerning share mortgages, Principal Subordination Deed (‘PSD’), BGNV Subordination Deed, Australian Banks Facilities Agreement dated 26 January 1990 (‘ABFA’), Australian Banks Supplemental Agreement dated 26 January 1990 (‘ABSA’) and Lloyds Supplemental Agreement No 2 dated 26 January 1990 (‘LSA No 2’) entered into by the plaintiff Bell companies, (other than BGUK). See [9195].
     503 Section 121 of the Bankruptcy Act had provided as follows at relevant times:
     (1) Subject to this section, a disposition of property … with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.
     (2) Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property.
     (3) In this section, ‘disposition of property’ includes a mortgage of property or a charge on or in respect of property.
     504 Those provisions were required to be read with s 6 of the Bankruptcy Act which stated:
     A reference in this Act to an intent to defraud the creditors of a person or to defeat or delay the creditors of a person shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors.
     Property Law Act 1969 (WA), s 89
     505 The plaintiff Bell companies also challenged the same Transactions (other than the BGNV Subordination Deed) under s 89 of the Property Law Act. Section 89 provided as follows:
     (1) Except as provided in this section, every alienation of property made, whether before or after the coming into operation of this Act, with intent to defraud creditors is voidable, at the instance of any person thereby prejudiced.
     (2) This section does not affect the law of bankruptcy for the time being in force.
     (3) This section does not extend to any estate or interest in property alienated for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the alienation, notice of the intent to defraud creditors.
     506 Operation of this provision does not depend upon occurrence of a subsequent administration in insolvency but the terms of the section in other respects are equivalent to s 121 of the Bankruptcy Act and the words ‘intent to defraud creditors’ can be taken to have the same meaning as they bore in s 121, at least where a common factor of insolvency at relevant times is demonstrated.
     507 Nothing turned on any difference in meaning between the words ‘alienation’ and ‘disposition’ as operative words of the respective sections.
     The ACT legislation
     508 Clause 23 of the BGNV Subordination Deed provided that the Deed was governed by the laws of the Australian Capital Territory (‘ACT’). It was the only Transaction sought to be avoided under the ACT legislation [9150].
     509 The purpose of the ACT legislation was to enact as part of the written law of the ACT provisions described under the heading ‘Alienation of Property with Intent to Defraud Creditors or Subsequent Purchasers’, being provisions that formerly applied in the ACT as part of Imperial Statutes 13 Eliz I, c 5 (1571) (‘the Statute of Elizabeth’) and 27 Eliz I, c 4 (1585).
     510 Those provisions of the Imperial Statutes were concerned with alienations made with intent to defraud creditors (the Statute of Elizabeth) and with fraudulent conveyances generally (27 Eliz I, cl 4 (1585)).
     511 The operative provisions of the Statute of Elizabeth were extracted as follows in PT Garuda Indonesia Ltd v Grellman [1992] FCA 188; (1992) 35 FCR 515, 521 (Wilcox, Gummow, von Doussa JJ):
     [T]ransfers of property for the purpose of delaying, hindering or defrauding creditors or others of their lawful debts were ‘to be clearly and utterly void, frustrate, and of none Effect … ‘ provided that the statute did not extend to transfers of property
     ‘upon good Consideration and bona fide lawfully conveyed or assured to any Person or Persons … not having at the Time of such Conveyance or Assurance to them made, any Manner of Notice or Knowledge of such Covin, Fraud, or Collusion as is aforesaid’.
     512 As with s 89 of the Property Law Act the occurrence of a subsequent insolvency administration was not a necessary element for the operation of the ACT legislation. It was accepted that the words ‘with intent to delay, hinder or defraud’ as used in the provisions applied by the ACT legislation carried the same meaning as in s 121 of the Bankruptcy Act and s 89 of the Property Law Act, at least where insolvency at the time of transfer, disposition or alienation was a common factor.
     Onus of proof
     513 His Honour, at [9188], considered that in respect of claims that had regard to the terms of ss 120(1) and 121 of the Bankruptcy Act, the respondents bore the onus of establishing absence of good faith and/or valuable consideration as the parties seeking to impugn the Transactions. It has been stated often that where relevant facts relating to the disposition have been known to both disponor and disponee it is not a difficult task for the party bearing that onus to adduce sufficient evidence to shift the evidentiary burden. See PT Garuda (527 ‑ 528) (Wilcox, Gummow, von Doussa JJ).
     514 Section 120(2) of the Bankruptcy Act expressly provided that the parties claiming under a challenged disposition to which that subsection applied bore the onus of showing the existence of good faith and valuable consideration. With regard to s 89 of the Property Law Act and the ACT legislation his Honour accepted, at [9189], that the onus would have been on the Banks in respect of those issues given that the legislative provisions recited those requirements as provisos to, rather than elements of, substantive provisions. See Glegg v Bromley [1912] 3 KB 474, 492.
     Applicability of s 565 of the Corporations Act to BGNV Subordination Deed
     515 The Banks by notice of contention submitted that proper construction of s 565 of the Corporations Act denied BGNV the right to assert a claim equivalent to a claim under s 121 of the Bankruptcy Act [APPA.000.056, ground 25].
     516 BGNV became registered as a foreign company under the Corporations Law on 4 April 1996 [MISP.00020.008]. An order was made by this Court under the Corporations Law on 26 March 1997 that BGNV be wound up [MISP.00002.072] on an application to the court dated 21 March 1996.
     517 The essence of the Banks’ argument, as to the proper construction of s 565 of the Corporations Act, was that the word ‘company’ as used in that section and as defined in s 9 required the company participating in a transaction to which s 565 applied to be a company registered under the Corporations Law at the time of participation. BGNV was not registered as a foreign company at the time it executed the BGNV Subordination Deed.
     518 The temporal provision in s 565 was not directed at establishing the registration status of a company at that time. The stipulated date fixed the time by which events would have to have occurred for s 565 of the Corporations Act to continue to have application to transactions of the type to which ss 120 ‑ 121 of the Bankruptcy Act would have applied if they had involved a bankrupt.
     519 Other provisions of the Corporations Act support that construction. Part of the requirement imposed by s 601CE of the Corporations Act on a foreign company seeking registration is that it provide with the application for registration documents the detail of all charges created on the property of the company as required by s 263(3), (4) of the Corporations Act.
     520 Obviously, creation of those charges would precede registration and could include a charge created before 23 June 1993 which in turn could be a charge to which s 565 of the Corporations Act applied.
     521 Similarly the transactions of an insolvent company to which Part 5.7B of the Corporations Act applies would not be limited to transactions entered into by the company after registration as a foreign company.
     522 The plain meaning of s 565 is that it speaks of rights available to the liquidator of a registered company in respect of which an order for liquidation has been made by a court. The act of registration made the company amenable to an order for liquidation by a court notwithstanding the foreign place of incorporation of the company. The purpose of s 565 is to provide for due administration of that liquidation and the past conduct of the company (before or after 23 June 1993, and before or after registration) will be conduct of a registered company for the purpose of s 565.
     523 In other words, the substantive requirement for reliance upon s 565 is that there be a company subject to a winding up order and a liquidator to prosecute a claim (and, therefore, that it be a registered foreign company if it is a foreign company), and the requirement that conduct by that company occur before 23 June 1993 is merely a temporal requirement to limit the operation of s 565 of the Corporation Act, not to require the company to have been registered as a foreign company at all material times prior to 23 June 1993.
     524 The terms of s 15AA of Acts Interpretation Act 1901 (Cth) set out below, which apply to the Corporations Act, assist the foregoing construction. See s 5C of the Corporations Act.
     In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.
     525 This ground of the Banks’ notice of contention must be rejected.
     Intent to defraud
     526 His Honour accepted, at [9085], that the words ‘intent to defraud’ as used in s 121 of the Bankruptcy Act were intended to include the meanings of ‘to defeat’ or ‘to delay’.
     527 In Marcolongo v Chen [2011] HCA 3 [56]; (2011) 242 CLR 546 (French CJ, Gummow, Crennan, Bell JJ) it was stated that the words ‘intent to defraud’ as used in an analogous provision (Conveyancing Act 1919 (NSW), s 37A) included the hindering or delaying of creditors. At [32] their Honours cited with approval the decision of the Supreme Court of New Zealand in Regal Castings Ltd v Lightbody [2009] 2 NZLR 433, 456 ‑ 457 which examined s 60 of the Property Law Act 1952 (NZ), also expressed in analogous terms to s 121, where it was held that ‘intent to defraud’ involved intent to hinder, delay or defeat creditors.
     528 It should be concluded, therefore, that ‘intent to defraud’ as used in s 121 of the Bankruptcy Act, s 89 of the Property Law Act and the ACT legislation includes intent to hinder, delay or defeat creditors being the three elements of the Fraudulent Conveyances Act 1571 (Eng) (13 Eliz I, c 5) from which s 121, s 89 and the ACT legislation were derived. See PT Garuda (521) (Wilcox, Gummow, von Doussa JJ).
     529 His Honour also accepted, at [9146], that it was not necessary to establish that intent to defraud was the sole intent of the disponor. Marcolongo, at [57], has made it clear that not only is the proscribed intent not required to be the sole intent, it is not necessary that it be the primary or predominant intent of the disponor.
     530 His Honour recorded, at [9146], that sufficient demonstration of the defrauding of creditors was effected by showing that one creditor was prejudiced and it was not necessary to show that creditors generally were affected. That, of course, is consistent with the instruction contained in s 6 of the Bankruptcy Act set out above. The expression ‘creditors’ also extends to potential liabilities and to future creditors. See The Trustees of the Property of Cummins (A Bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278, 290 ‑ 291.
     531 His Honour also accepted, at [9146], that the ‘essence of the concept of defrauding creditors lies in a disposition which subtracts from the property which is the proper fund for the payment of the debts, an amount without which the debts cannot be paid’. His Honour’s words reflected a statement made by Lord Hatherley LC in Freeman v Pope (1870) LR 5 Ch App 538, 541, repeated with approval by Brennan CJ and McHugh J in DM Cannane v J Cannane Pty Ltd (in liq) [1998] HCA 26; (1998) 192 CLR 557 [12] as a description of circumstances from which an actual intent to defraud creditors may be inferred where there has been an impugned disposition, although whether such an inference is drawn will depend upon the circumstances of the particular case.
     532 For example, in Williams v Lloyd [1934] HCA 1; (1934) 50 CLR 341 it was inappropriate to draw such an inference when the act of disposition and subtraction from assets occurred at a time when the disponor was in a financially sound position. And in Cannane such an inference was not available because the disposition relied upon was not a subtraction from the assets of the disponor but a diversion of assets to prevent them becoming part of the disponor’s property.
     533 The foregoing elements accepted by his Honour were not in issue in the appeal. It was the element his Honour determined to be a requirement for establishing intent to defraud that was challenged by the respondents in their cross‑appeal.
     534 His Honour accepted the Banks’ submission that the meaning of ‘intent to defraud’ required proof of conscious wrongdoing, dishonesty or impropriety, expressed by his Honour, at [9141], as ‘some subjective element approaching dishonesty’.
     535 In his Honour’s opinion the construction applied to the words ‘intent to defraud creditors’ in Hardie v Hanson [1960] HCA 8; (1960) 105 CLR 451 and in Cannane required that conclusion.
     536 In Hardie v Hanson the provision under consideration in that case (s 281, Companies Act 1943‑1957 (WA)) was not one providing for the avoidance of disposition of property made with intent to defraud creditors, but one providing for a director to be made personally liable for the debts of a company in liquidation where the director had been a knowing party to the carrying on of the business of the company with intent to defraud creditors. The section proceeded to make such conduct by the director an indictable offence liable to imprisonment.
     537 Obviously, in that case very little of intent to defraud could be inferred from the bare fact of the carrying on of business by the company. Furthermore, knowledge of the director of the intent to defraud was an express requirement of that section. As Dixon CJ pointed out (at 458) the section made it clear that the intent to defraud to which the director was a knowing party had to be an express, actual or real intent with the director actuated by a conscious fraudulent purpose. A constructive, imputed or implied intent on the part of the director would not do for that provision.
     538 Considerable care would be necessary before attempting to apply dicta from Hardie v Hanson to the construction of s 121 of the Bankruptcy Act and analogous provisions. As Gummow J stated in Cannane, at [54], ‘the expression “with intent to defraud” does not have any universal connotation applicable in all statutory contexts in which it is found’.
     539 It is to be noted that although in Cannane at [14], [15], Brennan CJ and McHugh J referred to the statement of Dixon CJ in Hardie v Hanson (456) that the intent to defraud suggested that present or future creditors of a company will be cheated of their rights if the intent is effectuated, their Honours made it clear that such an inference of intent could be easily drawn where there had been a subtraction from assets by a person who became bankrupt after that disposition put assets beyond the reach of present and future creditors. Gaudron J at [31] considered that a finding of ‘real intent’ for the purposes of s 121(1) would take very little to justify where ‘the person or company concerned disposes of assets when facing financial difficulties’.
     540 A comprehensive review of the history, and a cogent account of the operation, of s 121 was provided by the Full Court of the Federal Court in PT Garuda (520 ‑ 526) (Wilcox, Gummow, von Doussa JJ). Their Honours referred to the comment of Dixon J in Williams v Lloyd, at (372), that there must exist ‘a real intent to defeat or delay creditors’, and to the remarks of Gibbs J in Re Barnes; Ex parte Stapleton [1962] Qd R 231, 237 that actual fraud is to be established being ‘actual intention to defeat or defraud creditors’. Their Honours concluded that real or actual intent to defraud, defeat or delay creditors may be readily inferred where that is the necessary consequence of the disposition of property made by a debtor to stave off action by another creditor.
     541 Any doubt as to the operation of the words ‘intent to defraud’ in s 121 may be said to have been resolved in Marcolongo where French CJ, Gummow, Crennan and Bell JJ (at [31]) rejected the proposition that it was necessary in the proof of ‘actual intent’ to show ‘awareness that the transaction would have an effect on the ability of creditors to recover’ from the disponor and (at [28], [53]) rejected the assumption that it ‘was appropriate to fortify the requirement of an intention to defraud by some notion of dishonesty involving a desire to “cheat” or “swindle” those prejudiced’.
     542 If dishonesty is a separate element to be proved, it is satisfied by showing conduct that falls short of fair dealing. For example, if an intent to hinder, delay or defeat creditors has been inferred from an act or acts that prejudice the interests of creditors at a time when financial circumstances require the respective rights of creditors in a possible bankruptcy or liquidation to be taken into account, dishonesty will be an element of that inferred intent. It is not necessary to prove awareness on the part of the debtor or director of the extent to which that conduct has fallen short of the standards of ordinary, decent people. In Marcolongo [32] ‑ [33] French CJ, Gummow, Crennan and Bell JJ endorsed the following statement in Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22 [173]; (2007) 230 CLR 89, 162:
     As a matter of ordinary understanding, and as reflected in the criminal law in Australia [Macleod v The Queen (2003) 214 CLR 230 at 242 [36]-[37]], 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.
     543 His Honour found that the respondents could not succeed in a claim under s 121 of the Bankruptcy Act, s 89 of the Property Law Act or the ACT legislation, because the respondents had disavowed that the statement of claim made any allegation that the directors had engaged in conscious dishonesty or conscious wrongdoing.
     544 In making that determination his Honour misdirected himself as to the operation of the relevant statutory provisions.
     545 As set out above, it was not a requirement for a claim under s 121 of the Bankruptcy Act or the other statutes that the respondents establish conscious dishonesty or conscious wrongdoing to satisfy the meaning of the words ‘intent to defraud’. It followed that his Honour failed to duly determine the respondents’ case.
     546 As set out below, his Honour should have found on the material presented that intent to defraud had been established for the purposes of s 121(1) of the Bankruptcy Act, s 89 of the Property Law Act and the ACT legislation.
     547 With regard to the proof required of the intent of the plaintiff Bell companies to defraud creditors clear inference of such a fact was available from the primary facts, namely, the knowledge of the directors of the parlous financial position of the companies and of the effect on other creditors of the disposition of property of the companies to the Banks, that is to say, the subtraction of that property from the property able to provide funds for rateable distribution to creditors in liquidations of the companies. The outcome of the foregoing conduct, namely, the hindering, delay or defeat of creditors other than the Banks could be said to be so obvious that the intent to bring about that consequence could be inferred as an actual intent of disponor members of the Bell group.
     548 However, in this case, there was direct evidence of that intent which made it unnecessary to rely upon such an inference.
     549 As noted earlier in these reasons, at the time the Transactions were being negotiated in December 1989, SCBAL had served notices on BGF, and upon TBGL as Guarantor, which demanded repayment of moneys advanced to BGF by SCBAL.
     550 TBGL and BGF were unable to pay that debt. By correspondence and discussions with SCBAL, and its parent SCB, TBGL and BGF sought to have SCBAL withdraw the notices and to have SCBAL agree to the Transactions then being negotiated with the Banks completed. That communication made it clear that unless the notices were withdrawn, SCBAL’s action would cause all lenders, including the Bondholders, to require immediate payment of moneys payable to them and liquidation of TBGL, BGF and the Bell group would follow.
     551 His Honour, at [7100], accepted that Aspinall, who conducted the communication with SCB and SCBAL, had stated to SCBAL that it was possible in such a liquidation that the Banks as creditors might rank equally with the Bondholders.
     552 His Honour did not find that this claim represented Aspinall’s belief but said the statement was made as ‘a lever to win ground in a commercial negotiation’. In other words, the representation that the Banks risked ranking equally with Bondholders in a liquidation was an attempt by Aspinall to have SCBAL agree not to act on its notices of demand and allow the disposition of property to the Banks as offered by the Bell group to proceed. The claim that the Banks would rank equally with Bondholders in a liquidation was, of course, a colloquial description of the risk. The actual risk was that the claims of BGNV as lender to TBGL and BGF would rank equally with claims of the Banks in a liquidation of those companies and that a distribution to BGNV in those liquidations would, in the absence of claims of other creditors of BGNV with priority over the claims of the Bondholders, provide funds able to be distributed by BGNV to the Bondholders.
     553 At that time the sum of the loans BGNV had made to TBGL and BGF was approximately $400 million which exceeded substantially the amount advanced by the Banks to the Bell group, in round terms $260 million.
     554 His Honour, at [7110], found that Aspinall’s tactic succeeded and that, after preliminary advice from solicitors which confirmed the risk, SCBAL ‘withdrew’ its demand. His Honour also found, at [7112], that ‘the possibility that the bonds might not be effectively subordinated became common knowledge’ amongst the Banks thereafter. By that statement his Honour may be taken to mean that the Banks were aware of the possibility that the on‑loans from BGNV to TBGL and BGF may not have been subordinated. Indeed the ‘lead’ Banks, Westpac and Lloyds Bank, saw a clear risk that the on‑loans were not subordinated and that BGNV’s claims would rank equally with the Banks. See [7110] ‑ [7183].
     555 His Honour then found, at [9723], that the claim by Aspinall that it was possible that the Banks ranked equally with Bondholders ‘frightened’ the Banks and caused them to seek completion of the Transactions. The Transactions, of course, had the purpose and effect of subordinating the claims of all other creditors of the Bell group to the claims of the Banks and delivering title in, or charges over, the assets of the Bell group.
     556 The foregoing evidence, and his Honour’s findings, therefore, provided a firm foundation for a conclusion that a real or actual intent at the time the Bell group disposed of property to the Banks when unable to pay debts, was, by execution of the Transactions, to remove the right of all other creditors (whoever those creditors may be) to participate in rateable distribution of the assets of the Bell group so that, in consideration of execution of the Transactions by Bell group companies, the Banks would refrain from making demands for repayment of their advances to the Bell group.
     557 Such circumstances could be said to have presented ‘an overwhelming case of intent to defraud’. See PT Garuda (525) (Wilcox, Gummow, von Doussa JJ).
     558 The Banks submitted that the intent of the directors in acquiescing in the prejudice imposed on other creditors was based on a belief that ultimately the prejudice could be dissipated by use of the time provided by the Transactions in an attempt to effect sales of assets at maximum values thereby increasing the prospect of return to those creditors.
     559 But that contention disregarded the extent of the prejudice imposed and the fact that the conduct undertaken was directed to removing the particular risk that the claims of BGNV in a liquidation of TBGL and BGF would be of equal rank to those of the Banks. Furthermore, his Honour found, at [6065], that the directors had no concern for the interests of other creditors, and made no finding that there was any rational basis on which the directors could have been satisfied that the participation by those creditors in a distribution of any funds remaining after satisfaction of claims of the Banks would provide a better return to those creditors than rateable distribution with the Banks in an orderly and early liquidation. See World Expo Park Pty Ltd v EFG Australia Ltd (1995) 129 ALR 685, 698 (Fitzgerald P, Derrington J).
     560 Finally, even if it had been shown that the directors acted with such a concurrent belief or intent that fact could not nullify the disqualifying consequence of the intent demonstrated by the evidence set out above. This conclusion is reinforced by authorities considered under the heading ‘Equitable Fraud’ later in these reasons.
     561 His Honour, at [9151], stated that if he were in error in his construction of the words ‘with intent to defraud’, he doubted that he would have found the requirements of the ACT legislation satisfied in the case of the BGNV Subordination Deed because there was:
     … insufficient evidence that Ruoff, the sole director of Equity Trust knew or believed that on-loans were unsubordinated. Nor is there evidence that he appreciated the BGNV Subordination Deed was changing the status of the indebtedness. The inference that BGNV had the necessary intent to defraud would therefore arise solely from the natural and probable consequences of the transaction. If, as I have found, the on-loans were, in fact, subordinated, it would be difficult to draw such an inference.
     562 It can be seen that his Honour’s finding that the loans from BGNV to TBGL and BGF were subordinated affected his Honour’s conclusion as to Ruoff’s state of mind. In particular, his Honour, at [6028], stated that for a finding to be made that Ruoff suspected, or ought to have known, that the loans were not subordinated would be a finding ‘that Ruoff held a state of mind contrary to facts’. In fact Ruoff, who, as the sole director of Equity Trust, was, in effect, the sole director of BGNV, at no time expressed any knowledge or understanding of the existence of a term of subordination in the BGNV on‑loans.
     563 By a letter transmitted by facsimile on 22 December 1989 [TBGL.04991.120] a TBGL legal officer – finance (Tagliaferri) informed Ruoff that there was doubt between the Banks and TBGL as to whether BGNV’s right to recover its loans to TBGL and BGF had been subordinated and asked Ruoff to check whether the terms and conditions of the loans had been recorded. It appears there was no response to that communication. That caused his Honour, at [5973], to doubt that it had been received and his Honour stated that it had been ‘directed to an incorrect fax number’. As counsel for BGNV pointed out on the hearing of the appeal (appeal ts 2914), that conclusion was not available on the face of the documents. Although the facsimile transmission report [TBGL.04991.118] did not record the number to which the document had been sent the cover sheet [TBGL.04991.119] did show the correct number at the time of transmission and the transmission report did not record that transmission of the document had failed. Furthermore, there was evidence that confirmed that Ruoff received facsimiles on that number until 24 January 1990 [TBGL.04991.114; TBGL.08041.143]. Counsel for BGNV also pointed to Equity Trust’s letterhead which, as at 28 December 1989, listed the number in its contact details [TBGL.08041.207].
     564 By letter dated 24 January 1990 from TBGL (Simpson) to BGNV [TBGL.04991.115], Ruoff was informed that:
     The Directors of [TBGL] have arranged a re‑financing of the existing Bell Group of companies debt. The lenders to the facility have 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.
     The subordination will be on the basis that none of the inter‑company debt may be repaid and no interest may be paid on it (although interest may be accrued on it) until the whole of the debt to the lenders is repaid.
     We would be grateful for your advice, as a matter of urgency, as to whether or not [BGNV] would be able to enter into such an agreement.
     565 It appears that a handwritten draft of this letter was submitted by Simpson to Sly & Weigall for approval before it was sent to BGNV and that the fax number intended to be used for transmission to BGNV was the number used by Tagliaferri on 22 December 1989 [TBGL.04991.116; TBGL.04991.117].
     566 Despite that advice from Simpson that under the ‘refinancing arrangement’ no interest would be paid to BGNV, Ruoff replied on 26 January 1990 that there was no objection in principle to BGNV becoming a party to an arrangement subordinating recovery of inter‑company loans but he required a draft of the proposed document to put to Netherlands Antilles solicitors for advice [TBGL.08010.059]. It is to be noted that there was no suggestion in this exchange of correspondence that BGNV had already subordinated its rights of recovery of loans to TBGL and BGF to other creditors of TBGL and BGF.
     567 On 11 April 1990 Simpson forwarded a copy of the PSD that had been executed on 15 February 1990 by 66 Bell group companies as ‘Subordinated Creditors’, 25 of which also executed the PSD as ‘Security Providers’. The BGNV Subordination Deed subsequently presented to BGNV for execution repeated the substantive provisions of the PSD. The recitals to the PSD disclosed that implementation of the ‘refinancing’ arrangement had not been subject to satisfaction of conditions precedent other than those required to be met to fix the ‘Operative Date’. According to the terms of the BGNV Subordination Deed, the ‘Operative Date’ was 1 February 1990. Therefore, when execution of the PSD occurred on 15 February 1990, the ‘refinancing’ arrangement was already on foot. There was no requirement expressed in any document provided to Ruoff that BGNV had to agree to subordinate its rights as a creditor for the ‘refinancing’ arrangement to be continued by the Banks.
     568 His Honour, at [5980], noted that the copy PSD provided to Ruoff showed that it had been executed by all relevant parties on 15 February 1990, but then his Honour went on to state, ‘Only BGNV was left to sign’. It is not clear what understanding his Honour had in making that comment. The PSD did not include BGNV as a party as a ‘Subordinated Creditor’ nor was the PSD conditioned upon execution of a like instrument by BGNV.
     569 The PSD subordinated the claims of all ‘Subordinated Creditors’ as creditors of the ‘Security Providers’ to the claims of the Banks. The object of the PSD was to prevent funds moving from ‘Security Providers’ to ‘Subordinated Creditors’ and thus diminishing the capacity of ‘Security Providers’ to meet the terms of the Guarantees and Indemnities they had provided to the Banks. As noted above all ‘Security Providers’ (which included TBGL and BGF) were also ‘Subordinated Creditors’ and the terms of the PSD effectively prevented TBGL or BGF obtaining funds to be able to discharge their indebtedness to BGNV.
     570 The terms of the letter dated 24 January 1990 received from Simpson would have alerted Ruoff to the fact that BGNV faced default under the terms of the Bonds it had issued in May 1987 and July 1987 if it did not receive the interest payable on the loans BGNV had made to TBGL and BGF to enable it to meet the interest on those Bonds due in May 1990 and July 1990. Simpson’s letter informed Ruoff that there could be no payments of interest to BGNV until the whole of the debt due to the Banks had been discharged. The question Ruoff had to ask immediately in response to that letter was whether TBGL and BGF were able to pay the debt due to the Banks and pay interest to BGNV to allow it to meet the interest payable to Bondholders in May 1990 and July 1990.
     571 Subordination of BGNV’s right to recover loans from TBGL and BGF could not have been considered by Ruoff until that question had been answered. Ruoff did not make that enquiry.
     572 The Banks, under strong pressure from TBGL, but as his Honour held, at [6983], principally in protection of their own interests, released funds from moneys distributable to the Banks to allow payment of the interest due from BGNV to Bondholders on 7 May 1990. The payment to Bondholders was made on 11 May 1990 within a seven day period of grace [530].
     573 On 1 June 1990 Ruoff’s legal advisor in Curacao wrote to TBGL (Simpson) stating his understanding that if BGNV did not ‘cooperate with the subordination of the inter‑company debts’ the Banks may execute ‘the assets and securities held by [TBGL]’ (sic) and render the loans made by BGNV worthless. The letter sought confirmation that execution of the BGNV Subordination Deed ‘would therefore be an act to preserve the value of the assets of [BGNV] and … not ultra vires [BGNV’s] purpose’.
     574 On 22 June 1990, Simpson replied to Ruoff’s legal advisor that he did not ‘totally understand [the] comment in relation to the cooperation with the subordination of the inter‑company debts’. Simpson stated that the subordination demanded by the Banks had been completed and that it was up to the director of BGNV to decide whether the additional subordination requested by the Banks was to be provided by BGNV. Simpson advised Ruoff’s legal advisor that TBGL had required the Banks to accept that although TBGL would use its best endeavours to obtain execution of a subordination deed by BGNV, it was up to the director of BGNV to decide whether BGNV would do so.
     575 His Honour, at [5993], stated that ‘[he did] not understand why Simpson did not properly answer the question posed’.
     576 With respect to his Honour the response by Simpson had pointed out that failure of BGNV to execute the BGNV Subordination Deed would not provide cause under the ‘refinancing’ arrangements for Banks to execute upon the securities they had obtained. Furthermore, it was implicit in Simpson’s reply that TBGL could not confirm that execution of the BGNV Subordination Deed was an act to preserve the value of the assets of BGNV or an act ‘not ultra vires [BGNV’s] purpose’. Simpson made it clear that whether BGNV executed the deed was a matter on which the director of BGNV had to be satisfied that ‘it [was] legally able to do so’.
     577 Ruoff’s legal advisor did not ask Simpson for any additional information upon receipt of that letter.
     578 On 14 July 1990 payment of interest was credited to BGNV and distributed to Bondholders on the due date from sources other than funds distributable to the Banks [5299]. No payment of interest to Bondholders was made after execution of the BGNV Subordination Deed on 31 July 1990.
     579 Determination of whether there had been ‘intent to defraud’ had to be based on an objective examination of facts as they stood at the time of execution of the BGNV Subordination Deed on 31 July 1990. At that time Ruoff had received a copy of the solicitors’ advice provided to TBGL dated 1 June 1990 which stated that whilst TBGL had promised to the Banks to use reasonable endeavours to have BGNV execute the deed ‘[u]ltimately it is up to [BGNV] as to whether it will execute the document’. The copy of the PSD executed on 15 February 1990 by various Bell group companies would have shown Ruoff that operation of the PSD was not conditioned upon the grant of subordination to the Banks by BGNV. Furthermore, Ruoff knew from the terms of the BGNV Subordination Deed that it would effect extensive subordination to the Banks of BGNV’s interests. There was no evidence that Ruoff had any knowledge or awareness of a pre‑existing form of subordination that placed BGNV’s interests in the loans made to TBGL and BGF behind those of other creditors of TBGL and BGF.
     580 Notwithstanding the foregoing circumstances Ruoff decided to have BGNV accept the risk of prejudicing the rights of its creditors by executing the BGNV Subordination Deed.
     581 It was not open to his Honour to conclude that there was no evidence that execution of the BGNV Subordination Deed by BGNV would not change BGNV’s capacity to recover debts payable to it by TBGL and BGF, or would not prefer the interests of the Banks over the interests of BGNV, or that Ruoff could hold a rational belief that the terms expressed in the Deed matched existing circumstances for BGNV. Inference of an intent to defraud by acting to delay, hinder or defeat creditors of BGNV would not have been difficult to draw and should have been drawn.
     582 In any event, as his Honour stated, at [6049], ‘it would have been all over bar the shouting’ had his Honour determined that the on‑loans were not subordinated at the time of execution of the Transaction documents. It follows that in respect of the conduct of Ruoff his Honour, properly instructed by a finding that the on‑loans were not subordinated, would have found that the BGNV Subordination Deed was executed by BGNV with intent to defraud creditors.
     Good faith
     583 Where his Honour found, at [9723], that the Banks were ‘frightened’ by the possibility that ‘the bonds might not be effectively subordinated’ and that that circumstance ‘made them determined to proceed with the refinancing’ that, in effect, amounted to a finding by his Honour that the Banks were determined to have the Transactions executed to prevent the risk of rateable distribution between the Banks’ claims and the claims of BGNV in a liquidation of TBGL or BGF. That finding disclosed that in entering the Transactions the Banks accepted that they would refrain from taking any step based on the Bell group’s inability to pay its debts and would participate in the hindering, delaying or defeating of other creditors that would be effected by the execution of the Transactions.
     584 The existence of that purpose denied the prospect of any finding under s 121(1) of the Bankruptcy Act, s 89 of the Property Law Act, or the ACT legislation that the Banks acted in good faith when dispositions or alienations of property were made in their favour by the Bell Participants.
     585 His Honour made no finding on whether the Banks had acted in good faith for the purposes of those statutory provisions.
     586 His Honour did find for the purposes of s 120 of the Bankruptcy Act that the Banks did not act in good faith. It may be assumed that his Honour would have so found for the purposes of s 121 and the analogous statutory provisions if he had considered himself required to do so. It is unnecessary to determine whether, or the extent to which, the requirements for the establishment of good faith under ss 120 and 121 of the Bankruptcy Act correspond. See Wansley v Edwards [1996] FCA 704; (1996) 68 FCR 555, 563 (Olney, Whitlam, Sundberg JJ); cf PT Garuda (528) (Wilcox, Gummow, von Doussa JJ); World Expo Park (703) (Fitzgerald P, Derrington J); Official Trustee in Bankruptcy v Mitchell [1992] FCA 521; (1992) 38 FCR 364, 371 ‑ 372 (Burchett, French, Einfeld JJ).
     587 In the instant case, the facts that satisfied his Honour that the Banks had not acted in good faith as required by s 120, namely, knowledge of the inability of the Bell group debtor companies to pay their debts to the Banks and that execution of the Transactions prejudiced all other creditors, present or future, of Bell group companies, necessarily established absence of good faith for the purposes of s 121 and the other statutory provisions, that is to say that the Banks had notice of the intent of the Bell group companies to hinder, delay or defeat other creditors by execution of the Transactions.
     588 Therefore, the respondents’ cross‑appeal [APPR.000.021, ground 123; APPB.000.005, ground 31] seeking a finding of lack of good faith on the part of the Banks should be upheld. The Banks filed no notice of contention in respect of his Honour’s treatment of this issue.
     Valuable consideration
     589 His Honour, at [9182] ‑ [9186], was satisfied that a similar concept of valuable consideration applied wherever that term was used in s 120 and s 121 of the Bankruptcy Act and in s 89(3) of the Property Law Act. The ACT legislation referred to ‘good consideration’ rather than ‘valuable consideration’. His Honour found, at [9183], that valuable consideration as understood in the Bankruptcy Act and Property Law Act provisions remained an essential element of the ACT legislation. That finding was not contested on the appeal.
     590 His Honour, at [9214], found that the Banks had established that they had provided valuable consideration in the Transactions. The cross‑appeals of the respondents and BGNV challenge that finding.
     591 The claimed valuable consideration for the security and other benefits provided to the Banks by the Transactions was said to be the extension of time provided by the Banks to the Bell group debtor companies. His Honour’s finding, at [9214], read as follows:
     [T]here was valuable consideration, within the terms of the statute, provided by the [B]anks. The Australian [B]anks converted an on-demand facility to a fixed one; and the Lloyds [B]ank [S]yndicate enlarged the time for repayment of its facilities. They were the terms of the agreements. The plaintiffs say in their submissions that this extension of time was not in the nature of valuable consideration because the Bell group companies fell into default immediately following the implementation of the Transactions. That the situation developed in that way was certainly true but it does not detract from the fact that there was a grant of an extension of time by the [B]anks.
     592 The principal thrust of the respondents’ submissions on their cross‑appeal [APPR.000.021, grounds 121 and 122] was that numerous findings made by his Honour in the course of his reasons were to the effect that if there had been provision of any consideration by the Banks it was no more than nominal, trivial or colourable and it was submitted that those findings denied the ultimate finding made by his Honour that valuable consideration had been supplied.
     593 The Transactions viewed as a whole constituted the provision of security and other benefits to the Banks by members of the Bell group in respect of advances made by the Banks to BGF and BGUK as borrowers, such advances being guaranteed by TBGL and the advances to be used as working capital for the businesses of the Bell group.
     594 In their component parts, however, the Transactions involved provision of securities to the Banks over the assets of various companies which were not debtors to the Banks, thereby prejudicing creditors of those companies.
     595 Underlying the formation of the Transactions and Scheme was the awareness of the Banks of the parlous financial position of the debtor members of the Bell group, namely, TBGL, BGF and BGUK.
     596 The claimed valuable consideration for the security and other benefits provided to the Banks by the Transactions was said to be the extension of time provided by the Banks by converting the ‘at call’ facility provided by the Australian Banks to TBGL and BGF and the facility payable on 19 May 1991 provided to BGF and BGUK by the Lloyds Syndicate Banks to facilities payable on 31 May 1991.
     597 For ‘valuable consideration’ to justify a disposition of property made with intent to defraud creditors it is necessary not only that the consideration be more than nominal, trivial or colourable, but also have real and substantial value in all the circumstances (Barton v Official Receiver [1986] HCA 44; (1986) 161 CLR 75).
     598 Forbearance to sue by a creditor in return for provision of security may be sufficient consideration for the disposition to the creditor of that security (See Wigan v English and Scottish Law Life Assurance Association [1909] 1 Ch 291, 303; Re Abbott (A Bankrupt) [1983] Ch 45), but all relevant circumstances must be taken into account before the worth of that consideration can be evaluated, particularly where the consideration consists of such an intangible item as the provision of time.
     599 A review of all relevant circumstances in this matter shows absence of any real worth or value in the claimed consideration said to have been provided by the Banks.
     600 The Scheme, as accepted by his Honour, was the means by which the Banks obtained security over assets of 23 companies other than the debtor companies and the means by which various covenants and undertakings were provided by debtor and non‑debtor companies to advance the Banks’ interests by subordination of all inter‑company claims of the 66 companies named as ‘Subordinated Creditors’ in the PSD Transaction.
     601 In fact, the degree of control of management of the affairs of the Bell group companies provided to the Banks by the interlocking Transactions of the Scheme constituted, as his Honour found, at [6063], an informal administration or ‘work‑out’ of the companies of the Bell group under the supervision of the Banks. The extension of time was not intended to permit the debtors to have freedom to conduct their affairs as going concerns with the object of maintaining or improving solvency, but to provide time for the Banks to utilise the provisions of the Scheme to have the assets of the companies liquidated and all funds therefrom remitted to the Banks and applied to the elimination of the Bell group indebtedness to the Banks. No access to replacement loans was contemplated or provided under the terms of the Scheme by which the Bell group could be assisted in maintaining or expanding its businesses. The Transactions were executed with knowledge of the insolvency, or practical insolvency, of the debtor companies. Notwithstanding the recital to the PSD which stated that there were no outstanding demands by Australian Banks for the payment of Australian Bank loans, there was awareness by the Banks that demand for such payment had been made by an Australian Bank (SCBAL) on BGF and TBGL within the two months prior to the execution of the PSD and that BGF and TBGL had defaulted on that demand.
     602 All of the foregoing pointed to the extension of time for payment of the loans not being an accommodation able to be utilised by the Bell group to strengthen its position as a going concern but for the Banks to have a sufficient period in which to see the securities granted in the foregoing circumstances ‘hardened’ and their position as secured creditors strengthened. For that security to ‘harden’ it was important that demands not be made that would lead to the liquidation of Bell group companies. The time said to constitute the consideration provided by the Banks was the period anticipated by the Banks as appropriate to allow for completing an informal administration under which the debts due to the Banks would be recovered from orderly sale of assets of the Bell group conducted by TBGL officers for the benefit of the Banks under the terms of the Scheme.
     603 An extension of time for that purpose to avoid liquidation of the Bell group in circumstances of insolvency could not be regarded as true or valuable consideration justifying the disposition of property that would otherwise have been available for rateable distribution to creditors.
     604 There had to be practical benefit to the Bell group companies executing the Transactions and some practical detriment moving from the Banks before mere extension of the period of a finance facility could be regarded as valuable consideration sufficient to meet the requirements of the respective statutory provisions and the purpose of the respective statutes. See World Expo Park (701) (Fitzgerald P, Derrington J).
     605 The absence of the required character of valuable consideration was well described in the following findings made by his Honour.
     606 At [9214] his Honour accepted that Bell group companies were in default of the ‘refinancing’ facility immediately following implementation of the Transactions.
     607 As his Honour found, at [1673], on execution of the Transactions TBGL had neither the right nor the expectation to obtain access to proceeds of sale of the assets of the Bell Participants to meet the debts of those companies as they fell due and, at [4314] and [4335], control over any attempt at restructure of the affairs of Bell group companies had been transferred from TBGL to the Banks. As his Honour stated, at [8672], time was afforded in a technical sense but ‘at the expense of control over a vital component of [TBGL’s] ability to carry on as a going concern’. His Honour, at [4309], rejected the contention of the Banks that the Transactions provided the Bell group with time to implement a restructure. His Honour described that argument as, at best, nebulous and then stated:
     Real control over vital elements of the capacity to devise and implement a restructure were ceded to the [B]anks. The companies were placed in a position where they were immediately at the mercy of the [B]anks and unable, without the consent of the [B]anks (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 [B]anks 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.
     608 The cross‑appeals of the respondents and BGNV seeking the setting aside of his Honour’s finding that valuable consideration had been established should be upheld.
     Dispositions by way of settlement
     Corporations Act, s 565
     (Bankruptcy Act, s 120)
     609 Transactions made by TBGL, BGF, Bell Publishing Group Pty Ltd (‘BPG’) and Wigmores Tractors were challenged by the respondents at trial as settlements of property that would have contravened s 120 of the Bankruptcy Act if that legislation had been applicable.
     610 Section 120 read as follows in relevant respects:
     (1) A settlement of property, whether made before or after the commencement of this Act, not being:
     (a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or
     (b) a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the spouse of the settlor;
     is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.
     (2) A settlement of property, whether made before or after the commencement of this Act, not being a settlement referred to in paragraph (1)(a) or (b) or a settlement that is void as against the trustee by reason of the operation of that subsection is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove:
     (a) that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement; and
     (b) that the settlor’s interest in the property passed to the trustee of the settlement or to the donee under the settlement on its execution.
     …
     (8) In this section, ‘settlement of property’ includes any disposition of property.
     611 At relevant times, s 5 of the Bankruptcy Act stated that:
     property means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.
     612 The Transactions made by TBGL and BPG were attacked under the terms of s 120(1) of the Bankruptcy Act, the winding up orders having been made in respect of those companies within two years of the date of the Transactions. The Transactions made by BGF and Wigmores Tractors were challenged under the terms of s 120(2) of the Bankruptcy Act. Those companies were subject to winding up orders made more than two years but less than five years after the dates of the Transactions [9156]. Presumably, the dates of those Transactions were also more than two years before the respective dates of filing of the applications for winding up (Corporations Act, s 9 ‘relation‑back day’, s 565(3)).
     Settlement of property
     613 A settlement of property for the purposes of s 120 of the Bankruptcy Act is a dealing with property with the intent that some form of interest in the property be retained for the settlor or an intent that, with the interests of the settlor in mind, the recipient of the property retain the property in substance, although empowered to deal with it. See Re Tankard; Ex parte Official Receiver [1899] 2 QB 57; Re Plummer [1900] 2 QB 790; Re Branson; Ex parte Moore [1914] 3 KB 1086; Williams v Lloyd (375) (Dixon J).
     614 Under s 120(8) a settlement of property may include any disposition of property and the meaning of disposition of property for the purposes of that subsection may be taken to be at least as wide as the meaning ascribed to that term in s 121.
     615 The object of s 120 is to prevent the assets of a party facing insolvency being put beyond the reach of creditors by a means that still retains for the debtor some interest or expectation in respect of the property.
     616 The existence of a settlement of property, therefore, may depend upon elements of intent and understanding not apparent on the face of the dealing. See Barton v Official Receiver (78).
     Relevant Transactions
     617 His Honour’s findings that the challenged Transactions were settlements of property for the purposes of s 120 are subject to appeal by the Banks in respect of the Transactions dealt with below.
     a) Share mortgages executed by TBGL as trustee and authorisations executed by beneficial owners
     618 The relevant facts were recorded by his Honour at [462] ‑ [470] and his Honour’s findings appear at [9197] ‑ [9201].
     619 Share mortgages were executed as part of the provision of security to the Banks in the Transactions. Some of those share mortgages related to the Bell group shareholding in BRL. The share mortgages applied to 216,727,342 fully paid ordinary BRL shares and 23,141,272 convertible preference BRL shares, a total of 239,868,614 shares.
     620 TBGL was registered as the holder of 218,568,188 BRL shares but pursuant to Declarations of Trust dated 30 June 1989 they were held by TBGL as trustee for the beneficial owners Dolfinne, Industrial Securities, Neoma and Maranoa Transport.
     621 Two of the four beneficial owners, Industrial Securities and Neoma, were participants in the Transactions in that they undertook obligations to the Banks as ‘Security Providers’ and had executed instruments of Guarantee and Indemnity in favour of the Banks, a circumstance stipulated as a condition precedent to the operation of the Facility Agreements. The other beneficial owners, Dolfinne and Maranoa Transport, were not Security Providers and had undertaken no liabilities to the Banks.
     622 It is to be noted that the BRL shares held by TBGL on trust for Dolfinne and Maranoa Transport amounted to 190,638,707 of the 239,868,614 BRL shares mortgaged.
     623 On 1 February 1990 TBGL executed a share mortgage prepared by, and in favour of, the Banks.
     624 On 1 February 1990 the beneficial owners executed documents prepared by the Banks described as an ‘Authorisation and Direction and Confirmation’ (‘the authorities’) in which the beneficial owner stated that it confirmed that TBGL as mortgagor had been authorised and directed to grant and execute the mortgage dated 1 February 1990 over the property the subject of that mortgage.
     625 The mortgage executed by TBGL on 1 February 1990 did not include the 23,141,272 convertible preference shares beneficially owned by Dolfinne. Another share mortgage was executed by TBGL on 29 March 1990 in respect of that shareholding. No ‘Authority and Direction and Confirmation’ was executed by Dolfinne in respect of that mortgage.
     626 His Honour found the foregoing provision of security by TBGL to be settlements of property contrary to s 120 of the Bankruptcy Act and made orders setting aside the relevant Transactions, namely, the foregoing authorities and the share mortgages.
     627 In their appeal the Banks challenged those findings [APPA.000.007, grounds 131 ‑ 133].
     628 The Banks submitted that any settlement of property effected by the authorities and share mortgages had been a settlement of property of the beneficial owners and not of TBGL and that, furthermore, the winding up of the beneficial owners had not commenced until five years after the date of the Transactions, so those Transactions could not be challenged by liquidators of those companies.
     629 At the time of execution of the Transactions, on 1 February 1990, the Banks were aware that TBGL held the BRL shares as trustee for disclosed beneficial owners. The documentation prepared by the Banks was drawn to effect a transfer to the Banks, as mortgagee, of the whole of the legal and beneficial interest in the shares with a right to redeem that interest exercisable by TBGL. The share mortgages stated that TBGL as the legal and beneficial owner of the shares, mortgaged, charged and assigned to the Banks ‘all the estate, right, title, and interest whatsoever of [TBGL] into and out of the Shares’. TBGL bound itself by the terms of the mortgage to deposit with the Banks ‘all certificates and other documents of title or evidence of ownership in relation to the Shares’ and covenanted to the Banks to execute and deliver to the Banks concurrently with execution of the mortgage executed share transfer forms to enable the Banks to be ‘registered as the owner or otherwise obtain a legal title to the Shares’ and undertook if requested by the Banks to procure registration of the Banks as transferee on the register of members of BRL.
     630 The Banks, through their agent Westpac, became registered on the BRL share register as owners of the shares on or about 28 August 1990 [9597].
     631 In due course the Banks exercised the title they acquired as mortgagee by executing the rights provided by the mortgage, selling the shares and conveying as transferor full title to the purchasers. Of the $59.8 million obtained by the Banks from the sale of the BRL shares $47.6 million was provided by the shares previously held on trust by TBGL for Dolfinne and Maranoa Transport [9598].
     632 The details set out above show that the Banks were satisfied that confirmation of the execution of the mortgage in the foregoing terms amounted to a vesting by the beneficial owners in TBGL of their beneficial interests in the shares for the purpose of TBGL charging or assigning the full title to the Banks to better secure performance of the obligations of TBGL in respect of the discharge of Bell group indebtedness to the Banks.
     633 As far as the Banks were concerned control of the beneficial interests in the shares was ceded by the beneficial owners to TBGL and full title charged and assigned by TBGL to the Banks. A right of redemption remained with TBGL but, unless and until that right was able to be exercised, the Banks had received from TBGL the right to convey beneficial interest and title in the shares.
     634 Unless the Banks were able to contend that the authorities the Banks had presented to Dolfinne and Maranoa Transport for execution delivered the beneficial interest in the shares to TBGL to enable TBGL to mortgage the shares in its own right and convey the entire interest therein to the Banks, the Banks may have faced a claim by the liquidators of those companies that the Banks had participated in a breach of trust by TBGL as trustee in respect of disposal of the beneficial interests of Dolfinne and Maranoa Transport. TBGL could be said to have committed a breach of trust by purporting to deal with the interests of those beneficial owners by volunteering a conveyance of that interest to the Banks, those beneficial owners having no obligation to provide that interest to the Banks. In other words TBGL, to the knowledge of the Banks, would have made a disposition of that property for an ulterior purpose and contrary to its trust obligations.
     635 Furthermore, as noted above no authority was executed by Dolfinne in respect of the preference shares the subject of the share mortgage executed by TBGL on 29 March 1990. For the reasons set out above, the liquidator of Dolfinne may have argued that the Banks obtained no more than a voidable title to the shares under that mortgage until the Banks disposed of their interest to a bona fide purchaser for value without notice. The liquidator may then have argued that the Banks remained liable to account to the liquidator for their knowing participation in a breach of trust by TBGL. As noted above the Banks prepared the authorities and presented them for execution by the beneficial owners and return to the Banks as part of the Transaction documents. The Banks, therefore, were well aware of the need for TBGL to obtain such authority before TBGL could purport to convey to the Banks the legal and beneficial interest in shares beneficially owned by Dolfinne.
     636 Insofar as his Honour expressed a view at [9200] consistent with the above analysis, he did not err. Notwithstanding that his Honour’s argument was not assisted by the example postulated in [9200], his Honour correctly stated the relevant principle, namely, that the interdependent operation of the Transactions constituted a disposition of property that infringed s 120 of the Bankruptcy Act.
     637 Although the following authorities relied upon by the respondents (Caddy v McInnes [1995] FCA 1464; (1995) 58 FCR 570; Official Trustee in Bankruptcy v Baker [1994] FCA 1243; Donnelly v McIntyre [1999] FCA 450) all concerned a disposition of property to which the bankrupt had always been entitled at relevant times, the principle underlying those decisions has equal application to the facts of this case where settlement of property was effected by interdependent acts which together resulted in the obtaining and disposition of property by an entity subsequently placed in liquidation.
     638 The relevant grounds of appeal (131 ‑ 133), therefore, fail.
     639 In their amended submissions in response to the appellants’ amended grounds of appeal [APPR.000.043 at 1998 ‑ 2000], the respondents claim that TBGL was both trustee and equitable lienee of the BRL shares held by it on behalf of Dolfinne and Maranoa. The respondents did not raise this argument in their notice of contention nor did Owen J consider that argument in his reasons. The issue can be dealt with quite shortly. There was no suggestion in any material that TBGL was purporting to exercise, or evidence capable of establishing the existence of, such a lien. The contention cannot be sustained and must be dismissed.
     b) PSD
     640 As noted earlier the PSD [TBGL.00002.013] was executed by 66 Bell group companies as ‘Subordinated Creditors’, 25 of which also executed the PSD as ‘Security Providers’.
     641 His Honour, at [9202] ‑ [9203], found that the PSD consisted of a disposition of property to which the terms of s 120 of the Bankruptcy Act applied in that subordination of a right to recover property diminished, and thereby disposed of, property of the ‘Subordinated Creditors’.
     642 The Banks appeal from that finding [APPA.000.007, ground 134] save for the provisions of the PSD which attached trust obligations to moneys received by the ‘Subordinated Creditors’. The Banks accept that such provisions may constitute settlements of property for the purpose of s 120 but submit that they may be severed from the PSD. The relevant clauses of the PSD were cll 2, 3 and 4. They are important and it is necessary to set them out in full.
566. SUBORDINATION
     (a) For the consideration expressed in the recitals each party agrees with each other party that the Subordinated Liabilities and the rights of each Subordinated Creditor in respect of the Subordinated Liabilities are hereby subordinated to the Senior Liabilities and to the rights of the Security Agent and the Finance Parties in respect of the Senior Liabilities, and that no part of the Subordinated Liabilities is due for payment or capable of being declared due for payment (other than in respect of a Permitted Payment) unless:
     (i) the Senior Liabilities are satisfied or repaid in full; or
     (ii) in respect of the Subordinated Liabilities of a Security Provider, an Event occurs in respect of that Security Provider.
     (b) Notwithstanding anything contained in Clause 7(a), if any Event occurs in respect of a Security Provider the Subordinated Liabilities of the relevant Security Provider are payable immediately.
     (c) If an Event occurs in respect of a Security Provider prior to the repayment or satisfaction in full of the Senior Liabilities, each Subordinated Creditor agrees, on request from the Security Agent, to:
     (i) prove for the whole of the Liabilities due to it by the relevant Security Provider; and
     (ii) immediately send to the Security Agent a copy of its notice of proof.
     (d) A Subordinated Creditor may not prove in competition with the Security Agent or any Finance Party for the Liabilities due to it by the relevant Security Provider except following a request from the Security Agent under Clause 2(c) and in any event shall hold all moneys received in respect of those Subordinated Liabilities upon trust for the Security Agent in accordance with Clause 3(a).
     (e) Notwithstanding any term of the Subordinated Liabilities, each party agrees with each other party that until the Senior Liabilities have been paid or satisfied in full the Subordinated Liabilities are not repayable other than in accordance with this Clause (including in respect of a Permitted Payment).
567. PAYMENTS
     Until the Senior Liabilities have been paid or satisfied in full:
     (a) if any payment or distribution or security or the benefit or proceeds thereof are received by a Subordinated Creditor in respect of any Subordinated Liabilities or any amount is paid to any person in connection with any Subordinated Liabilities (other than in respect of a Permitted Payment), that Subordinated Creditor will forthwith deliver the same to the Security Agent in precisely the form received (except for endorsement or assignment by the relevant Subordinated Creditor where necessary) without the need for demand, for application against or retention on account of the Senior Liabilities, and any moneys so received by the Security Agent and not applied by it from time to time against or on account of the Senior Liabilities shall be held by it in a suspense account bearing interest (which shall accrue and be credited to such account) at a rate considered by the Security Agent to be a fair market rate. Until so delivered to the Security Agent, any money or other property received by a Subordinated Creditor in respect of any Subordinated Liabilities shall be held in trust by the relevant Subordinated Creditor for the benefit of the Security Agent. In the event of the failure of the Subordinated Creditor to make any such endorsement or assignment, the Security Agent or any of its officers or employees, are hereby irrevocably authorised to make the same on behalf of that Subordinated Creditor. After the payment in full of the Senior Liabilities any amount remaining to the credit of such suspense account shall be paid to the relevant Subordinated Creditor.
     (b) If the benefit of any right of set‑off or counterclaim accrues to or is received by a Subordinated Creditor prior to the satisfaction in full of the Senior Liabilities, (other than in respect of a Permitted Payment), that Subordinated Creditor will forthwith pay to the Security Agent an amount equal to the value of the benefit received by that Subordinated Creditor; and
     (c) no Subordinated Creditor shall exercise any right of contribution, subrogation, indemnity or other claim whatsoever against the Security Agent or any other Subordinated Creditor by virtue of any payment made by it, or sums received or recovered from it in connection with, or otherwise by reason of its liability under, any guarantee or other obligations undertaken on its behalf or otherwise.
568. LIQUIDATION
     Until the Senior Liabilities have been paid or satisfied in full:
     (a) In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of a Security Provider or the proceeds thereof, to creditors of that Security Provider, by reason of the occurrence of an Event in respect of that Security Provider then and in any such event the Subordinated Liabilities shall be postponed and subordinated to the Senior Liabilities and any payment or distribution of any kind or character, whether in cash, securities or other property which shall be payable or deliverable upon or with respect to the Subordinated Liabilities or any part thereof shall be held in trust by the relevant Subordinated Creditor for the benefit of the Security Agent and shall forthwith be paid or delivered direct to the Security Agent for application against or retention on account of the Senior Liabilities until the Senior Liabilities shall have first been fully paid and satisfied. Any moneys paid to the Security Agent and not applied by it from time to time against or on account of the Senior Liabilities shall be held by the Security Agent in a suspense account bearing interest (which shall accrue and be credited to such account) at a rate considered by the Security Agent to be a fair market rate. After the payment in full of the Senior Liabilities any amount remaining to the credit of such suspense account shall be paid to the relevant Subordinated Creditor.
     (b) For the purpose of enabling the Security Agent to enforce this Deed, each Subordinated Creditor hereby irrevocably authorises and empowers the Security Agent to demand, sue and prove for, collect and receive every payment division, distribution or application and give acquittance therefor and to file claims and take such other proceedings, in the Security Agent’s own name or in the name of the relevant Subordinated Creditor or otherwise, as the Security Agent may deem necessary or advisable for the enforcement of this Deed and the relevant Subordinated Creditor will execute and deliver to the Security Agent such powers of attorney, as may be requested by the Security Agent for all or any of the matters or things specified above. The liquidator of each Security Provider is authorised to apply any assets or moneys received by him in accordance with the terms of this Deed and the subordinations hereby effected.
     643 ‘Subordinated Liabilities’ was defined in cl 1.1 of the PSD (exception excluded) as ‘the liabilities of each Security Provider to any Subordinated Creditor’.
     644 ‘Event’ was defined in cl 1.1 as the happening of any of the following:
     (a) an order is made that a Security Provider be wound up; or
     (b) a liquidator or an official manager is appointed in respect of a Security Provider; or
     (c) a provisional liquidator is appointed in respect of a Security Provider and the provisional liquidator is ordered or required to admit all debts to proof or pay all debts capable of being admitted to proof proportionally; or
     (d) a Security Provider enters into, or resolves to enter into a scheme of arrangement or composition with or assignment for the benefit of all of any class of its creditors; or
     (e) a Security Provider resolves to wind itself up or otherwise dissolve itself.
     645 The choses in action of the Subordinated Creditors, consisting of their right to recover debts owing to them by the Security Providers, met the definition of property. The question his Honour had to resolve was whether the ‘postponement and payment over’ provisions diminished the choses in action in their character as property.
     646 The Banks contended that such terms did not comprise a disposition of property for the purposes of the Bankruptcy Act.
     647 An agreement to subordinate the right to recover a debt from a debtor to the rights of another creditor of the debtor involves an intangible subtraction from, and diminution of, the property constituted by the chose. On its face, the postponement was intended to deliver something of value to the superior creditor of the debtor. At that point the value received may be incapable of accurate calculation but a transfer of some part of the benefit of the chose in action has been effected by the agreement.
     648 Principally, the intended operation of the subordination is in a circumstance of insolvency and the effect of subordination of the Subordinated Creditor’s claims, and of concomitant prevention of competition in that insolvency with the claims of the Superior Creditor, is to allow pari passu distribution of the debtor’s assets to creditors other than the Subordinated Creditor. The subordination of a debt, therefore, may constitute the disposition of the entire value of the debt. See Re NIAA Corporation Ltd (in liq) (1993) 33 NSWLR 344, 358 (Santow J); Re Maxwell Communications Corp Plc [1993] 1 WLR 1402, 1418 ‑ 1419 (Vinelott J).
     649 Accordingly, the diminution in worth of the chose, whether a contingent event or otherwise, constitutes a disposition and settlement of the property of the Subordinated Creditor.
     650 The ‘payment over’ provisions, with or without the express attachment of trust obligations, reinforce the foregoing conclusion.
     651 The banks rely upon the consideration of subordination provisions undertaken in Re SSSL Realisations (2002) Ltd (in liq) [2005] 1 BCLC 1 by Lloyd J where his Honour found that no right in property in the nature of a charge was created by such provisions. His Honour was not required to consider whether any disposition of property occurred contrary to statutory provisions relating to insolvency enacted to protect the position of creditors [46] and made no finding that the arrangements in that case were incapable of constituting a disposition of property [44].
     652 With regard to the Banks’ submission that the trust provisions could be severed from the ‘payment over’ obligations imposed by the PSD, the relevant clause of the PSD (cl 21) relied upon for that argument read as follows, under the heading ‘SEVERABILITY’:
     If any provision of this Deed is prohibited or unenforceable in any jurisdiction, such prohibition or unenforceability shall not invalidate the remaining provisions in that jurisdiction, nor any of the provisions of this Deed in any other jurisdiction.
     653 The clause does not purport to provide for severance of the offending term. It appears to record an agreement by the parties that neither will contend that such prohibition or unenforceability of a term will ‘invalidate’ any other provisions of the agreement and that the agreement is to continue unmodified for presentation in ‘any other jurisdiction’.
     654 In any event, a disposition of property under the relevant term of the PSD was effected on execution of the PSD. That disposition, by operation of statute, became void against the liquidator at the date of commencement of the winding up, being the date of the filing of the application. At all times thereafter the liquidator would hold title to the property the subject of the disposition unless it were determined that the PSD at execution did not contain the offending clause and that, therefore, no disposition of property had been effected by the Deed.
     655 The terms of cl 21 do not provide for that result and speak against imposition of such a consequence by court order or declaration.
     656 Furthermore, it is apparent that the trust provisions are not terms that may be severed without affecting the utility of the remaining contractual provisions. Even if the unenforceable provisions were restricted to those imposing obligations of trust, severance of those items would not be sufficient to sterilise the remaining provisions. For example, even without express provisions imposing trust obligations, it may be argued that the content of the balance of relevant clauses is sufficient to revive such obligations in the form of constructive trust.
     657 Furthermore, for the reasons set out below severance of the provisions would not remove non‑compliance of the PSD with s 120 of the Bankruptcy Act.
     658 Clauses 3 and 4 in combination appeared to provide at least an equitable assignment to the Banks of the right of a Subordinated Creditor to recover a debt due to it by a Security Provider. First, the whole of the amount receivable by the Subordinated Creditor, whether a debt payable by the Security Provider or a division or distribution in an insolvency or scheme of arrangement in respect of the Security Provider, was payable to, or to be held by the Subordinated Creditor for, the Banks. There was a separate undertaking by the Banks to pay to the Subordinated Creditor any balance held by the Banks after the moneys assigned to the Banks had been applied to satisfaction in full of the Senior Liabilities due to the Banks. Second, under cl 3(a) the Banks were authorised to make any endorsement or assignment of property receivable by the Subordinated Creditor in respect of the debt necessary to deliver the same to the Banks and, under cl 4(b), were authorised to demand, sue and prove for, collect and receive property receivable by the Subordinated Creditor and, at their election, to take proceedings in the name of the Banks or in the name of the Subordinated Creditor.
     659 Although cl 4(b) was included under the heading ‘Liquidation’ it was expressed as a provision enabling the Banks to enforce the Deed generally and was not confined to the operation of cl 4(a). Furthermore, it provided the Banks with power to demand, and sue for, a payment receivable by the Subordinated Creditor. That was a power appropriate for recovery of the debt due to the Subordinated Creditor from the Security Provider but not relevant to a distribution receivable by the Subordinated Creditor from a scheme of arrangement or liquidation of the Security Provider. Even if the provision were read down and restricted in application to the rights of a Subordinated Creditor in a scheme of arrangement or liquidation of a Security Provider it would be an equitable assignment of those rights and would not be limited to an obligation on the Subordinated Creditor to hold for, and pay to, the Banks a distribution received from that scheme of arrangement or liquidation. See United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 37 NSWLR 131, 144 ‑ 145 (Sheller JA).
     660 The trust provisions in those clauses, therefore, were ancillary to the principal object of the clauses and severance of those provisions would have had no effect on the disposition of property otherwise effected by the PSD.
     661 The intended operation of cl 2(a), which if confined to its own terms provided for simple subordination of the right of a Subordinated Creditor to recover a debt owed to it by a Security Provider, had to be determined by consideration of the entire context of cl 2 and of the associated provisions of cl 3 and cl 4. Perusal of that context reveals that the subordination effected by cl 2(a) was an integral part of the operation of cll 2 ‑ 4 and was an essential component of the disposition of property effected thereby.
     662 His Honour did not err in his finding that the PSD effected a settlement of property contrary to the terms of s 120 of the Bankruptcy Act and this ground of appeal must fail.
     c) Guarantee and Indemnity
     663 An agreement entitled ‘Guarantee and Indemnity’ [TBGL.00069.014] (‘the Guarantee’) was executed by the Security Providers on 1 February 1990. Under the Guarantee, (cl 2.1), each Security Provider guaranteed to the Banks payment by the Borrowers of the Secured Liabilities, and, on demand, to make good any default by a Borrower in regard to such a payment. Further, the Security Provider indemnified the Banks against loss arising from, inter alia, breaches of covenant of the Guarantee and Facility Agreements by any person, other than the Banks, and against any action prosecuted by a Borrower against the Banks in respect of the Guarantee or the Facility Agreements.
     664 Although the Guarantee was expressed to provide security for the whole of the Secured Liabilities, the liability of a Guarantor was said to be limited to the ‘gross assets of the Guarantor’.
     665 The Guarantee (cl 2.2) also provided that the Guarantor indemnified the Banks against loss suffered if, inter alia, the Secured Liabilities were not recoverable by the Banks from the Borrower or the Security Provider because of ‘any transaction relating to the Secured Liabilities being void, voidable or unenforceable whether or not [the banks] knew or should have known anything about the transaction’.
     666 The respondents contended that the Guarantees executed by TBGL, BGF and BPG were void against the liquidators under s 120 of the Bankruptcy Act. His Honour, at [9204], upheld that contention.
     667 The decision of his Honour appeared to be based on the conclusion of Demack J in Re Pacific Projects Pty Ltd (Unreported, QSC, 11 November 1988) that the securing against loss and assumption of liability for debts amounted to a ‘disposition of a contingent interest in personal property to be held for the enjoyment of [the creditor] for an indefinite period of time’ (15).
     668 The Banks submitted that the decision of Demack J was wrong and that his Honour erred in applying it. The argument of the Banks appeared to be confined to the operation of the instrument as a guarantee. It was submitted that the Guarantee did not operate as a settlement of property under s 120 of the Bankruptcy Act being no more ‘an unsecured contractual promise’ from which no interest in the Guarantor’s property was obtained.
     669 A promise by the Guarantor to pay to the Banks moneys payable by a Borrower on the occurrence of the contingency of the Borrower’s default and the acceptance by the Guarantor of liability to indemnify the Banks for loss suffered by reason of defaults and actions of the Borrower created, and vested in the Banks, the enforceable rights of choses in action.
     670 Thus, the Guarantee both created property in the form of such choses in action and disposed of that property to the Banks. See Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395 [39] ‑ [43] (Finn, Sundberg JJ).
     671 This raises the question whether the creation of property in the form of a chose in action which provides a right to obtain judgment in a money sum against the Guarantor in respect of debts or sums owed to the recipient of the chose by a debtor, but does not then alienate the Guarantor’s interest in any of its assets, can stand as a settlement of property for the purposes of s 120 of the Bankruptcy Act.
     672 The liabilities undertaken by the Guarantors in the creation and disposition of the choses thereby introduced to the estate of each Guarantor contingencies that had the effect of diminishing the worth of the estate of the Guarantor notwithstanding that the Guarantor retained the assets of the estate. Given the purpose of s 120 as discussed above, it may be said that the Guarantee came within a settlement of property contemplated by s 120.
     673 It is not necessary that the disposition of the chose in action in such circumstances be accompanied by a charge or grant of security or that there be a vesting in the recipient of the chose of an interest in defined assets of the settlor.
     674 Furthermore, and importantly in the circumstances of this case, the choses in action were provided to the Banks under concurrently executed Transactions that created a package of proprietary rights designed to have the combined effect of quarantining for the use of the Banks the estates of the Guarantors. See Caddy v McInnes (582) (Beaumont, Whitlam, Tamberlin JJ).
     675 In addition to the foregoing, the Guarantee was more than a bare guarantee. The Guarantor provided a covenant not to exercise rights of subrogation against the Banks; not to claim as a creditor in an insolvency of a Borrower or a Security Provider in competition with the Banks; and, to hold in trust for the Banks any payment received by the Guarantor from a Borrower or Security Provider (cl 3.7). Express terms in cl 10 secured performance of the Guarantor’s obligations under cl 3.7 by appointment of the Security Agent as attorney for the Guarantor, the appointment effected by execution of the Guarantee by the Guarantor.
     676 As discussed in the examination of the terms of the PSD above, the effect of cl 3.7, reinforced by cl 10, was at least a contingent diminution of assets of the Guarantor and, therefore, a disposition and settlement of property of the Guarantor for the purposes of s 120.
     677 Whilst no submission was made on the severability of cl 3.7 it is necessary to address the point.
     678 Clause 12.8, under the heading ‘Severability’, read as follows:
     If any term of this Guarantee is or becomes invalid or unenforceable for any reason under the law of any jurisdiction or in relation to the Guarantor, such invalidity or unenforceability shall not effect its validity or enforceability in any other jurisdiction or invalidate or make unenforceable any other term hereof or the terms hereof in relation to the Guarantor.
     679 Although it did not repeat the words of the ‘Severability’ clause of the PSD it expressed the same purpose and similar comments apply, principally, that it does not purport to sever a term affected by invalidity or to alter the contractual terms existing between the parties.
     680 Clause 12.8 operates to protect the terms of the agreement in two ways. First, the parties agree that all terms of the agreement continue to be the terms that bind the Guarantor irrespective of the invalidity or unenforceability of any term. Second, the parties agree that invalidity or unenforceability of a term will not invalidate or make unenforceable any other term of the agreement. The reasons set out above in respect of the analogous provision in the PSD apply here, namely, that the ‘severability’ clause does not contemplate modification of the Guarantee as at the time of execution of the agreement nor the making of a court order or declaration to that effect.
     681 It would follow that a disposition effected upon execution of the Guarantee that is contrary to s 120 would vest title in the liquidator as at the date of application for an order for winding up of the Guarantor.
     682 But apart from the limited operation of cl 12.8 the width of the operation of cl 10 appointing the Security Agent as attorney of the Guarantor presents a fundamental difficulty for any argument for the severability of cl 3.7.
     683 The powers granted to the Security Agent upon appointment as attorney are significant. In particular, they permit the Banks to obtain what is otherwise granted by the Guarantor under cl 3.7. That is to say if cl 3.7 were ‘severed’ that step would not reduce the control over, and access to, property of the Guarantor provided by the Guarantee. See News Limited v Australian Rugby Football League Ltd [1996] FCA 870; (1996) 64 FCR 410, 582.
     684 For example, the Security Agent, instead of exercising a power of the Security Agent (a power alluded to in cl 3.7(b)) to direct the Guarantor to exercise a right of set‑off or to claim a payment due from any Borrower or Security Provider and to pay that sum to the Security Agent, has power as attorney to act in the name of the Guarantor and demand and receive directly, as agent for the Banks, the benefit of any set‑off and any moneys payable to the Guarantor by a Borrower or Security Provider.
     685 It has not been submitted that cl 10 is a ‘severable’ clause of the Guarantee.
     686 To put the issue another way, it could not be submitted that in combination cl 3.7 and cl 10 were severable. Such an order would alter fundamentally the operation of the Guarantee and could not be said to reflect the accord reached by the parties on formation of the contract. The terms of the Guarantee suggest that it was agreed at the time of execution of the Guarantee that cl 10 was a provision of importance in the operation of the agreement. It did not become severable thereafter by court order at the option of one of the parties exercising some form of waiver. Whitlock v Brew [1968] HCA 71; (1968) 118 CLR 445; State of New South Wales v Banabelle Electrical Pty Ltd [2002] NSWSC 178; (2002) 54 NSWLR 503 33.
     687 When the Guarantee is read as a whole substantial rights in, or control over, property of the Guarantor have been transferred or assigned to the Banks by the Guarantee, supporting his Honour’s conclusion that the Guarantee effected a settlement under s 120 of the Bankruptcy Act.
     688 It follows that his Honour did not err in his findings on this issue and the ground of appeal must be dismissed.
     d) Mortgage Debentures – Floating Charges
     689 Documents described as Mortgage Debentures (the Debentures) were executed by BGF and BPG on 1 February 1990. Contemporaneously Notices of creation of charges were lodged for registration pursuant to the provisions of the relevant company law. The Notices stated that the charges created were fixed and floating and that the property charged consisted of all assets, rights and property of the chargor company as at 1 February 1990 situated in Western Australia and all future assets wherever situated.
     690 His Honour found, at [9210], that the ‘mortgage debentures … constituted settlements of property’. The Banks appeal from that finding insofar as his Honour found that the floating charges of the Debentures were settlements of property under the terms of s 120 of the Bankruptcy Act. The Banks submitted that whilst there was some authority capable of supporting his Honour’s finding, the weight of authority was to the contrary. The respondents contended that a floating charge was properly regarded as the creation of an equitable interest in property and that his Honour had not erred.
     691 The Debentures were executed by BGF and BPG as part of their obligation as nominated Security Providers. The Debentures constituted a significant element of the security provided to the Banks pursuant to the Transactions.
     692 The Debentures stated that they had been provided as security for the payment of the Secured Liabilities. The Secured Liabilities were, inter alia, the liabilities incurred by BGF and BPG as Guarantors under the instruments of Guarantee and Indemnity, which included liability for the indebtedness to the Banks of the Borrowers, principally BGF and BGUK. BPG was not a Borrower.
     693 The security provided consisted of three components in the instrument executed by BPG and two components in that executed by BGF. The two common components were a fixed charge and a floating charge. Additionally, BPG provided a mortgage over shares it held in its subsidiaries.
     694 By way of amplification of the description of charged property contained in the registered Notices it is to be noted that the fixed charge was granted over all assets that consisted of freehold or leasehold interests in land and buildings and the proceeds of sale thereof; plant and machinery; goodwill; licences held in connection with the business of the chargor; uncalled capital; intellectual property rights; rights under insurance policies; and all accounting records of the business of the chargor.
     695 The floating charge, save for the assets charged by the fixed charge, was in respect of the whole of the undertaking of the chargor and all present property assets and rights owned by the chargor in Western Australia and all future assets wherever situated.
     696 The floating charge, therefore, covered debts payable to BGF and BPG by other Security Providers. But in respect of those debts, as noted earlier, it may be argued that the PSD, executed by BGF and BPG as Subordinated Creditors and as Security Providers, effectively assigned to the Banks the debts payable to BGF and BPG by a Security Provider. If so, then upon execution of the PSD on 15 February 1990, the terms of the PSD may be said to have fixed the floating charge in respect of those debts. See Norgard v Deputy Commissioner of Taxation (WA) (1986) 79 ALR 369, 377 ‑ 378 (Burt CJ).
     697 It is also to be noted that ‘crystallisation’ of the floating charge as a fixed charge was not postponed to the appointment of a receiver by the Banks under the Debenture.
     698 The floating charge became a fixed charge ‘automatically and immediately’ if an ‘Enforcement Event’ occurred. The term ‘Enforcement Event’ was defined as the making of a declaration by the Security Agent of the Banks that any part of the Banks’ loans was due and payable, or the making of a demand by the Security Agent for the repayment of the loans.
     699 Alternatively, if at any time in the reasonable opinion of the Security Agent it was necessary to ‘protect and preserve’ the rights held under the Debenture including the priority of the charge over ‘Mortgaged Property’, the Security Agent could convert the floating charge to a fixed charge in respect of any assets by delivering notice of the conversion to the chargor. ‘Mortgaged Property’ was defined as all assets, rights and property of the chargor the subject of the Debenture.
     700 Under the heading ‘Negative Pledge’, cl 4 of the Debenture, in effect, limited the freedom of the chargor to deal with property the subject of the floating charge. Only the disposal of stock in trade in the ordinary course of business of the chargor permitted under the ‘Financing Documents’ could be carried out without the consent of the Banks. That is, the Debenture did not reserve a right in BGF or BPG to carry on business in the ordinary way in respect of all assets subject to the floating charge. Only the property that consisted of stock in trade could be dealt with in that manner. In all other respects BGF or BPG, as chargor, could deal with property that was subject to the security of the floating charge only with the consent of the Banks first obtained, although that consent was not to be withheld if the agent of the Banks was satisfied on specified matters. In short, as discussed earlier in these reasons and as found by his Honour, upon execution of the Transactions the ability of BGF or BGP to deal with property under the floating charge was subject to the strict control of the Banks.
     701 It can be seen that in respect of the preponderance of assets and property subject to the floating charge, the chargors did not have freedom to act and deal with that property as if no charge existed. This fact had to be taken into account in determining the true nature of the interest created by the floating charge. As Wickham J stated in Landall Holdings Ltd v Caratti [1979] WAR 97, 109, in discussing the character of the interest created by a floating charge, the ‘nature of the equitable interest will, of course, depend in particular cases upon the construction of the deed which creates it’.
     702 The terms of the Debenture make it apparent that the nature of the equitable interest created by the Debenture by the grant of the floating charge carried hallmarks that were consistent with the grant of a fixed charge. The interest created foreshadowed, without the need for ‘crystallisation’, the grant of an immediate injunction in equity restraining relevant parties if the chargor attempted to deal with assets that were subject to the floating charge without the consent of the Banks. The requirement of consent kept all charged assets under the notice and control of the Banks. That fact, coupled with the power of the Banks to better secure their interests by converting forthwith the floating charge to a fixed charge over any assets, gave the Banks practical control of that charged property equivalent to that exercised by a fixed charge. The floating charge was constructed in the Debenture as an active equitable interest and not as a dormant interest, insofar as the latter expression assists in the description of a floating charge. See Illingworth v Houldsworth [1904] AC 355, 358 (Lord Macnaghten).
     703 The particular facts of this case provide compelling reasons to conclude that a disposition of property in the nature of a settlement of property for the purposes of s 120 of the Bankruptcy Act occurred on the creation of the floating charge on execution of the Debentures.
     704 The learned disquisition of the relevant law provided by Wickham J in 1978 in Landall Holdings Ltd v Caratti (at 107 ‑ 109) in which a floating charge was held to create an equitable interest in property was recapitulated in the reasons of Finkelstein J in Wily v St George Partnership Banking Ltd [1999] FCA 33; (1999) 84 FCR 423, 429 ‑ 435 and has been supported in recent years by the development of the opinion of learned authors. See Sykes & Walker, The Law of Securities (5th ed, 1993) at 959; Goode, Legal Problems of Credit and Security (3rd ed, 2003) at [4‑01]; Gough WJ, Company Charges (2nd ed, 1996) at 354; Tyler, Young & Croft, Fisher & Lightwood’s Law of Mortgage (2nd Aust ed, 2005) at [8.11]).
     705 The Banks sought to rely upon Tricontinental Corporation Ltd v The Commissioner of Taxation [1988] 1 Qd R 474 and Lyford v Commonwealth Bank of Australia [1995] FCA 1261; (1995) 130 ALR 267 where those cases decided that a floating charge could not be more than a mere equity until ‘crystallisation’ created a proprietary interest. In Lyford Nicholson J relied upon that conclusion to further determine that a ‘floating security’ could not ‘give rise to a disposition of property’ for the purposes of s 120 of the Bankruptcy Act. It is not necessary to examine those cases in detail, not only because the preponderant view now is to the contrary but because the significant facts in this case disclose that a disposition of property was effected by the interest created by the Debenture and described therein as a floating charge. As Burt CJ stated in Norgard v Deputy Commissioner of Taxation (377) ‘… the nature of the charge is not finally determined by what the parties call it. It depends upon the terms of the agreement’.
     706 It is to be noted that Landall v Caratti; Norgard v DCT; Evans v Rival Granite Quarries Ltd [1910] 2 KB 979; Tricontinental v FCT; Clyne v Deputy Commissioner of Taxation [1981] HCA 40; (1981) 150 CLR 1 were all cases in which the issue for determination was the priority of competing equities.
     707 The ranking in equity of a floating charge in a contest of priorities is not an issue required to be determined for the purposes of s 120 of the Bankruptcy Act in deciding whether a disposition of property occurred by creation of the floating charge.
     708 In the Debenture the floating charge was an equitable interest in property capable of controlling the assets without formal crystallisation or conversion of the charge to a fixed charge. The interest created was not confined to a mere equity with a prospect of maturity into an equitable interest.
     709 An example of how the equitable interest obtained by a chargee under a floating charge can, prior to ‘crystallisation’ of the charge, sustain rights in equity exercisable by a secured creditor in respect of the charged property is provided in Re Bartlett Estates Pty Ltd [1989] 2 Qd R 175, 180 ‑ 181 (Dowsett J).
     710 It follows from the foregoing that his Honour held correctly that execution of the Debentures constituted, in all relevant respects, settlements of property for the purposes of s 120 of the Bankruptcy Act.
     Relief on Statutory Claims
     711 By their cross‑appeal the respondents contend that compensatory orders could, and should have been, made in respect of the Statutory Claims. His Honour, at [9219], found it unnecessary to consider the question of what relief was available on the successful Statutory Claims because of his Honour’s conclusion that appropriate relief was embodied within the orders for ‘primary relief’.
     712 It may be accepted that it is probably unnecessary to determine the scope of the equitable relief that would flow from a declaration of invalidity of Transactions pursuant to the Statutory Claims given that such relief would be subsumed within the equitable compensation provided if the Barnes v Addy claims prevail.
     713 However, some short comments may be made. Jurisdiction in bankruptcy commenced as an exclusive equitable jurisdiction (see Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (4th ed) [1-080]). The statutory claims not only have their genesis in that bankruptcy jurisdiction but are likely to include conduct over which equity would exercise jurisdiction as a court of conscience and for which entitlement to relief in equity would follow.
     714 The invalidity as against a liquidator of transactions caught by the statutory claims is the means adopted at law to counteract the engagement in such practices that prejudice the interests of creditors of insolvent corporations. Demonstration of such conduct in equity would permit equity to control that conduct by injunction or orders for remedial constructive trusts and by appropriate orders to redress harm suffered therefrom (see Fouche [337] – [338] (Dixon CJ, Fullagar J); Bofinger [48]; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 [253]).
     715 The principal point of argument on this question was whether the decision of the High Court in Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322 foreclosed an argument that personal liability in equity attached a disponee of property of a disponor with notice that the disponor had alienated that property with the fraudulent purpose of defeating, delaying or hindering his or her creditors.
     716 The relevant facts in Brady v Stapleton involved fraudulent conduct by a bankrupt carried out to avoid the payment of penalties and income tax. In the Federal Court of Bankruptcy Clyne J found that the bankrupt, his wife, and Brady were active participants in a ‘daring and scandalous scheme to swindle the Commissioner of Taxation’ by disposition of a large part of the property of the bankrupt. Clyne J found that none of those dispositions were settlements caught by the terms of s 94 (precursor to s 120) of the Bankruptcy Act, but did find that dispositions to Brady, the bankrupt’s wife, and other individuals had created trusts in favour of the bankrupt and declarations to that effect were made. Clyne J found also that dispositions of property of the bankrupt to a company in which the bankrupt had a substantial shareholding, also the subject of a disposition, were alienations made with intent to defraud creditors contrary to applicable legislation that reproduced the Statute of Elizabeth and made declarations accordingly. The company was taken to have received the property of the bankrupt with notice of the fraudulent character of the assignment (332) (Dixon CJ, Fullagar J). The property fraudulently alienated consisted of both realty and personalty and, in two cases, moneys of the bankrupt used by the company to acquire realty. Save for one item, all property so alienated or acquired by the company with funds of the bankrupt was sold by the company. The declaration of fraudulent alienation in respect of property acquired with moneys of the bankrupt had the effect of following the money of the bankrupt to the proceeds of sale of that property (332) (Dixon CJ, Fullagar J).
     717 Clyne J did not order that any of the foregoing dispositions were void and no orders for consequential relief were made except for the one instance where the alienated property had not been sold.
     718 At the hearing of the appeal in the High Court the appeal against the orders made by Clyne J was dismissed for want of prosecution.
     719 The respondent, as trustee of the bankrupt’s estate, presented a cross‑appeal and was the only party to make submissions to the Court. The respondent contended that Clyne J erred in failing to make an order that the company pay to the respondent a sum equal to the proceeds of sale of the properties the subject of the declarations of fraudulent alienation.
     720 Therefore, the claim against the company as presented by the respondent on the cross‑appeal was restricted to a claim at law for an order for repayment of moneys had and received pursued by the respondent as a claim in personam and not ‘as a claim to “follow” or “trace” the property in question’ (331) (Dixon CJ, Fullagar J).
     721 Dixon CJ and Fullagar J (at 332 ‑ 333) accepted that whilst a disponee obtained no better than a voidable title to property disposed of with an intent to defraud creditors, the disponee was able to convey full title to the property to a bona fide purchaser without notice, as acknowledged in statutory provisions such as the Statute of Elizabeth. But, the trustee in the bankruptcy of the original disponor was entitled in equity to recover from the original disponee the proceeds of sale of that property where that disponee was a person who had notice of the fraudulent alienation and where the proceeds of sale remained identifiable for the purpose of following or tracing. Their Honours cited Re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831 in support of that principle. Re Mouat (833 ‑ 835) confirmed the jurisdiction of equity to assist creditors in the recovery and protection of property alienated by debtors in transactions that the Statute of Elizabeth made voidable at law and in equity. Whilst their Honours expressed caution in respect of an alternative order made in Re Fasey; Ex parte Trustees [1923] 2 Ch 1, namely, that the disponee pay the value of the alienated property if that property were not handed over, the facts in that case did not involve resale of the alienated property or loss of identity of that property. The alternative order for payment of value in lieu of return of the property would appear to have been clearly available in equity whilst the property remained in the hands of the disponee and was consistent with the principles applied in Re Mouat. Fasey was cited with approval, albeit on another point, in Marcolongo at (567) (French CJ, Gummow, Crennan, Bell JJ).
     722 However, it had been found by Clyne J and not challenged in the cross‑appeal, that the proceeds of sale were no longer identifiable and no other right in personam against the disponee was provided at law or in equity.
     723 McTiernan J, in dissent (at 342 ‑ 343), was satisfied that where the proceeds of sale could not be traced there remained a right to obtain orders in equity. In his Honour’s view the fact that at the outset the respondent trustee had held the right to an equitable remedy in rem meant that equity would enforce a right in personam to recover a sum equivalent to the proceeds of sale received by the disponee as an aid to enforcing an order for moneys had and received notwithstanding that the actual proceeds of sale were no longer identifiable.
     724 No doubt had Clyne J declared that the company had held on trust for the bankrupt the property it sold, it would have been held that there was no impediment to granting equitable relief in the form of an order in personam that the company account for the trust property by accounting for the proceeds of sale thereof (332) (Dixon CJ, Fullagar J).
     725 In that circumstance, of course, the right to proceed in equity for the breach of trust would be independent of any right to obtain orders in equity to assist enforcement of an entitlement at law to recover moneys had and received. See Fouche v Superannuation Fund Board [1952] HCA 1; (1952) 88 CLR 609, 637 (Dixon, McTiernan, Fullagar JJ).
     726 Indeed, the second limb of the cross‑appeal related to alienated shares declared to have been held on trust for the bankrupt. The respondent contended that Clyne J should have granted consequential equitable relief by ordering that the shares be transferred to the respondent instead of an order that the disponee pay a sum of money in lieu thereof. Dixon CJ and Fullagar J described the wide powers exercisable in equity and, in particular, the continuation of extensive rights to relief in equity notwithstanding loss of identity of the property. Their Honours stated in Brady v Stapleton (337 ‑ 338):
     … it would be a great mistake to suppose that the great case of Re Hallett’s Estate [(1879) 13 Ch D 696] lays down a doctrine peculiar to money. On the contrary, it extends to money paid into a bank account, and so losing its identity as money, a doctrine which equity would never have had the slightest hesitation in applying to money physically existing or to any other kind of personal property to which it could, as a matter of practical possibility, be applied. And there is no difficulty, and we do not think that equity would ever have had the least difficulty, in applying the same doctrine to shares or bonds.
     727 Consistent with the foregoing analysis is the following comment by Wickham J in Landall Holdings Ltd v Caratti (108):
     The common law had difficulty in accepting that a proprietary right could be acquired or conferred in relation to a thing which was not yet in existence or in relation to a thing when the proprietary right was in another – nemo dat quod non habet. That is partly, although not entirely, due to the concrete and denotative language of the common law which tends often, although not always, to speak of the thing itself rather than rights and interests recognizable by the law in respect to the thing. Equity on the other hand is concerned mostly, although not exclusively, with rights and interests in relation to the thing as distinct from the thing itself.
     728 The adoption by Dixon CJ and Fullagar J of the principle of equity set out in Re Hallett’s Estate (1879) 13 Ch D 696 and the reasons provided earlier by their Honours at (332 ‑ 333), show that had the facts in Brady v Stapleton extended to the mingling of proceeds of sale of fraudulently alienated property (taken by the original disponee with notice) with other funds it would have been accepted by their Honours that a claim for moneys had and received could have been enforced by application of the remedies available in equity such as those described in Re Hallett’s Estate by placing a charge on the mixed fund or following the sale proceeds in the fund.
     729 In the instant case, the Banks incorporated the proceeds of sale in the circulating funds of their businesses and no argument arises, perhaps with the exception of Gentra, that imposition of a charge on those funds would or could not be an effective remedy. The time of vesting of the right of the liquidator to pursue such a claim would not be material to the grant of that equitable remedy.
     730 In any event, additional regard must be given to the nature of the remedy intended to be provided by the Statutory Claims in the form in which they now exist.
     731 The instructive remarks of Gummow J in Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 [99] ‑ [102], upon the ascertainment of the scope of the statutory form of relief provided by s 82 of the Trade Practices Act 1974 (Cth) have equivalent application to s 565 of the Corporations Act being a legislative provision giving effect to ‘matters of high public policy’ and establishing comprehensive regulation and control of the conduct of corporations:
     99 The TP Act is a fundamental piece of remedial and protective legislation which gives effect to ‘matters of high public policy’ [ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 at 256]. It is to be construed so as ‘to give the fullest relief which the fair meaning of its language will allow’ [Bull v Attorney‑General (NSW) (1913) 17 CLR 370 at 384; Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32 at 44; Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 at 41].
     100 Section 82 applies across a spectrum of diverse legal norms created by Pts IV and V. A number of these will have no direct analogue in the general law. Given the objective of the legislation that is not surprising. However, it does emphasise the need for caution against treating a provision such as s 82 ‘as a mere supplement to or eking out of’ pre-existing law [Pound, ‘Common Law and Legislation’, Harvard Law Review, vol 21 (1908) 383, at 388. See also Frith v Gold Coast Mineral Springs Pty Ltd (1983) 65 FLR 213 at 231‑233]. To the contrary, as Mason P put it, the courts should not be ‘fearing to move far from the familiar coastline of traditional common law and equitable approaches’ [Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 364].
     101 In Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [(1992) 37 FCR 526 at 529‑530], Lockhart J said:
     ‘Section 82 is the vehicle for the recovery of loss or damage for multifarious forms of contravention of the provisions of Pts IV and V of the [TP] Act. It is important that rules laid down by the courts to govern entitlement to damages under s 82 are not unduly rigid, since the ambit of activities that may cause contravention of the diverse provisions of Pts IV and V is large and the circumstances in which damage therefrom may arise will vary considerably from case to case.
     What emerges from an analysis of the cases (and there are many of them) is that they do not impose some general requirement that damage can be recovered only where the applicant himself relies upon the conduct of the respondent constituting the contravention of the relevant provision.
     Also, a perusal of the provisions of Pts IV and V, the contravention of which gives rise to an entitlement to an applicant for compensation for loss or damage, points to the conclusion that applicants may claim compensation when the contravener’s conduct caused other persons to act in a way that led to loss or damage to the applicant. Examples are s 46 which concerns the misuse of market power by corporations; s 47 relating to the practice of exclusive dealing; also s 48 which is concerned with resale price maintenance. As to s 47(1) and (6) relating to third line forcing see Castlemaine Tooheys Ltd v Williams and Hodgson Transport Pty Ltd [(1986) 162 CLR 395 (High Court) and (1985) 7 FCR 509 (Full Federal Court)]. See Hubbards Pty Ltd v Simpson Ltd [(1982) 60 FLR 430 and (1982) 69 FLR 392 (on appeal)] with respect to s 48. See also Australasian Meat Industry Employees’ Union v Mudginberri Station Pty Ltd [(1987) 18 IR 355] where contraventions of s 45 of the [TP] Act were involved and they concerned contracts, arrangements or understandings or restrictive dealings which adversely affected competition. Also in Pt IV are sections such as s 60 and s 63A. Section 60 prohibits corporations from using physical force or undue harassment or coercion in connection with the supply of goods or services to consumers or the payment therefor. Section 63A prohibits corporations from sending unsolicited credit cards to persons.’
     102 These considerations, reflecting the apparent scope and purpose of the statute, militate against the presence of any legislative intention that before the court comes to assess the amount for which applicants are to be compensated under s 82 it first must identify any relevant general common law rules or analogies, understand the reasons that led to their development, and then seek to adapt or adopt them consistently with the scope and purpose of the legislation.
     732 The following commentary on interpretation of the Corporations Law also acknowledges the importance of having regard to policies underlying the introduction of the comprehensive regulatory scheme of the Corporations Law, in determining the purpose and object of the provisions of that legislation:
     In particular the question is how we can use the features of modern regulatory schemes, such as pre‑enactment policy, legislative structure, operational effect and post‑enactment regulatory policy to illuminate the purpose and object of legislation. These are features of modern regulation not evident in older statutes where coherence or ‘fit’ [See Dworkin R, Taking Rights Seriously (1977); Law’s Empire (1986)] with existing law was considered important. Most regulatory schemes, while they assume continuation of the general law to a greater or lesser degree, effect a distinct rupture in the flow of law in an area. Instead of a string of emendations to existing law, modern regulation is the basic architecture of vast areas of legal control, bringing with it a distinctive program of policy justification, agency implementation, discretions and rules, and throwing into uncertainty the contribution to meaning available from the general law. This all has telling implications for interpretive law and practice.
     D Kingsford Smith, ‘Interpreting the Corporations Law – Purpose, Practical Reasoning and the Public Interest’ (1999) 21 Syd LR 161, 163 ‑ 164; see also Edwards v Attorney‑General (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667 [69] ‑ [77] (Young CJ in Equity).
     733 Section 565 of the Corporations Act defines neither the form of the proceeding nor the remedy for the right it provides. Whilst those matters are left at large some assistance in determining the nature of the remedy contemplated by the Corporations Act in respect of the right provided to obtain a remedy may be found in the correlative provisions of Part 5.7B which supplanted the provisions of s 565 for events that occurred after 23 June 1993.
     734 Part 5.7B of the Corporations Act defines a proceeding in respect of a right granted under that Part as a ‘recovery proceeding’ (s 588E(1)) and sets out the orders a court may make on a ‘recovery proceeding’ in respect of voidable transactions (s 588FF(1), s 588FE). The remedial orders available under s 588FF(1) are expressed in broad terms and include an order that there be paid to the company an amount, that in the court’s opinion, fairly represents some or all of the benefits received because of the transaction.
     735 The Explanatory Memorandum for the Corporate Law Reform Bill 1992 provided the following account of the purpose of s 588FF:
569. Proposed section 588FF is an ‘enabling provision’, giving the Court very wide powers to make appropriate orders in respect of voidable transactions to fit the particular circumstances.
570. Under the Bankruptcy Act, the characterisation of the transaction as being one to which sections 120 to 122 apply renders the transaction void against a trustee in bankruptcy and, by virtue of Corporations Law section 565, void against a liquidator. Consequently, the Court is not involved and therefore there is less flexibility to do justice between the parties, when one or more may be innocent of any ‘wrong doing’.
     (House of Representatives Explanatory Memorandum, Corporate Law Reform Bill 1992).
     736 Section 109H of the Corporations Law required the provisions of that scheme to be interpreted to promote the purpose or object underlying the law. That provision, in effect, repeated the terms of s 15AA of the Acts Interpretation Act 1901 (Cth) and upon enactment of the Corporations Act, s 15AA of the Acts Interpretation Act applied directly to that legislation. See s 5C of the Corporations Act. Similarly, s 109J of the Corporations Law permitted resort to extrinsic material to assist in resolution of ambiguity or confirmation of the meaning of provisions of the Scheme. That section repeated the terms of s 15AB of the Acts Interpretation Act which also applied directly to the Corporations Act upon enactment of that legislation.
     737 Whilst those provisions may not have been accompanied by a clear statement of relevant purpose or object, it can be said that the terms of Part 5.7B of the Corporations Act did identify a clear purpose of that legislation, namely, to assist liquidators to obtain orders to rectify the effect of transactions that prevent fair distribution of the assets of an insolvent company to creditors and to empower courts to make necessary orders to achieve that purpose.
     738 Conduct involving knowledge of intent or purpose of defrauding, delaying or hindering creditors or knowledge of the likelihood of insolvency of a party whose property is being dealt with providing a right to obtain to obtain relief under s 565 of the Corporations Act is likely to involve conduct for which equity would exercise jurisdiction to provide an appropriate remedy. It should be assumed that s 565 contemplates incorporation of a full panoply of remedies as a statutory response to circumstances that involve the use of fraudulent conduct and the need for assertion of public policy.
     739 Whatever the approach to interpretation of the precursor to s 565 of the Corporations Act may have been, it is plain that the substituted rights acquired by liquidators under s 565 of the Corporations Act were intended to receive the benefit of a purposive construction consistent with that reflected in the terms of Part 5.7B. See Newcastle City Council v GIO General Ltd [1997] HCA 53; (1997) 191 CLR 85.
     740 That is to say, whilst the scope of the new rights provided by s 565 of the Corporations Act may continue to be informed by past development of the law relating to bankruptcy, the remedies able to be applied to enforce the rights provided by s 565 should not be treated as trammelled by principles of law applied to prior rights that existed outside the Corporations Act. See Brennan v Comcare (1994) 50 FCR 555; (1994) 122 ALR 615, 633 ‑ 634 (Gummow J).
     741 In other words, to assist achievement of the purpose of the provisions of the Corporations Act courts should read the provisions of s 565 as contemplating the use of all appropriate remedial orders including those that would be regarded as appropriate in equity. See Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423.
     742 That means that where property dealt with in a dealing contrary to s 565 consists of money, the right to obtain remedial orders will not depend upon a continuing ability to identify the object dealt with. To meet the purpose of the Corporations Act it is to be assumed that s 565 contemplates that a court may order that a party at fault account for the use of moneys obtained by reason of a dealing contrary to the provisions of s 565(1).
     743 By definition, the business of the Banks involved mixing of moneys in an amalgam of funds which led to loss of identity of the property concerned. But in that circumstance an order may be made that the Banks account and make compensation for the use of that money whilst it was held from the liquidator for due distribution in the insolvency.
     744 Such an order would return the creditors, including unduly preferred creditors, to the position they would have been in but for the dealing in property of an insolvent company in contravention of s 565.
     EQUITABLE FRAUD
     Claims of respondents other than BGNV
     745 In addition to relying upon the Statutory Claims for orders for relief against the Banks the respondents also sought relief based on claims of equitable fraud. His Honour, at [4839], noted that the claims were advanced on four grounds and, at [8933] ‑ [9063], found that none of the grounds had been established.
     746 For the respondents (other than BGNV) only the first of the four grounds referred to above remains relevant to this proceeding. The essence of that ground was set out by his Honour, in [4839], as follows:
     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.
     747 In their cross‑appeal the respondents contend that his Honour erred in failing to find that equitable fraud occurred by an imposition and deceit on non‑bank creditors as pleaded in that ground [APPR.000.021, ground 94].
     748 The claim of equitable fraud as pleaded was said to be within the ‘[fourth] kind of fraud’ described by Lord Hardwicke LC in Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125; 28 ER 82, namely, agreements made between parties that effect an imposition and deceit on persons not parties to the transaction.
     749 It is apparent from the paragraphs of his reasons set out below that his Honour accepted that the first ground as pleaded was sufficient to raise a claim of equitable fraud for imposition and deceit effected by a fraud on creditors by conduct contrary to public policy. Although, at [4901], his Honour stated that he had refused to grant leave to the respondents to further amend the statement of claim by adding ‘a fraud on the bankruptcy laws’ as an additional ground in the equitable fraud cause of action, it is to be noted that the conduct said to be contrary to public policy relied upon by the respondents was the pleaded conduct of the Banks in entering the Transactions and the Scheme. That conduct in itself amounted to a pleading of attempted circumvention of insolvency laws. It follows that failure to expand the grounds of equitable fraud by including a specific plea of ‘fraud on the bankruptcy laws’ was of little consequence for the respondents’ case as pleaded.
     750 His Honour set out his understanding of the respondents’ pleading in the following paragraphs:
     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.
     …
     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.
     …
     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, 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.’
     …
     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. … 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 … 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.
     …
     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.
     …
     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.
     …
     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.
     751 Examples of the ‘[fourth] kind of fraud’ provided by Lord Hardwicke in Earl of Chesterfield were:
     (1) marriage‑brokage contracts;
     (2) agreements to refund to a parent or guardian of a spouse part of the portion of the wife or provision for the husband;
     (3) payments by a debtor to a creditor to induce participation in a deed of composition; and
     (4) payments by an applicant to an official to obtain preference for appointment to public office.
     752 All of the above examples were grounded in the need for equity to intervene to maintain adherence to good conscience and public policy.
     753 The first example, participation in marriage‑brokage contracts, did not become subject to objection at common law until well into the 19th Century, but equity always treated such arrangements as underhand wagering contracts of particular mischief tending to introduce improper matches in marriage and inimical to the wellbeing of society. Accordingly equity would make restitutionary orders even if the contract had been completed by a marriage. See Hermann v Charlesworth [1905] 2 KB 123, 129 ‑ 133 (Collins MR); 137 ‑ 138 (Cozens‑Hardy LJ); Story, Commentaries on Equity Jurisprudence (13th ed, 1908) (MM Bigelow) [261].
     754 The second example was regarded in equity as equally improper conduct in that it was antithetical to social harmony.
     755 Both of those examples no longer define equitable fraud, having been rendered irrelevant by development of the law with regard to the property rights and the status of women and the evolution of society’s attitudes and expectations in respect of marriage bargains.
     756 The conduct specified in the third and fourth examples, however, remains conduct contrary to public policy and is as improper in equity today as it was in the 18th Century.
     757 It should be noted that several years after Lord Hardwicke’s description of the ‘[fourth] kind of fraud’, Lord Mansfield in Worseley v De Mattos (1758) 1 Burr 467, 474 ‑ 475; 97 ER 407 made it clear that such type of equitable fraud was not limited to the examples provided by Lord Hardwicke:
     But valid transactions, as between the parties, may be fraudulent by reason of covin, collusion, or confederacy to injure a third person: for instance‑ A buys an estate from B and forgets to register his purchase deeds: if C with express or implied notice of this, buys the estate for a full price, and gets his deeds registered; this is fraudulent, because he assists B to injure A. Or, if a man knowing that a creditor has obtained a judgment against his debtor, buys the debtor’s goods, for a full price, to enable him to defeat the creditor’s execution: it is fraudulent. Again, if a man knowing ‘that an executor is wasting and turning the testator’s estate into money, the more easily to run away with it,’ buys from the executor, with that view, though for a full price; it is fraudulent.
     Marriage‑brocage bonds, secret agreements, different from the open treaty of marriage, and many other cases that might be put, though for a true and valuable consideration, as between the parties, are fraudulent, by reason of deceit or injury consequentially brought upon third persons.
     758 Indeed, it was apparent that Lord Hardwicke had anticipated expansion of this class of equitable fraud when in 1759 and subsequent to his retirement as Lord Chancellor, he stated:
     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.
     See Story, Commentaries on Equity Jurisprudence (13th ed, vol 1, 1908) (MM Bigelow) [186].
     759 Other conduct held subsequently to be within the ‘[fourth] kind of fraud’ has included contracts in restraint of trade and payments to reward or influence the making of dispositions by a testator. Again the need for equity to act to protect public policy determined treatment of that conduct as equitable fraud.
     760 In the second and third of Lord Hardwicke’s examples, and in respect of agreements for improper payments to influence a testator, the parties to such transactions may be taken to know, or at least be able to ascertain, third parties disadvantaged by the transaction. But in the first and fourth examples, and in respect of contracts in restraint of trade, it would not follow necessarily that the transacting parties would have any third party within contemplation at the time of contracting or have notice that a third party would be disadvantaged by the transaction undertaken.
     761 Thus acting ‘mala fide’ against third parties does not stand as the elusive ‘specific principle’ or ‘unifying factor’ that grounds equitable intervention in the examples provided of the ‘[fourth] kind of fraud’. See Meagher RP, Heydon JD and Leeming MJ, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (4th ed, 2002), [12‑050].
     762 Apart from all of the foregoing examples being regarded as transactions with objectives that were contrary to public policy and, therefore, actionable, the additional important common factor that constituted the fraud in equity and gave particular justification for the intervention of equity to make remedial orders and restore, if possible, the transacting parties to their original positions and to remove disadvantages imposed on third parties, was the underhand or improper conduct involved in the formation of the transactions.
     763 Whilst the learned author in Sheridan LA, Fraud in Equity (1957) 7 ‑ 9, 169, 174 doubted that the ‘[fourth] kind of fraud’ described by Lord Hardwicke represented a separate class of equitable fraud, it was recognised that equity would provide relief where a transaction visited fraud on third parties. Indeed as Sheridan stated, (7 ‑ 8), ‘all frauds are contrary to public policy, which is why they are redressed’.
     764 The definition of fraud in equity adopted by Sheridan (at 203) assists in identifying the character of improper conduct that equity will redress where third parties are disadvantaged by a dealing by others. Sheridan suggests that equitable fraud consists of two principal components. First, an advantage obtained by one party at the expense of, or the suffering of loss by, another and, second, the use of improper means to cause that disadvantage or loss. Whilst Sheridan acknowledges that those elements may be common to all litigiable claims, it is the degree of impropriety in the conduct that causes the disadvantage or loss that ‘distinguishes fraud from other grounds of redress’.
     765 Therefore, to identify the degree of impropriety in conduct that makes the conduct offensive to equity and justifies the grant of remedial orders, it is necessary to assess the extent to which the conduct breaches public policy and demands the exercise of equity’s discretion. Conduct contrary to public policy has continued to be treated as equitable fraud notwithstanding that express jurisdiction to grant corrective orders may have been provided by legislation for such conduct. See Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510 [235] ‑ 238.
     766 In the third example provided by Lord Hardwicke the conduct offensive to equity was the extra bargain the debtor made with a creditor to undertake to pay in full the debt due to the creditor and thereby get that creditor to participate in the deed of composition. The creditor, of course, had notice of the inability of the debtor to pay its debts in full. In that case equity did not act to relieve the debtor from the side agreement as a bargain made under undue pressure from the creditor, or under a significant disadvantage of lack of bargaining power. It intervened to prevent performance of a bargain that was based on improper conduct by the debtor and the creditor and to restore equality of treatment of creditors as required by law and as provided for in the deed.
     767 Formal administration in insolvency, or a deed of composition, will not be essential before impropriety of conduct can occur in respect of a corporation in a situation of insolvency. Once it appears that a company is insolvent, creditors of the company are regarded as having a direct interest in the company (Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (No 2) [1994] FCA 1117; (1994) 51 FCR 425, 444 (Gummow J)) in the sense that (as was made clear in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722), an obligation will then be imposed on the company not to prejudice the interests of its creditors. The fiduciary duty of a director to act bona fide in the best interests of the company would require the director not to have the company ignore or attempt to defeat that obligation to creditors.
     768 The foregoing is set out in the following passage in the reasons of Gummow and Hayne JJ in Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507 [67]:
     The starting point must be the general duty of a director to act in the best interests of the company [Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 289, 300‑301]. The best interests of the company will depend on various factors including solvency. In Kinsela v Russell Kinsela Pty Ltd (In Liq) [(1986) 4 NSWLR 722, 730], Street CJ said:
     ‘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’.
     769 Additional assistance is obtained from the following passage in the reasons of Giles JA (Ipp and Basten JJA agreeing) in Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 25 ACLC 1094 [162]:
     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 Winborne (1976) 137 CLR 1; 3 ACLR 529; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; 10 ACLR 395. In Grove v Flavel (1986) 43 SASR 410 at 421; 11 ACLR 161 at 170 the Court said 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 R (2000) 201 CLR 603; 173 ALR 529; 35 ACSR 500; [2000] HCA 43 at [95] so far as it suggested a direct duty owed to and enforceably 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.
     770 Although the obligation of the insolvent corporation not to prejudice creditors may be an imperfect obligation incapable of enforcement directly by creditors (see Re New World Alliance (445) (Gummow J)), that circumstance would not affect the determination in equity of whether rights accrued to creditors by engagement by the corporation and other parties with notice of the insolvency is improper conduct designed to disadvantage those creditors.
     771 Such recognition of the interests of creditors of a corporation is a counterbalance to the statutory exclusion of liability of corporators for the debts of the corporation. Until corporations legislation (Company Law Review Act 1998 (Cth) and Corporations Law, ss 254C and 1427) set aside the concepts of par value for shares and authorised share capital the maintenance of share capital of a corporation had been regarded as of prime importance for creditors rather than for the corporation or its shareholders and the obligation of the corporation to apply that capital only for the purposes of business was sometimes said to be an implied contract with creditors. See Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165, 179 ‑ 180 (McHugh, Gummow, Hayne, Callinan JJ).
     772 Equality of treatment of creditors in an insolvency has been a well‑known statement of public policy in both bankruptcy and corporations legislation for many years. See Keay A, ‘In Pursuit of the Rationale Behind the Avoidance of Pre‑Liquidation Transactions’ (1996) 18 Sydney L Rev 55, 65 ‑ 74. The fact of insolvency means that the conduct of the debtor, and of creditors with notice thereof, thereafter is constrained by obligations in equity.
     773 His Honour, at [4865], accepted that the ‘[fourth] kind of fraud’ that involved equitable fraud on creditors was ‘not limited to cases regarding deeds of composition’. At [4899], his Honour recognised that equity will act to ensure ‘a level playing field’ and stated that the binding effect on all creditors comes from an ‘element of common dealing’ provided by contract or by force of statute – to which could be added or provided by law or equity.
     774 The need for ‘a level playing field’ arises as a matter of public policy when a corporation becomes insolvent. At that point it has long been a requirement of corporations legislation that a company not be permitted to incur further trading debts. Liabilities to compensate third parties have been imposed on directors who breach their management duties to the company by failing to prevent insolvent trading. See Companies (Western Australia) Code, s 556; Corporations Law, s 588G; Corporations Act, s 588G. It would follow that management duties of directors would then include consideration of commencement of an appropriate form of external administration. The object of those provisions was to encourage directors to take early positive steps to commence an ordered form of administration to deal with the insolvency. See Australian Law Reform Commission General Insolvency Inquiry Report 45 (1988) [53]; Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113, 135 ‑ 138 (Spigelman CJ).
     775 A creditor aware of the insolvency of a debtor is aware of the requirement that creditors of the debtor are to be dealt with equally and of the obligation of the debtor to creditors in that regard and is in a similar position of moral obligation as a creditor party to a deed of composition.
     776 The rights provided by s 565 of the Corporations Act, and by the corporations legislation that preceded it (Companies Act 1961 (WA), s 273; Companies (Western Australia) Code, s 451; Corporations Law, s 565), confirm public policy that an insolvent corporation not provide a preference to a creditor. For events occurring on or after 23 June 1993, Part 5.7B of the Corporations Law (and Part 5.7B of the Corporations Act) replaced s 565 with more detailed limitations upon dealings by an insolvent corporation that emphasised the underlying purpose of entrenchment of equality in the treatment of creditors of an insolvent corporation. See s 588FA; s 588FC; s 588FE of the Corporations Act; Edwards v Attorney‑General (NSW) [73] (Young CJ in Equity).
     777 The legislation referred to sought to stop, from the onset of the insolvency, an insolvent corporation engaging in dealings that may disadvantage creditors. Thus a creditor with notice of the insolvency participating in dealings calculated to hold off the operation of that legislation to the disadvantage of other creditors would be engaged in conduct contrary to public policy. On an application by a party with standing to have the company wound up in insolvency equity would treat that conduct as grounding injunctive orders to restrain the dealings and to preserve the property involved (See: Corporations Act, s 459P, s 462).
     778 Before considering the relationship of an insolvent corporation and its creditors, it is appropriate to consider first the position of debtor and creditor under bankruptcy law which historically has informed the operation of insolvency law in respect of corporations.
     779 In bankruptcy law, although the prospect of a bankruptcy petition being presented within six months of an act of bankruptcy (and commencement of the bankruptcy being related back to that act of bankruptcy, Bankruptcy Act s 115) may be no more than a contingency, the act of bankruptcy itself causes the debtor to lose absolute title to property and to become subject to obligations in equity to retain assets for creditors. Importantly in equity no title to property of the debtor could be acquired in that period by a transferee with notice. That is, the act of bankruptcy is presumptive of a state of insolvency and a transferee with notice of the act of bankruptcy acts with notice of the insolvency and with notice of the inability of the debtor in equity to deal with the assets.
     780 Whilst under corporations law there has been no direct equivalent to an ‘act of bankruptcy’, the Corporations Act does apply the concept of relation back to set a date (which may precede the commencement of a liquidation begun by court order) from which retrospective periods are fixed to catch certain prior transactions of an insolvent corporation (see Corporations Act ss 9, 513A, 513B, 513C, 565, 588E, 588FE, 588FJ, 588Z).
     781 The principle applied by equity to a creditor’s knowledge of an act of bankruptcy involves notice of probable insolvency of the debtor and that principle may be applied equally to the conduct of a creditor that takes property of a corporation with notice of the probable insolvency of the corporation.
     782 Two examples of the operation of the equitable doctrine in bankruptcy appear in the following cases: Ponsford, Baker & Co v Union of London & Smith’s Bank Ltd [1906] 2 Ch 444, 452 ‑ 453 (Fletcher Moulton LJ) and Re Docker (1938) 10 ABC 198, 245 (Lukin J).
     783 In Ponsford Baker the debtors, stockbrokers, had defaulted on their obligations on the stock exchange and had committed an act of bankruptcy by assigning all their assets to the official assignee of the stock exchange for the benefit of their creditors. The debtors and the official assignee thought it would be in the interests of the assigned estate to redeem securities previously lodged with the debtors’ bank to secure loans made to the debtors by the bank. The amount outstanding on the loan account was tendered and the debtors and assignee called for delivery up of the securities. The bank, having notice of the act of bankruptcy, refused to accept the tender or to hand over the securities. The debtors and assignee as joint plaintiffs commenced an action in the Chancery Division for return of the securities and for damages from the bank for wrongful detention. The Court of Appeal held (at 457) that a secured creditor was not entitled to receive payment of a debt from a debtor once it had notice of an act of bankruptcy, the debtor being incapacitated from tendering the money.
     784 In Radio Corporation Pty Ltd v Bear [1961] HCA 26; (1961) 108 CLR 414, 422 Dixon CJ stated that the strong terms in which the foregoing doctrine was stated in Ponsford Baker by Fletcher Moulton LJ (at 452) made the passage worth repeating, a course that is equally appropriate in these reasons:
     Nothing is more firmly established in bankruptcy law than that a man who has committed an act of bankruptcy is not entitled to deal with his estate. He has no right to gather it in if it is not already in his hands or to make payments to his creditors out of that which he has actually at his command. He can give no good discharge to a debtor who pays him with notice of the act of bankruptcy, because the debt may by subsequent bankruptcy proceedings be turned into a debt due to his trustee, and not to himself. This is a principal and fundamental part of our bankruptcy administration, and yet if the doctrine contended for were established, the mere issue of a writ would nullify the whole of the precautions taken by the Legislature in this respect. The debtor having no defence could not prevent judgment being recovered and execution had, and if such claims could thus be enforced notice of an act of bankruptcy would be no impediment to a debtor effectively collecting and getting into his own hands all moneys due to his estate. We are of opinion, however, that this doctrine is not well founded. For the purpose of deciding this point it is necessary to examine carefully the exact legal position of a man who has committed an act of bankruptcy under the statutes at present in force. Until commission of the act of bankruptcy he was, of course, the beneficial owner of whatever assets he possessed, but by the act of bankruptcy his title to be regarded as such beneficial owner is no longer absolute, but is contingent on no bankruptcy petition being presented within three months of the date of the act of bankruptcy which leads to a receiving order being made. If such receiving order be made the whole of the assets vest in his trustee as from the date of the act of bankruptcy. He is, therefore, in the position that should such a contingency occur he is from the date of the act of bankruptcy something less than a mere trustee of his assets for the creditors in his bankruptcy. Until this state of suspense has been removed either by a receiving order or by lapse of time, he has no right to deal with those assets that were in his hands, and can give no title in them to any transferee with notice. Similarly, with regard to the debts and other choses in action which form part of his estate, he cannot collect them or give a valid discharge for them, and anyone making a payment to him with notice of the act of bankruptcy does so at his peril. But these statutory provisions have been enacted for the benefit only of the creditors of the bankrupt, and not for the benefit of his debtors.
     785 The Court of Appeal noted that in the circumstances discussed in that case the court had available to it all the powers of a Court of Chancery to fashion appropriate orders.
     786 In Re Docker (241 ‑ 244) Lukin J also recited part of the foregoing passage in Ponsford Baker and set out as follows extracts from various cases that provided guidance on assessing the impropriety of the conduct of a creditor with notice of the insolvency of a debtor:
     Clauson J in Re Simms [(1930) 2 Ch 22], in dealing with the question of bona fides, after reviewing the authorities on the question and whether a transaction whereby a debtor disposes of practically all his property is a fraudulent act of bankruptcy, says (at p 34): ‘The result of these authorities appears to me to be that a transfer by a debtor of substantially the whole of his property, whether by way of charge or by way of sale, will be an act of bankruptcy, if the necessary consequence of the transfer will be to defeat or delay his creditors.’ And later, at p 35, he says:‑ ‘I am afraid that I failed to appreciate how the company, having been a party to a transaction which is held to be a fraudulent transfer, with not only notice but knowledge of all the facts which carry this legal result (the knowledge of the debtor and his solicitor, who were the only directors, being necessarily the measure of the company’s knowledge) can set up bona fides as a defence. The suggestion I think was that all the parties honestly thought that this transfer which the law holds – and they must be assumed to have known that the law would hold – to be fraudulent, was the best thing in everyone’s interests. But I can rely on the authority of Cotton LJ in Ex parte Chaplin [(1884) 26 Ch D 319) for the proposition that a fraudulent transaction remains a fraudulent transaction (at all events if the parties know all the facts which stamp it in law as a fraudulent transaction) whatever may be the view of the parties that it may be the best thing for the debtor, or may result in effectually paying the creditors. That authority alone makes it impossible for me to accede to the argument which would claim protection for the company in the present case in the footing of bona fides.’
     In Re Jukes ((1902) 2 KB 58), in dealing with the same subject, Wright J said (at p 60): ‘I cannot help thinking that if a creditor of a debtor takes the whole, or substantially the whole, of the property of his debtor in payment of a past debt, and knowing that there are other creditors, he cannot be said to be acting in good faith. On the whole, therefore, I hold that the transaction in this case is not protected by s 49 of the Act’ (s 49 of the Bankruptcy Act of 1883, replaced by s 45 of the Act of 1914 – our s 96). See also in Re Kerr, a bankrupt ((1927) NZLR 177), where Skerrett CJ (at p 186) in reference to ‘good faith’ dealt with the obligation of inquiry as to other creditors and held that absence of inquiry was evidence of want of good faith. (241 ‑ 242)
     …
     [Cave J] in the Divisional Court, in Re Freeman ((1890) 7 Morr 38) said: ‘When a man is insolvent he has no business to take upon himself to decide whether his business is or is not to be sold or whether his business is or is not to be carried on. When he is insolvent he really is carrying on his business at the risk and expense of his creditors … A man, therefore, is not justified in going on, or in selling, or, in fact, taking any step at a time when he is insolvent without the concurrence of the creditors who have to bear the burden, if that step turns out to be a disastrous one.’
     Buckley LJ in Re A Debtor ((1912) 2 KB 533 at 541), said:‑ ‘I desire to add that it is a principle of the law of bankruptcy that if a man be insolvent it is desirable that at the earliest possible moment means shall be available to protect his assets for the benefit of all his creditors.’
     In Farmers’ Mart Ltd v Milne ((1915) AC 106) the House of Lords there dealt with the stipulation in an agreement which Lord Atkinson described as simply embodying a device ‘arranged between the pursuers and defender in fraud of the bankruptcy laws to secure to the pursuers a larger dividend than the other creditors in that estate were to receive.’ At p 115, the learned Lord said:‑ ‘My Lords, I have not the slightest hesitation in holding that such an agreement is a fraud upon the bankruptcy laws, the great object of which, as distinguished from the Statute of Elizabeth, is not merely to secure that the assets of a bankrupt shall be distributed amongst his creditors, but that they shall also be distributed equally. Equality is the great object and virtue of the Bankruptcy Acts. It is to defeat that equality that this agreement was entered into.’ (243 ‑ 244)
     787 Lukin J then went on to state (244):
     It is surely the essence of fair play that creditors knowing of a debtor’s insolvency should consult with their fellow creditors before enabling him to carry on.
     The evidence, in my opinion, shows that the bank, by deliberate action and with full knowledge of the debtor’s insolvency, had the business carried on for the express purpose of enabling it to collect for its exclusive benefit as much of the remaining assets of the insolvent debtor, including the debts due to the bankrupt, as were possible without the slightest regard for, and without any proper inquiries about or consultation with, other known creditors.
     788 Those statements all echoed the analysis Lord Mansfield had provided in 1758 in Worseley v De Mattos (474) that conduct designed to circumvent bankrupt law was fraudulent both at law and in equity:
     The end proposed by the secret trust was, that in case Slader should become bankrupt, his whole estate should first be vested in De Mattos, for payment of what was justly due to him. The preference aimed at was fraudulent and unlawful … Such preference is a fraud upon the whole bankrupt law, and would defeat the two main objects it has in view; to wit, the management of the bankrupt’s estate; and an equal distribution among his creditors.
     789 As Bigelow MM, ‘Definition of Circumvention’ (1889) 5 LQ Rev 140, 147 stated, the equitable fraud by circumvention consisted of ‘endeavour to alter rights by wrongfully evading the law in a matter in which the party to be wronged is not a party’. The two circumstances of evasion specified were evasion of the Statute of Elizabeth and evasion of bankruptcy laws.
     790 The fraud dealt with by equity in such cases is not exhausted by the singular transactions made voidable under insolvency laws. The equitable fraud lies in the impropriety of conduct contrary to public policy, being conduct using circumvention of the operation of those laws to effect imposition and deceit on third parties. His Honour, at [4910], in effect, accepted that conclusion.
     791 The principle was expounded by Lord Dunedin in Farmers’ Mart Ltd v Milne [1915] AC 106, 112 ‑ 113:
     [I]t is not only prejudicial to third parties, but it is inconsistent with public law and arrangements; and it is equally inconsistent with public law and arrangements whether it contravenes an actual section of the Bankruptcy Act, of which Thomas v Waddell [(1869) 7 M 558] may be taken as an example, or whether it goes against those general principles which are just as much applied to private arrangements in Scotland, such as trust deeds, as they are to the general arrangements which are prescribed in a sequestration.
     792 In equity the same principle should be taken to apply in a corporate insolvency as in a bankruptcy, namely, that upon the onset of insolvency, the common interest of creditors in the company means that thereafter the insolvent company holds its assets on trust for pari passu distribution amongst creditors. Also in equity, a creditor with notice of the insolvency acting with intent to defeat the interests of other creditors will get no title in equity to the property of the insolvent corporation, although possession of the legal title may permit full title to be conveyed to a bona fide purchaser without notice of the defect in equity.
     793 As Buckley J stated in Re Telescriptor Syndicate Ltd [1903] 2 Ch 174, 181:
     I may say that it is in my opinion desirable that as far as possible the Court should not assume a different attitude or act upon a different principle in the winding‑up of a company and in the bankruptcy of an individual.
     See also Keay A, ‘The Unity of Insolvency Legislation: Time for a Re‑think?’ (1999) 7 Insol Law Jnl 4, 9.
     794 Insofar as his Honour considered that an element of ‘common dealing’ was necessary for equity to intervene that element was provided by the circumstance of insolvency once a debtor and a creditor with notice thereof purported to engage in a dealing. At that point, as noted above, all creditors had a common interest in the insolvent company and it was not possible, in equity, for a creditor with notice of the insolvency to ignore those common interests. His Honour, at [4905] and [8972], recorded partial appreciation of this argument but appeared to overlook the circumstance of a creditor with notice of the debtor’s insolvency purporting to participate in a transaction with the debtor. His Honour, at [8973], restricted his consideration to the obligations of the debtor, and thereby misunderstood the pleaded case of the respondents.
     795 Accordingly, at [8970], his Honour stated that he failed to see how public policy could be affected by a transaction that could be described as no more than a ‘situation where individual debtor and an individual creditor meet outside a formal administration in relation to pre‑existing rights and obligations and decide to do something about them’. If his Honour understood that such a description could apply to a circumstance where a creditor with notice of insolvency dealt with an insolvent debtor with a purpose of taking the property of the debtor and thereby disadvantaging or defeating other creditors then the understanding involved error.
     796 His Honour, at [8973] ‑ [8974], stated that the respondents’ case in equitable fraud could be said to be represented by the proposition (although his Honour acknowledged that it was not so stated in the pleadings) ‘that the [b]anks deliberately concealed from non‑[b]ank creditors the import and effect of what they were doing’ in the implementation of the Transactions and the Scheme. Given his Honour’s understanding of the respondents’ pleading as recited earlier in his reasons it may be taken that his Honour did not consider that the pleading could be confined to a proposition that would limit and misstate the scope of the respondents’ case. His Honour, whilst accepting, at [9033], that ‘conscious wrongdoing is not an indispensible element of equitable fraud’ found, at [9046], that the claim in equity could not succeed in respect of LDTC as a creditor because it had not been shown ‘that the [b]anks procured or encouraged the Bell group officers to keep LDTC in the dark’. Furthermore, at [9027], his Honour found that LDTC could not be said to have been imposed on, or deceived, having regard to the findings his Honour had made. Namely, that LDTC knew that the ‘on‑loans’ were ‘straightforward subordinated loans’; knew that the Bell group was in ‘financial difficulties’; and ‘by 26 January 1990’ knew that ‘security had been given and taken, regardless of whether or not it knew of all the details of the security’.
     797 Perhaps his Honour’s finding that LDTC knew that the ‘on‑loans’ were subordinated went beyond conclusions available on the evidence, which contained no statement by Duffett (the controlling mind of LDTC) that he knew the on‑loans were subordinated. Duffett went no further than to state that if he had made assumptions about the loans they would have been made without knowledge of any of the circumstances relating thereto and that neither he nor anyone else had given separate consideration to the status of BGNV on‑loans. The expression ‘straightforward, subordinated loans’ used by his Honour in [9027], came from a passage of the transcript of Duffett’s evidence recited at [8894]. The full context of that passage makes it plain that Duffett used those words in reference to the convertible subordinated bonds issued by TBGL and BGF (the other bonds for which LDTC was trustee for Bondholders). Duffett was describing the proceeds obtained by TBGL and BGF from the issue of the bonds as ‘straightforward subordinated loans’. He did not refer to any loans made by TBGL and BGF from those proceeds or to loans made by BGNV to TBGL and BGF from the proceeds BGNV obtained from the bonds it issued. Furthermore, at [9333] and [9338], in opposition to the foregoing finding, his Honour accepted the contrary argument put by the Banks in support of their defence of laches against LDTC. Namely, that the evidence of Duffett that he believed the on‑loans were not subordinated meant that LDTC, since at least July 1991, had had the means of knowing the elements of the equitable fraud claim if LDTC intended to plead it.
     798 As to the additional findings by his Honour that LDTC knew that the Bell group was in financial difficulties, or knew that security had been taken by the Banks, neither circumstance would exclude equitable fraud if the Banks with notice of insolvency had purported to take security to obtain an advantage over other creditors.
     799 As discussed below, the foregoing findings of fact were irrelevant to the determination of the pleaded claim of equitable fraud.
     800 With regard to whether creditors, other than LDTC, were affected by imposition or deceit involved in that conduct his Honour found, at [9058], that it was ‘clear that the banks knew there were likely to be other creditors’. However, at [9062] ‑ [9063], his Honour then found that the claims of equitable fraud could not extend to those creditors because there was ‘no hint of the banks wanting to ensure that the Bell group officers kept the other non‑bank creditors in the dark’. In addition, his Honour was ‘unable to identify the offence to public utility that would bring it within the imposition and deceit doctrine’.
     801 The claim of fraud as pleaded was based on a right to obtain relief in equity for reasons of public utility where a debtor and creditor with notice of the insolvency of the debtor, engaged in a dealing to provide an advantage to that creditor at the expense of other creditors. The improper means of obtaining that advantage, thereby providing cause for equity to intervene, consisted of the attempt by a creditor (with notice of the insolvency) to obtain title or equitable interests in the assets of the debtor, contrary to the public policy that such assets be held by the insolvent debtor for equal distribution amongst its creditors, colloquially expressed by his Honour as an attempt to ‘steal a march on other creditors’. The conduct described as the ‘stealing of a march’ was the attempt to overreach the lawful claims of other creditors by purporting to obtain, and to hold out that they possessed, title and interest in Bell group assets to which the Banks were not then entitled in equity. See Sheridan (204).
     802 Whether a creditor so advantaged took steps to have disadvantaged creditors ‘kept in the dark’ would not be relevant to establishing that such a dealing constituted a fraud in equity. His Honour misdirected himself in holding that the claim could not succeed in the absence of such a finding. Indeed his Honour, at [4894], appeared to have accepted that the secrecy of an arrangement was not an essential ingredient in showing a fraud on creditors.
     803 The Banks submitted that the case of the respondents presented on the cross‑appeal differed from the case put at trial. However, his Honour’s reasons as adumbrated above set out the nub of the respondents’ case and confirmed that the conduct of the Banks, and public utility in providing relief in respect of that conduct, were issues raised by the respondents’ pleading to be dealt with by his Honour.
     804 On the hearing of the cross‑appeal counsel for the respondents sought to identify the disadvantage suffered by non‑bank creditors as the loss of an opportunity for those creditors to be engaged in consideration of proposals for compromise of debts under statutory arrangements and reconstructions of the insolvent Bell group corporations as a form of external administration. It was unnecessary for the case pleaded by the respondents to go further than to show that the conduct of the Banks had been undertaken with notice of insolvency and had been done to advantage the Banks at the expense of other creditors by denying those creditors the benefit of any form of external administration in which the creditors would be dealt with on equal terms with the Banks. As set out below that case was established at trial.
     805 The essential issues arising from the pleaded claim of equitable fraud by imposition and deceit were whether the Banks had knowledge that the Bell group was in a state of insolvency and whether that knowledge had been compounded by the construction by the Banks of a Scheme to effect informal administration of the affairs of the Bell group under the supervision of the Banks to have the assets of the Bell group applied to repayment of the claims of the Banks to the exclusion of other creditors and to avoid the commencement of any external administration that could imperil the preference the Banks had obtained. As noted elsewhere in these reasons, at [555] ‑ 556], [945], the Scheme, which included the BGNV Subordination Deed, also served the further purpose of avoiding the risk that in a liquidation of TBGL and BGF, BGNV (as a creditor of TBGL and BGF) could rank pari passu with the Banks in claims for recovery of moneys lent by BGNV to TBGL and BGF, a risk that his Honour said, at [9723], ‘frightened’ the Banks and caused them to seek execution of the Transactions as soon as possible.
     806 As to the first element, his Honour was satisfied that the Banks had knowledge of the state of insolvency facing the Bell group, namely, that the principal debtor companies could no longer meet their debts as they fell due. Therefore, it would follow that there was knowledge that the companies required some form of external administration. In particular, whilst his Honour found, at [7100], that Aspinall ‘did not believe in the substance of the argument’ that he had made to SCBAL that Bondholders would rank equally with the Banks in a liquidation, there was no issue that Aspinall believed, and that the Banks believed, that liquidation in insolvency would follow inevitably if SCBAL did not ‘withdraw’ the demands for payment it had served on BGF and TBGL in respect of moneys advanced by SCBAL to BGF.
     807 At [9034] his Honour found that the Banks knew that if demand were made for payment of any bank facility, liquidation of the Bell group would follow. Indeed it was the Banks’ case that, for the Bell group, the choice was either execution of the Transactions or liquidation.
     808 It should be added that although the notices of demand were described as ‘withdrawn’ the outcome of service thereof remained. Namely, that BGF and TBGL had defaulted in meeting the terms of the notices which on 4 December 1989 terminated the facility for advances to BGF and called for immediate payment by BGF of the sum of $15.3 million and on 8 December 1989 made demand on TBGL as guarantor of BGF to make immediate payment of the sum BGF had failed to pay. Those notices were to be taken as requiring payment of the moneys owing within a reasonable period, a period that had clearly expired at the time the notices were purportedly withdrawn, 19 December 1989. See Bunbury Foods Pty Ltd v National Bank of Australasia Ltd [1984] HCA 10; (1984) 153 CLR 491.
     809 At [7018], his Honour found that BGF did not meet the demand and, in terms, made the same finding in respect of the outcome of the demand for payment served on TBGL on 8 December 1989. In effect the inability of BGF and TBGL to meet the demands had been admitted in Aspinall’s pleas to SCBAL. It is to be noted that in each case, 7 December 1989 for BGF and 11 December 1989 for TBGL, further notices under s 364 of the Companies Code were served by SCBAL after the respective defaults to establish a statutory ground under the Companies Code on which orders for the winding up of those companies in insolvency could be made.
     810 The purported withdrawal of the notices on 19 December 1989, terminated the running of the s 364 notices but had no impact on the defaults of BGF or TBGL that had occurred when those companies failed to meet the demands for payment served on 4 December and 8 December 1989 respectively. Those defaults, in turn, continued to have consequences for TBGL, namely, as a defaulting guarantor of BGNV under the Bond Trust Deeds and the Bonds.
     811 As to the second element in the claim of equitable fraud, his Honour had made all necessary findings in that regard. At [4288], [4308] ‑ [4309], [4313] ‑ [4314], [4317], [4338] ‑ [4340], [8717] and [8726] his Honour accepted that the Transactions constituted the Scheme pleaded and, at [9034], that it included the further purpose of keeping ‘the Bell group companies out of liquidation’, that is to say to forestall the utilisation of the corporations law, namely, by commencement of an appropriate administration, whether that took the form of a compromise of debts by arrangement and reconstruction under a scheme; appointment of an administrator; or appointment of a liquidator.
     812 At [9037] ‑ [9038] his Honour provided the following examples of Bank conduct to illustrate the foundation for his findings as to the Banks’ purpose in implementing and protecting the Scheme against an application for winding up that would follow non‑payment by TBGL of interest due under a Bond Trust Deed:
     9037 I will give two examples of file notes made by bank officers that illustrate this point. Following the March 1990 Lloyds syndicate banks meeting, Wright (Banco Espírito) said this:
     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.
     9038 It was put bluntly by Davis (HKBA) in his memorandum dated 2 May 1990 in support of the recommendation that HKBA agree to allow TBGL to use the Bell Press proceeds for the payment of bondholder interest:
     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.
     813 At [9031] his Honour concluded that the claim of equitable fraud based on imposition and deceit ‘may not fall far short but … does not quite get there’. Given the nature and extent of the findings of fact that had been made by his Honour, the learned trial judge should have found that equitable fraud occurred when, with notice of the state of insolvency of the Bell group, the Banks presented the Transactions for execution to obtain title to, or charges over, assets of the Bell group to gain property to which it was not entitled and thereby disadvantage all other creditors of the Bell group.
     814 The cross‑appeals of the respondents on these grounds should be upheld. With regard to orders by way of relief in respect of the equitable fraud claims, there can be no cause for equity to decline to make necessary remedial orders by reason of participation by Bell group companies in the fraudulent purpose described. Public policy and the interests of affected third parties demand that appropriate orders be made.
     Defence of laches
     815 By notice of contention the Banks submitted that if the respondents’ claim of equitable fraud were upheld there should be a finding that by reason of conduct amounting to laches, relief in equity should be denied to the respondent LDTC [APPA.000.057, ground 26]. Parenthetically it may be stated that even if that contention were upheld, it could have no bearing on the ultimate orders if the claims of equitable fraud made by the remaining respondents succeeded. The banks contended, first, that the delay by LDTC in commencing an action in equitable fraud on its own account had been unreasonable and, second, that LDTC had either acquiesced to the Banks’ conduct or had caused such prejudice to the Banks for it to be unjust to allow the grant of the relief sought.
     816 His Honour, at [9303] ‑ [9314], reviewed pertinent authorities, and, at [9328] ‑ [9341], considered relevant evidence and made necessary findings of fact, which included the following. The liquidators of the Bell companies in liquidation were appointed in 1991 and 1993. Funding for litigation by the liquidators was obtained in 1995 and at that point the liquidators were able to provide instructions for the investigation of, and to obtain advice on, the Transactions. The activities of the liquidators in progressing the claims were also regarded as actions taken on behalf of LDTC. Proceedings were commenced by the liquidators in December 1995 with continuing legal advice being provided on the claims thereafter as voluminous discovered documents were examined and assimilated. Not until ‘late in 1998’ did the liquidators receive advice from senior counsel that a claim of equitable fraud was available. A draft of an amendment to the statement of claim to include that claim was served on the Banks in early December 1998. The application for leave to amend the statement of claim was not determined until December 2001 when leave was granted in the terms sought by the respondents and leave was given to LDTC to be joined as a party to the amended claim to prosecute in its own right a claim of equitable fraud. A significant cause for delay in determination of that application appears to have been the time taken to resolve issues that arose as to the appropriate forum for the matter after the High Court’s decision in Re Wakim.
     817 As noted earlier his Honour found, at [9333] and [9338], that at July 1991, by reason of Duffett’s belief that the on‑loans were not subordinated, it was arguable that LDTC possessed the means of acquiring knowledge of the elements of its equitable fraud case at that date. However, it should be noted that to exercise the means of acquiring that knowledge there had to be provision of discovery of, and access to, all relevant documents; the detail thereof to be absorbed; and legal advice thereon to be provided before presentation of any claim in equitable fraud could be considered. That meant that it was unlikely that it could be said that time began to run from July 1991. Furthermore, whilst conscious wrongdoing was not a requirement for a pleading of equitable fraud, all parties would have been well aware of rules of court that required a claim of fraud not to be pleaded unless satisfied that an appropriate foundation of fact existed (Rules of the Supreme Court 1971 (WA) O 20 r 9(1); see now Federal Court Rules 2011 (Cth) r 16.42; cf Federal Court Rules 1979 (Cth) r 11.10).
     818 The evidence accepted by his Honour was to the effect that considerable expense in legal fees had been incurred by the liquidators and that the liquidators and LDTC had given continuous attention to the preparation of the case up until leave to amend the statement of claim was granted in December 2001. Although that evidence may have left open a conclusion that LDTC had provided an explanation for the delay in exercising its rights, his Honour, at [9341], found the delay to be ‘unreasonable’. However, at [9338], his Honour concluded that the delay was ‘not sufficient to constitute laches’. By that his Honour meant, at [9339] ‑ [9340], that the attention LDTC had given to participating in the litigation and obtaining advice answered any claim by the Banks that LDTC had acquiesced in the Banks’ conduct. Furthermore, at [9336] ‑ [9337], his Honour found that the Banks had not established prejudice of the character required to establish a defence of laches, the prejudice relied upon being described by his Honour, at [9341], as ‘marginal at best’. His Honour held that it would have been unjust to deny relief to LDTC had it succeeded in its claim. It is to be remembered that the determination of whether a defence of laches will lie involves the assessment of what is just in all the circumstances.
     819 Whether a defence of laches is tenable against an equitable fraud that involves a fraud on the public may not be free of doubt. Certainly in earlier times such a fraud was not considered to be vulnerable to a defence of laches. See Young, Croft, Smith, On Equity (2009) [5.100].
     820 An early example of equity’s strict approach in that regard was demonstrated in Alden v Gregory (1764) 2 Eden 280, 285; 28 ER 905, a case that involved a substantial element of public utility in the supervision by equity of fraudulent conduct by the executor of a deceased estate. Beneficiaries resident in England were defrauded in 1723 by the executor purchasing from the estate property situated in Jamaica. Proceedings in the United Kingdom against a Jamaican resident who had purchased the property from the executor with notice had not progressed, for various reasons, since commencement of that proceeding in 1728. At the time the matter came before the Lord Chancellor, Lord Northington, in 1764, all the original parties were deceased and the parties to the proceedings were representative successors to those interests.
     821 On the issue of delay the Lord Chancellor said as follows (907):
     The next question is, in effect, whether delay will purge a fraud? Never while I sit here. Every day arising from it adds to the injustice, and multiplies the oppression.
     822 If today application of the principle of laches is discretionary in all cases and operates to prevent occurrence of an unjust result (see Streeter v Western Areas Exploration Pty Ltd [No 2] [2011] WASCA 17 [632] ‑ 662), it would be unlikely that equity would consider that the balance of justice fell the defendant’s way in respect of an equitable fraud that involved a fraud on the public unless the plaintiff had committed gross and inexcusable delay and the defendant had suffered major irremedial prejudice.
     823 His Honour based his conclusion on whether the delay was unreasonable and whether sufficient prejudice had been suffered by the Banks to make it just to deny any claim to relief.
     824 His Honour found that the delay was unreasonable but that the marginal prejudice suffered by the Banks was insufficient to attract the application of laches in this case. Importantly his Honour, at [9341], found that had the claim of LDTC succeeded it would have been unjust to deny relief to LDTC notwithstanding the unreasonable delay. The elements of prejudice asserted by the Banks were the prospect of loss of memory by witnesses and destruction of documents. His Honour was not satisfied that commencement of a claim by LDTC at an earlier date would have prevented memory fade on any issue specific to that claim and the documents destroyed had been largely replicated by documents from other sources.
     825 In effect his Honour found, at [9336] ‑ [9340], that the delay by LDTC in commencing a proceeding occurred because LDTC had been content to proceed on the ‘coat‑tails’ of other respondents, not because LDTC had no concern for its own interests or was content to acquiesce in the conduct of the Banks.
     826 The banks have not shown that his Honour overlooked or misunderstood cardinal facts, misunderstood or misapplied the law or had regard to irrelevant considerations in reaching his findings on this issue.
     827 It follows that this ground of the Banks’ notice of contention must fail.
     Claim of BGNV
     828 BGNV sought to establish a separate case of equitable fraud by reason of unconscientious conduct by the Banks in taking advantage of a ‘special disadvantage’ that affected BGNV in the execution of the BGNV Subordination Deed, namely, the failure of its director to perform its directors’ duties. His Honour found that case was not made out. BGNV cross‑appeals from that finding [APPB.000.005, grounds 26 and 27].
     829 As set out in Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447, 474 (Deane J), this ground of the cross‑appeal requires there to be an evident disability in one party sufficient to make the transacting parties manifestly unequal and, effectively, to put the disabled party under the dominion or power of the other. In other words, a purported acceptance by the latter of the assent to the bargain by the disabled party, on its face, would display unfairness and equitable fraud.
     830 Even if it is accepted that BGNV’s director acted improvidently or unreasonably and failed to perform its directors’ duties to BGNV, and that the Banks received advantage from that default in the execution by BGNV of the BGNV Subordination Deed, those circumstances, without more, would not show that at all material times it was obvious that BGNV would be unable to make a worthwhile judgment as to whether execution of the document would be in its interests. As it happened the judgment made by BGNV’s director was not in BGNV’s interests, but that did not flow from a patent inability, of which the Banks were aware, of BGNV to make a proper judgment in that regard. See Wilton v Farnworth [1948] HCA 20; (1948) 76 CLR 646; Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362; Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457; Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51.
     831 Although there was evidence that the Banks applied some degree of pressure to BGNV by instructing solicitors for the Banks to prepare, and present directly to BGNV, changes to the company constitution of BGNV, purportedly for the purpose of providing BGNV with capacity to execute the BGNV Subordination Deed, thereby raising a suggestion that the Banks expected BGNV to execute the Deed (conduct which drew a rebuke from TBGL), the Banks were informed in clear terms by TBGL that execution of the BGNV Subordination Deed was a matter for BGNV to determine for itself. There was no evidence that the Banks were aware that BGNV’s director was incapable of making an appropriate judgment in that regard.
     832 This ground of BGNV’s cross‑appeal must be dismissed.
     CONDUCT OF DIRECTORS
     833 The directors of the Australian companies in the Bell group were Aspinall, Oates and Mitchell (‘Australian directors’). The director of BGNV at material times was Equity Trust, of which Ruoff was the sole director. The directors of the Bell group companies registered in the United Kingdom, BGUK, TBGIL and Bell International Investments Ltd (‘BIIL’), were Edwards, Birchmore, Mitchell and Bond for BGUK and TBGIL and Edwards and Whitechurch for BIIL 4452. His Honour found that save for Equity Trust the directors, or a majority of them, breached fiduciary duties owed to the respective companies. Of the foregoing directors only Aspinall, Mitchell and Whitechurch gave evidence.
     Nature of fiduciary duties
     834 The pre‑eminent fiduciary relationship is that of a trustee and cestui que trust (or beneficiary). It arises out of, but is separate from, the trust obligations undertaken by a trustee upon formation of a trust. Upon appointment, all trust property is vested in the trustee who has trust obligations to preserve the trust property; duly administer the trust; and advance the interests of the object of the trust.
     835 Other instances of fiduciary relationships include partnership; guardianship; agent and principal; director and corporation; solicitor and client; employer and employee and, in some cases, expert advisor and client.
     836 There is no standard test to be applied to determine whether parties are within a fiduciary relationship. The existence and scope of such a relationship, and the nature of fiduciary obligations arising thereunder, will depend upon all relevant facts, including any contractual arrangements the parties may have made. See Hospital Products Ltd v United States Surgical Corporation (69) (Gibbs CJ); (102) (Mason J).
     837 In Pilmer v Duke Group Ltd (in liq) (196 ‑ 197), McHugh, Gummow, Hayne and Callinan JJ in the following passage cited with approval the description of McLachlin J of the essence of fiduciary duty and fiduciary relationship:
     It is important also to recognise the distinct character of the fiduciary obligation, which sets it apart from contract and tort. In Norberg v Wynrib [[1992] 2 SCR 226 at 272] McLachlin J said:
     ‘The foundation and ambit of the fiduciary obligation are conceptually distinct from the foundation and ambit of contract and tort. Sometimes the doctrines may overlap in their application, but that does not destroy their conceptual and functional uniqueness. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self‑interest. Consequently, the law seeks a balance between enforcing obligations by awarding compensation when those obligations are breached, and preserving optimum freedom for those involved in the relationship in question. The essence of a fiduciary relationship, by contrast, is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other.’
     838 His Honour, at [4531], accepted that the relationship between director and company was fiduciary but stated that it did ‘not follow that each and every duty owed by the director to the company is fiduciary’. In particular his Honour said that a duty owed by a director to a corporation to exercise care and diligence was a duty in equity but not a fiduciary duty, citing opinion to that effect expressed in Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 238 ‑ 239 (Wheeler).
     839 Whilst it was not part of the respondents’ case that the directors had breached a fiduciary duty of care and diligence, it is necessary to examine the nature and character of such a duty in determining what constitutes the fiduciary duties of a director and whether the duties said by the respondents to have been breached by the directors in this case are within that class.
     840 As discussed below, there may be cause to question whether the statement that a breach of a director’s duty to exercise care and diligence is not a breach of fiduciary duty has universal application. See Heydon JD, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in Degeling S and Edelman J (eds) Equity in Commercial Law (1st ed, 2005) 185 ‑ 237; cf Heath WM, ‘The director’s “fiduciary” duty of care and skill: A misnomer’ (2007) 25 C&SLJ 370.
     841 If (as it appears at 237 ‑ 238) the reasoning in Wheeler proceeded on the assumption that a trustee’s duty to exercise reasonable care in administering a trust was not a fiduciary duty and, therefore, the duty of care and diligence imposed on a director by equity could not be a fiduciary duty, then that assumption may need to be tested. See Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (4th ed, 2002) 210 ‑ 218; Ong DKS, Trusts Law in Australia (3rd ed, 2003) 219 ‑ 221; Partridge v Equity Trustees Executors and Agency Co Ltd [1947] HCA 42; (1947) 75 CLR 149, 163 ‑ 164; Goldfinch A, ‘Trustee’s Duty to Exercise Reasonable Care: Fiduciary Duty?’ (2004) 78 Australian Law Journal 678, 681.
     842 In earlier times the standard of care and diligence to be met by a trustee in carrying out the duties of office was regarded as onerous but over the years the stringency of the standard has been relaxed in equity and by statute (see Fouche v Superannuation Fund Board (641) (Dixon, McTiernan, Fullagar JJ); Trustees Act 1962 (WA), s 75). The standard required of a trustee is to take reasonable care, being the care that an ordinary prudent person of business would apply to his own affairs, keeping in mind that moral obligations to others have been undertaken: Re Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347, 355 (Lindley LJ). In respect of trust investments a higher standard applies, namely, that trust funds not be applied to an investment attended with any degree of hazard notwithstanding that it may be an investment within an authorised class of investments. See Learoyd v Whiteley [1887] UKHL 1; (1887) 12 App Cas 727, 733 (Lord Watson); Australian Securities Commission v AS Nominees Ltd [1995] FCA 1663; (1995) 62 FCR 504, 516 (Finn J).
     843 In respect of a corporate trustee that carries on a business of providing such services and holds out that it possesses particular skill, expertise and ability to provide special care as a trustee and solicits appointment to that office, a higher standard of care may be imposed, to wit, an obligation to apply the level of skill, expertise and ability represented. See Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515, 534; Australian Securities Commission v AS Nominees (518) (Finn J).
     844 A failure by a trustee to exercise reasonable care in exercising the powers and performing the duties of trustee that occasions loss of, or detriment to, trust property will mean that a breach of trust has been committed by the failure of the trustee to duly administer the trust. See Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449, 473 (Brennan CJ, Gaudron, McHugh, Gummow JJ).
     845 But the use of reasonable care in the exercise of powers and performance of duties of the trust is also an obligation undertaken by the trustee as fiduciary under the concurrent fiduciary relationship between trustee and beneficiary. In that fiduciary relationship the fiduciary has pledged to exercise the powers and perform the duties of the trust in the interests of the beneficiary and to use reasonable care in doing so. It would seem to be plain that the foregoing obligation is at the core of the fiduciary relationship, a relationship based entirely on reliance and trust. There appear to be compelling reasons for treating as a fiduciary duty the duty of the trustee to use reasonable care: Ong (219 ‑ 221).
     846 The fiduciary relationship is the means by which access to full and appropriate relief in equity may be provided where trust property has been put at risk by imprudent conduct by a trustee/fiduciary in breach of a fiduciary duty to exercise reasonable care. For example, preventative, remedial or restorative orders may be moulded to correct the breach and to preserve trust property.
     847 Although in the following passage (Hospital Products (100)) Mason J dealt specifically with the use of a declaration of constructive trust as a means of redressing a breach of fiduciary duty his Honour’s comments endorsed the jurisdiction of equity in respect of fiduciary relationships and reaffirmed that it was inappropriate to artificially constrict the concept of fiduciary relationship if that would deny equity’s ability to do justice in appropriate cases:
     The disadvantages of introducing equitable doctrine into the field of commerce, which may be less formidable than they were, now that the techniques of commerce are far more sophisticated, must be balanced against the need in appropriate cases to do justice by making available relief in specie through the constructive trust, the fiduciary relationship being a means to that end. If, in order to make relief in specie available in appropriate cases it is necessary to allow equitable doctrine to penetrate commercial transactions, then so be it: see, e.g., Barclays Bank Ltd v Quistclose Investments Ltd [[1970] AC 567] and Swiss Bank Corporation v Lloyds Bank Ltd [[1982] AC 584]. A preferable approach to an artificial narrowing of the fiduciary relationship – the gateway to relief in specie – is to define and delimit more precisely the circumstances in which the remedy by way of constructive trust will be granted.
     848 Whilst there are numerous differences between the functions of a trustee and those of a director (see Re City Equitable Fire Insurance Co [1925] Ch 407, 426 (Romer J)) there is, nevertheless, a degree of equivalence between the relationship of trustee and beneficiary and that of director and corporation not found in other fiduciary relationships: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 147 ‑ 149 (Lord Russell). In particular each is a ‘status‑based fiduciary relationship’ out of which ‘a general fiduciary duty’ in relation to exercise of powers and performance of duties may be said to arise. See Breen v Williams (112) (Gaudron, McHugh JJ).
     849 The directors represent the organic element of an otherwise inanimate entity and are the controlling mind and will of a corporation. They exercise all powers of the company other than those reserved to the company in general meeting. Responsibility for the management of the business of a corporation is imposed on directors by statute, subject to any qualification provided by the constitution of the company. See Companies Act 1961 (WA), s 73 and s 56; Companies Code 1981, s 6, s 66; Corporations Law, s 198A; Corporations Act s 198A. If directors devolve management functions to employees of the company, due oversight of that management remains part of the duties of the directors. See Australian Securities and Investments Commission [‘ASIC’] v Vines [2005] NSWSC 1349; (2005) 224 ALR 499 [90] ‑ [93]; PBS v Wheeler (224 ‑ 225, 241); Corporations Act, s 190. Specifically directors are entrusted by a company to protect and advance the interests of the corporation and, where the corporation is in a situation of insolvency, not to have the corporation prejudice the interests of creditors.
     850 Although the duty of a director to exercise powers and perform obligations of office with care and diligence, and the duty of a trustee to administer a trust with care and diligence, may have had a common root in equity (see The Charitable Corporation v Sutton (1742) 2 Atk 400; 26 ER 642; Swindle v Harrison [1997] 4 All ER 705, 734), for the reasons set out below the duty of a director in equity to use reasonable care has developed a less onerous standard than that applied to a trustee.
     851 The complexity of the affairs of a company and the allocation of particular responsibilities to individual directors require any review of the decision‑making conduct of a director to have regard to those matters and to the position in the company the director occupies (e.g. executive or non‑executive director; appointment to a committee of directors). Courts have acknowledged that the numerous exigencies are required to be taken into account in the conduct of the business of a corporation by directors supervising the management thereof. Accordingly, courts have declined to exercise any general supervisory role in respect of the degree of care and diligence applied by a director to business management decisions. See Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483, 493 (Barwick CJ, McTiernan, Kitto JJ); Dovey v Cory [1901] AC 477, 488 (Lord MacNaghten). Of course, that confinement of jurisdiction did not exclude the jurisdiction of equity to provide appropriate relief for breach of the duty of care and diligence imposed by equity. Nor did it derogate from the operation of other duties of the director under the fiduciary relationship of director and company. For example, not to act other than in good faith and for a proper purpose; not to act to obtain a benefit or make a profit from use of the advantage of the office of director or from the use of information obtained in that office; and not to have any personal interest in conflict with the duties of office.
     852 With regard to the duty imposed on a director (by equity) to exercise care and diligence in the management of a corporation, the standard of care applied is reasonable care. That is not ‘all possible care’ but the care expected of an ordinary person exercising an ordinary degree of prudence in respect of his own affairs. Liability of a director for a breach of that duty only arises when the director commits ‘gross or culpable negligence’. See Re City Equitable Fire Insurance Co (427 ‑ 428) (Romer J); The Overend & Gurney Co v Gibb [1872] LR 5 HL 480, 487. Put another way, it is conduct by a director that is so plainly imprudent and unreasonable in the circumstances that it is conduct not to be expected of any reasonable person exercising an ordinary degree of prudence in his or her affairs.
     853 In Fouche (641), the duty in equity of a member of the board of a statutory corporation vested with control and management of the affairs and property of the corporation was expressed as a duty to use reasonable care, being the care an ordinary prudent person of business would take. Breach of that duty was found in the gross negligence and wholly unreasonable conduct of board members (641).
     854 Whilst Fouche involved breach of duties owed to a corporate trustee by members of the statutory board that constituted the corporate trustee, the liability of the board members turned on breach of the duties in equity each owed to the corporation and not upon any argument that the board were ‘de facto’ trustees with duties of trustees (640). Of course, given that the conduct of directors may effect a breach of trust by a corporate trustee, the trust duties of that corporate trustee may give ‘form and direction’ to the duty of a director in equity to apply care and diligence to the management of that corporation. See Australian Securities Commission v AS Nominees (517) (Finn J); Corporations Act, s 197. But that duty of care and diligence of a director of a corporate trustee is the same duty as that imposed on a director of a non‑trustee corporation. See Jeffree v National Companies and Securities Commission [1990] WAR 183, 194 (Brinsden J), 196 (Pidgeon J).
     855 Over time, that duty of a director in equity has been modified by provisions of corporations legislation.
     856 Section 124 of the Companies Act 1961 (WA) imposed statutory duties upon directors that were said to be in addition to and not in derogation of any enactment or rule of law relating to the duty of directors of a company. In that context the words ‘rule of law’ would have included an obligation in equity. The duties imposed were:
     (a) at all times to act honestly and use reasonable diligence in discharge of the duties of office;
     (b) not to make use of information acquired by virtue of the position to gain directly or indirectly an improper advantage or cause detriment to the company.
     857 The section declared a breach of those provisions to be an offence and imposed a liability on the director to the company for any profit made by the director or for any damage suffered by the company ‘as a result of’ the breach. (emphasis added)
     858 The section did not refer to a duty to act in good faith for a proper purpose or to avoid conflict between duty and personal interest.
     859 Section 229 of the Companies Code 1981 (WA), which replaced the Companies Act 1961, provided some expansion of those provisions, in particular by adding ‘exercise of powers’ to ‘discharge of the duties of office’, but otherwise was to similar effect. When the Corporations Law replaced the Companies Act 1961 in 1991, s 232 of the Corporations Law was in similar terms but did not include provision for imposition on a director of liability to the corporation for any loss suffered by a company as a result of the breach. Instead, Part 9.4B of the Corporations Law empowered ASIC (s 1317EB) to apply for a ‘civil penalty order’ for a contravention of s 232 by a director (ss 1317DA; 1317EA). On that application the court could order the director to pay compensation to the corporation if the corporation ‘suffered loss or damage as a result of’ the contravention (s 1317HA). (emphasis added) Upon amendment of the Corporations Law on 13 March 2000 by the Corporate Law Economic Reform Program Act 1999 (CLERP Act), a corporation also obtained the right to apply for a compensation order (s 1317J) ‘for damage suffered by the corporation … if: … the damage resulted from the contravention’ (s 1317H). (emphasis added)
     860 It may be thought that the words ‘as a result of’ or ‘resulted from’ imported the test applied in equity for linking a breach of duty in equity to loss or damage suffered, namely, whether but for the breach no loss or detriment would have resulted. That involves the use of ‘but for’ in its widest sense, that is, as an event in a chain of events. It requires no further inquiry as to the directness or immediacy of the consequences in relation to the breach or whether the loss was caused by the breach. See Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211, 214 ‑ 216 (Street J); Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534; (1991) 85 DLR (4th) 129, 160 (McLachlin J); Munchies Management Pty Ltd v Belperio [1988] FCA 413; (1988) 58 FCR 274, 286 ‑ 288 (Fisher, Gummow, Lee JJ); Contra: Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 [704] ‑ 711.
     861 It should be noted that for a short period a requirement that the loss or damage be ’caused’ by the contravention was inserted in s 1317HA(1)(b) by the Managed Investments Act 1998 in July 1998. (emphasis added) That amendment was removed by the CLERP Act in March 2000 and the words ‘resulted from’ were inserted in its stead to restore the prior meaning of the subsection. (emphasis added)
     862 Part 2D.1 of the Corporations Law, introduced by the CLERP Act, restated the statutory duties of directors. The provisions were repeated in Part 2D.1 of the Corporations Act.
     863 The duty of a director to exercise care and diligence was expressed in s 180 of the Corporations Act as follows:
     180 Care and diligence-civil obligation only
     Care and diligence – directors and other officers
     (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
     (a) were a director or officer of a corporation in the corporation’s circumstances; and
     (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
     Business judgment rule
     (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
     (a) make the judgment in good faith for a proper purpose; and
     (b) do not have a material personal interest in the subject matter of the judgment; and
     (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
     (d) rationally believe that the judgment is in the best interests of the corporation.
     The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
     (3) In this section:
     business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
     864 It is to be noted that in respect of a ‘business judgment’ made in reliance upon a report by a committee of directors, s 189 of the Corporations Act provides that until the contrary is proved it is reasonable for a director to rely on information or advice prepared by a committee of directors on which that director did not serve, However, that proviso was subject to the reliance being made in good faith and after making independent assessment of the information or advice having regard to the director’s knowledge of the corporation and to the complexity of the structure and operations of the corporation.
     865 The importance of the exercise of the required standard of care and diligence in the discharge of duties by a director holding a position on a committee of directors such as ‘finance’, ‘audit’ or ‘remuneration’ and the prospect of a company suffering substantial detriment as a result of a director breaching that duty would be apparent. See Australian Securities and Investments Commission v Vines [2006] NSWSC 760; (2006) 58 ACSR 298 [119], [143], [163], 222.
     866 Whatever the standard of care may be for the statutory duty imposed by s 180(1), the duty is subject to the ‘business judgment’ rule. Section 180(2) provides that that duty, and equivalent duties at common law or in equity, are to be taken to be met if all requirements of the ‘business judgment’ rule are satisfied. Accordingly, the equivalent obligation in equity to exercise powers and carry out duties with care and diligence in respect of decisions relevant to business operations of a corporation has been modified by the ‘business judgment’ rule set out in s 180(2).
     867 It may be noted that s 1317G(1)(b)(ii) of the Corporations Act provided that a court may order that a director who has contravened s 180(1) pay a penalty of up to $200,000 if the contravention materially prejudiced the corporation’s ability to pay its creditors.
     868 Section 185 of the Corporations Act confirms that relief for conduct to which s 180(1) may apply can also be sought in civil proceedings for a breach of duty, for example, a claim in equity for compensation for breach of an equitable duty. The extent of the penalty that may be imposed for a serious contravention of s 180(1) of the Corporations Act suggests an assumption by the legislature that an equivalent breach by a director of a duty in equity to exercise powers and discharge duties with care and diligence, would bring access to relief in a proceeding in equity able to provide appropriate redress for the prejudice inflicted by the breach, i.e. equitable compensation as for a breach of fiduciary duty.
     869 Application of the ‘business judgment’ rule to the ‘equivalent duty in equity’ to act with care and diligence has the effect of restating that duty in respect of any decision relevant to the business operations of a corporation, as follows: to act in good faith for a proper purpose; to act free of conflict with any personal interest; to act only after obtaining information about matters relevant to that decision to the extent that a reasonable person would believe necessary; and, to act with a belief that the proposed decision is in the best interests of the corporation, not being a belief that no reasonable person would hold if in the director’s position. These requirements are cumulative and not independent alternatives.
     870 The failure of a director to meet either of the first two elements of the rule would raise contentions in equity of a breach of fiduciary duty and entitlement to appropriate relief. Breach of either of the latter two elements would be likely to involve the degree of unreasonable conduct or gross negligence that would bring a claim of breach of the duty in equity to exercise care and diligence, and for appropriate relief in equity to redress loss or detriment occasioned by that conduct. See Fouche (641).
     871 The question whether the intervention of equity in a fiduciary relationship is justified is determined by examination of the nature of the fiduciary relationship; the conduct of the fiduciary; and the consequences of that conduct. See Re Coomber [1911] 1 Ch 723, 728 ‑ 729 (Fletcher‑Moulton LJ); Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544, 559 ‑ 560 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ).
     872 Both the duty of care and diligence imposed by equity and the grant of relief in equity for a breach of such a duty are separate and distinct from the common law duty of care and from considerations relevant to relief for a breach of the latter duty. See Re City Equitable Fire Insurance Co (428) (Romer J); Nocton v Lord Ashburton [1914] AC 932, 957 (Viscount Haldane LC).
     873 If a director owes a duty to a corporation to exercise care and diligence and causes loss or detriment to the company by reason of substantial dereliction of that duty, it may be thought there would be good cause for equity to treat that conduct as analogous to a breach of the fundamental reliance and trust underlying the fiduciary relationship between director and corporation. The consequence would be a breach of fiduciary duty for which equity could direct the fiduciary to make good the loss or detriment.
     874 Such unreasonable conduct constituting culpable or gross negligence would represent a repudiation of the duty of care and diligence pledged by the fiduciary director to protect or advance the interests of the corporation. For that reason, the conduct would offend good conscience and entitle the corporation to obtain appropriate relief in equity.
     875 In Fouche, orders in equity directed the individual board members to provide equitable compensation to the corporate trustee to the extent necessary to redress the breach of trust committed by the corporate trustee that resulted in detriment to trust property. The cause of that breach by the corporate trustee was the breach of duty owed by the members of the board of the corporate trustee to carry out their functions of management and the exercise of their powers with reasonable care.
     876 The following passage in the reasons of Dixon, McTiernan and Fullagar JJ at (640 ‑ 641) is instructive:
     [W]e can see no escape from the view that the individual members of the board owed a duty to the corporation which they constituted and whose property and affairs they controlled and managed. Nor can we doubt that this duty is enforceable in equity. The board being plaintiff, and the duty being owed to the board, the case is not like Wilson v Lord Bury [(1880) 5 QBD 518]. On the other hand it finds a very close analogy in Joint Stock Discount Co v Brown [(1869) LR 8 Eq 381]. The learned Chief Justice seems to have thought that, if the members of the board owed any duty to anybody, it could only be enforced by action for damages – presumably at common law – and he said that the pleadings contained no claim for damages, and that no damage had been proved. But, whatever the position might be at law, the plaintiff board is seeking an equitable remedy, and, the administration of a trust fund being involved, it is clear that there is ample jurisdiction in equity to give appropriate relief if a breach of duty is proved.
     With regard to the nature of the duty, we are of opinion that it does not differ materially from the duty which rests on trustees in relation to investments. The duty is not so onerous as it once was. In modern times it is regarded as defined by Speight v Gaunt [(1883) 9 App Cas 1] and in Re Whiteley; Whiteley v Learoyd [(1886) 33 Ch D 347; 12 App Cas 727]. It is a duty of reasonable care – the care which an ordinary prudent man of business would take. In Charitable Corporation v Sutton (1742) 2 Atk 400 (26 ER 642) a bill was filed for relief against individuals in respect of alleged breaches of trust by an incorporated trustee. Lord Hardwicke throughout treats the individual defendants as in effect occupying the position of trustees, and he says: ‘If upon inquiry before the Master, there should appear to be a supine negligence in all of them … I will never determine that they are not all guilty’ (1742) 2 Atk, at p 406 (26 ER, at p 645). It would be strange if the position were otherwise.
     One cannot help feeling a degree of sympathy for the members of the board other than Rule – firstly because they had no qualifications for the task of investing trust funds, and secondly because, in consequence, they relied very largely on Rule’s judgment. But the standard to be applied is the standard of the reasonably prudent man of business, and it is nothing to the point that they were not men of business at all. Having regard to all the facts and circumstances set out in an earlier part of this judgment, we can see no escape from the view that all four defendants were guilty of gross negligence in assenting to the investment which is attacked, and that all are liable to make good any loss resulting therefrom.
     It was argued that the ex-members of the board, or at least Messrs Biggins, Wadley and White, ought to be relieved from liability under s 50 of the Trustee Act. This is not, in our opinion, a case for the application of that section at all. It may be assumed that all acted honestly, but it is impossible to say that they acted reasonably. Judged by the only possible standard, it is difficult to imagine anything more unreasonable than their conduct.
     877 Of course, as stated earlier, it was a significant fact in Fouche that the corporation had been formed to administer a trust fund. However, a non‑trustee corporation would place the same degree of dependence and reliance upon its directors to fulfil their pledge to exercise powers and perform duties to advance the interests of the corporation. It would also follow that the same duty of care and diligence in equity that applied to the board of the corporation in Fouche would apply to directors of all other corporations making apt the similar treatment in equity of such a breach of the duty of care and diligence by a director.
     878 The principles of equity applied in Fouche found an echo in the remarks of the High Court in Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484.
     879 In Youyang Pty Ltd (500 ‑ 501) Gleeson CJ, McHugh, Kirby and Hayne JJ, reiterated the thrust of the remarks of Brennan CJ, Gaudron, McHugh and Gummow JJ in Maguire v Makaronis (473 ‑ 474), and counselled caution in respect of cases that asserted that equitable compensation recoverable for breach of a duty in equity to apply care and diligence was equivalent to damages awarded for breach of a common law duty of care and which advocated that common law rules of causation, remoteness of damage and measure of damages should be applied to the assessment of equitable compensation. Implied in the call for caution was disapproval of the statement in those cases of the proposition that the failure of a trustee to exercise the necessary degree of care and diligence in duties owed to a trust estate should not be treated as a breach of fiduciary duty for the purpose of assessment of appropriate relief.
     880 Their Honours took the opportunity to cite with approval once again an exposition by McLachlin J on the nature and importance of a fiduciary relationship. Although in Youyang their Honours were dealing with the consequences of a breach of trust they noted the common standing of breach of fiduciary duty and breach of trust vis‑à‑vis equitable compensation in contrast with compensation in tort and contract:
     [T]here must be a real question whether the unique foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation even in this limited way with the measure of compensatory damages in tort and contract. It may be thought strange to decide that the precept that trustees are to be kept by courts of equity up to their duty has an application limited to the observance by trustees of some only of their duties to beneficiaries in dealing with trust funds.
     The point appears from the statement by McLachlin J in Canson Enterprises Ltd v Boughton & Co [[1991] 3 SCR 534 at 543]:
     ‘The basis of the fiduciary obligation and the rationale for equitable compensation are distinct from the tort of negligence and contract. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self‑interest. Consequently the law seeks a balance between enforcing obligations by awarding compensation and preserving optimum freedom for those involved in the relationship in question, communal or otherwise. The essence of a fiduciary relationship, by contrast, is that one party pledges itself to act in the best interest of the other. The fiduciary relationship has trust, not self-interest, at its core, and when breach occurs, the balance favours the person wronged.’
     Whatever the qualification to these principles which might flow in some cases from acceptance in Australia of the reasoning in Bristol and West Building Society v Mothew [[1998] Ch 1 at 17] and Bank of New Zealand v New Zealand Guardian Trust Co Ltd [[1999] 1 NZLR 664 at 681], they applied to the present case with undiminished cogency. [39] ‑ [40]
     881 The High Court affirmed that the essence or core of a fiduciary relationship is the matter of trust. As explained earlier, this can be seen to be of particular importance in the fiduciary relationship of director and corporation and for the assessment of whether there has been a breach of fiduciary duty in that relationship.
     882 Between a director and corporation the obligation on the director to exercise care and diligence is an essential requirement of the relationship given the extent to which the company depends upon proper exercise, by the director, of the powers of the company.
     883 Entitlement to remedy in equity for breach of a fiduciary duty does not depend upon showing personal enrichment of the fiduciary, or of another at the hands of the fiduciary. Such relief extends to conduct of the fiduciary that causes loss and detriment by reason of the breach of an essential obligation of the fiduciary relationship. For example, in Bennett v Minister of Community Welfare [1992] HCA 27; (1992) 176 CLR 408 the Director of Community Welfare had been appointed by the Child Welfare Act 1947 (WA) as guardian charged with the care, management and control of the person and property of Bennett. Pursuant to that fiduciary relationship the Director had fiduciary obligations to Bennett. Bennett suffered injury when officers employed by the Department failed to provide Bennett with safe equipment in the course of instruction in an institution to which Bennett had been confined. That breach of a common law duty of care by the officers was a breach for which the Minister was vicariously liable. The Director also had a duty of care, whilst Bennett was confined in the institution controlled by the Director, to facilitate the obtaining of independent legal advice for Bennett. That duty of care of the Director was independent of the fiduciary duty of the Director as guardian. The fiduciary duty as guardian was defined as a positive obligation on the Director to assert the rights of the ward by obtaining independent legal advice in respect of the injury sustained (and presumably, if necessary, to give effect to that advice on behalf of the ward) (412) (Mason CJ, Deane and Toohey JJ); (426 ‑ 427) (McHugh J). The reasons of McHugh J (426 ‑ 427) accepted that had the breach of fiduciary duty, as defined, been relied upon by Bennett the breach of that duty would have provided a right to equitable compensation where issues of causation, foreseeability and remoteness would have been irrelevant.
     884 In other words, where there has been a breach in a fundamental respect of the pledge by the fiduciary (in a fiduciary relationship) to act in the best interests of another that occasions loss or detriment, equitable compensation should follow. Thus, where exercise of care and diligence in management of the affairs of a corporation has been pledged by a director and relied on by a corporation, it would be consonant with principle for a breach of that obligation (by unreasonable conduct by a director that amounts to gross or culpable negligence and loss or detriment has resulted to a corporation), to be treated as a breach of a fiduciary duty in that fiduciary relationship.
     885 The breach would be a fundamental breach of the trust at the core of the fiduciary relationship, regarded in equity as unacceptable conduct, enabling equity to fashion appropriate orders for relief. See Re Second East Dulwich 745th Starr‑Bowkett Building Society (1899) 68 LJ Ch 196, 199. As Dawson J stated in Hospital Products (142):
     There is, however, the notion underlying all the cases of fiduciary obligation 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 to place reliance upon the other and requires the protection of equity acting upon the conscience of that other: see Tate v Williamson [(1866) 2 Ch App 55 at 60-61].
     886 The fiduciary principle was developed to monitor and redress ‘abuse of a loyalty reposed’ in a relationship where one party occupies a position of influence, ascendancy or power in relation to the other and has undertaken to use that position for the welfare of the other. See Hospital Products (97) (Mason J); Breen (133 ‑ 134) (Gummow J). It may be expected that such abuse is likely to be reflected in acts that provide benefit or advantage to the fiduciary, or to persons connected with the fiduciary, but intervention by equity in a fiduciary relationship is not limited to conduct that has obtained or has sought to obtain improper benefit.
     887 For example, in the seminal case of Nocton v Lord Ashburton, involving a status‑based fiduciary relationship of solicitor and client, the breach of fiduciary duty relied upon for the grant of relief in equity, where the breach occasioned loss to the client, was the breach of the fiduciary obligation of the solicitor to provide the client with careful advice that contained a full, and not misleading, disclosure of the facts known to the solicitor (956 ‑ 958) (Viscount Haldane LC); (965) (Lord Dunedin); (969, 971 ‑ 972) (Lord Shaw).
     888 In Nocton their Lordships sought to identify the circumstances in which equity would provide a remedy for breach of the duty in equity to use due care and skill in providing advice to a client in a fiduciary relationship of solicitor and client. The right to a remedy in equity was distinguished from the right to a remedy at law for breach of a similar obligation to exercise due care and skill in contract or tort.
     889 It was not in issue that the facts of the case presented a clear example of negligent performance of a solicitor’s duty to provide advice to a client with due care and skill. Indeed Lord Parmoor was satisfied that a claim in negligence for breach of a duty of care and skill had been pleaded and that similar orders to those sought in equity were available on that claim (976 ‑ 977) (Lord Parmoor). Viscount Haldane LC noted that in any event the plaintiff had made out a claim for compensation for breach of a contract to exercise due care and skill (958) (Viscount Haldane LC).
     890 In the courts below the matter had been treated exclusively as an action in deceit based on an allegation of fraud. The fraud alleged was the provision by the solicitor of advice in bad faith for the purpose of obtaining a pecuniary advantage. In the Court of Appeal the Master of the Rolls, in agreement with the trial judge, stated that ‘it would be wrong to allow a case based solely on serious charges of fraud to be turned into a comparatively harmless case based on negligence’ (945) (Viscount Haldane LC).
     891 Their Lordships were satisfied, however, that the matter as pleaded contained a plea of breach of a fiduciary duty of care and skill in equity. Notwithstanding that the allegations of fraud failed, it was clear that there had been misconduct as understood in equity in that the solicitor had misrepresented, albeit innocently, the value of the security held by the client for the advance made to the mortgagor and had not disclosed the extent of the solicitor’s interest in the mortgagor’s affairs, although partners of the solicitor had disclosed that fact to the client. Underlying the reasons of their Lordships was the knowledge that the solicitor had also breached a fiduciary obligation not to allow his personal interests to conflict with the interests of the client. It was stated that by reason of that conflict there was a duty on the solicitor to decline to act and to insist that another solicitor be retained (969) (Lord Shaw). However, breach of a fiduciary duty to avoid a conflict of interest was not the basis on which the case was determined and it was not contended that the solicitor had received an undisclosed profit.
     892 Their Lordships treated the solicitor’s belief that ‘he was properly joining with [the client] and guiding him in a good speculation’ (945) (Viscount Haldane LC) as an element of the breach by the solicitor of his fiduciary duty to apply due care and skill in providing advice to the client. The trial judge had found that it was probable that the solicitor would have given different advice had he not been personally interested in the result.
     893 The conduct of the solicitor was said to represent more than mere negligence and that the solicitor’s fiduciary duty of care and skill had been breached by conduct that was contrary to the dictates of conscience making it appropriate for equity to intervene. Accordingly, the client was entitled to relief in equity regardless of whether the client also had remedies in tort or contract for the failure to exercise due care and skill (952, 956 ‑ 958) (Viscount Haldane LC). It was accepted that the relief should redress the consequences of breach of the fiduciary duty to provide careful advice and should include compensation for any loss suffered as a result of that conduct.
     894 As stated by Lord Dunedin, the purpose of intervention by equity was ‘to keep persons in a fiduciary capacity up to their duty’ (963) (Lord Dunedin).
     895 Acts of disloyalty that inflict detriment on the other party to the fiduciary relationship may occur in circumstances where the fiduciary by ‘gross negligence’ and ‘unreasonable conduct’ has failed to duly exercise a fiduciary power or perform an obligation in the fiduciary relationship. See Fouche (641).
     896 Such conduct by the fiduciary is as disloyal to the fiduciary relationship as the gaining of profit or personal advancement, or failure to disclose conflict with personal interests and will provide cause for equity to hold the delinquent fiduciary up to the mark of a fundamental obligation undertaken in the fiduciary relationship: Maguire v Makaronis (474) (Brennan CJ, Gaudron, McHugh, Gummow JJ).
     897 Prescriptive obligations that arise in a fiduciary relationship may have particular connection with the fiduciary nature of the relationship. For example, the obligation described in Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178, 197 (Deane J), which arose out of the pledge by partners of loyalty to the partnership, was the requirement that a partner provide active assistance and cooperation in the winding up of partnership affairs and distribution of partnership property. That obligation was accepted to be a fiduciary obligation. In Bennett, the positive obligation said to have been imposed on the Director was to obtain legal advice for the ward. That duty reflected the core of that fiduciary relationship, namely, that the Director, as guardian, loyally protect and serve the interests of the ward. It was an obligation of such importance to the fiduciary relationship that it was proper to regard it as a fiduciary duty. See also Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371, 385 (Brennan J).
     898 The disloyalty of a fiduciary manifested by the repudiation of such an obligation, that results in detriment to the party to whom the obligation is owed, is as offensive to good conscience and equity as an act by a fiduciary that is in breach of a proscriptive fiduciary obligation, and entitlement to appropriate relief in equity should follow.
     899 The prime task in a claim in equity for relief for breach of fiduciary duty will be first, as stated in Hospital Products (100, 102) (Mason J), to examine the matter on its merits to see if the essential elements of a fiduciary relationship are present. After that examination the nature of the duties that arise out of the core pledges of loyalty and trust in that relationship, and the extent to which any of those duties are fiduciary obligations, can be ascertained.
     900 Comments made in Breen on the distinction between prescriptive and proscriptive duties must be read in the context of the particular facts of that case which concerned a very limited fiduciary relationship of patient and specialist medical practitioner. Neither the broad contractual relationship nor the narrower fiduciary relationship presented any obligation on the practitioner to provide access to personal records maintained by the practitioner in respect of the assessment and treatment of the patient. It followed that there was no duty to grant access to those records, let alone an argument that there was a fiduciary duty to do so. The foregoing comments in Breen were directed at rejecting the suggestion that mere existence of a fiduciary relationship per se could impose an obligation on a fiduciary to act in all circumstances in the interests of the other party to the relationship and that failure so to act would provide a right to relief in equity for breach of a fiduciary duty (137 ‑ 138) (Gummow J).
     901 Rejection of that proposition was a plain statement of the orthodox. The disapproval expressed by Dawson and Toohey JJ (95) in respect of the tendency in the United States and Canada for fiduciary relationships to be used for ‘creating new forms of civil wrong’ was qualified by an express statement that there had been no occurrence of such a development in Australia. Similarly, the comment in the reasons of Gaudron and McHugh JJ (112 ‑ 113) that ‘Australian courts only recognise proscriptive fiduciary duties’ has to be understood in the context in which it was made. As with the remarks of Dawson and Toohey JJ, it was directed squarely at what was regarded as an unacceptable development of law in Canadian jurisprudence. Likewise the comments of Gummow J (137 ‑ 138) were directed at supporting the remarks of Gaudron and McHugh JJ on what was regarded as an unsatisfactory development of law of fiduciary obligation in Canada and the United States. Furthermore, (at 112), the comment by Gaudron and McHugh JJ was preceded by an acknowledgement that as Australian law stood an obligation on a fiduciary to provide information may arise under a ‘status‑based fiduciary relationship’ where a ‘general fiduciary duty’ may arise or under a fiduciary relationship created by special circumstances that required provision and disclosure of information by the fiduciary. It must be remembered also, that Toohey and McHugh JJ had already accepted in Bennett that the positive or prescriptive duty imposed on the guardian in that case was a fiduciary duty.
     902 Breen confirmed that developments in Canadian law on fiduciary obligations would not be adopted in Australia but it did not purport to alter or restate the existing law in Australia. His Honour, at [4569] ‑ [4581], duly analysed and properly applied the law in that regard.
     903 A claim in equity against a fiduciary for compensation for loss suffered will depend upon demonstration of ‘criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty’: Maguire v Makaronis (473) (Brennan CJ, Gaudron, McHugh, Gummow JJ). As discussed above, the link required by equity involves no inquiry as to whether the loss was ’caused by’ or ‘flowed from’ the breach but whether the loss would have happened if there had been no breach. See Re Dawson (215) (Street J). Equity accepts that a sufficient link is established by the nature of the breach where orders for account, or disgorgement of profits, or restitution of misapplied property are sought in respect of a breach of fiduciary duty that is, for example, the breach of a duty to disclose material facts; to avoid conflict with personal interest; or not to misuse the position of fiduciary. Brickenden v London Loan & Savings Co [1934] 3 DLR 465, 469; Regal (Hastings) Ltd v Gulliver; Warman (558); Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373, 394 (Gibbs J); Green v Bestobell Industries Pty Ltd [1982] WAR 1, 5 ‑ 6 (Burt CJ).
     904 In Fouche the breadth of orders available in equity (for a breach of duty by the members of the board of management that resulted in loss being suffered by the corporation) was confirmed by the making of all such orders as were required to redress the incompetent management of the corporation that resulted in the breach of trust by the corporation as trustee.
     905 It was held in Fouche (643) that the equitable relief available could include orders ‘undo[ing] the whole indefensible transaction, and, as incidental thereto, to make any necessary order for the immediate payment of moneys …’. Such orders were additional to orders that the individual board members make good any loss of trust property that resulted from the breach of trust committed by the corporate trustee by reason of the breach of the duty owed to the corporation to exercise reasonable care. The loss of trust property resulting from that breach was a loss that the corporate trustee was also bound to restore for its breach of trust.
     906 In particular, the recipient (Fouche) of funds, provided by the corporate trustee in breach of trust, could be directed in equity to repay those moneys given that Fouche knew that the source of the moneys was a trust fund and knew all the facts that made the transaction a breach of trust: Fouche (640 ‑ 641, 642 ‑ 643).
     907 The breach of trust that occurred by reason of the failure of board members to exercise reasonable care in carrying out their functions, was described as the investment of funds by the corporation in a project, the inherent nature of which was so hazardous and speculative that it should not have been made ‘for any amount large or small’: Fouche (637). The essential facts relevant to that conclusion were taken to be obvious to the recipient of the trust funds, Fouche, the owner of the project. The court stated that the obligation of equity in those circumstances was to prevent completion of the breach, to redress the position and to restore the trust fund.
     908 Sufficient analogy can be seen between the circumstances in Fouche and the facts found by his Honour in this case as to the conduct of the directors of the Bell group companies and the knowledge of the Banks of facts that established breaches of the duty owed by the directors to those companies. In particular, facts relevant to the insolvency of the Bell group companies and to the material prejudice to creditors effected by the conduct of the directors.
     Pleaded fiduciary duties
     909 The pleaded breaches of fiduciary duty by directors were contained in [PLED.008.002.001, par 39A et seq].
     910 First, it was pleaded that the directors breached a fiduciary duty to act bona fide in the best interests of the companies which included an obligation to act in the interests of creditors, present or future, of an insolvent company. The latter element may be taken to be a pleading of a duty to act in the interests of an insolvent company by not causing the company to act to the prejudice of the interests of its creditors.
     911 Second, it was alleged that the directors breached a fiduciary duty to exercise powers properly. Again that may be taken to be a pleading that powers of the companies not be exercised for an improper purpose.
     912 Third, it was pleaded that the directors of the Australian companies and Mitchell and Bond as directors of the UK companies breached a fiduciary duty to avoid conflicts of interest.
     913 His Honour, at [733], stated that the Banks had admitted in their pleaded defence that the duties to act bona fide in the interests of a company and to exercise powers properly were fiduciary duties. At [4355], however, his Honour recorded that the case presented by the Banks at trial was that neither duty was a fiduciary duty. His Honour, at [4528], explained that he accepted that, notwithstanding the pleaded admission, he had a responsibility to ascertain the true state of the law.
     914 His Honour found those duties to be obligations of a fiduciary nature. After extensive review of authorities his Honour stated that the fiduciary character of the duties arose out of what his Honour described as the keystone requirement of a fiduciary relationship, namely, loyalty.
     915 The meaning of loyalty as used by his Honour may be taken to embody the principles of the fiduciary relationship described by McLachlin J and embraced by the High Court in Pilmer and Youyang. That is, a relationship that has trust and not self‑interest at its core and is constituted by a pledge by one party to act in the best interests of the other.
     916 In Maguire v Makaronis (474), Brennan CJ, Gaudron, McHugh and Gummow JJ noted that the disloyalty of non‑trustee fiduciaries had been subject to stringent treatment in decided cases and accepted that it was appropriate that such a strict approach be applied to the delinquency of such fiduciaries.
     917 His Honour, at [1949] ‑ [1954] and [4441], found that the Bell group companies were insolvent as at, and after, 26 January 1990. That finding was not challenged in the appeal. A material fact in respect of the first of the pleaded breaches of fiduciary duty, therefore, was established. Importantly his Honour found that the Banks were aware of facts that demonstrated that execution of the Transactions and implementation of the Scheme confirmed the insolvency of the Bell group companies and materially prejudiced the interests of all other creditors, whoever they may have been.
     Duty to act bona fide in the best interests of the company by not causing company to prejudice interests of creditors
     918 As noted earlier, determination of whether there is cause for equity to intervene in a fiduciary relationship requires more than the existence of the relationship: Re Coomber. Equity does not provide access to equitable remedies in such matters unless the grant of that relief is shown to be justified upon consideration of all relevant facts. The most pertinent of those will relate to the nature of the fiduciary relationship (i.e. the extent of the reliance upon, and trust reposed in, the fiduciary and the content of fiduciary duties arising thereunder), and the nature of the conduct of the fiduciary (i.e. having regard to the content of the fiduciary duties, was the conduct offensive to good conscience and equity).
     919 In respect of the fiduciary relationship between the Bell group companies and their directors, the reliance upon, and trust placed in, the directors by the companies for due management of the companies was entire.
     920 At the point of insolvency, or the pending manifestation of insolvency, the duty to act in the best interests of each company was of central importance for the companies to comply with statutory obligations and the obligation of the companies not prejudice the interests of creditors.
     921 The degree of reliance of the companies upon the fiduciary relationship with the directors that the directors would faithfully fulfil the duty to act in the best interests of the companies, and the consequences for the company if the directors failed to perform that duty, would cause equity to treat a breach of that duty by a director as a breach of a fiduciary duty.
     922 Indeed, in the circumstances found by his Honour, it would have been a strange result to have treated the duty to act in the best interests of the companies as anything other than a fiduciary duty. See Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1, 7 ‑ 8 (Mason J); Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration Receivership) [2011] 3 WLR 1153 [35] ‑ [36].
     923 Usually the bona fide belief of a director that the conduct undertaken is in the best interests of the company will meet the requirements of the duty: Richard Brady Franks Ltd v Price [1937] HCA 42; (1937) 58 CLR 112. However, that belief will not prevent a finding of breach of the duty where the conduct is plainly unreasonable or irrational or fails to have any regard to obligations the company must meet: Grimaldi v Chameleon Mining NL (No 2) [174] (Finn, Stone, Perram JJ).
     Duty not to exercise powers improperly
     924 Identification of a fiduciary duty not to exercise powers improperly is likely to involve restatement of obligations attached to the exercise of a fiduciary power: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821; [1974] 1 NSWLR 68, 835 (Lord Wilberforce). Examples of such fiduciary powers would include the raising of capital by allotment of shares and transactions dealing with the property of a company.
     925 Breach of such a fiduciary duty provides cause for equity to intervene at the suit of the company and make appropriate orders by way of relief: Hospital Products (100) (Mason J).
     926 Such orders may include declarations of invalidity and remedial or restorative orders directed to third parties with notice of facts that manifest the improper use of power: Howard Smith v Ampol (838).
     927 The cause for equity to act in respect of such a breach is not limited by a requirement for personal profit or advantage obtained by a director or by a person associated with a director, or for a director to have acted in conflict with personal interests. Nor is it necessary that the conduct of the director be less than honest or that the company suffer any loss by reason of that conduct: Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261, 270 (King CJ).
     928 It is apparent that the intervention of equity is attracted by the need for equity to supervise the due management of a corporation by ensuring that the powers of the company vested in the director are duly exercised pursuant to the director’s pledge to use the powers for the proper purposes of the company. That is to say, equity acts as a court of conscience to hold the director up to his or her pledged duty.
     929 Equity takes the view that the scope of relief to be provided by equity should follow principles similar to those applied to a breach of trust by a failure of the trustee to duly administer the trust and orders of restoration or rectification are at the forefront.
     930 His Honour, at [4582], found, with respect correctly, that the Transactions that conveyed interests in the property of the companies of the Bell group involved exercise of a fiduciary power and, if done for an improper purpose, a breach of a fiduciary duty.
     931 If the power of a director to allot shares of a company is a fiduciary power, as stated by Mason CJ, Deane and Dawson JJ in Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285, 290, then it must be concluded, as his Honour found, that the power to dispose of, encumber or charge assets of a company is of a like nature and a fiduciary power.
     932 And it must follow that the duty of a director not to exercise a power of a company for an improper or impermissible purpose is a fiduciary duty at least when the power being exercised is a fiduciary power. See Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [34].
     933 The question whether a director has exercised a power for an improper purpose is determined by objective assessment and not by the belief of the director. Whitehouse v Carlton Hotel Pty Ltd (294) (Mason CJ, Deane, Dawson JJ).
     Duty not to have conflict of interest
     934 It was not in issue that a breach of this duty would be a breach of a fiduciary duty.
     935 His Honour, at [9745], found that no breach of duty to avoid conflicts of interest had been established against the directors.
     936 The respondents, by notice of contention, asserted that his Honour erred in failing to find that directors Mitchell, Oates and Bond breached that duty.
     937 The first part of the respondents’ argument in support of that claim was that Bond, Oates and Mitchell each had a non‑pecuniary interest in Bond Corporation Holdings Ltd (‘BCHL’) that conflicted with the interests of the Bell group companies of which they were directors. In other words, the nature of their respective interests in BCHL was such that there was a real and sensible possibility that the interests of BCHL may be preferred or advanced by reason of that conflict.
     938 In respect of the pleaded breach of duty to avoid a conflict of interest, it appears from his Honour’s reasons that with regard to the first aspect of that breach to which the notice of contention refers, his Honour (at [4520] ‑ [4521]) considered that the pleaded facts relied upon for this element of the claim were insufficient to establish a conflict of interest of the required character and that they did not go beyond material relevant to the pleaded breach of duties not to act other than in the interests of the companies and not to act for an improper purpose.
     939 The thrust of the respondents’ submission was that once his Honour had found that the foregoing directors had acted for an improper purpose by considering the interests of BCHL over and above the separate interests of the individual Bell group companies, his Honour was bound to find that each director had breached a duty to avoid a conflict of interest.
     940 That submission, and the appellants’ ground of appeal that his Honour erred in finding that the directors acted with an improper purpose, namely, a ‘Bond‑centric’ purpose, may be dealt with conjunctively.
     941 The second element of the respondents’ argument was that his Honour should have found that the pecuniary interests of Bond in BCHL conflicted with the interests of the Bell group companies. It was claimed that Bond’s personal financial interest in Dallhold Investments Pty Ltd (‘Dallhold’) represented a direct conflict of interest. At all material times Bond controlled Dallhold which held 52.5% of the issued shares of BCHL.
     Breaches of fiduciary duties
     Duties to act bona fide in the best interests of the company by not causing company to prejudice interests of creditors and not to exercise powers improperly
     942 In the circumstances of this case the evidence relied upon to support the pleaded breaches of the separate duties not to act other than in the interests of the company and not to exercise powers of the company for an improper purpose, overlapped and led his Honour to deal with the breaches compendiously. Whilst each duty is distinct and requires consideration of separate criteria it was not asserted that his Honour erred in so doing.
     a) Australian directors
     (i) Generally
     943 His Honour, at [6084] ‑ [6092], set out his conclusions with regard to the conduct of Aspinall, Mitchell and Oates as directors of the Australian companies.
     944 The findings of fact relevant to his Honour’s conclusions were as follows.
     945 His Honour, at [721] ‑ [723], [882], [4283] ‑ [4294], [4314] ‑ [4315], found that the Transactions constituted a Scheme, the principal object of which was to transfer control of the Bell group assets to the Banks for the conduct of an informal administration controlled by the Banks, the proceeds of sale of the assets obtained from that control to be applied to discharge of the liabilities to the Banks of BGF, BGUK and TBGL. A further object of the Scheme was to avoid a formal administration of those companies being commenced within the period prescribed by relevant statutory provisions where that circumstance could cause the preferences obtained by the Banks over other creditors, including, indirectly, the ‘bondholders’, to be set aside. The purpose of executing the Transactions had been to deliver to the Banks securities and preferences in return for the Banks refraining from continuing or commencing demands on BGF, BGUK or TBGL for repayment of amounts payable to the Banks [8744] ‑ [8747], [8940].
     946 His Honour, at [1952], [2109], found that BPG, Western Interstate and Wanstead became insolvent upon entry into, or as a consequence of, the Transactions and the Scheme. His Honour also found, at [1915] ‑ [1916], [1949] ‑ [1954], that execution of the Transactions confirmed the insolvency of all Bell group companies, save for the three exceptions to that group insolvency, namely, Ambassador, Belcap Enterprises and Maradolf. Whether W&J Investments (a ‘Subordinated Creditor’) was then insolvent was said to be uncertain.
     947 At [901] his Honour identified the outcome of execution of the Transactions as follows:
     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.
     948 In a situation of insolvency the directors had a duty not to exercise the power to enter the Transactions in respect of the property of the companies for a purpose that had the effect of causing the companies to prejudice the interests of creditors. In Jeffree v NCSC (194) (Brinsden J) (196, Pidgeon J agreeing) accepted that conduct of a director that caused a company to fail to preserve property for prospective creditors in the face of possible insolvency constituted a breach of a fiduciary duty to exercise powers for the benefit of the company.
     949 As stated by King CJ in Australian Growth Resources v Van Reesema (269):
     The appellant company was left without a business or assets and in an irretrievably insolvent condition. From the point of view of the company it was an extremely improvident transaction. …
     It is inconceivable, to my mind, that directors with any appreciation of their fiduciary responsibilities could cause a company to enter into such a transaction. It could not possibly be regarded as for the benefit of the company. Even if the members are disregarded, the transaction is wholly inimical to the interests of the creditors and the growers to whom the company has obligations.
     950 Having made findings of practical insolvency and findings as to the purpose of the Transactions and the nature of the Scheme that the Transactions constructed, the further findings of improper purpose by the directors in executing the Transactions (whether considered for each company individually or as part of the Bell group of companies) became inescapable.
     951 His Honour, at [6088] ‑ [6092], included as a ground for his reasons for finding a breach of those duties by the Australian directors the absence of evidence of any semblance of a plan by the directors for restructure of the Bell group companies. That argument was adopted in some degree by the respondents in response to an argument put by the Banks in support of the ground of appeal that his Honour erred in finding that the foregoing duties had been breached. But, at [6089], the reliance placed by his Honour on this so‑called omission was shown to be the lack of weight it revealed in Aspinall’s stated beliefs put forward as the explanation for his actions as director. That is to say the absence of any evidence of engagement with a proposal for reconstruction assisted his Honour to conclude that Aspinall had not turned his mind in any meaningful way to the benefit an individual company in the Bell group could obtain from execution of the Transactions [6080]. His Honour should not be taken to have concluded that failure to have a settled plan for restructure of the group was in itself a breach of the fiduciary duty to act in the best interests of a company.
     952 In the circumstances of this case, where the Bell group was conducted and operated as a group with interdependent interests the directors were entitled, provided the interests of the group remained compatible with the interests of an individual corporation, to also give consideration to the interests of the companies as a group in determining whether the best interests of an individual company would be met by a proposed course of action. See Neat Domestic Trading Pty Ltd v AWB Ltd [2003] HCA 35 [47]; (2003) 216 CLR 277 (McHugh, Hayne, Callinan JJ). However, the Bell group was facing insolvency. At the time of execution of the Transactions the only remaining revenue‑producing business of the group was that which made use of the publishing assets. That business did not supply sufficient revenue to meet the debts of the group as they fell due. In addition, the realisable worth of assets of the group was insufficient to meet the liabilities of the group [2001]. Therefore the interests of a corporation with creditors for which no provision had been made, or as a result of the Transactions could be made, would diverge significantly from the interests of the group. In such a circumstance of insolvency the directors would fail to discharge their duty to act in the best interests of that company if they caused the company to prejudice the interests of its creditors: Walker v Wimborne (6 ‑ 7) (Mason J).
     953 The importance attached by equity to the duty of directors to consider the interests of creditors in a situation of insolvency has been explained earlier in these reasons at [767] ‑ [777], [920] ‑ [921].
     954 The stringent constraints upon directors now set out in the Corporations Act to protect the interests of creditors in such circumstances may be taken to have been grounded upon the provisions of equity that directors not cause a company to disregard or prejudice the interests of creditors where insolvency is imminent.
     955 Whilst those provisions of the Corporations Act were introduced subsequent to events in this matter, importantly, they prescribe that conduct by a director that is a breach of either a duty of care and diligence, or a duty to act in good faith in the best interests of a company and for a proper purpose, being a breach that materially prejudices a corporation’s ability to pay its creditors, makes the director liable to a severe monetary penalty (Corporations Act, s 1317G). Furthermore, that conduct is a criminal offence if material prejudice to creditors is effected by a reckless breach of the duty to act in good faith and in the interests of a corporation, or of the duty to exercise powers for a proper purpose (Corporations Act, s 184).
     956 The interests of creditors that required particular consideration in deciding whether execution of the Transactions would be in the interests of individual companies were the significant amounts owing to the Commissioner of Taxation (‘the Commissioner’) by Bell Bros, Bell Bros Holdings and Maranoa Transport and to BGNV by TBGL and BGF. TBGL, BGF and Bell Bros participated in the Transactions, as ‘security providers’ and Bell Bros Holdings and Maranoa Transport executed Transactions to subordinate their rights to recover debts due from other companies in the Bell group to the rights of the Banks to recover from those companies moneys advanced by the Banks to BGF and BGUK.
     957 The material relevant to consideration of the interests of the Commissioner as a creditor was as follows. In September 1982 the Commissioner issued assessments of income tax to Bell Bros for the taxation years 1980 and 1981 and to Bell Bros Holdings for the taxation years 1977, 1979, 1980 and 1981. Further assessments of income tax payable for subsequent taxation years were issued to those companies, and to Maranoa Transport, between August 1983 and May 1987 [2020]. As at January 1990 the amounts outstanding under those assessments, including interest charges for late payment, amounted to approximately $34 million of which approximately $30 million arose from the assessments issued to Bell Bros. The transactions relevant to the latter assessments involved purchase and sale of shares in Elders Ltd; Ansett Transport Industries Ltd and Boral Ltd [2010].
     958 Upon issue of the assessments, the foregoing amounts became debts recoverable by the Commonwealth (s 208(1) ITAA). See Re Mendonca (A Debtor); Ex parte Commissioner of Taxation (1969) 15 FLR 256, 259.
     959 Objections to the assessments were lodged by the taxpayer companies and the Commissioner was requested to withhold demand for payment of the debts pending disposal of the objections. The Commissioner agreed to that request. His Honour, at [2044], opined, correctly, that neither the filing of objections nor the forbearance of the Commissioner from taking recovery action in respect of the debts altered the status of the debts owing to the Commonwealth nor the status of the Commissioner as a creditor of the respective companies.
     960 In due course the objections to the assessments were disallowed by the Commissioner and requests were made by the companies for the decisions of disallowance to be reviewed.
     961 Review proceedings in respect of the decisions by the Commissioner to disallow the objections by Bell Bros to the 1980, 1981 and 1984 assessments were commenced in the Federal Court on 26 August 1988 [2023].
     962 Coincidentally, formal control of the Bell group passed to BCHL on the same day, 26 August 1988 [123]. Mitchell and Oates had been appointed directors of TBGL on 2 August 1988 [121]. Aspinall was appointed as a director of TBGL on 13 October 1988 [TBGL.00822.117].
     963 RHàC resigned as director of TBGL and terminated participation in management of the Bell group on 24 October 1988.
     964 The consolidated accounts of the Bell group set out in the TBGL Annual Report 30 June 1989 contained a Note to the accounts which stated that in respect of the foregoing taxation debts the directors were ‘confident that the objection will be successful’ [TBGL.00008.002, Note 4(b), p 30]. The accounts carried an endorsement by Aspinall and Oates, dated 13 November 1989, which stated that the accounts (which included the foregoing Note) gave a true and fair view of the affairs of the group as at 30 June 1989 [TBGL.00008.002, p 57]. A Note to accounts in the same terms had appeared in the consolidated accounts contained in the 1985, 1986, 1987 and 1988 TBGL Annual Reports. The representation made by the Australian directors in Note 4(b) of the 1989 TBGL Annual Report, therefore, repeated a statement made by preceding directors. The Australian directors, however, did not make inquiry to inform themselves of any relevant facts in respect of the representation and did not obtain advice from the solicitors they had instructed to act in the Federal Court proceeding as to the prospect of success in that proceeding in which the taxation assessments were being contested by Bell Bros.
     965 The facts before his Honour, and his Honour’s findings, show that there was no foundation for the represented belief of the Australian directors and that provision for the income tax debts should have been included in the 1989 accounts. Indeed it appears that in the course of preparation of a December 1988 balance sheet internal accountants of the Bell group had allocated a provision of $30 million to the ‘potential liability arising from the Bell Bros taxation dispute’. Subsequently they had forwarded a memorandum to the Australian directors explaining why it had been necessary to reverse that provision and use it to offset ‘the write off of capital tax losses ($30m)’ instead [5443] ‑ [5445].
     966 The assessments were based on a determination by the Commissioner that the assessable income of the respective companies included profits made from the acquisition and sale of property in the form of shares [2010]. Objections to the assessments could not succeed unless the objectors discharged the onus of proof imposed upon them by s 190 of the ITAA to prove that the assessments were excessive. In practical terms that required proof that the property had been acquired as an investment without consideration of resale and that the sale proceeds were receipts of capital.
     967 Neither Aspinall, Mitchell nor Oates had any knowledge of the relevant transactions or of the substantive disputes arising from the assessments. Acquisition of the shares had occurred when RHàC, and possibly Newman, were the controlling minds of the relevant companies. No contemporaneous statements appear to have been provided by those persons in Bell group records.
     968 The Bell group records did include, however, a report from C&L to Newman prepared in November 1982 which provided details of a conference that C&L had attended with expert taxation counsel, A M Gleeson QC and G D Hill, in respect of the assessments issued in September 1982 to Bell Bros and Bell Bros Holdings. The report stated, ‘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’ [2063]. The assessments under consideration in that advice included two of the three assessments later the subject of the Bell Bros proceeding in the Federal Court.
     969 After commencement of the proceedings in the Federal Court solicitors were instructed by BCHL on behalf of the Bell group companies in about September 1988 [WITP.00001.030 [6]]; [2048] ‑ [2049], [2052]. The solicitors retained B Shaw QC as counsel. In early November 1989 the solicitor with the carriage of the matter prepared for the consideration of RHàC a draft affidavit for use in the Federal Court proceedings. The draft affidavit was prepared without the benefit of a proof of evidence. It was forwarded to RHàC together with relevant copy documents. In due course the material was returned to the solicitor unopened and without comment [2055].
     970 In December 1989 Shaw QC provided oral advice to the instructing solicitor that some aspects of the draft affidavit prepared for the consideration of RHàC appeared to be fatal to the taxpayers’ case [2058].
     971 By January 1990 no statements from RHàC, or Newman, to establish relevant corporate intent had been obtained, or were likely to be obtained, in the opinion of the solicitor [2059].
     972 In August 1981, about one year before the relevant assessment was issued by the Commissioner, RHàC had provided evidence to a formal inquiry into ‘the Elders transactions’. The terms of reference of that inquiry, in part, concerned propriety of conduct under corporations law of entities engaged in dealings in shares in Elders Ltd in March 1981. That inquiry, of course, was not concerned with the likelihood or otherwise of any ‘taxation’ liability of Bell Bros arising out of its dealings in Elders Ltd shares.
     973 A subsidiary of Bell Bros acquired shares in Elders Ltd on or after 19 March 1981. On 24 March 1981 Bell Bros made an agreement to sell its shareholding in that subsidiary to a party seeking to obtain, at a stipulated price, the shares the subsidiary held in Elders Ltd. The agreed purchase price for the shares in the subsidiary reflected the stipulated price for the Elders Ltd shares and realised a profit of approximately $16 million on the sum outlaid to acquire those shares. Inter alia, it was a contention of the Commissioner in the Federal Court proceeding that part of the consideration received by Bell Bros for the shares in its subsidiary was assessable income under s 26(a) of the ITAA as ‘profit arising from the carrying on or carrying out of a profit‑making undertaking or scheme’ in which TBGL, Bell Bros and the subsidiary were participants [TBGL.00580.011].
     974 The solicitor regarded the information that RHàC had provided to the inquiry as ‘positive provided that the necessary evidence could be obtained’ [WITP.00001.030 [30], [39]]. The ‘necessary evidence’ was evidence from RHàC that addressed all issues raised in the Federal Court proceeding including the claim of a profit‑making scheme. To that point, such evidence had not been obtained and, as set out above, was thought by the solicitor to be unlikely to be obtained [WITP.00001.030 [40]].
     975 His Honour noted, at [5157], that it was Aspinall’s evidence that he had been informed by an ‘in‑house tax accountant and adviser’ employed by BCHL that he (the in‑house adviser) was confident there would be no liability on the assessments. However, as his Honour stated, at [2066], neither Aspinall nor the other directors spoke at any time to the solicitor acting for the Bell group companies in the matter, nor sought details of the advice provided by expert counsel instructed by that solicitor. The ‘in‑house adviser’ was not called to give evidence [2017].
     976 The solicitor did give evidence and stated that it was his opinion that unless evidence of corporate intent could be obtained the proceedings in the Federal Court would fail and that he had told the ‘in‑house adviser’ this on a number of occasions [2056]. Furthermore, he stated that at the time of publication of the 1989 TBGL Annual Report in November 1989 no director had sought his advice as to the strength of the Bell Bros case in the proceeding in the Federal Court [2053]. His Honour found, at [2066], that he could not be satisfied that 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’.
     977 As a postscript his Honour noted that on 14 February 1990 A Myers QC, the then‑retained counsel, advised the solicitor that the taxpayers did not have a strong case as matters stood and expressed a view that the share transactions were probably trading operations [WITP.00001.030 [41]]; [2060].
     978 It does not appear that at any time counsel instructed by solicitors with the authority of the Australian directors provided advice that it was probable that the objections would succeed.
     979 On the foregoing material, publication of a statement that it was the opinion of Aspinall, Mitchell and Oates as directors that provision for the debts due to the Commonwealth for assessed income tax was unnecessary because of the strength of the objections to those assessments, involved conduct by the directors that was both imprudent and unreasonable.
     980 At [2073] his Honour found, correctly, that the income tax liabilities of the companies represented the interests of a creditor that the directors of those companies were obliged to consider and that it was not apparent that the directors had given any consideration at all to those interests.
     981 The second significant creditor was BGNV, and, indirectly, LDTC as trustee for the bondholders of bonds issued by BGNV.
     982 BGNV was a creditor of TBGL and BGF for the sums lent to those companies from moneys received by BGNV from the issue of bonds.
     983 In December 1989, SCBAL served notices of demand and s 364 notices on BGF and TBGL with the intent that external administration of those companies be commenced; a ‘receiver’ [sic] appointed; and, sale of the publishing assets of the Bell group effected [288.01.0095]. Aspinall, albeit by assertion rather than cogent argument, warned SCBAL that ‘bondholder’ interests may rank equally with the claims of the Banks in the liquidation of those companies. SCBAL assumed that Aspinall’s assertion was based on legal advice and sought urgent advice itself, as a result of which the s 364 notices were withdrawn. That caused the Banks collectively to decide that it would be in their interests that demands for payment of moneys owing to the Banks not be served on TBGL or BGF and that security be taken over all available assets as soon as possible to obtain priority for the Banks over whatever interests the bondholders held [9723].
     984 It was clear, of course, that part of the object of the directors in executing the Transactions was to remove any prospect that the claims of BGNV, as a creditor, could compete with the claims of the Banks in return for which the Banks would forebear from making demand for payment of moneys advanced.
     985 It should be noted that in respect of the debt owed by TBGL to BGNV, it was probable that BGNV would not have been able to prove for that debt in the liquidation of TBGL without bringing into account the whole of BGNV’s potential liability in equity to indemnify TBGL as guarantor of BGNV’s liabilities to bondholders. The effect of the notional account for that sum, approximately $400 million at 26 January 1990, would be the discharge of the loan balance owing by TBGL to BGNV, approximately $61 million. See Re SSSL Realisations (2002) Ltd (in liq) [2006] Ch 610, 621 et seq [79] ‑ [82], [98] ‑ [117].
     986 The consequence of the application of such a rule would be that the Banks would have been able to prove in a TBGL liquidation without competition from BGNV.
     987 In respect of the debt owed by BGF to BGNV, however, no such offset would have arisen and BGNV could have proved in a liquidation of BGF pari passu with the Banks in respect of the BGF loan debt of approximately $339 million. That sum, as noted earlier, exceeded the amount due to the Banks.
     988 Whilst noting that Aspinall believed that the group was not insolvent and that the Transactions may allow him to ‘right the ship’ it was his Honour’s conclusion that such a belief was without rational foundation.
     989 His Honour found, at [1949] ‑ [1954], that the Bell group companies were insolvent both before and after execution of the Transactions. As noted earlier those findings were not in issue on the appeal. As his Honour put it, at [1949], the circumstance facing Aspinall at 26 January 1990 was one of ‘insurmountable endemic illiquidity’. No doubt his Honour had in mind that a prudent businessman charged with supervision of the affairs of companies in that position would not have failed to recognise that fact.
     990 His Honour commented, in [6086], that Aspinall was ‘well aware that the publishing assets could not produce sufficient cash to meet bank interest’ and was ‘also well aware of the parlous financial circumstances of “the group”‘. It followed, of course, that if the principal source of revenue of the group could not meet interest payable to the Banks it would be unable to meet the substantial annual interest payments due to bondholders. By his references to the matters of which Aspinall was aware his Honour conveyed his conclusion that Aspinall possessed knowledge of sufficient facts to be aware that causing companies within the group, the Bell Participants, to dispose of the assets of the group to the Banks could not be undertaken in that situation of insolvency without Aspinall considering whether it would prejudice the interests of creditors of companies of the group. That is to say, to so act without considering the interests of those creditors would be contrary to the duties imposed on a director of the debtor companies.
     991 As noted earlier, Aspinall saw the disposition of assets to the Banks as a task to be undertaken as a matter of urgency and the means by which the Banks could be persuaded to withhold demands for repayment of the moneys advanced by them to BGF and BGUK, repayment of which had been guaranteed by TBGL.
     992 That was the limit of the benefit to be obtained from the Transactions. There was no access to further finance to replace the working capital being extracted from the group to repay the Banks’ advances. The grant of security to the Banks over all assets foreclosed any prospect of resolution of the insolvency by a scheme of arrangement or composition of debts unless the Banks agreed to release the securities and to participate in such a scheme or composition. Furthermore, by the Transactions the group passed the proceeds of all asset sales to the Banks and relinquished access to the only alternative source of additional funds to meet the debts of the group.
     993 The asserted belief of a director that such a course of action met the best interests of a company could not be accepted as a rational belief when the company, by reason of the circumstances of imminent insolvency, had to take account of, and not prejudice, the interests of creditors.
     994 The following remarks by Clauson J in Re Simms [1930] 2 Ch 22 stating principles to be applied in bankruptcy may be taken to reflect principles of equal relevance to the proper performance of duties and exercise of powers by directors of insolvent corporations. They also support the conclusion that the asserted belief of the Australian directors that the disposition of the whole of the property of the group was in the best interests of each company was neither a bona fide nor a rational belief:
     The result of these authorities appears to me to be that a transfer by a debtor of substantially the whole of his property, whether by way of charge or by way of sale, will be an act of bankruptcy, if the necessary consequence of the transfer will be to defeat or delay his creditors. (34)
     The suggestion I think was that all the parties honestly thought that this transfer which the law holds – and they must be assumed to have known that the law would hold – to be fraudulent, was the best thing in everyone’s interests. But I can rely on the authority of Cotton LJ in Ex parte Chaplin (26 Ch D 319) for the proposition that a fraudulent transaction remains a fraudulent transaction (at all events if the parties know all the facts which stamp it in law as a fraudulent transaction) whatever may be the view of the parties that it may be the best thing for the debtor, or may result in effectually paying the creditors. That authority alone makes it impossible for me to accede to the argument which would claim protection for the company in the present case on the footing of bona fides. (35)
     995 As his Honour found, Aspinall made no enquiry and sought no advice as to how the interests of the substantial creditors of Bell Bros, Bell Bros Holdings and Maranoa Transport were to be addressed by those companies. Furthermore, Aspinall made no enquiry and sought no advice as to how the interests of BGNV as a creditor of TBGL and BGF may be affected by the Scheme implemented by the Transactions. To the contrary, it had been represented to the Banks by Aspinall that the disposition of assets to the Banks and avoidance of the liquidations (that would otherwise follow bank demands for repayment of advances) would eliminate the risk that in such liquidations the Banks may face competition from claims represented as the amounts due to bondholders by BGNV. Such conduct was a clear negation of a duty of a director of BGF to have regard to the interests of BGNV as a creditor.
     996 His Honour, at [6049], recognised that such conduct by a director of BGF visited palpable and unarguable prejudice on BGNV if the loans BGF obtained from BGNV were not subordinated. For the reasons set out earlier, his Honour’s finding that the loans were subordinated involved error and his Honour should have found to the contrary and should have made the consequential and inescapable findings that such conduct was a breach of fiduciary duty by the Australian directors.
     997 Cross‑examination of Aspinall on the issue of subordination of the on‑loans (ts 31048 ‑ 31054) is illuminating. Aspinall made it clear that his understanding of the issue went no further than his belief that the issued bonds were subordinated as the following extracts describe.
     (ts 31048):
     But as to [the on‑loans] that’s not an area that I have any expertise in. That is why I would have to go and get advice.
     (ts 31049):
     You understand, do you not, that the Bell company which borrowed the moneys raised by BGNV would owe those moneys to BGNV?‑‑‑I understand that, yes.
     Yes?—Yes.
     If that particular Bell company went into liquidation – – -?—The one that borrowed the money?
     Yes, if it went into liquidation an issue would arise as to whether the claim of BGNV would rank equally with other unsecured creditors. Isn’t that correct?—I don’t know. I really don’t know.
     You don’t know?—I don’t know. As I have just said to you, and I repeat again, this is not an area of expertise that I have. I can make an assumption which would be dangerous, but I don’t know.
     If – – -?—I mean, if we had all the documentation of the convertible bonds and how they work – I mean, I just can’t answer the question. I’m sorry. I don’t understand.
     So the question leaves you in a state of uncertain knowledge. Is that your ‑ ‑ ‑?—As far as how the subordination fell down through the companies, yes.
     I see, and that – – -?—But I say that the bonds were subordinated and always subordinated at BGNV level. What actually happened to that subordination I don’t know. I don’t understand that process.
     That’s the state of comprehension you say you would have had at the time on 26 January?—I believe so, yes.
     (ts 31051):
     I didn’t know … what happened to the subordination once the moneys were on‑lent.
     Now, if Mr Simpson knew or knew what would happen or what the character was of the transactions after the money was passed on by BGNV, would you have expected him to discuss it and explain it to you?‑‑‑Yes, but I don’t recall him actually being completely familiar with that. I think we had to go and ask some questions of others who managed the affairs of the subordinated bonds that were issued. It was something that we didn’t deal with on a day‑to‑day basis and we would have had to go and get some advice and that’s really all I can say about that. What his knowledge was, you would have to ask him.
     We will?—I’m sure.
     Simpson did not give evidence.
     998 It appears that Aspinall neither sought nor obtained any advice on the status or effect of the BGNV on‑loans or upon the obligations of TBGL and BGF to BGNV as a creditor of those companies.
     999 That conduct, of course, was consistent with the implementation of a purpose of providing security to the Banks to advance the interests of the Banks over other creditors and to obtain accord from the Banks to withdraw, or withhold, demands for repayment of the moneys advanced to the group by the Banks and thereby avoid the winding‑up of the group companies. However, given the existing state of insolvency that conduct was inconsistent with Aspinall’s duty not to act other than in the best interests of the Bell group companies, and not to act for an improper purpose, where that conduct prejudiced the ability of companies in the group to meet their obligations to creditors.
     1000 There was ample evidence to support his Honour’s finding, at [6089], that Aspinall breached those duties by ‘committing the companies to the grant of securities without 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’.
     1001 At [5066], his Honour had found that Aspinall’s evidence that he held a belief that ‘refinancing’ was in the best interests of each company in the group was not credible. Read in conjunction with his Honour’s subsequent finding at [6089], his Honour’s conclusion in [5066] stood as a statement that his Honour was not satisfied that Aspinall either understood what was required of him to comply with the foregoing duties or had turned his mind at all to the obligations of individual companies which, facing enmeshment in a group insolvency, had to have regard to the interests of their creditors.
     1002 With regard to the conduct of Mitchell his Honour, at [6090] ‑ [6091], found on the evidence before him that the principal concern of Mitchell, as part of the core group of BCHL directors (Bond, Beckwith, Mitchell and Oates), was to advance the struggle for survival of the BCHL group. Mitchell had paid little attention to the affairs of the Bell group companies outside its ability to assist survival of the BCHL group. This conduct and purpose was described by his Honour as ‘Bond‑centric’. His Honour did not accept that Mitchell held any honest belief about the solvency of the Bell group of companies in the absence of any evidence that he had made any material enquiries in that regard. Furthermore, it was clear to his Honour that Mitchell had made no attempt at all to identify creditors of companies in the Bell group or to assess the effect on creditors of granting the proposed securities to the Banks in the circumstances of the actual impending insolvency that would affect all companies in the group.
     1003 With regard to the evidence provided by Mitchell his Honour, at [5374], [5437], [5440], [5453], [5475], [5597], [5877] and [6091], set out the paucity of the knowledge displayed in that evidence that Mitchell held of the affairs of the Bell group and of the nature of his obligations as a director of those companies.
     1004 Accordingly, his Honour found that Mitchell had breached the fiduciary duties his Honour had described. There was more than adequate evidence to allow his Honour to reach that conclusion.
     1005 With regard to Oates, who did not give evidence, his Honour, at [6092], found that on the available evidence it could be concluded that Oates, whilst having greater involvement in Bell group affairs than Mitchell (in particular, by participating in the negotiations with the Banks in 1989 and 1990), still had an intimate involvement in the affairs of BCHL in his role as part of the central group of directors of BCHL. It appears that by treating Oates’ conduct and purpose as ‘Bond‑centric’ his Honour related the degree of Oates’ involvement in BCHL to the failure of Oates to make any enquiries to identify creditors of the Bell group companies and to consider the effect that the grant of securities to the Banks would have on creditors given the parlous financial circumstances of the Bell group made known to Oates in the course of the foregoing negotiations with the Banks. His Honour therefore found Oates had breached the aforesaid fiduciary duties. Again there was sufficient evidence to permit his Honour to make that finding.
     1006 In the context in which it was used in his Honour’s reasons the term ‘Bond‑centric’ denoted preparedness to prejudice the interests of non‑bank creditors of Bell group companies by the provision of preferences to the Banks to stave off imminent demands by the Banks for repayment of funds advanced by them to the Bell group and attempt to avoid the catastrophic impact upon BCHL that would follow commencement of administration of Bell group companies.
     1007 It is apparent that there was ample evidence on which his Honour could conclude, as he did, that the directors Aspinall, Mitchell and Oates:
     (a) failed in their duty not to act other than in the interests of the companies by causing various companies to act to prejudice the interests of creditors other than the Banks;
     (b) acted for an improper purpose by charging or delivering to the Banks interests in assets of the Bell Participants in the circumstance of known or anticipated insolvency of the Bell group of companies thereby materially prejudicing the interests of other creditors of those companies.
     1008 But for those breaches by the directors execution of the Transactions and implementation of the Scheme could not have occurred.
     1009 The appellants submitted that, having found that the Australian directors failed to give any consideration to the separate interests of each company of the group, his Honour erred in failing to then determine 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 each company individually. This was described as ‘the Charterbridge test’. See Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62, 74.
     1010 It is apparent that in the circumstances of this case, and having regard to the nature of the findings made by his Honour, there was no requirement for his Honour to apply the so‑called ‘Charterbridge test’.
     1011 The breach of duty by the Australian directors to act in the best interests of each company and not to exercise powers of the company for an improper purpose was effected by the directors executing transactions that caused companies of the group to materially prejudice the interests of creditors of those companies. There was no need for his Honour to go further and determine what ‘an intelligent and honest person’ would have done in the circumstances.
     1012 I agree with the reservation expressed by Clarke and Cripps JJA in Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, 146 ‑ 148. Breach of a duty not to act other than in the best interests of a company arises if the failure to consider the separate interests of the company produces a result that fails to meet the best interests of that company. If such a breach and consequence is demonstrated the detriment suffered by the company must be addressed by appropriate remedy. At that point there can be no requirement to consider what an intelligent and honest person would have done, proof of breach of fiduciary duty and entitlement to relief having been demonstrated.
     1013 The motivation or purpose of the board of directors in resolving that Bell group companies execute the Transactions did not require ‘infinite analysis of the fears and desires, proximate and remote, which, in truth, form[ed] the compound motives usually animating human conduct’ but the ‘substantial object the accomplishment of which formed the real ground of the board’s action’. See Mills v Mills [1938] HCA 4; (1938) 60 CLR 150, 185 ‑ 186 (Dixon J).
     (ii) BGF
     1014 There was a discrete sub‑issue in respect to the affairs of BGF. The banks submitted that the Australian directors, in considering the best interests of BGF, were entitled to believe that BGF was indebted to the Lloyds syndicate banks under the Lloyds syndicate loan facility and, therefore, it could not be said that they held other than a bona fide belief that it was in the interests of BGF to provide security to the Lloyds syndicate banks under the Transactions.
     1015 The foregoing argument involved construction of the Lloyds syndicate loan facility documents, in particular, the 1986 Loan Agreement [353.09.0017]; Lloyds Supplemental Agreement No 1 (‘LSA No 1’) [366.02.0001] and the Form of Restated Lloyds Facility Agreement No 1 (‘RLFA No 1’) [366.02.0001].
     1016 Before considering that issue it is to be kept in mind that his Honour had found, in effect, that the three Australian directors who controlled the Australian companies, now in a situation of insolvency, had exercised the powers of the Bell Participants with a joint purpose of staving off demands by the Banks for repayment of moneys advanced to the Bell group. To effect that purpose it was necessary for all Bell Participants to execute the Transactions and provide securities over all group assets to the Banks and thereby establish priority in the Banks over all other creditors of the group.
     1017 In a situation of insolvency exercise of the power to dispose of property of the Bell Participants with such a purpose constituted abuse of the power where it caused a company to prejudice the interests of other creditors.
     1018 Furthermore, the failure of the Australian directors to consider at all whether participation in the Transactions was in the best interests of each company individually, meant that the Australian directors could not be heard to say that they had a bona fide belief that they had so acted. Not only did the Australian directors not consider the interests of other creditors of each company, in fact they engaged in conduct directed at disadvantaging those creditors. A particular object of the Transactions was to defeat the interests of BGNV as a creditor of TBGL and BGF.
     1019 The foregoing findings of fact provided the grounds for his Honour’s conclusions that the Australian directors breached fiduciary duties owed to the Australian companies. Those breaches of duty in respect of the affairs of BGF did not turn on whether the Australian directors caused BGF to grant securities to the Lloyds syndicate banks when BGF had no debt obligations to those banks. It follows that if his Honour erred in construing the Lloyds syndicate loan facility documents, it could not have affected his conclusion that the Australian directors breached fiduciary duties owed to the Australian companies.
     1020 Therefore, the ground of appeal that his Honour erred by failing to properly construe the Lloyds syndicate loan facility documents and by failing to find that pursuant to those documents BGF was a debtor to the Lloyds syndicate banks in the amount of the loans advanced by the Banks thereunder, raises no issue of consequence.
     1021 Nonetheless, the following short reasons are provided to deal with the issues raised.
     1022 On 19 May 1986 the Lloyds syndicate banks and BGF and BGUK (at that time known as TVW (UK) Ltd) executed the 1986 Loan Agreement for the provision of a loan facility of £60 million by the Banks. The agreement provided that the facility was available for 45 days from the date of execution of the agreement, the ‘Commitment Period’. Moneys drawn down in the ‘Commitment Period’ were repayable on 19 May 1991, the ‘Repayment Date’. If less than the sum available was drawn down under the facility within the Commitment Period, the unused balance was ‘cancelled’.
     1023 The term ‘Borrower’ was defined in cl 1.1 as BGF or BGUK and ‘Borrowers’ was defined as BGF and BGUK.
     1024 Clause 6 stated that the ‘Borrowers’ were to repay the ‘Loans’ on the ‘Repayment Date’.
     1025 Clause 4 provided that a ‘Loan’ would be made to a ‘Borrower’ pursuant to a request made by the Borrower in the Commitment Period in the form of a draw down notice exhibited to the agreement. The form as exhibited was drawn as a notice given by ‘Borrowers’ jointly.
     1026 Clause 10 set out optional interest periods for selection by a Borrower.
     1027 Clauses 4 and 10 anticipated that each loan made under the facility would be made to a Borrower, although loans to Borrowers jointly were not precluded.
     1028 Pursuant to cl 7.4 repayments made before the Repayment Date automatically reduced the amount of the facility. Thereafter, no part of a sum repaid could be reborrowed by either Borrower.
     1029 Clause 8 permitted the Borrowers jointly to give notice to the Lloyds syndicate banks converting the loan facility to a ‘Revolving Credit Facility’ in respect of the amount outstanding at the date of the conversion. Thereafter, either Borrower could draw down any part of the undrawn balance that became available upon repayment of, or any part of, a loan.
     1030 Clause 14 contained an undertaking by the ‘Borrowers’ to pay on demand compensation to a bank for increased costs incurred by the bank as a participant in the syndicate by reason of a provision of law or regulation, or of a change therein.
     1031 Under the heading ‘General Undertakings’, cl 17 provided that each of the ‘Borrowers … severally’ undertook ‘so long as any Indebtedness is outstanding’ to keep the agent informed of its financial status. ‘Indebtedness’ was defined in cl 1.1 as meaning, inter alia, ‘in relation to any person indebtedness in respect of moneys borrowed or raised by it’.
     1032 Under cll 21, 22 and 23 the Borrowers undertook to pay fees, expenses and stamp duty incurred in the preparation and conduct of the facility.
     1033 The proper construction of the foregoing provisions was that the Borrowers incurred a joint and several liability to the Lloyds syndicate banks in respect of moneys payable under cll 14, 21, 22 and 23. The obligation to provide regular information under cl 17 was a separate obligation for each Borrower that depended upon the ‘Indebtedness’ of the ‘Borrower’.
     1034 It was not contended that BGF’s liability under cll 14, 21, 22 or 23 was relevant to the question raised on the ground of appeal. Nor was the existence of a contingent right to draw down funds under a Revolving Credit Facility under cl 8 relied upon.
     1035 Within the Commitment Period BGUK drew down the whole of the sum available under the facility. Clause 3 stated that the purpose of the facility was to use the proceeds of the loans for repayment of existing borrowings and thereafter for general corporate purposes. It may be concluded that it had been understood at the outset that the facility would be used by BGUK to replace an existing borrowing.
     1036 The requirement in cl 6 that the ‘Borrowers’ ‘repay’ the ‘Loans’ on 19 May 1991 had to be read distributively. First, it was an obligation on a ‘Borrower’ to repay a loan to discharge ‘Indebtedness’ incurred by that borrowing and, second, it was an obligation upon joint ‘Borrowers’ to repay a loan for which joint indebtedness had been incurred.
     1037 Clause 6 contained no words imposing a liability of surety, guarantor or indemnifier upon a Borrower in respect of the Indebtedness of the other Borrower. Therefore, cl 6 imposed no liability on BGF to ‘repay’ the moneys payable by BGUK on the Repayment Date.
     1038 But cl 18.3 provided that the Lloyds syndicate banks were to be indemnified by the ‘Borrowers’ in respect of loss or expense caused by Events of Default. The extent of the indemnity provided by cl 18.3 was limited to loss or expenses sustained or incurred by a bank as a consequence of an Event of Default or the operation of cl 18.2. It did not impose an obligation on a Borrower as principal debtor, or otherwise, to indemnify a Lloyds syndicate bank against non‑payment of principal or interest by the other Borrower.
     1039 The Events of Default as recited in cl 18.1 related to occurrence of circumstances that affected a Borrower’s capacity to perform its obligations under the 1986 Loan Agreement. Clause 18.2 permitted the ‘Majority Banks’ to accelerate repayment of the Loans by declaring all Loans immediately due and payable upon the occurrence of an Event of Default. A declaration under cl 18.2 calling up the Loans could also be made if, inter alia, TBGL or an ‘Indemnifying Subsidiary’ failed to pay a sum due and payable to the Lloyds syndicate banks pursuant to cl 17.1 of the Negative Pledge Agreement [367.01.0002]. It was a condition precedent to the advance of any funds under the 1986 Loan Agreement that the Negative Pledge Agreement be executed and delivered to the Lloyds syndicate banks (cl 5.1(g)).
     1040 The Negative Pledge Agreement was executed concurrently with the 1986 Loan Agreement on 19 May 1986 by the Lloyds syndicate banks, TBGL and 43 subsidiaries of TBGL described as ‘Indemnifying Subsidiaries’. BGF and BGUK executed the Negative Pledge Agreement as ‘Indemnifying Subsidiaries’.
     1041 Clause 3 of the ‘Bell Negative Pledge Schedule’ (being the Second Schedule to the Negative Pledge Agreement) provided that TBGL and each Indemnifying Subsidiary agreed as principal debtors to indemnify the Lloyds syndicate banks against failure of any party to make due and punctual payment of any amount lent by the Lloyds syndicate banks to TBGL or an Indemnifying Subsidiary.
     1042 As discussed earlier in these reasons, Indemnifying Subsidiaries were released from their covenants of indemnity on 30 July 1987 in respect of the Australian bank facilities.
     1043 LSA No 1 was executed on 27 August 1987 to provide for the joinder of TBGL as guarantor of the Borrowers under the Lloyds syndicate loan facility and RLFA No 1, also dated 27 August 1987, was Appendix One to LSA No 1. Pursuant to cl 16 of RLFA No 1, TBGL ‘as primary obligor and not merely a surety’ guaranteed the performance of the obligations of the Borrowers. The Indemnifying Subsidiaries did not execute LSA No 1 and were not parties to RLFA No 1. RLFA No 1 restated the terms of the Lloyds syndicate loan facility. One outcome of the restatement was the deletion of the Negative Pledge Agreement and of the obligations of Indemnifying Subsidiaries thereunder. That was replaced by the inclusion of TBGL as a party and as guarantor of the Borrowers. The Indemnifying Subsidiaries, therefore, were released from their obligations under the 1986 Loan Agreement and Negative Pledge Agreement. On execution of RLFA No 1 it became plain that TBGL was the only party with liability as guarantor or indemnifier and that unless and until BGF incurred ‘Indebtedness’ as a Borrower, it had no liability to make a ‘repayment’ under cl 6 of RLFA No 1.
     1044 It follows that, as at 26 January 1990, BGF had no ‘Indebtedness’ and no principal liability as debtor to Lloyds syndicate banks under RLFA No 1.
     1045 With regard to the obligations of indemnity imposed on Borrowers contained in cl 18.3 of the 1986 Loan Agreement, this provision was modified and restated in cl 19.3 of RLFA No 1. It remained an obligation on the Borrowers to indemnify the Lloyds syndicate banks against loss or expenses sustained or incurred as a consequence of Events of Default. In respect of BGF it could not be more than a liability for consequential loss and was not a liability as indemnifier to pay a principal sum or interest due by the other Borrower.
     1046 His Honour, at [2144], concluded, correctly, that BGF had ‘no relevant liability to the Lloyds syndicate banks’ immediately before 26 January 1990.
     b) UK directors
     1047 His Honour, at [5873] ‑ [5876], considered the conduct of Bond as a director of BGUK and TBGIL. Bond did not give evidence. His Honour concluded that in the absence of evidence from Bond, he should draw the inference available from the evidence before him that Bond could not have had reasonable grounds for the assurance he provided to other directors that the Bell group companies were solvent and that TBGL was able to honour the letters of comfort it had provided at the request of other UK directors in respect to the provision of funds by TBGL to BGUK and TBGIL required to discharge liabilities of those companies to creditors.
     1048 His Honour was also satisfied that Bond’s attention at all relevant times was directed to his role as principal director of BCHL and to the survival of BCHL and Dallhold. His Honour was not satisfied that Bond had any understanding of the affairs of BGUK (and presumably TBGIL) [5896], [6098], nor any knowledge or understanding of the details of the Transactions.
     1049 Accordingly, his Honour, at [6098], determined that Bond ‘breached his duties as a UK director’ and in particular, at [5924] ‑ [6101], that Bond, by reason of the ‘Bond‑centric’ nature of his conduct, had exercised powers as a UK director for an improper purpose.
     1050 It was open to his Honour to conclude that Bond was not concerned with determining whether execution of the Transactions by BGUK and TBGL was in the interests of those companies or whether the interests of creditors of those companies had been addressed in the manner advised by counsel as the necessary steps for directors to take. It was also open for his Honour to conclude that Bond’s conduct which included assurances to fellow directors made without foundation, thereby causing those directors to breach their duties to BGUK and TBGIL, was done to serve the purpose of attempting to protect the interests of BCHL and Dallhold [5876] and, therefore, done for an improper purpose [6101].
     1051 At that time BCHL had lost control of BRL; a receiver had been appointed to Bond Brewing Holdings Ltd (‘BBHL’), and bondholders of bonds issued by BBHL were calling up the moneys payable on the bonds after BBHL had defaulted in paying interest due on the bonds [5917].
     1052 With regard to Mitchell his Honour found, at [5877], that notwithstanding his position as a director of TBGL he had not informed himself of the financial position of the Australian Bell group companies, in particular TBGL, before executing the Transactions. Therefore, he was not in a position to provide any assurance to the other UK directors as to the solvency of TBGL or the capacity for future performance of expressions of comfort provided by TBGL. As with Bond, the provision by Mitchell of an unfounded assurance to fellow UK directors caused those directors to breach their duties to BGUK and TBGIL [5877].
     1053 His Honour stated, at [6098], that he was satisfied that Mitchell’s conduct as a UK director could not be distinguished from his conduct as a director of the Australian companies and that he had breached the duty to act in the best interests of BGUK and TBGIL and the duty not to exercise powers of the companies for an improper purpose [6101].
     1054 Mitchell’s conduct in the course of the relevant meeting of directors of BGUK and TBGIL in which he stated he had no knowledge of the creditors of BGUK and TBGIL and that it was a matter for other directors to satisfy themselves whether it was appropriate to enter the Transactions was put forward as an argument for some form of exculpation for Mitchell’s conduct. It did no more than confirm Mitchell’s lack of engagement with important issues and lack of capacity to ascertain what was in the best interests of the companies. Coupled with his conduct in purporting to provide assurances to the other directors as to the ability of TBGL to meet the letters of comfort TBGL had provided to BGUK and TBGIL, [5920] ‑ [5921], being assurances made without a foundation of fact and which caused those directors to breach their duties [5877], there was ample evidence on which his Honour could conclude that Mitchell had breached the fiduciary duties described by his Honour [5877], [5924], [6098], [6101].
     1055 Of the other UK directors of BGUK and TBGIL, Edwards and Birchmore, neither director gave evidence.
     1056 As his Honour stated, those directors had acted properly in seeking expert assistance and advice in respect of the performance of their duties to those companies and had received ‘the clearest legal and accounting advice’ that proper and reliable financial statements had to be obtained from TBGL before the directors could determine whether it was in the best interests of BGUK and TBGIL to execute the Transactions [KPMGUK.16.0068; TBGL.07003.039]. In particular they had been instructed ‘not to accept simple assurances about the financial health of TBGL’ [5919]. The solvency of BGUK relied upon the capacity of TBGL to retain solvency and provide funds to BGUK to enable it to meet its liabilities to creditors, a fact made known to the BGUK directors. See [TBGL.04735.046]. Furthermore, the directors had been advised by counsel that the subordination of inter‑company debts to the interests of the Banks as required by the Transactions should not be accepted as it would prevent access to funds by BGUK to enable it to pay its creditors [5808], [TBGL.07000.027].
     1057 His Honour found that the directors made their decisions at the relevant meeting on 24 January 1990 without the material that was required pursuant to the foregoing advice and purported to rely upon bare assurances as to the solvency of TBGL given by Bond and Mitchell [5920] ‑ [5923].
     1058 Birchmore and Edwards entered the meeting with full understanding that granting the security sought in the Transactions would prejudice BGUK creditors unless they were satisfied as to TBGL’s ability to fund BGUK’s commitments [5857] ‑ [5858], [5866].
     1059 At the time of the meeting Edwards and Birchmore were under pressure from the Banks and TBGL to execute the Transactions [5827], [5870], [5900], [5904]. Whilst that pressure may have made the exercise of independent judgment more difficult the duties as directors remained unaltered and the evidence before his Honour permitted the finding made by his Honour that the duty to act in the best interests of the respective companies, which required the company not to act to prejudice the interests of creditors, had been breached.
     1060 His Honour found that Edwards and Birchmore had clear advice and, therefore, were fully aware that causing the companies to execute the Transactions would involve a breach of their duties to the companies unless they insisted upon, and were given, reliable financial information, not bare assurances, as to TBGL’s solvency.
     1061 With regard to the conduct of Edwards and Whitechurch as directors of BIIL his Honour, at [5927] ‑ [5951], was satisfied that similar conclusions had to follow and that each had breached a fiduciary duty to act in the best interests of BIIL.
     1062 Edwards was a director, and Whitechurch the secretary, of both BGUK and BIIL and they were present at the meetings at which expert advice was provided to the directors of BGUK [5927].
     1063 They were aware that they had to make diligent enquiries and could not rely on a simple assertion of solvency to support the letter of comfort provided by TBGL to assure the directors that BGUK would be able to meet its obligations to BIIL.
     1064 BIIL was a creditor of BGUK in an amount of £237 million. BGUK was a ‘Security Provider’ and the Banks required the creditors of BGUK to subordinate their claims against BGUK to the rights the Banks obtained under the Transactions and Scheme.
     1065 BIIL was indebted to ‘the Swiss sub‑group’ in an amount of £25 million. Creditors of that sub‑group included ‘the Swiss tax authority’. It was not possible for all members of the sub‑group to consent to subordination of the debts owed to them by BIIL. No provision was made under the Transactions executed by BIIL to meet the liabilities of BIIL to the sub‑group [5943].
     1066 At [5950] his Honour summarised his conclusion as follows:
     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.
     1067 The ‘mere assurances’ referred to were those provided by Mitchell and Bond at the meeting held on 24 January 1990.
     1068 Ample material was set out in his Honour’s reasons on which his Honour could reach the conclusion that the directors acted in breach of their fiduciary duties. The appeal from those findings must be dismissed.
     c) Equity Trust
     1069 His Honour, at [5952] ‑ [6030], set out his conclusion on the conduct of Equity Trust in executing the BGNV Subordination Deed on 31 July 1990. His Honour found that it had ‘not been proved to his satisfaction that Equity Trust failed to act bona fide in the best interests of BGNV as a whole in entering into the [BGNV] Subordination Deed’.
     1070 The process by which his Honour reached the foregoing conclusion has been discussed earlier under the section ‘Statutory Claims’ at [561] ‑ 582].
     1071 His Honour’s reasons for determining that Equity Trust had not breached fiduciary duties owed to BGNV, at [6028], were based on the conclusion his Honour had reached that the on‑loans by BGNV to TBGL and BGF were subordinated and, therefore, his Honour thought, it was unlikely that ‘Ruoff [the sole director of Equity Trust] held a state of mind contrary to facts’. If, as found in these reasons, the on‑loans were not subordinated, his Honour’s reasoning in that regard depended upon a false premise.
     1072 In any event, given that, as his Honour accepted, at material times no‑one turned his or her mind to the status of the on‑loans and that BGNV possessed no material that indicated that the loans had been subordinated, the only conclusion available to Ruoff in the circumstances was either that the loans were not subordinated or that the status of the loans in that regard was unknown.
     1073 It should have been found by his Honour that Ruoff’s conduct involved a decision to accept that the rights of BGNV’s creditors would be prejudiced by the execution of the BGNV Subordination Deed.
     1074 That was not conduct consistent with Equity Trust’s (Ruoff’s) duty not to cause BGNV to prejudice the rights of its creditor, LDTC, and his Honour should have found accordingly.
     1075 There was no evidence that Ruoff knew, or had reasonable grounds for believing, that the on‑loans were subordinated. Therefore, Equity Trust’s (Ruoff’s) conduct in executing the BGNV Subordination Deed on 31 July 1990 to subordinate BGNV’s right to recover the loans it had made to TBGL and BGF could not be regarded as rational conduct in the face of the duty of Equity Trust not to have BGNV prejudice interests of creditors of BGNV. By causing BGNV to subordinate its right to recover the loans Equity Trust (Ruoff) made BGNV unable to meet its obligations to creditors and patently insolvent. On 24 January 1990 Ruoff had been informed by TBGL that upon execution of the Transactions TBGL and BGF would not be able to make payments to BGNV of interest due on the loans. Execution of the BGNV Subordination Deed on 31 July 1990 could only have confirmed for Ruoff the prospect that BGNV was facing a very serious situation and default in the payment of interest to Bondholders, as indeed occurred when the next payment of interest fell due in December 1990.
     Duty not to have conflict of interest
     1076 The conclusion that his Honour did not err in determining that the Australian and UK directors breached the foregoing fiduciary duties and that consequential orders made by his Honour were supported by those findings means that it is unnecessary to deal with the respondents’ notice of contention that the orders ought to be upheld on the ground that Bond, Mitchell and Oates breached a fiduciary duty not to allow personal interests to conflict with their duties as directors.
     1077 However, the following short answers are provided in respect of those contentions.
     1078 In respect of the alleged non‑pecuniary interest held by Bond, Mitchell and Oates, I agree with his Honour that the facts relied upon for this ground were unable to define an interest of the directors that was of the required character. Namely, one that raised a real prospect of the directors advancing the interests of BCHL at the expense of the interests of the Bell group companies and that the argument went no further than that supporting the claims of breach of the duties not to act for an improper purpose and not to fail to act in the best interests of a company.
     1079 Insofar as it was argued that a finding that those duties had been breached mandated a finding that the directors also breached a duty to avoid a conflict of interest it does not follow from a finding of breach of either of those duties that breach of the duty to avoid a conflict of interest would be established. Additional facts must be demonstrated that show the nature of the non‑pecuniary interest of the fiduciary that raises a clear and real possibility that the fiduciary may be dissuaded from duly performing a fiduciary duty.
     1080 His Honour, at [6127], found expressly that he was not satisfied that there was any evidence on which to ground the conclusion pleaded, namely, that Mitchell or Oates had a motivation to maintain their continuance in office as directors of, or to protect their indirect financial interests in BCHL. That finding was not challenged.
     1081 This element of the notice of contention therefore must fail.
     1082 With regard to Bond’s personal financial interest being allowed to conflict with his obligations as a director, it would have been possible for his Honour to conclude, irrespective of any conclusion he reached in respect to the breach of other duties, that Bond failed to prevent that interest conflicting with his duties as a UK director of BGUK.
     1083 Although the nature, if not the detail, of Bond’s personal interests may have been understood by other UK directors of BGUK it is apparent, as noted by his Honour at [5905], that they relied, albeit inappropriately, on Bond to inform them on matters germane to the decisions directors had to make conformably with their duties owed to BGUK.
     1084 It was open to his Honour to conclude that the assurance of ultimate solvency of the Bell group that Bond gave to the other UK directors was an unsupported statement motivated by Bond’s desire to protect his personal financial interests and made without regard to his duty not to cause those directors to have BGUK enter the Transactions without full knowledge of the financial position of TBGL.
     1085 Given the other findings made by his Honour in relation to Bond’s conduct, his Honour should have found that Bond breached his duty not to allow his personal financial interests to conflict with his duties as a UK director by participating in the meeting of directors of BGUK in a manner that caused the other directors to breach their duties to the company.
     Summary
     1086 The plain circumstance, as at 26 January 1990, was that the Bell group was unable to meet debts as they fell due, a circumstance exacerbated by execution of the Transactions.
     1087 Any reasonable and prudent director charged with a duty not to act other than in the best interests of each company and not to exercise powers improperly would have appreciated that as at 26 January 1990 the interests of creditors of the companies in the assets of the group could not be served by execution of the Transactions. If the interests of those creditors had been duly considered commencement of an appropriate form of administration was the obvious and only course to follow.
     1088 The sole purpose of the Transactions was to provide the Banks with security over all assets of an insolvent group under which the Banks could control realisation of assets and apply proceeds thereof to the discharge of debts due to the Banks in priority to debts due to all other creditors.
     1089 The current state of the law in Australia, whether under the general law or statute, is taken to confine the duty owed to a security provider by a secured creditor acting to effect a sale of secured property, to a duty to exercise the power of sale in good faith. As expressed it is a duty not to sacrifice the interests of the security provider by acting in a wilful or reckless way in the sale of the property. It is not a duty to take reasonable precautions to ensure that the property is sold at the best possible price nor is it a duty to act so as to advance the interests of the security provider. See Upton v Tasmanian Perpetual Trustees Ltd [2007] FCAFC 57; (2007) 158 FCR 118 [13] ‑ [28] (Kiefel, Besanko JJ).
     1090 The absence of a general duty of care upon a secured creditor exercising a power of sale forestalls any claim that a secured creditor has such a duty of care to unsecured creditors. At best, only the interests of unsecured creditors of an insolvent security provider could be said to have equivalence to those of the security provider sufficient to make the unsecured creditors the object of a like duty owed to the security provider by the secured creditor, namely, not to sacrifice the interests of such creditors by wilful or reckless conduct.
     1091 The sale of assets by the Banks pursuant to the Transactions would have been free of any supervening duty to act in the interests of the unsecured creditors and no duty to account to those creditors arose out of any shortfall in the amounts received from realised assets against previously anticipated values. There would have been no obligation on the Banks to inform the creditors of the manner of sale of assets or to receive any submissions thereon from creditors.
     1092 In the circumstance of insolvency of the group it would have been disingenuous for a director to assert that he believed that the interests of creditors other than Banks would not be prejudiced by executing the Transactions and by refraining from commencing formal administration where those Transactions withdrew the group’s ability to pay debts; transferred control of the assets of the group to the Banks; and immediately reduced the worth of the debts due to other creditors by denying those creditors access to the assets of the group and subordinating payment of those debts to the payment in full of the claims of the Banks.
     1093 Dealings by the directors in assets of the companies facing insolvency, which had the effect of prejudicing the interests of creditors other than the Banks, could not be justified in equity and would constitute misconduct from which a finding of breach of a fiduciary duty would follow. A claim of honest belief that entry into the Transactions was, or could be, in the interests of the corporation and its creditors would be to no avail in equity.
     1094 A director of an insolvent company could not claim an honest belief that it was permissible to engage in misconduct.
     1095 Although directed to personal insolvency the following remarks of Cave J in Re Freeman; Ex parte Freeman (1890) 7 Morr 38, 46 may be taken to apply with equal force to the duties of a director of an insolvent corporation:
     With regard to the third allegation of misconduct, I entirely agree with the suggestion made at the Bar, that that was conduct which is not justifiable. When a man is insolvent he has no business to take upon himself to decide whether his business is or is not to be sold, or whether his business is or is not to be carried on. When he is insolvent he really is carrying on his business at the risk and expense of his creditors … A man, therefore, is not justified in going on or in selling, or, in fact, taking any step at a time when he is insolvent without the concurrence of the creditors who have to bear the burden, if that step turns out to be a disastrous one. In that sense the debtor was guilty of misconduct.
     Barnes v Addy
     1096 His Honour found that it had been established that the conduct of the Banks came within the colloquial description, the ‘first limb’ of Barnes v Addy (1874) LR 9 Ch App 244, in that the Banks were knowing recipients of the dispositions of property effected by the Transactions and appropriate relief in equity was ordered accordingly, save for the BGNV Subordination Deed the execution of which, as discussed above at [1069] ‑ [1075], his Honour had found, with respect in error, not to involve a breach of fiduciary duty by Equity Trust as the director of BGNV. At [8753] his Honour acknowledged, in effect, that had there been a breach of fiduciary duty by Equity Trust in executing the BGNV Subordination Deed the orders made based on the claim under the ‘first limb’ would have included an order in respect of that Deed.
     1097 By a number of grounds of appeal the Banks submitted that his Honour erred in finding that the Banks were liable under the ‘first limb’.
     1098 Notices of contention of the respondents claimed that his Honour erred in failing to apply the orders made by his Honour on the claim under the ‘first limb’ to the BGNV Subordination Deed and that the orders ought to have been made in any event on the claim of the respondents rejected by his Honour that relied on the ‘second limb’ of Barnes v Addy, namely, that the Banks knowingly assisted the directors in dishonest breaches of fiduciary duty.
     1099 I have had the benefit of reading the reasons of Drummond AJA on the various Barnes v Addy issues that arise under the grounds of appeal of the Banks and notices of contention of the respondents and respectfully adopt his Honour’s conclusions and his reasons therefor.
     1100 I agree with Drummond AJA for the reasons he provides that knowledge of the Banks in the claims of ‘knowing receipt’ and ‘knowing assistance’, was duly established and that the High Court in Krakowski v Eurolynx Properties Ltd [1995] HCA 68; (1995) 183 CLR 563 has defined how aggregation of the knowledge of disparate personnel is permitted in determining the extent of the knowledge of a corporation.
     1101 I add the following comments.
     1102 The respondents contended that, although his Honour had stated correct principles for determining whether the participation by a party in a transaction to assist errant fiduciaries had been dishonest, his Honour had erred in holding that proof of such dishonesty required the ‘conscious wrongdoing’ of that party to be established.
     1103 At [8600], [8603] and [8604], his Honour the trial judge found as follows:
     I believe the hard facts possessed by the banks are sufficient to establish that, as at 26 January 1990, the banks held a strong suspicion that the Bell group companies were insolvent or nearly so. They knew that the companies were of doubtful solvency. This level of suspicion and knowledge is contributed to and compounded by what I consider to have been a reckless failure to make enquiries which a reasonable and honest banker would have made. The reference of ‘honest’ is necessary because of the legal test. It does not indicate a finding of conscious wrongdoing by any bank officer.
     …
     As a general statement, as the refinancing negotiations progressed the banks seemed to have become less concerned to receive information. It got to the point where they ceased chasing information that was readily available and which may have clarified many of the concerns held the banks. In my view, the reason for this was that the banks had began to realise that the Bell group was in serious financial trouble and was of doubtful solvency. The banks had resolved to proceed with the refinancing in any event. They adopted the existing borrowers structure on the basis that it avoided double jeopardy and would leave them no worse off in the event that the Transactions, or some of them, were set aside. This is, I think, at the heart of the matter. The accumulation of detailed financial information became less important because it would not have made much difference: the banks had decided to continue with the refinancing and a critical factor in that decision was that they would be no worse off.
     It can be inferred from the sudden change in behaviour, which I believe has not been adequately explained, that the bank officers ceased making the enquiries that one would expect a reasonable person in their position to have made. They did so because they had resolved to proceed with the Transactions regardless of the exact financial status of the Bell group companies.
     1104 Earlier, at [6733] – [6749], his Honour had found that at some time after 15 December 1989 the Banks had removed a request from the ‘refinancing’ terms sheets that the directors provide certificates of solvency in respect of Bell group companies and in the absence of any satisfactory explanation therefor, his Honour had concluded that the Banks had done so because of doubts about the solvency of the companies concerned.
     1105 His Honour’s finding that the Banks held a strong suspicion that the Bell group companies were insolvent contained an implied dependent finding that the Banks knew that if their suspicions were correct the proposed grant of securities to the Banks by the Transactions would prejudice the interests of other creditors. Therefore, the strong suspicion held by the Banks must have extended to a suspicion that the execution of the Transactions by the directors would be a dishonest breach of their fiduciary duties in that it would cause the companies to prejudice the interests of other creditors.
     1106 His Honour’s reasons, at [5756] – [5761], set out the material that supported his Honour’s conclusion that the Banks had clear knowledge of the obligation of the directors to satisfy themselves that it was in the best interests of each company to execute the Transactions and that a significant factor in that assessment had to be consideration of the interests of creditors.
     1107 As noted earlier, his Honour found, at [7110], [7112] and [9723], that the Banks were ‘frightened’ by Aspinall’s claim that ‘the bonds might not be effectively subordinated’. Aspinall made that claim for the purpose of persuading SCBAL to withdraw the demand for the repayment of its advance, and to forestall the Banks from making further demands for repayment. That purpose was fulfilled. Upon the Banks becoming aware that BGNV may compete pari passu with the Banks in a liquidation of TBGL or BGF and present claims as a creditor that would exceed substantially the claims of the Banks, the Banks determined that the Transactions should be executed as soon as possible, an anticipated consequence of which would be the stultification of any claim that BGNV may have as a creditor of TBGL or BGF.
     1108 Indeed it may be said that the fraudulent purpose of the directors would have been patent to the Banks. The proposition put to them by Aspinall was, in effect, that it was in the interests of the Banks to proceed with the Transactions to obtain the advantage over other creditors that the directors were willing to grant in a circumstance of insolvency in return for the Banks withdrawing or withholding further demands for payment.
     1109 His Honour found that the Banks held a strong suspicion that the Bell group was insolvent and committed a ‘reckless failure to make enquiries which a reasonable and honest banker would have made’ in the circumstances. Those findings meant that his Honour was able to conclude that the claim of ‘knowing receipt’ under the ‘first limb’ had been made out. It also followed that, properly instructed, his Honour should have concluded that the claim of ‘knowing assistance’ under the ‘second limb’ also was established. That is to say that the Banks knowingly assisted the directors in a dishonest breach of their fiduciary duties and the fraudulent disposition of company property, and that the Banks thereupon became constructive trustees in respect of the dealings with that property. See Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2006] 1 WLR 1476 [10], [18] (Lord Hoffmann).
     1110 It was submitted by the Banks that a difference in the law on this issue had arisen between Australian and UK authorities and that his Honour had determined correctly according to Australian authority that the Banks had not provided knowing assistance to the directors in their breach of fiduciary duty.
     1111 The potential divergence of authority between the two jurisdictions was that pointed out in Farah Constructions at [161] ‑ [165]. The High Court noted that, on one reading of Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, the Privy Council may have reformulated or enlarged the ‘second limb’ by including within it, or in place of it, an independent source of liability of a third party, namely, the liability of a third party who dishonestly induced or procured a breach of trust although the trustee had not acted with an improper purpose and had not been assisted in a dishonest or fraudulent design. The High Court stated that if that was the intended result of Royal Brunei Airlines it did not represent the current state of the law in Australia in respect of the ‘second limb’.
     1112 That reservation by the High Court has no application to the facts found by his Honour in this matter on which the respondents contend that dishonest breach of fiduciary duty was established.
     1113 The High Court stated in Farah Constructions, at [178], that what constitutes ‘knowledge’ for the purposes of the second limb of Barnes v Addy was set out in the conclusions of Consul Development Pty Ltd v DPC Estates Pty Ltd.
     1114 The relevant passages in Consul Development were identified in Farah Constructions, at [176], as the reasons of Gibbs J at (398), and Stephen J at (412).
     1115 The relevant part of the reasons of Gibbs J at (398), read as follows:
     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.
     1116 Stephen J, at (408), restated the words of Lord Selborne in Barnes v Addy, namely, that a necessary ingredient of the liability of a stranger as a constructive trustee under the second limb was fraud and dishonesty constituted by the ‘knowledge or suspicion on his part of an improper or dishonest design in the transaction’ (Barnes v Addy (252)) (emphasis added).
     1117 At (412), having stated that mere constructive notice by reason of negligent failure to enquire (save for failing to investigate title in dealings in real estate) was not sufficient to establish the required knowledge of dishonesty, Stephen J then said as follows:
     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.
     1118 That approach was consistent with longstanding authority on knowledge as understood in equity. As Lord Cranworth LC stated in Owen & Gutch v Homan (1853) 4 HLC 997, 1034 ‑ 1035:
     [I]t may safely be stated that if the dealings are such as fairly to lead a reasonable man to believe that fraud must have been used in order to obtain such concurrence, he is bound to make inquiry, and cannot shelter himself under the plea that he was not called on to ask, and did not ask, any questions on the subject. In some cases wilful ignorance is not to be distinguished in its equitable consequences from knowledge. If a person abstains from inquiry because he sees that the result of inquiry will probably be to show that a transaction in which he is engaged is tainted with fraud, his want of knowledge of the fraud will afford no excuse.
     1119 Also consistent with the passages in the reasons of Gibbs J, at (398), and of Stephen J, at (412), set out above is the following treatment of knowledge for the purposes of the ‘second limb’ in several UK authorities that dealt with circumstances analogous to the facts found by his Honour.
     1120 In Barlow Clowes, at [10], [18], in which the pertinent fact found was that the party providing assistance to an errant fiduciary held the suspicion that the money used by the fiduciary had been misappropriated, the Board reaffirmed the reasons provided by the Privy Council in Royal Brunei Airlines v Tan. Namely, that the fraud or dishonesty described by Lord Selborne in Barnes v Addy, could be said to be made out where the ‘suspicion of an improper or dishonest design in the transaction’ was combined with a conscious decision not to make enquiries which might result in knowledge. See Manifest Shipping Co Ltd v Uni‑Polaris Insurance Co Ltd [2003] 1 AC 469. The Privy Council also reiterated that the standard to determine whether that conduct was dishonest was objective and was not set by the standards of the party concerned.
     1121 That met the background principles for analysis of the ‘second limb’ set out by the High Court in Farah Constructions, at [173]:
     As a matter of ordinary understanding, and as reflected in the criminal law in Australia, (Macleod v R (2003) 214 CLR 230 at 242 [36]‑[37]) 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 (Hill v Simpson (1801) 7 Ves Jun 153 at 170 [32 ER 63 at 69]. See further May v Chapman and Gurney (1847) 16 M & W 355 at 361 [153 ER 1225 at 1228]; Jones v Gordon (1877) 2 App Cas 616 at 625 628–629 and 635; English and Scottish Mercantile Investment Co v Brunton [1892] 2 QB 700 at 707–708).
     1122 His Honour’s confinement of ‘knowing assistance’ to circumstances where the party actually knew that what was being done was improper did not reflect the law set out in Farah Constructions. Farah Constructions, at [175], accepted that four of five divisions of knowledge suggested in Baden Delvaux v Société Générale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161 were of assistance in determining whether requisite knowledge had been established for the purposes of a Barnes v Addy claim. However, a prudent reminder was provided by the Full Court of the Federal Court in Grimaldi v Chameleon Mining NL (No 2) [259] ‑ [260] (Finn, Stone, Perram JJ) that adherence to rigid or exclusive categories of knowledge will be inappropriate in determining whether a foundation for liability has been established under either ‘limb’ of Barnes v Addy:
     Put compendiously liability both for knowing receipt and knowing assistance turns on what the third party knew, or had reason to know, of the circumstances constituting the breach of ‘trust’ (recipient liability) or the ‘dishonest and fraudulent design’ (assistance liability). It is here, as justly observed in Jacobs’ (at [1335]), that the whole topic has ‘become bedevilled by an obsessive refinement of distinctions between degrees of knowledge and notice’. What the authors have described as the ‘zenith of complexity’ was attained by Peter Gibson J in Baden v Société Générale pour Favouriser le Développment du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 at [250] where five categories of knowledge and notice were postulated …
     The comment that should be made at the outset about this five‑fold classification is that it tends to invite the use of formulae to solve problems. Unsurprisingly judges have cautioned against treating each category as an exclusive and rigid one.
     1123 It follows from the foregoing principles, and the findings of fact made by his Honour set out above, that his Honour erred in failing to conclude that the Banks provided knowing assistance to the directors in their dishonest breach of fiduciary duty and that the Banks stood as constructive trustees at the outset of the Transactions.
     1124 The statement by the High Court in Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 [122] (Gleeson CJ, Gummow, Kirby, Callinan, Heydon JJ) that curial intervention ‘against persons who knowingly assist … 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’ confirms that it is appropriate for a court to make restorative or compensatory orders in respect of property of a corporation affected by a breach of fiduciary duty committed by a director of the corporation.
     1125 Furthermore, as Gibbs J explained in Consul Development (396 ‑ 397) (a statement cited with approval by the High Court in Zhu in a footnote to the passage set out above), corrective orders against persons who knowingly assist an errant fiduciary is an extension of the principle that persons who knowingly receive benefits from such a breach of fiduciary duty must account for that which is improperly obtained. See Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555.
     1126 Appropriate intervention by a court in such a case is likely to entail orders in equity that recognise or impose a constructive trust with associated remedial orders.
     1127 The reasons of Drummond AJA helpfully describe the breadth of the concept of property of a corporation that enables curial orders made against third parties to fulfil the object of equity that errant fiduciaries be held to their duty.
     1128 The Banks’ grounds of appeal must be dismissed, the respondents’ notices of contention upheld and appropriate orders made in respect of the BGNV Subordination Deed.
     OTHER GROUNDS OF APPEAL AND CROSS-APPEALS
     Loss of right of rescission by election to affirm
     1129 The Banks in their appeal submit that his Honour erred in failing to find that the respondents affirmed the Transactions and, therefore, did not have a right to rescind those contractual arrangements. The Banks’ contention was encapsulated in the submission that ‘significant delay’ in purporting to exercise a right to rescind constituted an election to affirm the Transactions.
     1130 The ground of appeal only has relevance if the respondents’ claims that the Transactions were made void by statute fail. As discussed below in respect of the grounds of appeal and cross‑appeal relating to the orders for relief made by his Honour, it should be assumed that if the statutory claims had been upheld his Honour would have made similar consequential and remedial orders as those made on the equitable claims.
     1131 The claims of breach of fiduciary duty and equitable fraud grounded a right to elect to rescind the Transactions, but the claims based on s 120 and s 121 of the Bankruptcy Act involved application for declarations that the Transactions were void under the statute as dispositions of property made with intent to defeat creditors or as settlements of property made within a defined period of proximity to an administration in insolvency.
     1132 The statutory claims involved the public interest and the performance of duties by the liquidators as court‑appointed officers. The obligation on the liquidators upon appointment was to ascertain whether there was evidence that the Transactions infringed the statutory provisions and whether proceedings seeking declarations that the Transactions were invalid by operation of statute were appropriate having regard to the cost, the interests of creditors, the public interest, and the residual interests of the corporators. The liquidators were not involved in exercising an election to rescind the Transactions and were not required to commence a proceeding to obtain orders to confirm the effect of a purported exercise of a right of rescission.
     1133 The following comments may be made on the argument of the Banks that in respect of claims of breach of fiduciary duty and equitable fraud the respondents affirmed the Transactions and lost the right to rescind.
     1134 Whether there has been an election to affirm is a question of fact and whether equity will accept a purported rescission is a matter of discretion if there are circumstances that would make rescission unjust or unreasonable in the circumstances. See Fysh v Page [1956] HCA 13; (1956) 96 CLR 233, 243 (Dixon CJ, Webb, Kitto JJ).
     1135 His Honour, at [9315] ‑ [9316], addressed the relevant evidence and, at [9654], was satisfied that no bar to relief by orders for rescission had been established by the appellants.
     1136 It was patent that his Honour was satisfied that soon after their appointment in 1991 and 1993, the respective liquidators directed their efforts to discharge of their duties by making necessary enquiries and investigations, conducting examinations to elicit information, obtaining advice, and endeavouring to secure finance for the conduct of proceedings. Litigation funding was obtained in early 1995 and proceedings were commenced in December 1995. His Honour noted that $6 million in legal fees had been incurred by July 1996.
     1137 There was ample evidence on which his Honour could be satisfied, as he was, that the liquidators had given appropriate attention to the discharge of their duties after appointment and that it had not been shown that the liquidators had elected to affirm the Transactions and not rescind them pursuant to rights to rescind obtained by the respondents for breaches of fiduciary duty or equitable fraud.
     1138 This ground of appeal, therefore, is not made out.
     Rescission not available because restitutio in integrum not possible
     Funds released by banks to bondholders not recoverable
     1139 A ground of the appeal by the Banks was that his Honour erred in failing to find that rescission should not have been ordered because of the inability of the court to restore the Banks to the position they would have been in if the Transactions had not been executed.
     1140 The argument presented by the Banks in support of the ground was that, at the request of TBGL, the Banks permitted moneys that the Banks had obtained under the Transactions and that would otherwise have been applied to reduction of Bell group indebtedness to the Banks, to be released to TBGL for the payment of interest by BGF on moneys owed to BGNV and thereafter applied by BGNV to the payment of interest due to Bondholders. The Banks submitted that those funds were irrecoverable and, therefore, that the Banks could not be restored to the position they were in before the Transactions were executed. It was argued that orders of rescission should have been refused because it was not possible for the court to do what was ‘practically just’ between the parties. See Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216, 223 ‑ 224 (Dixon CJ, Webb, Kitto, Taylor JJ).
     1141 The Banks contended that the moneys released in May and July 1990 to meet the interest payments due to Bondholders would otherwise have been available for distribution to the Banks as creditors in the liquidations of TBGL and BGF that would have commenced if the Transactions had not been executed.
     1142 His Honour appeared to conclude that the foregoing release of funds by the Banks was a decision that had been made by the Banks after the Banks had given exclusive regard to their own best interests. Furthermore, his Honour, at [9422], considered it possible that liquidations would not have been commenced immediately if the Transactions had not been executed, and, therefore, that interest payments to Bondholders could still have been made when they fell due in May and July 1990.
     1143 With regard to the latter speculation the state of insolvency of the Bell group as at January 1990, as found by his Honour, made that possibility unlikely given that the purpose of the Transactions was to hold off formal administrations in insolvency.
     1144 The funds released by the Banks and the circumstances in which, and purpose for which, the funds were released did not provide cause for his Honour to refuse to exercise a discretion to make an order for rescission. Equity recognises that in many cases precise restitution will be impossible and that a practically just result will be effected by an order for rescission that is modified by appropriately moulded orders.
     1145 No error has been shown in his Honour’s reasoning and this ground of appeal cannot succeed.
     Securities released by banks not recoverable
     1146 The Banks raised the additional ground of appeal that his Honour erred in failing to refuse an order for rescission in respect of Transactions that concerned the publishing assets. It was contended that the validity of the securities obtained by the Banks over the publishing assets had not been challenged by the providers of the securities. Those parties had sold the publishing assets and, ultimately, the proceeds of sale were applied to reduction of the indebtedness of BGF to the Banks. The securities held by the Banks had been discharged as part of the sale of the publishing assets.
     1147 Apart from equity not insisting on ‘in specie’ restitution as a condition of rescission, the argument supporting this ground of appeal appears to rest on a false premise. Prior to the execution of the Transactions the Banks had no security over the publishing assets. They did have a supervisory interest in the assets to the extent of the pledge in the Negative Pledge Guarantee that the publishing assets were not to be subject to security without the consent of the Banks. The loss of that advantage by the Banks had little consequence for the practical restoration of the status quo.
     1148 Return to the status quo upon rescission of the Transactions involved delivery of the proceeds of sale to the liquidator and exercise of the right of the Banks to participate as creditors in distributions by the liquidator from funds obtained from the realisation of assets.
     1149 At [9570] ‑ [9573], [9654] ‑ [9660], his Honour set out the pertinent facts and his conclusion as to why orders for relief could be moulded appropriately to provide a practically just result between the parties.
     1150 His Honour determined that the Banks had not shown cause for his Honour to refrain from making orders for rescission in respect of the Transactions.
     1151 It has not been shown on this ground of appeal that his Honour erred in either the application of principle or the proper exercise of his discretion by misunderstanding or failing to consider relevant facts.
     1152 The ground of appeal, therefore, fails.
     Ratification
     1153 As an answer to the respondents’ case of breach of duty by the directors the Banks pleaded that the shareholders of each Bell company (other than TBGL) had consented to the Transactions and thereby ratified any breach of duty by directors arising out of the execution of the Transactions.
     1154 His Honour, at [9386] ‑ [9397], considered that defence and concluded that it had not been made out.
     1155 The Banks by a ground of appeal contend that his Honour erred in that finding and that the defence should have been upheld.
     1156 The Banks accept that the shareholders of TBGL, BGF, Bell Bros and Maranoa Transport lacked capacity to ratify a breach of duty by the directors of those companies being companies in insolvency that had external creditors the interests of which took precedence over the interests of shareholders.
     1157 His Honour, at [2095] ‑ [2096], [7232], [SUBP.009.001, par 16], found that the following companies also had liabilities to external creditors, present and prospective: Bell Bros Holdings; Albany Broadcasters; Western Interstate; WAN; Bell Press; Western Mail; Albany Advertiser; WA Broadcasters; South West Printing and Hocking. In addition, the Annual Accounts for the year ending 30 June 1989 for Wanstead [TBGL.00209.080] and WAON Investments Pty Ltd [TBGL.00212.051] also disclosed present and prospective external creditors.
     1158 All of the foregoing companies were Bell Participants. Bell Bros Holdings, Albany Broadcasters, WAN, Bell Press, Western Mail, Albany Advertiser, WA Broadcasters, South West Printing and Hocking were not parties to this proceeding.
     1159 The creditors included trade suppliers, employees and shareholders. The principal creditor was the Commissioner under tax assessments issued or pending. As discussed earlier the amount due to the Commissioner on assessments issued was approximately $34 million. The 1989 Annual Accounts, issued 13 November 1989, in respect of the foregoing companies contained provisions for anticipated additional income tax assessments that amounted to approximately $25.3 million.
     1160 His Honour found, at [7232], that from their perusal of those annual accounts the Banks would have been aware that the foregoing companies had external creditors.
     1161 The issue of ratification of the conduct of the directors cannot arise in respect of the circumstances of the above companies there being no suggestion that external creditors consented to the grant of securities. See Kinsela v Russell Kinsela Pty Ltd (730 ‑ 733) (Street CJ).
     1162 With regard to the remainder of the respondent Bell Participants, the Banks argued that his Honour had erred by applying a ‘group approach’ to the issue; by finding that it was necessary for the directors to make a full and frank disclosure to shareholders of the breach of duty; and by treating the grant of securities as a misappropriation of property that was incapable of ratification.
     1163 The Transactions included execution of formal consents by the shareholder corporations of each Bell Participant to execution of the Transactions by those companies.
     1164 The directors of the shareholders who executed the consents were the directors of the Bell Participants who executed the Transactions.
     1165 The Banks contended that it followed necessarily that the directors as directors of the shareholders had full knowledge of the impending breach of duty as directors of the Bell Participants and, therefore, no argument of absence of informed consent could arise.
     1166 His Honour, at [9395], determined that the actions of the directors as directors of the shareholders could not have a higher quality than the pending acts of the directors as directors of the Bell Participants and that the breach of duty flowed through to a like breach as directors of the shareholders. The Banks relied upon this reasoning by his Honour for their argument that he had erred in applying a ‘group approach’ instead of considering the circumstances of each shareholder.
     1167 It was not submitted that there was evidence of other than a common circumstance in the relationship between the directors of the shareholders and the directors of the Bell Participants and the argument fails.
     1168 With regard to his Honour’s reasoning, his Honour stated correctly that it was a matter of logic. The case put by the Banks was that the directors had an honest belief that there was no breach of duty involved in their execution of the Transactions. Therefore, as his Honour put it, no argument could be put that as directors of the shareholders the directors of the Bell Participants had made full disclosure of an intended breach of fiduciary duty and had sought absolution in respect of it. See Bamford v Bamford [1970] Ch 212, 238 (Harman LJ).
     1169 Indeed the Banks seemed to submit that the directors of the Bell Participants had not been involved in such an exercise. The argument was put that it was a condition precedent of the ‘refinancing’ that the shareholders of the Bell Participants provide formal consent to execution of the Transactions by each Bell Participant. That seemed to be a proposition that as directors of the shareholders the directors executing the documents of consent were only required to attend to the requirements of the Banks as ‘refinanciers’ and that, in practical terms, an obligation of disclosure as directors of the Bell Participants did not arise.
     1170 The argument confirms the conclusion that the execution of the formal documents of consent did not carry the intent of shareholders to authorise or ratify breaches of fiduciary duties owed by the directors to the Bell Participants.
     1171 If directors propose to act to make dispositions of property of an insolvent company and cause the company to act contrary to statutory provisions and thereby commit breaches of fiduciary duties they owe to the company, equity would require more cogent and compelling circumstances of informed authorisation before it would consider a claim that significant errant conduct of a director had been ratified by shareholders of the company.
     Limitation
     1172 The grounds of appeal by the Banks included a claim that his Honour erred in failing to uphold that part of the Banks’ case which asserted that the ‘relevant new equitable claims’ were, or should be, barred by application of limitation periods prescribed in s 47 of the Limitation Act 1935 (WA) (the Limitation Act) or by application of provisions of limitation governing analogous claims at common law.
     1173 The Limitation Act was repealed by the Limitation Legislation Amendment and Repeal Act 2005 (WA) (the Repeal Act). The Repeal Act (s 4(2)) stated that, despite repeal, the Limitation Act continued to apply to causes of action that accrued before 15 November 2005. That date was the date of commencement of the Limitation Act 2005 (WA) which introduced general limitation provisions in respect of ‘equitable actions’.
     1174 Section 47 of the Limitation Act, in relevant respects, provided as follows:
571. (1) In any action or other proceeding against a trustee or any person claiming through him, or in reference to any trust, except where the claim is founded upon any fraud or fraudulent breach of trust to which the trustee was a party or privy, or is to recover trust property or the proceeds thereof still retained by the trustee or previously received by the trustee and converted to his own use, the following provisions shall apply:-
     (a) All rights and privileges conferred by this Act or any statute of limitations shall be enjoyed in the like manner and to the like extent as would have been the case if the trustee or person claiming through him had not been a trustee or person claiming through him.
     (b) If the action or other proceeding is brought to recover money or other property and is one to which no existing statute of limitations applies, the trustee or person claiming through him shall be entitled to the benefit and be at liberty to plead the lapse of time as a bar to such action or other proceeding in the like manner and to the like extent as if the claim had been against him (otherwise than as a trustee or person claiming through a trustee) in an action of debt for money had and received; but so nevertheless that the statute or bar by lapse of time shall … not begin to run against any beneficiary until the interest of such beneficiary is an interest in possession.
     …
     (3) For the purposes of this section the expression ‘trustee’ includes an executor or administrator, who for such purposes is included in the term trustee, and includes a trustee whose trust arises by construction or implication of law as well as an express trustee, and the provisions of this section relating to a trustee shall apply as well to several joint trustees as to a sole trustee.
     1175 Section 47, ostensibly, implemented the equivalent provisions first enacted in s 8 of the Trustee Act 1888 (UK). Those provisions were a statutory incursion upon the rule in equity that a claim against a trustee was not barred by lapse of time. But, as noted in Clay v Clay [1999] WASCA 8; (1999) 20 WAR 427 the terms of s 25(2) of the Supreme Court Act 1935 (WA), which mirrored the terms of s 25(3) of the Judicature Act 1873 (UK) and excluded the operation of any statute of limitations upon a claim by a cestui que trust against a trustee, confined the scope of operation of s 47 in the introduction of statutory limitation periods on actions against trustees.
     1176 The definition of trustee used in s 47 and in its counterparts in other jurisdictions led to unforeseen difficulties in construction. The application of s 47 to ‘a trustee whose trust arises by construction or implication of law’ brought forth the problem of the development of a dual meaning of the term ‘constructive trustee’. The primary meaning of ‘constructive trustee’ is a person, such as a trustee de son tort, who holds, or deals with, the property of another in circumstances that attach the good conscience of that person and which indicate the existence of a relationship of trust and justify the intervention of equity for breach of duty. Such a circumstance may also arise out of a breach of a fiduciary duty: Dal Pont GE and Chalmers DRC, Equity and Trusts in Australia (4th ed) [38.05] ‑ [38.10]. The secondary meaning of ‘constructive trustee’ is a person whom equity has bound by an order of ‘remedial’ constructive trust requiring that person account for, or hold, property as directed by the court, the intervention by equity being predicated upon conduct by the constructive trustee that equity regards as fraudulent or contrary to good conscience for which remedy in the nature of a constructive trust is required: Dal Pont and Chalmers [38.15] ‑ [38.20]. Both forms of constructive trust ground further orders in equity and that common substratum caused the difficulty in construction of the statutory limitations imposed upon claims in equity against trustees.
     1177 Comment by law reform agencies and academics on the statutory provisions contended that there had been no intention to distinguish between the two forms of constructive trust. However, judicial construction of the statutory provisions took a different path.
     1178 The construction applied by the courts to s 8 of the Trustee Act (UK), and to analogues thereof, determined that whilst a constructive trustee under a ‘remedial’ constructive trust was included within s 47(3) the provisions of s 47(1) that denied to a trustee the benefit of time limitation on certain claims against the trustee did not include a constructive trustee in its secondary meaning. Therefore, the time limitation on claims in equity against trustees applied to a constructive trustee under a ‘remedial’ constructive trust without any exceptions. The reason for that was said to be the intention of the legislative provisions to treat the conduct of such a constructive trustee as equivalent to the conduct of a tortfeasor and to make equivalent limitation provisions applicable to claims against such persons where those claims were pursued in equity in a jurisdiction concurrent with the common law jurisdiction in claims of fraud. See Soar v Ashwell [1893] 2 QB 390, 393 (Lord Esher MR); Hovenden v Lord Annesley [1806] 2 Sch & Lef 607, 633 ‑ 634; Taylor v Davies [1920] AC 636; Clarkson v Davies [1923] AC 100; Selangor United Rubber Estates Ltd v Cradock (No 3) (1582) (Ungoed‑Thomas J); Paragon Finance plc v DB Thakerar & Co (a firm) [1999] 1 All ER 400, 407 ‑ 413 (Millett LJ); Piwinski v Corporate Trustees of the Diocese of Armidale [1977] 1 NSWLR 266; Queensland Mines Ltd v Hudson [1976] CLC 40‑266.
     1179 Given that, as noted below, fraud in equity is not the counterpart of fraud at common law it may be thought that the imposition of a ‘remedial’ constructive trust may not be limited to facts that provide an analogous right of action in fraud at common law.
     1180 The distinction between fraud in equity and fraud at common law was stated by Viscount Haldane LC in Nocton v Lord Ashburton, at (953 ‑ 954), as follows:
     It must now be taken to be settled that nothing short of proof of a fraudulent intention in the strict sense will suffice for an action of deceit. This is so whether a Court of Law or a Court of Equity, in the exercise of concurrent jurisdiction, is dealing with the claim, and in this strict sense it was quite natural that Lord Bramwell and Lord Herschell should say that there was no such thing as legal as distinguished from moral fraud. But when fraud is referred to in the wider sense in which the books are full of the expression, used in Chancery in describing cases which were within its exclusive jurisdiction, it 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 ignorance, 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. The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them. 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 that from the beginning regarded itself as a Court of conscience.
     1181 His Honour, at [9247] ‑ [9266], determined that the reasons of Millett LJ in Paragon Finance set out the correct construction to be applied to s 47. Millett LJ, at (412), conceded that, as had been pointed out by commentators, it was difficult to understand the reasoning that had led the courts to include constructive trustee in its secondary sense within the definition of trustee for the purpose of time limitations on claims against such a constructive trustee but had excluded that trustee from the definition of trustee for the operation of the exceptions to those benefits. His Lordship, at (413 ‑ 414), reasoned that there was no logical basis for distinguishing the limitation period to be applied to actions at law for damages for fraud and the delivery of a remedy in equity in respect of a claim in equity based on the same facts where equity intervened to provide a remedy that was moulded to have a person ‘account as constructive trustee’. Accordingly, the construction applied to the definition of trustee should be limited to a trustee in respect of whom the jurisdiction exercised by equity was exclusive and not merely concurrent with the jurisdiction of courts of common law. Presumably where equity exercised a concurrent jurisdiction in respect of a ‘remedial’ constructive trust it would be expected to apply limitation provisions applicable to an analogous action at common law.
     1182 In accepting the conclusion applied in Paragon Finance his Honour, correctly, assumed that the decision of the Full Court in Clay v Clay was no longer binding upon him after the High Court had upheld the appeal against that judgment: Clay v Clay [2001] HCA 9; (2001) 202 CLR 410. The decision of the Full Court in Clay v Clay had applied the limitation provisions of s 47 to a ‘remedial’ constructive trust that was said to arise out of a breach of fiduciary duty. The High Court held that there had been no breach of fiduciary duty. Furthermore, at (413), the High Court appeared to accept the correctness of the analysis set out in Paragon Finance that the definition of ‘trustee’ in s 47(3) did not extend to a ‘remedial’ constructive trustee and that, therefore, s 47 did not apply where the court imposed a ‘remedial’ constructive trust.
     1183 Acceptance of the construction suggested by Millett LJ in Paragon Finance should have led his Honour to conclude that for the purposes of s 47 directors committing a breach of fiduciary duty by the abuse of trust and confidence reposed in them by a company in respect of the control and management of the company’s property were properly described as constructive trustees within the primary meaning of the term: Barker v Duke Group Ltd (In liq) [2005] SASC 81; (2005) 91 SASR 167 [75] ‑ 77; Paragon Finance (408) (Millett LJ); Soar v Ashwell (398) (Bowen LJ). By reason of the exceptions in s 47(1), no limitation period under s 47 would have applied to equity’s exclusive jurisdiction in respect of the conduct of those constructive trustees where that conduct was regarded as fraudulent in equity, a term that included the ignorance by the constructive trustees of the scope of the fiduciary duty or obligation owed. See Nocton v Lord Ashburton (952 ‑ 955) (Viscount Haldane LC).
     1184 If it were accepted that the Banks provided knowing assistance to the directors in the fraudulent disposition (as understood in equity) of company property it would then follow that the same liability in equity without time bar would apply to the Banks: Soar v Ashwell (394 ‑ 395) (Lord Esher MR), (396) (Bowen LJ), (405) (Kay LJ); Barnes v Addy; cf Barker v Duke Group Ltd 78; Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (4th ed) [5‑285]; Dal Pont and Chalmers [38.55].
     1185 His Honour’s reasons, at [9264] ‑ [9265], reached the conclusion that the Banks were ‘remedial’ constructive trustees as ‘knowing recipients’ of company property and, therefore, no express limitation period applied. That is to say the character of the status of the Banks was set by the conduct of the directors from whom the Banks received property of the companies with knowledge of that breach of fiduciary duty by the directors: Dal Pont and Chalmers [38.90] ‑ [38.110].
     1186 Whether the Banks were held to be constructive trustees as parties providing knowing assistance to the directors in a disposition (held to be fraudulent in equity) of property of the companies or were no more than remedial constructive trustees as recipients of that property with knowledge that the disposition had been effected by the directors in a dishonest breach of fiduciary duty, the consequences, as far as the question of limitation was concerned, were the same. That is, no statutory period of limitation applied to a claim in equity against the Banks.
     1187 That would mean that in the exercise of the exclusive jurisdiction of equity in respect of a breach of fiduciary duty and the remedies sought in respect thereof, not restricted to proprietary remedies, the doctrine of laches governed the application of any time bar to the proceeding, perhaps, not to the exclusion of consideration of the application of a statutory time limit by analogy: Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497, 509 ‑ 510 (Kirby P).
     1188 His Honour, at [9267] ‑ [9294], proceeded to consider whether it was appropriate to apply to the equitable claims a limitation period applicable at common law to an analogous claim. His Honour determined that insufficient analogy between the nature of the claims in equity and an action in tort had been demonstrated. Furthermore, his Honour was satisfied that, in any event, it would not be just in all the circumstances to apply such a bar to the foregoing equitable claims.
     1189 His Honour’s careful analysis of principle and his consideration of relevant facts showed no error in his application of the law nor in the exercise of his discretion. Therefore, these grounds of appeal must fail.
     Election
     1190 The grounds of appeal relied on by the Banks included the claim that his Honour erred in failing to hold that BGF had relied upon and had elected to affirm the Transactions for their terms and effect thereby disentitling it to any relief in the proceedings relating to the Transactions.
     1191 The relevant facts and the reasons why these grounds of appeal must fail are set out in the reasons of Carr AJA with which I respectfully agree.
     Set‑off
     1192 The Banks contend that item 4 of the Orders made by his Honour on 30 April 2009 declaring entitlements of the Banks to lodge proofs of debt in the liquidations of BGF and BGUK, and items 5, 6 and 7 of the Orders directing the Banks to account for and to pay to BGF and BGUK moneys payable to those companies as provided in the Orders, should be set aside and replaced by orders that provide for exercise by the respective banks of rights of set‑off against BGF and BGUK before payment of any moneys to BGF and BGUK and before lodgement of any proofs of debt in the liquidations of those companies.
     1193 His Honour, at [9674] ‑ [9677], considered the submissions made on this question and found there was an absence of mutuality able to ground such a set‑off. Furthermore, his Honour concluded that such a variation to the Orders would avoid the requirement of equity that the errant conduct of the Banks in knowing participation in breaches of fiduciary duty by the directors be satisfactorily redressed. That is, the effect of such a set‑off would be the restoration of the vice that the orders in equity were designed to counter, namely, the preferential distribution to the Banks of proceeds from assets of the liquidated companies to the prejudice of other creditors of equal rank.
     1194 The right of a creditor to claim a set‑off in the liquidation of a debtor was, in respect of BGF, a ‘substituted right’ provided in s 553C of the Corporations Act (in replacement of the equivalent right previously contained in s 553C of the Corporations Law and, therefore, a ‘carried over provision’: Corporations Act s 1371, s 1400).
     1195 Section 553C of the Corporations Act reads as follows:
     (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
     (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
     (b) the sum due from the one party is to be set off against any sum due from the other party; and
     (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
     (2) A person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
     1196 In respect of BGUK, similar provisions were contained in r 4.90 of the Insolvency Rules 1986 (UK) which applied to the liquidation of BGUK at relevant times.
     1197 It is immediately apparent that, as his Honour found, no mutual credits, debts or dealings existed between the Banks, BGF and BGUK before the respective winding up or liquidation orders were made in respect of those companies.
     1198 Prior to such winding up or liquidation BGF and BGUK had been indebted to the Banks but there was no mutual debt owed by the Banks to either of those companies.
     1199 The Banks had purported to reduce the indebtedness of BGF and BGUK by exercising rights as security holders obtained by the Banks from the execution of the Transactions.
     1200 A judgment of the court had established that the Banks had obtained those securities with knowledge that the directors of Bell group companies had breached fiduciary duties owed to the companies that provided the securities and that thereafter the Banks held, as constructive trustees, any proceeds obtained from enforcement or execution of the securities.
     1201 The liability of the Banks as constructive trustees was not a product of mutual dealings between the Banks and BGF or BGUK at the time of the respective liquidation or winding up orders.
     1202 The Banks possessed no right as trustees to apply as set‑offs against debts owed to the Banks by BGF and BGUK the sums for which they had to account as trustees to BGF and BGUK.
     1203 As Marks J stated in Lloyds Bank NZA Ltd v National Safety Council of Australia Victoria Division (in liq) [1993] 2 VR 506, 508, after considering the decisions of the High Court in Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609; Hiley v Peoples Prudential Assurance Co Ltd (in liq) [1938] HCA 40; (1938) 60 CLR 468 and Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd [1982] HCA 20; (1982) 150 CLR 85:
     These cases are not concerned with the characterisation of debts, but they hold, among other things, that ‘the benefit or burden’ of credits, claims and dealings must not only be between the same persons but also be between them ‘in the same interests’. It goes without saying that money in the hands of a trustee in that capacity is not held in his ‘interest’ as a party to dealings on his own account (not as a trustee) with the debtor.
     1204 To similar effect were the following remarks of JD Phillips J (515):
     Put shortly, the existence of the trust affecting the two surpluses in the bank’s hands destroys the ‘mutuality’ which is a prerequisite of the right to set off arising under s 86: see, for example, National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785, at 821, per Lord Kilbrandon. A trustee who is holding money for his beneficiary is not entitled to set off against the beneficiary’s claim to have the money transferred to him some other and separate indebtedness of the beneficiary to the trustee personally. The cross‑claims, if between the same parties, are not between them ‘in the same interests’.
     1205 At all times in equity the circumstances of execution of the Transactions impressed the Banks with the duties of constructive trustees. The instruments of security provided by the Transactions, or the proceeds obtained from enforcement or execution thereof, constituted property in the hands or control of the Banks that was subject to that trust. Where the property was no longer identifiable by reason of conduct of the trustees, the trustees’ personal obligation to account for property that had been in their hands remained an obligation of the Banks as trustees, not an obligation arising from a dealing by the Banks with BGF or BGUK.
     1206 As stated by Derham R, The Law of Set‑Off (3rd ed) [17.97]:
     The application of the principle of taking subject to equities assumes that the beneficiary’s entitlement is to a beneficial interest in a debt which at law is owing to the trustee. Alternatively, a beneficiary may claim that another has knowingly received trust moneys in circumstances where the trustee paid the moneys to the recipient in breach of trust. The beneficiary in that circumstance may assert an equitable tracing claim to recover the moneys. This gives rise to a proprietary remedy to recover trust property, and it cannot be the subject of a set‑off. But even if the moneys are no longer traceable so as to preclude a proprietary remedy, and the beneficiary’s claim instead is that the recipient has a personal liability as a constructive trustee on the basis of knowing receipt of trust property, the recipient could not assert a set‑off in respect of a separate debt owing to him by the trustee. The principle that a beneficiary takes subject to equities available against the trustee is based on the notion that there is mutuality at law as between the debt held on trust and the cross‑debt owing by the trustee, and the question is whether it is unconscionable for the debtor to rely on this defence at law, given the trust. However, when a recipient of trust money has a personal liability as a constructive trustee to the beneficiary on the basis of knowing receipt, there is not mutuality either at law or in equity in relation to that liability and a debt owing by the trustee to the recipient. This should also be the case when the basis of liability as a constructive trustee is as an accessory to a breach of trust.
     1207 It follows that this ground of appeal must fail.
     Remedial Trust
     1208 The Banks submitted in their appeal that his Honour erred in making orders based on the concept of a remedial constructive trust. It was asserted by the Banks, first, that there was no trust property on which such an order could be based and, second, that such an order may only be made upon a finding made under the ‘second limb’ of Barnes v Addy (‘knowing assistance’) and that it was not available where the conduct established was confined to the ‘first limb’ (‘knowing receipt’).
     1209 The second part of the Banks’ argument falls away given that this Court has found that his Honour should have held that the requirements of the ‘second limb’ had been satisfied.
     1210 Consideration of the nature and purpose of the so‑called remedial constructive trust shows that the first ground of the Banks’ arguments also cannot be sustained.
     1211 Pursuant to the reasons of this Court, the orders that the Transactions be set aside must remain undisturbed. The orders are consequential orders that follow a finding that either ‘limb’ was infringed.
     1212 By reason of the breach of the ‘second limb’ the Banks became ‘institutional constructive trustees’ at the outset of the Transactions and subject to the in personam liabilities attached to that trust, in particular, to pay compensation for loss arising from the misuse of the property of the corporations or to account for gains made from the use of it. As parties with knowledge of the breach of fiduciary duty of the directors involved in the transfer of property of Bell group companies to the Banks, the Banks obtained no more than a voidable title to that property, a title subject to the contingency of a future order that the Transactions be set aside ab initio.
     1213 Breach of the ‘first limb’ provided a discretion in equity for the court to direct that the Banks account as constructive trustees for receipt of property of a Bell Participant. That could have resulted in proprietary orders if property remained extant or in the form of traceable proceeds. Otherwise the Banks were subject to the same in personam liabilities as applied to constructive trustees for infringement of the ‘second limb’. Similarly, the title to property received with knowledge of the breach of fiduciary duty of the directors was a voidable title and subject to an order that the Transactions be set aside ab initio.
     1214 In respect of the infringement of either ‘limb’, the Banks as constructive trustees had to account as defaulting fiduciaries would have been obliged to account. If the property of a corporation had left the hands of the Banks and the proceeds thereof were no longer defined and traceable, the obligation to account and to make restitution would be satisfied in equity by appropriate in personam orders. See Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 [1], [47] ‑ [51], [91], [99] ‑ [100] (Gummow, Hayne, Heydon, Kiefel, Bell JJ).
     1215 Comprehensive discussion of the principles underlying the grant and form of relief in equity in respect of Barnes v Addy claims are set out in the reasons of Finn, Stone and Perram JJ in Grimaldi v Chameleon Mining NL (No 2) [242] ‑ [281], [503] ‑ [512], [553] ‑ [567].
     1216 As his Honour noted, the relevant facts in this case included circumstances well beyond the point where proprietary relief or tracing orders could be made and the court was required to fashion appropriate orders to provide for equitable restoration of funds to the estates of the corporations the subject of breaches of fiduciary duty, those orders being based upon the application of the in personam liabilities of the Banks that had attached to their former positions, whether actual or notional, as constructive trustees.
     Denial of right to elect an account of profits
     1217 His Honour determined that in the circumstances of this case it was appropriate to award equitable compensation and to deny the respondents the right to elect that the Banks provide an account of the profits obtained. His Honour ordered that the Banks pay various amounts to certain of the respondents, those amounts to include a component of compound interest.
     1218 The respondents by their cross‑appeal contend that his Honour erred in so exercising his discretion and seek an order restoring their right to elect. Alternatively the respondents submit that his Honour applied incorrect principles to the calculation of equitable compensation and seek an order varying the terms of the order accordingly.
     1219 His Honour, at [9707] ‑ [9711], considered that ‘ancillary monetary relief’ could be ordered in a way that provided practical justice and that his discretion should be exercised to deny the respondents a right to elect to obtain an order for an account of profits.
     1220 The reasons provided by his Honour for that conclusion, at [9707] ‑ [9708], were that ‘the purpose that awards of compensation serve’ could be fulfilled by simpler remedies and that there was substantial public interest in not allowing litigation in this matter to be further prolonged.
     1221 Although, as discussed below, his Honour may not have provided the appropriate ‘ancillary monetary relief’ to be ordered in this case, the exercise of his Honour’s discretion had a proper foundation in his Honour’s reliance upon the greater public interest. The case had used more public resources than was sustainable for such litigation and, as his Honour saw it, the inability of the parties to confine their arguments and disputations within reasonable bounds forecast that exorbitant time would be spent on the taking of an account of profits. This was a case where his Honour could have been satisfied that equitable compensation would not be so far removed from the outcome of an account of profits that it was justifiable to limit further delay, expense, and use of public resources by directing that equitable compensation be the appropriate remedy.
     1222 Subject to correction of a component of his Honour’s assessment of that compensation there is no reason to disturb his Honour’s discretion to substitute the equitable compensation assessed for the taking of an account.
     Amount of equitable compensation
     1223 The orders made by his Honour were delivered on 30 April 2009 and further reasons were provided therefor, (‘the Relief Reasons’). Those reasons followed extensive submissions filed by the parties upon publication of his Honour’s reasons for decision on 28 October 2008.
     1224 Part of the further submissions included a proposition put by the Banks that the calculation of equitable compensation had to have regard to a notional occurrence of liquidations within a reasonable time of 26 January 1990 in lieu of the performance of the Transactions.
     1225 The effect of that submission was a contention that his Honour should have determined that the Banks would have received distributions in those liquidations and should only disgorge the amount of notional dividends required to be distributed to other creditors, not including BGNV.
     1226 A finding by this Court that the loans from BGNV to TBGL and BGF were made on the usual terms for inter‑company loans and contained no term that subordinated the lender’s right to recover the loans from the borrower is destructive of the argument of the Banks that they should not have been ordered to repay a sum greater than the amount claimed by other creditors of the Bell group companies, excluding the claims of BGNV.
     1227 Clearly the restitutionary orders made by his Honour (subject to argument as to error in the manner of calculation of the interest component) should stand.
     1228 The Banks were not entitled to receive, or enjoy the benefit of, the moneys received in consequence of the dispositions of company property effected by the Transactions.
     1229 The funds determined to be appropriate for restoration to the estates of the liquidated companies must be returned to those estates for due administration by the liquidators. The fact that the Banks, in due course, will receive an as yet undetermined distribution from the estates of TBGL, BGF and BGUK is not a cause for modification of the order that the Banks disgorge the benefits received from improper receipt of company property.
     1230 It is for the liquidators to determine the proper distribution of the property of the companies once the amounts due to those estates have been received.
     1231 Equitable compensation was properly characterised as a return of proceeds received from the conversion of the property obtained under the Transactions now set aside together with a component of interest. See Bofinger [100]. The case before his Honour was within the class of cases where calculation of compound interest was appropriate to approximate the profit made by the Banks from the use of those proceeds. See Grimaldi [547] ‑ [552].
     1232 No argument was put by the Banks that the obligation of the Banks to account, or to pay equitable compensation, for the benefits obtained from the use of the property received by the Banks with knowledge of a breach of fiduciary duty should be reduced to the extent that the resulting sum included benefits obtained exclusively from the application of skilful management of the funds by the Banks. See Warman International v Dwyer (562) (Mason CJ, Brennan, Deane, Dawson, Gaudron JJ); Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 [55] (Gleeson CJ, McHugh, Gummow, Callinan JJ). It follows that if equitable compensation is found to be the appropriate form of redress return of the funds received together with compound interest would represent an appropriate method of assessment of that compensation.
     1233 The evidence before his Honour, referred to by his Honour at [9706], included a calculation of estimated profit that pointed to a conclusion that the Banks may have received a return from the use of the funds obtained from the Transactions in an amount that exceeded in a substantial degree the amount of compound interest obtained from applying the Westpac Business Indicator Rate on monthly rests [WITP.00001.054, [160] ‑ [171]; WITP.00001.084, [9]].
     1234 The respondents asserted, with respect, correctly, that his Honour, in attempting to meet the aim of providing practical justice, failed to have due regard to the object of an order for equitable compensation when such an order is made in lieu of an errant fiduciary, or a third party with notice, providing an account of profits improperly received from the use of property in respect of which they are to be taken to have responsibilities as trustees.
     1235 His Honour considered the award of equitable compensation to be compensation to the respondents ‘for being held out of their money’ [9716] and, therefore, the required calculation represented the ‘best use’ the respondents may have made of the money [9717].
     1236 If the right to elect an account of profits was to be foreclosed in a case where it had been found that the Banks received property from which profits were obtained with knowledge that disposition of that property to the Banks had been effected by a breach of fiduciary duty, then the equitable compensation provided in lieu had to reflect the cardinal principle of equity that there be disgorgement of profits gained.
     1237 That point was made by the Court of Appeal in Wallersteiner v Moir (No 2) [1975] QB 373, the import of which was that interest calculated to represent profit earned should be taken to be interest set at 1% per annum above the official bank rate, or minimum lending rate, in operation from time to time with yearly rests.
     1238 His Honour accepted that compounding of interest with monthly rests was appropriate but by considering only the ‘best use’ the respondents could make of the money, his Honour set the interest rate at 1% per annum below ‘the Westpac Business Indicator Rate’.
     1239 Compounding interest on yearly rests may be appropriate for calculating the profits gained by a fiduciary not engaged in the business of money lending but for money employed in the money lending businesses of banks his Honour’s selection of monthly rests cannot be said to reflect error.
     1240 The calculations of indicative profit earned by the Banks were based on the Westpac Business Indicator Rate, taken to be, it seems, a base earning rate for the Banks.
     1241 Regular publication of the Westpac Business Indicator Rate ceased on 25 January 2008. Publication of the Westpac Reference Lending Rate continued, which, historically, had been set at a discount of 0.75% to the Westpac Business Indicator Rate. His Honour accepted that from 25 January 2008 the Westpac Reference Lending Rate plus 0.75% could be taken to represent a base earning rate for the Banks.
     1242 To reflect an appropriate approximation of profit earned by the Banks in use of such money the rates should have been set at 1% above the base earning rate. His Honour erred in setting the rate at 1% below the base earning rate as set above.
     1243 It does not appear to have been contended that use of the relevant Westpac rate was inappropriate for use as an estimate of profits gained by the Lloyds Syndicate Banks from the use of the moneys distributed to them by Westpac.
     1244 The magnitude of the resulting sum is a consequence of the undue length of the period in respect of which the calculation must be made – a period of approximately 22 years. Whilst on its face the sum calculated is a vast amount it results from the passage of the inordinate period of time since the date of the events in respect of which relief is sought. It was not submitted by the Banks that any part of that sum could be isolated and attributed to a period of delay caused by unreasonable conduct of a respondent and, therefore, no cause was shown to reduce the sum on that account.
     1245 The Banks put to his Honour that failure to confine the calculation of compensation would result in an unjustifiable ‘windfall’ to the respondents and others.
     1246 His Honour acknowledged that equity was able to limit the sum awarded to ensure that no benefit accrued to a party that had participated in the breach of fiduciary duty for which the equitable compensation was provided. See Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132.
     1247 Underlying the submission of the Banks was the contention that the recipients of the ‘windfall’ would be the Bondholders in, as his Honour put it (Relief Reasons [52]), ‘a more idiomatic understanding of the word’. The argument put was that pursuant to the hypothetical liquidations the Bondholders could not have anticipated a return of any part of the debts due to them.
     1248 But as his Honour noted (Relief Reasons [65]) the Bondholders did not participate in any breach of fiduciary duty and were not disentitled to participate in any distribution of dividends in the eventual completion of the current liquidations by distributions to creditors of amounts paid to liquidators as equitable compensation.
     1249 His Honour duty considered the arguments of the Banks and was not persuaded by them. If his Honour had addressed those submissions whilst aware that the submissions of the Banks on the subordination issue could not have been sustained, it would have been even more obvious to his Honour that speculation on the outcome of a process of hypothetical liquidation was of no utility and that the only proper course, according to principle, was to proceed with the calculation of equitable compensation as described.
     Liability to taxation
     1250 The Banks contend in their appeal that his Honour erred in calculating the amount of compound interest by failing to make provision for the incidence of taxation on annual income earned by way of interest to determine the appropriate amount of principal upon which interest was to be calculated in successive years.
     1251 The corporate rate of income tax at relevant times was 39% between January 1990 and 30 June 1993 and 30% thereafter.
     1252 A difficulty that arises in the consideration of that issue is uncertainty as to the amount of the taxable income on which the tax would have to be assessed.
     1253 His Honour accepted that access to prior taxation year losses may have been used to offset any liability to income tax on the notional earnings that would arise by calculating a component of interest as a compensatory sum.
     1254 The Banks submit that the repository of the Bell group losses, BGF, would not have been able to satisfy the continuity of ownership test (ITAA s 80A) and referred to Federal Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) [2005] HCA 20; (2005) 220 CLR 592. Further, it was submitted by the Banks that the same business test could not have been satisfied (ITAA s 80E). Northern Engineering Pty Ltd v Federal Commissioner of Taxation [1979] FCA 79; (1979) 42 FLR 301, 304 was cited in support of that proposition.
     1255 The respondents countered that the effect of FCT v Linter had been reversed and the status quo restored by the Tax Law Amendment (Loss Recoupment Rules and Other Measures) Act 2005 (Cth).
     1256 It is to be noted that the continuity of business test in s 80E of the ITAA was introduced as a saving measure to apply if the continuity of ownership test of s 80A was not satisfied. The two tests were not cumulative. See Linter Textiles Australia Ltd (in liq) v Commissioner of Taxation [2002] FCA 1089; 50 ATR 548 [17] ‑ 31.
     1257 In any event these questions are not matters for determination in this proceeding, the application of such provisions depending upon significant undetermined issues of fact.
     1258 What is required in this proceeding is the assessment of a fair determination of an amount of equitable compensation in the circumstances. That may require application of an appropriate contingency if the prospect that calculation of compound interest without regard to probable impact of liability to taxation would inflate the return to the wronged party.
     1259 But the foundation for the assessment of equitable compensation in this matter is disgorgement of the benefit obtained by the wrongdoer, not the assessment of what the wronged party could have earned or retained by use of the funds.
     1260 It has not been shown that his Honour erred in his treatment of this issue (Relief Reasons [26] ‑ [40]) in declining to apply speculation as to the possible liability of the respondents to taxation assessments.
     Injunctive relief
     1261 Included in the relief sought by the respondents were applications for orders restraining the Banks from taking any steps to enforce the terms of a Transaction in which the contracting party was a Bell Participant that was not a plaintiff in the proceeding.
     1262 The Transactions in respect of which such injunctive relief was sought were the PSD and the BIIL Subordination Deed. Under the PSD rights were obtained by the Banks in respect of 13 Bell Participants not joined as plaintiffs in the proceeding. Under the BIIL Subordination Deed dated 14 May 1990, another non‑plaintiff Bell Participant, BIIL, had agreed to subordinate the debt due to it by BGUK ($516.4 million, [493]) to the claims of the Banks against BGUK. Those Bell Participants were identified by his Honour in [83] of the Relief Reasons. All of those entities, save for Bell Bros Holdings, were deregistered companies. Bell Bros Holdings was a company in liquidation.
     1263 His Honour, at [108] of the Relief Reasons, accepted that the rights obtained by the Banks against the foregoing Bell Participants under the Transactions described were improperly obtained by the Banks. His Honour also accepted, at [88] and [102] of the Relief Reasons, that the exercise by the Banks of rights so obtained against the foregoing Bell Participants would divert funds to the Banks and have a ‘significant adverse impact’ on the sums to be received by the respondents and upon distributions able to be made by the liquidators to external creditors of the Bell group companies.
     1264 None of the Bell Participants described had a liability to the Banks before execution of the foregoing Transactions. His Honour, at [122] of the Relief Reasons, ‘acknowledge[d] that a consequence is that the banks may recover more than the debts they are legitimately able to prove in the liquidations of the various companies’.
     1265 His Honour accepted that the court had power to make the orders sought by the respondents but declined to exercise his discretion to do so.
     1266 The essence of his Honour’s reasons for refusing to grant injunctions in the terms requested is found in [109] and [116] of the Relief Reasons. His Honour stated that the relevant Bell Participants had not sought to have the Transactions rescinded and the respondents should not be permitted to obtain ‘rescission through the back door’ on behalf of those companies. His Honour took the view, therefore, that the Transactions remained on foot and that the rights of the Banks remained enforceable.
     1267 The starting point for his Honour should have been what equity required in the circumstances after giving due regard to the possibility of any hardship or inconvenience being inflicted on a non‑party to the litigation by reason of the grant of the relief sought. If the detriment identified was direct, it may outweigh the hardship likely to be suffered by the parties seeking the relief.
     1268 The following acknowledgement of the matters required to be considered in the exercise of a discretion to grant relief that may affect third parties was clearly stated in an instructive passage in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; (1998) 195 CLR 1 [65] ‑ [66] (Brennan CJ, McHugh, Gummow, Kirby, Hayne JJ):
     Third parties
     65 In applications to grant interlocutory injunctions, the court is concerned to examine and in appropriate cases to protect, pending the trial, the moving party’s right to relief against that party’s opponent. But the rights of plaintiff and defendant are not the only rights considered in determining where the balance of convenience lies. In Wood v Sutcliffe [(1851) 2 Sim (NS) 163, 165‑166 [61 ER 303, 303‑304]. See also Kerr on Injunctions, 6th ed (1927), 31‑32, and cases there cited; Spry, Equitable Remedies, 5th ed (1997) 402‑403, and cases there cited] Sir Richard Kindersley V‑C said:
     ‘[W]henever a Court of Equity is asked for an injunction in cases of such a nature as this, it must have regard not only to the dry strict rights of the Plaintiff and Defendant, but also to the surrounding circumstances, to the rights or interests of other persons which may be more or less involved: it must, I say, have regard to those circumstances before it exercises its jurisdiction (which is unquestionably a strong one), of granting an injunction.’
     The principle in Wood v Sutcliffe was approved by Cumming‑Bruce LJ in Miller v Jackson [[1977] QB 966, 988]:
     ‘Courts of equity will not ordinarily and without special necessity interfere by injunction where the injunction will have the effect of very materially injuring the rights of third persons not before the court.’
     His Lordship cited with approval a passage from Dr Spry’s Equitable Remedies [5th ed (1997) 402‑403]. We too adopt the author’s statement:
     ‘the interests of the public and of third persons are relevant and have more or less weight according to the other material circumstances. So it has been said that courts of equity “upon principle, will not ordinarily and without special necessity interfere by injunction, where the injunction will have the effect of very materially injuring the rights of third persons not before the courts”. Regard must be had “not only to the dry strict rights of the plaintiff and the defendant, but also the surrounding circumstances, to the rights or interests of other persons which may be more or less involved”. So it is that where the plaintiff has prima facie a right to specific relief, the court will, in accordance with these principles, weigh the disadvantage or hardship that he would suffer if relief were refused against any hardship or disadvantage that might be caused to third persons or to the public generally if relief were granted, even though these latter considerations are only rarely found to be decisive. (Conversely, detriment that might be caused to third persons or to the public generally if an injunction were refused is taken into account.)’
     66 Miller v Jackson has been approved and applied on a number of occasions in Australian courts [Clarke v Japan Machines (Australia) Pty Ltd [1984] 1 Qd R 404, 419 (Thomas J with whom Campbell CJ and Andrews SPJ agreed); O’Keeffe Nominees Pty Ltd v BP Australia Ltd [1990] ATPR 41‑057, 51,740‑51,741 (Spender J); Gilltrap v Autopromos Pty Ltd [1995] ATPR 41‑395, 40,377 (Spender J). See also Perrey v Mordiesel Co Pty Ltd [1976] VR 569, 576 (Lush J)]. However, the weight to be given to third party interests varies according to the circumstances. In the present case, PCS Resources offered to supply labour knowing that the [Patrick group of companies] proposed to sever the stevedoring operations from the workforce employed by the employer companies. Although North J made no adverse findings against PCS Resources as to the circumstances in which it entered into the hiring agreement with Patrick Operations on the evening of 7 April, the services which PCS Resources contracted to perform were known by it to be in substitution for the services which the employer companies had theretofore performed. In balancing the interests of the employer companies and their employees against the interests of PCS Resources and their employees, North J was entitled in the exercise of a discretionary judgment to conclude that the injunctions directed to the members of the [Patrick group of companies] should be made. At all events, there is no reason shown why that exercise of discretion should be overturned on appeal.
     1269 The interests of the third parties to be considered by his Honour in this proceeding were consonant with the interests of the respondents. There could be no suggestion that grant of the injunctions sought could materially injure the interests of the identified Bell Participants.
     1270 Balancing the interests of the third parties against the interests of the respondents could only result in grant of the relief sought.
     1271 The concern of equity would be that the Banks not profit from the conduct involved in bringing the Transactions into being and the improper delivery of property to the Banks thereunder.
     1272 Once his Honour accepted that withholding further equitable relief would transmit benefits to the Banks pursuant to the Transactions at the expense of the respondents and external creditors, there had to be cogent evidence of detriment likely to be suffered by a third party by reason of the grant of such relief before refusal of the relief sought could be considered.
     1273 His Honour appeared to consider that the rights obtained by the Banks against the third parties pursuant to the Transactions they had executed had to prevail unless the third parties were joined in the proceeding and took steps to obtain orders to set aside those rights. His Honour stated, at [119] of the Relief Reasons, as a further ground for refusing relief that ‘there is nothing (or no‑one) to whom the declarations and injunctions could attach because the companies simply do not exist’. The foregoing matters indicate that his Honour failed to consider the issues relevant to the request for injunctive relief raised by the respondents. Non‑joinder of a party was not a bar to relief in the absence of demonstration of direct disadvantage to a third party and the proposed injunctions sought attachment of the Banks to restrain their conduct not attachment of the companies.
     1274 The need for further relief in equity having been demonstrated, the appropriate order was that the Banks be restrained from making any demand or request for payment to ASIC, to a liquidator or to the companies (in the event of re‑registration) in respect of any sum a Bank may claim was payable to it pursuant to a Transaction executed by a third party non‑plaintiff.
     1275 His Honour misdirected himself as to the principles to be considered and the discretion available to his Honour was improperly exercised.
     1276 The cross‑appeal of the respondents on this issue must be allowed and appropriate orders made.
     ORDERS
     Generally
     1277 His Honour set aside the Transactions ab initio where they bound certain of the respondents. In respect of the BGNV Subordination Deed to which TBGL and BGF were parties the Deed was set aside insofar as it bound those parties. However, his Honour declared that as between BGNV and the Banks the BGNV Subordination Deed was valid and effectual and that loans made by BGNV to TBGL and BGF ‘were … subordinated on the terms and conditions applying per se to the bonds issued by BGNV’.
     1278 The reasons provided by this Court require the foregoing declaration to be set aside and the orders varied by inserting an order rescinding ab initio the BGNV Subordination Deed as between BGNV and the Banks.
     Costs
     1279 The reasons of the Court require that the appeal be dismissed. The respondents, therefore, are entitled to an order for the costs of the appeal.
     1280 With regard to the cross‑appeals, the respondents succeeded on all principal grounds but failed on the distinct and severable issue of equitable fraud. That issue occasioned sufficient time in argument to justify disallowance of costs in respect thereof. The time spent on the issue represented approximately 10% of the time allocated to the cross‑appeal of the main respondents and, therefore, the costs of the cross‑appeal recoverable by the main respondents should be limited to 90% thereof.
     Orders of this Court
     1281 Pursuant to the reasons of the Court the following orders are to be made:
572. The appeal is dismissed.
     2 The cross‑appeal of the first to the fifth, seventh to twenty‑eighth and thirtieth respondents is allowed in part.
573. The cross‑appeal of the sixth and twenty‑ninth respondents is allowed in part.
574. The orders made by the honourable trial judge on 30 April 2009 are amended as follows:
     (i) Items 1.5 to 1.24 are renumbered 1.6 to 1.25.
     (ii) A new item 1.5 is inserted as follows:
     Insofar as it purports to bind the sixth plaintiff the BGNV Subordination Deed is rescinded ab initio.
     (iii) Order 2 is deleted and replaced by the following:
     2(a) In respect of the Bell Participants described below (‘Recited Bell Participants’) the defendants are hereby restrained and enjoined until further order of this Court from relying on, asserting, exercising or enforcing any right under clauses 2, 3, 4, 5, 6, 7(b), 8, 9, 10, 12 or 15 of the Principal Subordination Deed or under clauses 2, 3, 4, 6, 7(b), 8, 10 or 13 of the BIIL Subordination Deed against the Australian Securities and Investments Commission (ASIC), a liquidator of a Recited Bell Participant, a Recited Bell Participant, or otherwise, in respect of any payment, division or distribution of any kind or character whatever, whether in cash, securities or other property or security or the benefit of proceeds thereof payable or deliverable to or received by a Recited Bell Participant from the twenty‑eighth respondent as liquidator of the third respondent or from the twenty‑seventh respondent and/or twenty‑eighth respondent as liquidators of the ninth respondent or from the liquidator of the fourth respondent.
     Recited Bell Participants
     Armstrong Ledlie Stillman Pty Ltd
     Belcap Portfolio Pty Ltd
     Bell Bros Holdings Ltd (In Liq)
     Bell Properties Pty Ltd
     Bell International Investments Ltd
     Davsell Pty Ltd
     Godine Enterprises Pty Ltd
     Group Color (WA) Pty Ltd
     Harlesden Pty Ltd
     Overells Pty Ltd
     Savidge & Killer Pty Ltd
     W & J Financial Services
     Wanstead Finance Pty Ltd
     Wigmores Finance Pty Ltd
     (b) ASIC, a liquidator of a Recited Bell Participant, or a Recited Bell Participant has liberty to apply in respect of the foregoing order.
     (iv) Order 6 is amended by deleting the word ‘minus’ and inserting the word ‘plus’ in its stead where the former word appears in items 6.1(a) and 6.1(b).
     (v) A new Order 6A is inserted as follows:
     6A. The counterclaim of the defendants is dismissed.
575. The appellants pay the costs of the appeal and of the cross‑appeal of the sixth and twenty‑ninth respondents and 90% of the costs of the cross‑appeal of the first to fifth, seventh to twenty‑eighth and thirtieth respondents, such costs to be taxed if not agreed, taxation to be without regard to the limitation of a relevant cost scale or statutory determination. If costs have not been agreed between the parties within 30 days of this order, the taxing officer is to instruct the parties to attend a mediation proceeding to be conducted before the taxation is listed for hearing.

SCHEDULE 1

BELL GROUP CONVERTIBLE BOND ISSUES

Paragraphs in Reasons of Trial Judge Date of Issue Issuer Bondholder Trustee Guarantor Convertible to Shares in: Value of Bonds Issued Value of Bonds Converted Distribution of Bond Funds Interest Date Maturity Date Bonds
Subordinated Bond Issue No.
313-315, 319, 338
2728-2772 20 Dec 1985 TBGL Heytesbury Securities P/L * (GFH)
** LDTC – TBGL $75m – TBGL 10 Dec 10 Dec 1995 Payable in USD Yes

1
309, 320-338
2728-2772
2781 20 Dec 1985 BGNV
(TBGL subsidiary) Public LDTC TBGL TBGL $75m $14.6m
tbgl.03421.050
Notes: 7(i)(a); 8(i)(a); 22 BGNV to TBGL
$75m 10 Dec 10 Dec 1995 Payable in USD Yes
316-318, 319, 338
2773-2791 7 May 1987 BGF
(TBGL subsidiary) Heytesbury Securities P/L * (GFH)
** LDTC TBGL TBGL $75m – BGF 7 May 7 May 1997 Payable in USD Yes

2
310, 320-338
2773-2791 7 May 1987 BGNV
(BGF subsidiary from 3/87) Public LDTC TBGL TBGL $175m – BGNV to BGF
$175m 7 May 7 May 1997 Payable in USD Yes
311, 320-338
2550 (J error)
2792-2801 14 July 1987 BGNV
(BGF subsidiary from 3/87) Public LDTC TBGL TBGL £75m – BGNV to BGF
£75m 14 July 14 July 1997 Payable in Sterling
(Put Option exercisable on 14.7.92 @ 123.125%) Yes

3

• Change of name to Group Financial Holdings Pty Ltd on 5 January 1988
  **Bonds transferred to SGIC on 28 July 1988

SCHEDULE 2

BGNV LIABILITY ON BONDS ISSUED

Date of Issue   Reference in Reasons of Trial Judge Value of Bonds Issued   Liability on unconverted Bonds at 30.6.87   Liability on unconverted Bonds at 31.12.87  Liability on unconverted Bonds at

30.6.88 Liability on unconverted Bonds at 30.6.89 Liability on unconverted Bonds at 26.1.90
Bond Issue 1 10.12.85 Par 309 A$75m A$62.9m A$61.3m
Ex: 610.44.0056 at p5 (5.2.88 converted Bonds = A$13.7m – assume same at 31.12.87) A$60.4m A$60.4m A$60.4m
Bond Issue 2 7.5.87 Par 310 A$175m A$175m A$175m A$175m A$175m A$175m
Bond Issue 3 14.7.87 Par 311 (£75m) A$172.2m
(AUD/GBP Exch Rate 14.7.87 = 0.4356) (£75m) A$193.4m
(Assume AUD/GBP Exch Rate applied 31.12.87 = 0.3877) (£75m) A$162.3m
AUD/GBP Exch Rate 30.6.88 = 0.46123
(excluding liability for ‘Put Option premium’ i.e. A$37.5m) (£75m) A$153.6m
A$160.8m
(if $7.2m provision for Put Option in TBGL Group A/cs included)
tbgl.03421.050 Note 22(b) p32
tbgl.00008.002 Note 23 p38
AUD/GBP Exch Rate
30.6.89 = 0.4882 (£75m) A$163.5m
AUD/GBP Exch Rate 26.1.90 = 0.4586
Total A$422.2m (at 14.7.87) A$237.9m A$429.7m
Ex: 360.02.0038
Apps A, C, D A$397.7m A$389m
A$396.2m
(if $7.2m provision for Put Option in TBGL Group A/cs included)
tbgl.03421.050 Note 22(b) p32
tbgl.00008.002 Note 23 p38 A$398.9

SCHEDULE 3

TBGL LIABILITY AS ISSUER/GUARANTOR OF BOND ISSUES 1, 2, 3 AS PER ACCOUNTS

Bond Issue Date TBGL Amount
10.12.85 Issuer A$75m

1. 
   10.12.85 Guarantor of BGNV A$75m
   7.5.87 Guarantor of BGF A$75m
2. 
   7.5.87 Guarantor of BGNV A$175m
3. 14.7.87 Guarantor of BGNV (£75m) A$172.2m [14.7.87 AUD/GBP Exch Rate = 0.4356]

TBGL liability on Bonds (excluding liability for any accrued interest) as at: 30.6.86 A$150m [Issuer A$75m]
[G/or BGNV(1) A$75m]
A$150m
31.12.86 A$150m [Issuer A$75m]
[G/or BGNV(1) A$75m]
A$150m
30.6.87 A$387.9m [Issuer A$75m]
[G/or BGF A$75m]
[G/or BGNV(1) A$62.9m]
[G/or BGNV(2) A$175m]
A$387.9m

[Ex: 282.14.0004 TBGL Annual Report]
[30.6.87 Note 7(c) p31 – A$12.1m converted]
31.12.87 A$579.7m [Issuer A$75m]
[G/or BGF A$75m]
[G/or BGNV(1) A$61.3m]
[G/or BGNV(2) A$175m]
[G/or BGNV(3) £75m A$193.4m]
[31.12.87 AUD/GBP Exch Rate = 0.3877]
A$579.7m

[Ex 610.44.0056 p5 – A$13.7m converted]

30.6.88 A$585.2m   [Issuer A$75m]

[G/or BGF A$75m]
[G/or BGNV(1) A$60.4m]
[G/or BGNV(2) A$175m]
[G/or BGNV(3) £75m A$162.3m]
[30.6.88 AUD/GBP Exch Rate = 0.46123]
[G/or ‘Put Option Premium’ A$37.5m]
[Ex: tbgl.03421.050 TBGL Annual Report]
[30.6.88 Notes 22(b)(i), (iii); 7(i)(a) p21, 32]
A$585.2m

[Ex: tbgl.03421.050]
[Notes 7(i)(a); 8(i)(a); 22 – A$14.6m converted]
31.12.88 A$578.9m [Issuer A$75m]
[G/or BGF A$75m]
[G/or BGNV(1) A$60.4m]
[G/or BGNV(2) A$175m]
[G/or BGNV(3) £75m A$156m]
[$36.1 @ 31.12.88 AUD/GBP
Exch Rate = 0.4807]
[G/or ‘Put Option Premium’ A$37.5m]
A$578.9m
30.6.89 A$546.2m [Issuer A$75m]
[G/or BGF A$75m]
[G/or BGNV(1) A$60.4m]
[G/or BGNV(2) A$175m]
[G/or BGNV(3) £75m A$153.6m]
[30.6.89 AUD/GBP Exch Rate = 0.4882]
[G/or – provision for amortisation
payment of ‘Put Option Premium’ in
30.6.88 A/cs A$7.2m]
[Ex: tbgl.00008.002 TBGL Annual Report]
[30.6.89 Note 23 p38]
A$546.2m
26.1.90 A$548.9m [Issuer A$75m]
G/or BGF A$75m]
G/or BGNV(1) A$60.4m]
G/or BGNV(2) A$175m]
G/or BGNV(3) £75m A$163.5m]
[26.1.90 AUD/GBP Exch Rate = 0.4586]
A$548.9m

DRUMMOND AJA’S REASONS

My approach to the appeal 319
SUBORDINATION 319
The contracts inter se 321
The inferred term – a summary of my reasons 322
The inferred term – the trial judge’s reasoning 324
Objective manifestation of an intention 328
Surrounding circumstances must be mutually known 332
A question of fact 334
The relationship between TBGL and BGNV 336
BGNV a party to the on‑loan contracts with TBGL and BGF 341
BGNV’s power to subordinate the on‑loans 344
No differences between the three on‑loans 346
A threshold objection to inferring a term for subordination 346
Onus of proof 349
The first bond issues 349
The second bond issues 350
The third bond issue 351
The documentary material 351
‘Bonds means proceeds’ and ‘effective subordination’ 352
TBGL letters of 11 December 1985 and 15 April 1987 353
Griffiths’ memorandum of 3 September 1985 to Holmes à Court 360
Subordinated debt as equity or – a further issue 361
The Amalgamation of Banking Structure document 365
The Lloyds Bank information memorandum 365
The negative pledge reports 371
The notional conversion thesis 377
The 1988 spreadsheets 378
The information packages and the three year business plan 381
The information packages 381
The three year business plan 383
The correspondence between TBGL and the banks about the collapse of the NP agreement into the NP guarantee 385
The withholding tax exemption letters 388
The no other indebtedness undertaking 394
The Coopers & Lybrand advice of 15 October 1986 396
Bell Group Finance (ACT) Ltd 398
Accounting treatment of the bonds and the on‑loans 401
The annual and other accounts of TBGL, BGF and BGNV 401
The terms of the on‑loans 403
How were they set? 403
Splitting the first bond issue 410
Effective subordination 412
The commercial purpose of the bond issues 417
Subordination as an argument for equity treatment of the bonds 419
A term for Subordination – conclusion 420
No consideration of the on‑loans within Bell 425
The subordinated obligation in the conversion bonds 427
The implied term as to subordination 429
Certainty of a term for subordination 434
The capacity of the banks to enforce the contracts inter se 437
The contracts inter partes 437
The estoppel inter partes case 438
The Banks’ estoppel inter se case 453
The banks’ Trade Practices Act claim 453
The conduct of the banks 454
No consideration of the on‑loans by the banks 455
Why no Bell or bank officer considered the on‑loans 458
The banks in the 1980s 459
Bank lending to Holmes à Court-controlled companies 464
The negative pledge ratios 469
The double whammy effect 473
The banks’ response to the TBGL letter of 11 December 1985 seeking equity treatment of the bond issues 475
The banks’ response to the TBGL letter of 15 April 1987 seeking equity treatment of the bond issues 476
The banks’ response to TBGL’s request to move to the NP guarantee 478
The significance of collapsing the NP agreements into the NP guarantee 484
The significance for on‑loan subordination of the banks’ agreement to BGF (ACT) becoming a nominated borrower 487
DIRECTORS’ DUTIES 489
Are the duty to act bona fide for the benefit of/in the interests of the company and the duty to exercise powers for proper purposes fiduciary duties? 492
Are the fiduciary duties of directors limited to proscriptive ones? 494
Are the tests for determining whether directors have properly performed their fiduciary duties to act bona fide in the interests of the company and to exercise powers for proper purposes subjective or objective? 501
Duty to act bona fide in the interests of the company 506
The duty to exercise powers for proper purposes 508
A more interventionist court 518
Interests of creditors 520
A question of reasonableness? 525
Conclusions 532
BARNES v ADDY 539
The Barnes v Addy case – knowing receipt and knowing assistance 539
The law 540
Knowing assistance 542
Knowing receipt 550
Absence of trust property 553
Absence of trust property before rescission 562
Imputation of knowledge and agency 563
Aggregation of knowledge of bank officers and of other material 564
A guiding mind? 569
The one transaction 571
A duty to communicate? 573
Aggregation of documentary material 574
Imputation of contradictory evidence 575
Westpac as the agent of the Australian banks and Lloyds Bank as the agent of the Lloyds syndicate banks 575
Knowledge imputed from solicitors 581
The solicitors did not keep any material information to themselves 583
Errors as to the quality of knowledge possessed by the banks 590
That the banks ought to have known certain things 592
Errors as to imputation of knowledge from failure to enquire 594
Bank knowledge of directors breaches of duty 596
Knowledge of directors and banks of Bell insolvency 597
The directors 597
The banks 600
The solvency certificate requirement 607
The carrying value of the publishing assets 607
External creditors – the on‑loans 619
External creditors – the claims by the DCT 622
External creditors – others 627
The clause 17.12 regime 628
The Waivers 631
No worse off 635
The minutes of the Bell directors’ meetings 641
Bank knowledge of lack of corporate benefit 646
Corporate benefit – time to restructure 648
Conclusion on bank knowledge 650
BGUK, TBGIL and BIIL – bank knowledge of directors’ breaches 651
The Bell respondents’ ‘knowing assistance’ case 654
Bank knowledge of BGNV director’s breach 655
BGNV’s knowing assistance case 664
No conscious dishonesty 665
Pleading deficiencies 672
STATUTORY CLAIMS 672
Dispositions of property – the share mortgages 674
Dispositions of property – the guarantees 676
Dispositions of property – conclusion 681
Relief 681
Statutory avoidance – when does it occur? 684
The consequences of avoidance 698
EQUITABLE FRAUD 707
Fraud by inequitable and unconscientious dealing 728
Defences and relief 728

DRUMMOND AJA:
My approach to the appeal
1282 This case has been underway for two decades. It should not have become one of extraordinary complexity. The position of the Bell group companies as at January 1990 was relatively straightforward. These are not my words but the opening written submissions of the appellants in support of ground 1 of their appeal. They are made, so far as I can see, without any ironic intent. I agree with them.
1283 Prior to the hearing of the appeal, each of the parties was ordered to identify with asterisks their 25 best grounds of appeal or cross‑appeal. This exercise served no purpose. The order did not limit the parties to arguing only those grounds. It was too late in this litigation, which quickly became uncontrollable, to do that: I mention only that when Wheeler JA gave the ‘asterisk’ direction, her Honour noted that the written closing submissions at trial totalled 36,932 pages and that the attitude of the parties to the appeal was that ‘all of us wish to re‑agitate virtually the entire matter’.
1284 At the appeal hearing, extensive oral submissions were directed to a number of grounds of appeal which were not marked as ‘best grounds’. By way of example, at appeal ts 886 ‑ 887, senior counsel for the appellants identified his ‘core propositions’ with respect to the knowledge requirement of the Barnes v Addy cases. They involved 19 grounds of appeal. Most raised important issues. Only four, grounds 75, 76, 81 and 84, were asterisked.
1285 I have therefore dealt only with those grounds of appeal that seem to me to be of significance.
SUBORDINATION
1286 A major issue on appeal is whether the learned trial judge was correct in concluding that the on‑loans by BGNV of the proceeds of the first bond issues to TBGL and of the other two bond issues to BGF were on a subordinated rather than an unsubordinated basis. Owen J identified the importance of this issue in section 18 [4243] ‑ [4244], section 7.3.2 [861] ‑ [880], and section 12.1.4 [2556] ‑ [2558].
1287 As appears from the offering circular and the trust deed, the bondholders invested in the finance bonds issued by BGNV in reliance on, among other things, promises of payment of interest and repayment of principal by BGNV, but primarily on the promise by TBGL, as guarantor of those payments. They agreed that, in liquidations of BGNV and TBGL, their entitlements to payment would be subordinated to the entitlements to payment of all unsubordinated creditors of BGNV and TBGL, including the banks. They also invested in the associated conversion bonds issued by TBGL on the promise that they could convert their redemption entitlement under the BGNV finance bonds into shares in TBGL at the price stipulated.
1288 This litigation has arisen out of the collapse of the Bell group in early 1991. It is easy to say now that the bondholders should not have the windfall of an increased recovery in the liquidation of TBGL and BGF that will flow from each on‑loan contract if it does not include a term subordinating TBGL and BGF’s liabilities to BGNV in respect of the on‑loans to their liabilities to all unsubordinated creditors including the banks and that such a term should be inferred or implied in each of the three on‑loan contracts. But the bond issues and associated on‑loans were made during a long period of highly profitable growth and expansion of the Bell group and aggressive bank lending to entrepreneurs and others in a booming market, when the possibility of the collapse of the Bell group was remote.
1289 The apparent simplicity of the question whether the on‑loans contained a term for subordination of BGNV’s rights to repayment by TBGL and BGF is belied by the effort taken by the parties and the trial judge in litigating and adjudicating this issue. The part of the judgment that deals with whether the on‑loan contract contains an implied or an inferred term for subordination, sections 12 ‑ 13 and 18, extends over 220 pages. Much evidence and many hundreds of pages of written and oral submissions were devoted at the trial to this issue. The appellate litigation of this issue produced voluminous written submissions and lengthy oral submissions. His Honour took another 210 pages to dispose of the banks’ alternative claim that TBGL and BGNV were estopped from denying that the on‑loans were subordinated. Evidence and submissions at trial and the on appeal on this issue were also voluminous.
1290 His Honour’s reasoning to his conclusions on these issues and the conclusions themselves expressed in differing ways are diffused through the judgment. His explanation for this is in [4] ‑ [21] of his reasons.
1291 The issues raised by the respondents’ cross‑appeals here are whether the learned trial judge was correct in finding:
(a) that there was an inferred or alternatively, an implied term in each of the three on‑loan contracts between BGNV and TBGL and BGF to the effect that in a winding up of TBGL and of BGF, BGNV’s rights to repayment by them of the on‑loans were subordinated to the rights of other creditors of TBGL and BGF, including the banks, to repayment of moneys owed to them (the ‘contracts inter se’ issues) [854];
(b) that, in the absence of contractual terms for subordination in the on‑loan contracts, BGNV, TBGL and BGF were estopped as against the banks from denying that the on‑loan contracts included a term for subordination to the effect just stated (the ‘estoppel inter partes’ issue) [857], [3422].
1292 By their appeal and notice of contention in the respondents’ cross‑appeal, the appellants challenged his Honour’s rejection of the banks case that:
(a) the same circumstances relevant to the contracts inter se issues gave rise to contracts between TBGL, the other Bell negative pledge companies and the banks (except HKBA: see [3398]) to the effect that the liabilities of TBGL arising from the raising and deployment of funds in connection with the first and second (but not the third) bond issues, including the liabilities to BGNV in respect of the on‑loans would, in a winding up of TBGL and of BGF, be similarly subordinated (the ‘contracts inter partes’ issues) [856];
(b) the same circumstances relevant to the contracts inter se case gave rise to an estoppel available to TBGL against BGNV with respect to subordination of the on‑loans from which the banks could benefit (the ‘estoppel inter se’ case) [855], [3422].
The contracts inter se
1293 His Honour held that the on‑loan contracts each contained an inferred term, or alternatively, an implied term subordinating the liabilities of TBGL and BGF to repay the BGNV on‑loans to their liabilities to unsubordinated creditors including the banks. His Honour dealt first, and at length, with the case for an inferred term for subordination in the on‑loan contracts and then, much more briefly, with the case for an implied term for subordination.
1294 Owen J considered the contractual subordination question in a number of sections of his judgment. He returned to this issue finally in ‘The subordination issue: conclusions’ in section 18 of the judgment, where he said [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.
1295 His Honour’s conclusion that there was an inferred term for subordination in each of the on‑loan contracts is at [3381] and [3382] in section 13.4 of the judgment. His conclusion about an implied term to that effect is at [3332] in section 13.2.9.
1296 In my opinion, his Honour’s conclusions that the on‑loan contracts contained an inferred or an implied term for subordination of TBGL’s obligation to repay them to BGNV are flawed by a number of errors.
The inferred term – a summary of my reasons
1297 It was not contentious at the trial that the on‑lending of the proceeds of the three BGNV bond issues constituted contracts between BGNV and TBGL and BGF [2610].
1298 It was also common ground that each of these contracts was an informal one in that it was not constituted by or recorded in a single document or series of documents [853], [2610] ‑ [2612], [2645], [3382], [4255]. It followed that whether the on‑loan contracts contained a term for subordination was a question of fact. It was not to be resolved by a process of contractual interpretation of any documents.
1299 An enormous mass of documents was tendered at trial from the records of the Bell companies and the banks. However, only a handful of Bell documents, fewer than a dozen, mention these on‑loans and none describes their ranking status.
1300 The question of fact his Honour said he had to determine was whether TBGL, BGF and BGNV had manifested mutual assent to, or had reached a tacit agreement for, the inclusion of a subordination term in each of these contracts.
1301 In the course of reasoning to his conclusion that the on‑loan contracts did contain a subordination term, Owen J relied on a number of documents. These documents were all generated within TBGL or its advisors. Some were internal TBGL documents while others were given to the banks and other third parties.
1302 His Honour held that some of these documents manifested an intention by TBGL and BGF to subordinate the on‑loans. Others he said manifested an intention by TBGL that subordination was essential to its argument to the banks that the bond issues should be treated as equity while some showed the commercial purpose of TBGL for making the bond issues. His Honour relied on the documents the subject of these two intermediate conclusions in reaching his ultimate conclusion that the on‑loans were subordinated: he considered that they formed part of the factual matrix of the on‑loan contracts.
1303 Further, none of these documents was given to BGNV and no one in BGNV was aware of any of them (save that Graham, a Bell UK officer and a BGNV director, was familiar with the Lloyds Bank information memorandum). His Honour was therefore in error in using any of them as supporting his ultimate finding of an informal agreement between TBGL and BGNV for subordination of the on‑loans.
1304 Further, despite recognising at [3219] that it was an erroneous approach, he found in a number of these documents, on which he placed particular reliance, support for his conclusion that the on‑loans were subordinated by subjecting them to a process of contractual interpretation that yielded meanings the documents as pieces of evidence were not capable of bearing. He should instead have sought the evidentiary significance of these documents in the meaning of the language used in each, construed in its context. None, however, constituted evidence that the on‑loans included a subordination term.
1305 His Honour also erroneously relied on the subjective beliefs of a number of Bell personnel about the subordination of the on‑loans in reaching his conclusion that a term to that effect should be inferred in each on‑loan contract.
1306 His Honour also relied on two arguments of the banks to reach his conclusion that the on‑loans were subordinated: firstly, the ‘bonds means proceeds’ argument viz that references in the TBGL documents to the subordinated bond issues encompassed the proceeds of those issues; and secondly, the ‘effective subordination’ argument viz that because the BGNV bond issues were made on the same terms as the TBGL (and BGF) bond issues and the latter were subordinated, the BGNV issues would not be effectively subordinated unless the on‑loans, as the proceeds of those issues, were also subordinated. He was in error in accepting both of these bank arguments.
The inferred term – the trial judge’s reasoning
1307 In section 12.4 of the judgment, his Honour analysed the lengthy and complex way in which the contractual subordination issue was pleaded by the banks, referring to the difficulties the banks had in formulating their claim that there was a contract between TBGL and BGNV that provided for the subordination of the TBGL’s liabilities under the on‑loans to its liabilities to the banks.
1308 After a detailed examination of a mass of evidence, his Honour said in section 13.4, ‘Contracts inter se: conclusion’ [3381] ‑ [3382]:
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.
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 … with an inferred term (arising from a tacit understanding or agreement or from a manifested mutual assent) concerning subordination …
1309 In sections 12.5.1 and 12.5.3, his Honour reviewed the legal principles applicable to informal contracts (as were the on‑loan contracts) and to inferring and implying terms in such contracts.
1310 In [2659], he explained his references in the judgment at e.g. [2643] and [3382], to ‘a tacit understanding or agreement’ and to a ‘manifested mutual assent’:
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’.
Cf Baltimore & Ohio Railroad Co v US 261 US 592 (1923); Fincke v US 675 F 2d 289 (1982).
1311 Owen J referred with approval at [2662] to a passage in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 at [369] dealing with informal contracts which concluded as follows:
… 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 … 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.
1312 His Honour acknowledged at [2654] that the same principles govern whether an informal contract includes a particular term. See also Husain v O & S Holdings (Vic) Pty Ltd [2005] VSCA 269 [51]. His Honour then said [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.
He had said at [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.
1313 Intention in this context: ‘describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened. It is not a search for the uncommunicated subjective motives or intentions of the parties’ (authorities omitted): Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 [25]. See also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40].
1314 When he spoke of ‘the parties’ his Honour was referring to TBGL and BGNV, in relation to the first on‑loan contract, and to BGF and BGNV in relation to the other on‑loan contracts. As his Honour noted in his final conclusions, the banks were not party to those contracts and lacked standing to enforce them: see [4256].
1315 In Equuscorp Pty Ltd v Glengallan Investments [2004] HCA 55; (2004) 218 CLR 471, Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ said at [34] of the principal of objectivity in the law of contract, mentioned by his Honour in [2657]:
There are reasons why the law adopts this position. First, it accords with the ‘general test of objectivity [that] is of pervasive influence in the law of contract’. The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions.
1316 Speaking of informal contracts, his Honour concluded at [2672] that it was permissible to look at conduct occurring after the latest date by which each of the on‑loan contracts was made for the limited purpose of ascertaining whether a contract, with the terms contended for, existed.
1317 It is appropriate to say here that I do not accept the BGNV respondents’ submission that the conduct of TBGL in procuring BGNV to enter into the Subordination Deed of 31 July 1990 is evidence of conduct subsequent to the making of the on‑loan contract showing that they did not agree at the time the on‑loans were made to include a term for subordination. The deed was drafted by the lawyers for the banks during a period in which all the banks became increasingly concerned that pari passu competition with the bondholders was a serious risk and in circumstances in which the banks had not obtained information sufficient to enable them to determine the actual status of the on‑loans: see [7180], [7183], [7225], [7226] and [7228]. The banks were insistent on TBGL procuring the deed from BGNV. Aspinall, who had the carriage on behalf of TBGL of negotiations with the banks, was more eager to placate the banks in order to obtain time for TBGL to trade out of its difficulties and more immediately, to obtain, as his Honour found, the release of funds necessary to pay bondholder interest than he was to investigate the status of the on‑loans. In my opinion his Honour was entitled to reject this submission, repeated on appeal.
1318 His Honour’s conclusions at [3381] and [3382] and his discussion of the principles applicable to inferring an informal contract from conduct of both parties indicates that his Honour considered that each of TBGL (and BGF) and BGNV by their conduct showed an objective intention to make contracts for the on‑loans of the bond proceeds that contained a subordination term. That that was how his Honour proceeded is confirmed by what he said in section 18, ‘The subordination issue: conclusions’ at [4252] ‑ [4255].
1319 His Honour also made statements at [3101] and [3278] that may suggest that he found inferred on‑loan contracts, each containing a subordination term, on a different basis, one that did not involve a finding that BGNV showed by its own conduct an objective intention on its part to include such a term in those contracts. Even if his Honour did reach such a conclusion, it would be erroneous because, as will appear, there is no evidence showing that TBGL ever determined to include a subordination term in the on‑loan contracts.
1320 However, as I explain in the section ‘BGNV a party to the on‑loan contracts with TBGL and BGF’ below, I do not think his Honour departed from his orthodox approach, illustrated by his statements at [3381] and [3382], which require each of TBGL and BGNV to manifest an intention that the on‑loan contracts would include a subordination term.
1321 What his Honour said about the applicable legal principles I have referred to was orthodox and was not challenged on appeal. But, because of the way his Honour dealt with a lot of the evidence including but not limited to that showing the subjective beliefs and intentions of the Bell personnel involved in deciding to issue the bonds, as expressed both orally and in documents, it is important to note at the outset some further principles of relevance to the resolution of the contractual subordination question.
Objective manifestation of an intention
1322 Throughout the judgment on the contractual subordination term issue, his Honour frequently referred to evidence about discussions between people and to documents as showing an objective manifestation of intentions that the on‑loans were to be subordinated and also that subordination of the bond issues was a justification for equity treatment of those issues by the banks. This evidence was central to his Honour’s conclusion that the on‑loan contracts did include an inferred term to that effect.
1323 As will appear, I think his Honour was in error in finding in any of the documents he relied on any evidence that the on‑loans contracts included a term for subordination.
1324 But quite apart from that, that one party to an informal contract by its representatives may have manifested an intention to include a particular term in an informal contract has no relevance to whether that term was in fact incorporated in the contract unless there is evidence that the other party objectively agreed to its inclusion.
1325 The on‑loan contracts cannot be inferred to include a term for subordination unless there is objective evidence showing that BGNV should be taken to have known that that was one of TBGL’s requirements and that BGNV assented to it. The statement by McHugh JA in Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110 shows this. The passage cited from Branir by his Honour is to the same effect. So is Industrial Rollformers Pty Ltd v Ingersoll‑Rand (Australia) Ltd [2001] NSWCA 111 where Giles JA, with Priestley and Meagher JJA agreeing, said in the context of an informal contract [138]:
It is necessary, if one party is to be held to have bound itself in contract by its conduct, to be able to identify within the conduct of both parties the terms of the contract, and to be objectively satisfied that both parties agreed to be bound by those terms.
1326 The reason is clear. In Australian Woollen Mills Pty Ltd v The Commonwealth [1954] HCA 20; (1954) 92 CLR 424, the High Court referred at (457) ‘to a principle which is fundamental to any conception of contract. It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty’. BGNV cannot be subjected to a contractually enforceable obligation to subordinate its rights to repayment of the on‑loan by TBGL to TBGL’s obligations to the banks unless it agreed, either inferentially or impliedly, to inclusion of that term.
1327 Notwithstanding his Honour’s correct statements at [2663] and [2657], he frequently but erroneously used documents not communicated to BGNV, which he said objectively manifested an intention by TBGL to subordinate the on‑loans, to make findings about the inclusion of a subordination term in the on‑loan contracts. A typical example of the way his Honour proceeded is in section 13.4 of the judgment, ‘Contracts inter se: conclusion’, where, after having found at [3378] that the on‑loan contracts contained a subordination term, his Honour says at [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.
1328 There is no evidence that can justify imputing knowledge of any of these documents to BGNV. Neither Graham nor Williams had any recollection of seeing any of them and there is no evidence that they were communicated to BGNV.
1329 In any event, it was in the text of Griffiths’ memorandum (‘the key is to have the issue subordinated … in time as well as nature’ etc) and of these letters to the ATO (‘the funds raised from this issue will be lent by BGNV to TBGL on the same terms as the issue’ etc) and of the letters to the banks (‘the bonds are a subordinated debt … not payable for 10 years with a strong likelihood of being converted …’ etc) that his Honour found support for his conclusions that they contained objective manifestations of the intentions of TBGL and BGNV to subordinate the on‑loans (and that they also contained representations that the on‑loans were subordinated that were the foundation of the banks’ estoppel case).
1330 A general awareness by BGNV directors Graham and Williams, as found by his Honour, of TBGL’s purposes in issuing the bonds and of the arrangements made by TBGL and BGNV for the issue of the bonds, without them having seen the text to which his Honour attached such significance, is not sufficient to make any of these documents available as evidence of BGNV’s contractual assent (or as representations binding on BGNV, even if any of them could be read as containing the representations found by his Honour, for the purposes of the banks’ estoppel case).
1331 For want of evidence that any of these documents were communicated to anyone acting for BGNV, they cannot be used as evidence of BGNV’s assent to any such contractual term (or to BGNV being bound by any representation by the TBGL officers who authored these documents). His Honour was in error for that reason in using these documents to find that the on‑loan contracts included a subordination term.
1332 Whether an informal contract has been made depends on an objective assessment of the conduct of both parties, not on their subjective intentions. But his Honour’s findings that no relevant TBGL or BGNV officer actually, i.e. subjectively, considered the on‑loans or their terms at the time they were made emphasises the need for there to be clear evidence of an objectively manifested intention by TBGL communicated to BGNV to subordinate the on‑loans before a tacit understanding about that can arise between them sufficient to have contractual force.
1333 The subjective beliefs that the on‑loans were subordinated, which his Honour found were held by key personnel of both TBGL and BGNV at the time the on‑loan contracts were made, that were not communicated to the other party are devoid of any contractual effect. His Honour recognised that at [2657]. Even where two parties both hold the same subjective belief or intention about a matter, that will still be ineffective to incorporate the matter in an informal contract between them. The objective theory of contract requires that there be some identifiable communication between them about their common belief or intention before it can give rise to an informal contract or to the incorporation of a particular term in such a contract.
1334 Nor does it assist the determination of the issue whether the informal contract between TBGL and BGNV included a subordination term that TBGL communicated its intention to include a subordination term (if it indeed did that), not to BGNV, but to a third party e.g. the banks. Such a third party communication is not capable of showing BGNV’s assent to the inclusion of a term for subordination in the on‑loan contract between TBGL and BGNV. It has no more significance than the uncommunicated subjective intention of TBGL to that effect.
1335 All this is basic law and was acknowledged repeatedly by his Honour in the course of his judgment: see [2651], [2657], [2663], [3085], [3101], [3107], [3136] and [3278]. Unfortunately, in the course of dealing with the mass of evidence tendered so promiscuously by the parties, I think his Honour lost sight of, and failed in many respects to apply these principles. Moreover, even when he stated basic principles, his Honour at times added qualifications that indicate a failure to accept the restrictions placed upon him by these principles. In [3085] he said:
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. (emphasis added)
1336 As the authorities I have referred to show, the legal rights and obligations of the parties to a contract turn upon what their words and conduct would be reasonably understood to convey to each other, not upon actual beliefs or intentions. The investigation of what a representative of one party subjectively had in mind when they made an oral or written communication to a representative of the other party cannot be of any relevance to whether the communication has evidentiary value in the determination of whether there is a objectively manifested tacit agreement or intention to include a particular term in the contract. That investigation may, as his Honour noted, explain or illuminate the communication, but only by revealing what the author subjectively meant to convey or had in mind when speaking or writing to the recipient.
1337 At [3136] he said:
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. (emphasis added)
1338 I have explained why communications within one party’s organisation and between that party and a third party are irrelevant to determining whether an informal contract contains a particular term unless they are communicated to the other party to the contract.
Surrounding circumstances must be mutually known
1339 His Honour repeatedly noted in the passages I have referred to above that the banks did not contend that any of the documents they relied upon with respect to this issue had contractual effect, so as to enable the on‑loan contracts to be described as ‘partly oral and partly in writing’. They comprise documents passing between TBGL people (but not including BGNV personnel), TBGL’s advisers, the ATO and the banks. In some, his Honour found evidence of an intention by TBGL to subordinate the on‑loans, in others evidence of an intention that subordination was an important argument to be put by TBGL to the banks to procure equity treatment of the bonds. He treated various of these documents as forming part of the surrounding circumstances or factual matrix which he considered in reaching his conclusion that the on‑loans included a subordination term: see [853] ‑ [855] and [2644] ‑ [2645].
1340 It was erroneous for his Honour to take into account, as part of this factual matrix, documents produced by TBGL but not communicated to BGNV.
1341 Making a determination with respect to whether the parties have manifested a mutual intention about the existence or terms of an informal contract ‘requires consideration, not only of the text of the documents, but also the surrounding circumstances known to participants, and the purpose and object of the transaction, but not the participants’ subjective beliefs’: County Securities Pty Limited v Challenger Group Holdings Pty Limited [2008] NSWCA 193 150; [66] (Beazley JA agreeing).
1342 As McColl JA there noted, it is only matters mutually known to the contracting parties that can be taken into account in such an exercise. For other statements in differing contractual contexts emphasising the need for facts to be mutually known before they can be taken into account in seeking the objective intentions of the parties. See DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423, 429 and Toll (FGCT) v Alphapharm [40] (surrounding circumstances as an aid to contractual interpretation); Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 (surrounding circumstances as an aid to determining whether to imply a term in a contract), 351 ‑ 352, where Mason J (Stephen and Wilson JJ agreeing) added that the relevant surrounding circumstances will extend to facts that are notorious: ‘knowledge of them [by both parties] will be presumed’ and Brennan J at (401); Kriketos v Livschitz [2009] NSWCA 96 [107] and [108] (surrounding circumstances as an aid to determining whether a contract constituted partly in writing and partly by conduct – see [102] – has been concluded). I take these statements to be illustrations of the application of the objectivity principal in contract.
1343 In The Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111, Macfarlan JA (Young JA and Sackville AJA agreeing) held that the background or surrounding circumstances to which regard could be had in interpreting a contract was limited to facts of which the parties had actual, as opposed to constructive, knowledge. He also explained why he did not consider that the statement in Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at [11] departed from this requirement: see [97] ‑ [106].
1344 Subsequently, in QBE Insurance Australia Ltd v Vasic [2010] NSWCA 166, Allsop P (Giles and Macfarlan JJA agreeing) explicitly rejected submissions that the scope of admissible material in the task of interpretation and construction of a written contract was not restricted to circumstances actually known to both parties but could include matters only constructively known to the parties and even evidence said to indicate the purpose or object of the transaction, including its genesis, background, context and market, without such matters being known by the parties themselves or by both of them: see [20] ‑ [35].
1345 If a circumstance known only to one of the parties who are said to have entered into an informal contract were allowed to influence the decision on whether a contract had been concluded or whether it included a particular term on the ground that that circumstance was part of the relevant factual matrix or surrounding circumstances, or that it revealed the purpose or object of the transaction, that would conflict with the principle of objectivity in the law of contract: the knowledge, beliefs or intentions of one party, not communicated to the other, cannot be taken into account in determining whether the parties have arrived at an inferred contract by their conduct.
1346 His Honour repeatedly ignored the restriction placed by the requirement for mutual knowledge on the evidence he could properly take into account as part of the surrounding circumstances or factual matrix of the on‑loan contract in determining whether TBGL manifested an objective intention to include a subordination term in the on‑loans.
A question of fact
1347 Determination of whether an informal contract has been concluded between the parties and what are its terms involves a question of fact, not law. In such a case, as Spigelman CJ said in County Securities v Challenger Group Holdings [7]:
[T]he subject matter and the concomitant terms of the contract must be inferred from a combination of surrounding circumstances including conversations, documents and conduct none of which provide a definitive form of words. The issue is not one of interpretation, because there are no words to interpret. The issue is one of fact: what did the parties agree?
(In referring to ‘[no] definitive form of words’ and ‘no words to interpret’ his Honour was, I think, contrasting an informal contract with a written contract.)
1348 To similar effect are the observations of Lord Hoffmann in Carmichael v National Power plc [1999] UKHL 47; [1999] 1 WLR 2042 at 2049, cited by Spigelman CJ at [11]:
[T]he rule that the construction of documents is a question of law … applies in cases in which the parties intend all the terms of their contract (apart from any implied by law) to be contained in a document or documents. On the other hand, it does not apply when the intention of the parties, objectively ascertained, has to be gathered partly from documents but also from oral exchanges and conduct. In the latter case, the terms of the contract are a question of fact …
1349 In Handbury v Nolan (1977) 13 ALR 339, referred to by Spigelman CJ at [10], the High Court was concerned with whether an informal contract was for the sale of a cow which had tested positive for pregnancy or for the sale of a cow which was in fact in calf. Barwick CJ (with Aicken J agreeing) said at (341):
Although the catalogue and terms of sale were in writing, the contract of sale and purchase, through the bidding at the auction, was oral, incorporating no doubt the terms of the catalogue and of the auction. The matter, in my opinion, is not to be resolved, as it were, by construction of documents, but as a matter of fact, i.e. what in substance was the subject matter of the sale and purchase.
1350 While the question whether an informal contract has been concluded and what are its terms is a question of fact, questions of law will arise incidentally to that ultimate question of fact when the evidentiary significance of documents relevant to the ultimate question has to be determined. The construction of a document not itself having contractual force is always a question of law though it involves identifying only the document’s evidentiary significance to some issue in the case. So whether the letter in the Larratt v Bankers and Traders Insurance Co (1941) 41 SR (NSW) 215, 225 was evidence of the author’s repudiation of a contract and whether the letter in Furness v Meek (1857) 27 LJ Ex 34 enclosing a deed evidenced that the deed was to operate only as an escrow involved questions of law i.e. the construction of the documents. See also Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60, 77 ‑ 78.
1351 In the absence of evidence that the language of such a document had a special meaning for the author and the recipient, the words used must be given their ordinary meaning. Its construction may be clear on its face. But it may be necessary to have regard to the context to understand the document. When TBGL wrote to the banks on 11 December 1985 and said: ‘The Bell Group Ltd considers that the issues should be regarded as equity when considering balance sheet ratios for the purposes of its banking covenants’, an awareness of cl 7 of the NP agreements was necessary to understand what the author was saying.
1352 But the important point is that construction of a non‑contractual document to ascertain its evidentiary significance to the ultimate question of fact (here, what are the terms agreed between the parties?), does not involve a process analogous to that of contractual interpretation, even though reference to the context of a document may be necessary to determine the document’s significance.
1353 Contractual interpretation involves the identification of the objective intentions of two parties who have reached a concluded agreement and embodied it in a document. The court, particularly in a commercial context will strain to give a documentary contract a sensible meaning. Ambiguity or uncertainty will not defeat it. See Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, 437 (Barwick CJ). If the language of a written contract is open to two constructions, the contract will be construed so as to avoid consequences which appear ‘capricious, unreasonable, inconvenient or unjust’. See Cheshire and Fifoot’s Law of Contract (9th Aust ed, 2008) [10.34], citing Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99. If giving the language of a contract its literal or ordinary meaning leads to an absurd result, the court will interpret the contractual language so as to avoid the absurdity by supplying, omitting or correcting words, even if this extends beyond the mere correction of obvious and minor errors, to the open modification of important provisions in commercial contracts: see Cheshire and Fifoot [10.35].
1354 It is not open to a court charged with construing a non‑contractual document to extract by those sort of techniques of contractual interpretation a single or certain meaning from a non‑contractual document open to more than one reading or to give such a document what it thinks is a commercially sensible meaning not justified by the language of the document.
1355 In determining the significance of many documents his Honour failed to treat them as pieces of evidence whose meaning was to be found in the ordinary meaning of the language of the document construed in its context. Instead he determined their significance by a process of contractual interpretation, with the result that he ascribed meanings to a number of significant documents remote from what the language of the documents was capable of conveying in its context. The meaning his Honour found in the TBGL letter of 11 December 1985 asking the banks to treat the first bond issue as equity, i.e. to exclude it from liabilities in calculating the NP ratio, is one significant example of his Honour’s erroneous approach. He construed TBGL’s unambiguous request of the banks to treat the bond issues as equity for NP ratio purposes as a request to treat the proceeds of those issues, including the on‑loans, as equity: see [3231] ‑ [3239].
The relationship between TBGL and BGNV
1356 The nature of this relationship is relevant to understanding the significance of some of the documents upon which his Honour relied in finding a subordination term in the on‑loan contracts and also to how his Honour found that BGNV was party to both contracts containing such a term and to estoppel‑founding representations about subordination made by TBGL to the banks.
1357 BGNV was set up at the behest of TBGL, initially its sole shareholder, to ensure the success of the Eurobond issue: its involvement enabled TBGL to promise European investors that bond interest would be exempt from Australian withholding tax. That feature was critical to the success of the bond issue in the Euromarket.
1358 BGF was incorporated in February 1986 as a wholly‑owned subsidiary of TBGL to be the Bell group fundraising arm. Ownership of BGNV was transferred from TBGL to BGF soon after. This did not result in any change to the role BGNV performed with respect to the bonds.
1359 BGNV’s business activities were confined to issuing the TBGL Eurobonds, passing the proceeds on to TBGL and attending to administrative matters with respect to the payment of interest to bondholders and to the provision of information requested by LDTC, the trustee for the bondholders. In all these matters it acted in accordance with the directions of TBGL. BGNV had no other business and no assets other than the debts due to it by TBGL and BGF resulting from the on‑loans: see [3096] ‑ [3097], [2840] ‑ [2841], [3089] ‑ [3090] and [3271] ‑ [3278]. BGNV’s only creditor was LDTC as trustee. It had no relationship with any of the defendant banks either directly as a borrower or indirectly as a guarantor in respect of any other Bell group company. Nor did it have any contact with any of these banks. BGNV was, as Owen J found, a special purpose vehicle.
1360 BGNV was controlled by directors appointed by the TBGL Chairman’s Office in Perth who were officers of Bell companies domiciled outside Australia, except for a local Netherlands Antilles management company, initially Curacao Corporation Company NV. 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. Graham and Williams were employees in the Treasury division of TBGIL. Burghard was Bell group legal counsel in the United States. Curacao Corporation Company NV ceased to be a director on 10 March 1988 and was replaced by Equity Trust, another Netherlands Antilles company. Ruoff was the sole director of Equity Trust. Graham resigned as a director in November 1987 while Williams and Burghard resigned in August 1988. By August 1988, all the original directors had resigned leaving Equity Trust as the sole director.
1361 Two directors of BGNV, Graham and Williams, gave evidence at trial. At [3276] and [3277], his Honour summarised their evidence, noting that each understood that the role of BGNV, created for tax reasons, was to issue bonds so that the finance raised for use by TBGL would not be regarded as liabilities for the purposes of calculating the NP ratios that were binding on TBGL.
1362 According to his evidence which was accepted by his Honour, Graham was employed in London from 1985 until 1987 as deputy treasurer of TBGIL. However, he reported to Griffiths, the group Treasurer, and infrequently to Holmes à Court himself, both in Perth, with respect to any matters concerning TBGL in which he was involved. Though not personally involved in the December 1985 bond issue, he obtained his understanding of TBGL’s intentions in relation to the bond issues from discussions with Griffiths and others. As part of this exercise he was appointed a director of BGNV. He did not attend any BGNV board meetings, voting by proxy, in accordance with his understanding that BGNV’s role was to facilitate and achieve the purposes of the Eurobond issues. He had more involvement in the two 1987 BGNV bond issues than the December 1985 one. But his role in relation to those issues was principally to liaise between Griffiths in the Chairman’s Office in Perth and the issue managers. He was aware that the 1987 issues adopted the same structure as the 1985 issue with the same objective of raising funds for TBGL that the NP banks would treat as equity. He had no recollection of seeing most of the documents relied on by Owen J to find that there was a subordination term included in the on‑loan contracts and that representations were made to the banks by TBGL to that effect.
1363 Williams worked in London as TBGIL treasurer. He had regular contact with TBGL head office in Perth and in particular with Griffiths and other Treasury officers there. He had much the same general understanding of the objects of the BGNV bond issues as did Graham though he had very little involvement in those issues. He too was appointed a director of BGNV and had the same limited involvement in it and its activities and the same knowledge of its role as did Graham. He had no recollection of seeing any of the documents relied on by Owen J that I have referred to.
1364 The key feature of the contractual relationship between BGNV and TBGL was that BGNV acted in accordance with TBGL’s instructions in carrying out its functions with respect to all three bond issues.
1365 By its directors, BGNV decided to issue each of the three lots of bonds in accordance with instructions received from TBGL. It paid the net proceeds of the bond issues to TBGL or to BGF in accordance with TBGL’s directions. Performance of its functions thereafter is illustrated by how BGNV answered requests from LDTC for information and for certificates that the bondholders were entitled to make under the trust deed: Ruoff, the director of Equity Trust once it became managing director of the BGNV, expressly said in his examination on commission that Equity Trust acted on instructions from TBGL in performance of its functions as managing director of BGNV. He also said that Equity Trust would pass the requests from LDTC on to TBGL and receive, in return, the information required to satisfy the enquiries. Equity Trust would then pass that on to LDTC, in the form of a reply by BGNV to the request. LDTC was also entitled to call on BGNV for certificates of compliance with the terms of the trust deed. Ruoff would pass those requests on to TBGL and, on receiving the form of certificate from TBGL, he would retype it as a certificate from BGNV and send it to LDTC.
1366 The only independent discretion exercised by BGNV, which included obtaining advice from its own lawyer, occurred in early 1990 in response to TBGL’s requests for BGNV to execute the subordination deed proposed by the banks. But BGNV only took such action at TBGL’s urging. And while BGNV was taking such independent action, it was also, right up to July 1990 when it executed the subordination deed, continuing to issue information and certificates to LDTC in accordance with the procedure set out above.
1367 The nature of BGNV’s relationship with TBGL is further illustrated by how bond interest was paid. BGNV entered into the paying agency agreements with TBGL and the paying agents in respect of the three BGNV bond issues under which it was agreed that BGNV or TBGL would pay bond interest to the paying agents for transmission to the trustee for the bondholders. It fact, all such interest was paid direct by TBGL to the paying agents. All accounts however were written up to show the movement of interest payments from TBGL to BGNV to paying agent: see [3067]. Senior counsel for the respondents, Mr Young, said (appeal ts 4022):
What happened in practice is that TBGL made payments of the interest due direct to the paying agent in the case of each of the bond issues. Those payments went direct rather than via BGNV. The accounting arrangements, though, recorded the fact that the interest was paid by BGNV. My instructions are that that was the invariable course.
1368 That appears to be correct. TBGL was the sole source of funds for BGNV. That it was TBGL that made the arrangements necessary to ensure all interest payable to bondholders by BGNV on all three BGNV bond issues was paid from its funds to the paying agents for transmission to the bondholders is of significance to a proper understanding of various documents generated by TBGL upon which his Honour relied, including various NP reports and the 1988 spreadsheets.
1369 As to the first BGNV bond issue, for the first interest payment to bondholders due on 10 December 1986, see the memorandum of 25 November 1986 from Chapman, TBGL assistant Treasurer, to another TBGL officer McGuinn, and the telex by Cahill, TBGL assistant Treasurer of 9 December 1986 to the trustee for the bondholders confirming payment of that interest by TBGL ‘on behalf of BGNV’ to the principal paying agent for transmission to the bondholders. For the second interest payment due 10 December 1987, see the memorandum of 8 December 1987 from Chapman to Parkinson, a member of the TBGL tax and accounting section, enclosing the instruction from Burghard, a Bell group officer writing however as BGNV managing director, to TBGL ‘to make payment direct to [the principal paying agent] on [BGNV’s] behalf for interest due tomorrow on the convertible bonds’ and the telex from the principal paying agent of 10 December 1987 to TBGL confirming receipt from TBGL of the amount required to meet that interest payment to bondholders.
1370 As to the second BGNV bond issue whose net proceeds were on‑lent to BGF, instead of TBGL, see for the first interest payment to bondholders due on 7 May 1988, the telex from the principal paying agent to TBGL of 3 May 1988 asking TBGL to hold at its disposal the amount necessary to pay bondholder interest and to credit that amount to the paying agent’s nominated ANZ bank account and TBGL’s telex response from Chapman of 4 May 1988 sent without reference to BGNV which confirmed ‘that BGNV has arrangements in hand to credit to your ANZ account the sum’ requested for interest on 6 May.
1371 As to the third BGNV bond issue whose net proceeds were also on‑lent to BGF, see for the first interest payment to bondholders due on 14 July 1988, TBGL’s letter of 8 July 1988 to the principal paying agent in respect of that issue: ‘We confirm we will make payment’ of the coupon payment due 14 July 1988 through TBGL’s paying bank Midland bank, London on behalf of Westpac, Perth; see also the internal Westpac, Perth, memorandum by Youens of 11 July 1988 approving release of the necessary funds by Westpac to Midland for TBGL and TBGL’s letter of 14 July 1988 to the trustee for the bondholders confirming that TBGL had remitted those funds to the paying agent.
1372 In relation to all three bond issues see the memorandum from Chapman of TBGL treasury to Maher and Cahill in TBGL accounts of 9 July 1987 setting out the routine to be followed in the TBGL accounts section to ensure payment to the principal paying agent of the correct amounts due for interest in respect of all three BGNV bond issues and associated fees and in respect of the two issues made to Heytesbury, one by TBGL and the other by BGF and the further memorandum from Chapman of 24 August 1988 on the same topic.
BGNV a party to the on‑loan contracts with TBGL and BGF
1373 In section 13.2.1 his Honour dealt with the issue why BGNV was a party to the on‑loan contracts with TBGL and BGF. His Honour was satisfied, largely on the basis of the evidence of Graham, a BGNV director, that BGNV was aware of TBGL’s commercial purpose in raising funds by the bond issues and saw its role as directed towards facilitating TBGL’s purpose [3097]. His Honour concluded at [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. (emphasis added)
1374 At section 13.2.6.3 his Honour turned to the question of who set the terms of the on‑loans. Whether TBGL had authority to set those terms as BGNV’s agent was raised at trial and his Honour touched on this issue in this section e.g. at [3275]. But I do not think that his Honour based his finding about how the terms of the on‑loans were set on any notion of agency. Rather I think he found that TBGL’s authority arose as a matter of fact from the special relationship between it and BGNV.
1375 After summarising the evidence of Graham and Williams, his Honour continued [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. (emphasis added)
1376 In the next paragraph, his Honour rejected the plaintiffs’ argument that BGNV had no authority under its articles to lend on a subordinated basis and said:
… the conclusion to which I have come, namely, that BGNV on‑lent the funds of a subordinated basis, stems from what happened in fact …
1377 His Honour appears to have found that it was TBGL, as between it and BGNV, that had the authority to set the terms of the on‑loan contracts. But I do not think that his Honour in [3101] and [3278] found that TBGL had authority, without reference to BGNV, to determine to include a subordination term in the on‑loan contracts (if it is assumed that those contracts did in fact include such a power or term) and that all that was left for BGNV to do was to accept TBGL’s determination.
1378 Although in [3101] and [3278] his Honour refers to the importance of TBGL’s intention, the passages in emphasis in those paragraphs show that he does not resile from the need for there to be agreement, even if only tacit, by BGNV to any determination by TBGL that the on‑loan contracts should include a subordination term before such a term could be included in the on‑loan contracts. He expressly held that to be his task at [2663]. What his Honour said in sections 12.5.1 and 12.5.3 about the legal principles that he considered relevant to determining whether a term could be inferred into an informal contract is all directed to the need to find agreement by both parties to the inclusion of that term, either tacitly or by the manifestation of their mutual intention. The need for that is reflected in his explicit finding at [3243]: ‘In my view, the intention of the contracting parties, as manifested by their conduct, was to make the on‑loans on a subordinated basis’ and in his final view in section 13.4, ‘Contracts inter se: conclusion’, which he stated in [3381] and [3382] and which are set out above.
1379 The background information about the existence and role of BGNV which his Honour identified in the evidence of Graham and Williams was mutually known information: the officers of TBGL involved in setting up BGNV were well aware themselves of these matters.
1380 In any event by the resolution of 28 November 1985, Graham, Williams and Burkhard were, along with the initial managing director, Curacao Corporation NV, appointed not just as directors but as ‘managing directors’. BGNV’s deed of incorporation provides: ‘The management of the company is commissioned to a managing board, consisting of one or more managing directors. The company is represented at law and otherwise by any one of the managing directors’. I think the inference that can be drawn from these appointments, unusual by Australian standards, is that each had sufficient authority to permit knowledge acquired by each relevant to the activities of BGNV to be imputed to the company: see Haughton (JC) & Co v Nothard, Lowe & Wills Ltd [1928] AC 1, 19 and El Ajou v Dollar Land Holdings Plc [1994] 2 All ER 685, 705.
1381 His Honour was entitled to take into account that mutually known information when he decided that TBGL had the authority to set the terms of the on‑loan contracts. Those contracts came into existence, at the latest, when BGNV acted to give effect to TBGL’s decision by issuing the bonds and paying the net proceeds over to TBGL, all in accordance with TBGL’s directions. BGNV’s actions in doing this provide the evidence of its tacit agreement necessary to show that contracts under which TBGL borrowed the bond proceeds from BGNV came into existence between them.
1382 The on‑loan contracts are not examples of the usual kind of contract which is the ultimate agreement reached by two parties, each with their own interests and each of whom has negotiated for the contractual outcome most advantageous to it. In view of the special relationship between BGNV and TBGL, BGNV was entitled to leave it to TBGL to set the terms of the on‑loan contracts to which it was a party. But even in those special circumstances, no contract could come into existence between them merely upon TBGL setting the terms of that contract. BGNV would still have to give its assent, even if only tacitly, to what TBGL had determined. That was I think the view to which his Honour adhered, though he erroneously concluded that there was mutual assent to the inclusion of a subordination term in each on‑loan contract.
1383 I reject the submissions of the BGNV respondents that the BGNV directors would have been in breach of their duties by abdicating responsibility to fix the terms of the on‑loans to the borrower, TBGL.
1384 It is true that directors owe fiduciary duties to their company, not the shareholders and that they are not required, when exercising the powers of management vested in them, to act in accordance with directions from the shareholders (though they may risk dismissal by ignoring shareholder wishes): see Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821; [1974] 1 NSWLR 68, 837.
1385 But BGNV was established for a specific purpose: it had no business other than that of issuing the bonds at the directions of TBGL (and then of BGF) and of attending to the associated administrative tasks also in accordance with their directions. BGNV’s directors were aware of its role as a conduit between the bondholders and TBGL and were entitled to exercise their powers of management to ensure that role was performed. There is no reason why BGNV, at least in the circumstances prevailing up to the time of the third bond issue should not act to ensure TBGL’s objectives in raising funds by the bond issues were achieved and in accordance with the directions it received from TBGL. There was no divergence between the interests of TBGL, BGF and BGNV with respect to the bonds until well after the third bond issue.
BGNV’s power to subordinate the on‑loans
1386 The BGNV respondents submitted that while its articles of incorporation permitted it to make the on‑loans to TBGL and BGF, they did not permit it to subordinate those on‑loans. It followed, so they submitted in effect, that his Honour should not have found an inferred or implied term for subordination in the on‑loan contracts because of the inappropriateness of fixing BGNV with an objective intention to do something beyond power. They also submitted that his Honour should have found that BGNV’s entry into on‑loan contracts with a term as to subordination (if they did include such a term) ‘was ultra vires and thus of no legal effect’.
1387 The appellants at [APPA.000.089.001, page 14] submit that BGNV did not rely on this particular argument at trial and should not be allowed to raise it now. The appellants’ first submission is correct: see [3279] where his Honour noted the plaintiffs’ argument about its articles of incorporation which are inconsistent with the one now raised. It also appears from the concluding comments in this passage, repeated in [4493] that his Honour did not attempt to decide the ultra vires issue now relied on.
1388 At trial, the question of BGNV’s capacity to subordinate the right to repayment by TBGL of the on‑loan to the rights of other creditors of TBGL arose in the context of the banks’ insistence in the first half of 1990 that TBGL procure from BGNV the subordination deed in favour of the banks which it ultimately executed in July 1990.
1389 The banks’ Dutch lawyers, Smeets Thesseling and van Bokhorst, engaged to advise the banks in relation to that subordination deed, reviewed BGNV’s articles of association in May 1990 and volunteered the opinion that the purpose clause did not give BGNV authority to secure the obligations of third parties, which subordination of its receivables would entail. Smeets suggested that the banks should arrange for BGNV to make an appropriate amendment to its articles. That opinion was contradicted by van Eps, the Netherlands Antilles lawyer advising BGNV and TBGL. On 13 June 1990, the board of BGF resolved to amend the articles of association of BGNV to give it the necessary power. Finally, on 3 July 1990 van Eps sent a long advice to TBGL setting out his reasons for believing that the unamended articles of incorporation gave BGNV the necessary power to subordinate its right to recover in respect of the on‑loans. The BGNV respondents now want to embrace the banks’ lawyers and abandon their own.
1390 In view of the failure of the BGNV respondents to raise at trial this particular ultra vires argument now relied on, in view also of the conflict between the Dutch lawyers and the failure of the BGNV respondents to explain how this court should approach the issue given that it was not common ground on appeal that Netherlands Antilles law should be taken to be identical with Australian law on relevant matters, it is not appropriate to allow them to raise the argument now: Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 [9] and [10] and Chilcotin Pty Ltd v Cenelage Pty Ltd [1999] NSWCA 11 [14] ‑ [18].
No differences between the three on‑loans
1391 His Honour concentrated on whether the first BGNV on‑loan contract with TBGL contained a term for subordination of BGNV’s rights to repayment by TBGL to TBGL’s obligations to pay back its loans from banks. In [3100] he said:
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 …
See also [3382] and [3385] (in section 18 of the judgment where his Honour set out his final conclusions on the subordination issue).
1392 The correctness of this approach was challenged by the respondents.
1393 I reject this challenge. The documentary and oral evidence from the Bell officers referred to in the appellants submissions [APPA.000.088.001, pages 64 and 65], entitled his Honour to find as he did at [2826] ‑ [2828] and later at [3098] ‑ [3100] and again at [3378] and [3382], that the 1987 bond issues were structured in the same way as the 1985 issue so that if it were subordinated so were the other two. It is true that TBGL did not have the Coopers & Lybrand advice of October 1986 which preceded the second and third bond issues. But that did not cause TBGL to modify the 1985 structure for the subsequent issues. As is apparent from the TBGL letter of 25 November 1985 to the ATO and the offering circular setting out the terms on which the bonds were offered to ex‑Australian investors, the first issue 1985 structure was in all material respects identical to the 1987 structures.
1394 There is no reason to doubt his Honour’s approach that all the BGNV on‑loans were subordinated or they were all unsubordinated.
A threshold objection to inferring a term for subordination
1395 At [2655], Owen J cited Deane J’s statement in Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539, at 570:
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?
1396 Deane J went on to illustrate the distinction between inferred and implied terms by reference to the facts of the case before him at (570 ‑ 571):
It simply cannot be inferred or assumed as a matter of actual fact that the testatrix ever directed her mind to that question [whether it was a term of the contract that the firm was, when the testatrix died, under an obligation to take any (and, if so, what) positive steps to locate some or all of the persons named in her will] or that, if she did, there was any actual joint intention of herself and Mr Hardwick which can be expressed as a contractual term. The likelihood is that the testatrix was content to rely upon Mr Hardwick as the custodian of her will without troubling herself about whether he was to be under a duty to take any, and if so what, positive steps to ensure that effect could be given to her testamentary intentions. If a term spelling out the obligations of the firm in that regard is to be included in the contract between the parties, it must be implied as a matter of presumed or imputed intention.
1397 In reliance on this passage in Deane J’s judgment, the BGNV respondents submitted that Owen J fell into error in finding an inferred term for subordination in the on‑loan contracts because, as his Honour found, the parties did not direct their minds to that issue.
1398 I do not accept these submissions. As Deane J makes clear in this passage, the subjective state of mind of one party, whether non‑consideration of, or a subjective belief in, the need to include a term in a contract, is irrelevant to whether a term should be inferred in the contract: there must always be an ‘actual joint intention (of the parties) which can be expressed as a contractual term’. Deane J, in my opinion, was here making an orthodox point that a term will be inferred rather than implied in an informal contract where the evidence shows an objectively ascertainable mutual intention of the parties that their contract should include a particular term, though they may never have articulated or even considered that. So much is confirmed by the passages in Deane J’s judgment preceding that set out above. His Honour there considered that terms could be inferred ‘as a matter of actual intention of the parties’ for termination of the bailment of the will by either side upon notice to the other and for the keeping by the solicitor of the will in safe custody after the death of the testatrix. His Honour did not suggest that either the testatrix or the solicitor turned their minds to the questions of termination or post‑mortem safe custody. Their failure to consider these questions did not prevent Deane J from inferring those terms on the basis of the objective circumstances of the case.
1399 The passage in Griggs v Noris Group of Companies [2006] SASC 23; (2006) 94 SASR 126 at [21] relied on by the BGNV respondents is also consistent with the orthodox reading of Deane J’s comments above. The examples there given of terms which could be inferred in the contract show that inferring a term depends upon what is the objectively ascertained actual intention of the parties: ‘These additional terms can be inferred because it is reasonable to suppose that the parties did intend that the agreement would be effective and the terms are necessarily incidental to its effectiveness’. Nor did McDougall J in OzEcom Ltd v Hudson Investment Group Ltd [2007] NSWSC 719 decline to find an informal contractual agreement for an extension of a closing date on the ground that the parties had not turned their minds to the question of extension of time. Instead, he reached his decision on the orthodox basis that he could not spell out from the conduct of the parties and their communications any agreement, even of the most informal kind, for extension of the closing date fixed by the contract: see OzEcom [152] and [158] ‑ [160].
1400 R v Clarke [1927] HCA 47; (1927) 40 CLR 227 does not assist the respondents. It is not a general modification of the objectivity principal in contract, which was expressly affirmed by Starke J at (244). It deals only with an anomalous class of contracts, namely those arising from the performance of the conditions of a reward offer. They are anomalous insofar as the offeror dispenses with the usual requirement for a concluded contract of communication by the offeree of acceptance of the offer. The offer is therefore regarded as making reliance upon it an essential condition of the offer which must be satisfied before there can be a contract. Accordingly, performance of the offer done in ignorance of the offer will not bring a contract into existence: so the subjective state of mind of the reward claimant is a relevant issue and can contradict the inference that would otherwise be drawn from the circumstances of the case objectively considered.
1401 In my opinion, none of these cases provide support for the proposition that conflicts with the principle of objectivity in contract law that the absence of a subjective intention or belief of one or both parties that an informal contract should include a particular term is a fatal bar to inferring that term in the contract.
Onus of proof
1402 In section 12.6, Owen J effectively held that the banks had the onus of proving that the on‑loans were subordinated. That is challenged by the banks on appeal. I have reached the conclusion that his Honour was in error in finding that the on‑loans were subordinated. In my opinion, the evidence is clear and nothing turns on which party bears the onus of proof. It is therefore unnecessary for me to deal with this issue.
The first bond issues
1403 In section 12.7 his Honour identified the genesis of TBGL’s ultimate decision to issue Eurobonds in its need for additional funding for its continuing expansion from sources other than its existing bank lenders. TBGL’s capacity to increase borrowings from existing lenders was restricted by its need to comply with the NP ratios in its NP agreements with its bank lenders. See also [3169]. Griffiths, Bell group Treasurer, had reported to the April 1985 board meeting of TBGL that all its existing borrowing capacity had been utilised and that exchange rate movements in foreign currency borrowings were adversely affecting TBGL’s compliance with the NP ratios in its agreements with its existing NP bankers [TBGL.00767.001.002 and Treasury report as at 24 May 1985].
1404 In this section, his Honour traced the steps taken within TBGL to identify a Eurobond issue as an appropriate means of securing a new source of funding for the group’s continuing expansion that its existing NP bankers would be prepared to treat as equity rather than debt (which as his Honour said at [2710] was their correct characterisation) in the controls on TBGL’s fundraising which were in place with those bankers under the NP agreements. His Honour also traced the steps taken to develop that idea to the stage where the bonds were issued by BGNV and TBGL in December 1985, and the action taken by TBGL by its letter to the banks of 11 December 1985 to seek their agreement to treat the bonds as equity rather than debt.
1405 In late 1984, at a very early stage of this development process, SBCIL the investment bank that ultimately became the bond issue manager identified the need for a suitable offshore vehicle as issuer, suggesting a new entity which it called ‘Bell group NV’ [2717]. Subsequently, as his Honour noted e.g. at [2743], that views within TBGL, and among its legal and investment banking advisers, fluctuated about whether an offshore vehicle was needed, until late November 1985 when the decision was made, mainly for tax‑driven reasons ([2838], though not entirely [2834]) to do that and BGNV was incorporated.
1406 However, as his Honour also noted, in late 1985 considerable attention was paid, within TBGL and among its advisers, to the intermediary role of the offshore issuer in raising finance from the bondholders and on‑lending it to TBGL, a role expressly described in the bond offering circular and in the letters by TBGL of 25 November 1985 and Coopers & Lybrand of 5 December 1985 to the ATO. See e.g. [2747], [2748], [2751], [2754], [2757], [2762] (and [2838], [2839] in 12.11).
1407 Despite all this attention given to the role of BGNV, including as a lender to TBGL, and despite the fact as his Honour noted at [2770], that the net proceeds of the bond issue received by BGNV were transferred on 20 December 1985 from its account to a TBGL account, his Honour found, correctly in my opinion, that no‑one involved in the bond issues gave any consideration to what the terms of the BGNV on‑loan to TBGL should be.
1408 That finding needs one qualification: a lot of attention was given in late 1985 by Bell and its advisers to the need to ensure, for tax purposes, that BGNV did not make any profit from the on‑loan: see [2748], [2751] and [2838]. BGNV ‘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’. That is how bondholder interest was paid.
The second bond issues
1409 His Honour dealt in section 12.8 with the second bond issues by BGNV and BGF, guaranteed by TBGL, in May 1987, which were provoked by TBGL’s continuing appetite for funds and the need to strengthen its borrowing capacity and lower its gearing. He explained at [2780] and [2781] why it was decided for tax reasons to make BGNV a subsidiary of BGF rather than of TBGL, the issue guarantor, and at [2787] why tax considerations required BGNV to on‑loan the net proceeds of its issue to BGF for distribution to companies within the Bell group. At [2786] he noted TBGL’s request to each of its NP bankers to treat these issues as equity for the purposes of the banking covenants and the banks agreement to do that.
The third bond issue
1410 In section 12.9 his Honour dealt with the third convertible bond issue in July 1987, a sterling issue made by BGNV and also guaranteed by TBGL, in circumstances in which TBGL did not, at the time, have sufficient borrowing capacity to provide additional capital then needed by its UK subsidiaries BGUK and TBGIL. In [2800] and [2801] his Honour explained why TBGL made no request to its NP bankers to treat this third issue as equity because of the imminence of agreement to replace the NP agreements with the NP guarantees: they expressly excluded non‑current subordinated debt of TBGL and its Australian subsidiaries from the NP ratio calculations.
The documentary material
1411 The on‑loans are not mentioned in any BGNV documents except for some brief references to them in its annual accounts. They are mentioned in only a few TBGL documents: the three offering circulars, the four letters by TBGL and Coopers & Lybrand to the ATO and the first NP report. Nowhere is there mention in any of the documents of the ranking of the liabilities to BGNV arising under the three on‑loan contracts.
1412 In section 13.2.4.3 his Honour reviewed a number of TBGL documents and concluded at [3210] that, considered in their entirety, they exhibited 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. It was an important step in his Honour’s reasoning for concluding that the on‑loan contracts contained a subordination term.
1413 In other parts of the judgment including section 13.2.5, his Honour found in these and other TBGL documents support for his conclusion that the on‑loan contracts contained a subordination term. He also accepted the banks’ case that some of them contained the representations upon which their estoppel case for subordination of the on‑loans depended.
1414 In my opinion, as will appear, his Honour’s reliance on these documents for these conclusions in both the contract and estoppel cases was unjustified. These documents are referred to below.
‘Bonds means proceeds’ and ‘effective subordination’
1415 Before I consider these documents it is appropriate to note that the banks put two arguments at trial which his Honour accepted and which played a decisive role in his finding that the on‑loan contracts included a subordination term and that representations sufficient to found the banks’ estoppel case that the on‑loans were subordinated were made by TBGL to the banks. One was the banks’ ‘effective subordination’ argument which I will deal with later. The other was the ‘bonds means proceeds’ argument. His Honour’s overview of the elements of reliance and detriment in the banks’ estoppel case at [3650] contains one acknowledgment of the importance for him of these two arguments:
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.
1416 His Honour’s reliance on the banks’ ‘bonds means proceeds’ thesis, as his Honour described it, permeates both the judgment on the contractual subordination issue and on the banks’ estoppel case: see e.g. [3213], [3560] and [3571]. His acceptance of the banks’ thesis that references in TBGL documentation to subordinated bonds encompassed the on‑loans of the bond proceeds, was based in large part on his analysis of the TBGL letter 11 December 1985 to the banks. It was not based on factual findings that any Bell or bank officer at relevant times in 1985 to 1987 or 1998 thought about references in TBGL material to the BGNV subordinated bonds and concluded that those references also covered the proceeds of those bond issues which were on‑lent to TBGL. The factual findings he did make were to the contrary: no Bell officer and no bank officer gave any consideration to the on‑loans or their terms.
1417 In section 13.2.5 ‘”Bonds” and “proceeds”‘, his Honour dealt with this argument. He identified it as ‘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’. That is not the banks’ real argument: his Honour correctly identified that in the last sentence of [3650] set out above.
1418 His Honour acknowledged by reference to the questioning of witnesses at trial that the banks’ proposition that references in TBGL documentation to bonds encompassed the on‑loans of the bond proceeds, was a difficult distinction to explain: [3220] and [3221]. He also said at [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’. He continued: ‘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’.
1419 This led to his finding at [3243]: ‘In my view, the intention of the contracting parties, as manifested by their conduct, was to make the on‑loans on a subordinated basis’.
TBGL letters of 11 December 1985 and 15 April 1987
1420 The letter of 11 December 1985 was a key piece of evidence upon which his Honour relied to reach his conclusion that the on‑loans were subordinated and that there was a representation by TBGL to the banks to the same effect. His Honour considered that the letter of 15 April 1987 was to the same effect. His reliance on the letters for those conclusions was unjustified.
1421 His Honour said [3238] ‑ [3239]:
It [the 11 December request] 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.
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 …
1422 It is not possible in my opinion to read the references in the letter of 11 December 1985 to bonds as encompassing the on‑loan of the bond proceeds or as evidencing that that on‑loan was subordinated. His Honour’s reasoning in accepting the banks’ ‘bonds means proceeds’ thesis, based as it is in large part on his analysis of this letter at [3231] ‑ [3239], was flawed with error.
1423 This is what the letter of 11 December 1985 says:
Re: $A150 Million Convertible Subordinated Bonds Due 1995
As you have previously been advised The Bell Group Ltd will through its financing subsidiary Bell Group NV issue into the Euro markets $A75 million Convertible Subordinated Bonds which will mature in December 1995.
At the same time interests associated with Mr MRH Holmes a Court will take up a further $A75 million Convertible Subordinated Bonds with a December 1995 maturity which will be issued by The Bell Group Ltd.
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 20 February 1986 to ordinary shares of The Bell Group Ltd at a premium of 18% above an initially agreed market price of $11.80 a share.
Based on past price performance of The Bell Group Ltd’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 was a strong likelihood of being converted, The Bell Group Ltd considers that the issue should be regarded as equity when considering balance sheet ratios for the purposes of its banking covenant.
Details of the issue have been summarised and are attached to 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 …
1424 The request that TBGL made in this letter is straightforward. TBGL told the banks that it would incur liabilities totalling $150 million as a result of the $75 million bond issue it was making through its financing subsidiary BGNV into the Euromarket and the $75 million bond issue it was making direct to Holmes à Court interests. The unstated assumption in the letter is that this $150 million of liabilities had to be treated as such in calculating the NP ratios under TBGL’s NP agreements with the banks. The purpose of the letter was to ask the banks to agree to ignore this $150 million of liabilities in calculating the NP ratio in cl 7 of TBGL’s NP agreements with the banks. TBGL argued that the two bond issues should be regarded as equity, not liabilities, because they were convertible subordinated bonds with a long maturity and unlikely to be redeemed but converted into shares in any event.
1425 It is apparent from a reading of the letter firstly, that TBGL was using BGNV to raise $75 million of finance for it: BGNV was not going to keep its bond proceeds but would pass them onto TBGL. None of the banks made any mention of this aspect of the bond issue in its contemporaneous documentation. Secondly, the summary attached to the letter stated that TBGL was unconditionally guaranteeing the BGNV bond issue. Some of the banks noted this at the time. TBGL would incur a $75 million liability to BGNV when BGNV passed the bond proceeds over to it by way of inter‑company loan and it would also incur a $75 million liability in respect of its guarantee of the BGNV bond issue; repayment of the on‑loan would however result in the discharge of its liability on the guarantee. TBGL would incur a further $75 million liability to the Holmes à Court bondholders. But the letter did not descend to any detail in describing just how this $150 million of liabilities would arise from the bond issues. It was unnecessary for TBGL to go into those details: it only wanted the banks to agree to treat as equity a total liability of $75 million in respect of the BGNV bond issue and the separate $75 million liability in respect of its own bond issue. That is what it requested by the terms of the letter.
1426 The Australian banks had no difficulty understanding TBGL’s broad request to treat this $150 million of liabilities as equity and accordingly, to ignore them in calculating NP ratios. They promptly agreed to that request, in most cases without any detailed analysis. The broad response of each of the banks gave TBGL all it required.
1427 His Honour went back in the estoppel case in section 16.2.3 to the matters he considered in section 13.2.5 in relation to the 11 December 1985 letter and said of it:
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 …
…
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 …
1428 He then referred to his rejection of the notional conversion thesis and said that was why he did not think the letter could be read as a request to consider the banking covenants as if the bonds had been converted into shares and so eradicated the bonds and the on‑loans from non‑current liabilities from inclusion in the calculation of the banking covenants. He concluded [3580]:
It is, in my view, more simple than that [i.e. than notional conversion] … The sensible and reasonable construction of the letter [of 11 December 1985] 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 [pleaded by the banks] …
1429 In his analysis of the letter, his Honour concentrated on the BGNV bond issue. His Honour noted in [3231] that ‘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’. His Honour acknowledged at [3231] the difficulty in treating this money amount as equity in accordance with the request in the letter. But he was undeterred by that. It is an insuperable difficulty: there is no basis on which that $75 million, which his Honour identified in [3238] as the amount of TBGL’s repayment obligation to BGNV, can be regarded as equity in TBGL.
1430 Owen J arrived at his interpretation of the letter not by seeking the ordinary meaning of the language used in it, read in its context, but by a complicated analysis of the rights and obligations of each of TBGL and BGNV under the finance and related conversion bonds. His Honour reached his conclusion at [3238] and [3239] that the subject of the request in the letter was a subordinated debt namely TBGL’s obligation to BGNV under the on‑loan, notwithstanding the absence in the letter of express reference to the on‑loan or to TBGL’s associated obligation to BGNV (an absence he noted at [3222]).
1431 As just a piece of evidence the question is: is the letter evidence that the informal on‑loan contract between BGNV and TBGL contained a term that the BGNV on‑loans of the bond proceeds were subordinated?
1432 The ordinary meaning of the language used in the letter will govern its evidentiary significance unless there is evidence that the words were used by the author and understood by the recipient in a special sense other than the ordinary meaning. Insofar as the meaning of the letter is not clear on its face, reference can be made to relevant context. The letter cannot be understood without knowledge of the NP ratio provisions in the NP agreements. It is necessary to refer to cl 7 of the NP agreement to understand the ordinary meaning of the language of the request in the letter, not to decipher language which has a special meaning for the author and the recipient. But the need to refer to contextual material to understand what the letter means does not permit it being subjected to a process of contractual interpretation. There can be no suggestion that the language in the letter is used and understood in a special rather than the ordinary sense of the words: far from speaking in a special code, which contained a hidden reference to the on‑loans which he and the banks both understood, the author of the letter of 11 December 1985 (Cahill) did not, as his Honour found, turn his mind to the on‑loans at any time, including when he composed the letters. The bank officers who considered and agreed to these request did not do that either. And no bank found any difficulty in understanding the request: all promptly agreed to it and none sought clarification from TBGL before doing so.
1433 Even if it were permissible to subject the letter to the process of construction appropriate for a contractual document it would still not be possible to give the letter the meaning his Honour did, which was so divorced from that of the language used.
1434 His Honour correctly noted at [3212] that it was not part of the banks’ case that the letter of 11 December 1985 or any of the other documents he referred to as being consistent with his reading of the letter had contractual effect. He also acknowledged in [3219] that it was not appropriate to subject the letter of 11 December 1985 to a process of contractual interpretation. But he subjected the letter to an analysis more appropriate to an attempt to give a document, by a process of contractual interpretation, an effective operation as a commercial contract.
1435 Even if such an approach were justified, TBGL’s $75 million liabilities created by each of the BGNV bonds, i.e. its liability on the guarantee, and by the bonds it issued to Heytesbury which are mentioned in the letter, are more obvious candidates for the subject matter of the request than is TBGL’s liability on the BGNV on‑loan, which is not mentioned in the letter but only found to be its subject by a process of strained interpretation. His Honour said at [3231] that the request in the letter should not be understood as directed to TBGL’s liability on the guarantee, without explaining why that should be so.
1436 As a ‘contingent liability’ to entities external to the Bell NP group, that liability was expressly required by cl 7 of the NP agreements to be brought into account in calculating the NP ratio: a provision of $79.362 million was made for TBGL’s liability on this guarantee for principal and interest in the consolidated group balance sheet for the 1986 year in note 25 ‘contingencies’. The language of the letter can be read as covering TBGL’s liabilities to the bondholders under both issues, including its liability on the BGNV guarantee. That is the liability of importance for TBGL. It was TBGL not BGNV, through which TBGL said it would issue the bonds, that would pay bondholder interest and the $75 million to the bondholders if there were no conversions. Both as a matter of legal obligation as guarantor and as a matter of practical reality, it was TBGL that would discharge BGNV’s liability to its bondholders, as his Honour noted at [3067]. If the banks agreed to ignore TBGL’s own liability to the BGNV bondholders on its guarantee in calculating the NP ratio, that gave TBGL all it asked for in its letter.
1437 The banks also relied on the letters of 11 December 1985 and 15 April 1987 as containing a representation that the relevant on‑loan was subordinated: see [3557], [3558] and [3561]. In dealing with these two letters in the estoppel case he expressly said that they had the same representational character to the effect that the on‑loans were subordinated: see for the first letter, [3557] ‑ [3585] and for the second, [3561] and [3585] ‑ [3586].
1438 His Honour found that those letters contain representations supporting the banks’ estoppel case essentially for the same reasons he found they supported the contractual subordination case: see [3571].
1439 In this section 16.2.3 of the judgment, his Honour noted in [3570] references to the TBGL guarantee in the submissions made by the respondents at trial. But again he offered no explanation why the letters could not be read as referring to TBGL’s liability as guarantor of the BGNV bonds: he again ignored that liability.
1440 For the reasons given above, neither can be read as containing any of the representations said by his Honour to be contained in them.
1441 In section 13.2.5 in [3239] ‑ [3241], his Honour identified a number of other documents which he said were consistent with and supported his conclusions about the letter of 11 December 1985. For the reasons given below, none of these documents in my opinion provides any support for the finding in [3239] that the on‑loans were subordinated.
1442 In this section 13.2.5, his Honour said at [3217] and [3218] that he thought that a 26 August 1987 TBGL internal memorandum indicated that officers within the Bell group had no intention to limit subordination to the bonds in the strict sense, but apparently intended that it would extend to the on‑loans. The reference in this memorandum to conditions 3(A) and (B) of the finance bonds and cl 3 of the offering circular is not accompanied by any comment. It is merely one of a number of considerations the author draws to the attention of the recipients in proposing what appears to be an amended structure for the NP guarantee that was already then in place with the banks. Even if the subjective beliefs of the author recorded in the document did indicate what his Honour found in the document, they could not be used to assist in determining whether there was an objectively ascertainable tacit agreement between BGNV and TBGL that the on‑loan contract should contain a subordination term for want of any evidence that BGNV had any knowledge of the document.
1443 Even if an analysis of the letter of 11 December 1985 of the kind conducted by his Honour could manifest an intention on the part of TGBL that the on‑loan was to be subordinated, the letter could not, in the absence of communication to BGNV, provide any evidence that the on‑loan contract between TBGL and BGNV contained a subordination term because they had each tacitly agreed on that. Graham and Williams, Bell officers in the UK and directors of BGNV, were aware of the purpose TBGL sought to achieve by the December 1985 bond issues. Requesting the banks to treat the bonds as equity, as was done by the letter of 11 December 1985, was integral to that purpose. But his Honour relied on his close analysis of the text of the letter to find evidence in it of an intent by TBGL to subordinate the on‑loans. And there is no evidence that either Graham or Williams saw the letter of 11 December 1985 or that it was otherwise communicated to BGNV. Their knowledge of the general purpose TBGL sought to achieve by the bond issue is insufficient to make the letter of 11 December 1985 available to show, in the way his Honour used it, assent by BGNV to an intention by TBGL to subordinate the on‑loans, (assuming that was in fact TBGL’s intent), insofar as Owen J relied on BGNV’s own agreement tacitly expressed, to include a subordination term in the on‑loan contracts.
Griffiths’ memorandum of 3 September 1985 to Holmes à Court
1444 In [3191] and [3210], his Honour considered this memorandum had ‘particular significance’ in demonstrating an objective manifestation of an intention that subordination would be an essential element of the argument that TBGL would put to the banks for equity treatment of the bonds. His Honour went further and regarded the memorandum as of ‘particular significance’ as part of the material which demonstrated the manifestation of an objective intention that the on‑loan would be subordinated: see [3191] and [3384]. See also e.g. [2728], [3114], [3144], [3177] and [3214].
1445 In this memorandum Griffiths recommended to Holmes à Court that TBGL should proceed to raise $75 million – $100 million by means of an unsecured, subordinated convertible bond issue into the Euromarket. He envisaged the issue being made by an offshore subsidiary of Bell and guaranteed by Bell. In his discussion of his proposal 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. The 10 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 on the balance sheet or cash flow to prevent the gearing from becoming too high.
1446 The respondents argue that the phrase ‘the key to the issue is to have the issue clearly subordinated and acceptable to our banks as quasi‑equity’ must be read as confined to the bond issue itself and as not extending to the on‑loans of the proceeds. The appellants submit that it should be read as extending to the on‑loans of the proceeds. I do not accept the appellants’ submission. The memorandum does not deal in any way with the on‑loans though it does mention using an offshore subsidiary to issue the bonds. The language of the memorandum is incapable of being read as extending to subordination of the on‑loans. It shows nothing more than Griffiths’ personal, subjective views about the structure of the proposed bond issue as then proposed. That is one reason why it can be of no relevance to whether TBGL and BGNV agreed that the on‑loans would be subordinated.
1447 But Griffiths’ memorandum was, so far as the evidence revealed, seen only by the addressee, Holmes à Court. As I have said, there is no evidence that it was communicated to anyone connected with BGNV, which was only incorporated months later. For that reason too, his Honour was in error in relying on the document to support his finding of a manifest intention to subordinate the on‑loans.
Subordinated debt as equity or – a further issue
1448 Griffiths’ memorandum gives rise to another matter.
1449 An odd feature of the case, in which very many issues were explored, was that the reason why Bell officials decided to issue the bonds on a subordinated rather than an unsubordinated basis was never satisfactorily explained by the respondents, a point made by counsel for the appellants at appeal ts 3134.
1450 It is improbable that in 1985 the Australian banks were unfamiliar with the concept of subordinated debt as contrasted with unsubordinated debt, as Griffiths appears to suggest in his explanation in evidence 20 years later at ts 19890 for what he said in the 3 September memorandum. Various bank officers show a clear understanding of that, as might be expected. See e.g. Cutler’s diary note of 12 November 1985 of his attendance at the TBGL shareholders meeting, Edward of SocGen’s contact report of his meeting with TBGL personnel on 2 December 1985, the memorandum of McDowell and Park of Wardley Australia (HKBA) of 14 January 1986 and Wilcox of NAB’s memorandum of 2 January 1986.
1451 The evidence of the banks’ expert Stranger‑Jones, which was generally accepted by his Honour [2563], throws some light on this puzzle. He made the commonsense comment, accepted by his Honour at [3054], that investors considering convertible subordinated bonds would not focus on where they would rank in a liquidation if they still then held the bonds: if that were a concern for them, they would not buy the bonds in the first place. But he explained that investors considering subordinated bonds, though not at all concerned about the possibility of a liquidation, would generally treat such bonds as being in the nature of capital in the issuing company rather than simple debt because their ranking position in a liquidation made subordinated bonds more like equity in the company arranging the issue than liabilities of that company. Walsh of SCBAL said much the same in par 19 of his witness statement and at ts 27044 on the basis of his understanding of subordinated debt derived from the quite long credit training program he undertook with Chase Manhattan bank in 1973.
1452 Both Stranger‑Jones and Walsh were explaining why subordinated bonds were regarded as akin to equity, not by lenders to a company concerned to protect their position in the event of its financial collapse, but by lenders and other entities for whom the possibility of liquidation was of no concern, such as bond investors (who would not buy the bonds if at all worried about possible financial collapse of the company behind the issue) and stock analysts (trying to get as accurate a picture as possible of a company’s current financial position). Stranger‑Jones said that treating bonds as equity rather than debt because they were subordinated was common in the 1980s for companies borrowing from lending institutions on negative pledge arrangements.
1453 SocGen’s response to the TBGL request of 15 April 1987 for equity treatment of the $250 million of bonds is of note. In its telex of 21 May 1987, the Paris credit committee rejected the Sydney office’s recommendation to agree to the TBGL request, which had emphasised the likelihood of conversion, saying: ‘as long as the bonds are not converted, it is a debt’. The response from SocGen in Sydney of 25 May 1987 acknowledged this, but pointed out that because the debt was subordinated to SocGen’s facilities and its maturity date was well beyond the maturity date of those facilities, ‘in a practical, commercial sense, therefore, the bonds are effectively equity’. On 29 May 1987 Paris agreed and approved the request of 15 April 1987 without further comment. Quite apart from any question of conversion, subordination was seen as important for treating the bonds as equity, not because of its impact on SocGen’s position in a liquidation of TBGL, but because long‑term subordinated debt was very like equity in TBGL, looked at as a going concern: see [3862].
1454 Kevin Weir of NAB had a similar view. In his statement he said of the TBGL request of 15 April 1987 to treat the relevant bond issue as equity: ‘subordination was a concept with which I was familiar at the time. It was not uncommon at the time for borrowers to use subordinated debt as a way to bolster the capital position of the company or group’. Eggleshaw of Lloyds Bank in his statement said that
[A]s an experienced banker the advantages of the convertible subordinated bond issue were obvious to me: the bonds were an obvious way of improving the balance sheet, being subordinated they could be treated as equity, they provided deferred equity whilst still allowing the coupons on the bonds to be tax deductible and providing an opportunity to leverage on the existing equity and the new funds.
1455 As his Honour noted at [3790], Timothy (not Peter) Dennis, then a senior manager in the overseas branch of CBA’s corporate and international division said that in the period covering 1985 ‑ 1987, CBA had an unwritten policy of treating bonds as liabilities unless they were subordinated. He was not questioned about this statement but it appears to be another indication of a bank having a sophisticated understanding of subordination as a justification of itself for treating certain liabilities as equity.
1456 In 1987, TBGL proposed and the banks agreed to collapse the NP agreements into the NP guarantees. Under the latter, TBGL was permitted, without reference to the banks, to exclude from liabilities all ‘non‑current subordinated debt’ that it might incur in calculating the NP ratios. Though in correspondence leading up to this agreement TBGL explained that the reason for this exclusion was to cover subordinated debt ‘such as the subordinated convertible bonds which lenders to Bell have already agreed to treat as equity for liability ratio purposes’, the definition in the NP guarantees did not require excluded subordinated debt to also be convertible into shares in TBGL. TBGL took advantage of this new definition by excluding from NP liabilities its subordinated borrowings from Heytesbury and then from BRL referred to in [3261] and [3262] of the judgment though none of those borrowings were convertible into shares in TBGL. Once the NP guarantee regime came into effect, subordination (plus a modest deferral of the time for repayment) was accepted by TBGL and the banks to be sufficient to justify equity treatment of borrowings.
1457 The article by Bruce Johnston, ‘Debt Subordination: the Australian perspective’ (1987) 15 Australian Business Law Review 80, explains why subordination of debt, without any question of convertibility of the debt into shares in the borrower, was then seen, not as protection for the lender in the borrower’s insolvency, but as an important new method of corporate finance in Australia. As a hybrid of debt and equity: ‘Subordinated debt offers many advantages over normal debt financing and over equity financing. At the centre of these advantages is its capacity to be like equity for financial purposes and like debt for tax purposes’. As Johnston noted: ‘Companies throughout the financial markets of the world have increasingly used subordinated debt issued in these markets as a method of funding their capital base. Many issues of Euro notes, Eurobonds, and junk bonds are now in the form of subordinated debt’. He identified at page 83 what was called in the litigation ‘the double whammy’ effect of the preparedness of lenders to treat subordinated debt as equity in the borrowing company as ‘the primary benefit of subordinated debt’. He also discussed many of the taxation issues that TBGL had to deal with in developing its bond issues.
1458 His Honour touched on the notion that subordination, without convertibility, might justify equity treatment of the bonds at [3177]. But he did not follow this up. The case run by the respondents at trial (and maintained on appeal) was that subordination of the bonds was largely irrelevant to what TBGL wanted to achieve from its requests of 11 December 1985 and 15 April 1987 and that convertibility of the bonds was the thing that mattered. The notion was also foreign to his Honour’s firm view that the bonds were debt not equity, at least until actual conversion: see [2710] and [3204].
1459 It is difficult to accept that Griffiths and the other TBGL people involved in structuring the first bond issue were not aware by the mid‑1980s of the value of a subordinated bond issue as a means of obtaining the advantages of raising additional capital while at the same time obtaining the advantages of doing that by a mechanism that the tax office would treat as debt. Convertibility would of course enhance the argument to be put to TBGL’s existing lenders for treating a subordinated issue as equity. But as the SocGen people in Sydney and Paris recognised, subordination plus long maturity were sufficient reason for equity treatment of the debt of a going concern.
1460 If that were the true position, it would also explain TBGL’s decision to change to a subordinated issue from the unsubordinated issue initially contemplated. It would also provide a convincing explanation for why no‑one in TBGL or the banks in the period of the 1985 ‑ 1987 bond issues then had any interest in the on‑loans, notwithstanding the insistence by many bank witnesses long after, at the trial, about the importance they attached to the on‑loans being subordinated.
1461 However, given the way the case has been conducted, I do not think the sophisticated concept of subordinated debt, touched on in some of the evidence at trial, can justify the conclusions that the on‑loans did not contain a term for subordination. But this concept does serve to show that what might appear to be uncommercial in the extreme once bad times have descended might have made good commercial sense in earlier, better times.
The Amalgamation of Banking Structure document
1462 Much the same point made by Griffiths in his memorandum of 3 September 1985 about the significance of subordination is made in recommendation 3 of the document referred to by his Honour at [3192], ‘Amalgamation of Banking Structure’. Both amalgamation and raising funds in the Euromarket were matters of long‑standing interest within TBGL. I accept the respondents’ submissions that the dating of the document at October 1985 is speculative. There is no evidence who within TBGL produced it or who received it. I do not think his Honour was entitled to place any weight on it as he did at [3192] and [3210] as evidencing a reason for TBGL’s approach to the banks in December 1985 to have the bond issue to which TBGL had then become committed treated as equity. But that is not an error of much moment. For want of evidence of communication to anyone connected with BGNV his Honour was also in error in relying on the ‘Amalgamation of Banking Structure’ document as background material relevant to whether the on‑loans were subordinated, its only possible evidentiary significance.
The Lloyds Bank information memorandum
1463 His Honour regarded this memorandum as a significant document in relation to the contractual subordination case and also in relation to the banks’ estoppel case: see [3557] and [3560] in section 16.2.1 and [3587] ‑ [3590] in section 16.2.4. See also [3431] in section 15.2.1, [3646] ‑ [3648] in section 17.3.2 and [3933] in section 17.10.1.2. It was based on the information memorandum TBGL prepared for SocGen and circulated with TBGL’s authority by Lloyds Bank to Lloyds syndicate banks in April 1986.
1464 Graham, but not Williams, was familiar with both memorandums. He was closely involved in developing the Lloyds Bank syndicated loans arrangement. He discussed the Lloyds Bank information memorandum with Eggleshaw and other officers of Lloyds Bank.
1465 His Honour dealt in detail in section 12.12.3 with this memorandum, returning in section 13.2.4.3 to deal with its significance to the contractual subordination issue at [3195] ‑ [3197]. After referring to some passages in it, His Honour said at [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. (emphasis added)
1466 The reference here to ‘the position contended for by the plaintiffs’ is that convertibility, to the exclusion of subordination, was the critical element to and accepted by the banks for equity treatment of the bonds.
1467 His Honour said that his object in section 13.2.4.3 was to decide whether convertibility or subordination or both were relied on by TBGL and accepted by the banks in agreeing to treat the bonds as equity rather than debt for the purposes of the NP ratio calculations. His Honour’s conclusion at [3210] was that the documents he there reviewed, which included this memorandum, exhibited ‘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’. Yet in a comment, irrelevant to that question, his Honour made an explicit finding in the passage in emphasis that the memorandum was evidence that the on‑loans were subordinated.
1468 His Honour in dealing here with the significance of the information memorandum for the banks’ contractual subordination case did not explain his reasons for reaching this conclusion. It is necessary to go to where his Honour dealt with the memorandum in the banks’ estoppel case to see why. The only representation by TBGL pleaded by the banks – in ADC 11ED(30)(g) – was that its liabilities as a member of the NP group arising from the raising and deployment of moneys in and after the bond issues would be subordinated to its liabilities to the bank lenders: see [3587]. In section 16.2.4, in [3588], his Honour repeated his finding in the passage in [3197] I have underlined above. He concluded at [3590]:
… Nonetheless, just as I did with the 11 December 1985 letter, I am prepared to draw the inference that the reference to ‘subordination’ [in the information memorandum] 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.
1469 I have said that his Honour’s acceptance of the banks’ argument that ‘bonds means proceeds’ permeates the judgment. Here is another example of that.
1470 In my opinion, the information memorandum provides no evidence in support of the contractual subordination claim. Nor does it contain anything sufficient to give rise to a representation in the estoppel case that the on‑loans were subordinated.
1471 The information memorandum is an invitation by TBGL to those banks prepared to join the Lloyds syndicate to lend GBP£60 million to BGF and TVW (UK), wholly owned subsidiaries of TBGL, for a five‑year term under TBGL’s ‘standard negative pledge agreement with all its existing bankers’.
1472 The memorandum and attached documents contain the following references to the December 1985 bond issues:
• Page 2 in section A, ‘TBGL, An introduction’ – ‘under the convertible bond issue A$75 million were raised by TBGL and A$75 million by BGNV. In this regard it should be noted that existing bankers [to TBGL] have agreed to treat this issue as equity and participants in this facility will likewise be requested to so treat it’ [2854].
• Page 23 in section B, ‘TBGL, A summary of financial information’, in a list of significant financial events occurring since 30 June 1985 – ‘(5) in December 1985 TBGL raised A$150 million in subordinated convertible bonds maturing 1995. Interest payable on the bonds is 11% per annum. The nature of the bonds is such that they may be considered as equity for the purposes of gearing calculations’ [2857].
• Page 23 – ‘the impact of the above post‑30th June events has been a substantial increase in the consolidated net worth of TBGL with a resultant significant reduction in effective gearing and hence increasing borrowing capacity. Restated net worth including convertible bonds is in excess of A$650 million …’ [2858].
• Page 28 in section F, ‘Bell group NP agreement – ‘in December 1985 TBGL 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’ [2855].
• Note to attachment at the beginning of the memorandum – ‘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 to treating this item as capital is that TBGL current share price is higher than the conversion price and conversion can be currently exercised. Under Australian accounting practice, however the convertible bonds must be treated as loan capital until conversion’ [2859].
• NP group balance sheet as at 31 December 1985 – ‘Shareholders Funds’ totalling $497 million includes an item: ‘convertible notes – $150 million’.
1473 The December 1985 on‑loans were not mentioned in the information memorandum or its attachments. There was no reason for TBGL to mention them there. The main purpose of the information memorandum was to persuade the syndicate banks to lend a total of GBP£60 million to TBGL’s financial subsidiaries, BGF and TVW (UK).
1474 Because the proposed syndicate lending would be under TBGL’s standard NP agreement, TBGL would have to undertake to the syndicate banks to comply with the NP ratios. Another purpose of TBGL in authorising the issue of the memorandum was to ensure that the syndicate banks would, like its existing banks, agree to ignore in calculating the relevant NP ratio the $150 million liability that TBGL had incurred as a result of the issue of the December 1985 BGNV and TBGL bond issues. The December 1985 bonds were mentioned in the information memorandum solely because they were liabilities that should be brought into account in calculating the NP ratios but which TBGL required the syndicate banks to exclude from the NP ratio calculations for the reasons given in the memorandum.
1475 To say as his Honour did in the last sentence of [3197] that a reader would probably understand that the subordinated status of the bonds was a reason being advanced in favour of the equity treatment that TBGL was demanding strains the two references to bond subordination (at pages 23 and 28) beyond the meaning those few words can sensibly convey given the emphasis placed in the document on convertibility. A reader to whom the memorandum was addressed would pay close attention to understanding why the existing banks had been prepared to ignore the $150 million liability of TBGL in respect of the December 1985 bond issue for the purposes of the NP ratio calculations by treating it as equity rather than debt in order to determine whether his own bank should agree to do that also. I think such a reader would pay more attention to the explanation given in the note in the attachment to the memorandum that the justification for treating the $150 million liability in respect of December 1985 bond issue as equity i.e. as capital of TBGL was the likelihood of that liability being extinguished by conversion into TBGL shares than to the inconsistent use of the word ‘subordinated’ in some, but not all, of the descriptors of the bonds in the memorandum.
1476 But even if what his Honour says about the significance of the references to the bonds themselves being subordinated is accepted, that provides no justification for concluding that a reading of the memorandum shows that the on‑loans were also subordinated.
1477 I do not think a reasonable reader in the position of the addressee of the memorandum would read beyond acquiring an understanding of what was involved in agreeing to the TBGL borrowing proposal and go beyond that and pick up from a couple of references to the word ‘subordination’, one underlined one not, that part of the December 1985 bond issue had been on‑loaned and further, that because the bonds themselves are sometimes described as subordinated, the on‑loans must also have been subordinated. To hold otherwise would be to ascribe to a reasonable reader of the memorandum an astuteness that went beyond what was required for an understanding of the document sufficient to enable a decision to be made on the TBGL proposal, an astuteness moreover not displayed by anyone in the banks who received the memorandum.
1478 I agree with the respondents’ submission that the document must be read as being concerned with the bonds themselves and that it cannot be read as intended to reflect any agreement or understanding concerning subordination of the on‑loans.
1479 The information memorandum in my opinion provides no support for his conclusion at [3197] that the on‑loan contracts contained a subordination term or at, [3590], a representation to that effect.
1480 The appellants seek to uphold the finding in [3197] on the ground that the information memorandum was issued with the authority of TBGL and that Graham, by then a director of BGNV as well as a Bell UK Treasury officer, was responsible for dealing with Lloyds Bank in relation to the memorandum including its development to its final form, and on the further ground that all the information in the memorandum comprises objective evidence of the knowledge, beliefs and understandings of TBGL and BGNV concerning the fundraising effected by the 1985 bond issues. That can all be accepted. However, for the reasons given, I do not think the information memorandum is capable of being read as his Honour did so as to provide evidence that the on‑loans were subordinated.
1481 The appellants also point out that neither TBGL nor Graham were mere readers of the document. But the difficulty in ascribing to TBGL and BGNV through Graham’s special knowledge not apparent to an ordinary addressee of the memorandum is his Honour’s finding that no‑one in BGNV, including Graham, gave any thought to the terms on which the on‑loan should be made. There is therefore no basis for inferring that the language of the memorandum had a special meaning that dealt with the on‑loans that was mutually known to TBGL and BGNV.
The negative pledge reports
1482 His Honour put these reports into four categories according to how he thought the liabilities of the NP companies were presented: see section 12.1.6.3, [2938].
1483 His Honour held that a number of these reports supported the banks’ case that the on‑loans were subordinated. He was in error, for reasons following.
1484 The banks also relied on, and his Honour accepted that these reports contained representations for the purposes of the estoppel case: see [3557] and [3563]. The significance the banks placed on the NP reports is encapsulated in the banks’ written submissions at pars 323 ‑ 325 where they say that the overwhelming inference was that the on‑loans had been excluded from the calculations of the NP ratios in the reports because of their subordination.
1485 Although not compiled strictly in accordance with the requirements of the NP agreements, the banks accepted all the NP reports, without criticism, as his Honour noted at [2932] and [2936]. (The respondents’ submission at 531 that no bank officer gave evidence about reviewing how the calculations of the NP ratios were performed appears to be correct.)
1486 The issue here, however, is not whether a correct methodology was followed by Coopers & Lybrand in preparing these reports (although his Honour at [2975] considered that they met ‘the basal requirements’ of RLFA No 1 and the NP guarantees) but how Coopers & Lybrand proceeded and what inferences with respect to subordination of the on‑loans can be drawn from what they in fact did. His Honour correctly recognised that at [2969]. The respondents’ submissions to the contrary at par 515 are rejected.
1487 Even if there is to be found in any of the NP reports evidence that the on‑loans were subordinated the question remains for the contract subordination case whether that evidence can properly be used to find that TBGL and BGNV have bound themselves to include a term for subordination in those on‑loans contracts.
1488 Senior counsel for the respondents submitted that his Honour’s whole approach to this aspect of the relevance of the NP reports to the contracts subordination case was flawed (ts 2587). The conclusion his Honour reached about the significance of the NP reports was based on his detailed analysis of the text of each. There is no evidence that anyone in BGNV, apart from Graham, had any knowledge of the NP reports. His knowledge appears to have been limited to sending the NP report for the six months to 30 June 1985 to Eggleshaw of Lloyds Bank in February 1986 to assisting Eggleshaw to develop the Lloyds Bank syndicated loan arrangement. But there is no evidence that he read any of the reports or was otherwise aware of the contents. Eggleshaw said he could not recall discussing them with Graham. There is no basis for fixing BGNV with knowledge of the contents of these reports. They are therefore irrelevant to whether BGNV gave its assent to the inclusion of a subordination term in its on‑loan contracts with TBGL and BGF.
1489 However, whether the NP reports contain representations to the banks for whom they were prepared that the on‑loans contained a subordination term is relevant to the banks’ estoppel case: see section 16.2.6.
1490 I have had the advantage of reading Lee AJA’s analysis of these documents. I agree that all the negative pledge reports up to that for the period ending December 1987 are consistent in treating all the funds raised by BGNV, which it on‑lent to TBGL and BGF, as additions to TBGL’s capital and in treating the mechanism by which the bond proceeds were distributed within the Bell group as irrelevant to the proper reporting to the banks of the Bell NP group’s liabilities. I also agree that the subsequent NP reports treat the bond issues in a manner which does not support the judge’s view that they provide evidence that the on‑loans were subordinated. The respondents’ ‘complicated explanations’ in their submissions, as the banks describe them, are, except for the category 1 report, untenable.
1491 For the reasons given by Lee AJA I also think that insofar as the banks rely on these reports in their estoppel case, none contain a representation to the effect that the on‑loans were subordinated.
Category 1: The report to December 1985
1492 This report is the only NP report that expressly mentions the on‑loans. By the time this report was prepared in April 1986, the Australian banks had agreed to TBGL’s request on 11 December 1985 to treat the bond issues as equity in the NP ratio calculations. The note in the Lloyds information memorandum prepared in April 1986, at the same time as this NP report, explains why this report excludes from NP ratio liabilities the redemption liabilities of TBGL and BGNV on the first round of convertible subordinated bond issues on the basis that they were properly regarded as part of TBGL’s capital because of the likelihood of convertibility. As Lee AJA points out, this approach eliminated the liability TBGL had to BGNV in respect of the on‑loans. It did that irrespective of whether the on‑loans were subordinated or unsubordinated. The respondents’ submission (at par 529) which relies on the so‑called ‘notional conversion thesis’ is correct. The conclusion his Honour apparently reached about this particular report was that it was consistent with an objectively manifested intent that the on‑loan should be subordinated: see [3238] ‑ [3240]. His Honour was in error in finding evidence in this report that the on‑loans were subordinated.
1493 Lee AJA also explains why his Honour was in error in [2946] in reading appendix C to this NP report as saying the report treated the BGNV on‑loan itself as equity in TBGL. The main respondents’ submission is to the same effect (appeal ts 528). TBGL sought and the banks agreed (without referring to the on‑loans) to give the NP group the benefit of a $150 million deduction for the TBGL and BGNV bond issues from NP group liabilities: the final deduction in appendix C to this report expressly gives effect to that agreement. It is not to the point that that does not reflect the methodology that the author of the report should have followed: it is what the author in fact did. And it is that which determines the evidentiary significance of the report.
Category 2: The three reports for the periods ending June 1986 ‑ June 1987
1494 His Honour referred to these reports as confusing [2953] but correctly noted in [2956] that each did not include in the liabilities of any Bell group company any amount in respect of any convertible subordinated bond issue or in respect of the on‑loans made by BGNV to TBGL and then BGF. I agree with Lee AJA’s analysis of these three reports and with his conclusion that they are consistent with the first report in treating the funds raised by the bond issues as share capital subscribed to TBGL and which accordingly extinguished the liabilities that BGNV and TBGL had to bondholders and TBGL and BGF’s liability to repay the on‑loans to BGNV. There is nothing in these reports that constitutes evidence that the on‑loan was subordinated.
Category 3: The report to December 1987
1495 This report was prepared after the NP agreements were replaced by the NP guarantee. Under the NP guarantee non‑current subordinated debt of TBGL and its Australian subsidiaries was excluded from the liabilities in the calculation of the NP ratio in cl 12 of the guarantee. His Honour in [2959] thought that this provided the reason for the exclusion of TBGL’s liability to BGNV in respect of the on‑loans from the ratio calculations in this report and in consequence, constituted evidence that the on‑loans were subordinated. His Honour was in error as Lee AJA points out. Contrary to the appellants’ submission at par 337, this was not the only basis that could justify exclusion of the on‑loan liabilities. This report too, did not include as NP ratio liabilities the bond redemption liabilities of TBGL (both direct as issuer and as guarantor) and BGF or their liabilities to BGNV to repay the on‑loans because it was prepared on the same basis as the earlier reports insofar as the funds raised by the bond issues continued to be treated as share capital subscribed to TBGL and as therefore extinguishing all those liabilities. That is why the on‑loan liabilities were excluded from the ratio calculations, not because (as his Honour thought) that gave effect to the NP guarantee provisions which excluded non‑current subordinated debt as defined in the guarantee from the ratio calculations. There is nothing in this report evidencing that the on‑loans were subordinated. I agree with Lee AJA’s analysis of this report.
Category 4: The three reports to June 1989
1496 In [2975], his Honour considered that all three of these reports in effect evidenced that the on‑loans were subordinated for the reason that TBGL (and BGF’s) liability to BGNV in respect of the on‑loans were excluded from the NP ratio calculation in cl 12 of the NP guarantee in each report, and this was permitted only if those liabilities constituted non‑current subordinated debt of TBGL (and BGF). That was not, however, the reason why TBGL and BGF’s on‑loan liabilities were excluded from these reports.
1497 It was not these liabilities to BGNV in respect of the on‑loans that were excluded from these reports but instead, BGNV’s redemption liabilities to the bondholders of equal amount.
1498 The first report in this group (to June 1988), which alone Owen J considered in any detail, was the first NP report which did not treat the bond issues as capital of TBGL but rather as borrowings. The reasons for this changed treatment are set out in note 22(b) to the consolidated balance sheet in the TBGL annual report of June 1988. It is clear from note 22 to the TBGL annual accounts, on which this NP report is expressly said to have been based in the Coopers & Lybrand covering letter, that the deduction of $585.2 million from the total of non‑current liabilities for the entire Bell group as at 30 June 1988 which was made in appendix C to this report does not include the on‑loans: the deduction is for something quite different. It is expressly stated in note 22 as the total of the bond redemption liabilities of TBGL, BGF and BGNV as bond issuers as at 30 June 1988 (excluding $14.6 million of bonds actually converted). At that date, those liabilities were: TBGL – $75 million, BGF – $75 million and BGNV – $435.2 million. The on‑loans were never the subject of a decision by the author of the report to exclude them in the ratio calculations as his Honour thought had happened; they were never taken into account in the compilation of this report. That is sufficient to deprive this report of any value as evidence that the on‑loans were subordinated. The direct liabilities of BGNV to the bondholders should not have been included in this deduction for ‘subordinated convertible bonds’ in appendix C to the report because it was not an Australian subsidiary for the purpose of the NP guarantee (as Scudamore correctly observed in his evidence at ts 34566). Instead, the $435.2 million figure should have been included in the total non‑current liability section of appendix C to this NP report separately as liabilities of TBGL and BGF to BGNV in respect of the on‑loans. That was not done. But if the author of the report erred in the methodology followed, that is irrelevant to the question whether this report constitutes evidence that the on‑loans were subordinated.
1499 I agree with Lee AJA’s reasoning that this NP report provides no support for the trial judge’s view in [2967] that the BGNV on‑loans were subordinated because the liabilities of TBGL and BGF to BGNV on the on‑loans were excluded from the calculation of total liabilities of the NP group in this report.
1500 His Honour did not deal separately with the three NP reports in this last group. As Lee AJA points out, there are some differences in methodology particularly between the first two reports and the last one. But for the reasons he gives, I agree that they provide no support for his Honour’s conclusion that the on‑loans were subordinated.
1501 The on‑loans could not in any event have been properly excluded from ‘total liabilities’ of TBGL and BGF and the other Australian subsidiary in this NP report as non-current subordinated debt. They did not come within the definition of ‘subordinated debt’ in the NP guarantee. That is defined to mean ‘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 guarantor and/or the Australian subsidiaries’. Counsel for the banks submitted, (appeal ts 3457), that the negative pledge guarantee was intended to provide protection to the banks. That was plainly one of its objects. Accordingly, if the banks are to be protected by NP ratios that had to be calculated each six months, this definition of subordinated debt must be limited to debt irrefragably identifiable from documentation as coming within the definition: it cannot be interpreted so as to permit TBGL to exclude from the NP ratio calculation debt not readily identifiable as subordinated but which might turn out, after a more or less protracted examination of documents and oral statements, to be subject to an express oral or an inferred or implied term that it is subordinated. That is another reason for rejecting his Honour’s view that exclusion of the on‑loans from the NP ratio calculations in these reports could only have occurred because they were regarded by the report authors as non-current subordinated debt for the purposes of the NP guarantee.
1502 Though it throws no light on whether the on‑loans were subordinated, the deduction of the BGNV liability of $435.2 million included in the $585.2 million in Appendix C to the June 1988 report can be justified under the terms of the NP guarantee as non‑current subordinated debt if it is read as referring to the total of the expressly subordinated redemption liabilities of TBGL as issuer of one of the bond issues and as guarantor of the others. The note 22 to the consolidated balance sheet dealing with ‘convertible bonds’ in the TBGL accounts for each of the years 1988 and 1989 identifies these ‘principal debtor liabilities’ of TBGL as guarantor.
1503 I have already explained why treating TBGL as responsible for the entire redemption liabilities under all the bonds reflected the factual realities, with the consequence that the on‑loan liabilities of both TBGL and BGF to BGNV could properly be treated as having been extinguished. In dealing with the estoppel arguments his Honour noted at [3595] that the general thrust of the negative pledge reports was consistent with the exclusion of the debts of TBGL and BGF to BGNV on the on‑loans from total liabilities of the NP group and that this supported a conclusion that in the NP reports TBGL and the other NP 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’. The on‑loans were excluded from each of the NP reports. But for the reasons given, that does not provide any basis for finding a representation by TBGL that the on‑loans were subordinated.
The notional conversion thesis
1504 For the reasons given by Lee AJA, his Honour was in error in rejecting the ‘notional conversion thesis’: that was no thesis but the express basis on which the TBGL annual reports for the entire group for 1986 and 1987 were prepared and on which the five NP reports for the period to December 1985 ‑ December 1987 were each based (and not just the first of those reports, as the respondents contended at [APPR.000.032, page 119, par 532]).
1505 The appellants are correct in submitting that for the purposes of the ratio calculations the only issue was the position of the NP group. The NP agreements and then the NP guarantees required the NP reports to be based not on the whole Bell group’s annual consolidated balance sheets but on the consolidated balance sheets for only the Bell NP group of companies. However, each of the first five NP reports was explicitly stated to be based on the former and the banks accepted every report as sufficient compliance with the NP agreements and the NP guarantees. Treatment in the reports of all liabilities in respect of the bonds as extinguished flowed from the way those liabilities were treated in the group consolidated balance sheets i.e. because in the opinion of those responsible for the accounts, the likelihood of conversion of the bonds was such as to justify that treatment. This likelihood of conversion was one of the reasons put up by TBGL to the banks in 1985 and again in 1987 to justify equity treatment of the bonds and, as his Honour found, a major reason for the banks’ agreement: see [4260]. The NP reports emphasise the likelihood of conversion of the bonds and the consequences of this for the on‑loans.
1506 The appellants’ criticisms of the respondents’ failure to call anyone from Coopers & Lybrand involved in the preparation of both the NP reports and the annual accounts was the subject of an explanation which his Honour was entitled to accept: see [2989]. Any personal opinions Bell officers may have expressed about the notional conversion thesis at the trial could not assist in determining whether TBGL had by the NP reports sufficiently manifested an objective intention to subordinate the on‑loans to have contractual effect as between TBGL and BGNV. Once it is concluded that the NP reports do not contain any representations that the on‑loans are subordinated, personal opinions of Bell officers about the notional conversion thesis are of no relevance to the banks estoppel case either.
The 1988 spreadsheets
1507 This group comprises a large number of documents generated at short intervals through 1988. Each is entitled: ‘TBGL – negative pledge group borrowing position as at (date) 1988’. They are all in a similar form. None expressly mentions the on‑loans.
1508 Owen J referred to these spreadsheets a number of times. It was argued that BGNV was never a member of any Bell NP group so it was submitted by the banks and accepted by his Honour at [3241], [3268] and at [3255] ‑ [3256] that the inclusion in the ‘subordinated borrowings’ category in each spreadsheet of reference to the redemption amounts of the BGNV convertible bonds could only be a reference to the BGNV on‑loans to TBGL and BGF.
1509 His Honour singled the spreadsheets out as one of only two lots of post‑contractual material arising after July 1987 ‘as significant’ in his final conclusions on the contractual subordination issue in section 13.4: see [3386] and [3387]. He thought they were significant for the same reason he considered the pre-contractual material he mentioned in [3384] was significant i.e. because they were material which manifested an intention by the parties to the on‑loan contracts to make the on‑loans on a subordinated basis.
1510 How this could be so when there is no evidence the spreadsheets were ever communicated to BGNV or seen by anyone on behalf of BGNV was not explained by his Honour. So far as the contractual subordination case is concerned, they can therefore be of no use in that case. (The banks did not rely on them in their estoppel case.)
1511 Apart from that, I think that Owen J was in error in finding in these documents support for his conclusion that they evidence that the on‑loans were subordinated: the reading that Owen J gave to the spreadsheets departs radically from the language used.
1512 On appeal, the respondents submitted that Owen J was in error in reading these spreadsheets as referring to the on‑loans and in placing reliance on them as probative of the subordination of the on‑loans given how they got into evidence. They got into evidence by being placed by the banks on the electronic court book in May 2006, a few months before the end of the trial hearing in September 2006, which started in July 2003, and a year after the key Bell personnel Griffiths, Cahill, Graham and Williams had been called by the banks. The spreadsheets were not put to any of the expert witnesses either. There is no explanatory evidence. His Honour was left to make what he could of them with the assistance only of the parties’ submissions.
1513 The respondents had taken a different view of the spreadsheets in closing submissions at trial. And inconsistently with their oral submissions on appeal, in their written appeal submissions, they referred to the spreadsheets as one of only five lots of documents which expressly referred to the on‑loans as such, though there is no express reference to the on‑loans in any of these spreadsheets. The evidentiary significance of the spreadsheets must be determined by the documents themselves: it cannot be governed by concessions once made by the respondents: see Re Fresjac Pty Ltd (in liq); Campbell v Mount [1995] SASC 5378; (1995) 65 SASR 334, at [9].
1514 These spreadsheets are each described as showing the borrowing position of ‘the TBGL negative pledge group’ at a particular date. By cl 14 of the NP guarantee, TBGL undertook to the banks that all borrowings (other than inter‑company borrowings) by it and the Australian subsidiaries would be undertaken by a nominated borrower. The only nominated borrowers were TBGL, BGF and TVW (UK) Ltd. ‘Australian subsidiary’ was defined to mean any wholly‑owned subsidiary of TBGL incorporated in Australia but expressly included the UK subsidiary, TVW (UK) Ltd and expressly excluded that UK company’s own UK subsidiary, TBGIL.
1515 The summary in each spreadsheet appears to show the combined net borrowing figure for the ‘Bell NP Group’, which I understand to comprise TBGL and BGF and TBGL’s other Australian subsidiaries and TVW (UK). Each summary sheet shows total net borrowings, including inter‑company borrowings and subordinated debt/borrowings.
1516 Inter‑company borrowings within the NP group are not included in the spreadsheets: those included are limited to borrowings from Bell group companies outside the NP group, it being necessary to include them in the spreadsheets if the sheets are to show the full borrowing position of the NP group. In the section of its spreadsheet listing inter‑company loans/borrowings by TBGL through BGF and lendings by TBGL through BGF, only inter‑company transactions with non‑NP group companies are shown. For example, intra‑group borrowings by TBGL from TBGIL are listed in the sheets for 30 June, 8 July, 12 August and 9 September 1988; from Heytesbury Holdings (Holmes à Court’s own private company), in the sheets for 11 March, 5 February and 29 April 1980. Intra‑group lendings by TBGL to TBGIL are listed in the sheets for 30 June, 8 July and 12 August 1988 and to BRL (not an Australian subsidiary because not wholly owned by TBGL), in the sheet for 11 March 1988. The object of the spreadsheets is pretty clearly to obtain an accurate position of the NP group’s borrowing position, which necessarily requires the sheets to include the NP group’s borrowings from non‑NP group Bell companies as well as the group’s borrowings from other sources external to the Group.
1517 Each spreadsheet includes under the heading ‘subordinated borrowings’ the entire redemption amounts (after allowing for the conversions of part of the 1985 issue) owing under ‘convertible bonds’ i.e. the bonds issued between 1985 and 1987 by TBGL, BGNV and BGF. The same amounts are shown for the Australian dollar bond issues in all these sheets. The differing amounts shown for the Sterling issues appear to be due to fluctuations in the AUD/STG exchange rates.
1518 As counsel for the respondents submitted with respect to the spreadsheets, TBGL can be regarded as having the responsibility to repay on an expressly subordinated basis all moneys outstanding on all the bond issues because of its dual role as issuer of the first of the bonds and principal debtor guarantor in respect of all the BGNV and BGF issues, notwithstanding the legal liability of BGNV and BGF to the bondholders for those same moneys.
1519 Treating TBGL as responsible for the entire redemption liabilities under all the bonds reflects not only the legal position which covers its liabilities as guarantor under each of the bond issues but also the factual realities in 1988, which I have discussed above. The consequence of such an approach would be that the on‑loan liabilities of both TBGL and BGF to BGNV could properly be treated as having been extinguished because they cannot be double counted given the purpose of the exercise for which the spreadsheets were prepared viz to show the actual borrowing position of the NP group at particular dates.
1520 That this was in fact the approach of the authors of these spreadsheets is I think confirmed by the way inter‑company loans are dealt with. In the sheet as at 29 April 1988, under ‘inter‑company loans’ particulars are first given of moneys owed to various Bell group companies by BGF (the group finance vehicle which appears to have been the legal borrower); however, these are totalled and described not as owing by BGF but as ‘total owed by TBGL’. Particulars are then given of moneys owed to BGF by various Bell companies with the total again being described not as owed to BGF but as ‘total owed to TBGL’. Notwithstanding that BGF appears to have been the legal borrower and lender in respect of these inter‑company transactions, they are shown in the spreadsheets as the responsibility in reality of TBGL. All the spreadsheets follow this pattern.
1521 I think this same approach is reflected in the spreadsheets where they include all the convertible bonds under ‘subordinated borrowings’.
1522 That the spreadsheets do not contain any reference even an implicit one to TBGL or BGF’s liabilities to repay the BGNV on‑loans is reinforced by the fact that each spreadsheet lists what appears to be all inter‑company loans by non‑NP Bell companies to, and all inter‑company loans by each of TBGL, BGF and the other nominated borrower, TVW (UK), to non‑NP Bell companies and includes the total inter‑company borrowing and lending as separate figures in the summary sheet. Yet there is no reference to the BGNV on‑loans in any section of any spreadsheet listing inter‑company loans. The very substantial borrowings by TBGL and BGF from BGNV, a non‑NP Bell company, by way of the on‑loans can only have been excluded from the inter‑company loans sections of the spreadsheets because the author recognised that those borrowings were already allowed for by listing TBGL’s redemption liabilities in respect of all the bonds under the separate heading ‘subordinated borrowings’: it would involve double counting in showing the borrowing position of the NP group to include both the on‑loan liabilities and the bond redemption liabilities.
The information packages and the three year business plan
1523 In section 14.2 of his judgment, at [3395] his Honour noted, without further mentioning them, that in support of the banks’ contract inter partes case that TBGL and BGNV concluded contracts with the banks which included a term for subordination of the on‑loans, the banks relied on, among other things, the information packages provided by TBGL in November and December 1987 and February 1988 and three year business plan provided in May 1988 to the banks.
The information packages
1524 It was not until he came to the banks’ estoppel case that his Honour considered the evidentiary significance of these documents.
1525 His Honour referred in section 15.2.1 to the way the banks pleaded reliance upon the information packages in support of their estoppel case that the representations of the on‑loans were subordinated were made and to the arguments the banks put forward in support of these allegations in section 16.2.1 [3564] and [3565].
1526 In section 16.2.6 he returned to these documents. He held at [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.
1527 These packages, which included balance sheets showing the assets of the negative pledge group on both the cost and market value basis at nominated dates were provided to the NP banks to show the position of the TBGL NP group after the October 1987 stock market crash when TBGL was seeking the banks continued support. Under the heading ‘balance sheets’ the document stated that under both the cost and market value balance sheets, the NP group ‘has stayed within its negative pledge covenants. In both cases, the borrowing ratios under the NP agreement have not been exceeded’. In the balance sheet themselves there is a reference to ‘convertible notes’ with a cost and market value of $576.3 million shown.
1528 The statements in these documents that the NP ratios were being complied with clearly enough implies that the liabilities of the TBGL NP companies arising from the TBGL, BGNV and BGF bond issues were excluded from group liabilities in calculating the NP ratios because of the banks’ agreement to treat the bonds as equity in TBGL. There is no suggestion that any bank queried this treatment of the bonds in these documents. It was not until after these packages were sent to the banks that TBGL itself altered its view about the likelihood of conversion of the bonds and thus the need to reclassify them as liabilities rather than assets.
1529 His Honour does not say these statements in the packages by themselves contain representations that the on‑loans were subordinated. Clearly they do not. There is no reference to the on‑loans. In finding representations in these documents that the bond issue proceeds were subordinated debts of the NP group his Honour adopted the same approach (which I have explained above was unjustifiable) that he took to the letters and other documents he referred to in [3596] as the context for the information packages, largely in reliance on his acceptance of the banks ‘bonds means proceeds’ argument.
1530 There is in any event no evidence that fixes BGNV with knowledge of these documents.
The three year business plan
1531 His Honour found, in dealing with the contracts inter se case, some equivocal support in the three year business plan of May 1988 for his conclusion that subordination was regarded as an essential element in the equity treatment of the bonds: see [3206] ‑ [3208]. He considered it of more significance in that part of the banks’ estoppel case in which they sought to prove representations that the on‑loans were subordinated. In ADC 11ED(70) the banks pleaded, in reliance on statements in the plan that described the convertible subordinated bonds issued to that time as ‘fully subordinated’ and that ‘All bonds are fully and explicitly subordinated to all unsubordinated debt’, that TBGL represented that the bondholders ranked behind the bank lenders in respect of recovery of moneys from assets of the Bell group.
1532 His Honour noted the respondents’ submission at [3598] that the three year business plan concerned the consolidated group and did not inform the reader about how funds were deployed within the consolidated group. He rejected that submission at [3601] where he referred to 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’, to conclude that ‘the representation was [not] limited to a statement that it was only the external liabilities of BGNV that were subordinated’ but by implication extended to the on‑loans.
1533 The business plan does not mention the on‑loans either expressly or by implication. It says: ‘All bonds are fully and explicitly subordinated to all unsubordinated debt’. That merely states briefly what is set out more fully about the status of the bonds in the offering circular and the trust deed. His Honour paraphrases that non‑contentious statement in [3601] by substituting ‘the subordinated debt’ for ‘all bonds’. His Honour also referred at [3601] to ‘an express statement in the plan that the subordinated debt … supported unsubordinated debt’. What the plan in fact says is that equity treatment of all the bonds justifies an optimistic view of the Bell group’s financial position:
If we take into account the TBGL (fully subordinated) convertible notes which have a face value of $556 million and an average maturity of seven years, then the ‘real’ level of net asset value plus fully subordinated debt which supports the projected net 30 June 1988 non‑subordinated debt of $1.44 million is according to the Potter Partners report between $1.36 million and $1.77 million.
1534 The plan adds that this is an ‘already comfortable position for medium term lenders’. The plan at page 16 reinforces the justification for treating the bonds as equity by saying that TBGL management still considered a high conversion rate would be achieved.
1535 The plan does not mention the on‑loans. It does not deal with inter‑company borrowing and lending, which is eliminated in the consolidated group accounts (as his Honour in another context earlier noted: see [2190]). His Honour acknowledged that the business plan was drawn up in respect of the entire Bell group and the balance sheets were prepared on a consolidated group basis; he also acknowledged that the ratios referred to in the plan had nothing to do with the NP ratios (apart from anything else, those ratios were not historical figures as the NP ratios calculations had to be, but projections over the 1989 to 1991 period covered by the plan).
1536 His Honour reached his conclusion at [3601], to detect a representation in the business plan about liabilities arising from the use of the proceeds of the bonds being subordinated by again relying on the banks’ argument that ‘bonds means proceeds’ and the banks’ argument about ‘effective subordination’. It is not possible to draw from the language of the plan the representation found by his Honour.
1537 In oral submissions, (appeal ts 3417), the appellants referred to the role of Mr Davies, the Bell group Financial Administrator, in preparing the business plan of May 1988 and to his earlier extensive involvement in the development of the 1985 bond issues. Mr Davies was head of the Bell accounting. He did not give evidence. The submission was based on the proposition that if Davies as accounting department head was involved in setting the terms of the first on‑loan contract and if the on‑loan was unsubordinated, as the respondents contended, then Davies could not in all honesty have included the following statement at page 16 of the business plan: ‘All bonds are fully and explicitly subordinated to all unsubordinated debt’. That is perfectly accurate, for the reasons set out above. This submission also ignores his Honour’s findings that no‑one in TBGL gave any consideration to the on‑loans and his further finding about the absence of documentation in Bell records dealing with the on‑loans. I refer below to the inference to be drawn from the evidence that the setting of the terms of the on‑loans was dealt with in the accounting department as a routine matter. There is no basis for supposing that routine exercise must necessarily have been considered by the head of the department.
1538 Moreover, there is no evidence that fixes BGNV with knowledge of this document. Graham appears to have been aware of it. But it was prepared long after he resigned in early November 1987 as a director of BGNV.
The correspondence between TBGL and the banks about the collapse of the NP agreement into the NP guarantee
1539 In section 12.12.5.2 his Honour traced the development within TBGL that ultimately produced its proposal to the banks to collapse the NP agreements into the NP guarantee. He concluded this section at [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.
1540 By letters of 10 February 1987 TBGL made this request of some banks e.g. Westpac, NAB and SocGen. Later by letters of 14 May 1987, TBGL made the same request of other banks. Lloyds Bank by letters of 23 July 1987 put the proposal to the Lloyds syndicate banks. The three letters are in different terms. The letters or the material accompanying them identified the change as involving the dropping of the indemnities by TBGL subsidiaries that the NP banks had under the NP agreement. There is no mention in the letter of 10 February 1987 of a change in the definition of ‘total liabilities’ to be contained in the new NP guarantee excluding from NP ratio liabilities ‘non‑current subordinated debt’. But there is reference to that in the material including the draft guarantee enclosed with the letter of 14 May 1987 that went to all the Australian banks and which was also enclosed with the Lloyds Bank letter of 23 July 1987 to the Lloyds syndicate banks. The explanation provided by TBGL for this change of definition 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’.
1541 Graham was involved in his capacity as TBGIL Treasurer, in TBGL’s proposal to replace the agreements with the guarantee and in particular, in negotiating with Lloyds Bank about this. But even if it should be concluded that BGNV, through Graham, was aware of all documentation relevant to this proposal and its implementation, there is no basis on which it can be found at that BGNV was party to on‑loan contracts that included subordination terms or that TBGL made representations to the banks that the on‑loans were subordinated.
1542 In par 11ED (59A) of their amended defence and counterclaim the banks having pleaded details of the TBGL proposal to collapse the NP agreement alleged that during the course of the negotiation of the proposal TBGL represented to the banks that the convertible bonds (being the 1985 bonds and the first 1987 bonds) had created non‑current subordinated debt of companies in the negative pledge group. Owen J held at [3592]:
… 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.
1543 His Honour in identifying in the estoppel case the representations relied on by the banks did not refer to the letters of 10 February 1987 or 23 July 1987 which went only to some of the banks: see [3562]. But it is clear from the way his Honour dealt with the letters of 10 February 1987 and 23 July 1987 in the sections of the estoppel judgment dealing with reliance and detriment that he treated those letters as containing the same representation as the 14 May 1987 letters: see e.g. for Westpac at section 17.4.3 and in particular [3741], for Bank Indosuez section 17.12.3 particularly at [4024] ‑ [4026].
1544 The comments made by TBGL to the banks about the proposed change to the definition of total liabilities mentioned only the convertible subordinated bonds. They make no mention at all of the on‑loans of the bond proceeds. There is nothing in these letters capable of being read as a statement that the on‑loans were themselves subordinated. As is apparent from [3592], his Honour reached the contrary conclusion by employing the banks ‘bonds means proceeds’ argument. There is no basis for concluding that the authors, Cahill (to HKBA and SCBAL) and Wilson (to WBC, NAB and Lloyds Bank), and the recipient banks understood the expression ‘non‑current subordinated debt’ in the various letters and attachments as having anything other than the ordinary meaning of the words used in the proposed definition in the draft NP guarantee.
1545 It is correct as the appellants submit that the liabilities arising from the bond issues which, in the absence of consent by the banks to contrary treatment or a change in definition, had to be included in total liabilities the liabilities of TBGL as guarantor of the BGNV bonds and to BGNV in respect of the on‑loans of the bond proceeds. But once TBGL’s liability as guarantor of the BGNV issues was excluded from total liabilities in calculating NP ratios, either by agreement with the banks or by the changed definition, there is no basis upon which it can be argued that TBGL’s further liability to BGNV in respect of the on‑loans should still be included in total liabilities, for the reasons I have given above.
1546 I reject the appellants argument that the proposed new definition of non‑current subordinated debt included the on‑loans for the reasons also set out above. Griffiths’ personal opinion about the ambit of the expression ‘non‑current subordinated debt’ is no more relevant to the question whether the use of that expression in the letter represented that the on‑loans were subordinated than Griffiths’ subjective belief that they were subordinated, especially given that Griffiths, in this part of his cross‑examination, reiterated what he had earlier said about not having given consideration to the on‑loan and his Honour’s finding to that effect.
1547 In my opinion, the fact relied on by the respondents that until the NP guarantees were finalised well after May 1987, the draft guarantee proposed to include BGNV as a nominated borrower is no reason for denying that the letter can be read as representing that the on‑loans were subordinated debt of the TBGL NP Group. That fact is irrelevant to that question. The existing BGNV bonds had been excluded from liabilities for the purposes of the NP ratio calculations by express agreement of the banks in circumstances in which no representation arose about the status of the on‑loans. If BGNV were to be included as a nominated borrower no reader would think that would alter the existing agreements for treatment of the BGNV bonds already issued especially since the letter itself noted that the reason for the new definition of total liabilities was to exclude subordinated debt such as the subordinated convertible bonds which lenders to TBGL had already agreed to treat as equity for liability ratio purposes. TBGL’s liability as guarantor of any future issue by BGNV would be excluded from total liabilities for NP ratio purposes under the new definition in the NP guarantee. Its liabilities in respect of any on‑loan by BGNV would also be excluded from total liabilities for the same reasons that its on‑loan liabilities were excluded from NP ratio calculations under the NP agreement.
The withholding tax exemption letters
1548 Correspondence between TBGL and the ATO played a significant part in leading his Honour to the conclusion that the on‑loans were subordinated.
1549 This correspondence comprises the letter of 25 November 1985 sent by TBGL to the ATO and the three letters sent by Coopers & Lybrand on its behalf to the ATO, one dated 5 December 1986 and the other two dated 15 April 1988. The emphasis his Honour placed on these letters is explained by the fact that, in the enormous mass of documentation put into evidence, they are one of the very few documents generated within the Bell group that refer to the terms of the on‑loans of BGNV bond proceeds.
1550 At [3239] ‑ [3240] his Honour regarded the TBGL letter to the ATO of 25 November 1985 and the two Coopers & Lybrand letters of 15 April 1988 to the ATO as being ‘consistent’ with an objective manifestation of intent that the on‑loans would be on a subordinated basis, but not determinative of that [3007]. (He did not there mention the Coopers & Lybrand letter of 5 December 1986.) His Honour, without any explanation, later took a different view, considering the letters, and in particular the first, to provide unequivocal evidence manifesting an objective intention to subordinate the on‑loans: see [3283] and [3286] in the summary section, 13.2.7 and [3384] in the conclusion section, 13.4. It is necessary to backtrack to [3283], where his Honour first summarised his findings on this issue, to understand why:
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.
1551 As his Honour observed, the decision to use BGNV as the issuer of the Eurobonds was driven by tax considerations, namely the need for payments of interest to the bondholders to be deductible against TBGL’s income and for receipts of bond interest by the bondholders to be exempt from Australian withholding tax: see [2838] ‑ [2839], [2731] ‑ [2732], [2834], [2836], [2835], [2751] ‑ [2752]. Griffiths said at ts 19886 that the issues would not have proceeded if both these taxation questions had not been resolved in favour of TBGL.
1552 The first letter to the ATO, written when it was TBGL’s intention to have all of the first bond issue made by BGNV was in these terms:
[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.
1553 The attachment dealt with the six matters summarised at [2995]. What was requested in terms was a ‘taxation clearance for the creation of the above financing structure’. But it is clear from the text of the letter that a withholding tax exemption certificate was sought. (I am not aware of any explanation why the letter made a request not only in respect of interest but also redemption payments: as I understand it, relevant provisions of the Income Tax Assessment Act then in force, in particular s 128F, only provided for exemption from withholding tax on payments by way of interest.)
1554 The Coopers & Lybrand letter of 5 December 1986, written just before the first lot of bondholder interest was due, expressly sought a withholding tax exemption certificate in respect of the first BGNV bond issue. This second letter included the following:
The bonds were issued by BGNV, a company incorporated in the Netherlands Antilles. It is a wholly‑owned subsidiary of Bell and its only business is the borrowing of money to fund Bell’s business activities.
Funds raised from the issue of the bonds have been lent by BGNV to Bell on the same terms as the issue so that no profit will result to BGNV. BGNV therefore acts as a financing intermediary only.
Accordingly we request the issuance of a withholding tax exemption certificate in respect of interest payments made by Bell to BGNV in the following circumstances …
The letter then set out details of the bond issue.
1555 One of the letters of 15 April 1988 sought a withholding tax exemption certificate in respect of the May 1987 BGNV bond issue while the other contained a similar request in relation to the July 1987 BGNV bond issue. These two letters are in similar terms to the letter of 5 December 1986 save that they refer to the loans raised by the bond issues being made to BGF (rather than to TBGL) which is described as ‘the intermediate Australian holding company of BGNV and a wholly‑owned subsidiary of TBGL’.
1556 The three Coopers & Lybrand letters differ from the TBGL letter of 25 November 1985 in a number of respects, none of which I think are of present significance.
1557 The three letters sent by Coopers & Lybrand to the ATO were effective to produce the requested exemption certificates. No challenge was made to any of the claims by TBGL for deduction of interest in respect of the bonds or to the bondholders’ rights to receive bond interest in full without any withholding tax deduction (appeal ts 2624). (The letter of 25 November 1985 may not have been acted on by the ATO: apparently the ATO would only accept a formal application for exemption from withholding tax on interest payable to investors after the relevant loan arrangements had been established.)
1558 At trial, the respondents argued 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 only to those terms stated in the correspondence that were relevant to the taxation clearance requested by TBGL. His Honour accepted that if that were correct in relation to the first letter, that interpretation would apply equally to the subsequent correspondence. In that, I think his Honour was correct. The respondents also argued at trial, on the basis of an untenable reading of the letter not pursued on appeal, that the 1985 letter could not be read as identifying subordination as a relevant term of the bond issue itself and in consequence, the expression ‘the same terms as the issue’ could not include a reference to the on‑loan being subordinated. I do not think that the respondents are precluded from repeating on appeal the argument that the tax clearance letters provide no support for finding a subordination term in the on‑loans, because they now support that argument with different reasons from those relied on at trial.
1559 His Honour found support for his view in [3007] that the letters were consistent with the intention to on‑lend on a subordinated basis and for his firmer view in [3283] and [3384] that they showed that the on‑loans were subordinated essentially because the bonds themselves were expressly subordinated and the statement that the on‑loans were ‘on the same terms as the issues’ indicated that they were similarly subordinated.
1560 In my opinion, it is not possible to read any of these letters as providing any support for the proposition that any of the on‑loans were subordinated.
1561 Subordination, like convertibility, Luxembourg stock exchange listing etc is just another of the many terms of the bond issues. There is no more justification for singling out subordination and saying the expression ‘on the same terms as the issues’ in the letters picks up subordination and applies it to the on‑loans than for saying that phrase picks up any of the other terms of the bond issues and also applies them to the on‑loans. His Honour was in error in holding otherwise in e.g. [3283]. The submissions of the sixth and 29th respondents at [APPB.000.008], section 5.12.5 are also in point here.
1562 Each letter is confined, in its reference to the on‑loans to the general statement that each is ‘on the same terms as the issue’ i.e. as the bond issue itself and to an explication that immediately follows. In the first letter the explication is this:
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.
1563 The author of the first letter does not leave the ATO to guess what he means by describing the on‑loans as ‘on the same terms as the issue’: he adds by way of express explanation that because of this, the group will receive no taxation benefit from the interposition of BGNV between the bondholders and TBGL. And to make it completely clear, the author in the third paragraph of the letter says Bell is seeking a taxation clearance for the tax‑neutral structure involving BGNV because it will result in TBGL making payment to BGNV in respect of annual interest and redemption payments which will be ‘on the same terms as’ the annual interest and redemption payments provided for in the bond issue itself which BGNV must pay to the bondholders. The letter precisely identifies the terms of the bond issues which are the same as those of the on‑loans. His Honour does not attach any importance to this last sentence. It is, however, the key to understanding what TBGL meant by saying the on‑loans were on the same terms as the bond issue.
1564 The phrase ‘on the same terms as the issue’ in each of the Coopers & Lybrand letters is followed by this: ‘so that no profit will result to BGNV. BGNV therefore acts as a financing intermediary only. Accordingly, we request the issuance of a withholding tax exemption certificate in respect of interest payments made by TBGL (or BGF) to BGNV in the following circumstances …’. These letters with complete clarity explain that the exemption is sought only in respect of interest payments payable by TBGL (or BGF) under the on‑loan to BGNV and which BGNV will pay over to the bondholders and that it should be granted because those TBGL (or BGF) interest payments are on the same terms as the interest payable by BGNV to bondholders. It is not possible to read the statement that the on‑loans are on the same terms as the issues any more widely than that. His Honour did not refer to these passages of critical importance in each of the Coopers & Lybrand letters either.
1565 Whether the on‑loans were subordinated or unsubordinated, a consideration of relevance only in the liquidation of TBGL and BGF, was of no concern to either TBGL or the ATO in relation to the requested tax clearances. Neither the TBGL letter of 25 November 1985 nor any of the Coopers & Lybrand letters can be read as dealing with the ranking of the on‑loans in a liquidation.
1566 The banks also submit that giving the letters the reading I think they have, and which the respondents now advance, is erroneous because it fails to take into account background circumstances such as the commercial purpose of TBGL in issuing the bonds already referred to and the importance of subordination to both TBGL and the banks as an argument for obtaining the banks’ consent to equity treatment and certain other circumstances.
1567 But, as his Honour repeatedly found, none of these letters form any part of any on‑loan contract. They are but pieces of evidence to which regard can be had in inferring as a fact‑finding exercise whether the terms of the on‑loan contracts included subordination. They are therefore not to be construed as contractual documents by reference to the factual matrix from which the contract in question has emerged. The purpose for which they were written is plain, namely to obtain favourable tax treatment for the bond issues. There is no justification for loading up this body of evidence constituted by the letters with connotations derived from surrounding circumstances and the commercial purpose of the bond issues that might require a reading of the letters different from that conveyed by the ordinary language used in the letters.
1568 For his Honour, the significance of these letters for the contractual subordination issue was in the text of each stating that BGNV will lend the funds raised from the bond issue to TBGL on the same terms as the bond issue.
1569 The BGNV directors upon whom his Honour relied to find that BGNV was a party to a tacit understanding that the on‑loan contracts contained a term for subordination of the on‑loans, Graham and Williams, were both aware, as his Honour found, of the importance of obtaining the ATO’s confirmation that Eurobond investors would be exempt from Australian withholding tax and of obtaining the banks consent to treat the bonds as equity for NP ratio purposes. There was evidence to support these findings: see e.g. Graham’s witness statement at pars 9 ‑ 15 and 20 and ts 20572.
1570 But there is no evidence that the letters, the text of which Owen J considered so important, were seen by Graham or Williams or were otherwise communicated to BGNV. Even if the letters were capable of providing evidence that the on‑loans were subordinated and not merely evidence of the subjective intentions of TBGL in documentary form, the general awareness by Graham and Williams of the tax and equity considerations relating to the bonds is not sufficient to entitle his Honour to use them in the way he did. They are therefore incapable of manifesting any mutual intention of TBGL and BGNV to subordinate the on‑loans or of forming part of the surrounding circumstances or factual matrix to which regard can be had in determining whether the on‑loans were subordinated.
The no other indebtedness undertaking
1571 His Honour at [3006] considered that there was support for his view that the TBGL and the Coopers & Lybrand correspondence with the ATO showed that the on‑loans were subordinated in an argument raised by the banks at appeal ts 3487 ‑ 3489 and pursued on appeal to the effect that if TBGL and BGNV had entered into unsubordinated on‑loans of the proceeds of the second and third bond issues, they would have been in breach of their undertaking in the finance bond conditions 3(A) and (B) and cl 3 of the first offering circular not to create or have outstanding any indebtedness other than that under that finance bond for borrowed money convertible into equity of TBGL unless that other indebtedness is subordinated.
1572 But the undertaking by TBGL does not apply to TBGL’s indebtedness to BGNV in respect of the on‑loans which could not have breached that undertaking even if unsubordinated: the indebtedness of TBGL and BGF to BGNV for the on‑loans was never convertible into equity of TBGL. The procedure to be followed by BGNV for converting the conversion bonds into shares in TBGL is set out in cl 6(c) of the conversion bond (and cl 11(16) of the first trust deed):
On the conversion date, the issuer [BGNV] will redeem the relevant bond at its principal amount and will, on behalf of the bond holder, apply the proceeds in paying up in full the relative [sic – related?] conversion bond. Pending such application, the issuer shall hold such proceeds on trust for the bondholder, but the issuer may deduct and retain for its own use a commission of A$0.01 per A$1000 principal amount redeemed. Such conversion bond shall (without any further action on the part of the holder thereof) forthwith be converted by Bell group [TBGL] into ordinary shares, credited as fully paid as aforesaid. Conversion bonds may be paid‑up only in the foregoing manner and no holder of any conversion bond shall be under any other liability to pay up any amount unpaid thereon.
1573 To comply with this procedure BGNV must do the following: upon a bondholder electing to convert, it must first redeem the relevant finance bond at its principal amount. To do this, BGNV must appropriate an amount of its funds equal to the principal amount of the finance bond to payment of the redemption amount. Having done that and pending the application by BGNV of those funds to payment up of the conversion bond, BGNV must hold the funds so appropriated on trust for the bondholder, except that it may deduct and retain for its own use a commission of A$0.01 per A$1,000 principal amount redeemed. Having made this appropriation and having deducted commission, BGNV must then forthwith pay the amount it has so appropriated, less the commission it has retained, to TBGL whereupon the conversion bond is converted into shares in TBGL. Those shares are credited as fully paid even though TBGL will not receive the principal amount of the redeemed finance bond but only that amount less BGNV’s retained commission.
1574 The conversion procedure is not concerned with how BGNV will obtain the funds necessary to redeem the finance bond and convert the other bond into shares. As a practical matter, BGNV would have to look to TBGL for repayment of the on‑loan for that. But on receipt by BGNV of repayment of the on‑loan by TBGL, those funds would cease to be moneys paid by TBGL in respect of its indebtedness to BGNV and would become moneys owned by BGNV which it could then appropriate to payment up of the conversion bond. Though no money actually changed hands when part of the first BGNV issue was converted, the accounts were written up to show that TBGL repaid the necessary part of its indebtedness in respect of the on‑loans to BGNV and that BGNV had used that repayment to set in train the conversion procedure. But that does not mean, so far as legal effect is concerned, that BGNV did not follow the conversion procedure set out above.
1575 This procedure makes no provision for TBGL short‑circuiting the process e.g. by cancelling the finance bond issued by BGNV and the associated conversion bond, issued by TBGL, and itself issuing the appropriate number of shares to the bondholder. It is the funds of BGNV applied in accordance with the conversion procedure in the bond conditions that are convertible into equity in TBGL. Those funds do not represent any antecedent indebtedness of BGNV or TBGL. They are the monetary consideration BGNV must pay to TBGL in accordance with the conversion procedure in return for the latter’s issue of the shares to the bondholders. There is no justification for giving this conversion procedure the different and ‘commercial’ interpretation contended for by the appellants which would be necessary to conclude that there would be a breach of the undertaking if the on‑loans of the proceeds of the second and third BGNV bond issues were unsubordinated.
The Coopers & Lybrand advice of 15 October 1986
1576 On appeal, the respondents in reliance on this Coopers & Lybrand letter of advice made the point that if his Honour were correct in finding in the expression ‘on the same terms as the bond issue’ in these other letters support for the proposition that the on‑loans included a term for subordination, that could jeopardise the deductibility of interest payments that TBGL would have to make to BGNV (appeal ts 2618). The appellants disputed this (appeal ts 3516). The respondents explained the relevant taxation regimes by reference to this letter to TBGL of 15 October 1986 from its tax advisers Coopers & Lybrand. Though it dealt with BRL convertible bonds proposed to be issued by a Netherlands Antilles subsidiary of BRL and on‑loaned to Bell Resources Finance, another BRL subsidiary for deployment in the BRL group, it was not disputed that the position under the taxation laws was the same then, as at the time of each of the three BGNV bond issues: see Griffiths at ts 20004. I will deal with this letter as if it referred to BGNV and TBGL.
1577 In this letter, Coopers & Lybrand, noted in dealing with the deductibility of interest in par 18 that TBGL would have to pay interest to BGNV for on‑payment to the bondholders, that BGNV as a non‑Australian resident could not claim any deduction for interest paid to the bondholders but that because BGNV would ‘effectively be funded on a back‑to‑back loan arrangement with’ TBGL, TBGL could claim deductions in respect of the interest payable by it to BGNV under the on‑loan arrangement. The author explained that by a ‘back‑to‑back loan arrangement’ he meant an arrangement providing for TBGL to pay to BGNV as interest on the on‑loan an amount exactly the same as that which BGNV has to pay as bondholder interest. He said of the requirement that no profit should be made from the involvement of a company like BGNV, as overseas bond issuer and the on‑lender of the proceeds to the Australian parent, that it is ‘an overriding restriction’ and ‘a standard condition of the issue of a tax clearance certificate to approve the loan arrangement between the tax haven subsidiary and its Australian parent’ (the s 128F(6)(e) requirement for exemption). He makes it clear that, subject to the loan arrangement being back‑to‑back in respect of interest only, it should otherwise be ‘an ordinary inter‑company loan on commercial terms’ for the reasons set out in pars 38 and 39 of the letter. He added that there would then be ‘no difficulty in [TBGL] claiming an income tax deduction for that interest in Australia …’.
1578 Coopers & Lybrand in this letter went on to deal in par 28 and following with another issue. There was a risk that the finance bond component of the dual issue of finance and conversion bonds might be classified by the ATO as a convertible note under provisions of the Income Tax Assessment Act including s 82L and s 82R that would operate to deny to TBGL a deduction for interest paid to BGNV for on payment to the bondholders. Their advice to obviate that risk was that, subject always to the no profit requirement referred to above being satisfied, the on‑loan between BGNV and TBGL should be ‘an ordinary inter‑company loan on commercial terms’ rather than a mirror of the terms of the loan by the bond investors to BGNV.
1579 Coopers & Lybrand’s advice is clear: the on‑loans had to be back‑to‑back with the bond issues themselves only insofar as there should be no profit by BGNV from the on‑loans by charging TBGL more interest than it had to pay to the bondholders; otherwise they should be structured as ordinary inter‑company loans on commercial terms.
1580 I reject the appellants’ submissions at appeal ts 3353 ‑ 3354 that TBGL ignored this advice and ran the risks associated with making the two BGNV on‑loans in 1987 mirror all the terms of the bond issues: for the reasons given, none of the four letters to the ATO can be read as saying that any terms of the bond issues other than those relating to interest are mirrored in the on‑loans. Further, the only evidence about the content of the terms of the on‑loans is that contained in the BGNV annual accounts referred to above and that gives no support to the appellants’ argument.
1581 Nor does the Coopers & Lybrand advice of 29 September 1987 to TBGL support the proposition relied on by the appellants that the on‑loans were made as back‑to‑back arrangements extending beyond a term of the on‑loan for payment of interest by TBGL to BGNV that mirrored the terms of the bond issue fixing the interest payable to bondholders. The whole concern of that letter, including par 18, is focused on the deductibility for TBGL of interest payments made by it in respect of the bonds, how a recent tax ruling put that in jeopardy and what action TBGL could take as a consequence. It does not deal with other terms of the on‑loans.
1582 The appellants also submitted that Griffiths rejected the proposition that an inter‑company loan would not be an ordinary commercial unsecured loan if there was a term as to subordination. Mr Ryan SC, the appellants’ senior counsel submitted (appeal ts 3357): ‘He thought you could have a loan, a normal, commercial loan, which could be subordinated’. I do not accept the submission. In his evidence here relied on, what Griffiths said was that he would not be concerned, as a member of Bell Treasury with the terms of inter‑company lending between companies each 100% owned by TBGL, with matters such as whether those loans were subordinated, secured or unsecured; that was a matter for the legal, taxation and accounting sections.
Bell Group Finance (ACT) Ltd
1583 Correspondence between TBGL and Lloyds Bank on 3 September 1987 relating to the establishment of Bell Group Finance (ACT) Ltd also played a significant part in leading his Honour to the conclusion that the on‑loans were subordinated.
1584 On 11 September 1987, TBGL wrote to all the banks to seek their consent to a new subsidiary, BGF (ACT), being added to the list of nominated borrowers under the NP guarantees, initially limited to TBGL, BGF and TVW (UK), who alone would undertake borrowings on behalf of the members of the NP group. This letter explained the ACT company’s role in this way:
For the reasons outlined above it has been decided to establish a new ACT Inc public company to act as issuer of these types of instruments. The company, or BGF (ACT) will be a wholly-owned subsidiary of BGL. All moneys raised by BGF (ACT) from these issues will be on lent to BGF.
1585 This letter did not say that the ACT‑issued instruments would be guaranteed by TBGL and importantly, it did not say that the on‑loans referred to would be subordinated.
1586 Most of the banks gave their consent. BGF (ACT), however, appears never to have become active: it never issued any debt instruments and made no on‑loans to BGF.
1587 By an earlier letter of 3 September 1987 sent to Lloyds Bank but not to the Australian banks, TBGL sought Lloyds Bank’s comment on the new arrangement then under consideration which involved BGF (ACT) as a new nominated borrower. It included this statement:
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.
1588 The drafts of 4 and 7 September of the letter of 11 September which were both based on this letter of 3 September repeated this statement about subordination of the on‑loans. The letter of 3 September (with the two subsequent drafts based on it) are the only documents in evidence generated within the Bell group that expressly refer, in the context of a proposal for a TBGL subsidiary to raise funds by the issue of long‑term subordinated notes convertible into TBGL shares, to intra‑group on‑loans of the issue proceeds being made on a subordinated basis. Hence the attention given to this issue.
1589 His Honour’s conclusion at [3025] was this:
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.
1590 His Honour was in error in finding in these documents support for his conclusion that the BGNV on‑loans were subordinated.
1591 His Honour leaped in [3025] from a carefully confined finding about the subjective beliefs of certain unidentified ‘relevant officers of Bell’ in September 1987 to an unexplained conclusion that the BGNV on‑loans, all made as his Honour notes between December 1985 and July 1987, before the September 1987 correspondence was drafted, were subordinated.
1592 For this conclusion to stand, his Honour would need to show first of all, that the unidentified Bell officers who held the belief referred to in September 1987 included those Bell officers he did in fact identify as involved in the 1985 and mid‑1987 bond issues. None of this latter group, apart from Cahill, was questioned while they were in the witness box about the 3 September 1987 letter and associated drafts [3017]. He would also need to show, as he recognised, why that apparently pervasive belief was not reflected in the actual proposal that TBGL put to all the banks a few days later in its letter of 11 September 1987.
1593 His Honour did not identify ‘the relevant officers of Bell’ who he concluded held the belief set out above. I can identify only two. The letter of 3 September 1987 was written by Sue Wilson, a TBGL corporate solicitor. No doubt she was one of them. She did not give evidence. She was involved in 1987 in dealing with the banks about the collapse of the NP agreement into the NP guarantee. But I can find no evidence that she was involved in the development of any of the bond issues with which the BGNV on‑loans to TBGL and BGF were associated. Cahill, who was involved in these bond issues, was the signatory of the letters of 11 September 1987 and was the only witness who was asked about this matter. His Honour, for the reasons he gave, did not find any assistance in his evidence.
1594 In my opinion the letter of 3 September 1987 and the next two drafts provide evidence only that the unidentified ‘relevant’ Bell officers to whom his Honour referred and who were involved in developing the proposal the subject of the letter of 3 September then intended that the intra‑group on‑lending by the Canberra company of funds to be raised by the issue of long‑term unsecured subordinated notes convertible into shares of TBGL would be on a subordinated basis.
1595 His Honour concluded at [3023] that the reason why reference to subordination and to the TBGL guarantee were omitted from the letter of 11 September 1987 between 3 and 10 September was that the fund‑raising options then under consideration were widened beyond subordinated convertible note issues to include debt instruments. That in my opinion does not rise above speculation. It is an unlikely explanation for dropping reference to the parent company guarantee, without which BGF (ACT) could not hope to raise funds in the market, and to also dropping reference to subordination. There is good reason why the debt instruments referred to in the letter of 11 September would be issued by BGF (ACT) on a subordinated basis. That would mean that TBGL would obtain all the advantages of increased borrowing capacity that would flow from excluding them from NP ratio liabilities under the NP guarantees.
1596 In any event, there is no basis for thinking that those unidentified Bell officers to whom his Honour referred included people whose knowledge can be attributed to BGNV. The subjective beliefs about on‑loan subordination of unidentified Bell officers provide no basis for finding a mutual understanding on the part of TBGL and BGNV that the particular on‑loan contracts here in question included a term for subordination.
1597 His Honour noted that the main relevance of the BGF (ACT) issue was in relation to the questions of reliance and detriment in the banks’ estoppel case [3016]. But it has as little relevance to that case as it has to the contractual subordination case.
Accounting treatment of the bonds and the on‑loans
1598 The plaintiffs’ case was that the BGNV on‑loans were ordinary, unsecured, unsubordinated loans with no fixed terms of repayment and that the absence of any reference to the on‑loans being subordinated in the ledgers or the audited accounts or in the balance sheets of TBGL, BGF and BGNV for the financial years ended 30 June 1986 to 30 June 1989 showed that the on‑loans were not subordinated.
1599 In section 12.13, his Honour examined the accounting treatment of the bonds and the on‑loans in the records of TBGL, BGF and BGNV ‘to consider whether these documents and records lead to any conclusion about the status of the on‑loans’.
The annual and other accounts of TBGL, BGF and BGNV
1600 He turned first to how the on‑loans were treated in the annual accounts and other records of TBGL, BGF and BGNV. The only reference to the on‑loans was in the BGNV annual accounts: according to the year, the notes to these accounts stated: ‘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 [TBGL] and the holding company [BGF] are unsecured, interest‑bearing and have no fixed terms of repayment’. But those accounts did not refer to the status of the on‑loans whether as subordinated or unsubordinated assets or liabilities of BGNV or TBGL or BGF.
1601 Owen J reviewed the conflicting expert evidence and noted that the Bell accounts were prepared on a going concern basis while subordination was relevant only in a liquidation situation [2908] and [2909]. He concluded that disclosure in the accounts of the ranking of inter‑company loans was not required by any regulatory provision or by accepted accounting practice [2916], [2921] and [2926].
1602 He noted the evidence of Griffiths that the only documentation in respect of most inter‑company transactions involving TBGL were company minutes or accounting book entries and he noted the absence of any documentation or minutes for any of the on‑loans. He said that the February 1987 memorandum from the Bell officer, Wilson, recommending that all inter‑company loans be done by minute to avoid stamp duty payable under then recent legislation could not explain the absence of documentation for the 1985 on‑loans [3266].
1603 His Honour seems to have been of the view that the absence of reference to the on‑loans in these records, except for the BGNV accounts, and the absence of any reference to the ranking of the on‑loans in all of these accounts was neutral and provided no support for either the banks’ subordinated or the respondents’ unsubordinated propositions, although he did not make any express finding to that effect: see [2552].
1604 His Honour returned to the significance of accounting records in section 13, in the course of identifying the terms of the on‑loan contracts. Having found in [3243] that: ‘the intention of the contracting parties, as manifested by their conduct, was to make the on‑loans on a subordinated basis’, he acknowledged in [3244] in section 13.2.6 the need to test this conclusion against a number of considerations including ‘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.’
The terms of the on‑loans
How were they set?
1605 Owen J began his renewed discussion of the accounting records in section 13.2.6.2 by accepting at [3258] the plaintiffs’ submissions that the evidence showed that the ordinary course of inter‑company lending within the Bell group was on an unsubordinated basis. He did not, however, accept the further submission that this conclusion, coupled with the absence of any reference in the accounts to the BGNV on‑loans being subordinated, showed that they were unsubordinated.
1606 His Honour rejected the plaintiffs’ submissions that the terms of the BGNV on‑loans were set in that ordinary course of dealing with inter‑company loans, which was a TBGL accounts division function. Instead, he found that the terms of the BGNV on‑loans were set by the Chairman or officers of the Australian Treasury.
1607 His explanation for this conclusion at [3258] was: ‘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 in to BGNV, made their way into the NP group’.
1608 The conclusion, clearly implied here though not expressly stated, is that the terms of the BGNV on‑loans were set, not in the ordinary course of Bell group inter‑company lending, but specifically by Holmes à Court and or his associates in the Treasury division. But this finding led nowhere. His Honour did not go on and find that Holmes à Court and/or his associates in Treasury actually determined that the on‑loans should be subordinated. Nor did he suggest that anyone associated with BGNV knew of such a decision. Instead, he found that all of the TBGL personnel involved in the bond issues including the BGNV directors, Graham and Williams, did not give any consideration to the on‑loans.
1609 I have referred above to the quite different basis on which his Honour found a subordination term in the on‑loan contracts, namely, that that was the result of a tacit agreement between TBGL and BGNV that was objectively manifested by a host of documentation. Be that as it may, his Honour’s conclusion that the terms of the on‑loan contracts were set by Holmes à Court personally, with or without senior Treasury officers, cannot stand.
1610 Holmes à Court died before the trial. The only people in the Australian Treasury who gave evidence were Griffiths, Cahill and Corr.
1611 The evidence of Griffiths, Cahill and Studdy supports the finding that Holmes à Court and TBGL treasury personnel were intimately involved in ‘the whole of the arrangements for’ the bond issues insofar as they were involved in setting the terms of the issue to ensure the objectives of Holmes à Court and the board were achieved. These objectives were the raising funds in the European market through an offshore TBGL subsidiary and from Heytesbury, by a structure that would attract the consent of the NP bank lenders to the funds raised being treated as equity of TBGL rather than debt for the purposes of the NP ratios and would, by splitting the issue, ensure Holmes à Court’s own shareholding in TBGL would not be diluted, all in a tax effective way: see [102], [3092] and [3096].
1612 But nowhere in the evidence on that topic can I find any suggestion that the involvement of the Chairman or Treasury personnel extended to the setting of the terms of the on‑loans. Such evidence as there is on how those terms were set is all to the contrary. None of Cahill, Corr or Studdy gave evidence touching on that particular matter though it was raised in oral evidence with Griffiths.
1613 His Honour said at [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.
He concluded at [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.
1614 Though Corr was employed by TBGL from 1983 to 1987 as assistant group Treasurer and thereafter by BCH, his evidence was directed to events after 1988. The limited evidence he gave about the on‑loans of the bond issues at ts 14564 ‑ 14568 was vague and affected by poor recall. He did not give any evidence identifying the terms of the on‑loans. Nor did he say anything about any role that Holmes à Court or Treasury officials may have played in setting their terms.
1615 While his Honour accepted at [3135] their evidence at trial that each of the Bell witnesses, except Corr, had a subjective belief that the proceeds of the bond issues were the subordinated debt of the NP group, he unequivocally found that no‑one in the Bell organisation, including Griffiths (Bell group Treasurer), Cahill (Bell group Assistant Treasurer), Studdy (the only TBGL director during the Holmes à Court regime to give evidence [2716]), Graham and Williams (directors of BGNV and officers of Bell group Treasury UK [2716]) turned their minds to the terms of the on‑loans. See, by way of example only, [3133], [3269], [3379] and [4252]. His repeated references to no‑one thinking through the mechanism of the on‑loans emphasises his error in considering that the fixing of terms of the on‑loans was an important, rather than a routine matter. That consideration by itself makes it likely that the on‑loans were set as unsubordinated loans in accordance with the ordinary, routine inter‑company lending practice.
1616 His Honour’s finding at [3258] that the terms of the on‑loans were set at a high level by Holmes à Court and his group Treasury people is contradicted by his Honour’s findings at [3133] that Griffiths did not turn his mind to the terms of the on‑loans and at [3096] about the key role of Griffiths in the bond issues, coupled with Griffiths’ own evidence.
1617 The finding insofar as it relates to Griffiths is particularly significant. He was in the very senior position of Group Treasurer and he had by far the longest and most detailed involvement in the bond issues [2716], [2722] ‑ [2725], [2728], [3091] – [3093], [3096] and [3098]. In this whole process, it is apparent from his Honour’s findings that Griffiths was the key figure. He with Newman were the recipients of the initial September 1984 proposal from SBCIL for a TBGL bond issue and he was closely involved thereafter in its development. The TBGL board at its meetings of 8 October and 12 November 1985 minuted that it ‘offered its congratulations to the group Treasurer for having arranged this finance on these terms’ in recognition of Griffiths’ role. His Honour said: ‘This suggests to me that the directors, particularly Holmes à Court, were being kept advised by Griffiths and that they were amenable to his advice and recommendations’. At [3096] his Honour said this:
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. (emphasis added)
1618 This finding that no‑one turned their minds to the terms of the on‑loans, insofar as it applied to Griffiths, was based on Griffiths’ evidence: ‘[3115] … 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’ and ‘[3116] … 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’. Griffiths also said he could not identify a single piece of paper that recorded the terms of the BGNV on‑loans that totalled in excess of $400 million and the nature of their subordination (ts 20011).
1619 There is no basis for the appellants’ submission that the terms of the BGNV on‑loans and whether they were subordinated were matters of sufficient importance to have in fact been determined by Holmes à Court. Griffiths’ evidence was clear. Inter‑company lending between the two different banking groups, the UK and the Australian groups, was a matter for the respective Australian and UK boards. But inter‑company lending within the same banking group was arranged at the accountancy level, without his involvement: see ts 19801 ‑ 20021. Because the BGNV on‑loans were made within the same banking group to and by TBGL and companies 100% owned by it, Griffiths was not concerned with whether they were subordinated, secured or unsecured, despite the fact that hundreds of millions of dollars was involved. ‘I simply didn’t turn my mind to it’ (ts 20009 – ts 20010).
1620 Here is the evidence of Griffiths at ts 20010 – 20011 which the appellants relied on at pars 42 and 127 of their submissions to support the finding that Holmes à Court personally decided the terms of the on‑loans (in contrast to the terms and conditions of the bond issues themselves):
TOBIN, MR: Are you able to say from your own knowledge in whose mind in The Bell group the terms of the on-loan and the nature of its subordination were held?—Ultimately all things were held by the chairman.
Did you know that? Do you know that to be the case, that he held in his mind the terms as to the subordination and the terms on all other aspects of these on‑loans?—He understood the issues of subordination from information he’d received.
I’m asking you a different question, I’m sorry,
Mr Griffiths?—Do I know
With each of these on‑loans, constituting hundreds of millions of dollars over three years, I’m putting to you that you would be unable to tell His Honour, on oath in the witness box, that you know that Mr Holmes a Court held in his mind the detail of the precise terms of the on‑loan and the precise nature of its subordination. What do you say to that?—I would be unable to confirm what Mr Holmes a Court knew.
1621 His Honour’s conclusion in [3258] that the terms of the on‑loan was a sufficiently important matter to have attracted the attention and decision of Holmes à Court and his Treasury associates cannot stand with these findings and with Griffiths’ evidence.
1622 The TBGL board considered the first bond issue at a number of its meetings at which Holmes à Court and Griffiths were present. However his Honour found that while Holmes à Court was the effective decision maker [3096] there was no evidence that the directors formally discussed or passed a resolution concerning the terms of the on‑loan (though the board approved the use of BGNV as an issuing vehicle in the certain knowledge that it would on‑loan the proceeds of its issue to TBGL) [3095]. Owen J also referred with apparent acceptance to the evidence of Studdy, the only member of the TBGL board to give evidence: his ‘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 of the Chairman and officers of the company had looked at it carefully and were happy with it’ [2811]. That proposal dealing with the bond issue made no mention of the terms of any on‑loan though it identified the need for an offshore vehicle to be involved in issuing the bonds.
1623 The absence of any discussion of the on‑loans at board level is a further hurdle to accepting that setting the terms of the on‑loans was an important matter, which required attention at the highest levels within TBGL, rather than a routine one which could be, and was, left to the ordinary mechanisms within the Bell organisation for dealing with inter‑company lending.
1624 His Honour referred at [2552] and [3266] to the absence of any documentation of the on‑loans and the absence in the accounting records of any reference to the on‑loans being subordinated. This is more evidence that the setting of those terms was a routine matter and not one of any importance within TBGL.
1625 The probative force of this evidence that the terms of the on‑loans were not set at a high level within TBGL but were dealt with as a routine matter of inter‑company lending is reinforced by the fact that when inter‑company loans within the Bell group were not made on the usual unsubordinated basis but instead, as subordinated loans, they were documented as such in TBGL records.
1626 A search of the records revealed only three such loans, as his Honour noted at [3263]. They involved TBGIL and BGUK, HRL and BGF and BRF and BGF. The terms of each were fully recorded in writing. Two were noted in the relevant company’s accounts as ‘subordinated loans’ – the third was repaid within the year and so was not therefore mentioned in the relevant annual accounts but was noted in the company journals as a subordinated loan.
1627 If, as his Honour found, the setting of the terms of the BGNV inter‑company on‑loans was an important matter, this evidence suggests that if the on‑loans were in fact subordinated they would have been noted in Bell records in the same way as these three inter‑company loans were. Yet contrary to his stated intention in [3244], he did not test whether the absence of any reference to subordination of the BGNV on‑loans in the accounting records indicated that they were made on the ordinary unsubordinated basis used for Bell inter‑company loans.
1628 His Honour thought this evidence about the three subordinated loans significant because it ‘establishes the contrary argument’ namely that not every inter company loan was made on the normal unsubordinated basis [3263]. That demolishes an argument never put by the plaintiffs. The plaintiffs who introduced this evidence did not contend that every inter‑company loan was made on an unsubordinated basis. His Honour said that there was not much evidence explaining the genesis or objectives of the three subordinated loans while there was an abundance of evidence about that, with respect to the bond issues and the on‑loans [3264] ‑ [3265]. The NP group was frequently, between reporting dates, in breach of the NP ratio – see [MISD.00004.212], part of the banks’ closing submissions at trial – and Griffiths used a number of techniques to ensure the ratio was satisfied on reporting dates. That may have been a purpose of the two subordinated loans to the NP group member BGF: they would not themselves count as liabilities in calculating NP ratios and their ‘double whammy’ effect would bring a significant part of any then‑existing borrowings in excess of the 65% ratio back within that ratio. But the need to understand the commercial purposes for which these three subordinated loans were made was of no relevance to the plaintiffs’ argument: what was relevant was that they were the only subordinated inter‑company loans that were able to be identified and they were all documented as such.
1629 His Honour said that subject to a caveat: ‘there is no evidence that officers of the Bell group made a deliberate decision not to document the BGNV on‑loans’ [3265]. That is not challenged. But it is no answer to the plaintiffs’ argument. It is the failure to document the on‑loans as subordinated, if indeed they were, that is significant. If, as his Honour found, the setting of the terms of the on‑loans was an important matter, and if they were indeed subordinated, it is unlikely that they would not have been each documented as such.
1630 The caveat his Honour mentioned arose from Griffiths’ evidence that documentation of inter‑company loans that was more extensive than company minutes and accounting book entries was only prepared as a general rule if such documentation was necessary for tax purposes ‘or to show to someone outside the Bell group’. But that practice cannot explain the complete absence of documentation for, and any record of, the on‑loans if they were subordinated and if, as his Honour found, the decision to subordinate had been made at the highest level within TBGL.
1631 Contrary to his stated intention, his Honour did not attempt to test whether this evidence about the three subordinated loans contradicted his conclusions that the on‑loans were subordinated. Instead, he assumed at [3267] that the on‑loans were subordinated and saw this evidence merely as an occasion for expressing regret that the BGNV on‑loans were not expressly noted in the Bell books as subordinated.
Splitting the first bond issue
1632 His Honour dealt with why the first bond issue originally intended to be made by TBGL came to be split into an issue by TBGL and an issue by BGNV in section 12.7.3 and in section 12.11. He concluded, in a finding relevant to his acceptance of the banks’ ‘effective subordination’ argument, that there was 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 as already referred to [2842].
1633 His Honour returned to this topic in section 13.2.3.4 where he looked at the significance of this split with respect to the contractual subordination question. He here repeated at [3156] his earlier findings that there were two reasons for the split: firstly, the bond issue had to be tax effective and 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 and secondly, Holmes à Court was concerned that his overall equity percentage holding in TBGL not be diluted by investors converting their bonds into shares.
1634 His Honour referred at [3160] to Holmes à Court’s subjective intention, expressed at the shareholders meeting in November 1985 and prior to the decision to use BGNV, that the bonds Heytesbury intended to take up would be ‘on exactly the same terms as [those] offered to the public’. He also referred in [3162] to the similar statements contained in the Heytesbury and TBGL bond issue agreement of 20 December 1985. He nevertheless noted in [3161] and [3163] why identicality between the two lots of bonds was not possible.
1635 In discussing the Heytesbury and TBGL bond issue agreement, his Honour observed: ‘nowhere in the schedule [to that agreement] is there any indication that the subordinated status of the domestic bonds was in any way different from that of the Eurobonds’. Nor was there in fact any difference in status: as His Honour noted in [3164] both the Heytesbury bonds and the Eurobonds were unarguably subordinated.
1636 He turned in [3165] to a more important matter. He said that if the on‑loans from the Eurobonds were on an unsubordinated basis ‘by reason of a change that was brought about purely and simply for taxation purposes, a curious situation would arise’. This dismissive comment undervalues the significance attached by TBGL to achieving its taxation objectives in respect of the bonds: the use of BGNV was essential to TBGL obtaining the tax advantages without which it would not have issued the bonds: see Griffiths at ts 19886. Further, the introduction of a third party into the bond issue structure necessarily involved substantial changes to the structure originally planned. Be that as it may, his Honour identified the ‘curious situation’ as residing in the fact that if the Eurobond on‑loans were unsubordinated, Heytesbury would have to stand behind BGNV before it could claim.
1637 His Honour in [3167] focussed on Holmes à Court and said that if he had ‘determined to award the Europeans a free kick of that type it would at least have been discussed’, but there were no such discussions. Though his Honour did not say so in express terms, the inference here is that it was unnecessary for Holmes à Court to turn his mind to the way the European investors would be advantaged at Heytesbury’s expense if the BNGV on‑loan to TBGL was unsubordinated because Holmes à Court must have intended the BNGV on‑loan to be subordinated. But such an inference is mere speculation.
1638 It is no doubt true that if Holmes à Court had deliberately given the BGNV bondholders a free kick, to their advantage and at Heytesbury’s expense, by determining that the on‑loans should be unsubordinated, it is likely there would have been some discussions within TBGL about the differences between the position of the Eurobond holders and Heytesbury in a liquidation of TBGL. But as his Honour there noted, Holmes à Court was confident in the financial performance and future of TBGL and it is unlikely that he would have been contemplating a liquidation scenario in which a differential between the position of the Eurobond holders and Heytesbury would alone have been of moment: that provides an explanation for the absence of discussions. Further, his Honour found that no‑one in TBGL gave any consideration to the on‑loans. Even if this finding does not extend to Holmes à Court, it certainly extends to his important assistant, Griffiths, and for the reasons I have given above, I think his Honour was in error in finding that Holmes à Court personally determined the terms of the BGNV on‑loans and that he should have found instead that Holmes à Court did not give any consideration to them either. It is therefore of no evidentiary significance to the contractual subordination issue that there were no discussions involving Holmes à Court about the consequences of BGNV’s involvement which required an on‑loan of the proceeds of its issue to TBGL.
1639 His Honour concluded his consideration in [3165] of the ‘curious situation’ scenario by saying: ‘In my view it is accurate to characterise this scenario as meaning the Eurobond holders were not effectively subordinated’.
1640 His Honour finished this section of the judgment at [3168]:
The conclusion can, I think, conveniently be expressed in terms similar to those used in ADC par 11ED(71) [the banks’ pleading]. 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.
Effective subordination
1641 Having used this concept in [3165] and [3168] in section 13.2.3.4, his Honour returned to the notion of effective subordination in section 13.2.6.1 where he again discussed the relationship between the Eurobonds and the domestic bonds to see whether that had any effect on the status of the on‑loans [3244].
1642 This notion of ‘effective subordination’, like the notion of ‘bonds means proceeds’, played a part in his Honour’s reasoning to his conclusion that the three Eurobond on‑loans were subordinated. It also became a major theme in the sections of the judgment dealing with the banks’ estoppel case: see e.g. [3646] ‑ [3647], [3649] and [3650] and [3692].
1643 His Honour referred to the statement by Holmes à Court to the shareholders’ meeting of 12 November 1985 [3246] and to statements about the BGNV and TBGL domestic bonds being on identical or similar terms in the offering circular [3248] – [3250], in the agreement between Heytesbury and TBGL [3251] ‑ [3252], in the TBGL letter of 11 December 1985 to the banks [3253] and in notes to the balance sheets in various TBGL annual reports. He also referred to the 1988 spreadsheets which ‘lump the BGNV bond issues and the accompanying domestic bond issues together and describe them as subordinated borrowings’ [3255].
1644 His Honour drew the following conclusions from this material at the end of this section of the judgment [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.
1645 The notion of effective subordination resulted from an argument developed by the banks that because the moneys that would come in to TBGL’s hands from its bond issues to Heytesbury were subordinated debt and because its bond issue to Heytesbury was on the same terms as the BGNV issue to the Euro investors, that necessarily required the moneys coming into TBGL’s hands from the BGNV issue also to be subordinated.
1646 The expression ‘effective subordination’ was, as his Honour said at [3569] in dealing with the estoppel case, ‘the banks’ shorthand’ in its submissions for this proposition. It is also clear that this was the sense in which his Honour understood and used the expression: see [3165] and [3168] already mentioned and [3256], [3647], [8893] and [8995].
1647 There is no reason why the BGNV bonds had to be ‘effectively subordinated’ in that sense. The TBGL and BGNV bond issues were intended by TBGL and BGNV to raise funds for TBGL which the banks would be prepared to treat as equity rather than debt for NP ratio purposes. Those objectives were achieved. The two issues were on substantially the same terms. But the interposition of BGNV between the bond investors and TBGL necessarily required a different structure for getting the bond proceeds into TBGL’s hands than was required under the TBGL issue. Everyone knew that: everyone including the banks knew there would be an on‑loan by BGNV of the bond proceeds to TBGL. The banks got the offering circulars for the second and third issues in which that was explicitly stated and TBGL’s letter of 11 December 1985 opened by telling the banks that TBGL would raise $75 million by issuing bonds ‘through its financing subsidiary BGNV’. No‑one in TBGL, BGNV or the banks showed any concern about the mechanism used to get the BGNV bond proceeds into TBGL’s hands: as his Honour found, none gave any consideration to the BGNV on‑loans at the time. None were concerned at the time that the BGNV bonds would not only be subordinated but ‘effectively subordinated’ in the sense in which his Honour used that expression. The inference is that everyone involved in the bond issue in TBGL and BGNV and the banks were prepared to accept, without any query, what was done within TBGL to pass the BGNV bond issue proceeds to TBGL. Concerns about that only arose in the banks in late 1990 of the 1991 when financial collapse of TBGL was imminent.
1648 The absence of concern by Holmes à Court in 1985 about what is now said to be the unjustifiably advantageous position of the BGNV bondholders compared with that of Heytesbury is no justification for saying that TBGL and BGNV must have intended the two issues to be ‘effectively subordinated’. The reason why Holmes à Court was at pains to emphasise to shareholders that the bonds he intended to take up through Heytesbury were ‘on exactly the same terms as offered to the public’ is clear: his influence within TBGL was such that he effectively controlled whether the bonds would be issued and on what terms. In making this statement he was assuring shareholders and potential public investors in the bonds that the issue he intended to take up would not be on terms more advantageous than the issue to be offered to the public. That is the reason for all the other statements about identicality and similarity in the other documents relied on by the trial judge. Yet these assurances to public investors that Heytesbury would not get any insider advantage at their expense became for his Honour evidence that public investors in the bonds would not be advantaged at Holmes à Court’s expense.
1649 Except for the 1988 spreadsheets which I have already dealt with, all the material which his Honour here relied on was confined to stating that the BGNV bonds and the TBGL bonds were on identical or the same or similar terms. None of the material mentioned the on‑loans. A comparison of the trust deed for the BGNV issue with the December 1985 agreement between Heytesbury and TBGL and their later trust deed shows that the terms and conditions of both bond issues were very substantially the same. But his Honour concluded that BGNV and TBGL, as the contracting parties, must have had a different objective intention from that. He considered that they should be taken to have intended not just that the bond terms and conditions would be substantially the same but that the two issues would be ‘effectively subordinated’, which necessarily means that the on‑loans would be subordinated. There is nothing in any of these documents that evidences that.
1650 The respondents submitted that the concept of effective subordination is a pleading construct. I think that is correct. It appears to have been picked up from the banks’ pleading. Counsel for the main respondents on appeal said that the expression does not appear in any of the contemporaneous documentation including the documentation relied on by his Honour (appeal ts 2725 – 2756). Appellants’ counsel accepted that, while the expression ‘effective subordination’ may appear in some of the witness statements of bank officers, there is no mention of that concept in the contemporaneous documents (appeal ts 3500).
1651 In par 11ED(17) of their amended defence and counterclaim, the banks alleged that various statements in the TBGL letter of 11 December 1985, including the statement that the two $75 million bond issues would be identical, 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. In par 11ED(71)(m) the banks pleaded an expanded notion of effective subordination based on the beliefs and intentions of each of TBGL, BGNV and BGF, as parties to the three on‑loans.
1652 In section 17 of the judgment dealing with the evidence the banks led to show reliance and detriment on the representations about subordination of the on‑loans that the banks claimed were made by TBGL there are many references to bank witnesses talking about effective subordination of the bonds. Typical is the evidence of Haman of Indosuez Bank, a member of the Lloyds syndicate from early 1986. At [4011] his Honour referred to his evidence that if he had understood, when considering whether to recommend Indosuez’s agreement to the TBGL request of 15 April 1987 to treat the May 1987 subordinated convertible bond issue as equity, that the second BGN bond issue was not effectively subordinated he would not have supported that request. But nowhere did Haman suggest that he identified at any relevant time in 1986 to 1988 that the proceeds of the BGNV bonds had been on‑lent within the Bell organisation and that his understanding that the bonds were effectively subordinated meant to him that not only the bonds and the funds raised by the bonds but also the on‑loans of those funds were subordinated. His Honour referred to many other bank witnesses who gave evidence to the same effect: see by way of examples only, [3776], [3855], [3861], [3987] ‑ [3988], [4031], [4036], [4049], [4058], [4076], [4099], [4159], [4216].
1653 The subjective beliefs of Studdy at par 19 of his affidavit and Griffiths at par 16 of his, were relied on by the appellants at [APPA.000.088.001, page 37] to show conscious consideration by each of effective subordination. Even if those beliefs were available as evidence supporting the finding of a contractual term for subordination, they do not show any such thing: their evidence was confined to a belief that there was no significant difference between the TBGL and BGNV bond issues.
1654 In my opinion ‘effective subordination’ in the sense used by the banks and by his Honour is an expression that masks, rather than assists in the resolution of the difficulties involved in determining whether TBGL and BGNV agreed that their on‑loan contract included a term for subordination.
1655 In dealing with an argument by the banks that Holmes à Court’s statement to the shareholders meeting of November 1985 that the bonds to be issued to Heytesbury would be on exactly the same terms as those offered to the public evidenced that the Eurobond on‑loans were subordinated, his Honour said [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.
1656 The BGNV bond issues themselves were always subordinated just as were the TBGL issues to Heytesbury. His Honour is not talking about that here. His Honour proceeds in [3247] on the assumption that it was a term of the Eurobonds that they were to be effectively subordinated i.e. that the on‑loans would also be subordinated, and finds that there is no evidence that anyone considered or intended that splitting the issue between BGNV and TBGL would result in that term of the Eurobond issue being changed to a term that made the on‑loans unsubordinated. But there is in the judgment an explanation for the absence of such evidence: His Honour found that no‑one in TBGL or the banks gave any consideration to the on‑loans. To rely on the concept of ‘effective subordination’ in the way his Honour did here, pre-empts the question he had yet to decide, namely, whether the on‑loans were subordinated.
1657 His Honour takes the same untenable approach to the other documents he refers to in this section of the judgment. None of his reasoning, based as it is on these documents, supports the conclusion in [3256].
1658 The notion of effective subordination as used by the banks and by his Honour reflects an approach to interpreting the documents that refer to the identicality or similarity of the two issues as if they had contractual effect. It is the foundation for the appellants’ submission at appeal ts 3500, based on what they identify as the commercial purpose of the December 1985 issues, that in order to give effect to this commercial purpose, subordination must flow through to the on‑loans between BGNV and TBGL. This approach gives connotations to these documents not found in the language used in them.
1659 Such an approach is not permissible. All the documents referred to are merely pieces of evidence to which regard can be had by the court in deciding whether a term for subordination should be inferred or implied in the on‑loan contracts. The only evidentiary significance each has is determined by the meaning of the language used in each i.e. by the ordinary meaning of the words. The ordinary meaning of the phrases in these documents about identity and similarity in relation to the two bond issues does not in my opinion extend to encompassing anything beyond the terms and conditions of the bonds themselves.
The commercial purpose of the bond issues
1660 In section 12.10, Owen J turned to the question of the commercial purpose of the bond issues. He reviewed the evidence of Bell officers involved in the three issues including that of Griffiths, Graham and Williams (both also directors of BGNV) and Studdy a director of TBGL. In reliance on that evidence he found that ‘the commercial purpose of TBGL in making the three bond issues was to inject debt into the NP group that the NP banks would agree to treat as equity rather than as a liability for NP ratio purposes’ [2825]. This finding of TBGL’s commercial purpose for making the bond issues was central to his Honour’s conclusion that the on‑loan contracts contained an inferred term (see [2830], [3243] and [3364]) or an implied term for subordination (see [3331]).
1661 The respondents submit that his Honour was in error in making this finding. They contend in par 174 that tax considerations drove TBGL’s decision to issue the bonds. The matters they list in par 173 no doubt influenced the thinking of the TBGL personnel involved in organising the bond issue. But there is a mass of evidence to the effect that obtaining the banks’ consent to treat the bonds as equity rather than debt was, as his Honour found, one of TBGL’s chief objectives in making the bond issues.
1662 His Honour returned to the question of the commercial purpose of the bond issues in section 13.2.1. Largely on the basis of Graham’s involvement in the arrangements for the bond issues, he found that BGNV was aware of the commercial purpose of the fund raising and that it saw its role as directed towards facilitating and achieving TBGL’s purposes in undertaking the bond issue [3097]. He concluded this section at [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 …
1663 The circumstances to which regard can be had in identifying the commercial purpose of the issues must be mutually known to TBGL and BGNV before that purpose can be taken into account in determining whether the on‑loan contracts included a subordination term. That requirement is satisfied here.
1664 Graham and Williams became directors of BGNV from the outset of the company’s existence and were each aware of TBGL’s intentions to raise funds by convertible subordinated Eurobonds that would not be treated as liabilities by the banks for the purposes of the NP ratios: see [2806] ‑ [2807] and [2808], findings supported by the evidence both written and oral of Graham and Williams, each a ‘managing director’ of BGNV. That is sufficient to fix BGNV with knowledge of TBGL’s commercial purpose as found for issuing the bonds. I reject the respondents’ submissions to the contrary.
1665 At [2819] his Honour rejected the plaintiffs’ argument, repeated on appeal, that because the request for equity treatment of the bond issues of 11 December 1985 was only sent to the banks after TBGL had become committed to the issue, obtaining the banks’ agreement to equity treatment cannot have been part of TBGL’s commercial purpose in issuing the bonds. His Honour said: ‘I am satisfied the letter had been preceded by discussions with the banks’. As his Honour noted at [2724], Griffiths raised the matter with Cutler of Westpac as early as June 1985: see Cutler’s diary note of 11 June 1985 and his handwritten note apparently dated 20 June 1985. Chapman in her letter of 31 October 1985 to the banks enclosing the negative pledge report to 30 June 1985 said that TBGL would approach them in the coming months to discuss ‘the appropriate treatment of the proposed convertible note issue of which you were recently advised’. This argument by the respondents is unfounded.
1666 The respondents also say the governing consideration must be the commercial purpose of the TBGL board i.e. as an entity separate from the individual directors of whom Studdy alone gave evidence. I reject this attack on his Honour’s finding as too narrowly based: the commercial purpose of the bond issues has to be determined in my opinion by reference to all the circumstances touching on that question including the way the final structure of the bond issue emerged from the activities not only of the TBGL board but also of the TBGL officers involved in that exercise, including the key decision maker Holmes à Court who, as his Honour, found acted on the advice and recommendation of his group treasurer, Griffiths.
1667 In view of the evidence available to his Honour and on which he relied, there is in my opinion no error in his finding about the commercial purpose of TBGL in arranging the bond issues.
Subordination as an argument for equity treatment of the bonds
1668 His Honour’s finding on the question whether TBGL regarded subordination of the bond issues as an essential argument in favour of the request to the banks to treat those issues as equity rather than debt played an important part in his reasoning that the on‑loans were subordinated. His Honour having noticed it in section 12.10 did not return to this question until a good deal later in the judgment, firstly in section 13.2.4.2, with a conclusion at [3190]; then in section 13.2.4.3 with a further conclusion at [3210] and then in section 13.2.5 where he said at [3243], in a passage he repeated in section 18 (at [4250]) where he summarised, with some additional findings, his conclusions on this issue:
… 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 …
1669 The respondents submit that his Honour was in error in finding that subordination was an essential element of TBGL’s argument to the banks for equity treatment of the bonds. It is true as the respondents point out that in some of the TBGL documents relating to the development and implementation of the various bond issues there is no reference to subordination. But there is repeated reference to the issue of subordinated bonds in much of the documentary material generated in 1985 as TBGL moved towards the final bond structure and the issue of the bonds themselves in December 1985, (as well as in later documentation relating to the subsequent issues). All this effort was directed towards achieving TBGL’s commercial purpose of raising funds by the bond issues that the banks would agree to treat as equity rather than debt for the purposes of the NP ratio covenants.
1670 In my opinion, the state of the evidence was such that his Honour was entitled to find that subordination was an integral part of attaining TBGL’s commercial purpose in issuing the bonds.
A term for Subordination – conclusion
1671 In section 13.2.2 his Honour turned to the question whether the on‑loan contracts contained a term for subordination. In this and the sections of the judgment that follow up to section 13.2.5, his Honour reviews a large body of evidence. But it is not until [3243] at the end of section 13.2.5 that his Honour makes an unequivocal finding about subordination of the on‑loans. He there says:
… In my view, the intention of the contracting parties, as manifested by their conduct, was to make the on‑loans on a subordinated basis.
1672 He referred to the banks’ argument that it was an integral part of this commercial purpose that subordinated funds be injected into TBGL and that, in order to achieve that purpose, the proceeds of the bond issues had to be provided to TBGL on a subordinated basis [3105].
1673 In 13.2.3.1 his Honour examined what the various Bell officers involved in arranging the bond issues subjectively understood about the concept of subordination and its application in the context of the on‑loans, saying at [3107]: ‘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’. In 13.2.4.2 his Honour returned to this matter for the purpose, he said at [3173], of dealing with ‘the question’ he had posed in [3172] viz ‘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?’.
1674 It is apparent from his Honour’s conclusions in both sections that, contrary to his professed intention in [3107] (repeated in [3173]) and notwithstanding his repeated statements in [2657], [3085] and [3278] and in the opening paragraph of subsection 13.2.3.2 that the subjective beliefs of involved persons are irrelevant to the determination of whether there was a contract of on‑loan containing a subordination term, his Honour did not use the evidence of the witnesses’ subjective beliefs to assist him to understand any of the communications he looked at here. Instead he used the documentary communications he referred to, to find in them support for his findings about the subjective beliefs of the witnesses.
1675 In subsection 13.2.3.1, at [3128], his Honour said: ‘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’. He refers at [3135] to Griffiths, Studdy, Cahill and Williams each having this understanding. What his Honour drew from these assertions is set out at [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. (emphasis added)
1676 His Honour accepted all this evidence, observing at [3132] that ‘… generally speaking there is support for the position advanced by the witnesses in the contemporaneous documentation’.
1677 In my opinion, his Honour excluded Corr from his conclusion in [3135]. I reject the appellants’ submissions at [APPA.000.088.001, page 41] that Corr said he understood that not only the bonds but also the on‑loans were subordinated. Corr’s evidence here was ambiguous: see ts 14552. His Honour’s uncertainty about Corr’s evidence – see ts 14566 – was never cleared up. His Honour did not follow up Corr’s non‑responsive answer to his question at ts 14570.
1678 Paragraph [3135] contains the key conclusion in subsection 13.2.3.1 of the judgment. Though it is not clear, I do not think his Honour has here found that the Bell witnesses believed that on‑loans were subordinated. As the passage from [3135] which I have emphasised above suggests, this finding seems to foreshadow the banks’ ‘bonds means proceeds’ argument. However, the evidence entitled his Honour to reach this conclusion, though the subjective beliefs of the Bell personnel and the contemporaneous documentation which his Honour referred to were irrelevant to the task his Honour had to perform: none were communicated to BGNV.
1679 I take the contemporaneous documentation his Honour referred to in [3132] to be that in subsection 13.2.3.1 and perhaps also in subsection 13.2.3.2, where his conclusion at [3150] was 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’. His Honour does not here suggest that the documentation supports a conclusion that the on‑loans were subordinated nor does he make any finding that any of these documents shows that the on‑loans contained a term for subordination.
1680 In these two sections, Owen J refers to internal Bell communications and communications between Bell and its advisers and shareholders and Bell and the banks. Except for the TBGL letter to the ATO referred to in [3112] and [3148], none of these documents mention the on‑loans and none including the ATO letter can be read as saying anything about whether they were to be subordinated. None, including the TBGL letter to the ATO (for the reasons already given), provides any support for the witnesses’ beliefs that the on‑loans were subordinated if his Honour’s reference to the proceeds of the bond issues being subordinated was intended to suggest that. These documents do not take the case any further than showing that the bonds themselves were to be subordinated and that subordination of the bonds was necessary to persuade the banks to treat the bonds as equity.
1681 The way his Honour dealt with the SBCIL proposal of 1 July 1985 to Newman and Griffiths (at [3141] and [3142]) requires comment. It referred to the use of an offshore issuing vehicle and to an issue of bonds constituting ‘subordinated obligations of the issuer rating after all unsecured and unsubordinated obligations but equally with all of the present and future subordinated obligations of the issuer and the guarantor’, phraseology which his Honour noted was to the same effect as ‘the status wording’ contained in the offering circulars and the trust deeds for the bond issues. He accepted the banks’ argument that this expression showed that the bonds ‘and their status’ were expressly intended to rank equally with subordinated obligations of TBGL and that ‘They [i.e. the bonds] were not, through an on‑loan from the issuer, envisaged as ranking effectively pari passu with unsubordinated obligations of TBGL’ (emphasis added). He added: ‘And it flows through to later communications from SBCIL to the Bell group’.
1682 The SBCIL proposal of 1 July refers only to the bonds and does not mention the on‑loan. There is nothing in the wording of the document that suggests that the author or the parties, SBCIL or TBGL, gave any thought to whether any on‑loan would be either subordinated or unsubordinated. What appears in the emphasised passage in [3142] above is a gloss placed upon the document by the banks and accepted by Owen J that the ordinary meaning of the language cannot support. The banks’ gloss appears to reflect their ‘bonds means proceeds’ and ‘effective subordination’ arguments. This proposal to TBGL by SBCIL is incapable of providing an evidentiary foundation for a finding that TBGL objectively intended the on‑loan to be subordinated.
1683 At [APPA.000.088.001, page 27] the appellants say other documents are also relevant here, namely, those at pars 83 and 85 of this submission. Some duplicate documents are referred to in 13.2.3.1 and one is not relevant to anything: see [TBGL.00864.089]. Some of those additional documents support the proposition that Bell officers believed subordination was a factor in obtaining the banks’ consent to equity treatment of the bonds. A couple refer to the use of an offshore issuer. But none refer to the on‑loans. As with the documents mentioned by his Honour in 13.2.3.1 and 13.2.3.2, none provide any support for the witnesses’ evidence that they believed the on‑loans to be subordinated, and no support for the only relevant consideration: do they constitute evidence showing an objective intention by TBGL to subordinate the on‑loans?
1684 In this same part of the judgment in section 13.2.4.2, ‘the state of mind of the decision‑makers’, his Honour focused on the evidence of the Bell witnesses. His conclusion in [3190] concerned the subjective state of mind of various Bell officers, including Graham, a BGNV director, to the effect that they regarded subordination as a necessary element in the approach to the banks to gain consent to equity treatment of bonds. For the reasons given, Graham’s belief in the relevance of subordination of the bonds can be imputed to BGNV. But, as his Honour noted at [3150], that subordination of the bonds was considered by TBGL to be important in procuring the banks’ consent to equity treatment of the bonds does not determine whether the on‑loans themselves were subordinated.
1685 In section 13.2.4.3, ‘communications concerning convertibility’, his Honour focused on the documentation that he had considered in 13.2.3.1 and 13.2.3.2 and some additional documentation. I have already explained why none of this material provides any support for his Honour’s conclusion about subordination of the on‑loans save that I did not deal with two documents mentioned by his Honour here for the first time, namely, the TBGL internal memoranda of 9 January 1987 from Johnson to Holmes à Court and Griffiths and of 13 March 1987 from Cahill to Griffiths. At [3200] his Honour saw the significance of these two memorandums in the fact that they expressly mentioned subordination, rather than convertibility, as an argument in favour of equity treatment and both tied equity treatment into TBGL’s overall objective of increasing borrowing capacity. Neither mentions the on‑loans and neither provides any support for a conclusion that the on‑loan contracts contained a subordination term.
1686 His Honour’s conclusion in 13.2.4.3 was that the documents he here considered ‘exhibited 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’ [3210].
1687 His Honour in [3150], [3190], [3210], [3380] and [4260] held that subordination was a consideration, though not the only one, relied on by TBGL in asking the banks to treat the bond or issues as equity rather than debt for the purposes of the NP ratio calculations. I can see no error in this finding by his Honour. There is ample support for it in both the contemporaneous documents to which he made reference and the evidence of the TBGL witnesses including Griffiths.
1688 However his conclusion in [3210] that the documents I have referred to above reveal an objective manifestation of an intention that subordination was an essential argument by TBGL for equity treatment by the banks of the bonds is erroneous. For the reasons given, unless each of these documents was communicated to BGNV, it is irrelevant to the question whether the on‑loans contained a term for subordination: each such document, unless communicated to BGNV, is merely the record of the subjective beliefs or intentions of the author. If any of these documents were communicated to BGNV, then that would be relevant to the task facing his Honour but only insofar as they would constitute mutually known background facts or circumstances to which his Honour could have regard in deciding whether to infer or imply a term for subordination in the on‑loan contracts.
1689 With one exception, the information memorandum sent by Lloyds Bank to prospective members of the Lloyds syndicate in April 1986, which I have dealt with above, his Honour did not in sections 13.2,3.1, 13.2.3.2, 13,2.4.2 or 13.2.4.3 deal with whether any of the documents he here considered constituted evidence that the on‑loans as distinct from the bond issues themselves were subordinated. He had a different object in view in this part of the judgment, namely, to identify how these documents provide evidence that subordination was an argument relied on by TBGL to seek equity treatment for the bonds from banks.
No consideration of the on‑loans within Bell
1690 Notwithstanding his Honour’s reference to what the Bell witnesses (except Corr) subjectively believed about the proceeds of the BGNV bond issues being subordinated, he expressly found at [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’. (emphasis added)
1691 His Honour repeated this finding of no consideration to the terms of the on‑loans at a number of other points in the judgment [3135], [3225], [3269], [3379], [3608] and [4252].
1692 The banks submit that the respondents overstate what his Honour found when he said at various points that no‑one considered the terms of the on‑loans. The banks submit in effect that these findings must be understood against the background of findings as to the witnesses’ understanding of the commercial purposes of the bond issues and his Honour’s finding that the on‑loans would be subordinated. They say the finding of no consideration to the on‑loans relied on by the respondents meant nothing more than that there was no evidence of any conversation or express statement about the on‑loans being subordinated and that that finding related only to the practical details of giving effect to the agreement to subordinate the on‑loans.
1693 I reject those submissions. They turn the way the judge proceeded on its head. The banks could not have been unaware that the BGNV would pass the proceeds of its bond issues onto TBGL and BGF by way of inter‑company loan: TBGL’s letter to the banks of 11 December 1985 clearly implied that and the offering circulars for the second and third BGNV issues, which the banks had, expressly said that.
1694 But in the passage set out from [3133] which I have emphasised, his Honour makes it clear by the example he gives to illustrate this finding, that it was a broad finding that no‑one gave any thought at any relevant time to those on‑loans, including what the terms of those on‑loans should be. Further confirmation of the breadth of his Honour’s finding is contained in [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’ (emphasis added).
1695 Further his Honour thought that the failure of any relevant officer or employee to give any consideration to whether the on‑loans were subordinated created a real difficulty in inferring a term for subordination (which he ultimately found was included in the on‑loan contracts) on the basis of a tacit understanding or agreement to subordinate the on‑loans: see [3133] ‑ [3135] and [3379]. If the bank submissions are correct, his Honour should have felt no such difficulty.
1696 One qualification must be made to his Honour’s finding in [3133]. It is apparent from the letters written by TBGL to the ATO seeking withholding tax exemptions for the Eurobond investors that consideration was given by various Bell Treasury officers to ensuring that the on‑loans would provide for interest to be paid by TBGL and BGF to BGNV that matched the interest BGNV had to pay to the bond investors. This appears to have been done, with the relevant payments being entered in the records of each of these companies. But the consideration that Bell officers gave to the on‑loans did not go beyond that.
The subordinated obligation in the conversion bonds
1697 As his Honour also noted at [3227] and [3231], TBGL had a monetary liability to the bondholders under its conversion bonds associated with the 1985 BGNV finance bonds limited to $750, the total amount paid up under that conversion issue. But the letter of 11 December 1985 does not mention this minuscule liability and the request for equity treatment cannot be read as referring to it.
1698 At the appeal hearing, counsel for the appellants drew attention to the promise by TBGL on the first sheet of the conversion bond (repeated in condition 3(A) of the bond conditions) to repay on 10 December 1995, if conversion had not taken place, the A$0.01 paid up on each A$1,000 bond when they were issued with the finance bonds by BGNV. The argument is that because this amount of $0.01 per $1,000 which TBGL was entitled to receive from the proceeds of the conversion bond issue would come into its hands as subordinated borrowings, that provides evidence that all the other millions of dollars of finance bond proceeds that TBGL received by way of on‑loan from BGNV must also have been subordinated.
1699 If this obligation imposed by the conversion bond condition 3(B) on TBGL to pay to the conversion bond holder on 10 December 1995 ‘the principal amount of A$0.01 being the amount paid up on this conversion bond’ was unqualified it would be a subordinated obligation of TBGL: see condition 6(B)(2) of the trust deed and condition 1 of the conversion bond, which picks up condition 1 ‘status and form’ of the finance bond. But this obligation to repay was expressed to be ‘in accordance with the conditions endorsed’ on the conversion bond itself, including condition 3(B). This provides that ‘on redemption of any Bond [i.e. any finance bond – see condition 1] in any circumstances in which the relative (sic) Conversion Bond is not correspondingly paid up and converted into Ordinary Shares … of Bell group, the relative Conversion Bond attached thereto [to the associated finance bond] shall simultaneously be redeemed at the amount paid up thereon and the redemption price [of the finance bond] shall be inclusive of such amount’. The obligation to pay the A$0.01 on redemption of the conversion bond was to be discharged, in the event that the conversion bond was not converted into TBGL shares, not by payment of the A$0.01 but by payment of the redemption price of A$1,000 of the associated finance bond. This scheme is consistent with the information in the TBGL journal voucher made available to the court by the appellants in respect of the first bonds issue which shows that the A$0.01 treated as paid up on each conversion bond when it was issued, was never paid by the bond holder and never received by TBGL: all it received from BGNV was the net proceeds of each associated A$1,000 finance bond.
1700 I think that the express subordinated status of this particular obligation throws no more light on whether the on‑loan by BGNV to TBGL of the proceeds of the first BGNV issue was also subordinated than does the express subordinated status of both BGNV’s direct liability and TBGL’s liability as guarantor to the finance bondholders under the finance bonds. Even if this $0.01 per $1,000 was paid to TBGL, which it appears did not in fact happen, I do not think it can be said to have come in to TBGL’s hands as subordinated borrowings: the $0.01 per $1,000 was not paid by the bondholders to TBGL by way of loan but as an amount paid up on each conversion bond i.e. as payment of part of the purchase price of the shares which could be acquired pursuant to the conversion bond. The $0.01 had none of the characteristics of a loan. It was expressly declared that interest was not payable on the $0.01. Further, BGNV’s repayment obligation was discharged not by repaying the $0.01 but by paying another and different amount namely the $1,000 principal amount of the associated finance bond. There is no reason why this special regime for the discharge by TBGL of its obligation to redeem each conversion bond should be thought to provide a guide to how the on‑loan of the finance bond proceeds was to be structured. In contrast to the elaborate provisions made for payments in respect of the conversion bonds in the trust deed and the bond conditions, the only mention of the on‑loan of the finance bond proceeds by BGNV to TBGL was in the offering circular. How the on‑loan was to be arranged and administered was left to BGNV and TBGL to sort out between themselves.
The implied term as to subordination
1701 In section 12.5.3, his Honour reviewed the legal principles applicable to implying terms in informal contracts like the on‑loan contracts. His Honour concluded [2677]:
… 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 [quare: effective] operation of the contracts assessed against the background of, but without rigidly applying, the BP Refinery criteria.
1702 The test as framed by Deane J in Hawkins v Clayton at (573) does not in terms require the proposed term to satisfy the obviousness criterion referred to in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. But the criteria in BP Refinery, though not applied rigidly in the case of informal contracts, are not irrelevant to whether a particular term should be implied in the contract: see Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 121 (Deane J); Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 [446] (McHugh and Gummow JJ) and Breen v Williams [1996] HCA 57; (1996) 186 CLR 71, 105 (Gaudron and McHugh JJ).
1703 Reasonableness by itself is never a justification for implying a term in a contract. The authorities are consistent in emphasising that: see e.g. Codelfa Constructions Pty Ltd v State Rail Authority of NSW (346) and (401) and Hospital Products 4 and 48. Cf University of Western Australia v Gray [2009] FCAFC 116 [139]; (2009) 179 FCR 346: ‘What is presently clear is that the implication [in law of a term] requires a justification greater than merely that of “reasonableness” …’.
1704 These three cases involved formal contracts. But there is no justification for applying a different rule for implying terms in informal contracts. Under Deane J’s formulation, consistently approved, the implication of a term in such a contract will only be justified if that is ‘necessary for the reasonable or effective operation of the contract in the circumstances of the case’. The requirement that the proposed term be reasonable probably connotes only that it must operate in a way that is fair to each party: see Byrne [48]. That could never be sufficient by itself to justify the implication of a term. That requirement must be cumulative with the requirement for an objectively identifiable effective operation.
1705 Whether a term subordinating BGNV’s rights to repayment of the on‑loans by TBGL to the claims of all TBGL’s unsubordinated creditors (who included the banks) should be implied, must be determined by reference to the circumstances existing when each on‑loan contract was made: see Codelfa Constructions Pty Ltd v State Rail Authority of NSW (352) (Mason J, Steven and Wilson JJ agreeing) and (375) (Aicken J, Wilson J agreeing). Those circumstances included the belief of all relevant TBGL and BGNV personnel in the continued prosperity of the Bell group at those times.
1706 Subject to the comments I have made above, the trial judge in these passages accurately stated the relevant principles of law.
1707 The terms of the on‑loan contract were not referred to in TBGL’s annual accounts. BGNV’s accounts contained the following notes: ‘the amount owing by the holding company [TBGL] is unsecured and has no fixed terms of repayment’ or ‘the amounts owing by the ultimate holding company [TBGL] and the holding company [BGF] are unsecured, interest‑bearing and have no fixed terms of repayment’ [2886] ‑ [2887].
1708 Irrespective of the status of these entries, it can be inferred that the on‑loan was repayable on demand and carried interest at the same rate as the bonds: for the reasons already given, BGNV could not make a profit on the on‑loans and BGNV could only discharge its obligations to the bondholders by way of payment of interest and on conversion and redemption by getting the necessary funds from TBGL.
1709 If regard is had to the circumstances existing when the on‑loan contracts were made, each contract can operate reasonably and effectively between the parties, TBGL and BGNV, without a subordination term. TBGL got the finance it required by getting access to the net proceeds of the bonds by way of a loan from BGNV and BGNV was entitled to require TBGL to provide it with the funds necessary to meet its obligations to the bondholders in respect of both interest and redemption moneys.
1710 The on‑loan contract with a subordination term would operate between those parties in the same way as it did without such a term. A term for subordination would only have effect if TBGL went into liquidation, an unlikely event throughout the period of issue of the BGNV bonds. BGNV could prove in TBGL’s liquidation for exactly the same amount owing to it by TBGL whether or not the on‑loan contract contained a subordination term. The value of BGNV’s right to prove would be less if the contract included a subordination term than it would be in the absence of such a term. But BGNV would not itself benefit or suffer a detriment if the on‑loan contract did not contain a subordination term: if TBGL were liquidated, BGNV’s liquidation would inevitably follow and anything BGNV recovered in TBGL’s liquidation would go to the bondholders. It had no business other than with respect to the bonds and the on‑loans. It had no assets other than the debts due to it by TBGL and BGF and no liabilities other than to the bondholders. The only consequence of inclusion of a term for subordination would be to affect two groups of strangers to the on‑loan contract: the bondholders, who would recover more through BGNV, and the other unsubordinated lenders including the banks who would recover less in TBGL’s liquidation, if the on‑loans were unsubordinated than they would if the on‑loan contracts contained a subordination term.
1711 His Honour recognised at [3329] that, if considered at one level, the on‑loan contracts could work effectively without the implication of a term for subordination. But he reached the contrary conclusion.
1712 He said at [3328] and [3329] that the answer to the question whether a term for subordination should be implied in the on‑loan contracts depended on what was regarded as ‘the contract’ into which the term was to be implied. If ‘the contract’ was taken to be a simple straightforward instance of inter‑company lending, he acknowledged there would be considerable difficulties standing in the way of implying a term as to subordination. I have explained above why I think that is exactly how each of the on‑loans was treated by the parties. His Honour then said that if the concept of ‘the contract’ was broadened to encompass on‑loan of the proceeds of the bond issue made ‘on the same terms as the issue’, (which his Honour considered more closely resembles the reality of the relationship between BGNV and the other Bell group companies in 1985 and 1987 [3332]), a different result would follow [3330] ‑ [3331]:
… The contract would fall to be considered in the context of the bond issue … the commercial purpose of the fundraising exercise would be a relevant consideration.
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 [sic] 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’.
1713 His Honour relies on what he has found to be the commercial purpose of the bond issue as justifying the implication. But it is apparent from the way he frames that commercial purpose in [3331] that the statement of the purpose cannot of itself come near justifying the implication of a term for subordination in the on‑loan contracts. That purpose could be and was achieved without anyone in TBGL, BGNV (or the banks), needing to think about the on‑loans. It is only if there is added to the commercial purpose the constructs relied on by the banks that ‘bonds means proceeds’ and that the bonds had to be ‘effectively subordinated’ that the gap between the commercial purpose of the issues, as his Honour here states it, and the conclusion can be reached that it is necessary for the reasonable and effective operation of the on‑loan contracts that they must include a term for subordination. For the reasons given above, those constructs cannot justify the conclusion his Honour reached here. In any event, his Honour justifies the implication of a term for subordination in the on‑loan contracts not by reference to the presumed intentions and interests of TBGL (and BGF) and BGNV as the parties to those contracts, but by reference to the understandings and interests of strangers to these contracts, the banks, which according to his Honour’s findings arose from communications to them by TBGL.
1714 His Honour is incorrect in describing in [3328] the scenario involving treating the contract as a simple straightforward instance of inter‑company lending as meaning that ‘the loan would effectively be divorced from its context’ and that ‘it would not matter where the funds came from nor would it be relevant to identify the purpose or objective for which the monies were advanced’. The terms of those on‑loan contracts cannot be limited to the note contained in the BGNV accounts mentioned by his Honour at [3328]. The relevant context of the on‑loan contracts would include at least the fact that they were the mechanism whereby the funds raised by TBGL for its own business purposes through the bond issues by its financing subsidiary, BGNV, got into TBGL’s hands and the fact that BGNV had no means of meeting its obligations to the bondholders otherwise than from moneys paid to it by TBGL by way of interest on the on‑loans and repayment of the on‑loans themselves. The relevant context would also include the need for TBGL to structure the on‑loan contracts to ensure that the taxation objectives of the bond issues were achieved and the belief of all relevant TBGL and BGNV personnel in the continued prosperity of the Bell group.
1715 Looked in this context, the on‑loans must include by inference or implication the terms referred to above that link the interest TBGL would pay to BGNV to the interest BGNV would have to pay to the bondholders, etc. But there is no justification for saying as his Honour did that the implication of a term for subordination was necessary to give the on‑loan contracts a reasonable and effective operation.
1716 On appeal, the respondents at appeal ts 2633 abandoned their challenge to his Honour’s findings in section 12.15 that nondisclosure of the status of an on‑loan by an overseas finance vehicle of the proceeds of a convertible bond issue was a material nondisclosure under Euromarket practices including the Luxembourg stock exchange listing rules.
1717 However, in the context of the implied term case, they argued that if the BGNV directors had determined to subordinate the on‑loans, they would have made public disclosure of that because it would have been prudent, even though not contrary to Luxembourg law. They made no disclosure. It was then said that the absence of disclosure is a matter which tends against the proposition that the term as to subordination was so obvious that it went without saying.
1718 I reject this submission. It amounts in my opinion to no more than an assertion that if one party shows that it did not intend to include the disputed term, that tells against implying the term. But implication gives effect to what the court considers to be the presumed joint intention of the parties. The subjective intention of one party, even if disclosed by conduct rather than words, is irrelevant to identifying the parties’ joint intention.
Certainty of a term for subordination
1719 In sections 13.2.8 and 18 his Honour dealt with the content of the term for subordination of the on‑loans. He held that the subordination terms of the bond trust deeds were sufficiently certain to have contractual effect: see [3316] and [3324]. He concluded at [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. (emphasis added)
See also [3286] and [3381].
1720 Assuming his Honour was right in finding a tacit agreement between BGNV and TBGL for the inclusion of a subordination term in the on‑loan contracts, he was entitled to make the finding in [4255] about the content of that term.
1721 But his Honour did not attempt to demonstrate that a subordination term could be framed in a sufficiently certain way to have contractual effect. I reject the appellants’ submissions at [APPA.000.088.001, par 293] to the contrary. He was in error in leaving it, as he did, to be resolved in the winding up of TBGL, BGF and BGNV: see The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 10] [2009] WASC 107, 137.
1722 Here is the wording of the term subordinating BGNV’s right to repayment by TBGL of the on‑loans contended for by the banks on appeal to give effect to his Honour’s conclusion that it should mirror so far as is possible the subordination terms set out in the bond issue documentation:
6(A)(2) In the event of the winding-up of TBGL the claims of BGNV against TBGL in respect of the on-loans shall be postponed to the Relevant Claims and accordingly no amount shall be payable by BGNV to the Bondholders or Couponholders until the extent of the Appropriate Amount has been finally established and it has been distributed as hereinafter provided and any amounts paid to BGNV in the winding up-of TBGL shall be held by BGNV upon trust: –
(i) FIRST for application in payment or satisfaction of the costs, charges, expenses and liabilities incurred by BGNV in or about the execution of these trusts.
(ii) SECONDLY (to the extent only of the Appropriate Amount) for distribution in satisfaction of Relevant Claims which have not been satisfied in full out of the other resources of TBGL (if any); and
(iii) THIRDLY in or towards payment pari passu and rateably of the principal moneys and interest due upon the Bonds and the Coupons.
1723 6(A)(2) in this draft appears to be a reference to cl 6(A)(2) in the first bond trust deed between BGNV, TBGL and LDTC. The expressions ‘Relevant Claims’ and ‘appropriate amount’ are no doubt intended to evoke the terms as defined in cl 6(A)(1)(iv) and cl 6(B)(1)(iv) and in cl 6(A)(1)(vi) and cl (B)(1)(vi) of the trust deed.
1724 The respondents in rejecting the appellants’ implied term start from the same point as the appellants namely the relevant clause of the trust deed. They point out that the trust deed contains a tripartite arrangement between BGNV as bond issuer, TBGL as BGNV’s guarantor and LDTC, the trustee representing the bondholders, whereas the on‑loan contracts are a bipartite arrangement between BGNV and TBGL only. The respondents go on to argue that the transposition of the bond issue subordination regime into the on‑loan contracts can only work if identical terms namely BGNV, TBGL and the trustee are transposed inconsistently. They also point to difficulties in giving effect in the on‑loan contract subordination term to cl 6(B)(2)(i) of the trust deed which envisages that LDTC will prove in the liquidation of TBGL on behalf of the bondholders and that that clause postpones the entitlements of TBGL’s unsecured creditors, including the banks, over any moneys received by LDTC in the winding up of TBGL, to payment of LDTC’s ‘costs, charges, expenses and liabilities incurred by [LDTC] in or about the execution of the trusts of these presents (including any unpaid remuneration of [LDTC])’.
1725 These are substantial in amount: see section 31.7.3 and the proof lodged by LDTC in TBGL’s liquidation for its outstanding fees and legal expenses of $262,316. The respondents submit [APPR.000.032, page 105] that, for the terms of the on‑loan to be ‘on the same terms as the bond issues’, it is necessary to provide for LDTC’s costs etc of administering the bonds to be covered by the first priority under the turnover trust.
1726 The banks’ proposed draft does not deal with this latter consideration. Instead, the draft proposes that BGNV will be subject to a trust arising upon receipt by BGNV of moneys from the liquidator and that the only priority payment provision proposed is limited to ensuring BGNV receives, by way of first claim on those moneys, reimbursement of its costs, charges, expenses and liabilities incurred in receiving, retaining and ultimately disbursing those moneys. That gives effect to the equitable principle that where it would be unconscionable not to do so, a person whose efforts recover a fund for the benefit of another is entitled to recoup the costs of those efforts from the fund before disbursement to those entitled: see Dean‑Willcocks v Nothintoohard Pty Ltd (In Liq) [2006] NSWCA 311; (2007) 25 ACLC 109 [62].
1727 It is not necessary to provide for LDTC in the on‑loan contract to make that contract reasonable or effective. LDTC can prove in TBGL’s winding up for any moneys due by TBGL, as it has done. Moreover, it would appear that LDTC is an unsubordinated creditor of TBGL in this respect: see the provisions of cl 14(A) and (C) of the trust deed providing for prompt payment of LDTC’s remuneration and expenses. Making express provision for a priority payment in favour of LDTC in the proposed subordination term is therefore of no practical effect: LDTC’s claim will be satisfied either fully or partly, before BGNV receives anything for its claim.
1728 Where the court considers that the parties have concluded an informal contract but cannot find that they have objectively manifested an intention to include all the terms which are essential for the operation of their agreement, the court will ensure that such a contract is effective by inferring or implying the necessary terms.
1729 His Honour found that the objective intentions of BGNV and TBGL were to include a subordination term in the on‑loan contracts that mirrored, so far as possible, the subordination provisions of the trust deeds. Though he did not attempt the task, I think it would have been open to his Honour to find as a matter of inference from the circumstances of the case that the content of the term could be framed with sufficient certainty to the effect of the banks’ appeal proposal. The banks’ proposed term shows that.
The capacity of the banks to enforce the contracts inter se
1730 If it were necessary to deal with the question of the capacity of the banks to enforce the contracts inter se, I would agree for the reasons given by Lee AJA that his Honour was correct in dismissing the banks’ arguments because the on‑loan contracts were not in writing.
The contracts inter partes
1731 Central to each of these three contract claims as pleaded by the banks (see [3395], [3396] and [3397]) is the conduct by TBGL including the provision by TBGL to the banks of the documents the subject of the contracts inter se claim and the estoppel claim.
1732 In particular, reliance is placed by the appellants in their written submissions in relation to the first contract, on the letter of 11 December 1985 and the relevant banks’ acceptance of the request in it; in relation to the second contract, on the information memorandum and the relevant banks’ acceptance of the request for equity treatment contained in it and, in relation to the third contract, the letter of 15 April 1987 and the relevant banks’ acceptance of the request in it. His Honour found that there was a tacit agreement between TBGL and BGNV for the inclusion of a subordination term in the on‑loan contracts between them. Central to his Honour’s conclusion was his view that there was evidence, which included but was not limited to the same conduct and documents relied on by the banks to make out their contracts inter partes claims, that established that.
1733 Notwithstanding his Honour’s findings about the material relied on by the banks in support of the contract inter partes claim evidencing an intention by TBGL that the on‑loans would be subordinated, his Honour rejected these claims firstly, because he considered the key documents namely the letters of 11 December 1985 and 15 April 1987 and the information memorandum were framed in language that was representational and not promissory and therefore incapable of giving rise to a contract ([3405] and [3406]); secondly, because he considered the formal agreements entered into between TBGL and the other NP group companies and the various banks were intended to comprise the entire contractual relationship between them [3404]; thirdly, because he considered the contracts failed for uncertainty as to the identity of the contracting parties ([3412] to [3413]).
1734 Even if it could be said that his Honour’s reasons for rejecting the banks’ contracts inter partes cases were erroneous, the appeal here must fail because the conduct of, and documents given to the banks by, TBGL upon which this claim is founded are incapable, for the reasons I have given, of providing an evidentiary basis for the inclusion in any such contracts of a term for subordination of the on‑loans.
The estoppel inter partes case
1735 The banks’ estoppel case here is based on the same representational conduct by TBGL upon which his Honour relied in finding that the on‑loan contracts contained a term for subordination.
1736 His Honour repeatedly referred to the factual overlap between the contractual subordination case and the representational element of the banks’ estoppel cases, a reflection of how the banks pleaded the two cases: see [855] (the same circumstances gave rise to the estoppel); [3427], [3556] and [4260] (the basic factual matrix is the same for the estoppel case as for the contractual arguments); [3213] and [3571] (the banks ‘bonds means proceeds’ argument underpins their estoppel case and has significance to the contractual subordination case); [2880] (the collapse of the NP agreements into the NP guarantees is relevant to both cases); [3587] (the information memorandum is relevant to both cases); [3111] (the same evidence will bear on both cases) and [3618] (similar reasoning applies for holding that BGNV was party to an on‑loan contract with a subordination term and also bound by representations made by TBGL with respect to subordination of the on‑loan).
1737 In finding that the informal on‑loan contracts contained an inferred term for subordination, his Honour relied on a number of documents which included the same documents listed below on which he relied to find that TBGL made representations to the banks sufficient to found their estoppel case.
1738 For the reasons given, no question of contractual construction of any of these documents arises in the contract case. The critical question was one of fact only: had TBGL and BGNV reached a sufficiently clear tacit agreement for subordination of the on‑loans to have contractual effect? That is determined by an objective assessment of their words and conduct, having regard to relevant surrounding circumstances. ‘What matters is what each party by words and conduct would have led a reasonable person in the position of the other to believe’: Toll (FGCT) v Alphapharm [40].
1739 In seeking the meaning of these same documents in order to determine whether they contain representations of the kind relied on by the banks in their estoppel case a similar approach is required. No question of contractual construction of documents arises. The meaning to be given to the statements in these documents said to constitute representations is: ‘the sense in which the representation would be understood by a reasonable person in the position of the representee’: Krakowski v Eurolynx Properties Ltd [1995] HCA 68; (1995) 183 CLR 563, 576 ‑ 577 and Australian Crime Commission v Gray [2003] NSWCA 318, [182] ‑ [183], citing Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406, 435 – 436. This is the test his Honour applied at [3475] where he held that ‘the way in which the statement would reasonably be understood by the person to whom it is addressed’ determines whether it meets the requirement of clarity necessary for an estoppel representation.
1740 His Honour was in my opinion correct in recognising at [3574] that, in a case such as this, there was therefore no significant difference between the level of certainty that must be attained by the words and conduct relied on to objectively show mutual assent for the purposes of an informal contract and the level of certainty those same words and conduct must display to constitute a representation sufficiently certain to found a promissory estoppel.
1741 In contending that TBGL (and the other NP companies) and BGNV were estopped from denying that the on‑loans were subordinated, the banks set up cases of estoppel by representation, estoppel by convention and equitable or promissory estoppel: see [3457].
1742 As Owen J noted at [3552], equitable estoppel operates upon representations or promises about future conduct and is not confined, as are common‑law estoppels, to representations of existing fact. In section 18 of the judgment where his Honour set out his final conclusions on the subordination issue he said at [4262] that, because of ‘the representational character of the statements’ central to the banks’ various estoppel cases and because of ‘the ongoing nature of the relationship’ between TBGL and the banks, his focus was on equitable estoppel rather than on estoppel by convention or by representation. This is I think explicable by his Honour’s findings as to the content of the representations made by TBGL in the critical documents given to the banks that involved future matters: as to the letters of 11 December 1985 and 15 April 1987: see [3580] and [3586] and [3646] ‑ [3647]. His Honour found similar representations in the other documents on which the banks’ estoppel case was based, a conclusion he summarised in [3648] and [3616].
1743 His Honour noted at [4262] an apparent inconsistency between his conclusion about the relevance of promissory estoppel and his finding in the contracts inter partes case at e.g. [3405], that the statements in the critical letters of 11 December 1985 and 15 April 1987 were representational and not promissory. In my opinion the inconsistency is a real one: the letters cannot comprise both promises about future matters and yet be confined to statements of existing fact. I think it is his Honour’s reading of these letters in the context of the contract inter partes case that was the correct one. As his Honour correctly noted at [3405], the letters did not contain any promise, only a statement of existing fact about the terms of issue of the bonds (to which TBGL was committed before it sent each letter to the banks) and the associated request for equity treatment. In contrast, in dealing with these letters in the context of the estoppel case (and the contract inter se case), he found in them representations about future matters, but only by giving the documents an impermissibly strained reading. This inconsistency is, however, of no significance: for the reasons given above, none of the letters and other documents relied on by the banks contain any representations about subordination of the on‑loans.
1744 His Honour accepted that a representation must be clear and unambiguous to found an estoppel, whether by representation ([3470] ‑ [3475]), by convention ([3527] ‑ [3534]) or by promissory estoppel ([3546] ‑ [3549]). His Honour’s statement with respect to promissory estoppel, made in reliance on Legione v Hateley at (436 ‑ 437), was not disputed, though subjected to a qualification by the banks.
1745 Owen J said (at [3549]): ‘… 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’. His Honour correctly concluded at [3550] that, in the factual circumstances of this case, there were more similarities than differences between the three species of estoppels. The reason is clear: each bank ran its own estoppel case. But as his Honour noted each case was based on the same representations said to have been made by TBGL: ‘… 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’ [3424]. See also [3554].
1746 At [3543(d)] his Honour, having noted the point at [3536], accepted, correctly in my opinion, what Priestley JA said, with the agreement of Hope and McHugh JJA, in Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466, 472, in the course of setting out the principles he distilled from Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387, that cases described as estoppel by encouragement and by acquiescence, proprietary estoppel and promissory estoppel are all species of equitable estoppel.
1747 Brennan J in Waltons Stores at (420) doubted the utility of this classification of the various kinds of equitable estoppel and in his influential statement of the elements of equitable estoppel at (428 ‑ 429) he did not distinguish between them. But Brennan J nevertheless accepted at (420) that ‘the familiar categories serve to identify the characteristics of the circumstances which have been held to give rise to an equity in the party raising the estoppel’. These classifications remain relevant. The majority in Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 [7] declined to decide whether dicta in earlier cases suggesting that there was a single overarching doctrine of estoppel encompassing all kinds of common law and equitable estoppel are correct. Sir Anthony Mason, a judicial advocate of an overarching concept of estoppel, has more recently observed extrajudicially that even if a unified concept of estoppel were to emerge, it would need to allow for the inevitable differences in the nature of some estoppel‑based claims and defences: ‘Promissory estoppel and proprietary estoppel call for some difference in treatment’. See his article ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 Law Quarterly Review 66 at 91.
1748 In my opinion, a clear representation or promise about future matters relating to property is not an essential element of equitable estoppel by encouragement or by acquiescence or proprietary estoppel (of which the first two are examples) though it will usually suffice: vague and imprecise conduct is often enough to give rise to an equitable proprietary estoppel.
1749 However, certainty of the representation or promise remains a requirement of a promissory estoppel. That was the opinion of Mason and Deane JJ in Legione v Hateley at (436 ‑ 437), based on statements in the House of Lords and in the Court of Appeal in Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741. The justification for the requirement of representational certainty that emerges from Woodhouse is the abiding concern of the courts not to allow the enforcement of non‑contractual promises to ‘outflank the principles of the law of contract’ as Mason CJ and Wilson J put it in Waltons Stores at (400). Woodhouse shows that the requirement that a representation or promise relied on to found a promissory estoppel must be certain is one control for ensuring that promissory estoppel does not achieve that: that is clear from the passage in Woodhouse, cited by Mason and Deane JJ, that records the incredulity Lord Hailsham shared with Lords Pearson, Cross and Denning, that the recipient of an ambiguous offer ‘could obtain by means of the doctrine of promissory estoppel something that he must fail to obtain under the conventional law of contract’. The requirement of unconscionability, as an element of promissory estoppel additional to a breach of a non‑contractual promise, is another control: see The Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394, 416. So is the discretionary nature of the relief available in promissory estoppel: see Giumelli v Giumelli (120 ‑ 121).
1750 Contrary to what Ipp J said in Australian Crime Commission v Gray at [196] ‑ [199], I do not regard Waltons Stores as providing any support for the proposition that a representation capable of more than one reasonable meaning is sufficient for a promissory estoppel. At [199] Ipp J concluded: ‘None of the justices [in Walton Stores], however, regarded the different meanings that could possibly be drawn from the appellant’s conduct as obstacles to a finding that the respondent had established a promissory estoppel’. Only Gaudron J at [14], noted, without further comment, the argument advanced that uncertainty precluded the establishment of a promissory estoppel. But she determined the case on the basis that the evidence revealed a clear representation [24] and [25]. So did each of the other members of the court. It is true as Ipp J points out that they each thought different representations were established. But it is not correct that any thought that the particular representation each held was established, was uncertain or ambiguous or that any paid any attention to the fact that other members of the court reached different conclusions about the content of the particular representation each relied on.
1751 This point is of present relevance insofar as there are statements in some of the cases, notably in Australian Crime Commission v Gray, involving promissory estoppels that ambiguity in the representations relied on will not be fatal to such a claim. I respectfully disagree with Ipp J’s alternative conclusion at [207] that even if the promise to the Grays was ambiguous, a promissory estoppel could still be established, there being no question there of a proprietary estoppel.
1752 At trial (see [3472]) and on appeal in their written and oral submissions at [309] and appeal ts 3557 and appeal ts 3560 ‑ 3561, the appellants accepted that, to succeed on the estoppel case, they had to establish a clear and unambiguous representation with respect to subordination of the on‑loans. But they added a qualification in oral submissions that this requirement of clarity was to be understood in the sense discussed in Australian Crime Commission v Gray and Galaxidis v Galaxidis [2004] NSWCA 111 and said, evoking Gray at [195], that the cases show that relatively imprecise statements have been held sufficient to ground an equitable estoppel.
1753 In some cases, vague, equivocal and ambiguous statements of future intention have been held sufficient to give rise to an equitable estoppel. Properly understood, these in my opinion are cases of equitable proprietary estoppel by encouragement or acquiescence and so do not depend on proof of clear representations or promises but on conduct with respect to property of the parties said to be estopped that is often diffuse and ambiguous, but which is sufficient, in the circumstances of the particular case, to attract the intervention of equity.
1754 Australian Crime Commission v Gray was a case of promissory, not equitable proprietary estoppel. There, a promise that the promisees would not suffer financial disadvantage if they entered a witness protection program was held to be sufficiently certain to found a promissory estoppel because an implication of reasonableness sufficient to give the promise the requisite quality of certainty could be made in the circumstances of the case.
1755 Ipp JA, Mason P and Tobias JA agreeing, also said in [195]:
As Flinn v Flinn demonstrates, there have been many instances where representors have not been able to escape responsibility merely because of ambiguity or lack of clarity in the representations they have made, even where it was difficult to resolve uncertainties inherent in them.
1756 But what Flinn v Flinn [1999] VSCA 109; [1999] 3 VR 712 shows is that ‘impossibly loose arrangements’ incapable of being described in any sensible way as involving clear representations can in certain circumstances be sufficient to give rise not to a promissory estoppel, but to an equitable estoppel by encouragement.
1757 In Flinn, a vague family arrangement case in which the estoppel claimant was awarded a farm property subject to certain conditions, Brooking JA said at [80]:
The defendant repeatedly contended that to found an estoppel a representation must be ‘unambiguous’, or ‘clear’, or ‘unequivocal’. But a promise may be definite in the sense that there is a clear promise to do something even though the something promised is not precisely defined, and this has always been recognised in the cases.
1758 The proposition apparently accepted in Australian Crime Commission v Gray at [195] that a representation, though only half expressed, can still be clear and unequivocal and thus satisfy the clarity requirement for a promissory estoppel is difficult to accept.
1759 In his judgment in Flinn, including at [80], Brooking JA was dealing only with equitable proprietary estoppels. His Honour went on in [80] to refer to the speech of Lord Kingsdown in Ramsden v Dyson (1866) LR 1 HL 129, a statement of the law that he said ‘has long been accepted as authoritative’. Brooking JA noted at [81] that:
Lord Kingsdown’s speech has been relied on in support of the proposition that a proprietary estoppel may give rise to an equity even though ‘the interest to be taken … was unclear’ … or even though ‘the promised or expected interest was uncertain’ … or even though there is ‘difficulty in quantifying in legal concepts the interest held out by the donor … or ‘the precise nature or quantum of the interest or right’ is not formulated … Most recently, Lord Kingsdown has been invoked in support of the proposition that an equity may arise notwithstanding that it is not clear whether the promise is of a right of occupation for life or ownership … (authorities omitted) (emphasis added)
1760 Representations or promises infected with this sort of vagueness cannot in any sensible way be described as clear and unambiguous. Yet they all sufficed to give rise to equitable proprietary estoppels. The cases examined by Brooking JA at [80] ‑ [93] of his judgment are all examples of equitable estoppels by encouragement or acquiescence which were treated as a discrete head of equity in the statement in Holiday Inns Inc v Broadhead (1974) 232 EG 951, to which Brooking JA referred at [90]:
In my judgment the authorities clearly establish that there is a head of equity under which relief will be given where the owner of property seeks to take an unconscionable advantage of another by allowing or encouraging him to spend money [or I suggest, effort], whether or not on the owner’s property, in the belief, known to the owner, that the person expending the money will enjoy some right or benefit over the owner’s property which the owner then denies him.
1761 Encouragement or acquiescence sufficient to attract this equity may be found in something described as a promise or representation, though that is not an essential requirement for either kind of equitable estoppel. The particular promise or representation may be clear and unambiguous or it may be as unclear and uncertain as the examples referred to by Brooking JA in [81] of his judgment. Silence may in some circumstances suffice. An equitable estoppel by encouragement or acquiescence can still arise. What attracts the intervention of equity in cases within this principle is the unconscientious conduct of the defendant in allowing or encouraging the plaintiff to incur a particular kind of detriment with respect to property.
1762 Flinn was such a case: the claimant succeeded in establishing a case based not on a promissory estoppel but on a proprietary estoppel by encouragement. Brooking JA concluded [94] ‑ [95]:
On the liberal approach exhibited by the authorities, the 1988 promise found in the present case by the judge – a promise of an unspecified interest in the farm – was not too uncertain to found a proprietary estoppel … (emphasis added)
Nor do I think that the uncertainty of the condition requiring payment of a reasonable sum to Robbie – an uncertainty fatal to the existence of a contract – will prevent the equity from arising. As the review of the authorities over the last 200 years shows, uncertainty preventing the creation of a contract has never been regarded as necessarily preventing the beneficial intervention of equity. Time and again an equity has been held to exist where no contract had arisen, the court often going a long way in giving effect to what the law of contract would ignore as an impossibly loose arrangement. The present case lies within the reach of the long and flexible arm of equity.
1763 I have mentioned in the appellants’ submissions about Galaxidis. Though there is in Galaxidis a discussion about the clarity required of a representation to found an estoppel, that case arose out of imprecise family discussions over a number of years and was I think decided both at trial and on appeal on the basis of an equitable estoppel by encouragement with respect to the defendants’ property: see the discussion by Tobias JA, with whom Giles and Hodgson JJA agreed, of the trial judge’s decision at [59] ‑ [69] and his Honour’s conclusions at [112] ‑ [113].
1764 In contrast, as the appellants acknowledged both at trial and on appeal, their estoppel cases depend upon proof of representations about existing facts and future matters said to be contained in documents distributed to them by TBGL. His Honour accordingly and correctly in my opinion held that clarity and freedom from ambiguity of the representations relied on were essential to the success of that case, which his Honour dealt with as involving promissory estoppels.
1765 At [3475] his Honour rejected the plaintiffs’ argument that a representation will be sufficiently clear if the only interpretation reasonably open is that which is contended for by the representee and held that a representation will meet the requirements of clarity if: ‘… the court will construe it as the way in which the statement would reasonably be understood by the person to whom it is addressed’ (original emphasis).
1766 This formulation does not I think differ from that advanced by Tobias JA (Giles and Hodgson JJA agreeing) in Galaxidis where he said at [93]:
In my opinion, the effect of this Court’s decision in Gray is that even if a representation is insufficiently precise to give rise to a contract (as in the present case), that fact does not necessarily disqualify the representation from founding a promissory estoppel. Much will depend upon the circumstances in which the representation is made and the context against which it is to be considered. In its context, the representation is sufficiently clear and unambiguous if it is reasonable for the representee to have interpreted the representation in a particular way being a meaning which it is clearly capable of bearing and upon which it is reasonable for the representee to rely. In these circumstances, it would be unconscionable for the representor to deny responsibility for the detriment that arises because of that reliance. (emphasis added)
1767 If the representee contends that the statement has a meaning which the language is not capable of bearing, either as a matter of the ordinary meaning of the words used or after taking into account the special knowledge, if any, possessed by both the representee and the representor which gives the statement a special meaning for them different from the ordinary meaning of the language, the statement will not meet the clarity test proposed by his Honour because the representee cannot say that his understanding of the statement is a reasonable understanding.
1768 I do not agree that Galaxidis is inconsistent with Legione v Hateley at (435 – 436), as the respondents contended. Though Galaxidis was not a case of promissory estoppel, the statement at [93] is consistent with authority that goes back at least as far as Bowen LJ’s statement in Low v Bouverie [1891] 3 Ch 82, 106 and appropriately serves the object of preventing promissory estoppel intruding too far into the area covered by the law of contract.
1769 As appears from [3440], [3558] ‑ [3565] and [3646] ‑ [3648], the representational conduct by TBGL (said to be binding on all the NP companies and on BGNV: [3441]) that was central to the various estoppel cases mounted by the banks comprised the preparation and delivery to the banks by TBGL of the following documents:
(a) the letter of 11 December 1985 sent by Cahill to the banks asking them to treat the convertible subordinated bonds as equity not debt: [3428] and [3558] (and the 15 April 1987 letter putting the same request but in relation to the second Bond Issue: [3432] and [3561]);
(b) the Information Memorandum sent by Lloyds Bank to prospective members of the Lloyds syndicate in April 1986, informing them that in order to participate in the Lloyds syndicate, participants must agree to treat the bonds as equity for the purposes of the NP ratio: [3431] and [3560];
(c) the 14 May 1987 letter to the banks referring to the new proposed NP guarantee structure, asking the banks to exclude from their definition of 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’: [3434] and [3562], [3591] ‑ [3592];
(d) the various negative pledge reports sent to the banks setting out the NP Group’s financial position, and setting out the ratio of assets to liabilities within the NP group: [3435] and [3563], [3594] ‑ [3595];
(e) the information packages sent out by TBGL to the NP group bankers which contain a pro forma balance sheet entitled ‘Forecast Negative Pledge Group Balance Sheet’: [3436] and [3564], [3596]; and
(f) the three‑year business plan distributed in May 1988 for the NP group: [3437] and [3565], [3597].
1770 His Honour found at [3580], [3586] and [3646] that the letters of 11 December 1985 and 15 April 1987 contained representations by TBGL to the banks that [3646]:
(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.
1771 His Honour’s findings are in accordance with the way the banks pleaded the representations contained in these two documents. He said [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.
1772 He there added: ‘This encompasses the effective subordination argument’. The representations in (b) and (c) also encompass the banks’ ‘bonds means proceeds’ argument.
1773 In [3648] his Honour said that he had reached a similar conclusion to that in [3646] and [3647] with respect to the representations in the documents I have referred to in subpars (b) ‑ (f) above. This conclusion goes beyond the banks’ pleading of the representation in the information memorandum – see ADC 11ED (30)(g) – and significantly beyond the representations pleaded in respect of the letter of 14 May 1987 (see ADC 11ED (59A)); the negative pledge reports (see ADC 11ED (63); the information packages (see ADC 11ED (67 ‑ 68) and the three‑year business plan (see ADC 11ED (70)). However, his findings with respect to documents (b) at [3590]; (c) at [3592]; (e) at [3596]; and (f) at [3597] are consistent with what his Honour said in [3648] insofar as he found each contained a representation to the effect that the proceeds of the BGNV bond issue on‑lent to TBGL or BGF were subordinated. His Honour’s inconclusive finding with respect to the NP reports in (d) is at [3595].
1774 The banks nowhere pleaded a simple representation by TBGL that the on‑loans were subordinated. The closest they came to that was to allege in ADC 11ED 17(i) that the TBGL letters to the banks of 11 December 1985 and 15 April 1987 should be read as representing that 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. The representations they did plead were more convoluted than a simple representation of subordination of the on‑loans. Some of his Honour’s findings reflect this.
1775 In section 18, ‘The Subordination Issue: Conclusions’, his Honour however said at [4259]: ‘put simply, the banks say that the company’s represented to them that the on‑loans were subordinated …’ and his ultimate finding in [4260] was: ‘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’. This is not a simple finding that TBGL represented that the on‑loans were subordinated and deliberately so. The bonds, or more accurately the redemption rights of the bondholders, were explicitly subordinated under the bond trust deeds but those deeds did not mention the on‑loans. This finding in [4260] only becomes understandable once it is realised that it is founded on his Honour’s acceptance of the banks’ arguments, put forward in their pleadings, that ‘bonds means proceeds’ and ‘effective subordination’.
1776 These two arguments were critical to his Honour’s conclusions that representations that the on‑loans were subordinated, which were relied on by the banks, were made by TBGL (and to his Honour’s conclusion that the on‑loan contracts contained a subordination term).
1777 In the section of the judgment constituting the introduction to the representations element of the estoppel case his Honour revealed how important the ‘bonds means proceeds’ argument was to his conclusions, saying at [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.
1778 In the section of the judgment constituting the introduction to the reliance and detriment elements of the estoppel case, his Honour identified the importance to his conclusions of the ‘effective subordination’ argument, saying at [3628]:
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.
1779 In [3583] and [3650], his Honour also made clear the importance of these two arguments to his conclusion about representations that the on‑loans were subordinated. His reliance on these arguments to find representations in the documents listed above that the on‑loans were subordinated is apparent from [3580], [3583] and [3586] (the letters of 11 December 1985 and 15 April 1987), [3590] (the information memorandum) and [3592] (the letter of 14 May 1987).
1780 However, it must be concluded for the reasons given earlier that none of the documents relied on by the banks to make out the representations upon which each of their estoppel cases are based is capable of being read as a representation that the on‑loans were subordinated.
1781 That no representations of the kind relied on by the banks were made by TBGL is confirmed by a number of circumstances.
1782 Firstly, his Honour summarised at [7228] the gradual accumulation in the period between November 1989 and May 1990 of knowledge, ultimately by all of the banks, of serious concern that the on‑loans might be unsubordinated. Yet not a single bank complained that they had clearly, unambiguously and repeatedly been told by TBGL in the period from 1985 to 1988 that the on‑loans were subordinated. Instead they set about working out how to deal with that concern and how to arrange for subordination of the on‑loans, something they achieved in July 1990, when BGNV executed the principal subordination deed.
1783 Secondly, the banks’ considered response in their folder of material including their reply to my question: ‘when was the first occasion on which a bank officer said to a Bell officer they had been told the on‑loans were subordinated?’ was in effect that that never happened. The best they could do was refer to the evidence of one SGAL officer who said he was incredulous when told at a meeting of bank representatives and TBGL in February 1990 about the possibility of the on‑loans being unsubordinated and to the trial judge’s finding at [7075]: ‘the evidence of various bank witnesses … is consistent in that they were all surprised when it was brought to their attention that the on‑loans might not be subordinated’. But surprise in early 1990 at the emergence of a new problem for the banks, then concerned at saving what they could in TBGL’s looming financial collapse, is not consistent with the notion that the banks from 1985 to 1988 had repeatedly been led by TBGL to believe that the on‑loans were subordinated. There was no complaint from anyone that they had been led by TBGL at the times of the various bond issues or thereafter to believe that. The banks’ estoppel case based on representations by TBGL first emerged in the banks’ pleading of May 1997: see [2613].
1784 Thirdly, at [9723] his Honour said: ‘I have also found that there is an estoppel that the banks could have asserted in relation to the subordination of the on‑loans’. He then added: ‘the banks had no clear idea what their rights were’. This is a reference to his finding that though various of the banks believed by January 1990 when the transaction documents were executed that there was a serious risk that the on‑loans were in fact unsubordinated, they did not know the position with certainty. Yet his Honour found that these same banks had from 1985 to 1988 been recipients of numerous clear and unambiguous representations by TBGL that the on‑loans were subordinated, upon which they (except for SCBAL and Skopbank) relied to their detriment [4264] and [4266]. Even allowing for the fact that his Honour’s findings about the representations at the heart of the estoppel case depended on his acceptance of the ‘bonds means proceeds’ and ‘effective subordination’ arguments, the latter finding in [9723] is irreconcilable with the former and strongly suggests that no representations about subordination of the on‑loans were ever made.
1785 The learned trial judge found that a representation as to subordination did exist, and that it was made by TBGL, and bound all relevant Bell companies vis-à-vis the Banks.
1786 In relation to BGNV, the learned trial judge relied upon his findings that BGNV authorised TBGL to decide the terms of the on‑loans, and extended this reasoning to find that TBGL was authorised to make the representation on BGNV’s behalf: see [3618].
1787 It was in the text of the letters of 11 December 1985 and 15 April 1987, of the NP reports, of the letter of 14 May 1987, of the information memorandum, of the information packages and the three‑year business plan that his Honour found support for his conclusions that they constituted representations that the on‑loans were subordinated. For want of evidence that any of these documents were communicated to BGNV, they are unavailable for use as evidence fixing BGNV with responsibility for the representations his Honour thought were conveyed by them. A general awareness by BGNV directors Graham and Williams, as found by his Honour, of TBGL’s purposes in issuing the bonds and of the arrangements made by TBGL and BGNV for the issue of the bonds, without them having seen the documents themselves (except for the information memorandum with which Graham was involved), is not sufficient to make any of these documents available as evidence of representations binding on BGNV, even if any of them could be read as containing the representations found by his Honour.
1788 In relation to the NP group of companies, Owen J found that, given that, in the main, they had common directors, they should be taken to have been aware of the same things that TBGL was aware of [3619] ‑ [3622]. Because of the importance of the actual text of the documents given by TBGL to the banks to his Honour’s conclusions that that constituted representational conduct by TBGL sufficient to support the banks’ estoppel case, the absence of any attempt by the banks to show that the various NP companies by their directors were aware of the contents of those documents exposes the error in his Honour’s conclusion here.
1789 My conclusion that his Honour was in error in upholding the banks’ estoppel inter partes case for want of any relevant representation makes it unnecessary to consider a number of issues raised by the respondents and the appellants, including those of reliance and detriment that took up so much of the judgment on estoppel and of the correctness of his Honour’s conclusion at [9723] that any rights the banks had to rely on the estoppels inter partes were discharged upon execution of the BGNV subordination deed.
The Banks’ estoppel inter se case
1790 The banks also argued at trial and on appeal that the same circumstances they relied upon for their estoppel inter partes case gave rise to an estoppel that could have been asserted by TBGL and BGF against BGNV, to the effect that the BGNV on‑loans were subordinated to other unsubordinated creditors of TBGL and BGF. In consequence, so the banks argued, the banks would have been entitled to the declaration they claimed that would function as an answer to the respondents’ contention that the Transactions affected the BGNV bondholders prejudicially: that the liquidators of the relevant Bell group companies did not want to rely upon that estoppel does not mean that the position should not be assessed.
1791 Having found for the banks on the contractual subordination issue and the estoppel inter partes issue, his Honour did not consider it necessary to determine this claim.
1792 For the reasons given, I consider that the circumstances relied on by the banks do not, contrary to his Honour’s conclusions, establish the banks’ estoppel inter partes case for want of any conduct capable of amounting to a representation to anyone, including the banks or TBGL or BGF, that the on‑loans were subordinated. It follows that the banks cannot establish this claim of estoppel inter se.
The banks’ Trade Practices Act claim
1793 By their notice of contention, the banks submit that if this court finds, contrary to Owen J, that the on‑loans were unsubordinated, they are still entitled to succeed in a claim based on s 52 of the Trade Practices Act.
1794 I consider that the on‑loans were unsubordinated. But this claim must fail. The allegedly misleading conduct by the relevant respondents is the same representational conduct relied on by the appellants in support of their contractual and estoppel subordination cases. For the reasons I have given in rejecting both those cases, there is no conduct on the part of the respondents capable of giving rise to representations that the on‑loans were subordinated.
The conduct of the banks
1795 From early 1985, senior TBGL personnel were set upon raising substantial funds by Eurobond issues. An integral part of their plan was to get the banks to agree to ignore the liabilities the bonds would create when the NP ratio was calculated in the six monthly reports TBGL had to give the banks.
1796 The subordinated nature of the bonds was one of the arguments put forward by TBGL and accepted by the banks when they agreed to treat the bond liabilities as equity instead of liabilities for NP ratio purposes. Having regard to the way the trial was conducted, that the bonds created subordinated debt could have effect only in a liquidation of TBGL, the guarantor of the bond issues.
1797 However, the conduct of the banks towards TBGL from the early 1980s up to at least the share market collapse of October 1987 was inconsistent with them having any fears for the financial stability of TBGL. Their conduct in that period in agreeing to TBGL’s requests to treat both the first two lots of bond issues as equity and then to collapse the NP agreements into the NP guarantees shows an absence of concern that they might ever actually need to rely on TBGL’s bond liabilities being subordinated to its debt to the banks.
1798 So does the universal lack of attention by bank officers to the issue that was said by all at the trial, after TBGL’s collapse, to be of such significance for the banks. The evidence of all the bank officers at trial was to the effect that if they had realised when they were dealing with TBGL’s various requests for equity treatment of the bond issues and for collapse of the NP agreements into the NP guarantees that the on‑loans might be unsubordinated, they would have taken action to remedy that situation.
1799 The banks through their officers were well aware from discussions with TBGL officers and from documentation given to them by TBGL, that the funds raised by BGNV from its bond issues would be on‑lent to companies within the Bell NP group. Many bank officers were involved in dealing with the first two TBGL requests for equity treatment of the bonds and the request to collapse the NP agreements into the NP guarantee that coincided with the third BGNV bond issue. They included experienced and senior officers. They knew that the consequence of agreeing to each of TBGL’s requests was to progressively expand TBGL’s capacity to increase its debt load beyond that which the banks considered prudent when that ratio was initially set while remaining within the NP ratio.
1800 Yet, as his Honour found, none gave any thought to the terms of the on‑loans at the time, though it was said by the bank witnesses at trial to be an issue of signal importance.
No consideration of the on‑loans by the banks
1801 At [3607], in dealing with the banks’ estoppel case, his Honour referred to the banks’ contention that TBGL made a representation that the BGNV on‑loans would, on a liquidation of TBGL, rank after the banks’ claims. He then said [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? (emphasis added)
1802 That no bank officer gave any consideration to the on‑loans and what their terms should be is clear from [3608] and in particular the example in emphasis his Honour there gave. This is an explicit finding of general application to all the bank officers who were involved in dealing with the various TBGL requests including that in the letter of 11 December 1985, that no Bell officer made any express representation that the on‑loans were subordinated and no bank officer understood such a representation to have been made. The width of this finding is confirmed by what His Honour said at [3650]:
Most of the direct statements [by bank witnesses] 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. (emphasis added)
1803 His Honour’s comment in emphasis does not record a finding of fact about what the bank officers (and the Bell officers) did. That is clear from section 13.2.5, the justification his Honour gave for this statement. In that section, his Honour said that he did not get much assistance in answering the question he dealt with there (whether ‘bonds’ included ‘proceeds’: [3211]) from the questioning of witnesses about whether the language of the TBGL documentation conveyed the idea that the ‘bonds’ and the ‘proceeds’ were the same thing: see [3220] and [3221]. Instead, as is apparent from [3226] ‑ [3239], his Honour found an affirmative answer to this question in his close analysis of the TBGL letter of request of 11 December 1985 and other documentation.
1804 In [3583] in the course of considering whether the TBGL letter of 11 December 1985 contained a representation that the on‑loans were subordinated, his Honour said:
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. (emphasis added)
1805 It was only by applying the banks’ ‘bonds means proceeds’ argument that his Honour was able to reach the conclusion he did in the second sentence of this passage. The passage in emphasis is further confirmation that his Honour did conclude that no bank officer gave any consideration to the on‑loans.
1806 The evidence of the bank witnesses, as summarised by his Honour in the long section of his judgment on the estoppel case dealing with the banks’ reliance on the representations he found were made by TBGL and with the detriment they thereby suffered, also confirms his Honour’s finding that no bank officer gave any consideration to the on‑loans: the witnesses’ evidence is generally along the lines that if they had understood that the on‑loans were not subordinated they would have taken certain action to protect the banks’ position. See e.g. 3714; [3829] and [3841] and [3845] and 3846; [3863] and [3849], [3856], [3858], [3859], [3861], [3881], [3883], [3884], [3885], 3887; [3912], [3918], [3952] (Banco Espirito). As to BoS, see [3974] and [3975]. As to Indosuez, see [4003], [4011]. As to BfG, see [4031], [4033], [4035], [4036], [4043]. As to Credit Agricole, see [4049], [4052]. As to Credit Lyonnais, see [4062], [4065] and [4071]. As to Creditanstalt, see [4080], [4089] and [4090]. As to DG Bank, see [4099], [4112]. As to Dresdner, see [4124], [4132] and [4142]. As to Gulf Bank, see [4148], [4154]. As to Kredietbank, see [4166] and [4182]. As to Gentra, see [4187]. As to Lloyds Bank, see [4223], [4235] and [4237].
1807 Sometimes, his Honour’s findings do not expressly record that the witness did not at the relevant time give any thought to the on‑loans. Reference to the witness statement shows that to be the case. I will refer by way of example to the following findings and associated evidence.
1808 At [3720] his Honour referred to what Cutler of Westpac said to the effect that ‘had he understood the on‑loans were not subordinated … (He) would not in any circumstances have agreed to treat the bonds as equity…’. In par 29 of his witness statement Cutler expressly said he did not consider the ranking of the on‑loans at the time. The same position emerges when his Honour’s findings are compared with the relevant witness’ statement: see Farr of HKBA at [3813] and par 21 of his witness statement; Dowse of NAB at [3829] and par 12 of statement; Eggleshaw of Lloyds Bank at [4223] and par 29 of his statement; Crocker of Creditanstalt at [4080] and par 38 of his statement; Purves of SocGen at [3873] and pars 16 and 23 of his witness statement; Latimer of CBA at [3784] and pars 43 ‑ 46 of his witness statement; Payne of CBA at [3785] ‑ [3789] and pars 16 ‑ 19 of the witness statement. (At [3789], his Honour wrongly transcribed the question to Payne in re‑examination by having it refer to ‘the on‑loans’ when in fact it referred only to ‘the bonds’ – see ts 26399.)
1809 There is not a single document in any of the banks’ voluminous records suggesting that any bank officer at the time of those requests (or at any time thereafter until late 1989 when TBGL was in serious financial trouble) gave any thought to the increased exposure the bank would face if the on‑loans were not subordinated in a similar way to the bonds themselves. The absence of any bank documentation referring to what the banks now claim was a matter of critical significance to them through the period 1985 to 1987 and beyond is further confirmation of the lack of importance the banks attached to the on‑loans in the period from 1985 to late 1989.
1810 That the banks never turned their minds at the relevant times to whether the on‑loans were subordinated is also supported by their reaction to learning in December 1989 of Aspinall’s suggestion about the on‑loans being subordinated and by their conduct thereafter in pressing for and ultimately obtaining the subordination deed from BGNV. Further support for the judge’s finding that no‑one in the banks turned their minds to the on‑loans when the various bond issues were made by BGNV is provided by the banks’ response to my question: when did any bank officer first complain about being misled about the status of the on‑loans? An allegation to that effect was only made by the banks for the first time in their pleadings: see judgment [2613] ‑ [2614].
Why no Bell or bank officer considered the on‑loans
1811 It is difficult to identify any explanation why every single bank failed to note the potential exposure created by the on‑loans and failed to raise it with TBGL when they were asked to treat the bond issues as equity and to collapse the NP agreements into the NP guarantee other than that none were concerned when they agreed to those requests at the possibility of the collapse of TBGL. I think the same explanation provides the reason why no Bell officer involved in the bond issues gave any consideration to the terms of the on‑loans. Studdy, the only director of TBGL to give evidence, expressly said as much at ts 75 of his examination.
1812 The practice of bank lending without security, on a negative pledge basis only, left the banks in a much weaker position, should a customer become financially distressed, than they would have been in if they had followed the traditional practice of taking security.
1813 It is unlikely in the extreme that the banks would have agreed to the Bell NP group substantially increasing its total debt beyond that allowable under the 65% ratio limit as originally formulated unless the banks were confident of TBGL’s prospects of continuing successful operations. The subordination of TBGL’s liabilities in respect of the bond issues was a factor that played a part in the banks’ agreement to treat the bonds as equity rather than debt, as his Honour found. But if the banks were not confident of TBGL’s future prosperity when they agreed to the TBGL requests that steadily weakened their position under the NP agreements and then the NP guarantee, the assurance which they said at the trial was of such importance, namely, that on‑loans were subordinated, is unlikely, if given in 1985 and again in 1987, to have procured agreement to those requests.
The banks in the 1980s
1814 The explanation for the actions of the banks and their officers that suggest they never considered, in the period up to at least October 1987, that the banks might ever need to rely on the subordinated status of the bonds to limit bank losses from lending to the Bell group requires I think some understanding of the banking environment in which the banks dealt with Holmes à Court and the companies including TBGL that he controlled in the 1980s and of the banks’ attitude to Holmes à Court himself.
1815 It is well‑known that the 1980s were a period of turmoil for banking in Australia as the environment changed from a highly regulated to a deregulated one which included, for the first time, competition from foreign banks from about 1985. From the early 1980s until at least the time of the market crash in October 1987, corporate lending boomed, fuelled by a combination of bank competition and inflation‑driven escalation in asset values. These matters are covered in the Report of the House of Representatives Standing Committee on Finance and Public Administration of November 1991, ‘A Pocket Full of Change – Banking and Deregulation’, to which his Honour was referred at trial by the plaintiffs:
2.88 In 1990 the effects of the extravagant lending of the banks during the preceding decade began to emerge in their balance sheets. There were marked increases in bad debts and non‑performing loans resulting from the injudicious ‘name’ lending to prominent speculators …
6.30 Once they ceased to ration credit, and charged those who are riskier a correspondingly higher margin, banks could have reasonably expected higher interest income and a commensurate increase in bad debts. Banks should have started making higher general provisions in their accounts to allow for this. Figure 6.5 shows they did not do so. It would appear that they were excessively influenced by the buoyant economic conditions of the time.
6.31 The bad debts are not merely the result of a move away from credit rationing. An extraordinary number of ‘entrepreneurs’ seemed to believe that asset prices could increase without limit …
6.32 These factors may explain the demand for finance but what many commentators found unusual was the zeal the banks displayed in lending to these investors. The banks appeared to share the view of the entrepreneurs that asset prices only rose. Table 6.6 shows the widespread exposure of banks to some of these entrepreneurs …
6.33 This promiscuous lending has been attributed to fear of competition from foreign banks, leading to a misplaced concern about protecting their market share. It has been suggested banks had difficulty in adjusting to the new deregulated environment. The Governor of the Reserve Bank said:
‘There were mistakes made by bankers. The bankers ceased to be bankers, I suppose, in that environment. Commonsense, conservative banking practices went out the window in the mad scramble that was going on at that time, for market share and preserving market share, financing borrowers who were pursuing properties, property developments, property takeovers, company takeovers, mergers and acquisitions and share acquisitions … the banks themselves, in the early stages, did not have good information systems. They did not have good risk assessment and credit monitoring arrangements.’
Many would say there also were mistakes made by the Reserve Bank. They should have taken a less passive role during this period.
1816 The respondent banks did not stand aloof from this environment.
1817 Evidence illustrative of the RBA Governor’s statement to the effect that during the 1980s, lending had a higher priority for the banks than did risk management was given by Mr Smith who became chief manager, group credit policy and control division of CBA when it was set up in 1991. He referred to the aggressive lending policies adopted by the major Australian banks from the mid‑1980s. He said that his division was established by CBA in response to the corporate failures of the late 1980s and early 1990s as an independent control on those in the bank making lending decisions (ts 26117 – ts 26118). Mr Deer, general manager, corporate banking, Westpac, in his memorandum of 8 May 1986 to the Board dealing with the request by Holmes à Court for the first $500 million of what became the Jumbo facility, which he relied on in his attempt to take over BHP, referred to Westpac needing to ‘actively compete in this deregulated environment’ and noted that ANZ and NAB had made large commitments on an urgent basis which Westpac would also have to be able to deal with. The Board agreed the next day to provide the $500 million to BRL in accordance with Holmes à Court’s request. Mr White, managing director of Westpac, in his memorandum of 16 October 1986 to the Bank’s chief general manager set out his increasing concerns about ‘the practice being adopted by major banks of providing very substantial backup or underwriting facilities to make possible bids for control of large listed companies’ in the context of Holmes à Court’s request for additional funding from Westpac for the BHP takeover.
1818 There is other evidence of the pressures various appellant banks felt from these competitive forces: all the appellant banks promptly agreed to the TBGL requests for equity treatment of the TBGL, BGF and BGNV bond issues though this, for the reasons set out below, weakened the already weak prudential controls that the banks had over TBGL’s ongoing appetite for debt. They agreed to further weaken those controls by agreeing to TBGL’s request to collapse the NP agreements into the NP guarantees. Most agreed to do this promptly but even the reluctant banks ultimately gave their assent.
1819 Significantly, from the early 1980s, in search of custom in an increasingly competitive banking environment, the banks abandoned what had been usual banking practices and procedures and began to lend increasingly large sums of money to corporate customers without security on negative pledge agreements only. This was a new and risky activity for banks. Various bank witnesses refer in their statements to their recognition of that obvious fact.
1820 An overview of the history of negative pledge lending in Australia is contained in the paper presented by Mr Robert Barton of the ANZ Banking Group at a conference on credit risk management for banks held on 4 September 1989 [TBGL.30129.050]. An internal memorandum circulated within CBA in late 1989 referred to Mr Barton’s paper and said: ‘The Chief General Manager, Corporate and International, [Poulter] considers it to be mandatory reading for all senior corporate banking staff and accordingly it is appropriate that the document be studied by all CIS members’. Mr Barton in his paper observed that before the emergence in Australia of negative pledge lending:
… almost all lending was secured by charges over the assets of the borrower, with banks generally requiring a substantial comfort margin between the conservative values of the security held and the loans being provided.
This was in an era of highly regulated banking with bank liquidity, exchange and interest rates tightly controlled … There was only limited competition between banks and it was very much a lenders’ market with borrowers being given unimaginative finance options …
With the establishment of more merchant banks in the 1970s, including many with international affiliations, we saw the introduction of negative pledge lending … The technique became more prevalent in the early 1980s and gained added impetus with the emergence of the State banks as more active corporate lenders and the entry of new [foreign] bank licences in 1985.
It is significant to note that the growth of negative pledge lending coincided with:-
• The emergence of aggressive and more innovative lenders in the Australian corporate market who tended to encourage corporates to expect negative pledge borrowing status as a matter of course …
• A greater market acceptance of high leverage and a general relaxation in the gearing levels required for corporate borrowers … Since 1980, average interest cover has dropped from 4.3 times to approximately 2.0 times in 1989 …
• A prolonged period of relatively high inflation with the expectation that asset values would continue to appreciate enabling companies to borrow their way out of short‑term liquidity problems
• An unprecedented run of the ‘bull market’ on local and overseas stock exchanges making it easier for corporates to raise equity to redress the more highly leveraged positions …
From the mid‑1980s the competition in the finance market tipped the scales almost overnight into a corporate borrowers’ paradise as the new [foreign bank] players quickly tried to establish a foothold in what was perceived as the lucrative corporate finance market for which there were no downsides.
Negative pledge lending and pricing became two of the main marketing tools used against the entrenched major trading banks. Inevitably this led to some relaxation of credit standards as the new players sought to establish themselves and the major trading banks fought to protect their market shares.
In this period of unprecedented change the financial management of some corporates struggled to keep pace and the credit control resources of some of the lenders either became stretched or less objective or were ignored.
A very dangerous and volatile situation had been created which set the timebomb ticking and it was only a matter of time off when it would explode.
… The stock‑market collapse in October 1987 triggered the explosion, blowing away some of the lenders and borrowers who had flirted with death once too often.
1821 Though the banks relied, as his Honour found, upon the promise of subordination of the bonds in agreeing to the equity requests, the NP banks did not consider at any time in the period from 1985 to well after the third bond issue in 1987, the possibility that the Bell group or TBGL might fail.
1822 Some of the banks’ witnesses expressly said that, e.g. Walsh (SCBAL) at ts 27044; Edward (SocGen) at ts 25240. But it is obviously so. It explains the willingness of the banks to lend very large sums of money through the 1980s until after the October 1987 crash to TBGL without security, on negative pledge arrangements only. It is I think the explanation for his Honour’s finding that none of the bank officers gave any consideration to the on‑loans although all the banks were well aware that the proceeds of each of the BGNV bond issues would be on‑lent to TBGL. It also explains the conduct of each of the banks in the period 1985 to 1987 in repeatedly agreeing to TBGL requests that weakened the limited protection they had under their negative pledge arrangements with TBGL. There is I think no other rational explanation for the banks’ behaviour in these respects than the expectation of profiting from a business relationship with Holmes à Court’s organisation coupled with an absence of concern about the possibility of the failure of that organisation.
Bank lending to Holmes à Court-controlled companies
1823 The banks regarded Holmes à Court and his companies as very desirable customers. TBGL and other companies under his control had a long history of successful business operations.
1824 In the course of dealing with the banks’ estoppel case, Owen J referred at [3653] to the:
… plank of the plaintiff’s 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 …
1825 His Honour did not accept that proposition, saying at [3654]:
… It is one thing to say that a commercial enterprise, such as [a] 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 …
1826 This assumption by his Honour is I think contradicted by the evidence of the banks’ behaviour towards TBGL during the period 1985 to 1987 when the events of central importance to the litigation occurred and by the historical material put before him by the plaintiffs.
1827 His Honour touched on the banks’ receptive attitudes to Holmes à Court in the mid‑80s in another context at [3309]. But he was I think too dismissive of the importance that the banks attached to capturing, retaining and expanding the custom of the Holmes à Court businesses, including TBGL, in the booming and highly competitive market conditions that prevailed in the 1980s, at least up until the share market crash of October 1987.
1828 From the early 1980s until after 1987, the appellant banks (and other banks) lent very large sums to TBGL without security and on an unsubordinated basis though they each initially also had unsecured indemnities from TBGL and each member of the Bell NP group. Bank witnesses spoke about the weakness of a bank’s position in being able to recover its loans under an NP lending agreement compared with secured lending and said that NP lending could only be justified if the bank had extensive confidence and trust in the probity and competence of the senior executives of the borrower. Various bank witnesses said they had that kind of trust in Holmes à Court and his senior executives: see e.g. Willis (NAB, witness statement, par 57); Cutler (WBC, par 19); Burt (BOS, par 12) and Poulter (CBA, par 33).
1829 Each NP agreement and NP guarantee permitted TBGL to borrow from other banks and third parties, an entitlement heavily utilised by TBGL. No respondent bank required TBGL to subordinate its obligations in respect of borrowings from others to its obligations to that bank. The only restrictions on TBGL imposed by these agreements were firstly, that subject to some qualifications, it could not, without the consent of the NP banks, give security to anyone over its existing or future assets; secondly, that its repayment obligations with respect to its borrowings from others could be on a subordinated or unsubordinated basis but, if the latter, its obligations to those other lenders had to rank at least pari passu with its obligations to the NP banks and thirdly, that it had to undertake not to allow Bell NP group total liabilities to exceed 65% of total assets or total secured liabilities to exceed 10% of total assets. See: cl 4, cl 7 and cl 8 of the NP agreements.
1830 TBGL, at least up to the share market crash in October 1987, had had a long and extraordinary run of successful operating. Its annual report for the year ending June 1987 recorded that ‘in the year under review, the group recorded its 16th successive increase in profit.’ and that ‘over the past 10 years – operating profit has increased by 63% per year on a compound basis compared to an average of 20% for the top 20 companies listed on the Australian Stock Exchange. Earnings per share have increased every year in the last decade to yield 42% compared to an average rate of 9% for the top 20 listed companies’. The banks were well aware of TBGL’s extraordinary and long running success under Holmes à Court’s guidance.
1831 The opportunity for a bank to expand its business with such a successful organisation as that run by Holmes à Court was highly valued in the competitive market that developed in the 1980s following financial deregulation and the entry of foreign banks into the Australian market.
1832 In all, the Australian banks and the Lloyds syndicate banks lent to the TBGL NP group and to other companies controlled by Holmes à Court vast sums in this period. Some details are set out in section 4.2 of the judgment. By the time of the share market crash in October 1987 TBGL was indebted to the six Australian banks for about $940 million while other companies controlled by Holmes à Court including BRL and Heytesbury owed them a further $570 million. In addition to the Lloyds bank syndicate funds loaned to TBGL, some syndicate members then also were owed substantial sums by other Holmes à Court controlled companies.
1833 In [306], Owen J said that the Australian banks and the Lloyds syndicate banks were by no means the only ones with which the Bell group had banking relationships. The defendant banks were aware of borrowings from other banks by TBGL. According to the TBGL consolidated group balance sheet, the TBGL group alone had as at 30 June 1987, borrowings of about $1.501 million out of $1.865 million total liabilities.
1834 None of the banks would have lent the kind of sums they did to TBGL and other Holmes à Court companies, most without security, if they had had any concern about the possibility of TBGL failing.
1835 The attractiveness of Holmes à Court as a bank customer is illustrated by the enormous support he attracted from a number of the appellant banks for his attempt to take over BHP through BRL. It was, according to Deer, Westpac general manager, corporate banking, Sydney head office, ‘the largest transaction in the country’ (ts 20353).
1836 By letter of 9 December 1986, Westpac, Standard Chartered Bank (SCBAL’s parent company), SocGen (by its parent company), and one of the Lloyds syndicate banks, Bank Indosuez, with a fifth bank, offered Holmes à Court through BRL a total of $6.5 billion for the purpose of assisting in the BHP takeover attempt. The facility was known to the parties as the Jumbo facility.
1837 This facility was extended by the banks’ letter of 27 April 1987, with three further banks, including Chase Investment Bank, by 19 June 1987 adding another $3.5 billion to the funds available to Holmes à Court for his takeover of BHP, thus giving him the $10 billion he considered he needed to achieve his objective. It was the stock market crash of October 1987 that terminated the takeover bid.
1838 $10 billion was a vast sum in the mid‑1980s.
1839 The magnitude of the banks’ lending to Holmes à Court through BRL under the Jumbo facility is demonstrated by the fact that Westpac provided a total of $1 billion between May and November 1986 [281] – something in excess of 25% of the bank’s capital: see the evidence of Deer at ts 20423, the evidence of Prof Hogan, a Westpac board member at ts 20660 ‑ 20661 and the note by Ward, Westpac general manager, credit policy and control, of 1 December 1986. Westpac had to obtain a clearance from the Reserve Bank of Australia to commit so much of its assets to a single client. Standard Chartered, which provided $3 billion, had to obtain approval from the Bank of England. Mr White, managing director of Westpac, in his diary note of 24 November 1986 reported on his meeting with Holmes à Court:
I told him that one of our real problems was the size of individual exposures. I said the figure contemplated was beyond our limits. He responded by saying that he had raised $1.7 billion in equity in the last year. He said Standard Chartered had a double problem – the size of their exposure and the connected nature of lending. They are committed to $3 billion and this been cleared with the Bank of England. Holmes a Court said that he had met the Governor of the Bank of England personally and the Bank of England had approved on the basis that this was a special situation which would be very easy to syndicate.
1840 In bank documents prepared in the period to the end of 1987 recording internal assessments of TBGL proposals for additional funding, for equity treatment of the bond issues and for collapsing the NP agreements into the NP guarantee there is much detailed evaluation of TBGL’s financial position and prospects. From time to time within some, but by no means all of the defendant banks, that there are negative comments about TBGL’s financial position. NAB was the bank most resistant to TBGL’s approaches. But the almost invariable response of most banks through the 1980s until at least the time of the October 1987 share market crash was ultimately to agree to TBGL’s demands. Concern in the banks about the need to protect their position in the event of the collapse of the Holmes à Court empire was not a priority.
1841 The response of Westpac’s managing director, Mr Bob White, to Holmes à Court’s approach for Westpac to participate in the Jumbo facility was to record in his diary of 24 November 1986 an instruction to the general manager, corporate banking to put in hand a proposal for the board’s consideration with this comment: ‘As you are well aware, I have very serious concerns about being a member of a small group of banks putting up such a substantial credit to the acquisition of shares in BHP’. Four days later the board of Westpac resolved to approve an increase in credit lines from $0.5 billion to $1 billion for ‘the Holmes à Court group’. White said at ts 20935:
It was a difficult judgment … because it was a dramatic change of attitude that the bank had exhibited in the past 12 months or so, and as I recall the ultimate decision to approve this was made at a special meeting of the board on the basis that the relationship that the bank enjoyed with Holmes à Court, the extent of the relationship and the earnings we derived from the Holmes à Court relationship, far exceeded any relationship or earnings we enjoyed from any association with BHP.
1842 In contrast, some banks showed no reservations about wanting to open or expand their relationship with Holmes à Court companies including TBGL.
1843 As appears from Edwards’ contact report of 2 December 1985 and Purves’ contact report of his dealings with TBGL people on 5 November 1985 and from the credit proposal prepared on 16 January 1986 in the Sydney office of SocGen recommending a $20 million unsecured facility for TBGL, SocGen Australia was very keen to expand its business with TBGL in a number of areas. The credit proposal comments on ‘the outstanding success of the Bell group [which] has been founded on the ability of the Chairman, Robert Holmes à Court’.
1844 In May 1987, just after the bond issue, BGF applied to HKBA to increase the $5 million facility it had with the bank to $115 million. Farr and Baker, state manager WA, ‘strongly recommended’ it, with the concluding comments:
There is an excellent opportunity for us to increase our involvement with one of the major corporations in Australia. TBGL and Holmes à Court have an impeccable record of success and integrity. We see a strong future for the group with the downside risk being well covered.
1845 Head office accepted this recommendation. HKBA was lending without security under a negative pledge agreement.
1846 I refer to other examples in dealing with the banks’ response to TBGL’s request to collapse the NP agreement into the NP guarantee and to TBGL’s request to treat the bond issues in December 1985 and May 1987 as equity.
1847 On the relatively rare occasions when TBGL’s approaches for funding were rejected, that is often explained by the disruption caused by the BHP takeover and the concern of the bank in question about jeopardising its existing relationships with BHP and its associates. Dresdner Bank declined Holmes à Court’s invitation to provide $1.5 billion to the Jumbo syndicate, not out of concern at the viability of the BHP takeover attempt, but because Elders, a long‑standing client of Dresdner and a supporter of BHP in opposing the Holmes à Court takeover attempt, put pressure on Dresdner not to support Holmes à Court. See the minutes of the Dresdner board meeting of 24 November 1986 and board member Von der Denken’s note of 25 November 1986 of his conversation with Holmes à Court. Lloyds Bank experienced unexpected difficulty in selling down the whole of the £60 million facility underwritten by it because, as Owen the managing director of Lloyds Bank said in his statement, TBGL insisted that Lloyds Bank only approach banks that were not already lenders to it and some of those were reluctant to jeopardise their existing relationship with BHP.
1848 Westpac in late 1986 rejected Holmes à Court’s request to increase its contribution to the Jumbo facility to a total of $1.5 billion. But that would have meant committing nearly 42% of Westpac’s entire capital base to one client: see [TBGL.30715.040]. Westpac still put $1 billion into that facility, about 25% of its capital base.
The negative pledge ratios
1849 Central to the banks’ case was the importance they say they attached to TBGL maintaining its negative pledge ratios.
1850 A key theme of the estoppel case of each of the banks was that if they had realised when asked to agree to treat bond issues as equity that the on‑loans were unsubordinated they would either have refused agreement or required TBGL to subordinate the on‑loans because otherwise the critical 65% ratio would be exceeded.
1851 In their witness statements, various bank officers described the NP ratio covenant as very important because it gave the banks a measure of control over the amount of debt the TBGL NP group was prepared to accumulate. ‘They enabled the bank to monitor and exercise some control over the financial condition of the borrower’: Stempel, Dresdner, par 13; Neto, Banco Espirito, par 17 and De Rohan, Credit Agricole, par 16. ‘An important covenant in protecting the banks against the company over borrowing’: Crocker, Creditanstalt, par 27; Heering, Kriedietbank. ‘To ensure that the gearing of the negative pledge group did not exceed a level considered acceptable to the lenders’: Atkinson, Lloyds Bank, par 14. ‘The only means by which to control the credit risk in a negative pledge lending situation’: Hagemann Jens, BfG, par 29; ‘an important control mechanism available to the bank’: Jenkin, Gentra, par 8.
1852 Owen J accepted this. Senior counsel for the appellant banks said at appeal ts 3573:
His Honour accepted, of course, they all wanted to do business with Holmes a Court, or most of them, when things were good, but it wasn’t an overriding imperative to the point where they would sacrifice normal prudential considerations in lending, and in particular they wouldn’t sacrifice the one item of prudential control that they had over this group which was the negative pledge ratio.
1853 Yet that is what the banks repeatedly did.
1854 Notwithstanding the mass of evidence led by the banks at trial about how important they considered it to be for TBGL to adhere to the 65% NP ratio, they repeatedly agreed to requests by TBGL that weakened the limited protection the NP ratio covenant gave them, first by agreeing to treat the December 1985 bond issues as equity, secondly by agreeing to treat the May 1987 bond issues in the same way and finally by agreeing in July 1987 to collapse the NP agreements into the NP guarantees. Under the NP guarantees, TBGL’s entitlements were expanded beyond its rights under the NP agreements and the banks’ protections correspondingly reduced: indemnities from TBGL’s subsidiaries were no longer provided and TBGL acquired the right, without reference to the NP banks, to borrow without limit from anyone it chose, provided those borrowings were on a non‑current subordinated basis.
1855 As Owen J noted, the bond issues, until actual conversion, generated liabilities that were required by the NP agreements to be taken into account as such in calculating the NP ratios. By agreeing in 1985 and in mid‑1987 to exclude the liabilities created by the bond issues and then all non‑current subordinated debt from the NP ratio calculations, the banks substantially weakened their position by permitting TBGL to accumulate a greater level of debt than the banks had long considered to be prudent, as reflected in the 65% ratio. As Owen J said at [3692], this was no trivial concession:
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.
1856 The banks agreed to the TBGL request of December 1985. In March 1986, TBGL managing director Newman was admitting to Dresdner Bank that TBGL’s gearing was high [4115]. They again agreed to the request of April 1987, although as his Honour noted at [2774], the Bell group balance sheets remained highly geared.
1857 A measure of the extent to which the banks were prepared to weaken the limited protection that 65% ratio covenant gave them against TBGL over borrowing is provided by the various tables Owen J produced showing the impact on the NP ratios in the various NP reports of treating the BGNV, TBGL and BGF bonds as equity rather than liabilities. I have expanded his calculations in table 29 and [2966] to show the impact of the banks’ agreement to treat the BGNV, TBGL and BGF bond issues from December 1985 as equity. (Scudamore, the banks’ expert, made similar recalculations but he ignored the bonds issued directly by TBGL and BGF, which were also treated as equity. For example, in his recalculation of the NP ratios at par 5.11 of his statement he excludes the $75 million in bonds issued by TBGL and in par 5.24, he excludes the bonds totalling $150 million issued by TBGL and BGF.)

NP Report Reported ratio Bonds issued Recalculated ratio
31/12/85 47.0% $150m 63.28%
30/6/86 60.97% $150 m 69.47%
31/12/86 61.96% $150 m 69.5%
30/6/87 55.3% $388m(i) 70.94%
31/12/87 63.6% $556.3m(ii) 85.8%
30/6/88 60.9% $585.2m(iii) 86.5%


31/12/88 42.7% $578.9 m(iv) 74.8%
30/6/89 45.7% $574.5 m(v) 76.19%

(i) from TBGL annual accounts consolidated balance sheet at 30/6/87, note 9
(ii) from TBGL consolidated unaudited balance sheet at 31/12/87, note 9
(iii) from NP report, appendix C
(iv) from NP report, appendix C
(v) from NP report, appendix C.
1858 Once the banks had agreed to collapse the NP agreements into the NP guarantees in mid‑1987 under which all non‑current subordinated debt was excluded from the NP ratio calculation, TBGL not only made the third issue of subordinated convertible bonds without seeking the banks’ approval but also maintained, without needing to seek approval from any of the banks, subordinated borrowings from August 1987 until into 1989 of at least $100 million from related companies outside the NP group: see [3261] ‑ [3262]. TBGL did not include these related company borrowings in NP report liabilities because they too were excluded under the NP guarantees as non‑current subordinated debt. However, if these ex‑NP group borrowings of $100 million are treated as liabilities for NP reporting purposes, the actual NP ratios as at the NP reporting dates of 31 December 1987, 30 June 1988 and 31 December 1988 are 89.8%, 90.9% and 80.3% compared with reported ratios of 63.6%, 60.9% and 42.7% respectively.
1859 The mass of evidence from bank officers given at the trial nearly 20 years after the events that they regarded adherence by TBGL to the 65% ratio as a critical protection for the banks is contradicted by their acceptance in the period 1985 to 1987 of ‘the pretence’, as his Honour accurately described it at [3577], that the 65% ratio was being adhered to when in fact it was constantly being exceeded, and in particular, was exceeded (often by very substantial amounts) on every one of the NP reporting dates in this period except for the report of 31 December 1985.
1860 This is further evidence that the banks were not concerned at any relevant time with the possibility of a Bell group failure.
The double whammy effect
1861 By agreeing to TBGL’s equity requests in respect of the bond issues the banks permitted TBGL to notionally keep within the 65% NP ratio while increasing its borrowing capacity beyond that envisaged by that ratio, not only by the amount of the bond liabilities that were ignored as a result of equity treatment but even further, by reason of the ‘double whammy’ effect their consent to equity treatment created. His Honour noted at [3661] and [3692] that the banks were aware of this. On appeal, counsel for the banks acknowledged as much at appeal ts 3288) and at appeal ts 3613/6.
1862 His Honour described the ‘double whammy’ concept saying at [2738]:
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’.
1863 TBGL could do this yet still stay within the now artificial 65% NP ratio. His Honour was justified in saying it was a key part of TBGL’s commercial purpose in making the bond issues. See [3169], [3610] and also [4246] where he said:
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.
1864 The ‘double whammy’ effect is illustrated by Griffiths’ comments in the Treasury report for the TBGL directors which he prepared on 31 October 1985, to which his Honour referred at [2737]. Griffiths said that he ‘estimated that the borrowing capacity of the NP group would … increase by a further $428 million when the group obtained the banks’ consent to treat the subordinated bonds [the December 1985 issues of $150 million] as equity for banking purposes’. The explanation for Griffiths’ calculation appears in summary form in the banks’ submissions at [APPA.000.088.001, pars 417 ‑ 418]. As at June 1987, the banks’ agreement to equity treatment of the bonds combined with the ‘double whammy’ effect allowed TBGL to stay within the 65% NP ratio while borrowing a minimum of $388 million (the amount of bonds then on issue excluded from NP group liabilities) x 1.86 or a total of $722 million more than it then could otherwise have borrowed within the 65% NP. (If TBGL turned the bond borrowings into assets, as was likely, that would boost its borrowing capacity even more, by a further $388 million to a total of $1.110 million. Corr explained this at ts 14570.)
1865 A measure of the significance of an additional borrowing capacity as at 30 June 1987 of $722 million resulting from equity treatment of the bonds then on issue and the associated ‘double whammy’ effect is provided by the fact that the relevant NP report shows that the actual NP group liabilities (excluding the bonds) then totalled $1.396 million.
1866 TBGL could utilise all this increased capacity to borrow on an unsubordinated basis debt that would compete with bank debt in a winding up of TBGL: see cl 4, cl 7 and cl 8 of the NP agreements.
1867 TBGL may not always have utilised to the full this additional capacity to borrow resulting from equity treatment of the bonds and the associated ‘double whammy’ effect. But in the period from December 1985 to late 1987, it frequently operated at the limits of its borrowing capacity. In [MISD.00004.212], part of the banks’ closing submissions at trial, the banks listed the documentary evidence tendered at trial that showed that in the period from December 1985 to June 1987, TBGL frequently exceeded the 65% ratio even when all the bonds on issue were treated as equity and excluded from liabilities (though it was always able on the NP reporting dates to bring liabilities back within that ratio).
1868 By agreeing to equity treatment of the bonds and then to move to the NP guarantees, the banks were prepared to allow the NP group to take on debt well beyond the level they had thought to be prudent from the early 1980s, when they first lent to TBGL on negative pledge arrangements that included the 65% ratio covenant, until December 1985, thereby eroding the protection against TBGL over‑borrowing that they originally considered necessary and had under that covenant. Further, by these agreements the banks eroded the original protection given by the NP ratio covenant by exposing themselves to significantly more pari passu competition from unsubordinated lenders to TBGL in a winding up of TBGL than they would have had to face but for those agreements.
1869 The banks’ case that they were vitally concerned that the on‑loans of the bond proceeds were on a subordinated basis is in irreconcilable conflict with their willingness to allow TBGL to accumulate on an unsubordinated basis the very substantial additional borrowings that resulted from these three agreements and the associated ‘double whammy’ effect.
1870 From December 1985 to July 1987 the banks agreed to the 65% NP ratio covenant being gradually changed from a real control on the extent to which TBGL could accumulate debt to a largely illusory protection, ‘a pretence’, in Owen J’s words. This behaviour I think shows that the banks in this period had no concerns about the possibility that TBGL might fail. No consideration was given by the banks or their officers at the time to whether the on‑loans were subordinated because that was not then identified by any of them as a matter of any importance.
1871 This is confirmed by the way the various banks responded to the TBGL requests for equity treatment and to its request to move to the NP guarantee.
The banks’ response to the TBGL letter of 11 December 1985 seeking equity treatment of the bond issues
1872 Though TBGL had given each of the NP banks some prior warning of its proposal that the bond issue should be treated as equity rather than debt [2849], five of the six Australian NP banks pretty well immediately agreed to the proposal when TBGL presented it to them in its letter of 11 December 1985 (the sixth, SCBAL, agreed in early March 1986 [2849]).
1873 CBA, Westpac and SocGen gave only minimal consideration to the impact on each of their agreeing to the proposal. It is unclear what consideration SCBAL gave to the request. Carling and Stone, two of SCBAL’s senior managers in Australia at the time, had no recollection of the matter though they believe they saw the 11 December 1985 request. Carling thinks it likely that he would have obtained approval, probably verbal, from SCBAL in London before writing his letter of consent of 7 March 1986.
1874 HKBA’s relationship with TBGL in 1985 was through its subsidiary, Wardley Australia. It agreed promptly to the TBGL request but only after the London office of Hong Kong Bank considered the Perth office memorandum of 14 January 1986 prepared by McDowell and Park which reviewed the financial position of TBGL and also that of BRL because of the impact on TBGL’s performance the value of its investment in BRL had. This memorandum noted the very strong performance of TBGL over the 10 years to 1985, the sound financial position of both TBGL and BRL and the high quality of their management and directors of TBGL and recommended that Wardley agree to TBGL request.
1875 NAB consented to the TBGL request on 6 January 1986 after members of the bank’s credit bureau, Wilcock, Dowse and Ciutto, considered it in a long memorandum prepared on 2 and 3 January 1986. All recommended approval based on the nature of the bonds (convertible and subordinated), the likelihood of conversion and the performance of the Bell group.
1876 None of the banks who received this letter appear to have felt any concern about agreeing to the request though that, for the reasons given, weakened the protection provided by the NP ratio covenant. The banks thereby showed their lack of concern at the possibility that TBGL might become insolvent, at least in any time‑frame of interest to the banks, and their concern to foster their commercial relationship with TBGL and Holmes à Court to whom they had each lent very extensive amounts additional to that leant to TBGL.
The banks’ response to the TBGL letter of 15 April 1987 seeking equity treatment of the bond issues
1877 All the banks promptly agreed to this request. None were concerned except momentarily, the Paris head office of SocGen.
1878 The request to Westpac was dealt with in its internal credit application of 28 April 1987. The application recommended among other things agreement to the equity request. Emphasis was placed on the value to the bank of TBGL’s custom: it was Westpac’s ‘largest single profit contributor’. The bank’s credit committee approved the recommendation for equity treatment, and other matters, on 30 April 1987 followed by board approval on 1 May 1987. Cutler notified TBGL accordingly on 6 May 1987.
1879 As I have mentioned, the Paris credit committee of SocGen initially rejected the Sydney office’s recommendation to agree to TBGL request of 15 April 1987 for equity treatment of the $250 million of bonds, saying in its telex of 21 May 1987: ‘as long as the bonds are not converted, it is a debt’. They were quickly persuaded by the response from SocGen in Sydney of 25 May 1987 and, on 29 May 1987, Paris approved the request without further comment.
1880 Rankin, HKBA managing director, referred Farr’s memorandum of 29 April 1987 (which noted the success of the December 1985 TBGL bond issues) to a credit controller, Leung. In a brief memorandum to Rankin, Leung recommended approval of the TBGL request because: ‘the bonds are subordinated and will not mature until 1997 long after our exposure expires’. HKBA promptly notified TBGL of its agreement.
1881 By memorandum of 21 April 1987, NAB’s Perth office referred the TBGL request of 15 April 1987 to the head office credit bureau with a request to deal with the matter urgently because TBGL intended to make the issue on 7 May. In a brief note, Wilcox recommended that the request be approved as being essentially identical to the December 1985 issue and Kevin Weir noted his agreement. On 29 April, NAB notified TBGL of its agreement.
On 21 April 1987, CBA’s Perth office forwarded the TBGL letter of 15 April 1987 to corporate and international head office, commenting that the request was reasonable and asking for confirmation. In a brief note, a member of that Department recommended approval because the new issue was identical with the December 1985 issue which the banks had agreed to treat as equity. The chief manager domestic lending, noted his approval, regarding it as a routine matter because of the earlier approval. Sim by telex of 24 April 1987 to Perth office advised of the bank’s approval of the request.
1882 It is unclear what consideration SCBAL gave to the request. The bank’s documentation appears to be limited to a copy of the TBGL letter of 15 April 1987 and the letter from Desmarchelier, SCBAL manager in NSW to TBGL on 15 May 1987 enclosing SCBAL’s agreement to the request. The decision making was largely concentrated in the bank’s Australian head office in Adelaide, group general manager Cameron was unable to say anything about the request or its approval.
1883 Owen, the chairman and CEO of Lloyds Bank has no recollection of dealing with the request. Eggleshaw, a director of Lloyds Bank, recalls receiving the TBGL letter of 15 April 1987. He thought the request was unremarkable, merely reflecting the way the Lloyds syndicate banks had agreed to treat the previous issue of bonds. He sent the letter and various enclosures to loans administration under cover of his memorandum of 23 April 1987 with the request to forward the material to the syndicate banks to ‘obtain their authority to agree and accept the treatment of convertible subordinated bonds due May 1997’. His Honour found at [4227] that Lloyds Bank did consider the request and agreed to it when it forwarded the request on to the syndicate banks. By 27 May 1987 all but six of the syndicate banks had indicated their agreement. The TBGL request was shortly after agreed to by the rest. None of the syndicate banks Kredietbank, Gulf, Gentra, Dresdner, DG Bank, Creditanstalt, Credit Lyonnais, Credit Agricole, BOS, BfG, Banque Indosuez, Banco Espirito, showed any significant concern.
The banks’ response to TBGL’s request to move to the NP guarantee
1884 The responses of the various banks to the TBGL proposal for replacement of the NP agreements with the NP guarantee varied. Some gave minimal consideration to the request before approving it; others evaluated the request after assessing TBGL’s then current financial position before approving it. A few banks only, notably Westpac, NAB and CBA, tried to resist this weakening of their position. But all ultimately agreed. The importance of keeping the Bell group’s custom ultimately dominated even the reluctant banks.
1885 Most of the banks that had documentation in their files dealing with the collapse request appreciated that they were being asked to give up the advantageous right to indemnification by TBGL subsidiaries but did not see it as of major concern having regard to the Bell group’s financial strength and that its other bankers were prepared to agree to the request. Examples follow.
1886 HKBA See the recommendation by Farr, a credit manager with the Perth office of 13 July 1987, that TBGL’s request be approved dealt with the request, supported by Rankin, managing director of HKBA in Melbourne head office, who by memoranda of 15 and 21 July 1987 sought and obtained head office approval on 21 July 1987.
1887 DG Bank See the detailed consideration to the request given by Fook and Nai in their memorandum of 7 August 1987. Their recommendation was approved up the line, ultimately by Jonker, DG bank branch manager Singapore.
1888 Credit Agricole See the recommendation of 5 August 1987 following a detailed review of the Bell group’s financial position by officers of the bank that went up to and was approved by the London credit committee on 7 August 1987.
1889 SocGen See the short memorandum by Edwards, manager, corporate lending, of 18 February 1987, recommending that the credit committee of the bank approve the TBGL request of 10 February 1987, the credit committee approval on 20 February 1987 and the Paris head office approval (required, according to Edward, because the dropping of the subsidiaries’ indemnities represented a major alteration to the facility).
1890 Some of these banks took the view that the loss of the subsidiaries’ indemnities did not detrimentally affect their position, placing emphasis on the financial strength of TBGL.
1891 SCBAL See the memorandum of 27 June 1987 by Desmarchelier, manager, corporate lending recommending approval of the request, that was given.
1892 BfG Bank See the board’s approval on 7 August 1987 of the bank’s syndicated loans department recommendation based on its analysis of up‑to‑date financial information about the Bell group.
1893 Gulf Bank See Kassim’s brief memorandum of 7 August 1987 to Wilcox, general manager institutional banking, at the bank’s head office in Kuwait, and Willcox’s approval on 15 August 1987.
1894 Gentra See Stocker’s memorandum to Jordan of 24 July 1987 recommending approval, which was given by Lovesey, the bank’s managing director, on 27 July.
1895 Dresdner Bank See the telex of 27 July 1987 from Jessett of the bank’s London branch to Frankfurt head office and that officer’s internal memorandum of 29 July 1987.
1896 The positions of other banks differed.
1897 Credit Lyonnais It is difficult to identify who approved the TBGL collapse request though it seems that Goubet, incoming managing director of the London branch, did that rather than Menard, who finished up as managing director of that branch in August 1987. Goubet said in his witness statement that he did not realise that the TBGL proposal involved the bank losing the benefit of the indemnities from asset holding subsidiaries of TBGL and would not have approved the proposal if he had been made aware of that. The Lloyds Bank letter of 23 July 1987 to Credit Lyonnais did not expressly refer to the withdrawal of the subsidiaries indemnities but enclosed a draft of the amended loan agreement incorporating the guarantee ‘for your consideration’. Goubet’s evidence, if reliable, suggests that his bank gave only cursory attention to the request before agreeing to it.
1898 Banco Espirito It responded quickly to the Lloyds Bank letter of 23 July 1987 with a telex on 30 July 1987 confirming the bank’ s agreement to the collapse proposal. No documentation was produced by the bank explaining how the decision was reached.
1899 Bank of Scotland Is unique: each of the three of its officers who considered the Lloyds Bank letter of 23 July 1987 recorded in contemporaneous documentation that the collapse proposal would strengthen the bank’s security position. Mr GS Smith then senior manager in the bank’s international division in Edinburgh approved the TBGL request. This suggests that the bank officers gave only the most cursory attention to TBGL’s request before approving it. When Smith came to prepare his witness statement he said he was not able to identify any basis for the view that the bank’s security was strengthened by the proposed change but added: ‘At this time [mid‑1987] I regarded Bell group as a blue‑chip borrower and I do not believe that I would have been particularly concerned with the proposed change’.
1900 A few banks were resistant to the collapse proposal.
1901 Westpac By Cutler’s letter of 24 February 1987 the bank responded to the TBGL request of 10 February 1987 by identifying how the bank’s position would be weakened if it were to agree to the proposal and concluded:
In principle, we would consider collapsing the NP agreement, and replace it with a structure along the lines of the five points set out in your letter. However, a basic requirement that we feel the Bank will seek is the capacity to have direct recourse to the assets of the existing indemnifying subsidiaries … Can we discuss further?
1902 By 9 April 1987, after having obtained internal and external legal advice and after further discussions with TBGL, Cutler gave up his attempt to have TBGL modify the guarantee proposal so as to meet Westpac’s ‘basic requirement’.
1903 He prepared a detailed credit application dated 9 April 1987 that went to the bank’s credit committee. In it, he sought approval from the Westpac hierarchy of TBGL’s request. He summarised the long relationship between WBC and the Bell group and referred to the long and extraordinary financial success of TBGL and to Holmes à Court’s abilities: he was ‘basically the growth centre of the Group’. Cutler also referred to, among other things, the substantial fee income the relationship with the Bell group had generated for WBC, to the business opportunities for WBC the relationship was likely to bring in the wake of the Bell takeover of BHP, and: ‘Special feature – group currently is Westpac’s largest single profit contributor’.
1904 The WBC credit committee approved the proposal on 22 April 1987, noting that the bank then had an exposure to TBGL of $185.9 million, to Heytesbury Holdings Ltd of $42.5 million and to Bell Resources Ltd of $955.6 million (the Jumbo facility), with a further exposure by finance companies related to WBC to the Bell group of nearly $50 million.
1905 NAB Various officers of NAB were reluctant to agree to the TBGL request made of NAB by letter of 10 February 1987.
1906 Numerous counterproposals were suggested within NAB. Most were rejected by TBGL and ultimately abandoned by the bank. The bank’s attitude to the proposal and its ultimate response are captured by the following documents: The Assistant Corporate Finance Manager, WA, summarised the position in his internal memorandum to the Manager, Credit Bureau, Head Office of 6 March 1987. While he noted that all four international banks had given their approval to TBGL, ‘all the Australian banks have expressed varying degrees of concern, with us adopting the strongest negative position’. He recorded his discussions with Cahill in which he asked what TBGL’s response would be to NAB’s insistence to the amendments that it wanted to the draft guarantee: ‘It was with some reluctance that Mr Cahill advised that the Group would be forced to proceed regardless, following full clearance of all lines provided to the Bell group by ourselves. He hastened to add that the Group would be very loath to see this eventuate, however, would be left with no alternative’. The Assistant Corporate Finance Manager concluded by noting that the choice for NAB was either to agree to TBGL’s demands and accept ‘a diluted security position’ or face ‘the loss of all our facilities and resulting income’.
1907 By 8 April 1987 TBGL was pressing NAB for a decision that day. Kevin Weir, senior manager of the bank’s credit bureau in the Melbourne head office in his memorandum of the same date noted:
… the matter of our agreement to the revised security arrangements are now at an urgent stage and WA seek an answer today … Negotiations on this point [clause to be included to prohibit lending to other than Australian subsidiary] have failed … inclusion of such a clause will be rejected outright by the company. No other bank seeks such inclusion … We are told that the business is at risk if we cannot agree to the exclusion (the issue has not been raised by other banks). Reluctantly I would recommend that we forego inclusion of such clause …
1908 He approved the request on 9 April 1987 ‘reluctantly’, concluding: ‘You will appreciate that the security position now agreed to represents a somewhat lesser position than lenders previously held and we feel that such prudential matters should not be outweighed by any profit motive’.
1909 Weir’s reservations, reflecting perhaps a style of prudential banking characteristic of an era before the highly competitive 1980s, were not enough to cause him to risk the loss of the Bell group’s business.
1910 CBA There were a number of discussions between CBA officers and TBGL officers following the bank’s receipt of the TBGL letter of 10 February 1987. The bank’s legal department by its memorandum of 27 February 1987 to the Corporate and International department, head office, pointed out deficiencies in the TBGL proposal including the loss of indemnities from subsidiaries, concluding that it was a matter for the bank’s commercial decision whether to approve the TBGL proposal and if so on what conditions. On 19 March 1987 head office told Perth that it was not prepared to agree to weakening the bank’s position until the points raised by the legal department had been discussed with TBGL. By early April, TBGL was pressing for a decision by 9 April because it had an arrangement to issue notes into the Euromarket on hold pending the decisions of the banks to agree to the collapse proposal.
1911 Sim and Sample, two managers in the corporate and international division of the bank in Sydney, reviewed the TBGL collapse request on 2 and 8 April 1987 respectively. Each noted unacceptable elements of the TBGL proposal. Both noted CBA’s unsuccessful attempts to persuade TBGL to meet the bank’s objections to the proposed NP guarantee and that if CBA did not agree to Bell’s demands the only option would be for it to sever its relationship with TBGL. Sim concluded: ‘if we wish to continue our efforts to become more involved with Bell and bearing in mind the supposed acceptance of the guarantee by other major banks, we need to accept the deficiencies outlined by legal, balanced against the commercial aspects, and accept the guarantee in its format. This is recommended’. Sample too recommended acceptance of TBGL’s demand, noting the financial strength of the Bell group and its record of consistent profits over many years and the high reputation its management enjoyed in the market. An unidentified superior endorsed their recommendations, noting that Bell was adamant in refusing to agree to the bank’s requests to strengthen the guarantee in the bank’s favour, as CBA ‘unfortunately has little alternative but to do likewise or sever the relationship’ and recommended submission to the credit committee for approval ‘considering Bell’s status and performance’.
1912 CBA quickly agreed to the TBGL proposal: the credit committee of the bank’s board approved Sim and Sample’s recommendations on 9 April 1987, as demanded by TBGL.
1913 Some banks raised concerns at the impact on their position of the changed definition of liabilities.
1914 During the finalisation of the drafting of the guarantee, Westpac’s legal department identified a number of concerns. By its letter to TBGL of 8 July 1987, Westpac among other objections to the draft NP guarantee repeated an earlier request to amend the definition of ‘total liabilities’ so that: ‘non‑current subordinated debt items be included unless otherwise agreed by the lender’. TBGL rejected this request in its reply of 16 July 1987, saying all its other lenders had agreed to the definition of total liabilities: ‘and we are not prepared to change it’. The legal department pressed its concern about this on Cutler. In his response he said that even if the draft guarantee was changed in accordance with Westpac’s request, Westpac would very probably give consent as and when requested anyway; he referred to Westpac’s ‘special role as major house bank to the Bell group’ and concluded ‘I’m inclined to meet Bell’s request’. Westpac dropped the matter.
1915 SocGen, too, was concerned about this erosion by the changed definition of the control that the NP ratio placed on TBGL’s capacity to borrow: Cahill, in his memorandum to Graham of 17 February 1987 summarised the outcomes of his approaches to all the major bankers to the NP group sounding them out about collapsing their NP agreements into the NP guarantees. He noted that SocGen was: ‘happy to consider the alterations as long as some limit is placed on the gearing up of TBGL through subordinated loans and the like’. SocGen also abandoned this concern.
1916 Other banks noted that change in the definition but did not regard as significant.
1917 At HKBA, by direction from Rankin, Farr sought internal legal advice about whether there were material changes between the NP agreement and the NP guarantee. In their advice, the lawyers referred to the change in the definition of total liabilities and noted only that the bank agreed to this. Then by memorandum at 30 July 1987 Farr confirmed that the alterations were: ‘not material in a commercial sense given that our facilities are unsecured’.
1918 The change to the definition of ‘total liabilities’ proposed by TBGL was noted within NAB but did not attract any concern: see e.g. the advice of 23 March 1987 from corporate securities to the corporate finance manager WA and Weir’s file note of 25 March 1987.
1919 On receiving TBGL’s letter of 15 May 1987 with the amended draft NP guarantee, CBA’s legal department gave advice on it. Latimer reviewed the advice and noted that the bank had previously agreed to exclude subordinated debt from total liabilities and could accept the changed definition of ‘total liabilities without further comment’.
The significance of collapsing the NP agreements into the NP guarantee
1920 Agreement by all the banks by mid‑1987 to collapse the NP agreements into the NP guarantees further weakened the limited capacity they had had under the NP agreements to recover their loans if TBGL got into financial difficulties. Firstly, they agreed to give up their right of indemnification for their lending against the assets of the Bell NP subsidiaries and accepted instead an unsecured guarantee from TBGL alone.
1921 Secondly, their agreement eroded the limited power the banks had had to control by means of the 65% NP ratio TBGL’s appetite for debt because they agreed to allow TBGL, without further reference to them, to raise whatever funds it chose, without limit, and to exclude those liabilities from the NP ratio, provided only that they were raised as non‑current subordinated debt. They abandoned the control they hitherto had of deciding on a case‑by‑case basis whether to do that. They accepted TBGL’s definition that such debt would be ‘non‑current’, even if it fell due as soon as 12 months after it had been incurred and even though some of the banks, e.g. the Lloyds banking syndicate, had granted funding to TBGL that would not fall due for repayment for years after mid‑1987.
1922 That the banks were willing to have debt in unlimited amounts excluded from the NP ratio calculations under their NP guarantee agreements with TBGL provided only it was raised as non‑current subordinated debt was the clear effect of the relevant provisions of the NP guarantee including the definition of ‘total liabilities’. The operation of the NP guarantee agreement in this respect is unambiguous. The banks’ agreement of July 1987 to collapse the NP agreements significantly weakened the benefit of the 65% gearing covenant for them. But that cannot be regarded as an unexpected outcome suggested by his Honour in [3676] in section 17.3.8 discussed below. It was merely the culmination of the banks’ actions in agreeing to the cumulative erosion of the benefit of that covenant by their agreements in 1985 and early 1987 to treat the bond issues as equity: their blanket agreement of July 1987 replaced the need for any further ad hoc agreements to treat non‑current subordinated debt as equity.
1923 The banks were told in the letter of 10 February 1987 proposing the NP guarantee of TBGL’s intention to look to overseas capital markets as an increasingly important source of future working capital and general financing requirements for further expansion. The long‑term £75 million subordinated bond issue into the Euromarket which TBGL made through BGNV in July 1987 was a prompt demonstration of TBGL’s intentions to do this.
1924 Until the October 1987 share market crash, the banks must have expected that TBGL would rely extensively on non‑current subordinated debt to meet its financing requirements, especially given how that also enabled TBGL to raise large amounts of unsubordinated debt because of the ‘double whammy’ effect that it could not otherwise have done without infringing the 65% NP ratio.
1925 Further examples of the exercise by TBGL, after the banks’ agreement to move to the NP guarantees, of the power to erode the effectiveness of the NP ratio as a protection for the banks by making borrowings without reference to the banks are provided by the subordinated loans referred to in the judgment at [3261] and [3262].
1926 BGF, a member of the NP group, entered into a subordinated loan agreement with Heytesbury, not a member of that group, in August 1987 which allowed borrowings of up to $145 million, repayable by August 1992. For a time, it drew on this facility to the full. Cutler refers in his witness statement to TBGL’s response to a Westpac query in October 1987 about TBGL’s consolidated group balance sheet and the negative pledge report to June 1987, which it had just received, seeking details of ‘quasi‑equity outstanding’. The TBGL response includes in the details of ‘subordinated debt in negative pledge group’ the three bond issues and a fourth item: ‘$144.5 million – Heytesbury Sub/Loan’.
1927 That loan was repaid in April 1988 and immediately replaced with a subordinated loan by Bell Resources Finance, also not a member of the NP group, which allowed borrowings of up to $100 million by BGF that were still in place in May 1989. The TBGL spreadsheet for February 1988 shows under the heading ‘subordinated borrowings’ by TBGL the following: ‘subordinated loan – Heytesbury – $100 million’. The TBGL spreadsheet for July 1988 contains a similar note, but showing Bell Resources Finance as the lender.
1928 This $100 million subordinated loan was not included as a liability in any of the relevant NP reports. Appendix C to the NP report to 31 December 1987, the first produced after the Heytesbury subordinated loan was made and after the move to the NP guarantees, shows that the bond redemption liabilities were excluded from the NP group liabilities together with another exclusion of $100 million in respect of ‘non-current subordinated debt’. The next NP report, for the period to June 1988, shows an item in non‑current liabilities of $654.8 million for ‘subordinated debt and the convertible bonds’. The note to this item states: ‘these assets and liabilities are excluded from the negative pledge ratio calculations’. The NP report for the period to December 1988 excludes from NP group liabilities in appendix C two items: $100 million for ‘non‑current subordinated debt’ and $578.9 million for ‘subordinated convertible bonds’.
1929 That the banks were prepared to so weaken the position they originally had under their NP agreements with TBGL is inconsistent with them having any concern in mid‑1987 about the possibility of TBGL getting into financial difficulties.
1930 The loss of the Bell subsidiaries’ indemnities was a real detriment to the banks, as most noted. But most agreed without any concern and those few who were troubled by this ultimately agreed. The changed definition of liabilities in the NP guarantee had the capacity to deprive the 65% NP ratio of much of its protective effect for the banks. Most of the banks gave only cursory attention to evaluating the significance for them of TBGL’s request to move to NP guarantees and did not consider this aspect of the proposal. Some banks considered this and a few protested but ultimately capitulated to TBGL’s demands.
1931 By July 1987, the banks had agreed to deal with a more heavily debt‑laden company and would face, in a winding up of TBGL, competition from a substantially larger pool of unsubordinated borrowers than they would have had to deal with but for their agreements to treat bond issues as equity and to move to the NP guarantee.
1932 The banks got nothing in return for increasing their exposure to TBGL by these agreements other than the opportunity to lend even more money to Holmes à Court’s organisation, an opportunity of which they took advantage well into 1987.
The significance for on‑loan subordination of the banks’ agreement to BGF (ACT) becoming a nominated borrower
1933 In section 17.3.8.1 of the judgment, his Honour dealt with an argument by the plaintiffs to the effect that the agreement of all the banks to BGF (ACT) becoming a nominated borrower under the NP guarantee agreement showed that the banks had no belief about, and were not concerned with whether the on‑loans by BGNV to TBGL were on a subordinated basis. His Honour’s findings are challenged in the respondents’ cross‑appeal.
1934 One of the steps in the respondents’ argument was that under the NP guarantee, BGF (ACT) could raise unlimited amounts of debt and still keep within its 65% NP ratio provided it was raised as non‑current subordinated debt. The next step in their argument at trial was that these subordinated borrowings could be on‑lent by BGF (ACT) to NP group companies on an unsubordinated basis, with the consequence that the lenders to BGF (ACT) would rank equally with the banks in the winding up of that company and its guarantor, TBGL. The final step in the argument was that the banks realised that and their lack of concern about this outcome showed the absence of any concern or belief by any of them that the on‑loans of the BGNV bond issues were subordinated. His Honour at [3676] said this:
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. (emphasis added)
1935 I have difficulty accepting his Honour’s reasons here for rejecting the argument put to him about the implications of agreeing to BGF (ACT) becoming a nominated borrower under the NP guarantee based as they appear to be on a construction of the NP guarantee remote from the clear language of that agreement, including the critical definitions. The court’s power to interpret a commercial contract to give it a practical commercial meaning is wide, but not unlimited. ‘A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted’: Jireh International Pty Ltd t/as Gloria Jean’s Coffee v Western Exports Services Inc [2011] NSWCA 137 [55]. Contrary to his Honour’s statement that the outcome advocated by the respondents would 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, that result was merely the culmination of the banks’ actions in agreeing to the cumulative erosion of the benefit of that covenant by its agreements in 1985 and early 1987 to treat the bond issues as equity.
1936 But the respondents’ argument depended on establishing as a fact that the banks realised that agreeing to BGF (ACT) becoming a nominated borrower could impair their position in a winding up of TBGL. The evidence of those few bank officers who were questioned about the matter was that they did not perceive this consequence. The evidence relied on by the respondents suggesting that some Westpac officers were alert to that is equivocal. His Honour was therefore I think entitled to find as he did at [3681] that the banks’ agreement with respect to BGF (ACT) did not provide evidence supportive of the respondents’ argument.
1937 However, I agree for the reasons given by the respondents in pars 600 and 601 of their submissions in support of the cross‑appeal that his Honour was in error in construing the NP guarantee as he did at [3679] and [3680] of his reasons. Non‑current subordinated debt raised by BGF (ACT) would remain that and it was expressly excluded from ‘total liabilities’ in calculating the NP ratio even if on‑lent within the NP group on an unsubordinated basis: such an on‑loan is irrelevant in calculating ‘total liabilities’ of the NP group because it has to be eliminated from that computation which must be done on an NP group consolidated basis.
DIRECTORS’ DUTIES
1938 As his Honour noted at [4383], the plaintiffs’ case was confined to breaches by the Bell and BGNV directors of general law duties. They did not rely on any cause of action based on breaches by the directors of any statutory duties.
1939 Owen J identified the duties which the plaintiffs alleged the Bell directors had breached as a duty to act bona fide in the best interests of the company [4351], a duty to exercise powers properly [4353] and a duty to avoid conflicts of interest [4354]. Failure by the directors to exercise care and skill was no part of the plaintiffs’ case [4356]. Breaches of these three duties were pleaded in relation to the Australian directors (Aspinall, Mitchell and Oates), the UK directors, the BIIL directors and Equity Trust, save that a breach of the duty to avoid conflicts of interest was alleged only against the Australian directors and against two of the four UK directors (Mitchell and Bond) [4355]. The particulars provided by the plaintiffs of the breaches of these two duties are summarised at [4357] and [4358]. They comprised a range of omissions and positive steps by the directors that, in respect of both duties, involved prejudice to creditors.
1940 At section 20.4.2 of the judgment, Owen J identified in the memorandums and articles of TBGL, BGF, BPG, BGUK and BGNV the business of each and the powers exercised by the directors in committing the Bell companies to the challenged Transactions, namely, the power vesting the management and control of each company’s business in the directors and their power to borrow, grant securities and give guarantees in connection with the company’s business. He identified this latter power as a management function [4472] and of central importance in the case [4469]. At 20.4.2.3 his Honour dealt briefly with all the other Australian companies and noted that each had a similar article conferring a similar power on directors to borrow etc.
1941 Owen J summarised his conclusions on the issue of breach of directors’ duties at a number of places in the judgment including sections 23.2.2, 29.2.1 and 37.2. At [6039] in section 29.2.1 he said:
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.
1942 At trial, the respondents succeeded in establishing a case within the first limb of Barnes v Addy (1874) LR 9 Ch App 244 based on a breach of duty by the Bell directors though they failed, for the reasons set out in [8732], to establish their second limb case. In [8735] his Honour said:
A breach of trust or a breach of fiduciary duty is at the heart of Barnes v Addy principles. In this case, I have identified the failure to act in the best interests of the individual companies and the exercise of powers for improper purposes as the relevant duties. Both duties are fiduciary in nature. If, as I have found (save for BGNV), there was a breach of those duties, the legal foundation has been laid for a claim.
1943 The appellants contended at trial and on appeal in reliance on Breen v Williams and Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 that, though directors were in a fiduciary relationship with their company, the only fiduciary duties they owed were proscriptive and confined to the obligations not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict; accordingly, it was said, the duty of directors to act bona fide in the interests of the company and their duty to exercise powers for proper purposes were not fiduciary ones. His Honour did not find that any of the directors sought or obtained any personal benefit or were involved in any conflict of duty with interest in performing their duties and exercising their powers. Hence the importance of the appellants’ contention which is the subject of grounds 74 and 75 of the notice of appeal.
1944 His Honour dealt with the appellants’ arguments about the non‑fiduciary nature of the duties pleaded by the respondents in section 20.6.3 and considered at [4552] that the general principle was that ‘unless there are some special circumstances in the relationship, the duties that equity demands from the fiduciary will be limited’ to what he described as the two ‘core obligations’ relating to unauthorised benefits and conflicts of interest. However, in that section his Honour reviewed the numerous cases including High Court cases in which the duties of directors of companies to act bona fide in the interests of the company and to exercise their powers for proper purposes were described as fiduciary ones. He also reviewed decisions at first instance and by intermediate courts since Breen in which these duties of company directors have also been treated as fiduciary ones.
1945 His Honour in effect reconciled the statements in Breen and Pilmer that limited the ambit of fiduciary obligations to the two proscriptive ones and those in the cases describing the duties of directors to act bona fide and for proper purposes as fiduciary ones by holding that the incidents attaching to one fiduciary relationship may be quite different to those in another, saying at [4569]:
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 the 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.
1946 His Honour concluded at [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.
Are the duty to act bona fide for the benefit of/in the interests of the company and the duty to exercise powers for proper purposes fiduciary duties?
1947 A power vested in directors to issue shares has repeatedly been described in the High Court as a fiduciary power that must be exercised bona fide for the benefit of the company as a whole. For example: ‘The power to allot shares conferred on the directors by article 4 is a fiduciary power to be exercised bona fide for the benefit of the company as a whole’: Grant v John Grant & Sons Pty Ltd [1950] HCA 45; (1950) 82 CLR 1, 32 (Williams J, McTiernan and Kitto JJ concurring). The court in Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483 referred at (492) to ‘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’.
1948 It is not only directors’ powers to issue new shares that have been held to be fiduciary ones. In Richard Brady Franks Ltd v Price [1937] HCA 42; (1937) 58 CLR 112, where the question was whether directors had validly exercised their power to grant securities over company assets to some of their number, Dixon J said at (142 ‑ 143) that the directors were subject to fiduciary obligations in exercising their powers. But those attacking what the directors had done had ‘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 … the fiduciary duty of directors is to the company and the shareholders’. In Ascot Investments Pty Ltd v Harper [1981] HCA 1; (1981) 148 CLR 337, Gibbs J, with Stephen, Mason and Aickin JJ agreeing, said at (349) of a wide discretion vested in the directors of a company to refuse to register share transfers:
The directors are bound to exercise their discretion bona fide in what they consider to be in the interests of the company, and not for any collateral purpose, but subject to that qualification their discretion is absolute and uncontrolled … This rule is an application of the general principles governing the exercise by directors of their powers; those principles are discussed in Ngurli Ltd v McCann (1953) 90 CLR 425, at 438 ‑ 440.
1949 As a general rule, all powers vested in directors under the company’s articles are fiduciary powers to be exercised in the interests of the company. In Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425, the court said (438 ‑ 439):
Voting powers conferred on shareholders and powers conferred on directors by the articles of association of companies must be used bona fide for the benefit of the company as a whole … The powers entrusted to the directors by the articles of association to be exercised on behalf of the company are fiduciary powers.
1950 This was not a novel statement. Starke J in Mills v Mills [1938] HCA 4; (1938) 60 CLR 150, 175 said: ‘Directors in the exercise of their powers are in a fiduciary position and must exercise those powers for the benefit of the company’.
1951 It is to be expected that all such powers are fiduciary ones. They are the means by which directors perform their functions. The office of director implies fiduciary status:
No doubt undertaking to act in this way [‘for or on behalf of’ and ‘in the interests of’ another person] is inherent in the position of trustee administering a trust, director participating in the control and management of a company, partner acting in the conduct of the partnership business and employee acting in the course of the business of the employer, for example. (John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1 [88]).
1952 The duty to exercise powers for proper purposes, in its application to companies, has its origin in the equitable doctrine of fraud on a power: see Mills v Mills (185) (Dixon J) and Ngurli v McCann (438). Dixon J was one of the first members of the High Court to identify that a consequence of directors being in a fiduciary relationship with their company was that they could only exercise powers conferred on them for proper purposes: see Richard Brady Franks Ltd v Price (142) and Mills v Mills (185).
1953 As is said in Ngurli v McCann (439): ‘The powers entrusted to the directors by the articles of association to be exercised on behalf of the company are fiduciary powers’. In Howard Smith Ltd v Ampol Petroleum Ltd, the Privy Council said of a power to issue shares (834):
But, intra vires though the issue may have been, the directors’ power under this article is a fiduciary power: and it remains the case that an exercise of such a power though formally valid, maybe attacked on the ground that it was not exercised for the purpose which it was granted.
In Kokotovich Constructions Pty Ltd v Wallington [1995] NSWSC 54; (1995) 17 ACSR 478, Kirby ACJ, with Priestley and Handley JJA agreeing, referred at page 490 to the fundamental principle of company law that the directors of a company owe a fiduciary duty to the company and continued: ‘One aspect of the fiduciary duty is that, where the company has vested a power to act in the directors, they can only exercise such power in a manner consistent with the purpose for which it was conferred upon them. That is, the power must be exercised for a proper purpose.
1954 These authorities show that in the context of the fiduciary relationship between directors and their company, the way the law gives meaning and content to a duty and a power of directors, once they are identified as fiduciary ones, is by requiring them to be exercised bona fide for the benefit of the company and for proper purposes. In John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1, the court at [87] referred to Mason J’s identification of the critical feature of the accepted categories of fiduciary relationship, which included director‑company, namely, ‘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’. The court added: ‘From this power or discretion comes the duty to exercise it in the interests of the person to whom it is owed’. The court continued [88]:
Justice Lehane, writing extra-judicially, made two points relevant to the present question. The first point is that phrases such as ‘for or on behalf of’ (and ‘in the interests of’) another person must be understood in a reasonably strict sense, lest the criterion they formulate become circular.
1955 The strictness in which such phrases are understood in the cases can be seen in the close attention given by the courts, when dealing with challenges to the validity of the exercise by directors of various powers, to identifying whether the exercise of the power was in the interests of the company and/or was for proper purposes.
1956 The duty of a director to act bona fide in the interests of the company and to exercise powers conferred for proper purposes only are necessarily fiduciary obligations.
Are the fiduciary duties of directors limited to proscriptive ones?
1957 In Breen v Williams Gaudron and McHugh JJ said (113):
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.
1958 This statement was approved in Pilmer v Duke Group Ltd (in liq) by McHugh, Gummow, Hayne and Callinan JJ (198).
1959 The relationship between a director and his company is one of the accepted fiduciary relationships. The appellants acknowledged that. It is trite law: see e.g. Breen v Williams (92, 106 ‑ 107).
1960 Courts of first instance and intermediate courts of appeal have, in various contexts, applied the statement in Breen v Williams that a fiduciary is subject to two proscriptive obligations only. Owen J mentioned the first‑instance decision in P & V Industries Pty Ltd v Porto [2006] VSC 131; (2006) 14 VR 1, in which Hollingworth J relied on the proscriptive/not prescriptive principle to hold that a director was not bound by any fiduciary obligation to the company to take positive action (there, to disclose information about his activities outside the company’s business).
1961 But there is no decision of which I am aware binding on this court to hold that the fiduciary duties of directors to their companies are so limited.
1962 Neither decision in Breen or Pilmer considered the position of directors who undoubtedly stand in a fiduciary relationship with their company and who have long been subject to duties to act bona fide in the interests of the company and to exercise their powers for proper purposes, both of which have long been described as fiduciary obligations. If the fiduciary obligations of directors to their company are limited to the two proscriptive ones, not to benefit and not to be in a conflict situation, an extensive revision of the law governing directors’ duties must have taken place without any examination of that particular issue at the intermediate or final appellate level.
1963 Two decisions of this court should be mentioned. In Wilden Pty Ltd v Green [2009] WASCA 38; (2009) 38 WAR 429 this court referred to Breen v Williams and P & V Industries Pty Ltd v Porto for the proposition that: ‘Ordinarily, a fiduciary does not have a prescriptive positive obligation of disclosure particularly of a personal interest’. However, the court did not have to consider the content of the fiduciary duties of directors to their company. What was in issue was whether, as the trial judge held, a corporate trustee of a unit trust and two of its directors owed a duty to disclose to a third unit holder the source of the funds they intended to use to inject additional capital into the unit trust by purchasing further units in it. McLure JA (as her Honour then was), who gave the judgment of the court, at [106], rejected the appellants’ argument that the company’s duty as a trustee to disclose the trust’s accounts to the beneficiaries obliged the company (not the directors) to disclose the source of the relevant funds to the third unit holder. It was in that context that she referred to Breen v Williams and P & V Industries Pty Ltd v Porto. At [107] her Honour held that even if the two directors owed a duty of disclosure to either the board of the corporate trustee or the other unit holders, the information in question was not material to any action taken by the corporate trustee or the other unit holders and so did not have to be disclosed to either.
1964 In Streeter v Western Areas Exploration Pty Ltd [No 2] [2011] WASCA 17, the principal question was whether two persons, S and C, were under fiduciary duties to a company WAE, of which they were directors, which precluded them from taking for their private benefit an allotment of shares in another company WANL, as the trial judge found. McLure P, Buss JA agreeing, upheld the appeal by S and C. McLure P agreed with the general statement of legal principles by Murphy JA, who dissented, subject to what she had to say about the critical legal issues [64]. These issues turned on the ‘two themes’ which McLure P called at [65] ‘the conflict rule and the profit rule’ by reference to which her Honour disposed of the appeal. Murphy JA at [367] had identified those themes in the judgment of Deane J in Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178. Murphy JA said [449]:
It is unnecessary for present purposes to decide whether the director’s duty to act for the benefit of the company and for proper purposes is in substance to be regarded as a proscriptive fiduciary duty, or a prescriptive duty in the exercise of fiduciary power …
McLure P did not refer to this issue.
1965 One consequence of the director/company relationship being a fiduciary one is that the director will be in breach of the proscriptive fiduciary duties he owes his company where he places his own interest in conflict with his duty to the company or where he derives an unauthorised benefit from his actions as director. But the presence or absence of personal interest or of conflict of interest and duty has been held to be not necessarily determinative of whether a director has performed his fiduciary obligations to the company. Typically, many powers are vested in directors by the company constitution. A director who is also a shareholder can validly exercise the fiduciary power to issue shares even though that results in a personal financial benefit, provided the exercise of power is in the interests of the company: Hirsche v Sims [1894] AC 654 and Mills v Mills. In neither case did the directors seek ratification by the shareholders generally of their exercise of power. In Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL, the validity of the exercise by the directors of their power to issue new shares was upheld because it was done in the interests of providing for the company’s financial stability, even though the directors thereby secured their own positions (494).
1966 Conversely, the absence of personal benefit or conflict of interest will not mean that an exercise of power by directors is necessarily valid. In Howard Smith Ltd v Ampol Petroleum Ltd and in Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285, the exercise by directors of a power to issue new shares was held invalid because those issues were held not to have been made for proper purposes, though the directors were absolved from any self‑seeking.
1967 Further:
It has been observed that in the case of company directors, the conflict rule is not strictly applied … Thus a director can also be a shareholder and act with a personal interest even though the director cannot be shown to have freed his or her mind of that personal interest … It is also said that a director is permitted to occupy board positions in competing companies. (Streeter v Western Areas Exploration Pty Ltd [No 2] 69 (references omitted)).
1968 Authorisation in the company’s constitution or ratification of the general body of shareholders are not essential preconditions to the validity of directors so acting. See Ford’s Principles of Company Law [9.410] and On The Street Pty Ltd v Cott (1990) 3 ACSR 54, 61.
1969 In some circumstances, directors must take positive action if they are properly to fulfil their fiduciary duties to act bona fide in the interests of the company and to exercise powers for proper purposes when no interests of their own may be affected. Chief Justice Latham in Mills v Mills at (164) gave the example of directors having to exercise a power in circumstances which adversely affect the interests of one class of shareholders and benefit the interests of another class. The fiduciary duty to exercise the power for proper purposes may require the directors to act fairly as between the two classes when no interests of their own are involved. As will appear, directors of financially distressed companies must now, in performing their fiduciary duties to their company, give proper effect to the interests of creditors though no interests of their own may be affected. The exercise of the power to, say, issue new shares differentially at discretion in the first case and the power to grant security over company assets in the second cannot always be accommodated within the proscriptive rubric identified in Breen v Williams at (113).
1970 To say that, so far as the fiduciary relationship of director and company is concerned, the only fiduciary obligations which will be recognised are the two proscriptive obligations mentioned does not appear to be consistent with the well‑established rule that the scope of the fiduciary duties in a particular relationship will vary and is to be determined according to the nature of the relationship and the facts of the particular case: see Hospital Products Ltd v United States Surgical Corporation (69) (Gibbs CJ), (102) (Mason J); United Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1, 11; Pilmer v Duke Group Ltd [77]. Even in the case of an accepted category of fiduciary relationship, the scope of the relationship and the nature of the duties owed by the fiduciary in the circumstances of the particular case must be similarly determined. In Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449, Brennan CJ, Gaudron, McHugh and Gummow JJ said (464):
The present case stands apart from those just mentioned because it involves both a fiduciary relationship within a well-recognised category [solicitor and client] as well as the claim to a well-established remedy. Nevertheless, even here, to say that the appellants stood as fiduciaries to the respondent’s calls for the ascertainment of the particular obligations owed to the respondents and consideration of what acts and omissions amounted to failure to discharge those obligations.
1971 Most fiduciary relationships of directors to companies have special features that directors do not share with many other fiduciaries.
While the duty of a trustee is to exercise a degree of restraint and conservatism in investment judgments, the duty of a director may be to display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested. (Daniels v Anderson (1995) 37 NSWLR 438, 494.)
1972 That directors may be expected to take risks with their company’s assets and future emphasises the need for insisting that their fundamental fiduciary obligation of loyalty to the company requires them to act bona fide in the interests of the company and to exercise their powers only for proper purposes, though no question of personal benefit or conflict of interest may arise.
1973 The need to focus on the facts of the particular case when seeking to identify the precise extent or limits of the fiduciary duties or powers of directors in issue is further demonstrated by what Romer J said in Re City Equitable Fire Insurance Co [1925] Ch 407, 426 ‑ 427. After affirming that directors in the performance of their duties were in a fiduciary relationship to the company and after rejecting an analogy with trustees, his Lordship said:
It is indeed impossible to describe the duty of directors in general terms, whether by way of analogy or otherwise. The position of a director of a company carrying on a small retail business is very different from that of a director of a railway company. The duties of a bank director may differ widely from those of an insurance director, and the duties of a director of one insurance company may differ from those of a director of another. In one company, for instance, matters may normally be attended to by the manager or other members of the staff that in another company are attended to by the directors themselves. The larger the business carried on by the company the more numerous, and more important, the matters that must of necessity be left to the managers, the accountants and the rest of the staff.
1974 That the search for the limits within which a power may be exercised by directors for proper purposes is a wide one is shown by what Lord Wilberforce said in Howard Smith Ltd v Ampol Petroleum Ltd at (835) in rejecting the respondents’ contention that the power vested in the directors to issue shares which was there in question could only be exercised to raise capital:
The discretion is not in terms limited in this way: the law should not impose such a limitation on directors’ powers. To define in advance exact limits beyond which directors must not pass is, in their Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated.
1975 This statement was approved by Mason, Deane and Dawson JJ in Whitehouse v Carlton Hotel Pty Ltd (289).
1976 The difficulty that arises in trying to limit the fiduciary obligations of directors to their companies to the two proscriptive obligations mentioned is illustrated by Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus (No 3) [2008] FCA 1986; (2008) 69 ACSR 264. The question in that case was whether Mr Rickus, the chairman of directors of a company who, prior to his dismissal, had produced company documents to a regulatory authority in response to its notice to him personally, was obliged to give the company copies of them. Failure by Mr Rickus to do that did not involve any breach by him of the proscriptive ‘no profit’ or ‘no conflict’ obligations. So the obligation to disclose to which he was held to be subject was a freestanding, positive one. Flick J said [68] ‑ [70]:
His position has been considered upon the basis that he was a director. The circumstance giving rise to the duty include the very request made for the production of the documents, the manner in which the notice was addressed and the documents sought to be produced. The circumstances also include …
The source of Mr Rickus’ duty to produce to the Trustee [company] a copy of the documents provided to the regulator was his duty to act in the best interests of the Trustee. As was made apparent to Mr Rickus, both in correspondence and at the board meeting in November 2006, the Trustee needed to be put in the position of having those copies so that the Trustee could properly address the matters being pursued by the Authority …
A more generally expressed submission advanced by the Trustee that it was part of the fiduciary duty owed by a director to make full disclosure is rejected. ‘The strong weight of judicial authority is that fiduciary duties are proscriptive rather than prescriptive; accordingly a fiduciary does not have a positive duty to disclose information’: Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963 at [375], 160 FCR 35 at 188 per Jacobson J. (original emphasis)
1977 His Honour held that the factual circumstances of the case imposed on the director a non‑fiduciary duty to act in the best interests of the company and it was that duty that required him to disclose the documentation to the company. However his undoubted fiduciary duty to the company did not, according to his Honour, require him to disclose the documentation. The exercise his Honour undertook to identify the ambit of the non‑fiduciary duty to the company, which he held that the director was under to disclose the information in question, is I think precisely the kind of investigation that would be required by authorities such as McGuire v Macaronis, if a director is under a fiduciary duty to act bona fide in the interests of the company and to exercise powers for proper purposes and the question is whether the director has failed to do something.
1978 In my opinion, until the High Court declares the law to be otherwise, long established authority requires the duties of company directors to act bona fide in the interests of the company and to exercise their powers for proper purposes to be accepted as fiduciary ones even though they may require the directors to take positive action. Further, that the directors’ own interests may be involved or that they may be in a situation of conflict will not necessarily mean that they have breached their fiduciary obligations in taking such action, if their actions have benefited the company.
Are the tests for determining whether directors have properly performed their fiduciary duties to act bona fide in the interests of the company and to exercise powers for proper purposes subjective or objective?
1979 Owen J at [4456] said that while there is a close connection between the duties of directors to exercise their powers only for proper purposes and to act in good faith in the interests of the company, they remain conceptually different. They are so treated in the standard texts, including ch 8 of Austin RP and Ramsay IM, Ford’s Principles of Corporations Law (14th ed, 2010). Both the appellants and the respondents dealt with them separately. In the older cases, before the fiduciary duty of directors to exercise powers for proper purposes became established, these two duties are sometimes conflated. In my opinion, they are now recognised as separate concepts.
1980 Owen J set out his understanding of the law relating to both the duty to act bona fide in the interests of the company and the duty to exercise power for proper purposes in a single passage at [4619] comprising section 20.7.3, his summary of the relevant law, where he said:
I will try now to summarise what I see as the relevant legal principles that must be brought to bear in deciding these questions:

1. 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.
2. Similar principles apply in ascertaining the real purpose for which a power has been exercised.
3. 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.
4. Statements by the directors about their subjective intention or belief are relevant but not conclusive of the bona fides of the directors.
5. 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.
6. 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.
7. 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.
8. 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.
   1981 It is apparent from subpars 1 ‑ 3 that Owen J considered that both the duty to act bona fide and the duty to act for proper purposes were subjective in that each depended upon the directors honestly believing they were acting in the interests of the company.
   1982 What Owen J said in subpars 5 and 7 about the court’s obligation to conduct an objective enquiry was limited to the use by the court of one method for testing the credibility of the directors’ assertions that they subjectively believed they were acting in a company’s best interests. All this is confirmed by his Honour’s statements at [4608] and [4618] and by his caveat to his acceptance of Ipp J’s statement of principles about the duty of directors to exercise powers properly in Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 218: see [4466] ‑ [4467]. When he returned to this matter in section 20.7, Owen J said at [4608] and [4618] that he accepted Ipp J’s statement in Wheeler but understood that it permitted the court to take into account objective considerations only in determining the credibility of what the directors had to say about their beliefs that they were acting bona fide in the best interests of the company. Owen J did not accept Ipp J’s objective test in Wheeler in par (c) at (218) for determining whether powers were exercised for proper purposes.
   1983 The proposition in subpar 8 of [4619] is not, however, concerned with matters of credibility. It is irrelevant that the directors may have honestly believed they were acting in the company’s interests, if the court on an objective assessment of all the circumstances, considers that their conduct is manifestly unreasonable. In that event, the court will intervene e.g. by treating such a decision by the directors as voidable. The language of this proposition evokes the concept of Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 unreasonableness in administrative law. It injects an avowedly objective element into the court’s assessment of the directors’ conduct but it deals with an extreme case of malperformance by the directors of their fiduciary duties. Brennan J in Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459, 469 ‑ 470 considered that this proposition was justified by Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9, 23 ‑ 24. Brennan J’s statement that such a conclusion is the penultimate step to inferring that the directors did not make their decision in good faith for a purpose within the power does not, I think, alter the fact that this test enables the court to set aside a manifestly unreasonable decision even though the directors may in fact have honestly believed they were acting properly.
   1984 Although the conclusion reached by his Honour at [4619] is in accord with the appellants’ submissions, the appellants’ contention is that Owen J did not apply these subjective tests. They attacked his Honour’s findings that the directors breached their duties on the ground that his Honour had applied an objective instead of a subjective test and found breaches of these duties on the basis of his own views, in substitution for the business judgment of the directors. Further, it was said that Owen J held the directors liable on the basis of what was no more than a failure to exercise reasonable care and skill, though the respondents never pleaded nor sought to make out such a case against the directors.
   1985 The appellants’ submissions on the law are summarised in appendix A to [APPA.000.084.001]. They draw a distinction between the duty of directors to act bona fide and their duty to act for proper purposes.
   1986 They submit that the principles governing the duty of directors to act bona fide relevantly include the following:
   (i) directors must exercise their discretions in what they honestly consider to be the best interests of the company;
   (ii) the test is a subjective one concerned simply with whether the directors’ belief was an honest one. It is not for the court to consider objectively whether the actions were in the interests of the company or whether the actions were reasonable;
   (iii) the courts recognise that directors have particular talents which make them the proper persons (rather than judges) to make decisions concerning the company’s interests;
   (iv) the obligation remains one which requires the directors to act in what they regard as the best interests of the company, notwithstanding that a company faces financial difficulties or liquidation;
   (v) the so-called duty to consider interests of creditors is an unnecessary gloss on existing duties of directors and its true operation is to restrict the right of shareholders to ratify breaches of duty owed to the company with a company is insolvent.
   1987 They submit that the principles governing the duty to act for proper purposes include the following:
   (i) the operation of the duty to act for proper purposes involves two steps: first, determining, as a matter of law, the purposes to which the power may be used and secondly, identifying what, as a matter of fact, was the actual purpose in mind that the directors which constituted the substantial purpose of the exercise of power;
   (ii) where, as here, the power relates to management of the company, the duty is also subject to the business judgment rule so that it is for the directors deciding where the company’s interests lie and how they are to be served and if the power is exercised the purpose of advancing what directors believed to be in the companies interests, the duty is complied with;
   (iii) the allegation that a director has acted for an improper purpose is a serious one. The onus of proving that a director was motivated by an improper purpose is on the plaintiff and the court does not assume impropriety.
   1988 In my opinion, the duty of directors to act bona fide in the interests of the company is subjective in that whether it has been fulfilled depends on the directors honestly believing that their actions were in the interests of the company. However, the test for determining whether the duty of directors to exercise their powers for proper purposes has been complied with is an objective one for the court, not the directors. I think the law was correctly stated by Jonathan Parker J in Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 where his Honour said [120] ‑ [123]:
   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. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed to be in the company’s interests; but that does not detract from the subjective nature of the test …
   To similar effect is the following passage from the judgment of Millet LJ in Bristol and West Building Society v Mothew [1998] Ch 1 at 18:
   ‘The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty.’
   The position is different where a power conferred on a director is used for a collateral purpose. In such circumstances it matters not whether the director honestly believed that in exercising the power as he did he was acting in the interests of the company; the power having been exercised for an improper purpose, its exercise will be liable to be set aside (see, eg, Hogg v Cramphorn Ltd [1967] Ch 254).
   Duty to act bona fide in the interests of the company
   1989 It is by reference to this duty that the propriety of action by shareholders in general meeting and by directors is the subject of review in the early cases. Many of the older cases, in discussing what is involved in acting bona fide in the interests of the company refer also to whether the challenged decision is within power. This generally involved a consideration only of whether the challenged action was ultra vires the powers conferred by the company’s articles, not on whether the power in question had been exercised for proper purposes, as that concept has been developed in the more recent cases. See e.g. Hirsche v Sims (660); Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, 671 ‑ 672; Re Smith and Fawcett Ltd [1942] Ch 304, 306.
   1990 Re Smith and Fawcett Ltd is commonly cited as authority for the proposition that the duty to act bona fide in the interests of the company is a subjective one that depends on the directors exercising their discretionary powers bona fide in what they, and not the court, consider to be in the interests of the company. The subjective nature of the test of whether directors or shareholders have acted bona fide for the benefit of the company is emphasised by what Scrutton LJ said in Shuttleworth v Cox Brothers & Co (Maidenhead), a case which involved a challenge to the alterations of articles by shareholder resolution (23):
   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 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.
   This statement was approved by Evershed MR in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 and by the High Court in Ngurli v McCann (438).
   1991 This line of English authority culminates in the decision in Regentcrest referred to above.
   1992 Australian authority on the content of a director’s duty to act bona fide in the interests of the company is generally to the same effect. Latham CJ made a typical statement of the rule in Richard Brady Franks Ltd v Price where the exercise of a power in the directors to give themselves security for past loans to the company was challenged when he said (135 ‑ 136):
   The onus is on the plaintiff who challenges the action of the directors to establish that they did not act bona fide for the benefit of the company … 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.
   1993 See also Australian Metropolitan Life Assurance Company Ltd v Ure [1923] HCA 29; (1923) 33 CLR 199, 206 (Knox CJ), 221 ‑ 222 (Isaacs J) a challenge to the exercise by the directors of the power to refuse to register share transfers; Mills v Mills (164) (Latham CJ), (161 ‑ 170) (Rich J), (179) (Starke J) a challenge to the decision by directors to issue shares that increased the voting power of one of their number; Ashburton Oil NL v Alpha Minerals NL [1971] HCA 5; (1971) 123 CLR 614, 627 (Menzies J), 640 (Gibbs J, Windeyer and Walsh JJ agreeing); Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (492 ‑ 493) (Barwick CJ, McTiernan and Kitto JJ) a challenge to the directors’ decision to issue new shares to a friendly company in the face of a takeover attempt.
   1994 In some of the older Australian cases there are references to the duty to exercise powers for proper purposes. For example, in Richard Brady Franks Ltd v Price, Dixon J said (142): ‘Directors are fiduciary agents and their powers must be exercised honestly in furtherance of the purposes for which they are given’. But his Honour decided the case on the basis that there was no ground for reversing the trial judge’s assessment that the directors had acted bona fide in what they considered to be the interests of the company rather than of themselves. In Ngurli Ltd v McCann, the sole governing director issued new shares to interests associated with him to secure control and voting power. The court invalidated the issue. Williams ACJ, Fullagar and Kitto JJ referred to both the duty of directors to act bona fide in the interests of the company and the duty to act for proper purposes without attempting to draw a distinguishing line between the two. They said at (438) that the case was concerned with the exercise by the governing director of ‘his fiduciary power as a director to issue new shares’ and made repeated reference to what he did constituting a fraud on the power: see (439) and (444 ‑ 445). They also reviewed the evidence about why the issue was made, noted the trial judge’s finding that the governing director has acted in bad faith and said (446): ‘The only fair inference from all the circumstances is that the meetings were held to carry into effect a scheme designed for Horace’s sole benefit and adopted by him’.
   1995 The appellants are correct in submitting that the duty of directors to act bona fide in the interests of the company is a subjective one. His Honour was also correct in so holding [4619].
   The duty to exercise powers for proper purposes
   1996 In their written submissions, the appellants relied on Harlowe’s Nominees (493) and Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) [1643] for the proposition that the proper purposes test depends upon the subjective beliefs of the directors where a power in question could be characterised as ‘relating to the management of the company’.
   1997 In Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL, a mining company engaged in exploration work made an allotment of shares to a large mining company which had collaborated with it in this exploration work. Barwick CJ, McTiernan and Kitto JJ accepted that the fiduciary power vested in the directors to issue new shares could only be exercised bona fide for the benefit of the company as a whole but rejected Harlowe’s submission that the power would be improperly exercised unless the company at the time of the issue had an immediate need for new capital. Their Honours said (492 ‑ 493):
   In many a case this may be true as a proposition of fact; but in our opinion it is not true as a general proposition of law. To lay down narrow lines within which the concept of a company’s interests must necessarily fall would be a serious mistake … The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company: Richard Brady Franks Ltd v Price (1937) 58 CLR 112, at 142 ; Mills v Mills (1938) 60 CLR 150, at 163, 169; Ngurli Ltd v McCann; (1953) 90 CLR 425, at 438‑441. Directors in whom are vested the right and the 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 … (emphasis added)
   1998 The first passage emphasised indicates that in the court’s view the test of validity was a subjective one, depending on whether the directors honestly believed they were acting in the interests of the company. In the following passage, the court acknowledged the restraint the court should exercise in reviewing directors’ management decisions, but subject to the important qualification in the second passage, emphasised that those decisions must be made not only in good faith but also ‘not for irrelevant purposes’. This suggests that there is room for an objective evaluation by the court: if it were enough for validity that the directors’ decision was made in the honest belief that it was for the benefit of the company, that should be the end of the matter and there should be no occasion for the court to ask whether the decision was made for irrelevant purposes. But Harlowe’s Nominees was I think disposed of on the basis that the question was whether the directors honestly believed that the new issue was for the benefit of the company. Their Honours declined to overturn the findings to that effect by the trial judge and found in the objective circumstances of the case support for his conclusion that the directors honestly believed the issue would guarantee the financial stability of the company: see the discussion at (494 ‑ 497).
   1999 The case does not support the appellants’ contention that the proper test for determining whether directors have exercised their powers for proper purposes is a subjective one.
   2000 The Ultraframe decision is in some respects confusing. In the passage relied on by the appellants in their written submissions, Lewison J said [1643]:
   Whether there was a need for Northstar to grant the debenture; and whether there were alternatives that could have been explored is not, in my judgment, the point. As both sides acknowledged, the relevant test is what the directors believed was in the interests of Northstar; not what a court might believe. Since, in my judgment, the directors of Northstar believed that the grant of the debenture was necessary to ensure continuing supplies of aluminium, and that a continued supply of aluminium was in Northstar’s best interests, I find that it was not granted for an improper purpose.
   2001 Ultraframe’s challenge to the grant of the Northstar debenture was based on allegations including that the directors had acted for the improper purpose of blocking a third party from lawfully gaining control of the Northstar business and had granted the debenture otherwise than bona fide in the interests of Northstar. See Ultraframe [1632].
   2002 In oral submissions, the appellants referred to another part of the Ultraframe judgment at [1292] ‑ [1301]. At [1292], Lewison J in reliance on Re Smith and Fawcett Ltd appears to conflate the duty of directors to exercise powers bona fide in the best interests of the company and the duty to exercise their powers for proper purposes only into a subjective one for the directors to determine. That is the approach his Lordship takes in [1643]. However, at [1293] his Lordship, in the course of a general review of the law on directors’ duties, said of a submission based on Re Smith and Fawcett Ltd to the effect that the validity of the exercise by directors of their powers depended upon whether they honestly considered they were acting in the interests of the company, something which had to be determined subjectively:
   The good faith of the directors is not, however, the be-all and end‑all. If they act in good faith, but for a purpose which is outside the ambit of their powers, their good faith will not validate their action. Similarly if they act for a collateral purpose, their good faith will not validate their action.
   2003 His Honour then cited the passage at (835) of the report of Howard Smith Ltd v Ampol Petroleum Ltd. Whether a purpose is outside the ambit of the directors’ powers is plainly a question of construction for the court. His Honour also considered that the wider question, whether the directors had acted for a collateral purpose, was also one for the court: it too had to be objectively determined.
   2004 I can find nothing in the judgment that explains the inconsistency between these statements at [1293] and [1643]. What Lewison J said at [1293] is in my opinion the correct statement of the law.
   2005 Howard Smith Ltd v Ampol Petroleum Ltd turned on whether the directors had exercised their fiduciary power to issue shares for an improper purpose. An allotment of shares by the directors of Millers to Howard Smith was challenged by Ampol, which was engaged in a contest with Howard Smith for the takeover of Millers. The trial judge found that Millers obtained more capital that it then needed as a result of the issue, that the Millers directors were not motivated by any purpose of personal gain or a desire to retain their position on the board when they made the issue, but held that their primary purpose was to reduce Ampol’s shareholding and advantage Howard Smith in the takeover contest. The Privy Council refused to interfere with the trial judge’s conclusion that the power to allot the shares was improperly exercised by the Millers directors.
   2006 Under the heading, ‘The Law’, Lord Wilberforce who delivered the opinion of the Judicial Committee, first identified the power vested in directors by the articles of association to issue shares, noted that it was not disputed that the issue was intra vires that power and said (834):
   But, intra vires though the issue may have been, the directors’ power under this article is a fiduciary power: and it remains the case that an exercise of such a power though formally valid, may be attacked on the ground that it was not exercised for the purpose for which it was granted.
   2007 What was said in Ngurli at (438) is to the same effect:
   But the powers conferred on shareholders in general meeting and on directors by the articles of association of companies can be exceeded although there is a literal compliance with their terms. These powers must not be used for an ulterior purpose.
   2008 Determination of whether a fiduciary power conferred on directors has been exercised for proper or improper purposes involves an enquiry wider than the true construction of the article creating the power.
   2009 Lord Wilberforce rejected the ‘extreme arguments’ on each side, for the appellant, that all that was required for validity was that the directors honestly believed the issue was in the interests of the company and were not motivated by self‑interest and, for the respondent, that the power can only be exercised to raise capital for the company and once found that it was not made for that purpose, invalidity follows. He said (834 ‑ 835):
   But it does not follow from this, as the appellants assert, that the absence of any element of self‑interest is enough to make an issue valid. Self‑interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made …
   In their Lordships’ opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined 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 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.
   2010 When the question is whether directors have exercised their powers for proper or improper purposes: ‘The good faith of the directors is not, however, the be-all and end-all’, as Lewison J said in Ultraframe [1293]. It is for the court to reach its conclusion on that. The court does not abdicate this responsibility merely upon determining that the directors acted bona fide or because the directors were exercising a fiduciary power that involved a business judgment on matters of management. As Lord Wilberforce said, credit should be given to the bona fide opinion of the directors, if it exists, and their judgment on matters of business should be respected. But the ultimate conclusion on whether the power has been exercised for a proper purpose is always for the court.
   2011 This follows from the fact that the court does not leave it to the repository of a fiduciary power to determine for himself whether the power has been exercised for proper purposes. In Ngurli Ltd v McCann, the court, in dealing with a challenge to the exercise by a director of his power to issue shares, referred to authority describing the equitable concept of fraud on a power as not involving dishonesty but merely the exercise of the power for a purpose beyond the scope of the power. The court then at (438) cited this passage from the judgment of Hatherley LC in Topham v Duke of Portland (1869) 5 Ch App 40, 59:
   The Court will not allow him (that is the appointor) to interpret the donor’s intention in any other sense than the Court itself holds to be the true construction of the instrument creating the power; and a literal execution of the power, with a purpose which it does not sanction, is regarded as a fraud on the power.
   2012 Whether there has been a proper exercise of such a power cannot be governed by whether the director exercising it honestly believes he has done the right thing. It is for the court to determine whether, in the circumstances of the case, the power has been exercised for a proper or improper purpose. The test is therefore an objective one.
   2013 Hogg v Cramphorn Ltd [1967] Ch 254, which was cited in argument in Harlowe’s Nominees but not referred to in the judgment, is so far as I am aware, the first case to accept that, although the directors acted in issuing new shares without any expectation of personal advantage and in the honest belief that it was in the company’s interests to do that to frustrate a possible takeover by a person the directors regarded as unsuitable to run the company, that was not sufficient to prevent invalidation of the issue. Buckley J held that the directors exercised their fiduciary power to issue shares for an improper purpose namely to ensure control of the company by the existing directors and so deprive the majority of shareholders of their constitutional right in general meeting to pursue what course it may choose: see Hogg v Camphorn Ltd (267 ‑ 269).
   2014 That the question whether directors have exercised a fiduciary power for a proper or improper purpose involves an objective determination by the court and is not governed by whether the directors acted in the bona fide belief they were furthering the company’s interests was, in my opinion, settled by Whitehouse v Carlton Hotel Pty Ltd where the approach taken in Hogg v Cramphorn Ltd was approved at (293). Mason CJ, Deane and Dawson JJ said of a director’s honest belief that his exercise of the power to allot shares was for the benefit of the company (293):
   In this as in other areas involving the exercise of fiduciary power, the exercise of a power for an ulterior or impermissible purpose is bad notwithstanding that the motives of the donee of the power in so exercising it are substantially altruistic.
   And at (294):
   The only substantial or moving purpose of the allotment in the present case was the manipulation of voting power. As has been said, it is simply not to the point that Mr Whitehouse believed that it was in the overall interests of the company that the voting power attaching to the shares held by his former wife be diluted so as to ensure that the control of the company in the period after his death would be in the hands of those whom he favoured.
   2015 If the test for whether a fiduciary power has been exercised for proper purposes is a subjective one, governed by whether the directors honestly believe that what they have done is in the interests of the company, the decision in Whitehouse should have gone the other way. It is apparent from the trial judge’s findings, not challenged on appeal, and set out in the dissenting judgment of Wilson J at (299) and discussed at (302), that the governing director who made the challenged issue, acted bona fide and reasonably, with a view to preserving the efficient and profitable operation of the company. Those challenging the issue were inexperienced in the company’s business and were intent on winding it up. The majority held the issue invalid because, despite the governing director’s good faith and belief that it was for the benefit of the company, an objective consideration of the circumstances showed that the motivating purpose for the issue was the improper one of manipulating shareholders’ voting power.
   2016 Appendix A of the appellants’ submission limits what they say is the subjective nature of the duty to exercise powers for proper purposes to cases involving the exercise by directors of their powers in matters of management of the company business. It is difficult to see how confining the submission to the exercise of powers in matters of management restricts the scope of the powers that will be subject to the subjective criterion proposed. Commonly, the general management of a company is confided to the directors and their specific powers are conferred in aid of that function. In any event, in Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464, the campaign material circulated by the directors to influence shareholders at a board election was issued in the exercise of their fiduciary power of general management of the company’s business under art 134 of the company’s articles (481 and 485). Kirby P, with whom Glass JA agreed, upheld the injunction preventing the directors from continuing the campaign at company expense, saying (487):
   [H]owever subjectively well-intentioned the [directors] were, bona fide and convinced that what they were doing was in the best interests of the bank, looked at objectively the only proper classification of their primary purpose, is that it was to secure the re-election of the chairman and the other four retiring directors.
   2017 Because the powers of directors are generally very broadly framed and because they exercise those powers in what are often complex commercial contexts requiring contestable judgments on matters of business, the court in deciding whether the relevant power has been exercised for a proper purpose will pay greater or lesser respect, according to the circumstances of the case, to the course taken by the directors. But the directors’ judgment will not be decisive when the issue is whether the relevant power has been exercised for a proper or an improper purpose.
   2018 In the Ampol judgment, in the section headed ‘Findings of Fact’, Lord Wilberforce noted at (832) that the trial judge had to determine whether the primary purpose of the directors in making the disputed issue was to raise capital, as they contended, or to block the Ampol takeover attempt and said:
   In order to assist him in deciding upon the alternative motivations contended for, the judge considered first, at some length, the objective question whether Millers was in fact in need of capital. This approach was criticised before their Lordships: it was argued that what mattered was not the actual financial condition of Millers, but what the majority directors bona fide considered that condition to be. Their Lordships accept that such a matter as the raising of finance is one of management, within the responsibility of the directors: they accept that it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management’s decision, on such a question, if bona fide arrived at. 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.
   2019 This provides no support for the appellants’ submission. It cannot be elevated into a principle that if the exercise by the directors of a particular fiduciary power can be characterised as involving a management decision, the court has no authority to enquire into whether the power has been exercised for proper or improper purposes other than to determine whether the directors exercised the power in what they honestly believed to be the interests of the company. There are a number of reasons why.
   2020 Firstly, immediately after making the statement in Ampol at (832) about it being wrong for the court to substitute its opinion on management decisions for that of the directors, Lord Wilberforce continued:
   But accepting all this, when a dispute arises whether directors of a company made a particular decision for one purpose or for another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships’ opinion, 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 might have been. If it finds 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.
   2021 Where a question arises as to the purpose for which directors exercised a particular power, the court will make its own judgment on that issue though this may involve enquiring into whether the directors were objectively justified in reaching the opinions they claim they formed. Decisions of directors on matters of management that involve business judgments are never so far beyond the court’s capacity to understand what has been done and why, that the court is unable to make its own judgment, when required to do so, on the true purpose that motivated the directors.
   2022 Secondly, when Lord Wilberforce said in the closing words of the passage at (832) that the court would not act as a kind of supervisory board over management decisions his Lordship was careful to limit that restraint to decisions which were not only honestly arrived at but which were also ‘within the powers of management’. There is nothing here which suggests that it is for the directors to determine in an unreviewable way that their decision is ‘within their powers of management’. That issue is for the court.
   2023 The Ampol decision is important for a number of reasons. Firstly, it unequivocally turned on whether a fiduciary power vested in directors was exercised for a proper purpose, not whether it was exercised bona fide for the benefit of the company. Secondly, it rejected the proposition that the answer depends on whether the directors in exercising the power honestly believed they were advancing the company’s interests. Thirdly, it shows that the purpose for which a power is conferred is not governed only by the proper construction of the article conferring the power: ‘a wider investigation may have to be made’. Fourthly, the proper exercise of a particular fiduciary power confided to directors is not governed by any absolute rule e.g. that the power to issue new shares can only be exercised to raise capital for the company, but by all the relevant circumstances of the case, including whether a particular exercise of power is intra vires the article conferring the power, the nature of the company and its business, the commercial setting in which the exercise of the power occurred, the motivations of the directors for the exercise of power and whether the exercise of the power involved a decision on matters of management and if so, the extent to which the court should defer to the business judgment of the directors.
   2024 That the determination of the question whether directors have exercised their powers for proper purposes requires this kind of broad evaluation is demonstrated by the cases. In Kirwan v Cresvale Far East Ltd (In liq) [2002] NSWCA 395; (2002) 44 ACSR 21, Young CJ in Eq, Meagher JA agreeing, said [300]:
   As has been suggested in the authorities, particularly in the Whitehouse case, although it is rare, there can be situations where obtaining control of a company at the expense of somebody else, even if it is one’s substantial or dominant purpose, is not an improper one.
   And at [302]:
   Likewise, if a company has need of capital and there is only one avenue of obtaining that capital, then even though the person who is subscribing the extra capital has a dominant purpose in obtaining control and even though that person is a director of the company, there would be no improper purpose in making the allotment.
   2025 It was on that basis that the issue of shares that gave a director a controlling interest in the company was held to have been made for a proper purpose: see [318] ‑ [319].
   2026 In Buche v Box Pty Ltd (1993) 31 NSWLR 368, the governing director exercised his power to substantially increase the number of issued shares to a number of his children, thus diluting the shareholding of the plaintiff, another of his children, which remained unchanged. The company was established by the governing director for the purpose of redistributing the income and assets of a family business among the family members and of minimising tax. By taking into account all the circumstances of the case Brownie J concluded at (378) that the director did not exercise the fiduciary power of allotment for any improper purpose.
   A more interventionist court
   2027 I have accepted that the test for determining whether the fiduciary duty imposed on directors to act bona fide in the interests of their company has been validly performed is a subjective one dependent on the beliefs of the directors. I have also explained why I think the test for determining whether directors have exercised their fiduciary powers for proper purposes is an objective one for the court’s determination. In my opinion the reason for this difference is historical. The duty to act bona fide was established long before the courts developed the requirement that directors in exercising their powers must act for proper purposes in the wide sense that the expression ‘proper purposes’ has been given in the modern cases and which extends beyond the issue of whether directors have acted intra vires their powers.
   2028 The law, not only statutory but also judge‑made, has, I think, moved beyond the deference once shown by courts to the judgments of company directors. In assessing whether fiduciary duties of directors to their companies have been breached the court will now, in appropriate circumstances, subject their actions to objective assessment, at least where the question is whether the directors have exercised their powers for proper purposes. The position is well stated in my opinion by Professor Sealy in his article ‘Bona Fides and Proper Purposes in Corporate Decisions’ (1989) 15 Monash University Law Review 265 where he said (265 ‑ 266):
   The English companies whose affairs came before the courts of last century were largely stereotypes: substantial commercial enterprises dedicated to the maximising of profit, with widely dispersed shareholdings. There was a pervading laissez-faire philosophy, and both the rules of chancery and the judges who administered them were well suited to enforcing standards of honesty and integrity, but not to undertaking the review of corporate decision-making on any objective basis: a simple test of bona fides and the doctrine of ultra‑vires, still tolerably vigorous, were sufficient to enable at least the more egregious irregularities to be struck down. But nowadays company law rules can no longer be formulated with reference to a notional paradigm commercial enterprise – we have on the one hand incorporated quasi-partnerships, small family concerns, members’ clubs and property owning cooperatives which bring intimate human considerations to the fore; and we have also joint ventures, conglomerates and the multinationals with complexities of quite a different order … It is not surprising that we are witnessing the emergence of a new corpus of rules and concepts for the review of corporate decisions, and a fresh judicial approach in this area which is unashamedly more interventionist … Our study is concerned with one small aspect of this change: the shift in emphasis from ‘bona fides’ to ‘proper purposes’ as a test for the validity of directors’ decisions, and the coincidental displacement of subjectivity by objectivity, of laissez‑faire by interventionism.
   2029 Mortimore S, in his Company Directors: Duties, Liabilities And Remedies (2009) says [10.28]: ‘Traditionally, where the issue is one of management, the court will not seek to substitute its own view for that of the board. However more recent cases decided before the enactment of the [Corporations Act 2006 (UK)] have shown a greater tendency on the part of the court to intervene in corporate decision‑making than was previously the case’ and at [10.31] he says that this more interventionist approach is likely to continue. He notes how, in so intervening, the UK courts have generally relied on the relevant/irrelevant considerations and the manifestly unreasonable tests stated in Associated Provincial Picture Houses Ltd v Wednesbury Corporation (233 ‑ 234). This suggests a very considerable readiness by the courts to review how directors perform their duties. But whether the path for review is by the application of the principles in Ampol or Wednesbury, courts in Australia and the UK no longer give the deference they once did to the decisions of directors, even when involving judgments on matters of business or management.
   2030 A striking illustration is provided by Re A Company; ex parte Glossop [1988] 1 WLR 1068. There Harman J considered that decisions of the directors of a large manufacturing business to regularly retain a substantial part of profits rather than to distribute them to the shareholders – quintessential management decisions – were open to challenge and allowed a shareholder to raise that issue by amendment to her petition to wind up the company on the just and equitable ground. In the course of his judgment his Honour said (1076):
   It is, in my judgment, vital to remember that actions of boards of directors cannot simply be justified by invoking the incantation ‘a decision taken bona fide in the interests of the company’. The decision of the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd … clearly establishes that a decision can be attacked in the courts and upset notwithstanding (a) that directors were not influenced by any ‘corrupt’ motive, by which I mean any motive of personal gain as by obtaining increased remuneration or retaining office, and (b) that directors honestly believed that the decision was in the best interests of the company as they saw its interests. Lord Wilberforce’s observations, delivering the advice of the board … acquits the directors of corrupt motive … he asserts the primacy of the board’s judgment; but he goes on … to assert that there remains a test, applicable to all exercises of power given for fiduciary purposes, that the power was not to be exercised for any ‘bye‑motives’.
   Interests of creditors
   2031 An important illustration of this process towards more court intervention in company affairs mentioned by Sealy, of central relevance in this case, is the development of the principle that directors in discharging their fiduciary duties to their company must, if the company is sufficiently financially distressed, have regard and give proper effect to the interests of creditors. The deference shown by courts until relatively recent times to directors who honestly believed they were acting in the interests of the company allowed directors to ignore such interests. However, courts will now intervene in an appropriate case, irrespective of the directors’ beliefs and business judgments, to ensure that creditors are properly protected.
   2032 This principle is based on the duty that directors owe to their company to exercise their fiduciary powers for proper purposes. It cannot be grounded in the subjective duty to act bona fide in what the directors believe to be the interests of the company. If it were, as the cases applying the principle show, the interests of creditors would often receive scant recognition.
   2033 Court intervention in Australia in the last quarter of the 20th century has imposed on directors of insolvent companies an obligation, in performing their duties to the company, to give proper recognition to the interests of creditors, whatever they may honestly believe to be in the best interests of the company.
   2034 This obligation cannot now be described as a ‘so‑called duty’, as the appellants have. The principle, originating in the dictum of Mason J in Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1, 7, is now firmly entrenched in company law jurisprudence in Australia (see Ford’s Principles of Corporations Law, [8.100]), New Zealand (see Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985] 1 NZLR 242 and later cases including Sojourner v Robb [2007] NZCA 493; [2008] 1 NZLR 751) and the United Kingdom. Gore‑Browne on Companies (45th ed) 15[10B] and 15[10C] says:
   There have been significant developments in Commonwealth jurisdictions when it comes to the interests of creditors, and these have influenced UK courts … This principle appears to have been readily accepted in many Commonwealth jurisdictions over the past 15 to 20 years and does not seem to be questioned.
   2035 In the UK, this now well‑established equitable duty of directors to have regard to the interests of creditors is given statutory recognition in s 172(3) Corporations Act 2006.
   2036 The reason for the imposition of this duty on the directors of such a financially distressed company is that stated by Street CJ, with the agreement of Hope and McHugh JJA, in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, 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 … 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.
   2037 This statement of principle was in effect confirmed by the High Court in Spies v The Queen [2000] HCA 43; (2000) 201 CLR 603 when Gaudron, McHugh, Gummow and Hayne JJ at [94] cited with approval a passage in the judgment of Gummow J in Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (No 2) [1994] FCA 1117; (1994) 51 FCR 425, which includes the following (444):
   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.
   2038 This duty is owed to the company, not to the creditors, and is enforceable only by the company or its liquidator: Spies [94] ‑ [95].
   2039 As Gore‑Browne points out, the doctrine is still in the process of development. Just what state of corporate financial distress will be sufficient to trigger the duty and whether the duty is owed not only to present creditors but to future ones have not yet been settled in all jurisdictions which recognise the principle. As to the former point, Street CJ in Kinsela at (733) proposed an elastic test that took into account both the nature of the company’s business and the interrelationship between financial instability and degree of risk to creditors. In Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261, King CJ, Cox J agreeing, at (269) applied the principle to invalidate a transaction entered into by the directors of a solvent company that left a company ‘without a business or assets and in an irretrievably insolvent condition’. In Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 25 ACLC 1094, Giles JA, Ipp and Basten JJA agreeing, was prepared to say [162]:
   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.
   2040 Leave to appeal to the High Court was refused. At [4445], Owen J accepted this statement was in accordance with principle. He was in my opinion entitled to do that.
   2041 In Walker v Wimborne, Mason J said at (7) that ‘the directors of the company in discharging their duty to the company must take account of the interests of shareholders and its creditors’. The proper discharge of this duty requires the directors to do something more than just think about the interests of creditors. In Kinsela, after referring to this statement by Mason J, Street CJ said at (732): ‘… the directors’ duty to a company as a whole extends in an insolvency context to not prejudicing the interests of creditors …’.
   2042 As the reason for the imposition of this duty on the directors shows, the duty will not ordinarily be satisfied by directors who consider the impact that entry into a particular transaction by the company will have on its creditors but proceed with the transaction even though it causes significant prejudice to those creditors. By doing that, the directors will usually, in my opinion, be in breach of their fiduciary duty to the company to exercise their powers for proper purposes and the transaction will be voidable at the election of the company or its liquidator. That is what happened in Kinsela. Though the trial judge found that the directors were not guilty of any dishonesty (see 727), Street CJ said at (733): ‘The company was plainly insolvent at the date of the lease and its collapse on that ground was imminent … Secondly, the prejudice to the creditors was the direct and calculated result of the lease; its purpose was to place the company’s assets beyond the reach of the creditors …’. His Honour concluded:
   The lease [to two of the directors] was not ultra vires and void as exceeding the capacity of the company. It was, however, entered into by the directors (albeit with the unanimous approval of all shareholders) in breach of their duty to the company in that it directly prejudiced the creditors of the company. It was accordingly a voidable transaction and, no third party rights having intervened, the company on the initiation of the liquidator is entitled to the aid of the court to avoid it.
   2043 There are numerous other cases in which the breach of the duty by directors of insolvent or near insolvent companies to properly consider the interests of creditors has resulted in dispositions of the company’s property being avoided on the application of the liquidator or the company or in the directors being required to account to the liquidator for dissipation of company property in breach of the duty to creditors: see by way of example, Sunburst Properties Pty Ltd (In Liq) v Agwater Pty Ltd [2005] SASC 335; Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] EWHC (Ch) 278; [2003] 2 BCLC 153; Re MBA Investment Management Ltd [2003] EWHC (Ch) 2277; [2004] 1 BCLC 217.
   2044 One consequence of the rule is that a disposition of company property by the directors acting in breach of their duty to consider the interests of creditors cannot be authorised by the shareholders: Kinsela (732). But the principle is not confined, as the appellants submitted, to a restriction on the right of shareholders to ratify breaches of duty owed by directors to the company when insolvent.
   2045 Owen J at [4424] correctly, in my opinion, rejected the banks’ argument that the duty to consider the interests of creditors operates solely as a fetter on the shareholders’ right to ratify breaches by the directors of their duty to the company. When Gummow J said at (444) in the New World Alliance case, after citing a passage in Kinsela at (732), 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’, his Honour was concerned to make the point that the directors did not owe a duty to creditors that was enforceable by them. That Gummow J accepted that a breach by directors of this duty to take into account the interests of creditors has real consequences and is not just a restriction on the right of shareholders to ratify directors’ breaches of duty is clear from his concluding comments at (445): ‘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’ (emphasis added). This is included in the passage cited with approval by Gaudron, McHugh, Gummow and Hayne JJ in Spies at [94].
   2046 Owen J was correct, in my opinion, when he said at [4438] and [4439] that when a company is in an insolvency context the interests of creditors are not in all circumstances paramount, to the exclusion of other interests including that of the shareholders. His conclusion at [4440] was that directors could not properly commit their company to a transaction if the circumstances were such that ‘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’. I would prefer to say that if the circumstances of the particular case are such that there is a real risk that the creditors of a company in an insolvency context would suffer significant prejudice if the directors undertook a certain course of action, that is sufficient to show that the contemplated course of action is not in the interests of the company.
   2047 Changes in the organisation of large corporations that occurred during the 20th century and changes in ideas about the proper role of corporations in society, particularly large and powerful ones, by those controlling them and by the public may explain the change from judicial restraint to increased intervention in corporate decision‑making that is described by Sealy.
   2048 As to the first matter, when owners controlled their companies, a laissez faire attitude to directors’ conduct on the part of the courts was understandable and acceptable: there was a coincidence of interest in companies’ activities between their owners and controllers. But with the development during the 20th century of large economically significant corporations, and the consequent wide dispersion of ownership, control passed to management whose interests do not always coincide with the shareholders, hence a need for legal intervention to protect shareholder interests. See Austin, Ford and Ramsay, Company Directors – Principles of Law and Corporate Governance (2005) section 1.41 and Farrar, Corporate Governance – Theories, Principles and Practice (3rd ed, 2008) 12 ‑ 13; and more generally, ‘Separation of Ownership and Control’ in New Encyclopaedia Britannica (15th ed, 1990).
   2049 As to the second matter, the quite recent development of the rule requiring directors of insolvent companies to take into account the interests of creditors is a significant departure from earlier judicial attitudes which left corporate decision‑making largely to management provided only that it acted honestly in what it believed to be the interests of the company. Further, it has become common in recent decades for directors, particularly those running large public corporations, to speak of the need to take into account a wide range of interests in addition to that of shareholders in order to better advance the company’s business. Parliament in the UK has followed up on these kinds of aspirational statements by corporate boards. Section 172 the Companies Act 2006 (UK) now requires a director of a company, in acting in the way he considers, in good faith, to be most likely to promote the success of the company for the benefit of its members as a whole, to have regard, not only to the interests of creditors, but also to various other interests including those of the company’s employees, suppliers, customers and the impact of the company’s operations on the community and the environment.
   2050 Expansion of the range of interests to which corporate management must have regard in its decision‑making has not gone as far in Australia as it has in the UK: see Austin, Ford and Ramsay Ford’s Principles of Corporations Law (14th ed, 2010) [8.090] ‑ [8.130], although as the authors note, a 1989 Senate Committee recommended legislating to require directors, in performing their duties to their company, to take into account the interests of employees.
   2051 The impacts of corporate decision‑making on a wider range of interests than shareholders are now being given more recognition. The need to ensure protection of those interests also I think serves to explain why modern company courts have become more interventionist, in reviewing the activities of directors than was traditionally the case.
   A question of reasonableness?
   2052 The clarity of Owen J’s position at [4619], repeated at [6084], that a subjective test applies when determining whether directors have performed their duties bona fide in the interests of the company and whether they have exercised their powers for proper purposes is confused by what his Honour had to say at [6085] ‑ [6091]. At [6085], he repeated what he had said in subpars 5 and 7 of [4619] about testing the credibility of the directors’ assertions as to their beliefs, but added a significant gloss:
   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. (emphasis added)
   2053 The first part of this statement is unexceptional. But it is clear from the way Owen J dealt with Aspinall’s evidence in the following paragraphs that his Honour intended this gloss in the words emphasised to add an objective criterion additional to the directors’ subjective honest beliefs that had to be satisfied before a finding of no breach of fiduciary duty could be made.
   2054 The objective test of the reasonableness of the directors’ conduct emerged, without explanation, in Owen J’s comments about Aspinall’s evidence at [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
   2055 It was here that his Honour also introduced the requirement that directors’ beliefs had to be ‘genuinely held’ if they were to properly perform their fiduciary duties.
   2056 Section 20.7.3 consists of the single paragraph, [4619], which makes no mention of reasonableness (except for the reference to Wednesbury unreasonableness in subpar 8). The appellants acknowledged that the objective criterion of the reasonableness of the directors’ conduct has a role to play in determining whether they have properly performed their duties but they said it was limited to assisting the court to assess the credibility of the directors’ claims: ‘It is not a freestanding yardstick against which a court can second‑guess whether a director was right to believe what he or she did’ (appeal ts 442). To test whether beliefs were genuinely held by reference to whether there were reasonable grounds for those beliefs is an orthodox means of assessing the credibility of a director’s statement about his beliefs: see Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598, 617 ‑ 618.
   2057 Owen J did not confine his enquiry into whether there were reasonable grounds for the directors’ beliefs about the benefits for the Bell companies of entry into the Transactions to assessing their credibility. He began section 29.2.4, in which he made his findings that the Australian directors had breached their fiduciary duties to the Bell companies, by saying [6084]:
   … 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.
   2058 But immediately after that, in [6085], he introduced the additional requirement for reasonable grounds that I have referred to.
   2059 In [6086] his Honour affirmed Aspinall’s credibility saying: ‘I have little doubt that Aspinall believed the basic things about which he gave evidence’. His Honour was precluded by the way the respondents conducted the case at trial from finding that Aspinall or any of the other Bell directors acted with conscious dishonesty. In relation to Aspinall he went further than complying with this restraint: he found that Aspinall was generally an honest witness (see [4980], [5371]) and he actually held the beliefs he swore to (see [6086]). If his Honour had adhered to what he said in [4598], [4608], [4619] and [6084], he could not have found that Aspinall breached his duties to act bona fide and for proper purposes.
   2060 Yet in [6088] his Honour found:
   In the circumstances that I have outlined it was not reasonable for him (Aspinall) 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.
   2061 His Honour here substitutes for the honestly held beliefs of Aspinall, that he had earlier identified as the proper test, a requirement that Aspinall had to consider what his Honour regarded as relevant matters, namely those in subpars (a) and (b) of [6088]. In his Honour’s opinion, Aspinall’s failure to consider those matters made his conduct in committing the companies to the Transactions a breach of his fiduciary duties to act in the best interests of the companies and to exercise powers for proper purposes. This is consistent with what he had said earlier at [5066] where he rejected Aspinall’s evidence that he believed that entry into the Transactions was in the best interests of each company in the Bell group as ‘not credible’. His Honour did not in [5066] say that Aspinall did not honestly hold the beliefs he swore to. What he found was that Aspinall was unaware of matters which he should have considered when deciding whether to commit the Bell companies to the Transactions because he did not properly understand the legal concept of corporate benefit and looked only at the benefits for the Bell group as a whole: see [5068].
   2062 Owen J applied the same objective test to Mitchell and Oates. After saying at [6091] that Mitchell, like Aspinall, failed to do the things mentioned in 6088 and (b), his Honour expressed reservations about Mitchell’s credibility when he said he held certain beliefs but concluded: ‘even if he did hold the beliefs, the same lack of enquiry and attention call into question whether he did so reasonably’. On those bases, his Honour held that Mitchell had breached the two fiduciary duties in question. He found Oates breached his duties on the same basis: see [6092].
   2063 Owen J described Aspinall’s failure (and that of Mitchell and Oates) as involving ‘unreasonable’ conduct. But I do not think this was a finding of negligence on the part of Aspinall (and the other two Australian directors). What his Honour meant by that appears from what follows.
   2064 At [6089] his Honour said firstly:
   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.
   2065 His Honour here applies an objective standard that flies in the face of his Honour’s statements in [4619] and [6084] about the subjective nature of both duties.
   2066 Owen J continued in [6089] to apply another objective test to Aspinall’s conduct to support his finding of breach of the two fiduciary duties:
   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 the true nature of the relevant duties. It goes directly to the exercise of his functions as an officer of the companies concerned.
   2067 It is odd to say that a person is an honest witness but that the beliefs he swore to were not genuinely held. His Honour is not, however, talking about credibility issues here either. In this passage, when his Honour said that Aspinall’s beliefs were not ‘genuinely held’ he was not, as he made clear by accepting that those beliefs were held, impugning Aspinall’s honesty, but applying an objective test to determining whether Aspinall had breached his duties.
   2068 His Honour did not use reasonableness either as involving negligence or as a freestanding test for him to determine whether what the directors did was in his opinion in the interests of the companies. At [4607], he cited the passage in Brennan J’s judgment in Wayde at (470) which explicitly states that the court has no power to hold a director’s decision invalid on the ground that the court thinks the decision unreasonable. In his conclusion in the following paragraph, [4608], Owen J makes no mention of reasonableness as the relevant test and what he there says is orthodox and reflects what he said earlier in subpars 5 and 7 of [4619].
   2069 It is I think possible to understand his Honour’s approach. At [7256], his Honour said that: ‘an important part of the plaintiff’s case is the lack of corporate benefit in the Transactions’. He said at [5575] and [5671] that 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’. He continued at [5671]:
   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.
   2070 His Honour in section 20.3.3 examined the scope of the duty of directors to take into account the interests of creditors and held at [4418] that there is a duty imposed by law to do that when their company is in an insolvency context. Before committing the Bell companies to the Transactions, the Australian directors failed to comply with that legal obligation. The failure to comply with such a prescriptive obligation does not involve a failure to exercise reasonable care and skill or the substitution of the judge’s opinion for that of the directors as to what is in the company’s interests. It is now established that the directors of a financially distressed company will breach their fiduciary duties to the company if they commit to action that imposes prejudice on creditors and a failure by the directors to comply with that obligation will justify judicial review of the directors’ decision. Owen J applied this rule. It can be seen as an example of the developing trend towards judicial review of the decisions of fiduciaries, including company directors, referred to by the Full Court in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 [174]:
   There are two discrete parts to modern Australian fiduciary law. The better known and understood part is concerned with the setting of standards of conduct for persons in fiduciary positions. Its burden, put shortly, is with exacting disinterested and undivided loyalty from a fiduciary – hence, for example, its focus on conflicts between duty and undisclosed personal interest, conflicts between duty and duty and misuse of a fiduciary position for personal gain or benefit. The other part serves a different function and is often overlooked in discussion of fiduciary law. Its essential concern is with judicial review of the exercise of powers, duties and discretions given to a fiduciary to be exercised in the interests of another (‘the beneficiary’) where the beneficiary does not have the right to dictate or to veto how the power, discretion, etc is exercised by the fiduciary. Here the law channels and directs how ‘fiduciary discretions’ are exercised. Unsurprisingly, there is quite some similarity between the grounds of judicial review of the decisions and actions of fiduciaries entrusted with such powers etc – for example, trustees, company directors and executors – and the grounds of judicial review of administrative action. (emphasis added)
   2071 His Honour also considered that the proper performance of the directors’ fiduciary duties in committing the Bell companies to the Transactions necessarily required there to be a real as opposed to a trivial ‘corporate benefit’ to each company and that there was no such benefit for any of those companies. The failure of the directors to ensure such a benefit before committing the companies to the Transactions necessarily constituted breaches of their fiduciary duties. So his Honour, without in any way substituting his personal views for that of the directors, was entitled to review the directors’ decisions for that reason also.
   2072 Owen J did not use the term ‘reasonable’ in the passages at [6085] ‑ [6088] to encapsulate the propositions in subpars 5 and 7 of [4619] that the credibility of the directors’ sworn beliefs should be tested by considering whether the circumstances in which the powers were exercised provided objective contradiction of each director’s evidence as to what he then believed. A conclusion, so reached, adverse to the credibility of the director must necessarily be that the director’s evidence as to what he believed should not be accepted as true or at least reliable and, if the test were subjective, it would necessarily mean that the director had breached his fiduciary duties. But his Honour found that all the Australian directors breached those duties without impugning their honesty.
   2073 The appellants are correct in submitting in support of grounds 3, 4 and 5 of their appeal, that Owen J applied an objective test. He did this despite having held that the test for determining whether directors had properly performed their fiduciary duties was subjective. His Honour was in error in holding that the test for determining whether directors had performed their fiduciary duty to exercise their powers for proper purposes only was subjective: it is, for the reasons I have given, an objective test.
   2074 But his Honour reached a correct conclusion that the Australian and UK directors had breached their fiduciary duties by making an objective assessment of their conduct of the kind required and by holding that they failed to do certain things that they should have done before committing the Bell companies to the Transactions.
   2075 Owen J held that what the Australian directors should have done was firstly, to take into account the interests of each individual Bell company including the interests of its creditors rather than the interests of the group as a whole: see [6039] ‑ [6040], [6043], [6045], [6064], [9743], [9746]. One aspect of this failure was the directors’ failure to investigate the ranking status of the BGNV bonds (see [6047] and [6048]) and the subsequent prejudice to the bondholders even though his Honour held the on‑loans were subordinated: see [9744]. (Notwithstanding this finding about the status of the on‑loans, his Honour in section 19.6 identified possible prejudice to the bondholders in the fact that prior to January 1990 a restructure of the finances of the Bell group was inevitable and a valid and effective restructure would necessarily involve negotiations with the bondholders as well as the banks. Entry into the Transactions destroyed any opportunity the bondholders would otherwise have had to negotiate a more advantageous position with the banks than that which the Transactions committed them to, namely, undoubted subordination to bank debt of their entitlements against BGF and TBGL.)
   2076 Secondly, his Honour considered that committing the Bell companies to the Transactions reflected an awareness by the directors that a restructure of the financial position of the group was necessary if it were to have any hope of surviving. But the directors never formulated how a restructure could be implemented and had in any event restricted their ability to affect a restructure by giving one group of creditors, the banks, control over all the group’s worthwhile assets: see [6039], [6052], [6055], [6065].
   2077 Thirdly, Mitchell and Oates (but not Aspinall) were motivated, in committing the Australian Bell companies to the Transactions, by a desire to protect the Bond group from the threat to its survival that would follow from a failure of the Bell companies to enter into the Transactions with the banks and Bell group’s inevitable collapse, rather than the interests of any Bell group companies of which they were directors: see [6039], [6069] ‑ [6070], [6125], [9747]. His Honour treated this conduct as involving breaches by Mitchell and Oates of their duties to act in the best interests of the Bell companies and to exercise their powers only for proper purposes, and not as a breach of the duty to avoid conflicts of interest: see [6125].
   2078 What the English directors Birchmore, Edwards and Whitechurch should have done but failed to do was obtain reliable financial information to verify the assurances they got from Bond and Mitchell about the solvency of TBGL: see [5919] ‑ [5921], [5925] [5926], [6096]. Mitchell and Bond as directors of UK companies breached their fiduciary duties to those companies by acting in the interests of the Bond group rather than those UK companies: see [6098], [6101].
   Conclusions
   2079 Owen J’s findings of significance to the issue of directors’ breach of duty are reviewed by Lee AJA, whose reasons I have had the advantage of reading in draft. His Honour considers that there is ample support in the evidence for those findings and consequently for conclusions that the Australian directors breached their fiduciary duties and in particular their duty to exercise powers for proper purposes only. I agree with Lee AJA’s reasons. Further, as Lee AJA explains, the egregious nature of these breaches makes it unnecessary to consider whether the Australian directors’ failure to have regard to the position of each member of the Bell group before committing them to the Transactions might be excused in accordance with the principle in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62, 74.
   2080 I add the following comments. Of the three Australian directors, Aspinall was the key one. He had carriage of the negotiations with the banks. He was managing director of TBGL from October 1989 until December 1991. For the same period he was a director of most, if not all, of TBGL’s subsidiaries.
   2081 Owen J accepted Aspinall’s evidence that he thought that once the refinancing with the banks was in place, he had 12 months to plan and implement a restructure: see [5362]. His Honour dealt in detail with what Aspinall said about believing the banks would give him access to Bell group assets in order to meet large debts including bondholder interest that would fall due during 1990. The assets whose sale proceeds Aspinall had in mind are listed in [5163]. During the negotiations that preceded entry by the Bell companies into the Transactions, Aspinall tried to resist the banks’ demands to take control of all worthwhile Bell assets through the cl 17.12 regime: see [1623]. But as his Honour noted at [1687] (and at [5172]), by January 1990: ‘The directors fought for a better deal in this respect but, by November 1989, that battle had been lost’. If, save for certain limited exceptions, any asset the subject of the Transaction documentation was sold, TBGL was accordingly obliged to pass the proceeds of sale over to the banks ‘unless all banks agree otherwise’. Notwithstanding that, ‘Aspinall’s expectation at 26 January 1990 was that the clause 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’: see [5168]. His Honour reviewed the evidence particularly of Latham, who played the lead role on behalf of the Lloyds syndicate banks in the negotiations for the Transactions and the evidence of Weir, who played a similar role on behalf of the Australian banks at [5169] ‑ [5176]. As his Honour noted in [5172], Aspinall complained in his letter of 7 May 1990 to Lloyds Bank about the difficulties some banks were creating in reliance on this ‘all banks’ clause by refusing to release asset sales proceeds that TBGL then needed to pay bondholder interest. Latham’s reply of 9 May 1990 recorded that the ‘all banks’ restriction on release of asset sale proceeds had not been ‘our favoured approach’ and acknowledged the difficulties it was creating for TBGL. But all he could do was express the hope that the reluctant banks would act reasonably and release the moneys in question to TBGL. Some bank officers may in mid‑1990 have said they wished to assist TBGL to get access to sale proceeds. But as Aspinall acknowledged in his letter of 7 May 1990 to Lloyds bank, other banks were reluctant to agree to that and were relying on the ‘all banks’ clause in the documentation that the banks had insisted upon.
   2082 His Honour concluded at [5175] that Aspinall (and the other directors) had ‘nothing more than a hope and certainly nothing approaching a contract, understanding or even a reasonable expectation on the part of the directors’ that the banks would give TBGL access to any of the additional cash sources upon which Aspinall was relying to enable the Bell group to survive in 1990. In section 24.1.19 – Aspinall’s evidence: conclusion – his Honour said at [5371] 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.
   2083 His Honour also rejected the banks’ arguments that the commercial purpose of the cl 17.12 regime was firstly to prevent asset sale proceeds going to Bond Corporation and secondly to provide a mechanism for access by TBGL to those proceeds. ‘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’ [1669] and ‘it seems to me that the mechanism in clause 17.12 consisted of no more than an acknowledgement that TBGL could make a request’ for access to asset sale proceeds: see [1671] ‑ [1673]. His Honour held at [8667] that the primary concern of the Lloyds syndicate banks in the negotiations that produced the clause 17.12 regime was to secure prepayment of the principal sums, ‘not surprising given that the banks knew the free cash flow from the publishing assets would be insufficient to service bank debt’ owing to them. The banks also ran and lost a case 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 the banks would have been forthcoming: see sections 9.14.7 and 9.14.8.
   2084 There is ample evidence to support all these findings.
   2085 Of particular significance in my opinion is the failure of the Australian directors, as found by Owen J at [2073], [5161], 5445 and [6050], to consider the interests of the Deputy Commissioner of Taxation as a creditor of Bell Bros, Bell Bros Holdings and Maranoa Transport for a total of over $33 million. They knew of the tax disputes (see [5161]) and that there were problems with some of the income tax assessments (see [6050]). As Lee AJA shows, Aspinall, Mitchell and Oates had no justification for publicly expressing the view that these tax assessments would be overturned and breached their fiduciary duty to exercise power for proper purposes when they committed the Bell companies to the Transactions. The decision to commit the Bell companies to the Transactions destroyed the right of the DCT to prove pari passu with the preferred bank creditors in a winding up of the group. It constituted a breach of their fiduciary duty.
   2086 Further, like Lee AJA, but contrary to Owen J, I have concluded that the on‑loans to TBGL and BGF of the proceeds of the bonds issued by BGNV were unsubordinated. His Honour acknowledged at [4243] and at [6049] that if the on‑loans were in fact unsubordinated, 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: prejudice to BGNV and the bondholders would have been unarguable.
   2087 I agree with Lee AJA’s reasons for holding Aspinall’s failure to make enquiry or seek advice about how the interests of BGNV as a creditor of BGF might be affected by entry into the Transactions was a serious breach of his fiduciary duties to BGF. Aspinall’s failure to make enquiry about the status of the BGNV on‑loans was not a mere negligent failure but a deliberate decision not to enquire when enquiry was required.
   2088 Owen J’s findings at [6047] ‑ [6049] are amply justified by the evidence. Aspinall claimed to have no recollection or comprehension of this issue and maintained it was always his belief that the bondholders were subordinated. Owen J found that Aspinall believed that the on‑loans were subordinated. As Lee AJA shows, his belief had no basis.
   2089 But in any event Owen J found Aspinall was well aware of the significance of the status of the on‑loans: see [7132] ‑ [7133]. Aspinall said had never investigated the position before suggesting to SCBAL in December 1989 that if they were to persist with the demand for payment and liquidation followed, the banks could find themselves in pari passu competition with the bondholders. He saw the reaction that suggestion produced in SCBAL and other banks. SCBAL became so concerned that it withdrew the various notices of demand it had served on BGF and TBGL in early December (see [7731]) and pressed Aspinall for information about the status of those on‑loans. He was fully alert to the need to investigate what the position was in relation to the on‑loans. He set in train enquiries and replied to SCBAL on 21 December 1989 informing the bank that he and his assistant, Simpson, were pursuing the issue: see [7131]. On 22 December, Simpson advised SCBAL that they had been unable to find anything relevant to the issue in their Perth offices but had asked BGNV for any documentation it may have: see [7132]. Tagliaferri (a Bell group legal officer) attended to this. On 22 December 1989, she sent a fax to Ruoff of Equity Trust asking him to send her any documentation he might hold about the on‑loans. She told him:
   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.
   2090 His Honour accepted the banks’ submission that the fax was directed to an incorrect fax number and concluded that the fax had not been received. However, Tagliaferri’s fax was sent to the fax number Ruoff used until 1 January 1990 and the transmission report indicates it was received. Ruoff could supply no useful information. No documentation recording the ranking status of the on‑loans was identified at trial despite the high importance of the issue. It can safely be inferred that no such documentation existed in either Ruoff’s records or TBGL or BGF’s records.
   2091 It is also clear that Aspinall did not follow up Tagliaferri’s faxed request of 22 December. As Owen J noted at [7183], there was no evidence that at any time, either before or after 26 January 1990, the request for information about the on‑loans which was made by SCBAL was renewed, either by SCBAL or any of the other banks to the TBGL directors or by the TBGL directors to Equity Trust. There is a good explanation for that. As his Honour noted at [7130], by about 22 December 1989, SCBAL officers decided, on the assumption that the on‑loans may be unsubordinated, that the only reasonable way to protect that bank’s position was to withdraw its demands and proceed to procure subordination deeds from all the key Bell companies. Once SCBAL decided not to follow up its request to Aspinall of late December 1989 for information about the on‑loans, Aspinall did not pursue the matter with Ruoff. He was not interested in exploring the issue: his concern was to get the Transaction documents executed as soon as possible. In his letter of 18 December 1989 to Standard Chartered Bank in London in which he urged withdrawal of SCBAL’s notices of demand, Aspinall alluded to the possibility of competition in a liquidation between the banks and the bondholders and said: ‘One of the purposes of the extension of the existing facilities is to enable the banks to become secured creditors, a position all view as more preferable’. By ‘all’, Aspinall meant both the banks and the Bell directors, including himself. S & W, TBGL’s solicitors, were involved in the drafting of the minutes of the resolutions for the Bell directors as well as the transaction documents. Aspinall allowed them to be instructed that the Bell companies had no external creditors. (5749). He considered that if the Bell group was to have any future, he had to get the banks of his back [6038] in order to obtain the 12 months he believed he needed ‘to right the ship’ [6086].
   2092 Other banks were by late December 1989/early January 1990 becoming concerned about possible competition with the bondholders and sought information from Aspinall. I deal with the relevant evidence in my discussion of the Barnes v Addy case. The banks were eager to get the Transaction documentation signed as soon as possible because of their concerns about the unsubordinated status of the on‑loans: see [7145], 7148; [7176] (Lloyds bank); [7151] ‑ [7154] (all Australian banks).
   2093 It is clear enough that by late December 1989/January 1990 the banks decided to press ahead with obtaining the security and other documents from the Bell companies which, once executed, would put to rest their concerns about competition with the bondholders: see [6964]. That is why the banks did not continue to press Aspinall for information about the on‑loans. Once that happened, Aspinall dropped his enquiries.
   2094 Even if his Honour was correct in thinking that Tagliaferri’s fax was never received by Ruoff, that is of little moment so far as Aspinall is concerned. What is of significance is Aspinall’s failure to follow the matter up and form a conclusion on whether the on‑loans were subordinated. For the reasons given, which include a complete absence in Bell records of any documentation of the on‑loans, the kind of investigation Aspinall should have conducted once he became alert to the importance of the matter from the banks’ reaction to his tactic would have revealed that the on‑loans were unsubordinated or, at the very least and in the absence of a detailed investigation that could reach a definitive conclusion, that there was a strong argument that they were unsubordinated. If Aspinall had done what he should have done, he could not have ignored the interests of the bondholders when he committed the Bell companies to the Transactions. It was because he ignored their claims to consideration that he (and the other Bell directors) acted for an improper purpose in committing the Bell companies to the Transactions. By January 1990, his overriding desire, to which all other considerations were subservient, was his desire to implement an agreement with the banks on the terms they proposed in order to buy the time to which he attached so much significance.
   2095 It was common ground at trial that by January 1990, the directors believed that the only alternative to the Transactions was liquidation [1881] and [5055]. But the Bell directors then no longer had the largely unlimited power vested in directors to do what they thought was in the best interests of the company. The obligation to take into account the interests of creditors that arose as TBGL moved into an insolvency context imposed a substantial fetter on their powers. As I later note, when the Bell companies entered into the Transactions, Aspinall had not formulated any plan for restructuring the group and delayed for a long while in doing that. That may be because he believed in January 1990 that time would allow him to maximise what the Bell group could raise from the sale primarily of the publishing assets but also of the BRL shares. But the Bell group’s financial position was so distressed and the quantum of what might be realised from the sale of those assets so uncertain in January 1990 that the decision to carry on business could only properly be made if the interests of creditors, notably the DCT and the bondholders, were protected. The Australian Bell directors bought the chance to carry on business by giving one lot of creditors both security over and control of all significant group assets and by ignoring the substantial prejudice that caused to those other creditors. Before the Bell directors could properly choose to carry on business over liquidation in the circumstances they faced in January 1990, they either had to have the agreement of the creditors or they had to extract binding concessions from the banks that would have adequately protected those creditors. Carrying on business without following one of those courses was not an option open to them if they were to properly perform their fiduciary duties.
   2096 I also agree with Lee AJA’s conclusions about the breaches of duty by the other Australian directors, the UK directors and the director of BGNV and with his Honour’s conclusions on the respondents’ notice of contention relating to breach of fiduciary duty by Bond, Mitchell and Oates.
   BARNES v ADDY
   The Barnes v Addy case – knowing receipt and knowing assistance
   2097 A major issue in the case was whether the banks were liable to the plaintiffs under the first limb of Barnes v Addy. This claim was successful, except in relation to BGNV [8755]. The banks have appealed this finding in favour of the plaintiffs. The plaintiffs by their notice of contention challenge Owen J’s refusal to set aside the BGNV subordination deed as a ‘knowing receipt’ by the banks. The plaintiffs also relied on the second limb of Barnes v Addy but his Honour rejected that claim on the basis they had not alleged conscious wrongdoing on the part of the directors and so could not establish that the directors engaged in a dishonest and fraudulent design [8732] and [9752]. The plaintiffs also challenge that ruling by their notice of contention.
   2098 At the time his Honour made those rulings there was uncertainty created by recent English authority and by what his Honour perceived to be the absence of definitive statements in the Australian authorities about the kind of knowledge on the part of the relevant participants required for both a ‘knowing receipt’ and a ‘knowing assistance’ Barnes v Addy case. His Honour refers to these matters in The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 5] [2004] WASC 273 at [15] and [29] and in the extract from the transcript of the hearing on 2 December 2004 scheduled to that judgment. His Honour returned to these matters at a number of places but most notably in section 21 of the judgment so far as concerned both limbs of Barnes v Addy. The question in relation to the Barnes v Addy case was whether each could be made out where the conduct alleged against the relevant participants did not involve an allegation of dishonesty in the sense of conscious wrongdoing on their part.
   2099 On the view his Honour took of the law, which included discussion of Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, he held that the plaintiffs’ failure to allege and prove conscious wrongdoing on the part of the Bell directors meant that they could not establish a case against the banks under the second limb of Barnes v Addy. But he held that the absence of such an allegation did not prevent a finding that the plaintiffs had established a case against the banks within the first limb of Barnes v Addy in relation to all the plaintiff Bell companies, other than BGNV. His reasons are summarised at [8733] ‑ [8748] and in relation to BGUK, TBGIL and BIIL, at [8754]. His Honour held the case against the banks in respect of BGNV failed because the plaintiffs fail to prove that Equity Trust, that company’s director, was in breach of its duty to the company. He noted that if he had found such a breach, the case against the banks would have been a strong one: see [8753].
   The law
   2100 Various of the appellants’ grounds of appeal e.g. grounds 78, 81 and 86, require consideration of the legal principles governing liability under the first limb of Barnes v Addy, while the respondents’ notice of contention relating to ‘knowing assistance’ requires consideration of the law applicable to the second limb.
   2101 Lord Selborne LC said in Barnes v Addy (1874) LR 9 Ch App 244 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.
   2102 Lord Selbourne drew a distinction between the conduct of strangers sufficient to bring them within the first limb and that required to bring them within the second limb. Under the first limb, it is sufficient to fix a stranger with liability to the beneficiary if the stranger has ‘received and become chargeable with some part of the trust property’. On the face of it, the Lord Chancellor appears to have considered receipt of trust property otherwise than as a bona fide purchaser for value without notice of the trust to be sufficient to charge the stranger for the purposes of the first limb. But as Giles JA, with Ipp and Basten JJA agreeing, said in Kalls Enterprises v Baloglow [112]:
   The liability referred to by the words ‘receive and become chargeable with some part of the trust property’ is commonly described as liability under the first limb of Barnes v Addy, and in shorthand as ‘knowing receipt’. Lord Selborne did not refer to knowledge in connection with the first limb but, as was succinctly stated by Gleeson CJ and Gummow, Callinan, Heydon and Crennan JJ in Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22 at [112], ‘persons who receive trust property become chargeable if it is established that they have received it with notice of the trust’.
   2103 It is I think significant that, in identifying the basis for holding strangers to a trust liable to the beneficiaries under the second limb, Lord Selbourne spoke not just of the stranger assisting the trustees with knowledge that they were engaged in a fraudulent design but with knowledge that the trustees were engaged ‘in a dishonest and fraudulent design’. Fraud in equity applies to a much wider range of conduct than conduct that would be regarded as fraudulent at common law or in ordinary parlance: Nocton v Lord Ashburton [1914] AC 932, 953 ‑ 954. Lord Selbourne’s additional requirement for dishonesty appears to have been intended to narrow the range of conduct that answers the description of fraudulent in equity, which is necessary to make out a ‘knowing assistance’ case. It may well be that in framing the second limb of liability, Lord Selbourne used the expression ‘dishonest and fraudulent design’ to apply only to conduct by trustees that was deliberately wrongful. There is good reason for equity to attach the conscience of a stranger with liability to the beneficiary where a stranger knowingly assists trustees engaged in such egregious conduct. It might be thought that there is less justification for imposing equitable obligations upon a stranger who does not himself receive any trust property but who only assists trustees who are not dishonest, in the ordinary meaning of the word, in their dealings with the trust property.
   Knowing assistance
   2104 However, Farah Constructions v Say‑Dee has, for now, settled the law for Australian courts with respect to the second limb in Barnes v Addy by confirming the opinions expressed by Gibbs J and Stephen J in Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373:
   (1) a defendant will be liable if he has assisted a trustee or fiduciary such as a company director with knowledge of the dishonest and fraudulent breach of trust or breach of fiduciary duty on the part of the trustee or fiduciary: Farah [160] ‑ [163];
   (2) the defendant will have sufficient knowledge of the trustee or fiduciary’s breach if his state of mind falls within any of the first four categories of knowledge described in Baden v Société Générale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA (1983), reported at [1993] 1 WLR 509 (note), 575 ‑ 576: Farah [171] ‑ [178];
   (3) dishonest and fraudulent designs sufficient for the purposes of the second limb can include both breaches of trust and breaches of fiduciary duty, but any such breach must be dishonest and fraudulent: Farah [179].
   2105 As to (1), Consul was concerned with whether a manager‑employee in the position of a director of his employer company was in breach of his fiduciary obligations to his employer and with whether a third party assisted the manager in those breaches of duty. In Consul, Gibbs J said (394): ‘It is well settled that a director stands in a fiduciary position in relation to this company’. The court in Farah at [179] said that ‘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’ and at [184], accepted that company officers were among those who owed fiduciary duties to their companies.
   2106 As to (2), in Farah at [174] the court noted, without comment, that:
   In Bank of Credit and Commerce International (Overseas) Ltd v Akindele, Nourse LJ observed that the first three categories [of Baden knowledge] 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.
   2107 In Re Montagu’s Settlement Trusts [1987] Ch 264, the question was what degree of knowledge of the trust sufficed to constitute a recipient of trust property a constructive trustee of it. Megarry VC referred to Baden and said (277):
   In the books and the authorities the word ‘notice’ is often used in place of the word ‘knowledge’, usually without any real explanation of its meaning. This seems to me to be a fertile source of confusion; for whatever meaning the layman may attach to these words, centuries of equity jurisprudence have attached a detailed and technical meaning to the term ‘notice’, without doing the same for ‘knowledge’ … Now until recently I do not think there had been any classification of ‘knowledge’ which corresponded with the classification of ‘notice’. However, in the Baden case at the 407, the judgment sets out five categories of knowledge, or of the circumstances in which the court may treat a person as having knowledge … It can be said that these categories of knowledge correspond to categories of notice: type (i) corresponds to actual notice, and types (ii), (iii), (iv) and (v) correspond to constructive notice.’
   2108 The correctness of Megarry VC’s comment is confirmed by the dictum of Lord Chelmsford in a conveyancing case, Espin v Pemberton (1859) 3 De G & J 547 at 554:
   Constructive notice, properly so called, is the knowledge which the courts impute to a person upon presumptions so strong of the existence of the knowledge that it cannot be allowed to be rebutted, either from his knowing something which ought to have put him on further enquiry, or from his wilfully abstaining from enquiry, to avoid notice. I should therefore prefer calling the knowledge which a person has, either by himself or through his agent, actual notice; or if it is necessary to make a distinction between the knowledge which a person possesses himself, and that which is known to his agent, the latter might be called imputed knowledge.
   2109 As Giles JA noted in Kalls [124], but contrary to the statement by Millett J in Agip (Africa) Ltd v Jackson [1990] Ch 265, 293, Peter Gibson J in Baden contrasted actual knowledge (category (i)) with four kinds of constructive knowledge ‘of descending stringency’, categories (ii) and (iii), as well as (iv) and (v) which, as his Lordship put it: ‘may lead the court to impute knowledge of the facts to the alleged constructive trustee even though he lacked actual knowledge of those facts’. See [1993] 1 WLR 509 (note) at (576). This classification was followed by Anderson J in Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; as Giles JA also noted at [125] ‑ [126].
   2110 That seems to me to be the correct approach. ‘The facts’ in the context of a ‘knowing assistance’ case which alone are relevant are facts which show that the fiduciary, in dealing with the property, has acted in breach of duty, and that the recipient knows that when it assists the fiduciary in its dealings with the property. If a person is aware of relevant facts, he has actual knowledge of them. If he is not so aware, saying that he nevertheless does have actual knowledge if it comes within categories (ii) and perhaps (iii) but not category (iv) introduces into Barnes v Addy jurisprudence an element of fiction that serves no useful purpose. As Peter Gibson J points out in Baden at (576) and (577), ‘knowledge’ in each of categories (ii) ‑ (v) refers to a particular ‘mental state’ which justifies the court in treating the recipient as if he had actual knowledge of those facts, though he lacks that actual knowledge. Save that it excludes knowledge in category (v), that is what the High Court in Farah endorsed when it said at [177] and [178] that ‘circumstances falling within any of the first four categories in Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy’.
   2111 As I explain later, the same kinds of knowledge sufficient for a knowing assistance claim suffice for a knowing receipt claim. The appellants’ oral and written submissions that only knowledge in the Baden categories (i) and (ii) are sufficient for a knowing receipt liability on the part of company directors and what they term in submissions supporting ground 81 ‘constructive knowledge’, must be rejected.
   2112 As to (3), in my opinion, the explication in Farah at [179] ‑ [184] of the phrase ‘dishonest and fraudulent design’ on the part of the trustee or fiduciary is not entirely clear to me. But I draw from those passages the following:
   (a) a finding of a breach of duty by the fiduciary will not, without some additional feature, be sufficient to show a dishonest and fraudulent design on the fiduciary’s part;
   (b) it is not necessary, in order to establish the existence of the additional feature, to show that the breach of duty occurred in circumstances in which the fiduciary acted with a conscious awareness that what he was doing was wrong: the breach of duty can be characterised as dishonest or fraudulent according to equitable principles and that will suffice for liability;
   (c) the additional feature will be found if the breach of duty is more than a trivial breach and is also too serious to be excusable because the fiduciary has acted honestly, reasonably and ought fairly to be excused. In determining whether the breach is excusable, the court should take an approach analogous to that of courts under provisions such as s 75 of the Trustees Act 1962 (WA) and s 1318 of the Corporations Act 2001 (Cth). Under the former provision, a trustee can be relieved from personal liability for breach of trust where the trustee ‘has acted honestly and reasonably and ought fairly to be excused for the breach’. Under the latter, officers of a corporation and certain other functionaries, can be relieved by the court from liability for negligence, default, breach of trust or breach of duty if ‘the person has acted honestly and that, having regard to all the circumstances of the case … the person ought fairly to be excused’. Under both provisions, the person claiming exemption must have acted honestly, that is, ‘without moral turpitude’: Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2005) 56 ACSR 528 [42] ‑ [43]. Whether the person has acted reasonably is an express consideration under the Trustees Act and is also a consideration under the Corporations Act provision: ASIC v Vines [39] ‑ [41]. But findings of honesty and reasonableness are not guarantees of exemption under either provision: each requires a discretionary judgment having regard to all the circumstances of the case. In any event, it is well established that a person can be fraudulent in the eye of equity though he acted with subjective honesty: Nocton v Ashburton (954).
   2113 Making the test of whether a trustee or fiduciary’s conduct amounts to a dishonest and fraudulent design depend upon an enquiry into whether the conduct would be excusable by analogy to the test under statutory provisions not invoked in the particular case may be cumbersome, but it is not unworkable. Why I think this is the test requires explanation.
   2114 Farah [181] noted that Gibbs J ‘did not categorise all such breaches [of trust or fiduciary duty] as “dishonest and fraudulent” because he said that the expression was to be understood by reference to equitable principles’. What Gibbs J said in the passage referred to in Farah at [181], (Consul (398)), was this:
   I respectfully agree with what was said in Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 as to the meaning of ‘dishonest and fraudulent’ for the purposes of the rule. This expression is to be understood by reference to equitable principles and, as I have already indicated, in my judgment it includes a breach of trust or of fiduciary duty.
   2115 A little earlier in his judgment in Consul (396), Gibbs J said of a statement in Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1581 ‑ 1582 by Ungoed‑Thomas J: ‘He held that what is “dishonest and fraudulent” for this purpose has to be judged according to ‘the plain principles of a court of equity’. Ungoed‑Thomas J considered in detail the requirements of the three elements of the second limb of Barnes v Addy – (1) assistance by the stranger, (2) with knowledge, (3) in a dishonest and fraudulent design on the part of the trustees. As to the last, his Lordship’s conclusion at (1590 ‑ 1591) was:
   I come to the third element ‘dishonest and fraudulent design on the part of the trustees’. I have already indicated my view, for reasons already given, that this must be understood in accordance with equitable principles for equitable relief.
   I therefore cannot accept the suggestion that, because an action is not of such a dishonest and fraudulent nature as to amount to some crime, that it is not a fraudulent and dishonest in the eyes of equity …
   The words themselves are not terms of art … They are to be understood ‘according to the plain principles of a court of equity’ to which Kindersley VC referred in Bodenham v Hoskins, and these principles, in this context anyway, are just plain, ordinary commonsense. I accept that ‘dishonest and fraudulent’ so understood, is certainly conduct which is morally reprehensible. But what is morally reprehensible is best left open to identification and not to be confined by definition.
   2116 Kindersley VC in Bodenham v Hoskins (1852) 21 LJ Ch 864 said that ‘the plain principles of a court of equity’ could not sustain the conduct of a bank which sought to retain the benefit it obtained when a customer, to the bank’s actual knowledge, transferred monies from an account he had opened for and in the name of his principal to his own personal account to reduce his overdraft. The bank knowingly though passively took the benefit of the customer’s wrongdoing: though its conduct may not have been dishonest, it can be said to involve a degree of moral reprehensibility.
   2117 It therefore appears that when Gibbs J in the passage set out above from Consul at (398) expressed agreement with what Ungoed‑Thomas J said in Selangor, his Honour considered that conduct by a trustee or fiduciary would be ‘dishonest and fraudulent’ for the purposes of the second limb in Barnes v Addy even if it did not amount to criminal dishonesty, provided it still involved conduct that, as a matter of ordinary language, could be described as morally reprehensible.
   2118 Owen J’s conclusion at [4727] was that a breach of fiduciary duty would be ‘dishonest and fraudulent’ if ‘the impugned conduct [is] attended by circumstances that would attract a degree of opprobrium raising it above the level of a simple breach of trust or breach of fiduciary duty’. At [4818], his Honour said of a dishonest and fraudulent design that: ‘it involves more than a mere breach of duty and that it involves an allegation of some gravity’. This fits in with the moral reprehensibility which I think Gibbs J considered necessary. His Honour appears to have held at [8732] that a ‘dishonest and fraudulent design’ imposes an even more onerous requirement insofar as he there held that conscious wrongdoing on the part of the directors was essential to establishing that.
   2119 But I do not think the court in Farah is to be understood as having accepted that conduct by trustees or fiduciaries must involve an element of moral reprehensibility before it will satisfy the requirement of the second limb that it is ‘dishonest and fraudulent’.
   2120 The court began to deal in detail with the phrase ‘dishonest and fraudulent design’ in [179]. It cited from the opening words of Lord Selborne’s judgment in Barnes v Addy his warning against undermining the sound doctrines of equity by making ‘unreasonable and inequitable applications of them’. It affirmed, in reliance on Consul, the need for a breach of trust or fiduciary duty to be dishonest and fraudulent if the requirements of the second limb were to be satisfied. It then rejected in [180] the respondents’ submission, in reliance on Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, that abandoned ‘the “dishonest and fraudulent design” integer’ on the part of the trustee or fiduciary and also added a ‘stiffening of the notice requirements in a way adverse to plaintiffs’. As to the latter point, Royal Brunei proposed, and the court in Farah rejected the proposition, that the accessory should himself act dishonestly. Notwithstanding its refusal to accept the high level of misconduct on the part of the accessory proposed in Royal Brunei, what the court said up to this point suggests that it was moving towards a requirement for serious misconduct on the part of the trustee or fiduciary. But it did not ultimately adopt that.
   2121 Though the court referred at [181] to the refusal by Gibbs J in Consul to categorise all breaches of trust or fiduciary duty as ‘dishonest and fraudulent’, it did so in the context of rejecting submissions by the respondent either that knowing participation in any breach of fiduciary duty [182] or in a significant breach of duty [183] was sufficient to satisfy the requirement of the second limb that concerned the conduct of the trustee or fiduciary. But the court did not expressly endorse Gibbs J’s agreement with what was said in Selangor about this expression requiring morally reprehensible behaviour. Nor can its assent to that be inferred.
   2122 Apart from the court’s statement in [179] that Consul established for Australia that the breach by the trustee or fiduciary must be a dishonest and fraudulent design, the only explanation the court gave for the kind of conduct that would answer that description appears in [184] where, by way of explaining their rejection of the respondent’s submissions at [182] and [183], their Honours said that breaches of trust and fiduciary duty vary greatly in their seriousness: some can be well‑intentioned, some can be trivial and some can be excused where the trustee or fiduciary has acted honestly and reasonably and ought fairly to be excused.
   2123 At [183], the court in Farah rejected the submission that a breach of trust or fiduciary duty had to be ‘significant’ to come within the second limb of Barnes v Addy. That I think is apparent from the comments they then proceeded to make in [184] which deal with the kind of conduct by a trustee or fiduciary which will be ‘dishonest and fraudulent’ for the purposes of the second limb in Barnes v Addy. By making the comments they did in [184] in that context, I understand the court in Farah to have said that a trivial breach or a breach of trust or fiduciary duty of the kind that would be excusable under provisions such as s 75 of the Trustees Act and s 1318 of the Corporations Act will not be sufficient to show ‘dishonest and fraudulent’ conduct on the part of the trustee or fiduciary for the purposes of the second limb but that conduct by a trustee or fiduciary that involves a breach of duty more serious than that will be sufficient to constitute ‘dishonest and fraudulent’ conduct. The court in Farah cannot I think be understood as requiring behaviour on the part of the trustee or fiduciary so egregious as to be described as ‘morally reprehensible’, even if not criminally dishonest.
   2124 The explanation by the court at [186] why the conduct of Mr Elias, even if in breach of his fiduciary duty to Say‑Dee, would not merit the description ‘dishonest and fraudulent’ is not I think inconsistent with this conclusion. The footnote (264) to [184] does not illuminate the ‘dishonest and fraudulent’ requirement. It is confined to reaffirming what their Honours said in [177] to the effect that knowledge by a participant in dishonest and fraudulent conduct by a trustee or fiduciary that comes within category (iv) in Baden will suffice to complete a second limb case.
   2125 If Farah establishes, as I think it does, that conduct by the trustee or fiduciary not involving moral reprehensibility can still amount to ‘dishonest and fraudulent’ conduct, that sets the bar pretty low, so far as this particular element of a cause of action based on the second limb of Barnes v Addy is concerned. But that is consistent with the court’s refusal to increase the burden on a plaintiff firstly, by rejecting Royal Brunei which required the plaintiff to show that the accessory was itself guilty of dishonesty and secondly, by affirming that knowledge by the plaintiff of the misconduct of the trustee or fiduciary less than actual knowledge will suffice for a second limb Barnes v Addy claim, so long as it comes within any of categories (ii) ‑ (iv) of Baden knowledge. (In [170], where the court said of a claim that persons were liable as knowing participants in a dishonest and fraudulent design that it was: ‘an allegation the seriousness of which means that it ought to have been pleaded and particularised, and the assessment required by Brigginshaw v Brigginshaw kept in mind’, the court was focusing on the accessories, not the trustee or fiduciary who need not be parties to the action.)
   2126 In my opinion, Owen J imposed too onerous a test on the respondents so far as their case based on the second limb of Barnes v Addy is concerned. For the reasons given, his Honour was in error in holding at [8732] that conscious wrongdoing by the directors was necessary to establish the ‘dishonest and fraudulent design’ element in the case of ‘knowing assistance’ which the plaintiffs ran against the banks. His Honour also said at [4727] that such a design required conduct that would ‘attract a degree of opprobrium raising it above the level of a simple breach’ of trust or fiduciary duty. That may suggest that there must be a level of misconduct on the part of the directors greater than I think Farah requires.
   Knowing receipt
   2127 As the Full Federal Court noted in Grimaldi [268], the High Court in Farah did not settle the law with respect to the knowledge requirement of the first limb of Barnes v Addy. The High Court went no further than saying at [112]: ‘persons who receive trust property become chargeable if it is established that they received it with notice of the trust’.
   2128 The Full Court in Grimaldi referred at [268] and [269] to ‘an established line of judicial decision and opinion both at first instance and in intermediate courts of appeal spanning at least 20 years’ adhering to the view that knowledge within any of categories (i) ‑ (iv), but not category (v), in Baden was sufficient for a knowing receipt claim within the first limb of Barnes v Addy. These decisions included the NSW Court of Appeal decision in Kalls Enterprises v Baloglow which post‑dated Farah. The Full Court concluded [270] that the primary judge was not in error in finding that knowledge within category (iv) of Baden was sufficient to the imposition of liability for knowing receipt.
   2129 In reaching its conclusions as to the kinds of knowledge sufficient for a knowing receipt claim based on the first limb in Barnes v Addy, the Full Court in Grimaldi referred to the, different rationales for liability under the two limbs in Barnes v Addy put forward in some of the cases: in relation to the first limb, equity’s concern for the protection of property acquired by purchasers for value without notice and in relation to the second limb, equity’s concern with unconscientious conduct. They referred to the doubt expressed by Stephen J in Consul (411) about why there should be a distinction between the kind of notice which will suffice in a knowing receipt claim and the kind of notice that should exist in a knowing assistance claim and said [267]:
   We share the doubt expressed here. We do not consider that a property protection rationale for recipient liability (beyond a proprietary claim to a subsisting equitable interest in property, or its proceeds, in the third party’s hands) of itself provides a sufficient justification for imposing a personal liability to account. That liability arises as a matter of conscience not of property. As with assistance liability, recipient liability should be seen as fault based and as making the same knowledge/notice demands as in assistance cases. We need not pursue this particular matter further because the weight of authority in this country appears now to draw no distinction between the two types of liability in this respect
   2130 I respectfully agree. If the first limb of Barnes v Addy was originally satisfied by receipt of trust property by anyone other than a bona fide purchaser without notice of the trust, the reach of the first limb has now changed significantly. If the banks had knowledge within any of Baden categories (i) ‑ (iv) of the breaches of fiduciary duty by the Bell directors in making the securities available to the banks, that would suffice to the purposes of recipient liability under Barnes v Addy. This is the principle that now governs liability for ‘knowing receipt’, not that contended for by the appellants in ground 78.
   2131 That was the view to which Owen J came at [4748].
   2132 As to whether the first limb of Barnes v Addy extends beyond cases involving trustees to cases involving breach of duty by fiduciaries their Honours in Farah 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 receiving property from trustees but also to persons dealing with ‘at least some other types of fiduciary’. Their Honours said it was unnecessary to examine the correctness of that assumption.
   2133 Notwithstanding this statement, the Full Federal Court in Grimaldi said [254]:
   Distinctly while the proprietary liability referred to depends upon the existence of trust property in the strict sense, ‘trust property’ for Barnes v Addy purposes extends beyond it to property held or controlled subject to a fiduciary obligation. Most importantly for present purposes, it extends to corporate property, i.e. property subject to the control and the fiduciary responsibilities of a company’s directors.
   2134 And later [275]:
   It is well settled as already noted [i.e. at 254] that, though a company is the beneficial owner and not the trustee of its own funds, those funds are treated for the purposes of Barnes v Addy as ‘trust property’ and this because of the fiduciary character of the duties of the directors under whose control those funds are held: Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 (‘Belmont Finance’) at 405.
   2135 In Kalls Enterprises v Baloglow, Giles JA, with Ipp and Basten JJA agreeing, rejected a submission based on the statement in Farah [113] that the first limb in Barnes v Addy was inapplicable to the receipt of moneys disbursed by a director of a company in breach of his duties to the company. Giles JA noted at [153] that Farah was a case of breach of a partner’s fiduciary duty and that the court was not concerned with breach of a director’s fiduciary duty owed to the company. His Honour there said that: ‘A number of cases have applied the first limb to persons receiving property with knowledge of breach of a director’s fiduciary duty’. He referred at [154] to Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 in which the Court of Appeal held, in reliance on earlier authority, that the first limb of Barnes v Addy applied to the receipt of company funds from directors who paid out those funds in breach of their fiduciary duty to the company. Giles JA then at [157] referred to a number of other English and Australian cases in which the first limb of Barnes v Addy has been applied in cases involving a breach of fiduciary duty by a company director. Giles JA referred at [158] to cases in which it was held that a director was in the same position a trustee in relation to the property of the company and concluded [159]:
   In the face of this line of authority, which is not exhaustive and to which regrettably Mr Baloglow did not draw attention, the submission in his supplementary written submissions [that the first limb of Barnes v Addy only applies to property received from a trustee ] should not be accepted. The line of authority should be followed until the High Court says otherwise.
   2136 On the authority of Kalls Enterprises and Grimaldi, the first limb in Barnes v Addy should, in my opinion, be regarded as extending to dispositions of company property made by a director in breach of his fiduciary duties to the company. This is the view Owen J reached at [4776] in reliance, in part, on Kalls Enterprises. In oral submissions, the appellants having first argued to the contrary, ultimately acknowledged the authority of Kalls Enterprises and said their submission that the first limb did not embrace property disposed of in breach by the directors of their fiduciary duties to the company should be treated as a formal one only (ts 1232).
   Absence of trust property
   2137 Owen J held that property for the purposes of the rule in Barnes v Addy extends beyond trust property strictly so called to property that is subject to fiduciary duties [8750]. I have already explained why I think his Honour was correct in holding that the rule in Barnes v Addy extends to property that is subject to fiduciary duties, including corporate property that is subject to the fiduciary responsibilities of the company’s directors. That is sufficient to dispose of ground 73 of the appellants’ appeal which asserts that Barnes v Addy is confined to trustees in the strict sense of the term.
   2138 His Honour concluded at [8750] that ‘ the basket or aggregation of rights included within the transaction instruments’ by means of which ‘all of the worthwhile assets of the Bell group companies (in particular, the publishing assets and the BRL shares) were given over to the banks’ constituted ‘trust property’ sufficient for the purposes of the first limb of Barnes v Addy in this case. His Honour earlier said at [8736] that the instruments evidenced both the creation and disposal of that basket or aggregation of rights. He listed those instruments in schedule 38.23 to the judgment. As his Honour noted at [8739], he used the terms ‘securities’ and ‘security instruments’ as including not only the mortgage debentures, the share mortgages and the Torrens title mortgages, but also ‘instruments conferring rights on the third party to protect or further the latter’s commercial position’, that is, the main refinancing documents, the guarantees and indemnities and the subordination deeds.
   2139 In the course of giving his reasons at [8736] ‑ [8739] for his conclusion at [8750], his Honour observed at [8738] that his characterisation of the relevant property as this basket of rights arising from the securities ‘should not be taken as an indication that I regard the later exercise by the third party of those rights, for example, by appointing a receiver or by selling the secured assets, as irrelevant to the process’. He did not, however, explain the relevance of this later exercise of rights by the banks to their characterisation as ‘trust property’, though he did say that it was the exercise of those rights, rather than the initial receipt of that ‘trust property’, that gave rise to the gain to the banks and the consequent loss to the Bell companies.
   2140 By grounds 71 and 72, the appellants attacked his Honour’s conclusions, contending that neither the instruments in question nor the rights created by them were property or ‘trust property’ for the purposes of the first limb of Barnes v Addy. An alternative submission at par 1033 that the banks did receive Bell company property was limited to the share mortgages and the real property mortgages, but only ‘to the extent that those transactions gave rise to proprietary interests’.
   2141 These grounds of appeal raise issues different from those involved in determining whether the various Transaction instruments were voidable under the relevant provisions of the bankruptcy legislation and the Statute of Elizabeth: the key expressions in those statutes, settlements and dispositions of property and alienations of property, have acquired technical meanings confined to those statutory contexts.
   2142 In Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286 Mason P (Stein and Giles JJA agreeing)said that the principles relating to the ‘knowing receipt’ of trust property limb of the rule in Barnes v Addy were in considerable flux and that uncertainties surround a number of issues, including the conceptual basis of the rule and its concept of ‘trust property’ that includes property that was not necessarily held in trust at the time of misappropriation or misdirection.
   2143 But what I think clear is that it is no longer possible to confine Barnes v Addy to trust property in the strict sense contended for by the appellants at par 1010 i.e. ‘assets or rights in relation thereto’ in which the beneficial interest and the legal interest are separately held.
   2144 The first limb of Barnes v Addy applies to property that is not ‘trust property’ in any orthodox meaning of that expression. This follows from the extension of the rule to fiduciaries and in particular to company directors. The transfer of company property by directors in breach of their fiduciary duties is within the first limb although the ‘property’ transferred is not subject to any trust but is owned absolutely by the company. In Belmont Finance Corporation v Williams Furniture Ltd, Buckley LJ said:
   A limited company is of course not a trustee of its own fund: it is the 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 … In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and the person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.’
   2145 This passage has been frequently cited in the Australian authorities in explaining why the first limb of Barnes v Addy applies in the corporate context: see e.g. Robins v Incentive Dynamics [61]; Kalls Enterprises v Baloglow [154]; Grimaldi v Chameleon Mining NL (No 2) [563] and [564].
   2146 In Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530, Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ said [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 [77]. (emphasis added)
   2147 The reference in footnote [77] is to what Gibbs J said in Consul Developments (397). In describing the justification for intervening in cases of breach by fiduciaries of their duties, their Honours were not confining themselves to cases within or analogous to the first limb of Barnes v Addy. They were speaking broadly, as is shown by their references to ‘persons who knowingly assist’ and to those persons not being permitted ‘to retain benefits resulting from their conduct’.
   2148 Zhu and Consul Developments (397) indicate that the rationale for intervention against persons who obtain corporate benefits from the breach by directors of their fiduciary duties to the company is twofold: firstly, to aid in the maintenance of the high standard of conduct required of fiduciaries by deterring third parties from encouraging or aiding fiduciaries to breach their duties and secondly, by refusing to permit such third parties to retain the benefits of their inequitable or unconscionable conduct. The particular nature of the benefit obtained by the third party in such circumstances might be thought not to play a part of any importance in determining whether a ‘knowing receipt’ claim based on breach of fiduciary duty by company directors has been made out.
   2149 But the proposition that the first limb of Barnes v Addy, in its application to persons who receive benefits at a company’s expense as a result of the breach by the company’s directors of their fiduciary duties, is not limited to benefits of a proprietary nature was rejected by the High Court in Farah.
   2150 One question there was whether certain information was ‘trust property’ within the first limb of Barnes v Addy. The director of one of two companies engaged in a joint venture to develop a parcel of land that could not proceed because of council opposition, was said to be in breach of his fiduciary duty to the other joint venturer by not disclosing to it the information he obtained from the council to the effect that amalgamation with adjacent land would conduce to development approval of the whole parcel. The director bought the adjacent land. The other company persuaded the courts below that the director was liable to it under the first limb of Barnes v Addy for the resulting gains.
   2151 Paragraph (i) of Say‑Dee’s submissions set out in Farah [121], was that a third party who directly received a financial benefit as a result of a non‑trivial breach of trust or fiduciary duty should be accountable for the benefit to the fiduciary of the trust/duty if he/she knew or had reason to know of the essential facts which constituted the breach. The court rejected the submission saying [121]:
   To substitute paragraph (i) for the first limb of Barnes v Addy would be a radical change: it abandons the requirement for receipt of property, and it alters the notice test. To introduce a change of that kind would call for very careful examination of the possible consequences. That examination was not conducted in argument. In any event, in view of the availability of relief under the second limb of Barnes v Addy, and the protection of confidential information under the general law, no sufficient reason was demonstrated for any change to legal doctrine in the manner advocated by the respondent.
   2152 Other statements in Farah show that only proprietary benefits can constitute ‘trust property’ for the purposes of the first limb in Barnes v Addy. The court said [117] ‑ [118]:
   For the following reasons there was no receipt of property within the meaning of the first limb of Barnes v Addy. The information which the Court of Appeal thought that Mr Elias ought to have disclosed was not confidential … [It was publicly available in council records]
   Even if the information were confidential, that would not make it property for the purposes of the first limb of Barnes v Addy. The protection given by equitable doctrines and remedies causes confidential information sometimes to be described as having a proprietary character, ‘not because property is the basis upon which that protection is given, but because of the effect of that protection’ [63]. Certain types of confidential information share characteristics with standard instances of property. Thus trade secrets may be transferred, held in trust and charged [64]. However, the information involved in this case is not a trade secret.
   2153 The references in footnote [63] are to Gummow J’s statements in Smith Kline & French Laboratories (Aust) Ltd v Secretary to Department of Community Services (1990) 22 FCR 73, 121 and in Breen v Williams (129). The reference in footnote [64] is to other parts of the same passage in Smith Kline (121). Gummow J there discussed the concept of property in the context of a contention that the use, in reliance on a regulation, to evaluate a rival drug, of confidential information about a new drug provided by a pharmaceutical company for the purpose of obtaining marketing approval for the drug by a government agency, constituted a compulsory acquisition of property within s 51(xxxi) of the Constitution. His Honour held at (121) that the concept of ‘property’ as understood in s 51(xxxi) extends to information which is of sufficient substance to be the subject of an equitable obligation of confidence in the affirmative because ‘property’ in the constitutional context extends beyond the general law understanding of that concept. However his Honour, in considering the ambit of the concept of property under the general law, said (120 ‑ 121):
   It seems clear enough that knowledge per se is not proprietary in character … Further, it is clear in Australia that the equitable jurisdiction to grant relief against an actual or threatened abuse of confidential information, not involving any tort or breach of contract, fiduciary duty, copyright or trade mark, is based not in pre‑existing proprietary right, but in an obligation of conscience arising in the circumstances of the case …
   However, in order to attract equitable intervention, the information must be ‘confidential in quality’ and of a ‘confidential nature … Further, trade secrets may devolve by operation of law, as upon bankruptcy (In re Keene (1922) 2 Ch 475) and by testamentary provision (Morison v Moat [1851] EngR 790; (1851) 9 Hare 241 at 241, 265; [1851] EngR 790; 68 ER 492 at 493, 502). It should be noted that In re Keene (supra) the secret formulae had never been committed to writing. A secret process employed in a business may be held in trust in connection with a trust of the business (Scott on Trusts, 4th Ed., 1987, 82.5) and may be the subject of an equitable charge given to a creditor (Struthers v Hospital Products Ltd, Supreme Court of N.S.W., Kearney J., 25/2/84, unrep.). And, in some circumstances, the obligation to observe an obligation of confidence may be extended to a third party: Malone v Metropolitan Police Commissioner (1979) Ch 344 at 361; Wheatley v Bell (1982) 2 NSWLR 544.
   In National Provincial Bank Ltd v Ainsworth [1965] UKHL 1; (1965) AC 1175 at 1247‑1248, Lord Wilberforce said that before a right or interest can be admitted into the category of property, it must be definable, identifiable by third parties, have some degree of permanence or stability, and be capable in its nature of assumption by third parties. This dictum has been applied in Australian decisions, for example, R v Toohey; Ex parte Meneling Station Proprietary Ltd supra, at 342‑343; Sonenco (No 77) Pty Ltd v Silvia [1989] FCA 462; (1989) 89 ALR 437 at 445, 457. The degree of protection afforded by equitable doctrines and remedies to what equity considers confidential information makes it appropriate to describe it as having a proprietary character. This is not because property is the basis upon which that protection is given, but because of the effect of that protection.
   2154 Gummow J drew a distinction, in discussing the notion of property under the general law, between confidential information that, though not property, was still protected by equity in certain circumstances and other information including trade secrets which he considered was property because it has the indicia of property described by Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] UKHL 1; [1965] AC 1175.
   2155 I understand the statement by the High Court in Farah [118] to approve what Gummow J here said. Accordingly, confidential information, even if susceptible to equitable protection, is not ‘trust property’ within the first limb of Barnes v Addy because it lacks the indicia of property. Other things, including certain kinds of information such as trade secrets, that do possess those indicia, are capable of constituting such ‘trust property’. As Gummow J observed at (120), rights created by statute may be proprietary in character. Such rights include patents, copyright and designs, all of which possess these indicia of property though they are intangible.
   2156 There is no justification for confining ‘trust property’ for the purposes of Barnes v Addy to tangible things. Importantly, that expression includes, as the respondents submit, choses in action comprising incorporeal property not reducible into physical possession, such as rights arising under a contract which are enforceable by action.
   2157 ‘A chose in action is a species of property’: Spellman v Spellman [1961] 2 All ER 498, 501 (Danckwerts LJ). ‘The meaning of the expression “chose in action” or “thing in action” has expanded over time, and is now used to describe all personal rights of property which can only be claimed or enforced by action and not by taking physical possession’: 13 Halsbury’s Laws of England (5th ed) [1]. Choses in action include rights arising under contracts and the benefits of contracts: Halsbury [4] and [6].
   2158 The rights created and conferred on the banks by execution of the various Transaction instruments constitute choses in action. Each of those instruments, including the Torrens and share mortgages, the mortgage debentures, the guarantees and indemnities and the main refinancing agreements and the subordination deeds, created choses in action when they were executed (or, at the latest, when they came into effect upon satisfaction of relevant conditions precedent). Property for the purposes of the first limb of Barnes v Addy then came into existence.
   2159 Further, all the various interests and rights obtained by the banks under the Transaction instruments, as contractual choses in action, constitute property that are capable of being held in trust, i.e., are capable of being subject to the fiduciary obligations of the directors. They therefore satisfy the requirement of ‘trust property’ for the purposes of the first limb of Barnes v Addy.
   2160 The share mortgages, which vested the legal title in the banks through their agent Westpac subject to the equity of redemption in TBGL, can be held in trust. The Torrens mortgages gave the banks a discrete interest in the subject lands which could be dealt with separately from the fee simple or any other interest in that land: English, Scottish & Australian Bank Ltd v Phillips [1937] HCA 6; (1937) 57 CLR 302, 321. Those interests are capable of being made subject to trust obligations.
   2161 The mortgage debentures are capable of being held on trust. The fixed charge components of those debentures over both real and personal property gave the banks either a legal charge or a fixed equitable charge, depending on the nature of the property charged. The floating charge components, for the reasons given by Lee AJA in his discussion of the statutory claims, gave the banks an active, not a dormant, equitable interest in the property subject to the floating charges. Even if the floating charge component did not create an equitable interest in the subject property until crystallisation as a fixed charge, it would be a present security, not a future security: Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, 994. As an equitable interest in the entire mass of property so charged, as opposed to specific items of property, it is capable of being made subject to trust obligations: see Comptroller of Stamps (Vic) v Howard‑Smith [1936] HCA 12; (1936) 54 CLR 614, 621 ‑ 622 (Dixon J).
   2162 The benefit of the guarantees and indemnities are also capable of being held on trust: Lloyd’s v Harper (1880) 16 Ch D 290, 308 ‑ 309, 315; Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, 189 ‑ 190, 198.
   2163 As to the main refinancing agreements and the subordination deeds, rights arising under contract can, as choses in action, be made the subject of trust obligations: Creamoata Ltd v Rice Equalization Association Ltd [1953] HCA 40 [319]; (1953) 89 CLR 286 and generally, Starke JG, Assignments of Choses in Action in Australia [107] and [108].
   2164 The vesting of those rights in the banks by execution by the Bell directors of the Transaction instruments therefore met the requirement for liability for a ‘knowing receipt’ that the act of transfer of the property be capable of constituting a breach by the directors of their fiduciary duties to their companies, which is referred to by Spigelman CJ, Handley and Santow JJA agreeing, in Evans v European Bank Ltd [2004] NSWCA 82; (2004) 61 NSWLR 75 [160] ‑ [161]. Owen J so held at 8749.
   2165 The respondents in their submissions referred this Court to what Lord Scott said in Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 [27] in a judgment in which the other members of the court agreed. The House of Lords dismissed an appeal against a successful appeal overturning summary judgment. Lord Scott said:
   The word ‘receipt’ in the expression ‘knowing receipt’ refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a ‘receipt’ of assets when the contract is completed and the question whether there is ‘knowing receipt’ may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a ‘receipt’ of assets in the sense that a ‘knowing receipt’ involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a ‘knowing receipt’ are recoverable from the recipient.
   2166 Lord Scott there said: ‘This is neither a case of ‘knowing receipt’ nor one of ‘knowing assistance’. The case turned on whether two directors had the companies’ authority to make the agreement in question. His statement at [27] was obiter. Lord Scott’s distinction between an executory contract for the transfer of assets, that does not give rise to a ‘receipt’ of property for the purposes of the first limb in Barnes v Addy, and the interest that arises on completion of such a contract, which alone in his Lordship’s opinion is capable of constituting such a receipt, overlooks I think that the first limb of Barnes v Addy is concerned with the receipt of property not with the receipt of tangible assets. For the reasons given, the chose or choses in action created by the making of an executory contract for the transfer of assets is itself property capable of being the subject of a claim under the first limb of Barnes v Addy: the creation of contractual rights can also involve both the creation of proprietary rights and their receipt by the vesting of those rights in a party to the contract.
   2167 In my opinion, Lord Scott also appears to overlook that while the word ‘property’ in common parlance refers to physical objects, in legal discourse it generally refers to the proprietary rights exercisable by someone with respect to those objects, not to the objects themselves: McCaughey v Commissioner of Stamp Duties (1945) 46 SR (NSW) 192, 201 (Jordan CJ). In Telstra Corporation Ltd v The Commonwealth [2008] HCA 7; (2008) 234 CLR 210, Gleeson CJ, Gummow, Kirby, Hayne, Heydon, Crennan and Kiefel JJ said [44]:
   In the present case it is also useful to recognise the different senses in which the word ‘property’ may be used in legal discourse. Some of those different uses of the word were identified in Yanner v Eaton [23]. In many cases, including at least some cases concerning s 51(xxxi) [24], it may be helpful to speak of property as a ‘bundle of rights’. At other times it may be more useful to identify property as ‘a legally endorsed concentration of power over things and resources’ [25]. Seldom will it be useful to use the word ‘property’ as referring only to the subject‑matter of that legally endorsed concentration of power.
   2168 The same point is developed at more length in Yanner v Eaton [1999] HCA 53; (1999) 201 CLR 351 [17] ‑ [20] (Gleeson CJ, Gaudron, Kirby and Hayne JJ); [85] ‑ 86.
   2169 Owen J’s conclusion at [4804], insofar as it is based on what he said at [4802], was correct. So was his conclusion at [8750] that the ‘basket or aggregation of rights included within the transaction instruments’ over all the worthwhile assets of the Bell group companies constituted ‘trust property’.
   2170 I would dismiss grounds 71 and 72 of the appellants’ appeal.
   Absence of trust property before rescission
   2171 This ground 76 is based upon the proposition that a cause of action for ‘knowing receipt’ requires proof of the existence of trust property at the time of receipt. To the extent that any Bell company property or interests were received by the banks by reason of the execution of the Transaction instruments, the appellants argue that all such property and interests were received by them absolutely under the terms of the contracts which were then unrescinded and binding in accordance with their terms. Accordingly, so the banks say, they could not then have received trust property. Further, no remedy is available to the respondents because the proceeds of realisation of that property and those interests were dissipated before rescission.
   2172 For the reasons given in dealing with grounds 71 and 72, upon execution of the instruments, the banks did receive ‘trust property’ within the first limb of Barnes v Addy. Further, the relief the respondents obtained was limited to personal, not proprietary, relief for the reasons his Honour gave in sections 36.3.2 and 36.3.3. In Grimaldi, the Full Court referred at [253] to:
   … what has long been recognised as the essential characteristic of the Barnes v Addy liabilities: they expose the persons to whom they apply to personal, to in personam, liabilities … In knowing receipt cases, the recipient can be required to pay compensation for loss arising from the misapplication of the trust property, or to account for gains made from it. These liabilities do not depend upon the third party retaining any part of the property received (or its traceable proceeds) in his or her hands although, if such property is retained, it must be accounted for specifically … But in the usual case, as Lewison J observed in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), the personal remedy ‘is needed precisely where the recipient has not retained the property.’
   2173 This ground must be dismissed.
   Imputation of knowledge and agency
   2174 An issue in the appeal that attracted extensive submissions concerns the extent to which is permissible to aggregate the knowledge of individual bank officers to make findings against the various banks of knowledge sufficient to make out the respondents’ ‘knowing receipt’ claims.
   2175 Another issue concerns the extent to which knowledge acquired by bank agents can be imputed to all the banks to justify the findings of ‘knowing receipt’ made against them. Two categories of agent are involved. The first involves Westpac and Lloyds Bank and the extent to which Westpac was agent for the Australian banks and the extent to which Lloyds Bank was agent for the Lloyds syndicate banks: the question here is whether knowledge acquired by Westpac and Lloyds Bank can be imputed to the other Australian banks and the Lloyds syndicate banks. The second category of agent consists of the banks’ lawyers: the question here is about the extent to which the knowledge and opinions of lawyers can be imputed to the individual banks. Imputation is only a live issue insofar as the individual banks do not have actual knowledge of particular matters but their agents, who do, have not passed that on to the banks.
   2176 Senior counsel for the appellants (appeal ts 886/7) summarised these issues raised in the appellants’ grounds of appeal as follows:
   The primary judge misapplied the principles by which knowledge of the bank is determined for the purpose of the first limb of Barnes v Addy by, firstly, wrongly aggregating the knowledge and states of mind of individual bank officers and other materials for the purpose of concluding that a particular bank had the requisite degree of knowledge [grounds 82, 83]; second, wrongly holding that Westpac was the agent of the Australian banks [97], Lloyds Bank was the agent of the Lloyds Bank syndicate banks [98] and thirdly the lawyers, Parker and Parker, Allen and Overy and Mallesons Stephen Jaques London were the agents of each bank [93]; fourth, failing to identify one or more guiding minds of each bank against which any possession of knowledge could be assessed [84]; next in this section, wrongly imputing subjective opinions held by individual lawyers to the banks in circumstances where there were inconsistent subjective opinions held by bank officers [83]. His Honour in this respect, we say, went further and incorrectly characterised the beliefs held by particular lawyers, in particular a Mr Cole, and even if he was entitled to impute beliefs, imputed beliefs the lawyers did not hold. That appears at grounds 81, 82, 83, 84, 86 and 93 to 100 of our grounds of appeal.
   2177 I mention grounds 99 and 100 only because senior counsel referred to them at this point. They attracted no further attention in the oral submissions. The contentions are that his Honour was in error in imputing to all the banks the views about corporate benefit of Browning, an in‑house Westpac counsel, and Keane, a NAB bank officer. The appellants’ written submissions are confined to a short assertion that the imputations were made. This court was not taken to any evidence to support that. These grounds are rejected.
   Aggregation of knowledge of bank officers and of other material
   2178 The appellants submitted that, in finding that each respondent bank had knowledge sufficient for the purposes of the ‘knowing receipt’ claim, his Honour wrongly aggregated the knowledge and states of mind of individual bank officers and materials held by that bank for the purpose of concluding that a particular bank had the requisite degree of knowledge, regardless of whether those particular officers were responsible for deciding to commit the bank in question to the Transactions.
   2179 As the appellants point out, his Honour at [4838] denied the availability of aggregation of knowledge to establish a ‘knowing receipt’ and insisted on knowledge on the part of an identified controlling mind or minds. However, in section 30.2.2 he later departed from that narrow view and concluded that the knowledge of multiple agents and employees could be aggregated to justify a finding as to the state of mind of the company even if that involves actual fraud. Krakowski v Eurolynx Properties Ltd justifies that approach.
   2180 In Krakowski, a vendor company, Eurolynx, was held to have fraudulently misrepresented its property by giving the purchaser a statutory notice stating that the copy lease to the tenant of the property attached to the notice comprised the entire agreement between the vendor and the tenant. The rental reserved by the lease was significantly in excess of the market rental at the time but it gave the purchaser the 10% return on its investment that it separately told Eurolynx’s real estate agent and one of its officers it wanted and they each later confirmed to the purchaser that the Eurolynx had a tenant who would pay such a rental. They did not however have any involvement in making the false representation relied on by the purchaser. Eurolynx had in fact made a separate agreement with the tenant for various incentives to take the lease including a rent‑free period and a fit out contribution equal to 1 year’s rent. The statutory notice was prepared by Eurolynx’s solicitor, who had negotiated the separate agreement with the tenant. It was signed for Eurolynx by its employee, Gilbert, who was not involved in any negotiations with the purchaser.
   2181 Brennan, Deane, Gaudron and McHugh JJ identified the critical issue at (580) as whether the representation in the statutory notice that the instrument of lease covered the whole agreement between Eurolynx and the tenant was made consciously by it or its solicitor: if so it must have been made fraudulently. They referred (581 ‑ 582) to Eurolynx believing, rightly or wrongly, that the contents of the separate agreement were immaterial to the transaction of purchase and to the evidence of Gilbert that he did not believe that the separate agreement ‘was anything to do with the purchase’. At (582 ‑ 583) their Honours said:
   Though Gilbert’s explanation as to why he did not advert to the separate agreement when he was supervising the sale of unit 12 be accepted, the question is not whether Gilbert’s mind adverted to the making of the representation but whether Eurolynx’ mind should be held to have adverted to the making of that representation.
   The mind of Eurolynx does not depend upon the acceptance of the evidence of Gilbert alone as to his appreciation of the significance of the separate agreement. Account must be taken of the evidence that Eurolynx’ agent (Cini) and Eurolynx’ officer (Ryan) who had first procured the agreement of Mermelstein (as agent for the purchasers) to buy unit 12 knew that the purchasers were willing to buy on the footing that the rent reserved by the lease was what the tenant had been and was willing to pay for a lease of the property offered to them… Their knowledge was the knowledge of Eurolynx, for they were the persons who were responsible for the initial negotiations and who had set the scene in which the representation had been made by the s 32 statement and the proffered contract of sale. As Bright J said in Brambles Holdings Ltd v Carey (26):
   ‘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.’
   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 (40) … It is erroneous to make a finding as to the company’s intention or willingness to misrepresent the contractual arrangements with [the tenant] without reference to the knowledge of Cini and Ryan.
   So to approach the question of Eurolynx’ liability is not to regard the negotiations with Cini and Ryan as containing the actionable misrepresentation. If Eurolynx be treated as knowing that the purchasers were buying on the faith of the rent which the property itself would yield, it must have known that the purchasers would believe that the rent reserved according to the copy of the instrument of lease produced represented the commercial rent that the premises the subject of the proposed purchase would yield and that there was no other agreement conferring on the lessee a financial benefit which was reflected in the rent reserved … Even if Gilbert, not knowing of the prior conversations between Mermelstein and Cini and Ryan, did not perceive that the s 32 statement would be taken to represent that the lease contained the whole agreement, an inference that Eurolynx intended or was willing that that representation be conveyed should be drawn against Eurolynx.
   2182 Their Honours noted (584) that there was no evidence that the solicitor knew of the discussions between Eurolynx’s real estate agent and officer and the purchaser’s agent.
   2183 The court thus found that a company had a consciously fraudulent state of mind when a false representation was made on its behalf by aggregating the knowledge about one matter (the separate agreement with the tenant) possessed by the company’s solicitor who prepared the statement containing the representation and the company’s employee who signed that statement, with the knowledge of the company’s real estate agent and one of its officers about a separate matter (the return the purchaser required on the purchase price) that gave the representation its false character, even though neither the solicitor nor the employee adverted to that separate matter and even though the agent and the officer had no involvement in making the representation. What justified aggregation of the knowledge of these various officers and employees and external agents was that they had responsibility to act for the company in different aspects of the one transaction.
   2184 Contrary to what Owen J said at [6159], about there being no such case, Krakowski is a case in which knowledge held by separate employees and agents of a company was aggregated to enable a finding that the company had a fraudulent state of mind not held by any individual employee or agent. This approach is not unique. In Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473, the Court of Appeal held that the knowledge acquired by Lyons, a former senior employee of a company, that a boxer was tied to a particular promoter, could be aggregated with the state of mind of North, the senior employee who replaced him, who engaged the boxer on behalf of the company, to show that the company had the intention to interfere with contractual rights necessary to establish an inducement by the company to the boxer to breach his contract with the promoter. Neither the former nor the current senior employee had any such intention and North was found to have had a genuine belief that the boxer was not committed to anyone when he engaged the boxer. See [240] ‑ [252]. (That the position of each was such that each’s state of mind was said to be the state of mind of the company does not detract from the significance of this particular ruling on aggregation of knowledge.)
   2185 In Port Stephens Shire Council v Tellamist Pty Ltd [2004] NSWCA 353 one issue was whether the knowledge of a subordinate officer of the Council, McMahon, could be aggregated with that of Atkinson, its external consultant surveyor, [404], to support a finding that the Council had a contumelious disregard for the plaintiff’s rights sufficient to justify an award exemplary damages. Ipp JA, with whom Giles JA agreed, said (407) that Krakowski did not provide any support for the proposition and (408):
   I doubt whether, even objectively speaking, the requisite mental element (be it consciousness of wrongdoing, or recklessness) or the inference of high‑handed contumelious behaviour, essential to an award of exemplary damages, can be established by a theory of collective knowledge. That is, by having regard to different acts by two or more different persons, undertaken by each without knowledge of what others did or would do, then assuming that the defendant corporate body had the collective knowledge and intention of the persons concerned, and proceeding to use that collective corporate state of mind to infer contumelious conduct. That, in essence, would result in constructive contumely, and that is not what exemplary damages is aimed at.
   2186 I respectfully disagree with Ipp JA’s treatment of Krakowski. His Honour’s description of the ‘theory of collective knowledge’ to find the state of mind of a corporation describes, in my opinion, exactly how the court proceeded in Krakowski. Further, there is no basis for distinguishing between the seriousness of an allegation of contumelious disregard and of an allegation of fraudulent intent: the legal burden of proving the latter is heavier than for the former. So far as the imputation of reprehensible states of mind to a corporation is concerned, finding constructive contumely is I think less draconic than the finding of constructive fraudulent intent made in Krakowski. Santow JA, in his dissenting judgment in Port Stephens Shire Council v Tellamist Pty Ltd, in my opinion correctly identified the import of Krakowski when he said (316):
   The fraudulent representation in Eurolynx required consciousness on its part. That consciousness was found by combining the knowledge of those sufficiently closely and relevantly connected to the corporation. That must include in the present case Mr McMahon and Mr Atkinson, the latter indubitably its agent in the exercise. There is no basis for doing otherwise when it comes to the conscious wrongdoing required for exemplary damages in tort; indeed a fortiori, especially as it is fraud not tortious wrongdoing that requires strict proof. The Council cannot escape the consequences of its actions simply by pleading ignorance where the necessary knowledge can be attributed on such a basis, as here. A corporation, including a council, can be liable in tort on the basis of conduct and knowledge (where it is relevant) of several persons who are sufficiently closely and relevantly connected to the Council as to attribute responsibility to the Council; compare Bright J in Brambles Holdings Ltd v Carey (1976) 15 SASR 279 cited with approval in Eurolynx at 582. Furthermore, this may be so even where the court recognises that the disparate conduct or states of mind of various persons who constituted the directing mind will only constitute the elements of the wrong when viewed in combination. Ford, HAJ, Austin, RP & Ramsay, IM, Ford’s Principles Of Corporations Law, Butterworths, 2000, at [16.080], p 16,088.
   2187 The issue of present relevance in Macquarie Bank Ltd v Sixty‑Fourth Throne Pty Ltd [1998] 3 VR 133, upon which the appellants relied, was whether a mortgagee’s Torrens system registration could be set aside under the statutory exception to indefeasibility of registered title which requires proof of actual fraud in the sense of personal dishonesty. It was argued that various officers of the mortgagee and of its solicitors each had knowledge which, if aggregated, would show that those persons ‘between them had the means of ascertaining’ the fraudulent execution of the mortgage by the mortgagor: see (144). The case was said to involve fraud by wilful blindness. Tadgell JA, with whom Winneke P agreed, refused to countenance aggregation of the means of knowledge. In a brief passage at (145), his Honour said that the statement in Krakowski (583) about ‘a division of function among officers of a corporation’ did not ‘justify 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’. His Honour’s only explanation for saying that was that the court in Krakowski was doing no more than ‘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’. That is true. But what the High Court held was that, by considering what the four relevant personnel of Eurolynx each knew and by aggregating their knowledge, the company had a fraudulent intent not possessed by any of its personnel. Krakowski is, in my opinion, clear authority for the principle which Tadgell JA rejected. Ashley AJA (160 ‑ 161) treated Krakowski as showing only: ‘that the actual state of mind of a servant or agent of a 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 made by another servant of the company (which representation was evidently false) had been consciously made by the company’. There is no need to attribute to the company the actual state of mind of a servant or agent already required to be treated as the company’s state of mind. In any event, even if the states of mind of Eurolynx’s real estate agent and officer were treated as the company’s state of mind, they were not involved in making the representation. Eurolynx was only held to have consciously made the fraudulent representation by aggregating with their knowledge the states of mind of the solicitor and the employee, though none of the four had any fraudulent intent.
   A guiding mind?
   2188 The appellants submitted at ground 84 that his Honour failed to require proof of ‘a guiding mind or minds of each bank’, that is, an identified person or persons of sufficient authority to bind their bank who were involved in committing the bank to the Transactions and who had actual knowledge of the directors’ breach of duty or of the facts sufficient for the purposes of the relevant Baden categories found by the trial judge. The appellants made a similar submission in another contexts e.g. in par 44, Australian Banks common submissions, it was said that no finding of bank knowledge of Bell insolvency could properly be made because of the failure to identify a guiding mind at each bank who had the relevant state of mind.
   2189 The court’s reference to Brambles Holdings in Krakowski at (582 ‑ 583) does not support the appellants’ argument that knowledge can only be imputed to a company by identifying someone with sufficient authority to be described as the company’s ‘guiding mind’ and who is proved to have the knowledge in question (ground 84, submissions, par 1150). None of the personnel whose knowledge was aggregated to establish the company’s fraudulent intent in Krakowski was said to be its ‘guiding mind’. The court made no attempt to identify such a person but proceeded to find the company’s state of mind by aggregating the knowledge of all those subordinate personnel. The statement the court made immediately after referring to Brambles Holdings about ‘a division of function among officers of a corporation’ is a refutation of the appellants’ proposition: what is necessary is that the people whose knowledge is sought to be aggregated should be involved in the one Transaction, irrespective of their role in the company’s organisation. Otherwise, a company would be able to take the benefits of corporate personality, including the right to acquire and hold assets and to engage in various business activities, but to deny responsibility for how those assets were acquired on how those activities were conducted. Cf Callinan J’s comments in Rogers v Nationwide News Pty Ltd [2003] HCA 52 [114]; (2003) 216 CLR 327.
   2190 That that is the correct approach is confirmed by the court’s reference at fn (40), in the same context, to Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446 where Wootten J said (485):
   Corporations must be held responsible from those who act on their behalf, whether an act is performed by one person or by a number. Doubtless there may be problems of mixed motives as between individuals, as indeed there often are within an individual, but it is better for the courts to grapple with the true facts, however difficult that may be, and to shut out the realities of corporate action by arbitrary rules of evidence.
   2191 Wootten J added that he would use expressions such as Council’s desires, intentions, motives and beliefs etc as ‘convenient shorthand the conclusions I draw from a consideration of the processes which led to the Council’s decisions’. He noted that most of the material on which he relied was reports prepared by council officers that he inferred, in the absence of contrary indication, supplied ‘a basis for attributing to the Council intentions, purposes, motives, beliefs and state of mind revealed therein’. Wootten J considered it proper to impute directly to the Council the aggregated knowledge of various subordinate officers without having to identify someone who could be said to be the ‘guiding mind’ of the Council.
   The one transaction
   2192 At [6159] Owen J said:
   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 or 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.
   2193 In Australian Competition and Consumer Commission v Radio Rentals Ltd [2005] FCA 1133; (2005) 146 FCR 292, another decision relied on by the appellants, Finn J found in the reference in Krakowski to ‘a division of function among officers of a corporation responsible for different aspects of the one transaction’ reason for refusing to hold that the company had knowledge that a customer was intellectually disabled, the basis for the claim of unconscionable conduct made against the company. The Commission argued that an inference should be drawn from the records of many hundreds of individual but unrelated dealings with a particular customer by a large number of employees of the defendant company over a four‑year period that the company knew that the customer in question was intellectually disabled. No individual employee had any reason to think the customer might be handicapped. Finn J declined to aggregate the information in the records generated by the various employees because they could not be said to be involved in different aspects of one transaction. See [172] ‑ [179] and [199].
   2194 While the employee, the officer and the agents in Krakowski whose knowledge was aggregated can be said to have been involved in the one transaction, that case provides no support for any narrow view of what constitutes a relevant transaction. The solicitor was involved in negotiating the lease and drawing the conveyancing documents for both the sale and the lease; the employee, Gilbert, was responsible for giving instructions to the solicitor for the drawing of the lease, the separate agreement and the contract of sale though he was not involved in either the sale or lease negotiations. The real estate agent and the officer were involved only in the negotiations for the sale. The courts below accepted the employee’s evidence that the lease and separate incentive agreement were not ‘directed only to the plaintiffs’, that is, they were not tailor‑made for the plaintiffs as an integral part of a sale and lease transaction, but were intended by the vendor to be taken to the general market as an arrangement separate from the sale of the property (183 CLR at 579). The knowledge of all was still aggregated to establish the false representation.
   2195 In this case, the issue of the financial health of the Bell group was a matter of ongoing interest and then increasing concern to each bank in the context of its long‑standing relationship as lender to the Bell group. The combined knowledge of the various bank officers in each bank, generally recorded in memoranda, notes and reports, of the financial affairs of the Bell group provided the information upon which each bank, by various officers of greater or lesser authority, made the decisions integral to the continuance of that relationship, that is, decisions to continue to deal with the Bell group, to meet its requests for further finance and the various requests made in relation to the bond issues and the collapse of the NP agreements into the NP guarantees and then, as conditions worsened, decisions about the actions to be taken by the particular bank in response to mounting concerns about the Bell group’s financial health. Aggregating the knowledge of individual bank officers when various decisions had to be made during this extended period was the way each bank functioned.
   2196 In the introductory section of his judgment on bank knowledge, section 30.1, in which Owen J outlined his approach to this issue, he identified in [6134] and [6135] two themes, the first concerned with whether the banks knew that the Bell group companies were insolvent and the second, with whether there was a corporate benefit to those companies from the Transactions and what the banks knew about that question. As to the first he said at [6136] that the banks’ knowledge of the financial position of the bell companies evolved over a long period of time; the corporate benefit question, however came to light during the negotiations for the Transactions between about September 1989 and January 1990 during which period, Westpac and Lloyds Bank were playing a greater role in accumulating and disseminating information.
   2197 It can properly be said in my opinion that, once the banks started in about September 1989 to move towards taking the securities they ultimately obtained in January 1990, all involved in that exercise on the side of the banks, bank officers, the agent banks, Westpac and Lloyds Bank, and the latters’ solicitors, were all involved in the one broad transaction so as to enable their knowledge to be aggregated, if that was necessary, to establish what each individual bank knew about both the financial condition of the Bell companies in that period and the other issue of corporate benefit to which his Honour referred.
   2198 It cannot be suggested that the state of financial health of the Bell group was only a matter of peripheral interest to the various banks. Prior to the October 1987 share market crash, TBGL’s long and robust financial performance was central to its relationship with the various banks and their willingness to accommodate its various demands. From soon after the October 1987 share market crash, the state of the worsening financial health of the Bell group became a matter of ongoing and increasing concern for both the Bell personnel who had to deal with the banks and the banks themselves. From about September 1989 when the banks started to move towards taking security from the Bell group companies it became a matter of central concern to the banks. So far as concerns each bank, his Honour was entitled to take into account the information each of its officers and the agent banks, Westpac and Lloyds Bank, accumulated in building up the level of knowledge which his Honour ultimately found each bank had had about the insolvency of TBGL. His Honour was entitled to take the same approach in determining what each bank knew about the issue of corporate benefit, an issue quickly identified by both Westpac and Lloyds Bank as one of importance soon after the banks decided to move towards a secured position.
   2199 There was no need to find, for each bank, a guiding mind in which reposed all relevant knowledge and who determined upon that bank’s actions with respect to the Transactions.
   A duty to communicate?
   2200 Krakowski does not support his Honour’s opinion at [6159] ‑ [6161] that the aggregation of information of various officers and agents of the bank was permissible only if each had a duty to communicate what each knew to the other or to some central superior. The High Court held that aggregation of knowledge possessed by various agents and employees of the company could be relied on to show the company’s state of mind, but made no suggestion of that being dependent on each of those personnel having a duty to communicate what each knew. The court did not refer to that concept at all. Wootten J’s approach in Dunlop v Woollahra Municipal Council, approved in Krakowski and referred to above, to aggregating the knowledge of various subordinate officers and imputing that directly to the Council is inconsistent with it being a requirement for aggregation that those officers had a duty to communicate what each knew to the other or to some superior officer.
   Aggregation of documentary material
   2201 Another complaint made in ground 82, in two and a half pages of written submissions not developed in oral submissions, is that his Honour made his findings that the banks had the requisite knowledge for the purposes of the ‘knowing receipt’ claim on the basis of an ‘accretion of knowledge’ by each but failed to identify, in the mass of material in evidence, including bank witness statements and oral evidence and bank documentation, the particular material upon which he relied to do that.
   2202 His Honour dealt with the evidence relevant to the issue of bank knowledge by gathering together the evidence relating to each of a large range of relevant topics which he selected for examination then by examining the position of each bank to those topics. This part of the judgment comprises sections 30.6 the 30.26 and over 600 pages. It shows that his Honour did what he said he did at [8742], namely, that he considered all the available material to each bank, narrated what happened at each bank at the relevant time and demonstrated the extent of knowledge did each bank had acquired. His Honour explained his approach to bank documents at [6162] ‑ [6165]. There is no reason to doubt that his Honour gave detailed consideration to the evidence of the kind he explained at [6385] ‑ [6387] in introducing his reasoning and findings on bank knowledge of the Bell group’s financial position. The many findings he made in these sections of the judgment coupled with his various summaries more than adequately satisfy the obligation to give informative reasons. It is not required and it would be entirely impracticable in this case to require his Honour to identify, with respect to each of the very many findings he made relevant in the ‘knowing receipt’ case to the issue of the knowledge possessed by each of the banks, each passage of evidence and each document or part thereof upon which he relied to make each finding. The appellants single out for criticism the summary the findings about bank knowledge his Honour made in schedule 38.21. His Honour described the origin of this table in section 30.21.8 and 30.22.16. It is as his Honour said a summary of his conclusions based on inferences from accumulation of material. He was entitled to present his findings in that form.
   Imputation of contradictory evidence
   2203 The only example given by the banks in this section of their submissions, Ground 83: Aggregation of Knowledge Errors, is what his Honour said at [7287] and [7288] about Latham’s evidence to the effect that he believed there was a corporate benefit for the Bell companies in the then‑proposed Transactions. That was referred to in the context of a submission that a corporation cannot know or believe contradictory things. In my opinion his Honour, far from fixing the Lloyds syndicate banks with contradictory beliefs, was concerned only with explaining why he would not impute to those banks the belief of Latham which was inconsistent with what his Honour took to be the views of Lloyds Bank solicitors. Wootten J recognised that sort of complication in Dunlop (485) when he referred to ‘problems of mixed motives as between individuals’ and said it was for the court to resolve such contradictory evidence in ascertaining the true facts. That is what Owen J did here.
   Westpac as the agent of the Australian banks and Lloyds Bank as the agent of the Lloyds syndicate banks
   2204 The appellants point here is that if Westpac was not the agent of the Australian banks and Lloyds Bank was not the agent of the Lloyds syndicate banks, knowledge acquired by Westpac and Lloyds Bank, but not passed on to the other banks, could not be imputed to any of those other banks to support findings against them of ‘knowing receipt’ of the Bell company property.
   2205 The banks submit that his Honour was in error in holding that Westpac was the agent of the Australian banks because it never had the capacity to affect the legal position of each of those banks and thus was in error in imputing to those banks certain knowledge acquired by Westpac but not circulated to them. His Honour correctly in my opinion held at [6315] and [6321] that Westpac was not the agent of the Australian banks in any general sense for want of capacity to affect their legal relations with any members of the Bell group. As independent financial institutions the other banks were unlikely to cede to Westpac such authority. The point is further illustrated by the actions of CBA and SCBAL, both of whom made demands for repayment of their loans independently of Westpac, but after the commencement of Westpac’s engagement that was said to make it their agent.
   2206 However, in my opinion his Honour is correct in holding at [6316] and [6322] that, though it lacked capacity to affect the legal relations of the other banks with the Bell group, Westpac was the Australian banks’ agent for the limited purpose of obtaining legal advice in connection with the refinancing discussions with TBGL and that Westpac was under a duty to those banks to pass on all legal advice it obtained and under an incidental duty to pass on information relevant to understanding that advice. Westpac had the other Australian banks authority to create legal relations between itself and those banks and the solicitors it retained. Westpac’s authority to obtain and duty to communicate extended to information it received from Lloyds Bank and its own solicitors material to the subject matter of the legal advice it was commissioned by the Australian banks to obtain from P&P. From about September 1989, Westpac did not obtain legal advice only for itself, but did that on behalf of the Australian banks also and so created a legal relationship between the solicitors it retained, P&P, itself and each of those banks. The factual foundations for Owen J’s findings, including details of the initiatives Westpac took to obtain legal advice and the reports Westpac made to the Australian banks relating to the procuring and obtaining such advice are accurately summarised in pars 1596 ‑ 1597 and 1600 of the respondents’ submissions in response to the appellants appeal. Westpac’s function here went beyond that of mere ministerial conduit: it was charged by the Australian banks with an active role in identifying where advice was needed, obtaining the necessary information and then obtaining that advice and liaising with Lloyds Bank and the solicitors engaged by Westpac and Lloyds Bank on behalf of their respective banks about all that. That justifies his Honour’s characterisation of Westpac as a limited agent. It follows that knowledge acquired by Westpac in performing that limited agency is properly to be imputed to the Australian banks.
   2207 If an agent has authority (whether actual or ostensible) to receive information of any kind, communication of that information to the agent is communication of it to the principal. In such cases, communication to the agent is considered to be communication to the principal by reason of the agents authority to receive the information for the principal, whether or not the agent actually passes on the information to the principal: NIML Ltd v MAN Financial Australia Ltd [2006] VSCA 128 [38(1)] and [40]; (2006) 15 VR 156; and El Ajou v Dollar Land Holdings (703). In NIML, Nettle JA, with the agreement of the other members of the court, said at [38(2)] that the law also imputes to the principal all knowledge relating to the subject matter of the agency which his agent acquires or obtains while acting as such agent. His Honour added, however, that the extent of the application of this rule is uncertain and in Australia it scope of operation appears limited to instances where it is the duty of the agent to communicate knowledge to the principal citing Mason J in Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634, 658 ‑ 659. Whether the principal has a duty to investigate a certain matter, so that information received by an agent about that matter can be imputed to the principal, is only relevant where the agent received the information otherwise than as agent of the principal: El Ajou (703 ‑ 704).
   2208 The scope of Westpac’s authority to act for the Australian banks is evidenced by what it did, as referred to above. In my opinion, Westpac had the actual authority of its associated Australian banks to receive the legal advices it commissioned from P&P and the associated information, including the information it received from Lloyds Bank and the latter’s solicitors, being information material to the subject matter of the legal advice it was commissioned by the Australian banks to obtain from P&P. The advices and information it received from P&P, Lloyds Bank and from the latter’s solicitors can therefore be imputed to each of the Australian banks even if that material was not in fact passed on to them by Westpac.
   2209 As with Westpac, the plaintiffs contended that Lloyds Bank was the agent of the Lloyds syndicate banks to negotiate with TBGL on their behalf in relation to the proposed refinancing. That his Honour was correct in refusing at [6357] to find that Lloyds Bank had any such general agency is illustrated by the evidence relating to the role and function of the syndicate meetings, of which there were a number in the latter half of 1989: 20 July, 11 September, 4 October (all banks), 13 October, 1 November and 8 January 1990, at which Bell officers generally made presentations direct to the Lloyds syndicate banks. These meetings were necessary any time a decision of any significance that affected the Lloyds syndicate banks’ interests needed to be made and generally involved a presentation by the Bell group directly to all the Lloyds syndicate banks.
   2210 His Honour correctly held at [6330] that Lloyds Bank’s agency as syndicate manager under RLFA No 1 was not the source of the agency relationship of the kind contended for by the plaintiffs i.e. one that would permit imputation to the Lloyds syndicate banks of knowledge acquired by Lloyds Bank. However, like Westpac, his Honour, also correctly in my opinion, found at [6358] that Lloyds Bank was the Lloyds syndicate banks’ agent for the limited purpose of obtaining legal advice relevant to the refinancing negotiations and that it accordingly had a duty to communicate such advice and any information necessary to understand that advice. This limited agency arose separately from Lloyds Bank’s agency as syndicate manager under RLFA No 1 under which its duties which were confined to duties ‘solely of a mechanical an administrative nature’. That Lloyds Bank had this authority to act in this limited agency for the Lloyds syndicate banks was confirmed at their meeting of 13 October 1989 and is evidenced by the letter addressed to ‘Lloyds Bank Plc (as Agent for the Banks)’ that each syndicate bank then gave to Lloyds Bank. The letters were in these terms:
   In connection with the proposed restructuring of the above Loan Facility [£60 million facility to BGUK/BGF of 19 May 1986 as restated at 27 August 1987] about which we have been informed, we confirm we have no objection to Lloyds Bank Plc as Agent exchanging such information as it may judge necessary with Westpac and the Australian Lenders to the Bell Group and holding such discussions as it may judge necessary with Parker & Parker who have agreed to act as Australian counsel for the Australian Lenders in relation to the restructuring of the Loan Facility. We also confirm we have no objection to Allen & Overy and Mallesons Stephen Jaques acting on behalf of Lloyds Bank Plc as Agent in relation to any of the foregoing.
   2211 Lloyds Bank’s authority extended beyond obtaining legal advice relevant to the refinancing negotiations from MSJL and A&O and disseminating such advice and related information among the Lloyds syndicate banks to exchanging information relating to the refinancing with Westpac and the other Australian banks and to obtaining information from the latters’ solicitors, P&P. Owen J refers to this at [6356]. Some of what Lloyds Bank did in execution of this agency is summarised in par 1607 of the respondent submissions. As Owen J found at [6349] and [6352], each bank retained responsibility for assessing the information provided by Lloyds Bank and for deciding on its own course of action. But Lloyds Bank, like Westpac, was given a considerable discretion to act on behalf of the Lloyds syndicate banks in the respects I have outlined above and had an active authority that went beyond its duties as agent under RLFA No 1, which were confined to duties ‘solely of a mechanical an administrative nature’. The nature of this limited agency was therefore such as to permit the imputation of knowledge acquired by Lloyds Bank as such agent to each of the Lloyds syndicate banks.
   2212 As his Honour found at [6316], Westpac had a duty as agent to circulate all material advices and associated information including that received from the solicitors to the Australian banks and Lloyds Bank and its solicitors, so that where it failed to do that, the relevant information could be imputed to the Australian banks. It circulated most of this material [6300]. His Honour made similar findings in relation to Lloyds Bank’s agency [6344] and [6351].
   2213 The legal advices that were received by each of Westpac and Lloyds Bank are identified in the plaintiffs’ submissions at trial, Appendix A of [SUBP.007.006], a list of the legal advices and what they said happened to them, and in the defendant’s response in [SUBD.010.001] at [486]. Most of these advices were circulated to the Australian and the Lloyds syndicate banks. All were received by both Lloyds Bank and Westpac, except for:
   (a) the first version of the joint memorandum of A&O and MSJ of 13 October 1989 and the final version of 19 October 1989 were sent only to Lloyds Bank. The final version was however included in the brief to counsel which was sent to both Lloyds Bank and, by P&P, to Westpac on 23 October 1989;
   (b) P&P’s summary of counsels’ opinion of 31 October 1989 was sent only to Westpac. Lloyds Bank of course received counsels’ opinion;
   (c) P&P’s advice of 9 December 1989 relating to the ‘amended proposal’ for the securities to be taken was sent only to Westpac. It sought the agreement of Westpac and the Australian banks to the proposal which was developed by P&P in conjunction with Lloyds Bank and its advisers;
   (d) MSJ’s advice of 9 December 1989 regarding lack of corporate benefit was sent only to Lloyds Bank;
   (e) the A&O letter of 5 October 1989 regarding avoidance of the risk of double jeopardy, but that advice was incorporated in the joint memorandum of A&O and MSJ which was received by Westpac on 23 October 1989.
   2214 The information in this material that was not circulated to the associated banks can be imputed from Westpac and Lloyds Bank to those banks: it can properly be described as comprising knowledge relating to the subject matter of their agency which the agent banks acquired while acting within the scope of their authority. In my opinion the knowledge that can be imputed to each of the banks through the two inter‑bank agencies, insofar as those banks did not have actual knowledge of the matter is in question, also includes:
   (a) Lloyds Bank and Westpac’s knowledge about the drafting of the Transactions, the meeting minutes and the directors’ resolutions. This comprises information obtained by Westpac and Lloyds Bank in connection with the advice they were given by the lawyers;
   (b) Lloyds Bank’s and Westpac’s knowledge concerning the terms of the trust deeds and the concerns about the on‑loans. These were matters upon which both Westpac and Lloyds Bank sought advice from the lawyers. The knowledge they obtained in the course of the provision of that advice and knowledge ancillary to that advice (e.g. their own knowledge of what the trust deed actually said) falls within their authority to obtain legal advice and assistance.
   2215 In my opinion the one category of information of significance, if not circulated to their associated banks, comprises the knowledge of Westpac and Lloyds Bank about the difference between the approaches of the Australian and UK directors. What Westpac and Lloyds Bank learnt about that may not be connected with their role in obtaining legal advice. Their knowledge was gained from Lloyds Bank’s attendance, by Latham and Armstrong and A&O, at meetings with the UK directors and the latter’s solicitors and through the sharing of knowledge between Lloyds Bank and Westpac. Lloyds Bank was responsible for dealing with the UK directors [6306]. It exchanged a lot of information about the attitudes of the UK directors with Westpac as appears from par (i) below. They passed much of this information on to the banks: see, by way of example, [5844], [6488], [6490], [6679] and section 30.10.2. The respondents were correct in submitting at par 1597 that Westpac monitored the regular reports coming from Lloyds Bank in relation to the issues thrown up by the UK directors, reporting regularly to the Australian banks and at par 1607 that Lloyds Bank devoted much time and effort to the issues raised by the UK directors, in particular as to which companies would subordinate their debts, the status of the TBGL letter of comfort and the refusal of TBGL to give a guarantee; Lloyds Bank liaised closely with the UK directors, the banks’ lawyers, Westpac and the Lloyds syndicate banks in relation to these matters.
   2216 At [8754] his Honour found that: ‘The banks knew what steps the UK directors were taking’. That can be justified on the basis of each bank’s actual knowledge as conveyed to it by either Westpac or Lloyds Bank. It is therefore unnecessary to determine whether the extensive knowledge acquired by Westpac and Lloyds Bank about the attitudes of the UK directors that was relevant to the banks’ knowledge of breaches by the Australian directors of their fiduciary duties can be imputed to all the banks.
   Knowledge imputed from solicitors
   2217 The appellants submitted in ground 93 that the trial judge was wrong to impute knowledge of the solicitors to the Banks because they were not ‘agents’ of the banks to whom the normal rules of imputation of an agent’s knowledge to their principal applied; accordingly, there was no basis on which knowledge obtained by the solicitors, while preparing the advices, or the solicitors’ knowledge or states of mind about matters contained in the advices themselves, should have been imputed to the banks.
   2218 P&P were retained by the Australian banks to draft the refinancing agreements and the securities taken from the various Bell companies [6368]. Its role extended beyond that, as his Honour found at [6370], to ensuring ‘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’ and to advising the Australian banks generally on insolvency issues (but not to ascertain the factual solvency of the Bell group companies [6375]) and as to how they could minimise the likelihood of the proposed Transactions being set aside by a liquidator [6374]. To perform these tasks 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 [6372].
   2219 A&O had a similar retainer from the Lloyds syndicate banks. It worked with Lloyds Bank on the refinancing agreements and the securities provided by the UK and the Australian Bell companies and gave advice in relation to those Transactions [6376] and [6377]. 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 [6380]. They worked together to devise a structure that would best suit the Lloyds syndicate banks [6376].
   2220 His Honour considered whether MSJ, A&O and P&P were the agents of the banks in section 30.2.3. And particularly at [6177] ‑ [6185] where he concluded:
   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.
   2221 What his Honour meant by an ‘expansive approach’ I think emerged later in section 30.5.4. In performing their retainers, all three firms conferred extensively and exchanged information with each other [6367], [6376] and [6381]. As his Honour noted at [6381], much of MSJL’s work was communicated to P&P [6381] and various of A&O’s advices were circulated among the Australian banks [6378]. His Honour held that information obtained by each firm that could be imputed to their banks included information which alerted them or ought to have alerted them to possible breaches of duties by the Bell directors and information relating to the subordination of the on‑loans [6375], [6379] and [6382]. Owen J accepted at [6194] that, depending on the nature of the agency arrangement, it could 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. It appears that he included such an authority in the retainers of these three firms as part of his ‘expansive approach’.
   2222 The appellants contend, in reliance on authorities set out in pars 1277 ‑ 1280 of their submissions, the solicitors were acting in an advisory capacity only, there was no basis on which knowledge they obtained while preparing the advices, or their states of mind about matters contained in the advices themselves, should have been imputed to the banks.
   2223 On his Honour’s findings, the solicitors’ role went beyond the traditional one of providing legal advice: they formed part of the teams set up by the two lots of banks to structure the Transactions to achieve the banks’ objectives of ending up with securities that would withstand challenge based on the concerns of the solicitors and the banks about whether the Bell directors were entitled to commit their company’s to those securities. I think his Honour was correct, for the reasons he gave, in the approach he took to whether the relationships between the three firms of solicitors and the various banks was one of agency sufficient to justify imputation to the banks of information obtained by and opinions formed by those firms.
   2224 In my opinion, however, it does not matter in this case whether that is a correct assessment of the relevant relationships and their consequences.
   2225 The question whether material known to the solicitors could be imputed to the Australian and the Lloyds syndicate banks is only a live one if any of the solicitors obtained information which was not passed on by them to Westpac or Lloyds Bank and upon which his Honour relied to make the findings he made against the banks of ‘knowing receipt’.
   The solicitors did not keep any material information to themselves
   2226 It would be odd if sophisticated firms of solicitors kept materially relevant information or views from their clients in circumstances such as these. There is no evidence that that happened in this case. So there is no need to determine whether the relationship between the banks and the lawyers were such as to permit their knowledge to be imputed to the banks.
   2227 The significance for his Honour’s findings of knowledge imputed to the banks on the basis of what the solicitors knew loomed large in the appellants’ initial submissions: it was said that a large part of the judgment depended on his Honour being able to impute information to the banks on the basis of what the solicitors knew. They referred to one of his Honour’s summaries about bank knowledge at [8726] where his Honour said that the banks knew of certain risks ‘in most instances directly or if not then by imputation through the lawyers’ (ts 1167). It is raised in various grounds of appeal, including ground 93.
   2228 Ultimately, however, the issue of imputation took on much less importance. The respondents contended that there was only one issue with respect to which the imputation to the banks of the knowledge of their solicitors was significant, while the appellants submitted that there were a further four such issues.
   2229 The respondents, in reliance on schedule 38.21 to the judgment, submitted (appeal ts 2037 ‑ 2038) that the only findings that his Honour made in reliance on knowledge imputed to banks were his findings that the Lloyds syndicate banks knew of the concern about the subordinated status of the on‑loans.
   2230 But this knowledge was not imputed to those particular banks because of knowledge about the matter acquired by the solicitors, but not disclosed to the lead banks, Westpac and Lloyds Bank. What his Honour relied on was that Lloyds Bank had actual knowledge of that matter which could therefore be imputed to the Lloyds syndicate banks. Lloyds Bank knew by late December 1989/early January 1990 that the BGNV on‑loans might not be subordinated because Perry of A&O had been alerted to this prospect as a result of his discussion with Ferrier of SCBAL about the latter’s memorandum of 20 December 1989 [7123] ‑ [7125]. Latham of Lloyds Bank learned of this problem in his discussion with Perry the day after the latter’s discussion with Ferrier [7139] ‑ [7142]. Lloyds Bank was thus given actual knowledge of a problem with subordination of the on‑loans by its solicitors and his Honour was correct in imputing Lloyds Bank’s knowledge, not any knowledge the solicitors had but failed to disclose to Lloyds Bank, to each of the Lloyds syndicate banks. As to Westpac, it is clear from his Honour’s findings that through Weir, Westpac had actual knowledge of the problem by late December/early January and showed a clear understanding of it at the meeting of all the Australian banks on 24 January 1990 [7113] ‑ [7114], [7151] and [6765]. His Honour found that all the other Australian banks had actual knowledge at least as a result of their attendance at the meeting of 24 January 1990 [7151] and [6765], and in some cases earlier than that: NAB by early January 1990 [7145] ‑ [7146], [7148] and SocGen by early January 1990 [7145].
   2231 In reply, the appellants submitted (appeal ts 3915) that there were four additional matters on which Owen J made findings based upon imputation. None, however, relied on the imputation to any of the banks of knowledge of the solicitors not disclosed to Westpac or Lloyds Bank. These matters are:
   (i) Knowledge of the difference in the behaviour of the UK directors and the Australian directors. His Honour said at [8724]: ‘Westpac, Lloyds Bank and the solicitors must have perceived a clear difference between the behaviour of the UK directors and the Australian directors in respect to the discharge of their duties’. He continued: ‘It may be that Weir [of Westpac] and Latham [of Lloyds Bank] could not be expected to comprehend the standard behaviour of prudent directors in the circumstances in different jurisdictions. But their lawyers must have understood this. In particular they must have appreciated these points …’. This is a qualified finding that Westpac and Lloyds Bank did not have actual knowledge of that difference in behaviour. However, there is a substantial body of evidence indicating that Westpac and Lloyds Bank each had actual knowledge of that difference:
   (a) Section 26.8: Lloyds Bank’s knowledge of the UK directors’ actions and attitudes. His Honour referred at [6306] to the division of labour between Lloyds Bank and Westpac under which Lloyds Bank dealt with the UK directors. Latham of Lloyds Bank took an active part in the meetings of 2 and 8 January 1990 of the UK directors and their solicitors, at which the issues upon which the UK directors ultimately acted were identified and extensively discussed.
   (b) Section 30.10: the Australian banks’ knowledge of the Australian directors’ actions and attitudes in the period October ‑ December 1989.
   (c) Section 30.11.2: Lloyds Bank’s knowledge of the Australian directors’ actions and attitudes, as they emerged through 1989.
   (d) The extensive information concerning the UK directors’ attitudes that Lloyds Bank gave to Westpac throughout January 1990: see e.g.
   • [058.27.0034.3];
   • [058.26.0022.1] and attachment [058.26.0022.2];
   • [058.27.0001] and attachment [058.27.0001.1];
   • [058.27.0004] and attachments [058.27.0004.1], [058.27.0004.2] and [058.27.0004.3];
   • [058.27.0017] and attachment [058.27.0018.1];
   • [058.27.0007] and attachment [058.27.0007.1];
   • [058.27.0041] and attachments [058.27.0041.1], [058.27.0041.2], [058.27.0041.3], [058.27.0041.4] and [058.27.0041.5);
   • [058.27.0013] and attachments [058.27.0013.1]; [058.27.0013.2]);
   • [059.01.0010] and attachments [059.01.0010.1], [059.01.0010.2] and [059.01.0010.3];
   • [059.01.0040] and attachment [059.01.0040.1]);
   • [059.01.0041] and attachments [059.01.0041.1], [059.01.0041.2], [059.01.0041.3], [059.01.0041.4] and [059.01.0041.5].
   Latham and Armstrong both of Lloyds Bank and Weir of Westpac must have had a clear understanding of the difference between the attitudes and actions of the UK and Australian directors from their involvement in all this material. If the solicitors had information about this topic which they did not disclose, and there is none that I am aware of, Lloyds Bank and Westpac’s actual knowledge was such that they did not need to have imputed to them the knowledge of their solicitors to show that they well understood the difference in the attitudes of the two lots of directors.
   (ii) Knowledge that Hayne QC and Burnside gave their advice on an erroneous basis because they did not have information about the Bell intercompany loan arrangements (which his Honour said was necessary for the banks to have a proper understanding of that advice) [7275]. The plaintiffs’ claim of lack of corporate benefit in the Transactions was as his Honour said at [7256], strongest when looking at the BPG group. The brief to counsel erroneously indicated that BPG was a debtor to BGF [7270] and counsels’ advice that there was a corporate benefit from the proposed Transactions for BPG was made on that assumption. But Westpac was given the brief to counsel shortly after their advice was provided [TBGL.30612.062] and MSJL told Lloyds Bank of this error in early December 1989 [TBGL.35572.047]. It is not therefore necessary to rely on imputation from the lawyers to show that all the banks knew of the erroneous basis for counsels’ advice: the actual knowledge of Westpac and Lloyds Bank about that can be imputed to the banks. In any event, his Honour found at [7276], in a finding not challenged by the appellants, that Westpac and Lloyds Bank knew of the true position with respect to inter‑company lending and had appreciated the significance of that to the ascertainment of corporate benefit for the BPG group.
   (iii) The knowledge of concerns by Watson, TBGL’s external lawyer, about the lack of corporate benefit for the Bell companies who were to execute subordination agreements. Watson expressed this concern to P&P in his fax of 26 January 1990. His Honour said at [8718] that this document could ‘be imputed to all Australian banks through Westpac or P&P’s agency arrangements’. Not surprisingly, Westpac was in possession of a copy of this fax: P&P could be expected to have passed such a document on to it. Westpac had actual knowledge of these concerns which could be imputed to the Australian banks and there was no need to impute P&P’s knowledge to do them.
   (iv) Knowledge of the terms of the bond trust deeds, particularly in the context of whether the banks knew that the giving of the proposed securities might be a default under those deeds. His Honour said at [7060]: ‘I think that the discussion by A&O and P&P of this issue can be imputed to all banks via the agent banks’. But imputation through the solicitors was unnecessary. Westpac and Lloyds Bank had actual knowledge of the relevant terms. His Honour, in findings not challenged, said at [7060]:
   [G]iven 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.
   2232 At [7062] his Honour concluded:
   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.
   2233 In their written submissions, the appellants provided a table of knowledge which they say appears to have been imputed to the banks, [APPA.000.084.002], although they acknowledge the difficulty of identifying precisely what matters of fact or states of mind were in fact imputed to the banks from the two agent banks through the solicitors. It is, however, unnecessary to rely on the imputation of knowledge through the solicitors to support any of the findings in the table.
   • Item 1: if his Honour found at [6882] that information was imputed to the Lloyds syndicate banks because it ‘carried over’ to them, it was the actual knowledge of Lloyds Bank, obtained from the solicitors, to which his Honour referred at both [6882] and [6883]. There is no need to rely on agency of the lawyers.
   • Item 2: his Honour does not impute knowledge of the SCBAL demands via lawyers to any of the banks: see [7042] ‑ [7043]. He found that Westpac and HKBA knew of the demands, because of their actual knowledge: see [7035] and [7036].
   • Item 3: concerns inference not imputation.
   • Item 4: no knowledge was imputed: see paragraph (iv) (knowledge of the terms of the bond trust deeds) above.
   • Items 5 ‑ 20: Lloyds Bank and Westpac had actual knowledge of the problem concerning the status of the on‑loans: see above.
   • Item 21: A&O’s advice about the Trust Deeds was sent to both Lloyds Bank [TBGL.35594.064] and Westpac [TBGL.30573.020]. There is no need to rely on lawyers’ knowledge.
   • Item 22: MSJA’s knowledge was not attributed by his Honour to any bank other than SCBAL. It was not in any event imputed to SCBAL, but was the subject of specific advice given by MSJA to SCBAL as its principal.
   • Item 23: no knowledge was imputed: see par (iv) (knowledge of the terms of the bond trust deeds) above.
   • Item 24: as for Item 23.
   • Item 25: as for Item 23.
   • Item 26: the information Owen J referred to at [7175] and [7156] that was circulated to the Lloyds syndicate banks was Lloyds Bank’s own knowledge and the solicitors’ advices themselves. Nothing was imputed in the banks through the solicitors.
   • Item 27: Perry copied his fax of 15 January 1990 to Latham (Lloyds Bank), see [TBGL.35597.050]. Peek (P&P) sent Perry’s fax to Browning (Westpac) under cover of [TBGL.30648.075]. Lloyds Bank and Westpac had actual knowledge of Perry’s opinion. There was no need to impute it.
   • Item 28: no knowledge was imputed: see paragraph (ii) (re the advice of Hayne QC and Burnside) above.
   • Item 29: Ascroft’s query about whether there was a corporate benefit for BPG, even if imputed to Lloyds Bank and the Lloyds syndicate banks, has little evidentiary significance because Latham knew the true position with respect to be BPG’s relationship with BGF [7281] and Ascroft’s firm later gave explicit advice to Latham about the lack of corporate benefit for BPG [7282].
   • Item 30: [7288] It is not necessary to impute MSJL’s opinion to the Lloyds syndicate banks because that opinion was included in the advice it gave Lloyds Bank, which in accordance with the arrangements for Lloyds Bank to act as agent for the Lloyds syndicate banks, formed part of the knowledge to be imputed via Lloyds Bank to those banks.
   • Item 31: no knowledge was imputed: see par (iii) (Watson’s concerns) above.
   • Item 32: there was no need to impute knowledge to the Australian banks of Stow’s views: as appears from [8719], Westpac through Weir had actual knowledge of that.
   • Item 33: Weir (Westpac) commissioned this advice from the Australian banks’ solicitors ([TBGL.30631.008]). It is highly likely, as his Honour found at [8720] that Westpac and the other Australian banks received it either directly or by imputation through Westpac, not by imputation through the solicitors.
   • Item 34: As for item 33.
   • Item 35: This concerns the actual knowledge of Westpac and Lloyds Bank. It is not necessary to rely on imputation through the solicitors.
   • Item 36: As for item 35.
   • Item 37: no knowledge was imputed: see par (i) (the difference between the UK directors and the Australian directors) above.
   • Item 38: as for item 37
   • Item 39: All of those matters were within the actual knowledge of Westpac and Lloyds Bank. It is not necessary to rely on any imputation of knowledge through the solicitors.
   • Item 40: as for item 39.
   Errors as to the quality of knowledge possessed by the banks
   2234 I have already rejected the appellants’ submissions in support of ground 81 that only actual, as opposed to constructive knowledge, of the breaches of duty by company directors is sufficient for a ‘knowing receipt’ claim. They also argued in support of this ground that his Honour, who accepted at [8733(e)] that knowledge within any of Baden categories (i) to (iv) was sufficient to make out the plaintiffs’ ‘knowing receipt’ claim, did not make findings that the plaintiffs had established in the banks relevant knowledge within Baden categories (iii) or (iv), though he purported to have done so.
   2235 His Honour in [8747] concluded that the banks had Baden categories (iii) and (iv) knowledge of the directors’ breaches.
   2236 In my opinion, the appellants’ focus on the verbal formulae used by his Honour in [8747], without having regard to the context which includes [8745], [8746] and [8748]. What his Honour says in these three paragraphs is sufficient to show that he has found failures by the banks to make the enquiries that they should have made which would have revealed that, in committing the Bell companies to the Transactions with the banks, the directors were dealing with their companies’ property in breach of their fiduciary duties. The focus by the appellants in ground 79 on one phrase in [8742] of his Honour’s findings is open to the same objection. Further, his Honour was not compelled to construct his finding against the banks that they had Baden category (iii) knowledge in the precise words in which that category was framed by Peter Gibson J in Baden itself. His formulation at [8733(e)(iii)] is a sufficiently precise paraphrase of that and his finding at [8747] about a ‘reckless failure’ cannot be misunderstood, in the context of his Honour’s judgment: it is a Baden category (iii) finding.
   2237 A number of grounds of appeal raise arguments that failed to acknowledge the very detailed examination Owen J conducted of the evidence that led to his very extensive findings about bank knowledge of directors’ breaches. The proposition in ground 78 that the case against the banks that they were at most aware of a doubt about whether there was a breach of duty by the directors is an example of such a failure. The contentions here made are that the relationship between the banks and the Bell companies was an arms length commercial relationship between major commercial entities and that all the banks were aware of was a complex and difficult situation facing the directors upon whose judgment the banks, in effect uncritically, had to rely. That ignores his Honour’s findings in section 25.8, particularly those about the knowledge the banks obtained from their lawyers on the corporate benefit issue at [5760] and [5761]. (These findings in [5760] and [5761] were not challenged by the appellants in either their table of challenged findings or their submissions, though others were.) It also ignores his Honour’s findings at [8687] ‑ [8689] about such matters as the close involvement of the banks in the preparation of key elements of the Transactions including the recitals in the various security instruments and the minutes of directors’ resolutions, which are soundly based in the evidence.
   2238 In ground 80 the appellants argue that the trial judge’s findings in [8745] about bank knowledge and in particular about their knowledge of the directors’ breach of duty that resulted in prejudice to creditors was erroneous in so far as it was a global finding and did not deal with the knowledge about that matter by each individual bank. This submission ignores the fact that, as his Honour records in [8742], [8745] is a summary only of his examination and conclusions in relation to the banks extending over 500 pages. And importantly, for the reasons I have given, the failure of the directors to consider creditors and in particular the DCT and BGNV as a creditor of TBGL and BGF infects the decisions of the directors to commit the various Bell companies to the Transactions and all the banks had sufficient knowledge of that failure to complete the plaintiffs’ ‘knowing receipt’ claim against them.
   That the banks ought to have known certain things
   2239 The appellants contend in ground 86 that his Honour’s findings of knowledge on the part of the banks on critical issues such as the absence of benefit to the various Bell companies from entry into the Transactions were not based on findings of what the banks actually knew but on what they ought to have known. Such a finding, it was said, has no place in any of the Baden categories of knowledge including categories (iii) and (iv) upon which his Honour relied. It is further said that his Honour found against the banks by applying to them a standard appropriate for negligence instead of that appropriate to a ‘knowing receipt’ claim.
   2240 The banks support this contention by reference to various passages in the judgment e.g. [6110(4)], [6129] and [6384], in which Owen J summarised allegations by the plaintiffs to the effect that the banks knew or ought to have known relevant things. The appellants’ contention is that because in an early part of the judgment dealing generally with ‘the significance of state of mind’ of the directors and the banks, section 7.5, his Honour said he would use the phrase ‘were aware’ to encompass all relevant states of mind, it should be inferred that when he made findings of knowledge on the part of the banks basis of what they ‘were aware’ of, later in the judgment e.g. at [6456], [6899], [7379], [8689] and [8745], that he was or perhaps may have been making findings only that the banks ‘ought to have known’ such matters: see [1173].
   2241 Most of his Honour’s findings referred to by the appellants are in terms of what the banks ‘were aware’ of. However, the appellants were able to identify a small number of findings, in the vast mass of findings made by his Honour, in which he used expressions such as ‘ought to have known’ and ‘should have known’ and ‘would have been aware of’ e.g. [6721], [6375], [7271], [7301] and [7305]. But when looked at in their context, as the respondents correctly submit they must be, findings such as that made in [6721] about what Bank Indosuez and Kredietbank ‘would have been aware of’ are findings of what the banks actually knew based on inference. The finding at [7271] that Paterniti and Weir ‘ought to have known the correct situation’ is subsidiary to and does not detract from the explicit finding earlier in that paragraph that they had actual acknowledge of the matter in question. The finding at [6375] is not a finding that P&P ought to have known of directors’ breaches of duty: it is a finding identifying the range of knowledge of P&P that could be imputed to the banks because its acquisition would come within the scope of P&P’s retainer, if it could be established that P&P possessed that knowledge. As to what his Honour said at [7301] and [7305], he made the critical and unchallenged finding at [7299] that the banks knew that the free cash flow from the BPG group would not be sufficient to cover the interest due to the banks and would not enable the Bell group companies to meet other commitments. At [7301] ‑ [7305] he examined a discrete area of evidence, among much other evidence, that concerned bank knowledge of ‘holes’ in the cash flow information they were given by TBGL. As noted at [7301], bank officers were cross‑examined about what they knew ‘or should have known’ about that. But his conclusion at [7305] was not that the banks ought to have known about the cash flow ‘holes’ but that they had actual knowledge of that. His Honour went on to hold that by failing to enquire against the background of what they knew, the banks had knowledge within the relevant Baden categories, i.e. actual knowledge, of the problem facing TBGL, namely, how it would go about meeting its financial commitments. This is relevant to what the banks knew about the likelihood of the directors breaching their duties in committing the companies to the Transactions.
   2242 But pervasive in his Honour’s summaries of his findings about bank knowledge is his use of language indicating things that the banks knew, not what they ought to have known. See section 30.2 6.3 ‘Knowledge: the critical findings’. (In [8745(12)] his Honour says the banks ‘must have known it was unlikely that business would be conducted in a manner recorded in the minutes’. I think his Honour is here making a finding as to what the banks did in fact know based on inference from the matters set out earlier in that subparagraph. His Honour I think takes the same approach at [8724], (though for the reasons given, imputation of knowledge of the lawyers to Westpac and Lloyds Bank to make these findings is unnecessary). See also section 30.26.4 ‘Knowing receipt: the conclusions’ and in particular [8749(5)] in which his Honour incorporates his reasons in sections 30.23, 30.24, 30.25 and 30.26.3 already referred to. See also his Honour’s final summary in section 37 and in particular [9749] ‑ [9751]. A reading of these sections shows in my opinion that the many findings his Honour here makes, on the basis of direct evidence or inference, are about what the banks actually knew, not what they ought to have known.
   Errors as to imputation of knowledge from failure to enquire
   2243 The appellants contended in support of ground 88 that the trial judge reached his final conclusions at [8747] by imputing to the banks knowledge of the directors breaches on the basis of their failure to make enquiries but failed to identify what information would have been provided to the banks if they had made enquiry. His Honour made extensive findings, summarised at [8744] ‑ [8746] and [8748], about the actual knowledge of banks, which included in the case of the Australian banks other than Westpac and the Lloyds syndicate banks, actual knowledge imputed to them through Westpac and Lloyds Bank. Much of the information upon which his Honour here relied to make these findings was volunteered to the banks by TBGL or supplied in response to their enquiries. Though enquiries, if followed up, may have produced additional information for the banks, the inferences that can be drawn from his Honour’s findings as to the banks’ actual knowledge are sufficient to answer the appellants’ complaint that his Honour failed to identify what the banks would have discovered if they had made enquiries of the kind referred to in Baden categories (iii) and (iv). His Honour was entitled, as the respondents submit, to make his finding of Baden category (iii) and (iv) knowledge on the basis of inferences open from the banks’ actual knowledge.
   2244 Grounds 89 and 90 are variations on ground 88. In ground 90, the appellants go in detail into what they say the banks would have learned if they had made enquiries of TBGL which would not have justified the findings his Honour made of Baden category (iii) and (iv) knowledge.
   2245 It was submitted that if the banks had made enquiries for up‑to‑date cash flow information after September 1989 they would have received responses from Aspinall that would have painted a rosy picture of TBGL’s financial position. That cannot be accepted. It is unlikely that Aspinall would have done that because of the extensive knowledge he knew the banks then had about TBGL’s very poor position. The view Aspinall formed in about July 1989 and which caused him to open negotiations with the banks to refinance the Bell group is the subject of the finding at [5018], which his Honour made by accepting Aspinall’s evidence. Things did not improve.
   2246 His Honour made various findings relevant to this contention by the appellants. They included these in their table of challenged findings but did not attack them in their submissions; in fact they there relied on some of them. His Honour found that, because of the complexity of the brewery transaction, Aspinall could not have had any realistic expectation by January 1990 that the BRL shares would be returned to value in time to assist in the payment of the bondholder interest due in May in July 1990 nor that BRL would be a source of management fees or dividends within that time that would assist TBGL’s cash flow problems: see [5141] and [6035(4)], relied on by the appellants in their submissions e.g. in [APPA.000.084.001, pars 7.3, 429 and 431.7. There was as his Honour noted at [4966] little dispute about the directors knowing by January 1990 that the income derived by companies in the Bell group was not sufficient to meet the current liabilities of the Bell companies as and when they fell due [6035(5)]. The banks knew that too [8667]. None of this was disputed by the appellants. TBGL needed to rely on the proceeds of asset sales for that purpose. But the banks insisted on taking control of all significant assets through the clause 17.12 mechanism and Aspinall could not get any undertaking from the banks to release those proceeds when TBGL would need them.
   2247 The banks also submitted here that enquiries of the BGUK directors would have resulted in assurances that they were taking or proper steps to allow them to commit BGUK to the Transactions. The finding by his Honour at [7306] about what the banks knew about the BGUK directors’ situation stands in the way of the banks being able to rely on such assurances, if sought and if given. That finding, included in their table of findings challenged, but not disputed in the appellants’ submissions, is supported by the information that Lloyds Bank obtained from the UK directors and passed on to Westpac to which I have referred in dealing with the imputation issues raised by ground 93. It was a finding well justified, in any event, for the reasons I give later in dealing with bank knowledge of breaches of duty by the directors of BGUK, TBGIL and BIIL.
   2248 The banks also submit that they had received certain information about TBGL’s restructure plans that justifiably satisfied them and that, if they had made further enquiries, they would have received satisfactory assurances that TBGL had restructure plans in hand. But his Honour found at [8654] that as at January 1990, TBGL had developed no restructure plan. That was because Aspinall considered it essential to reach agreement with the banks before doing that [5367]. These unchallenged findings make it difficult for the banks to contend that his Honour was in error when he further found that if the banks had enquired about restructure plans, they would have learned little because the directors had not devised any [8678]. Lloyds Bank had received evasive responses from TBGL about its planning and ceased asking for information about that [8647] and [8654]. Various of the banks appreciated that there was no plan [8647], [8649] and [8654]. In their submissions, and subject to one qualification, the banks ignore these findings which, when coupled with the finding about the absence of any restructure plan within TBGL, are soundly based.
   2249 The only challenge to any of these findings is by Lloyds Bank to those in [8647] about what it realised concerning the absence of any restructuring plan. But the evidence relied on here by the appellants goes no further than showing that Latham understood from his discussions with Aspinall and other Bell officers during the negotiations for the Transactions that the refinancing was an interim measure designed to give TBGL breathing space by converting the Australian banks’ facilities from on‑demand to long‑term ones. In that context, Latham also understood that TBGL intended to establish some form of long‑term refinancing structure. He said:
   I believed that the directors’ aim was to sort out the immediate short‑term problem with the Australian banks and then to put together a soundly formulated plan to the future. I had no doubt that the banking arrangements were a temporary measure pending a more comprehensive program. I felt the new maturity date for the bank debt [May 1991] also set a timetable for further efforts to restructure.
   But he does not suggest that anyone in TBGL gave him any idea about what form that would take.
   Bank knowledge of directors breaches of duty
   2250 There are a number of significant issues relevant to bank knowledge of breaches of fiduciary duty by the directors in committing the Bell companies to the Transactions. They include the banks’ knowledge of Bell group insolvency, their knowledge of external creditors, the clause 17.12 regime and the ‘no worse off’ thesis.
   Knowledge of directors and banks of Bell insolvency
   The directors
   2251 A major element of the plaintiffs’ case at trial was that at the commencement of, and during, the Scheme Period (from 8 January 1990 ‑ 31 July 1990), the main companies in the Bell group, including most of the plaintiff companies, were insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent. His Honour used the expression ‘an insolvency context’ to refer compendiously to these various financial states.
   2252 The banks’ contention that in late 1989/early 1990 the Bell group was then facing no more than a period of tight liquidity provoked his Honour’s response at [1930] that ‘it was much more than that’. His Honour set out his conclusions on the plaintiffs’ cash flow insolvency case in section 9.20 which included the following [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’.
   2253 And at [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.
   2254 His Honour explained the significance of the ‘pre Transactions and post Transactions insolvency cases’ to the Barnes v Addy case in section 7.2.3. The point of the pre‑Transactions insolvency case was that, because 18 plaintiff companies were, immediately prior to execution of the Transaction documents, already in an insolvency context and another three plaintiffs, those mentioned in [1954], would upon execution, become insolvent, that was relevant to showing that the directors, in committing the Bell companies to the Transactions, acted in breach of their fiduciary duties by failing to take into the account the interests of creditors and that the banks knew that: see [838] and [842].
   2255 His Honour dealt with the plaintiffs’ balance sheet insolvency case in section 10 of the judgment. Owen J generally accepted the plaintiffs’ approach. At [2001], he found that there was a demonstrated insufficiency of realisable value in the Bell group assets to meet the group’s liabilities.
   2256 His Honour’s findings on insolvency of the Bell group were not appealed by the banks.
   2257 His Honour’s findings in [6035], [6041] and [9742] that the Bell directors knew in January 1990 that the group was in an insolvency context were not challenged, save in one respect. At [6035] his Honour said that the directors knew, among other things, that:
9. 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.
10. 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.
11. 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.
12. 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.
13. 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 (with $25 million due in early May 1990 and another $8 million in early July: 338).
14. 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.
    2258 The only finding disputed by the appellants was that in [6035(4)] that the directors knew that the BRL shares had little realisable value in the medium term although they accepted the directors had the belief so far as the short-term was concerned. The expression ‘medium term’ is imprecise. But his Honour correctly understood that, as at January 1990, it would be many months indeed before the Bell directors could expect to sell or receive any income from the BRL shares.
    2259 The position in relation to the BRL shares as at January 1990 was summarised by the appellants in paragraph 7.3 of their submissions in support of ground [1] as follows, omitting judgment references. Absent external creditors, the proceeds of the sale of the BRL shares would ultimately flow to TBGL and BGF. None of the Bell subsidiaries that owned the shares had any external debt except for Maranoa Transport which had a disputed debt to the ATO of $1.34 million. As at January 1990, the value of the BRL shares was open to doubt. BCHL had procured a loan to itself from BRL of nearly $1 billion. The loan was not fully secured. BCHL had decided to convert the loan into a deposit paid by BRL for the purchase of the BCHL brewing assets from BBHL. Enhancing the value of the BRL shares depended on completing the brewery purchase. As at January 1990, it was uncertain whether the brewing transaction would be completed and it was uncertain what precise form the transaction would take, if completion did occur. The brewery deal with BCHL would not complete if TBGL went into liquidation. (That ultimately happened in October 1990.) In January 1990, the banks had a good understanding of these question marks against the value of the BR L shares.
    2260 As his Honour noted at [1641], the banks also admitted that when they entered into the Transactions, the Bell directors knew that, without access to asset sale proceeds, the Bell companies could not meet their recurrent current liabilities. Further, it was common ground at trial that the directors believed that the only alternative to the Transactions was liquidation [1881] and [5055].
    2261 Of the three Australian directors, Aspinall played the key role in negotiations with the banks. His Honour said at [6086]:
    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.
    2262 The extent of Aspinall’s knowledge in January 1990 of TBGL’s situation as found by his Honour is confirmed by the fact that TBGL had only been able to arrange payment of bondholder interest totalling $8.85 million that fell due in early December 1989 by removing funds from BRL by what his Honour described in section 9.9.7.2 as the ‘unusual’ Academy transaction [1488], something that Aspinall and the other Australian directors learned about in late December 1989 [6783]. By early January 1990, an independent director of BRL was demanding that TBGL reverse the Academy transaction and repay the $26.1 million it had recently obtained, which Oates as a director of TBGL told that BRL director would be difficult. Section 364 notices were issued in early January by BRL for recovery of these moneys. They were never repaid: see [1491]. Aspinall also knew of the tax debts and the need to make proper enquiry as to the status of the BGNV on‑loans.
    2263 At [6037] his Honour also noted 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 the insolvent trading provisions of the Companies Code, s 556, which he saw as further evidence of the directors’ knowledge of the Bell group’s precarious financial position.
    2264 The findings that the Australian directors knew the Australian Bell companies were in an insolvency context were well supported by the evidence. So were his Honour’s findings that the UK directors knew that the UK Bell companies’ survival depended on continuing financial support from TBGL, for the reasons I give later.
    The banks
    2265 His Honour’s findings at [8745(10)] and [8746] that the banks knew or had a strong suspicion that the Bell group companies were insolvent when the Transactions were entered into in late January 1990 is in contest in the appeal.
    2266 This challenge lacks cogency. I think his Honour’s conclusions that all the banks in January 1990 knew or suspected that the Bell group companies were insolvent or nearly insolvent are well founded in the evidence.
    2267 The background to these findings are dealt with in section 4.5 of the judgment. As at December 1988 the Australian banks were anticipating clearance of their facilities, most if not all unsecured, by 31 March 1989 with SCBAL expecting repayment by January 1989. TBGL which, through 1988 into 1989, had undertaken the sale of many of its assets and the complete or partial repayment of debts owing to various banks, not confined to the defendant banks, could not as at March 1989 pay out any of the Australian banks, whose facilities were on demand. TBGL then put various proposals to these banks for the formation of a bank syndicate which would provide further funds secured over the assets of BPG. This came to be referred to as the BPG club facility. In July 1989, TBGL informed the banks that it was unable to pay its outstanding obligations by the end of September of that year and asked them to extend their facilities on an unsecured basis until June 1991. This provoked a hostile reaction from the Australian banks. Negotiations then entered a new phase from July 1989. TBGL put various proposals initially to the Australian banks, but from about September 1989 to those banks and the Lloyds syndicate banks, that ultimately concluded with entry by the Bell companies into the Transactions in late January 1990. TBGL wanted the Australian banks to convert their on‑demand facilities into fixed term facilities. But they insisted on security. So TBGL had to involve the Lloyds syndicate banks even though their facilities were not repayable until May 1991. If TBGL gave security to the Australian banks it would be in breach of its NP arrangements with the Lloyds syndicate banks unless they consented to that. So TBGL had to offer them security too. Not all the banks readily agreed to this refinancing of the Bell group. Some, e.g. Dresdner, attempted to persuade other banks to pay them out. So did CBA. In early September 1989, it issued formal demands for recovery of its loan but withdrew them on 20 September 1989, after deciding to join with the other banks in taking security from TBGL. In early December, SCBAL issued its own demands on BGF and TBGL, followed up by s 364 notices to each. It was persuaded to withdraw them by concerns generated by Aspinall that they might have to compete with the bondholders in a liquidation of TBGL.
    2268 His Honour made a detailed review of the extensive oral and documentary evidence relating to the knowledge that banks had about the solvency of Bell group companies. He summarised his conclusions in schedule 38.21, which he explained in sections 30.1 and 30.21.8. Column 1 of this schedule is his summary of the knowledge possessed by each of the banks about the financial position of the Bell group companies in January 1990 but, as he noted in [6135], all six columns are all directed to identifying whether the banks knew that the Bell group companies were then insolvent.
    2269 Some things were common ground at trial: as already noted, it was common ground that the directors believed that the only alternative to the Transactions was liquidation. It was also common ground that, had the Transactions not occurred, winding up may well have followed [1140] and immediately before the commencement of the Scheme Period in early January 1990, the Bell group needed to restructure its financial position if it were to survive. 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 [900] and [1940]. Nor did the appellants challenge his Honour’s finding at [8744] in section 30.26.3, ‘Knowledge: the critical findings’, that as at January 1990 each of the Australian and Lloyds syndicate banks knew that TBGL and BGF were unable to repay the Australian banks facilities, all then on demand, and that the Bell group could not survive unless there was a restructure of its finances. Further, his Honour’s findings at [1686] that the Bell companies could not pay their debts, including bank and bondholder interest, as they fell due from recurrent income and needed access to asset sale proceeds to do that, were not challenged and were in any event admitted by the pleadings [1641]. The banks’ argument at trial, noted by his Honour at [902], was that:
    The banks contend that the [Bell] directors had no practical alternative other than to enter into the Transactions: there were no other steps that could realistically have been taken. They said that far from causing detriment, the refinancing … gave [the directors] the opportunity to pursue steps that would allow the group to avoid liquidation and to continue as a going concern.
    2270 All this shows that the financial position of the Bell group as at January 1990 was such that, unless it could arrange a restructure sufficient to relieve the financial pressures on the group, it was facing the prospect of fairly immediate liquidation. These matters were not in dispute at trial and are not challenged now. The banks were aware at relevant times of much of what is outlined above. Against the background to the Transactions, to which I have referred, they go a long way to showing why the banks’ submissions that his Honour was wrong to find that in late 1989/early 1990 they knew or strongly suspected that the Bell companies were in an insolvency context when they pressed for the securities they took in January 1990 cannot be accepted.
    2271 The appellants identified the findings in [8745] as of critical importance. They dealt with them in what they described as their ‘principal submission on the question of knowledge’ of the kind needed to support the plaintiffs’ ‘knowing receipt’ claim. The banks, with the exceptions I note below, do not dispute that they all knew, believed or suspected the following as found by his Honour in [8745]:
    8745(1): The banks had received and understood a lot of information about the debt and equity relationships within the Bell group.
    2272 In their overview submissions on bank knowledge, the appellants at par 5.1 dealt with this particular finding and submitted that the conclusion from the banks’ knowledge of the interdependence of the Bell companies, the danger of cascading demands leading to the demise of the entire Bell group and the consequential loss of asset values should be that entry into the Transactions benefited the Bell companies by avoiding payment demands that could not be met. (See also the unchallenged findings at [7294(a) and (b)].) The appellants’ position with respect to this finding in [8745(1)] is a pretty eloquent acknowledgement in itself of the banks’ knowledge of the precarious financial position of the Bell group.
    8745(2): The July and September cash flows demonstrated to all banks the importance of management fees and dividends from related companies, BRL, JNTH and GFH, to the ability of the TBGL group of companies to pay their debts as and when they fell due. The appellants admit that Westpac and SocGen, but not the other banks, knew that it was most unlikely that those management fees and or dividends would be received during 1990.
    2273 None of the banks, however, contested either in their table of findings challenged or in their submissions, what his Honour said about them all quickly realising that the September 1989 TBGL cash flow information was out of date, because it included a large amount of overdue but unpaid management fees payable by BRL and JNTH [6416(a)] and [6418]. As the September cash flow revealed, most of these fees were quite stale: BRL accrued management fees payable quarterly for the 1988/89 year that totalled $14.4 million as at July 1989, none of which had been paid by September. JNTH was in the same position with unpaid quarterly management fees for the 1988/89 year totalling $1.2 million as at July 1989 and also still unpaid in September. His Honour said at [6417] that it was apparent that these management fees (with the BRL dividends) formed a substantial portion of the total cash inflows to the Bell group as a whole, according to those cash flow documents provided by TBGL to all the banks. For a time, the banks sought more up to date information from TBGL. But they did not press the matter and did not receive anything further before 26 January 1990. Further, it was common ground at trial that as at 26 January 1990, JNTH owed TBGL a total of $1.8 million for management fees comprising the long outstanding $1.2 million plus fees for a further six months to December 1989 totalling $600,000 that all then remained unpaid [1434], [5153(b)]. Given these unchallenged findings, his Honour was entitled to make his finding in [8745(2)] that not only Westpac and SocGen, but all the other banks, knew it was most unlikely that management fees would be received from BRL or JNTH with respect to all the banks.
    8745(4): All the banks knew that the only significant assets of the Bell group were the BPG publishing assets and the BRL shares. They also knew of the problems besetting BRL through the brewery transaction and the Adsteam actions.
    2274 In their individual bank submissions, however, the appellants challenged his Honour’s further findings, including that in subpar (4)(a) of 8745, that the banks knew the publishing assets did not have the carrying values set out in TBGL’s financial statements at June 1989. As will appear, I think his Honour was entitled to make this finding with respect to all the banks, save for Banco Espitito and Gulf Bank.
    8745(7): The banks knew that there was a risk of pari passu competition between the banks and the bondholders in a liquidation though, at the time the transactions were entered into, the question of the status of the on loans had not been resolved. The banks admitted that Lloyds Bank, Westpac, SCBAL, SocGen and NAB, but not the other banks knew of this risk.
    2275 As will appear, his Honour was in my opinion correct in finding that all the banks knew in January 1990 of the risk of competition from the bondholders and he was also correct in drawing the obvious inference at [8748(5)] that the concerns by the banks about that happening, against the background of their knowledge of the financial position of the Bell group, was a driving force in causing them to press for the securities.
    8745(8): From the information made available by the Bell companies, the banks were aware there would be other creditors. Save for the DCT, the identity or extent of the other creditors was not known and the banks did not enquire. The banks knew that the effect of taking securities would be that they would have a priority over other unsecured creditors in a liquidation. If there were other creditors and the banks were obtaining a priority over them, it must follow that the banks knew that there was a potential that the Transactions would prejudice those creditors (including the interest entitlements of bondholders). (emphasis added)
    2276 The banks included in their table of disputed findings the passage in emphasis. But their submissions with respect to these findings were limited to contending in their overview submissions, par 5.8, that the banks took security for the obvious reason of obtaining priority over unsecured creditors in the event of a liquidation and that their knowledge of that effect was irrelevant to the issue of their knowledge of any breach of fiduciary duty by the directors. They also referred in their main grounds submissions with respect to ground 90 to his Honour’s finding here that the banks knew of the DCT’s claims but submitted that there was no basis for any conclusion that the banks should have made any further enquiry about those claims. The banks also acknowledged they knew of claims by external creditors additional to the DCT, but said that some were unfounded and the existence of the others was irrelevant to whether the directors properly performed their duties in committing the Bell companies to the Transactions.
    2277 As will appear, his Honour was, in my opinion, correct in finding that the banks knew of the standing of the DCT as a creditor and that his conclusions at [8746(c)] and [8745] that the banks had Baden categories (iii) and (iv) knowledge of the directors breach of duty and failing to consider the interests of external creditors were justified by the evidence.
    2278 But in my opinion, the range of matters not in dispute to which I have referred are ample to justify his Honour’s conclusions at [8745(10)] and [8746] that as at January 1990 each of the banks had a high degree of suspicion that the Bell group companies were insolvent and knew that they were nearly insolvent or of doubtful solvency.
    2279 The correctness of his Honour’s conclusions is reinforced by the evidence about the claims by the DCT and in respect of the BGNV on‑loans that I deal with later. It is further reinforced by his Honour’s findings about why the banks considered they would be no worse off if they took the securities even if they were later set aside and by their decision to drop their original requirement for directors’ solvency certificates from the main refinancing agreements.
    2280 The lack of substance in the banks’ challenge to this finding is further demonstrated by the banks’ joint submissions in support of ground 1 of the appeal, particularly at pars 7.1 ‑ 7.16. In these submissions, the banks summarise, accurately in my opinion, the position of the Bell group of companies as at January 1990. The conclusion from these submissions by the appellants is that the banks knew that the Bell group was in a financially precarious position, insolvent or nearly insolvent when they entered into the Transactions.
    2281 That the banks knew that explains why, from about the last quarter of 1989, they pressed the Bell companies for security to replace the negative pledge arrangements under which they had provided funding to the Bell group from the early 1980s. It also explains why they knew they could override TBGL’s objections to having to give the banks control, by means of the clause 17.12 regime, of all significant assets remaining in the Bell group, as his Honour noted at [6057] ‑ [6058]. The banks required this although they knew that without access to asset sale proceeds the Bell group would inevitably collapse. This stands in contrast to the ability of TBGL, when its businesses were prospering, to insist on the banks agreeing to its demands that they weaken the limited protection they had under the NP agreements and accept the NP guarantee proposed by TBGL in 1987. Those few banks that protested at the time, were told that if they persisted, TBGL would pay them out and cease to do business with them.
    The solvency certificate requirement
    2282 The provisions of the main financing agreements executed in January 1990 were developed over a period of months, particularly from September 1989, from terms sheets prepared by Westpac and Lloyds Bank and circulated to all the other banks [6722]. An initial requirement, approved by all banks, was for certificates of solvency by two directors of various Bell companies. This requirement was included up to the sheet produced on 22 November 1989. But it did not appear in the last terms sheet of 16 January 1990. His Honour found this requirement was dropped sometime after 15 December 1989 [6740]. He reviewed the evidence given by bank witnesses in explanation for this in section 30.9.2. He was unimpressed by their attempts to explain removal of this requirement: ‘none of the witnesses gave any plausible explanation for its removal’ [6741]. He concluded that the requirement for solvency certificates was dropped because of doubts by the banks about the solvency of the main Bell companies [6749]. His Honour’s reasoning is convincing. Here is further evidence that the banks had significant concerns about the solvency of TBGL when the Transactions were entered into.
    The carrying value of the publishing assets
    2283 The appellants submitted that the finding at [8745(4)(a)] to the effect that the banks knew that the publishing assets did not have the carrying value set out in TBGL’s financial statements as at 30 June 1989, which was based on the Whitlam Turnbull valuation of $632 million, was wrong because witnesses for each bank gave evidence that they believed the publishing assets had that value, subject only to the uncertainties expressed by the auditors in their report accompanying those financial statements, which reduced the value of the mastheads included in the Whitlam Turnbull valuation by $125 million.
    2284 This is a finding of some importance and I will spend some time on the relevant evidence for two reasons. Firstly, given the limited range of assets left in the Bell group by January 1990 and the problems that had to be overcome before the BRL shares could be sold, the strength of the publishing assets was, as Aspinall said, the key to any renegotiation of the Bell finances [5083]. It was the asset to which all the banks (except Banco Espirito) had regard in deciding whether to enter into the refinancing Transactions. What they thought the publishing assets were worth is also relevant to their knowledge of Bell group insolvency.
    2285 Secondly, how the appellants dealt with this particular issue in their written submissions illustrates the lack of discrimination that was displayed by their legal teams and those overseeing them in failing to focus on what was reasonably arguable and what was not.
    2286 The approach of the appellants’ legal team here was to peacock the evidentiary material and rely on that selection to support the submissions. When the evidence relied on by the appellants is looked at in the context of other relevant evidence, the picture that emerges is that, while a few bank officers placed uncritical reliance on the Whitlam Turnbull valuation figures, the concern of the banks in deciding whether to enter into the Transactions was whether there was sufficient value in the BPG assets to cover bank debt. In deciding to proceed, the banks heavily discounted the Whitlam Turnbull figure and determined to take the securities proposed because they thought that the publishing assets still had sufficient value to cover bank debt. Further, there is much scepticism recorded in contemporaneous bank documents about the high Whitlam Turnbull valuation that arose from the views widely held within the banks that TBGL’s financial position was very bleak indeed – ‘perilous’ and ‘desolate’ are two of the terms that appear in bank documents. The only exceptions to the correctness of his Honour’s ruling are Banco Espitito, which does not appear to have formed any view on any of the BPG valuations, and Gulf bank, which is the one possible exception.
    2287 The only bank with respect to which this submission was not made by the appellants was Westpac. Perhaps that was because it was pointless selecting the opinions of subordinate officers that might have lent support to the submission: there was a high degree of scepticism about not only the value of the publishing assets (‘it included a significant element of blue sky’) but also TBGL’s prospects overall that was expressed at the highest level among members of Westpac’s board credit committee, which made the key decisions with respect to Westpac proceeding with the refinancing Transactions: see [7338] and [7365] ‑ [7366].
    2288 As to SocGen, the appellants relied on its witness, Edward. The appellants’ submission is correct so far as it goes. But it is apparent that other views within the bank, which were relied on by head office to commit the bank to the Transactions, contradict the appellants’ submission and show that SocGen itself did not believe, at about the time the Transactions were entered into, that the publishing assets had anything like the carrying values referred to at [8745(4)(a)]. In any event, Edward said he agreed with those other views insofar as they were contained in the credit application of 27 March 1989 and in the credit application of 15 December 1989 which Paris head office approved, thereby committing SocGen to the TBGL refinancing. The authors of this latter application referred to the Whitlam Turnbull valuation and said that even if the masthead valuation were overstated, as the auditors suggested, the revised security value of $541 million would still provide a comfortable buffer against bank debt of $263.2 million. They continued:
    However in a more general sense the prevailing economic conditions in Australia (in particular the high interest rate environment) combined with a series of corporate collapses has resulted in a downward revaluation of asset values. In particular the severe problems currently being experienced in the electronic media could have some spillover effect into print media. Therefore it is conceivable that in this environment the assets of Bell Publishing Group would realise significantly less than $541 million. Probably a figure of between $375 million and $450 million is more realistic. Nonetheless this still provides a reasonably comfortable buffer.
    2289 As to NAB, the appellants relied on its witness, Keane. His Honour was entitled to include NAB in this finding at [8745(4)(a)]. He tested Keane’s evidence against the contemporaneous documentation including the analysis of TBGL’s position that Keane prepared on 24 August 1989 in which Keane recorded his own scepticism about the valuation in question:
    [T]hese assets have been the subject of a significant increase in the 1989 year … Mastheads from $96.8 million to $387.3 million (+ $290.5 million) … The earnings figure used in calculating the value of the group is significantly higher than historic earnings … The resultant value of BPG is $626 million … This represents a valuation of approximately 15 times EBIT, which in our view is a high multiple, signifying a very full valuation.
    2290 His Honour also referred to Keane’s reconstruction of the TBGL balance sheet on 3 November 1989 in which he described one of his adjustments in these terms: ‘write‑down of BPG asset to say $350 million (a reduction of $260 million from $617 million) being a conservative estimate of the current realisable value of this asset’ [7578].
    2291 The appellants made a similar submission in relation to Lloyds Bank based on the evidence of Latham. His Honour was not bound to accept Latham’s evidence at trial that was relied on by the banks and was entitled to include Lloyds Bank in this finding at [8745(4)]. He considered relevant contemporary documentation including Latham’s credit application of 20 November 1989, noting at [7821] Latham’s statement:
    The company and its Directors have, nevertheless been able to claim solvency, notwithstanding heavy reliance upon the revaluation by Whitlam Turnbull of the BPG assets, and in particular the Mastheads.
    2292 In this application Latham assigned a value to BPG of $400 million, with a lending value of 50% of that, compared with the Whitlam Turnbull valuation of $632 million including the $387 million they assigned to the mastheads.
    2293 As to SCBAL, the appellants relied on the evidence of Walsh. His Honour was not bound to accept his evidence, which was generally optimistic during the last quarter of 1989 about the Bell group’s prospects and was entitled to include SCBAL in this finding at [8745(4)]. Walsh’s evidence was contradictory on the value of the publishing assets. He said that while he could not recall where he got the figures for the note he made in December 1989, he said he believed that the Delphic entry in it represented his view at that time that the newspaper business could be sold for $500 million. In the memorandum of 23 August 1989, dealing with what was then described as the TBGL ‘club facility’ proposal, which Walsh sent to Knox, Group Managing Director and a member of the SCBAL credit committee, he thought it appropriate to base his assessment of the likely realisable value of BPG on 50% of the Whitlam Turnbull masthead valuation of $387 million plus their valuation of tangible assets of $245 million i.e. $425 million. In a further credit application of 7 September 1989, Walsh described the Whitlam Turnbull valuation as ‘clearly optimistic in valuation terms, but at worst gives the club a starting point’. He recommended continuing discussions with TBGL with the aim of participating in the ‘club’ proposal. Brookman, SCBAL’s Manager, Credit/Risk Management, disagreed with Walsh saying ‘the prospect of future liquidation cannot be dismissed, and if it is not imminent, it is arguably inevitable’. He prepared his own review of the ‘club’ proposal, recommending against it. He noted how the market had marked down media assets and referred to recent TV license sales at no more than 20% of their sale prices of less than 18 months previously. His Honour accepted Brookman’s assessment and rejected Walsh’s evidence [7703]. Patten, National Manager, Advances and Credits, and another member of SCBAL’s Australian Credit Committee, expressed his disquiet to Walsh about the application [7705]. Brookman’s review led to a joint recommendation, with Walsh, to issue an immediate demand for payment and to serve a section 364 notice on TBGL, action SCBAL ultimately took in December. His Honour rejected Walsh’s attempt to put an interpretation on the joint recommendation suggesting it reflected his then optimistic view about TBGL’s prospects [7707]. In a further application he prepared on 12 October 1989, Walsh again recommended participating in the ‘club’ deal. He referred to the ‘optimistic’ Whitlam Turnbull valuation, to how the proposed ‘club’ outstandings of $260 million would be covered by the BPG masthead valuation of $387 million which he understood, incorrectly as it turned out, BPG auditors would be accepting in the audited 1989 accounts [7711]. Brookman continued to question whether it was realistic to accept that TBGL had ongoing viability and Patten continued to express his disquiet at participating in the TBGL ‘club’ proposal given that Bell management seemed ‘unaware of their perilous financial position’ [7718]. It is clear his Honour did not accept much of what Walsh had to say preferring, as he said, to rely on the contemporaneous record [7719].
    2294 As to HKBA, the appellants relied on the evidence of Davis. Davis refers in his witness statement to his memorandum of 23 January 1989 to the general manager of the Asia‑Pacific head office of the bank and says: ‘In my facsimile, I expressed my view that a valuation of BPG of $600 million was optimistic, although I did not think that it was unreasonable’. That is not what the facsimile says. In par 1, in which he dealt with the Whitlam Turnbull valuation, Davis did not accept it and proposed a valuation of $400 million. Davis said of a June 1989 proposal to the credit committee recommending HKBA participation in a proposed new ‘club’ facility for BPG that he agreed with the comments on the proposal as to the value of the publishing assets which ‘vary considerably (between $316 million and $655 million) but was within the parameters of what I thought was possible for those assets’. The proposal does not suggest that $655 million was within the range of likely realisations. The authors were sceptical of the Whitlam Turnbull valuation and developed their own future earnings‑based valuation of the lowest figure of $316 million by applying the media industry average related earnings multiple of 10 rather than the high 15.8 used by Whitlam Turnbull. The authors concluded that if a major identified risk, collapse of the Bond Group, occurred: ‘the facility is very comfortably secured and even a forced sale would realise well in excess of $200 million’. The credit committee, who included Davis, had doubts about the reliability of the value of BPG: they approved the proposal ‘subject to WJCCF undertaking a satisfactory independent evaluation of Bell publishing’. WJCCF in their report of 16 June 1989 valued BPG at between $300 million and $330 million, by adopting a future earnings multiple of 10 to 11. His Honour considered in very considerable detail the evidence, including that of Davis, relating to the June 1989 TBGL proposal and a lot of other evidence about subsequent TBGL proposal in section 30.21.4. He noted that Davis’s assessment in his memorandum of 29 August 1989 that the sale of BPG could yield ‘$350 million+’ [7489]. His Honour was entitled to include HKBA in this finding at [8745(4)].
    2295 The appellants’ submission in relation to BfG was based on the evidence of Wright. His evidence about the carrying value of the publishing assets was limited firstly, to what he gathered from the Whitlam Turnbull report. He said:
    Neither I nor anyone else to my knowledge within BfG did any analysis of the report … I took note of the valuation rather than relying upon it as a definite valuation that BPG was worth $630 million. I was not convinced that BPG was worth $630 million, although it may have been as I have no experience in valuing intangibles, nevertheless I was satisfied from the valuation that BPG was a substantial asset with well above the amount of the Bell group bank debt.
    Owen J was not compelled to exclude BfG from his finding at [8745(4)].
    2296 The appellants’ submission in relation to Bank of Scotland was based on the evidence of Smith and Moorhouse. They rely on Smith’s perception that the publishing business was very valuable based on his reading of a report by Armstrong of Lloyds Bank of the syndicate banks’ meeting of 13 October 1989. He said he supported the recommendation that BOS take part in the Transactions for a number of reasons including his belief that BPG had substantial value, sufficient to cover all the bank debt of the Bell group. In his own recommendation of December 1989, he referred to the Whitlam Turnbull valuation of BPG at $632 million and the auditors’ opinion of a $125 million overstatement. He said that ‘if we assume a value of $507 million’ total syndicated bank debt was covered nearly twice over by the BPG assets alone. The evidence of Moorhouse, who could not recall reading either the Whitlam Turnbull or the Hambros valuations, was that it appeared to him that BPG had a very valuable asset, something confirmed by his reading of Armstrong’s report of the October 1989. Neither the evidence of Smith nor Moorhouse supports the appellants’ submission that his Honour was in error in including BOS in his finding at [8745(4)] that the publishing assets had a carrying value of $660 million.
    2297 The appellants’ submission in relation to Credit Agricole was based on the evidence of Rex. He said he considered BPG had significant value and that he thought the Whitlam Turnbull valuation could be relied on because it had been prepared by merchant bank in Australia; he also said he considered their masthead valuation of $387 million as ‘probably slightly high’. But he thought that academic because, as was noted in the credit application of 13 November 1989 recommending that Credit Agricole obtain security as soon as possible because of concerns that a Bond Corporation collapse would bring down the Bell group also, BPG current and non‑current assets totalled $720 million while bank facilities totalled only $250 million. The credit application noted that total BPG assets of $720 million included Bell publishing assets had been valued by Whitlam Turnbull at $626 million. He was not concerned with whether the masthead valuation was accurate but only with whether there were grounds for believing that the BPG assets gave sufficient cover for the bank’s debt.
    2298 The appellants’ submission in relation to Creditanstalt was based on the evidence of Crocker and Fenyves. On 16 November Crocker had submitted to head office an application for a final decision on the bank’s participation in the Bell group refinancing. In it he said:
    In our security valuation we have taken the Whitlam Turnbull valuation of $632 million and have reduced it to $300 million. This is to allow for over-optimism in the Whitlam Turnbull valuation and the deterioration in economic conditions in Australia during 1989 … TBGL has also informed us that it has a written offer to purchase BPG from it for $300 million. However, we have been informed by TBGL that it does not intend to sell BPG at the present time and, even if it was willing, the appropriate sale price would be around $500 million. Overall, we feel of $300 million valuation is appropriately conservative … the net asset position of TBGL should be regarded as very fragile. As outlined above, during the year the company’s publishing assets were revalued, the publishing masthead being re‑valued upwards from $96.6 million to $397 million … Without this masthead revaluation and the net asset valuation of the shareholdings, TBGL would show a significant deficit net worth.
    2299 Crocker concluded by recommending the Vienna head office agree to the proposed refinancing and said: ‘we feel the proposed restructuring is a pragmatic reaction to the current situation and once the security has been perfected, [the bank’s] position will have been materially improved’. Head office approved Crocker’s recommendation on the basis of this application. Owen J referred to all this in his detailed review of the evidence relating to Creditanstalt in section 30.22.9. Fenyves was cross‑examined about the statements in Crocker’s application and in effect dismissed them because the auditors had only written down the masthead by $125 million. However, his Honour was entitled to reject the testimony of these two witnesses on this issue in the face of the contemporaneous documentation I have referred to.
    2300 The appellants’ submission in relation to Credit Lyonnais was based on the evidence of Hebb and Goodall who they said accepted the carrying value shown in the annual accounts subject to the $125 million ‘qualification’ by the auditors. Hebb said he could not recall reading the Whitlam Turnbull valuation in detail or receiving the TBGL annual accounts with the auditors’ qualification to the masthead valuation, but cannot recall having any concerns about that because the auditors’ valuation would still have left the bank well covered by the BPG assets. Hebb took a different view about what he thought the BPG assets were worth in the application he prepared on 24 October 1989 which recommended that his bank proceed with the Bell refinancing proposal. He then considered it prudent to take a conservative view of the valuation of the masthead at 50% of the $387 million Whitlam Turnbull valuation and noted that that still provided the banks with an ample margin over the proposed facility. Goodall did not embrace the Whitlam Turnbull valuation. He said the auditors report accompanying the 1989 Bell group accounts, which he could not recall receiving but believed he would have read ‘would have given me comfort’ and would have led him to believe that there remained ample value in BPG alone to cover the bank debt. His Honour considered all this in his detailed review of the evidence relating to Credit Lyonnais. He was not bound to accept that the evidence of Hebb and Goodall at trial disentitled him to include Credit Lyonnais in the finding he made at [8745(4)].
    2301 The appellants’ submission in relation to Dresdner Bank was based on the evidence of Jessett and Mick. Jessett referred in his witness statement to the application of 15 November 1989 prepared by him and others for head office approval of the TBGL refinancing proposal, which mentioned the Whitlam Turnbull valuation as a basis for calculating the net worth of the BPG group, but says that after analysis of that valuation the officers who prepared the application considered that an achievable sale price for the BPG business both ‘in a voluntary sale as well as in a wind up situation’ would be in the range of $300 ‑ $400 million. In that application, Jessett and the other authors referred to the Bond empire being technically insolvent and they said that the overall situation of TBGL was desolate, with an asset base difficult to assess and continued heavy losses and an overall improvement in its business not foreseeable, other than from BPG. They noted that the proposed securities, however, represented an enormous improvement over the bank’s position, then protected only by negative pledges. His Honour deals with this application and Jessett’s evidence at trial about it at [8394]; Mick mentions that valuation as included in material sent by the London branch of the bank to Frankfurt head office in mid‑August 1989 without further comment. Nothing in their evidence throws any doubt on his Honour’s inclusion of this bank in this finding at [8745(4)].
    2302 The appellants’ submission in relation to Skopbank was based on the evidence of Simonen at pars 71, 76, 94, 104 and 105 of his witness statement. His evidence about the opinion he had in 1989 concerning the carrying value of the publishing assets is I think summarised at pars 94 and 104 where he said that he believes he would have made his own assessment of the Whitlam Turnbull and Hambros valuations as to which was the more realistic; though he could not recall what view he took, he thinks he probably took the middle ground, perhaps closer to the Whitlam Turnbull valuation because it was more up to date. He said he believed on the basis of both valuations that BPG was a very valuable business. But his evidence, particularly that concerning his assessment of the two valuations, did not require his Honour to exclude Skopbank from the finding at [8745(4)].
    2303 The appellants’ submission in relation to DG Bank was based on the evidence of Borig. The bank did not accept the Whitlam Turnbull valuation. As his Honour noted, DG Bank made a number of its own valuations of BPG from about mid‑May 1989 [8312], [8317]. Borig refers to the late August 1989 credit analysis prepared within the bank in which bank analysts, working on the information contained in the Whitlam Turnbull report, valued the BPG mastheads at $164.3 million compared with the Whitlam Turnbull valuation of $396.6 million. That analysis showed, as Borig referred to in his evidence, that the bank’s total security valuation of $371.2 million was substantially less than the $603.5 million based on the Whitlam Turnbull valuation of BPG, but still gave the bank a substantial’ cushion’ in the form of a security to loan ratio of 146%. DG Bank relied on its own lesser valuations of the publishing assets, not the carrying values showed in the TBGL annual report.
    2304 The appellants’ submission in relation to Banque Indosuez was based on the evidence of Haman. This does not provide any ground for doubting the correctness of his Honour’s finding at [8745(4)(a)], insofar as it applies to this bank. Haman had both the Whitlam Turnbull and Hambros valuations, did not do any detailed analysis of them, and saw none done within the bank either, but thought that a fair valuation of the BPG mastheads was probably somewhere in between the two. His opinion was that the BPG assets were significant and ‘even taking the lowest valuation, I was very comfortable with the cover for the bank’. He saw the auditors’ report in the TBGL 1989 annual accounts, with its comment about the overvaluation of the mastheads, but was not concerned by that ‘as the bank had, however, already applied a conservative estimate of the value of this asset in the credit application’.
    2305 The appellants’ submission in relation to Gentra was based on the evidence of Jenkins. Jenkins did not rely on the carrying values of the publishing assets shown in the 1989 annual report, even as qualified by the auditors as to mastheads value. He says in his statement, relied on by the appellants in their submissions, that he calculated the value of the publishing assets on alternate bases, as $504 million and $612 million. In the contemporaneous note he made on which he relied here, his conclusion was that his understanding of the value of BPG was in excess of $450 million and so did not require further revaluation. What he was concerned about was whether there was sufficient value in the publishing assets to provide satisfactory cover for the proposed new banks’ facility. There is nothing in his evidence to throw doubt on his Honour’s finding at [8745(4)(a)] insofar as it includes Gentra.
    2306 The appellants’ submission in relation to Gulf Bank was based on the evidence of Pettit. He had both the Whitlam Turnbull and Hambros valuations, was not in a position to determine whether either was right or wrong, but placed more reliance on the more recent Whitlam Turnbull valuation. He thought a realisable value for the BPG assets, based on a forced sale, was $325 million, that is, about half the Whitlam Turnbull valuation. His evidence provides support for his Honour’s inclusion of Gulf Bank in his finding at [8745(4)(a)]. However, in the credit application supporting Gulf Bank’s participation in the new TBGL facility prepared by the Singapore branch of the bank unqualified reliance was placed on the BPG assets which were to be offered as security and the Whitlam Turnbull valuation of BPG of $632 million. It was this credit application that received the bank’s approval. His Honour should not therefore have included Gulf Bank in this finding.
    2307 In relation to some banks, the appellants’ submissions did not identify, at least explicitly, any particular witness whose evidence they said contradicted Owen J’s entitlement to include those banks in his finding at [8745(4)(a)]. The appellants submitted in relation to these banks that his Honour did not expose his reasoning process in making the finding and that there was no evidence that any officer of the particular bank knew that the publishing assets did not have the carrying value set out in TBGL’s financial statements and did not refer to evidence called by the bank suggesting the contrary. Like the other banks, these banks received both the Whitlam Turnbull and Hambros valuations.
    2308 As to CBA, his Honour was entitled to ignore the evidence of Latimer which the appellants here referred to and which, by implication, they say should have led him to find that CBA did rely on the Whitlam Turnbull‑based publishing assets valuation publishing assets valuation. As he records in his witness statement, he was involved in the decision to issue the formal demand by CBA on TBGL because it had broken a promise that its subsidiary Wigmore would use $7.5 million from the sale of an asset to repay CBA debt in late August 1989. He noted that CBA had already considered and rejected the TBGL ‘club’ proposal for a syndicate of banks to lend additional monies to BPG and that TBGL ‘has been informed that CBA wants out now’. He was overridden by Mr Poulter in head office who decided to withdraw the demand on the basis noted in par 135 of Latimer’s statement, that ‘it is only too apparent that the group is unable to clear CBA’s loan at $12.5 million so it becomes a matter of next best choice … That is to participate in the proposed Australian lenders syndication’. Latimer says that after that he virtually ceased his involvement with the refinancing Transactions ‘and concentrated on other matters’. He did say, however, that he read the credit application of 4 October 1989 upon which the appellants here rely and made the notations on his copy on which the appellants relied, but added: ‘I thought that the application was really academic because of the decision that CBA would participate had been made on 20 September 1989′. His notations provide no justification for the appellants’ criticism of his Honour’s finding here in question. In explaining why he made them out of personal interest only he added: ‘because of my scepticism relating to the Bond Group, I had no faith in the accuracy or otherwise of the figures presented’.
    2309 As to Kredietbank, the appellants relied the witness statements of Broom (par 41), Bernaert, a member of the London Credit Committee of the bank and Broom’s superior (par 51) and Monahan, another member of the London Credit Committee (par 67), where each spoke of BPG being a substantial asset with good business prospects. Broom said that in the context of explaining the credit application of 10 November 1989 which he prepared and on which this bank’s decision to participate in the refinancing was based. However, as he said at pars 32 and 34 of his statement, in preparing this application he adopted a very conservative basis, in effect to ensure that he could be satisfied that there were sufficient assets in BPG to cover bank debt, and accordingly in making his various calculations assigned a value of zero to the intangible mastheads, though they no doubt had probably quite significant value, as the Whitlam Turnbull and Hambros valuations showed. Bernaert and Monahan simply endorsed Broom’s approach.
    2310 As to Banco Espirito, the appellants submit, in reliance on an extract from the minutes of the London Credit Committee meeting of 19 October 1989, that Banco Espirito knew and understood that the publishing business was sound and had continued prospects as a viable business. Here is the entirety of the reference to BPG: ‘Lloyds as agent bank made a three‑day trip to Australia to visit Bell publishing offices and printing works. Lloyds reported that the publishing side of Bell appeared to be well run. Most of the advertising business is unsolicited’. The only mention within Banco Espirito about the value of the BPG assets to which his Honour referred was a query by Brodie, made after the transaction instruments were executed, about whether the bank had anything showing a value for BPG [7927]. His Honour does not refer to any response. Although his Honour was in error in including Banco Espirito in his finding at [8745(4)(a)], it is clear that that bank never at any relevant time gave any thought to what the value of the publishing assets might be.
    2311 Even if his Honour should not have included Banco Espirito and Gulf Bank in his finding in [8745(4)(a)], there is ample evidence to justify his Honour’s conclusions that they and all the other banks knew or strongly suspected that the Bell group companies were in an insolvency context on 26 January 1990.
    External creditors – the on‑loans
    2312 His Honour held that, by January 1990, all the banks knew that there was a risk of pari passu competition between the banks and the bondholders in a liquidation, though at the time the Transactions were entered into, the question about the on‑loans had not been resolved. The appellants challenged these findings in relation to all banks except Lloyds Bank, Westpac, SCBAL, SocGen and NAB.
    2313 At [8748(5)] his Honour also found that after the banks came to know of this risk, it was a major consideration in causing them to pursue the refinancing Transactions which included the principal subordination deed and the BGNV subordination deed.
    2314 Given what the banks knew about TBGL’s financial position e.g. from its annual statements for the 1989 year and the quantum of the bondholders’ claims, his Honour’s findings are relevant to the banks’ knowledge of Bell group insolvency. Further, once his Honour’s finding that all the banks had knowledge of the position in relation to the on‑loans in January 1990 is seen to be correct, the banks cannot avoid the finding that they took the securities with knowledge that the Bell directors were breaching their fiduciary duties to their companies by giving those securities to the banks without having taken any steps to protect the interests of the bondholders (and the DCT) as creditors.
    2315 I have already indicated agreement with Lee AJA’s reasons for holding that Aspinall was in breach of his fiduciary duties to TBGL and BGF by failing to make enquiry or seek advice about how the interests of BGNV as a creditor of BGF might be affected by entry into the Transactions. I have added some comments of my own explaining why I regard this breach by Aspinall as a serious one because it was a deliberate decision not to enquire when enquiry was required.
    2316 His Honour in section 24.2.3 accepted Mitchell’s evidence that he believed the BGNV on‑loans were subordinated and that he was not told by anyone including Aspinall that there might be an issue about that. The only other Australian director, Oates, did not give evidence. His Honour found in section 24.4.1 that Oates had a much greater role in the affairs of TBGL and that he, like Mitchell, was aware of its precarious financial position. He concluded that the primary concern of Oates was with the survival of the BCHL group rather than with the interests of companies within the Bell group. He made no findings in relation to Oates with respect to whether he knew of any question about the BGNV on‑loans not being subordinated. But if the banks had sufficient knowledge of Aspinall’s breach of duty in failing to protect the interests of the bondholders when he joined with Mitchell and Oates in committing TBGL and BGF and the other Bell companies to the Transactions, the ignorance of Mitchell and Oates about the problem with the on‑loans could not obliterate the banks’ knowledge of Aspinall’s breach of duty which was sufficient to taint their receipt of the relevant property. The banks had sufficient knowledge of the circumstances in which the Transactions were entered into to know that the other directors could not properly commit the Bell companies to them.
    2317 In addition to Lloyds Bank, Westpac, SCBAL, SocGen and NAB, his Honour found that the Australian banks HKBA, CBA and the Lloyds syndicate bank Dresdner had actual knowledge of this issue concerning the on‑loans and he imputed knowledge about that to all the other Lloyds syndicate banks through Lloyds Bank and the lawyers: see schedule 38.21 and [8594] (and [7228]).
    2318 His Honour found that CBA and HKBA acquired actual knowledge of the risk that the BGNV on‑loans might not be subordinated from what was said at the meeting of the Australian banks on 24 January 1990. Notwithstanding the appellants’ submissions in par 15 of their bank knowledge submissions relating to CBA, his Honour was entitled to make the findings he did at [7151] ‑ [7154] in which he rejected the evidence of CBA witnesses, including Smith who attended that meeting, that they were unaware of the issue. Weir of Westpac made express mention at the meeting of the possibility that the BGNV on‑loans to TBGL and BGF might be unsubordinated and that the BGNV bondholders might rank equally with the banks in their winding ups. It was an important point in Weir’s presentation to the Australian banks’ representatives, which included his diagram, that their banks could expect to receive 100% of what was owed to them, provided the publishing assets sold for $400 million and even though the BGNV on‑loans were unsubordinated.
    2319 His Honour was I think entitled, for similar reasons, to find that HKBA also acquired knowledge of the on‑loan issue at that meeting. I reject the appellants’ submissions at par 12 of their bank knowledge submissions relating to HKBA.
    2320 As to Dresdner, his Honour’s finding that it had knowledge of the BGNV on‑loan problem prior to 26 January 1990 was a tentative one: see [7219] ‑ [7220] and [7228(10)]. In challenging it, the appellants relied only on the evidence at trial of the bank’s witnesses, Jessett and Mick. His Honour, however, relied on a contemporaneous note made by Jessett in preference to the evidence at trial.
    2321 For the reasons I have given in dealing with the position of Westpac and Lloyds Bank as agents for their associated banks, his Honour was correct in imputing knowledge each had as at January 1990 of the on‑loans issue to HKBA and CBA (even if his Honour was in error in finding that they had actual knowledge of the issue) and to all the Lloyds syndicate banks (even if he was wrong in finding that Dresdner had actual knowledge of the matter). His Honour’s findings at [8745(5)] were supported by the evidence.
    2322 It follows that the banks cannot escape a finding that they received the property of the Bell companies with Baden categories (iii) and (iv) knowledge of that breach of fiduciary duty by Aspinall, a breach that caused serious prejudice to the bondholders (and to the DCT). His Honour correctly recognised at [4243] that that would be so, if his finding that those on‑loans were unsubordinated turned out to be wrong.
    2323 His Honour was puzzled by the failure of Lloyds Bank to pass on to the syndicate banks the knowledge it had about the on‑loan issue: see [7176]. But that does not stand in the way of imputing its knowledge about this to all the syndicate banks. In challenging Owen J’s findings that all the banks (other than the five mentioned) had knowledge of the on‑loan issue, the appellants relied on the evidence of bank officers that they believed at least up to January 1990 that the on‑loans were subordinated. But even if they all had that belief, that would be irrelevant to determining whether the various banks should be fixed with knowledge of the on‑loan because of what must be imputed to them through Westpac and Lloyds Bank.
    2324 It is unnecessary to deal with ground 69 of the appeal which is limited to attacking his Honour’s conclusion that the bondholders were prejudiced by the Transactions even though he held, incorrectly, that the on‑loans were subordinated.
    External creditors – the claims by the DCT
    2325 The banks’ submission in relation to ground 68 was that, notwithstanding their knowledge of the tax claims, there was no ground for any conclusion that the DCT was prejudiced by the Transactions.
    2326 In the course of dealing with the plaintiffs’ successful cash flow insolvency case, his Honour at [1686] made findings, not challenged, that both the directors and the banks in January 1990 knew:
    (i) that in the immediate future, the level of recurrent income, mainly from publishing assets, would not be sufficient to meet interest commitments to the banks and to the bondholders, unless the overall level of debt was reduced;
    (ii) that it was therefore essential to restructure the Bell group finances, something which would take time to implement; and
    (iii) that, pending a restructure, TBGL would be reliant on access to the proceeds of asset sales to meet ongoing commitments including not only bank but also bondholder interest. See also the banks’ admission of this referred to at [1641].
    2327 Notwithstanding this, the banks insisted on taking control of all significant assets by means of the clause 17.12 regime and, despite their requests, refused to give the Bell directors any enforceable right of access to the proceeds of the sale of any of those assets.
    2328 Against that background, the likelihood of prejudice to the DCT from entry into the Transactions was such that the directors were duty‑bound in January 1990 to undertake an examination of the prospects of defeating the DCT’s claims before they could ignore them in making the decision to commit the Bell companies to the Transactions. As his Honour found at [4326], creditors of Bell Bros were prejudiced by it executing, as part of the Transactions, the Principal Subordination Deed because a liquidator appointed to Bell Bros by a creditor, such as the DCT, could not call in Bell Bros’s main asset, the $254 million debt owing to it by BGF, without the consent of the banks.
    2329 Lee AJA demonstrates, in a passage in his judgment with which I agree, why the directors were in breach of their fiduciary duties by failing to make proper enquiry about these tax assessments and by failing to consider the interests of the DCT as a creditor of these companies when they committed them to the Transactions.
    2330 In findings at [7249], [8994(3)] and [9058] not the subject of any challenge by the appellants, Owen J found that the banks knew of the existence of the tax assessments and of the possibility of a claim by the DCT. The banks also knew the amounts of the assessments. An amount of the order of $26 million was identified in TBGL’s 1988 accounts and $31 million in its 1989 accounts, which the banks had and read. As Keane of NAB said, when cross‑examined about whether Weeks of SocGen told him on 3 January 1990 of a possible tax claim of $30 million, he already knew about that: ‘it was in the annual report’. In his evidence at ts 22428 and ts 22429, referred to by his Honour at [7241], Weir expressed uncertainty about whether he shared the concerns of Weeks of SocGen (as noted by Keane of NAB in his file note of 3 January 1990) generated by a possible claim by the tax department for ‘$30 million plus’, not about whether he then knew of that claim. Weir read the TBGL annual returns too. In the context of TBGL’s capacity to pay, they were very significant amounts.
    2331 Though the banks knew of the directors’ expressions of confidence that the assessments would be overturned, repeated in annual report after annual report, the banks did make some enquiries about those assessments. But they failed to press the directors for informative responses. As his Honour noted in section 30.11.1, by mid‑1989, Lloyds Bank and the syndicate banks were becoming concerned particularly about BCHL’s control over TBGL and decided to explore the possibility of taking action to call up their loans on the basis of default by TBGL in providing reasonable information. See e.g. [6845]. Accordingly, Lloyds Bank wrote to TBGL on 28 July 1989 demanding information on a range of matters including the tax disputes. Latham referred to the response by Oates of 7 August 1989 in which Oates mentioned the tax disputes but gave ‘no details other than a bland statement that TBGL was confident that the dispute would be resolved in its favour’ [6849]. Weir of Westpac attended a meeting on 3 January 1990 with representatives of P&P, S&W and TBGL and, in the context of talk about contingent liabilities of TBGL, Morison of S&W recorded Weir as saying that the Australian banks wanted some information about the tax assessments. Weir did not dispute this. What his Honour found about the banks deciding to proceed with the securities on the basis that they would be no worse off than if they did not take them is a likely explanation for the banks failure to press for information about the tax assessments.
    2332 By December 1989 there was no basis for the confidence of the directors that the assessments would be set aside which they expressed in the notes in TBGL’s annual statements for that year. His Honour deals with this in sections 10.6.1.3 and 10.6.1.4.
    2333 By December 1989, the Federal Court case in which the Bell companies were challenging the assessments was moving along: a timetable had been set for them to file their material. But TBGL’s external solicitor in charge of the tax case, Dean, had to get several extensions of time to do this because of his inability to obtain the affidavit from Holmes à Court who he regarded as of critical importance to the success of the case. A successful challenge to the assessments depended upon cooperation as witnesses by Holmes à Court and former senior Bell group officers who had been associated with him. The essential question so far as the Bell Bros assessments were concerned was whether its intention, when it bought certain shares, was to hold them as an investment or for resale at a profit [2051]. Hence the importance of having evidence from Holmes à Court and his associates who had been involved in the purchase transaction about their intentions when they determine to commit Bell Bros to the Transactions that gave rise to the assessments.
    2334 By early January 1990 there was good reason to think their cooperation would not be forthcoming. The draft affidavit Dean had prepared for Holmes à Court was returned to him unsigned and without comment. The only other former TBGL directors who Dean identified as of possible significance, were Newman, who refused to provide evidence unless Holmes à Court himself did, and Michael Edwards who also refused to cooperate. Pepper, the BCHL in‑house tax adviser, instructed Dean to obtain an affidavit from Hussey, another former TBGL director but repeated efforts to contact him failed. It is clear that by December 1989, the cooperation of Holmes à Court and his associates was not going to be forthcoming. As his Honour found at [2059], relations between Holmes à Court and Bond had by then soured: Bond was suing Holmes à Court in London and there were allegations that BCHL officers had bugged Holmes à Court.
    2335 Dean’s evidence, accepted by his Honour at [2065], was that he repeatedly told Pepper in the period from November 1989 on, that without evidence from Holmes à Court, Bell Bros would lose. By 5 January 1990 when Dean prepared his brief to Myers QC, he considered it highly unlikely that Holmes à Court would provide evidence. Every senior counsel who looked at the matter was pessimistic, Gleeson QC in late 1982 [2063], Shaw QC who on 8 December 1989 advised that he considered that ‘the making of a profit must have been uppermost in the TBGL directors’ minds’ [2058] and Myers QC (but not until February 1990).
    2336 The directors knew of the insolvent state of the Bell group. They had no assurance of being able to realise in other than the long term the assets they needed to rely on to pay the DCT, namely the BPG assets or the BRL shares, and no assurance, in any event, of being allowed access by the banks to any such realisations if they proceeded with the Transactions. They were therefore bound to consider liquidation, if they could not reach an agreement with the banks that protected the interests of the DCT, instead of handing over to the banks control of all worthwhile Bell company assets and prejudicing the DCT by depriving it of the right to compete pari passu with the banks in a Bell liquidation.
    2337 The banks submitted that as at January 1990, the directors had no reason to undertake any examination of the DCT’s claims because even if the DCT ultimately won, there were sufficient assets after repaying the $260 million owing to the banks to pay the tax assessments of about $34 million. That submission depends in part on what the directors and the banks believed the publishing assets could be sold for. The figure suggested was between $500 and $600 million. As his Honour noted at [5124], that was an optimistic view. As I have explained, the banks thought the same when they assessed the value of the publishing assets for themselves in deciding whether to enter into the Transactions. The submission is, in any event, destroyed once it is accepted that the banks knew there was a real risk of pari passu competition with the bondholders in a Bell liquidation.
    2338 The banks also contended that if they had made enquiry of the directors about the tax case, Aspinall would have told them a number of things. Firstly, it was said that he would have told the banks that the DCT’s claim to be a creditor was disputed. They already knew that but the question is what would Aspinall have replied to a bank query in early January 1990. It cannot be assumed that, if the banks had then sought some explanation for the confidence of the TBGL directors that the objections to the assessments would be successful which continued to be expressed in the 1989 annual report, an explanation confirming that there were good reasons for that confidence would have been provided. Aspinall gave vague evidence that Pepper, with whom Dean had extensive contact with respect to the tax litigation but who did not give evidence, had told him sometime in the period 1988 ‑ 1990 of his confidence that TBGL’s objections to the assessments would prevail [5157]. He could not have obtained that information from Pepper in the period from late 1989 on: Pepper then knew how slim the prospects were of defeating the tax assessments and would have told Aspinall that, if he had then been asked about it. If the banks had pressed for information about the tax assessments in late December 1989 or early January 1990, Aspinall (or some other senior officer of TBGL) would have discovered what the true position then was. It cannot be assumed that Aspinall would have concealed that from the banks, once he became aware of it. Secondly, the banks said that Aspinall would have told them that the auditors had concurred in the Bell companies not providing for these disputes in annual reports and in NP reports. But the banks already knew all that. Thirdly, the banks say that Aspinall would have given them details about the court proceedings challenging the assessments. But he knew nothing about that and could not have given information to the banks about those proceedings without first speaking to someone such as Pepper or Dean, who would have told him of the serious problems Bell Bros was facing in the litigation.
    2339 Mention should be made of Peter Edward. In late 1989 and early 1990, he was the National Director, Corporate Finance, SocGen, based in Sydney. At the time of the share transactions which generated the Bell tax appeals, he was employed by TBGL as group financial controller and was involved in those transactions. In his witness statement he explained his firm opinion that the Bell tax appeals would succeed. It is not explained why Dean who had a close involvement in the tax appeals did not identify Edward as a witness of significance. SocGen relies on Edward to support its submission that his Honour was in error in finding, so far as SocGen was concerned, that it failed to make enquiry of the Bell directors about the tax assessments. Edward refers to the credit application prepared within SocGen on 15 December 1989 seeking Paris head office approval to converting the bank’s outstanding on‑call loan to TBGL into the fixed term facility, which was to form part of the refinancing arrangements with TBGL. He agreed with the views expressed in this credit application and supported it in his own watch list report to general management. As his Honour noted at [7650], the application dealt in some detail with the outstanding Bell tax assessments. The authors identified an advantage in proceeding with the proposed refinancing and associated extension of SocGen’s loan to TBGL in return for security from TBGL as enabling SocGen to obtain priority over the Tax Commissioner, if TBGL could survive the first six months after the grant of the security. Edwards did not take this opportunity to tell SocGen senior management what he says in his statement was his clear view that the Tax Commissioner would fail. It appears he kept to himself what he learned while with TBGL. His private knowledge about the tax assessments, acquired as an employee of TBGL, can be imputed to SocGen.
    2340 His Honour found at [8746(c)] and [8747] that the banks recklessly refrained from making enquiries as to the effect of the Transactions on creditors of the Bell group companies and knew of circumstances indicating that the directors might be breaching their duties. The tax assessments were for amounts that, in the context of the Bell group’s financial problems known to the banks, were so large that the banks were bound to make enquiry of the directors as to why they said they believed the assessments would be overturned and what steps the directors were taking to protect the interests of the DCT. The obligation on the banks to do that is enhanced when account is taken of what they knew about the risk of competition with the bondholders in the winding ups of TBGL and BGF.
    2341 There is ample evidence constituted by the banks’ knowledge of and failure to seek further information about the tax assessments, against the background of the known insolvent or near insolvent state of the Bell group, to support these findings.
    External creditors – others
    2342 In ground 68, the appellants challenged his Honour’s findings about prejudice to external creditors, additional to the DCT.
    2343 As to TBGL’s alleged indebtedness to BRL (or a subsidiary), the background to this issue is a period of trading in share price index futures conducted in the name of TBGL through an account with International Commodity Clearing House. The respondents’ case at trial was that TBGL had a liability of $408,206 to BRL (or one of its subsidiaries) because of an overpayment made to TBGL in respect of these trading activities. His Honour noted the unsatisfactory state of the evidence about this matter at [2088] but said at [2089] that: ‘the general ledger of TBGL disclosed the overpayment of this amount by BRL and recorded it in a TBGL suspense account representing a liability to BRL in that amount’. His Honour added that the general ledger of BRF, a BRL subsidiary, brought the same sum to account as a receivable from TBGL. It was on this basis that his Honour concluded at [2096] that BRL (or a subsidiary) was a creditor of TBGL which the directors were duty-bound to consider when they decided to commit the Bell companies to the Transactions. The amount in question was recorded only in a TBGL suspense account, not in any of its other accounts such as its profit and loss accounts, as an overpayment received not from BRF but from Godine, another BRL subsidiary. Woodings, the respondents’ expert, said that this entry in TBGL suspense account indicated that the treatment of the particular transaction had not been settled. These considerations greatly weaken the evidentiary value of the reference in TBGL’s books to Godine as a creditor. The audited accounts of Godine for the relevant periods do not make any mention of a liability of TBGL to Godine. His Honour was I think in error in finding that BRL or one of its subsidiaries was a creditor of TBGL.
    2344 The remaining creditors who his Honour found the TBGL directors had failed to consider in findings in issue in the appeal were TBGL shareholders in respect of whom dividends had been declared but not paid, and trade creditors of Albany Broadcasters and Bell Bros Holdings. The appellants are correct I think in submitting that his Honour was in error in making these findings because he failed to take into account that the Transactions did not prevent the payment by the three debtor Bell companies, in the ordinary course of their business operations, of any of these debts.
    The clause 17.12 regime
    2345 His Honour’s conclusion on the operation of clause 17.12 of the main refinancing documents, which is the subject of ground 41 of the appellants’ appeal, played a significant part in his determination that the Bell directors had breached their fiduciary duties by committing their companies to those Transactions and in his ultimate finding against the banks of ‘knowing receipt’.
    2346 In what the banks described as one of the critical findings against them, his Honour at [8745(9)] said:
    The banks knew that an effect of the Transactions was to give them security, and thus control, over all worthwhile assets of the Bell group and in particular, over the proceeds of assets sales. The banks expected those proceeds to be applied as pre‑payments of their facilities. The refinancing instruments contemplated that, with the consent of all banks, asset sales proceeds might not be used as pre payments of their facilities. Nonetheless, there was no understanding reached that they would be released to Bell group to pay non bank creditors, such as bondholder interest.
    2347 His Honour explained the operation of this clause in section 9.14 of the judgment. Under each of the main refinancing agreements, TBGL was required to hand over to the banks the proceeds of the sale of any asset by any Bell company that participated in the Transactions, to the intent that those proceeds would be applied by the banks in prepayment of the moneys owing to them. There were limited exceptions only to this obligation, notably that the Bell companies could dispose, in the ordinary course of business, of stock in trade and money so received and could retain asset sale proceeds up to a maximum $5 million in each six month period.
    2348 I have referred to his Honour’s findings that both the directors and the banks knew that revenue from the Bell group’s only significant source of income, the publishing business, was insufficient, after payment of its trade debts, to meet the Bell group’s recurrent expenses including bank interest and bondholder interest and that the Bell companies could not pay their debts without access to asset sale proceeds.
    2349 The benefit identified for the Bell group in entering into the Transactions was the time it thereby obtained which the directors, especially Aspinall, believed would enable the group’s fortunes to be turned around. On the face of things, any benefit the Bell companies got by entering into the Transactions from having the Australian banks facilities converted from unsecured on demand ones to secured facilities not repayable until 31 May 1991 was immediately destroyed by the requirement imposed on those companies by clause 17.12 to hand over to the banks the proceeds of any asset sales upon which their continued existence depended, for prepayment of the facilities.
    2350 The plaintiffs contended that clause 17.12 deprived the Bell companies of access to the assets they had to sell to meet current liabilities and by transferring control of those assets from the Bell group to the banks, placed the group at the mercy of the banks: see [834]. The banks’ response was that as at 26 January 1990, the ‘overwhelming probabilities’ were that if the Bell group companies required the release of asset sale proceeds to service current liabilities, the banks would have given their consent; they contended that that clause provided a mechanism by which the Bell group would have access to asset sale proceeds [835].
    2351 I have explained at [2080] ‑ [2083] of the section of my reasons dealing with directors’ duties why Owen J was entitled to accept these submissions by the plaintiffs and reject the appellants’ submissions. His Honour accepted that Aspinall believed that once he had reached an agreement with the banks, he had 12 months to plan and implement a restructure that would or might save the group. But, as his Honour held at [5371], as at 26 January, Aspinall knew of the precarious financial position of the Bell group companies, knew they needed access to asset sales proceeds to survive and had nothing more than a hope that the banks would give him access to such proceeds.
    2352 One of Aspinall’s answers to the fetter imposed on him by clause 17.12 was that he believed in December 1989/January 1990 that, in addition to the publishing assets he was then trying to sell and the BRL shares that were currently of little value because of the dispute in which BRL was then involved, he had certain non‑core assets – ‘other tools’ – worth about $81 million that he could sell and so obtain the 12 month window which he thought he needed to turn the group’s fortunes around: see [5163] ‑ [5165]. But about $49 million worth – the Bell Press proceeds, the Q‑Net proceeds and the ITC Entertainment proceeds – was in assets that would, on receipt by TBGL, have to be handed over to the control of the banks under clause 17.12.
    2353 Moreover, Aspinall had little ground for confidence in January 1990 that a substantial part of these ‘other tools’ would ever produce any cash. The sale of Bell Press was underway in January 1990. But receipt of the Q‑Net proceeds that Aspinall estimated at $7.5 million depended upon completion of a very complex transaction that was ultimately cancelled in October 1990. Of the other non‑core assets, Aspinall valued the debt due by JNTH to BGF in January 1990 as worth $14.3 million. That was an optimistic assessment. If it were to repay BGF, JNTH would have to recover debts due to it from Bond companies and those companies were themselves in serious financial difficulty by January 1990. By early March 1990, Aspinall was unsuccessfully pressing the Bond organisation for payment or security in respect of this $14.3 million. No repayment was ever made. His Honour discusses these matters in his consideration of the cash flow insolvency case particularly at [1472] ‑ [1482].
    2354 The banks say his Honour was in error in holding that the directors’ expectation that asset sale proceeds would be released was not reasonable. They contended that the January 1990 refinancing agreement and with it the Bell group would have collapsed if they exercised their strict rights under clause 17.12. They say they did not do that and that they did grant access to asset sale proceeds to TBGL from time to time and TBGL survived into 1991.
    2355 It is true that the banks did waive their rights under clause 17.12 to give access to TBGL to some asset sale proceeds. I deal with the significance of the waivers in the next section.
    2356 That these waivers were granted does not detract from the fact that the banks insisted on TBGL handing over to their control for prepayment of the debts owing to them all substantial assets that remained in the Bell group in January 1990 though they knew that TBGL could not survive without access to the sale proceeds of those assets. Given the knowledge by both the directors and the banks of Bell group insolvency when they did that, the clause 17.12 regime is significant evidence in establishing both breach of fiduciary duty by the directors in agreeing to that and knowledge by the banks of the breach.
    2357 The appellants submit that, given that liquidation was, in the directors’ beliefs, the only alternative to entry into the Transactions, the Transactions provided the Bell group with a chance to continue as a going concern, notwithstanding the clause 17.12 regime.
    2358 Once it is seen that the directors, when confronted with that choice, were in breach of duty by failing to protect the interests of the DCT and the bondholders as creditors, carrying on business was not an option properly open to them. For the directors to take that chance to save the Bell group in circumstances where the group could not meet its recurring expenses, including bondholder interest, unless the banks were prepared to waive the rights the directors conferred on them, serves only to emphasise the gravity of their breach of duty.
    The Waivers
    2359 His Honour held at [1674(4)] that the circumstances in which the waivers of their rights under clause 17.12 were granted by the banks in 1990 in relation to the Bell Press sale proceeds did not establish that the directors in January 1990 were justified in thinking it likely that the banks would grant access to the proceeds of asset sales. The banks were well aware that if TBGL were wound up within six months of execution of the securities, they would thereupon become void as against the liquidator by force of s 122 of the Bankruptcy Act 1966. And the banks did release the Bell Press proceeds to TBGL to protect their securities.
    2360 If the directors had thought about it, they would have been justified in thinking that the banks would not want their securities to be exposed to avoidance by liquidation within 12 months of execution and that they could therefore expect that the banks would make the proceeds of Bell asset sales available to TBGL, if that was necessary to avoid its winding up during that six‑month period. There is no evidence that the directors thought that. All his Honour said was that Aspinall may have believed once the Transactions were in place, the banks would not jeopardise their securities if he pressed for access to sale proceeds [6059].
    2361 But Aspinall considered he needed 12 months to try to put the Bell group on a secure financial basis and he had no basis for expecting the banks to continue to give TBGL any form of financial assistance once their securities had hardened. That is what happened.
    2362 His Honour said at [6983] and [7066] that there was ample evidence to justify the conclusion that a major reason for the banks’ decisions to grant the waivers and release the Bell press sale proceeds to TBGL in May 1990, was to avoid precipitating an event of default under the bond trust deeds which could lead to a liquidation within the six‑month preference period and consequent avoidance of their securities. There is a mass of evidence in contemporary bank documents that justifies this conclusion. Most were generated in the period February to May 1990 when TBGL was pressing the banks for access to those proceeds. His Honour quotes passages from these documents in many places in the judgment including [7672], [7735], [7743], [7449], [7537], [7538], [7604], [7605], [7451], [7394], [7679], [7540], [7978], [6931], [8484], [7932], [8359], [8292], [8150], [8223] ‑ [8225], [8443], [8101] and [8406]. The attitude of all the banks as revealed in their documents is illustrated by what Smith of CBA said about the meeting between TBGL and the Australian banks in September 1990:
    [T]he 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.
    2363 The banks knew that once the critical six‑month period had passed, the securities were still at risk. But their view was that their position as secured creditors would be significantly improved if they could ensure that TBGL was not liquidated before August 1990. A good illustration of the banks’ understanding is contained in Latham’s memorandum of 2 August 1990 circulated among various Lloyds Bank officers and referred to at [7898]:
    Our arrival at 1 August marks a valuable step forward in the hardening of our security, as six months have elapsed since execution of the Australian Security where value is to be seen principally in two parts:

• The Bell Publishing Group
• Shares in Bell Resources

1. Security Hardening
   The aspect of Security hardening which benefits most from the passage of six months is voidable preference. Two aspects which remain uncured are (a) Voidable Disposition … (b) Corporate Benefit … Whilst these two aspects are important the passage of time is relevant to establishing their satisfaction. Thus the six months which have now elapsed are also relevant though not decisive here … Certainly the view from Westpac was, and is, that the passage of six month significantly strengthens our position and this is a view supported by MSJ.
   2364 Bell Press proceeds of $25.8 million were received and handed over to Westpac as required by clause 17.12 in February 1990. In that month, the banks agreed to TBGL’s requests for access to $1.33 million from those proceeds to meet outstanding commitments to employees of Bell Press and for access to a further $7.7 million to pay the expenses of the banks in connection with preparation of a transaction document and fees and loan interest due to the banks [519] and [522]. Protracted discussions then took place between TBGL and the banks about the former being given access to the rest of those sale proceeds to pay bondholder interest due in May 1990, with some being reluctant to agree; for a time they insisted that those proceeds could not be released to TBGL without unanimous agreement of the banks [524]. In his letter of complaint of 3 May 1990 about this to Lloyds Bank, Aspinall said that bond interest of $7.5 million was due to SGIC on 7 May and that ‘there is absolutely no doubt that the SGIC will not support a deferment or rollup of their interest claim and, in fact, to the contrary, would welcome an opportunity to send the company into liquidation’. Aspinall warned the Lloyds syndicate banks at the meeting on 8 May 1990 that if the banks did not release the sale proceeds necessary to pay bond interest due on 14 May, he would recommend liquidation of the Group [5252]. In fact, the TBGL board had so resolved [6942]. Ultimately, on 11 May 1990, the banks signed a formal waiver that gave TBGL access to the balance of the Bell press proceeds remaining, nearly $17 million, to assist in paying the $17.5 million due on 7 May on the second BGNV bond issue [527] and [530].
   2365 A condition of this waiver was that TBGL find the $7.5 million needed to enable BGF to pay the interest due on 4 May on its own bond issue by calling in loans from Bond Group companies, which it did [527] and [529]. Another condition of this waiver imposed by three of the banks was that a subordination deed be entered into by BGNV by 31 May 1990: [528] and section 24.1.10.1. (Until then, TBGL’s only obligation was to use its best endeavours to procure such a deed.) The BGNV subordination deed was ultimately executed on 31 July 1990.
   2366 Another condition of the waiver insisted upon by some of the banks was that TBGL meet with LDTC and the bondholders to discuss concessions to be made by the bondholders to support the ongoing operations of TBGL. Aspinall was resistant to doing that because he thought that it would necessitate a full presentation of TBGL’s plans for the future which would involve the issue of ultimately purchasing the bonds at a discount and he did not think that seeking an interest moratorium from the bondholders would be productive. Aspinall held a meeting with LDTC in mid‑May 1990, but only because of the banks’ insistence. However, Aspinall did not mention anything about the need for concessions from the bondholders, though that was the reason why the banks insisted upon his meeting with them: see section 24.1.10.10.
   2367 In January 1990 Aspinall, Mitchell and Oates expected that BGUK would receive a final payment from its sale of ITC Entertainment in late 1988 of something less than £10 million. In fact £4.7 million was received on settlement between 29 June and 2 July 1990: see sections 4.4.2.3 and 9.7. TBGL could not pay bondholder interest due in July without these moneys. Their release to TBGL was essential to ensure that there was no default on which the bondholders could rely to wind up TBGL before the ‘hardening period’ for the banks’ securities had expired. The banks accordingly waived the right to retain the proceeds of the ITC Entertainment sale which were paid by TBGL over to Westpac in accordance with clause 17.12 and later released to TBGL. His Honour said at [533] that those moneys were not dealt with in accordance with the clause 17.12 regime but at [7897], he said that all the banks had agreed to a waiver in respect of this payment by 14 July 1990.
   2368 After the securities hardened in early August 1990, TBGL did not seek any waivers by the banks of their rights to retain other asset sale proceeds because there were no such sales. As Aspinall noted in April 1990, in the context of pressing recalcitrant banks to release Bell Press proceeds to meet bondholder interest due in May, ‘there are no other assets to sell’. The only assets of any value then left in the Bell group were the main publishing assets and the BRL shares. At his meeting with LDTC on 15 may 1990, he said the same [5264]. If Aspinall had managed to implement a sale of the publishing assets after the banks securities had hardened, it is improbable that he would have obtained access to any of the proceeds. That would depend upon unanimous agreement of the banks. As Owen J said at [1687]: ‘the [Bell] companies were at the mercy of the banks and, as experience showed, gaining the necessary waivers was a close run thing’. As TBGL’s financial position continued to deteriorate, with Aspinall having to tell the banks it could not pay bank interest due in September 1990, there was no prospect of all the banks agreeing to release any additional asset sale proceeds that may have come to hand.
   No worse off
   2369 One of the matters upon which Owen J relied in making his findings against the banks of ‘knowing receipt’ was what the appellants called the ‘no worse off’ thesis. His Honour, at [6969], described what he regarded as the relevance of this thesis as follows:
   The banks had been advised that the refinancing [Transactions] 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.
   2370 There is evidence that various banks did decide to proceed with the Transactions on this basis. But his Honour went further and held that, because of concerns about TBGL’s solvency and because they considered they would be no worse off if the securities they proposed to take were later set aside, the banks refrained during the course of negotiations for the Transactions from seeking from TBGL further financial information and also information about ‘other aspects of the circumstances in which the directors would commit the Bell group companies to the Transactions’ [8603] and [8745(14)]. This in turn played a part in leading his Honour to conclude that the banks had Baden category (iii) or (iv) knowledge of the Bell directors’ breaches of duty [6970] and [8747]. There is substance in the appellants’ submissions that his Honour was in error in making findings to that effect in reliance on the ‘no worse off’ thesis.
   2371 His Honour did not adopt a consistent approach in his use of evidence relating to the ‘no worse off’ motivation of the banks.
   2372 His Honour summarised in schedule 38.21 his conclusions on each bank’s knowledge about six matters which he explained in [6134] and [7746]. Item 4 was: ‘Were the banks motivated by the consideration that they would be no worse off by entering into the Transactions’. At [6135] he described items 1 ‑ 6 as all directed at ascertaining whether the banks knew that the Bell group companies were insolvent. He added at [6134] that that was not the end of the matter because, in relation to the Barnes v Addy claims, it was necessary to consider a seventh issue: ‘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?’. His Honour did not include this last issue in schedule 38.21. Nor did his Honour suggest in [6134] or [7746] that the ‘no worse off’ issue was of any relevance to that seventh matter, bank knowledge of directors’ breaches.
   2373 His Honour was correct in holding that evidence about why some banks acted on the basis of being ‘no worse off’ showed that they wanted to improve their position by becoming secured creditors of a near insolvent organisation. As I have explained in the section of my judgment dealing with Directors’ Duties, concern about the status of the BGNV on‑loans also motivated the banks to improve their position in this way. But he was in error in making the few additional and generally worded findings that some banks desisted, because they considered they would be ‘no worse off’, from seeking further information from TBGL out of concern that they might learn something about TBGL’s financial position or about the propriety of the directors’ conduct that they did not want to know about.
   2374 Such evidence as there was that various banks were motivated by the ‘no worse off’ consideration in entering into the Transactions was directed to an acknowledgement of the commercial risk that any securities the banks took might be set aside as preferences in the event that TBGL’s very poor financial position resulted in a liquidation soon after the securities were obtained. Further, through the latter part of 1989 each bank acquired a store of knowledge about TBGL’s financial position and by January 1990 each knew or strongly suspected that TBGL was facing insolvency in the not too distant future. His Honour was correct, for the reasons I have given, in drawing these conclusions about the various banks’ knowledge of TBGL’s financial position. If any bank prior to 26 January 1990 deliberately refrained from seeking information about TBGL’s financial position, and the court has been referred to little evidence of that, the explanation is I think pretty clear: each bank had accumulated sufficient knowledge to show that it was so likely that TBGL would pretty quickly become insolvent that further information on the matter was unnecessary. As his Honour found at [7299], after receiving the TBGL cash flows in September 1990, the banks did not seek updated cash flows because they understood that the free cash flow from the BPG group would not be sufficient to cover the interest due to the banks and would not enable the group companies to meet their other commitments: the banks had enough information and did not need to go into cash flow detail.
   2375 As to Lloyds Bank, the document referred to by his Honour in schedule 38.21 is incapable of supporting a conclusion that that bank placed any reliance on a belief it would be no worse off to refrain from seeking information from TBGL. The oral evidence of Latham referred to by the respondents shows that he developed a belief over time that his bank would be no worse off by taking the securities if they were subsequently set aside because the bank would be restored to the same position it was in before that. Latham pressed TBGL for a considerable amount of financial information including updated cash flows that were never received and it was open to his Honour to infer that that bank relied on its belief in being ‘no worse off’ ultimately to proceed with the Transactions without getting the information it wanted. But it did that knowing or strongly suspecting that TBGL was close to insolvency. There is no evidence to which the court was directed that could support his Honour’s conclusion that its belief that it would be ‘no worse off’ lead it to refrain from seeking information about TBGL’s finances for fear of what it might learn or to refrain from seeking information about the Bell directors’ conduct.
   2376 For a number of banks, HKBA, SCBAL and BfG, the evidence his Honour relied on in schedule 38.18 either did not support at all or provided only the most tenuous support for the conclusion that they were motivated to take the securities in question in the belief they would be no worse off if the securities were later set aside. But, for each, there was other evidence identified by the respondents in their submissions that supports such a conclusion. For other banks, the evidence shows that their major motivation was that, given the financial position of the Bell group, security was far more preferable than relying on the NP arrangements. These banks are Credit Agricole, Kredietbank, Creditanstalt, Banque Indosuez, Skopbank and Gulf Bank.
   2377 The court was not referred to any evidence relating to any of these nine banks that would support the critical findings his Honour made that any refrained, in reliance on its belief that it would be no worse off, from making enquiries either about TBGL’s financial position or the propriety of the conduct of its directors.
   2378 For a number of other banks, the evidence his Honour relied on in schedule 38.18 did support the conclusion that they were motivated to take the securities in question in the belief they would be no worse off if the securities were later set aside. These banks are BoS; Dresdner; DG Bank; Credit Lyonnais and Gentra. But again, the court was not referred to any evidence that would support his Honour’s finding that any of these banks relied on its belief that it would be no worse off if it took the proposed securities to refrain from making enquiries about TBGL’s finances or the conduct of its directors. (Smith of BoS, upon whose testimony at one point his Honour relied here, expressly rejected the proposition that a belief in not being worse off was the reason this bank did not press for up‑to‑date cash flow information from TBGL (ts 31722).)
   2379 At a number of points, his Honour made findings that Westpac decided to enter into the Transactions in the belief that it would be no worse off if the securities were later invalidated. In this context his Honour relied upon Weir’s presentation at the meeting of the Australian banks on 24 January 1990, [6963] ‑ [6964], and on the general evidence of Weir and Stuchbury when they recommended in December 1989 that the bank proceed with the Transactions [7367]. At [7381] and [7323] his Honour concluded that Westpac decided to proceed with the Transactions in the belief it would be no worse off if the securities were set aside and that that explained the lack of enquiry as to the solvency of the Bell companies ‘and related questions’. His Honour added at [7381] that ‘the bank did not need to determine the factual solvency (or otherwise) of the Bell group companies because it was determined to embark on the refinancing in any event’. However, he nowhere explained what he meant by ‘the related questions’ and in particular, he did not make any findings linking what Westpac did in the belief it would be no worse off with concern about whether the directors were acting properly in committing the Bell companies to the Transactions. Nor does the evidence support his Honour in thinking there was a deliberate decision by Westpac to refrain from enquiring about TBGL’s financial position for fear of what they might learn or for any other reason: senior managers knew enough about that not to need any more information.
   2380 The position is the same for SocGen, NAB, CBA and Lloyds Bank. There is nothing to suggest that, once each bank decided it would be no worse off by entering into the Transactions, any bank officers refrained because of that from making enquiry about the financial position of TBGL or the propriety of the Bell directors in committing the companies to the Transactions.
   2381 At [7670] Owen J concluded that SocGen knew or it least suspected to a high level that the Bell group companies were insolvent or nearly insolvent and they did little to investigate the matter to confirm the true position. At [7669] his Honour made the finding that SocGen decided to proceed with the Transactions in the belief it would be no worse off if the securities were subsequently set aside in a liquidation of the Bell group. The material his Honour said he relied on in making this finding which he listed in schedule 38.21 comprised the credit application of 15 December 1989 upon which SocGen made its decision to participate in the Transactions and the opinion of Weeks of SocGen, as reported by Keane of NAB. The credit application referred to the general view among the Australian and Lloyds syndicate banks that they wished to execute the Transactions as quickly as possible because they were no worse off and potentially better off by taking security. It identified as matters for consideration the precarious financial position of the Bond/Bell empire and its impact on TBGL’s viability. Auxenfants, to whom the respondents referred here, acknowledged that the bank took security because it knew that TBGL’s financial position was such that it could not pay the debt owing to it and that security would improve the bank’s position. The opinion of Weeks that SocGen would be no worse off by entering into the Transactions, was based on the advantages of taking security, even if it were exposed to possible avoidance, because of the risks of competition between the bank and the DCT and the BGNV bondholders in a Bell liquidation.
   2382 Owen J’s finding at [7582] and the material referred to in schedule 38.18 on which his Honour relied to show that NAB entered into the Transactions in reliance on the ‘no worse off’ thesis shows that what caused the relevant officers of that bank to overcome their reluctance in late December 1989/early January 1990 to enter into the Transactions was their learning of the risk that the BGNV on‑loans might not be subordinated to bank debt. NAB officers then saw the taking of security as a means of improving their bank’s position as against the bondholders, with whom they could be facing pari passu competition in a TBGL liquidation. It was in that context that they considered that the bank would be no worse off than the position it was then in if it proceeded to take securities which were later set aside.
   2383 The evidence, documentary and oral, listed in schedule 38.21 which his Honour said showed that CBA was motivated by the ‘no worse off’ thesis indicated, as his Honour held at [7444], that CBA proceeded with the Transactions because they were determined to take security and the bank would be no worse off if those securities were later set aside because the Bell group companies were insolvent. As the respondents contended, CBA may well not have pressed TBGL for information about its financial position but it had a clear view by late September 1989 what that was: CBA made formal demands for re‑payment of its loan to BGF that was guaranteed by TBGL in early September 1989 [7407], but withdrew them and decided to join with the other banks in negotiating the refinancing Transactions in late September 1989 [7415] in circumstances in which CBA knew or believed that neither BGF nor TBGL could meet those demands, if pressed, and would most likely go into liquidation: see [7443].
   2384 The evidence that various banks were motivated to take the securities in the belief they would be no worse off if the securities were later set aside shows an understanding by the state of TBGL’s financial distress. But his Honour was not entitled to rely on that evidence to find that that explained the banks’ lack of enquiry and state of knowledge about relevant matters that supported his conclusion that the banks had Baden category (iii) and (iv) knowledge of breaches by the Bell directors of their fiduciary duties in committing the companies to the Transactions.
   The minutes of the Bell directors’ meetings
   2385 The meetings for TBGL, BGF and WAN were held on 25 January 1990 while those for all the other Bell companies were held on either 31 January or 12 February 1990.
   2386 The banks contended that his Honour was wrong in finding that they did not have a reasonable basis for reliance on the minutes of these meetings of the directors of the Australian Bell companies when the decisions in question were made, as confirmation that the directors had turned their minds to the existence in fact of a real and substantial benefit to each of those companies from entry into the Transactions. The banks challenged his Honour’s conclusions that they failed, by abstaining from necessary enquiry, to satisfy themselves that the Bell directors had properly considered the issue of corporate benefit in relation to each of the Bell companies. They submitted that there was no obligation on them to make such enquiries but, if there were, ‘in an arms length transaction of this sort’ they made the only practical enquiry they could by insisting on provision to the banks of directors resolutions’ approving the entry into the Transactions which showed that the directors had considered these matters.
   2387 His Honour agreed that, in the normal case, the factual determination whether a proposed course of action is of real and substantial benefit to the company and is in the best interests of the company is a matter for the directors and banks are generally entitled to rely, in their dealings with companies, on an assurance from the directors that they have given due consideration to the requisite issue and have determined that the test has been satisfied [8679] and [8687].
   2388 But Owen J said this was not a normal case for two reasons. Firstly, the banks knew of the doubts about the solvency of the Bell companies and they also knew from their legal advice that solvency was relevant to the question of corporate benefit and that the existence of that benefit was critical if their Transaction instruments were to survive. They were also aware of facts that raised doubts about the presence of a real and substantial benefit for the Bell companies and about the capacity of the directors properly to conclude there was such a benefit. That would or should have been apparent to the banks, particularly in relation to companies within the BPG group which owed nothing to BGF: [8688] and [8689]. Secondly, the banks ‘had little or nothing in addition to the recitals and the minutes’ by way of evidence that the directors had properly considered the relevant issues and were content to rely on what the directors were prepared to say in those documents. As his Honour noted at [8684] and [8688], those documents had been prepared by the banks’ lawyers and because of the banks’ concerns about solvency and corporate benefit, the banks took pains, through their lawyers, to ensure that the refinancing documents and the minutes that the Bell directors had to provide to the banks were drafted in such a way that those points were covered.
   2389 His Honour’s conclusion on the banks’ argument that they were entitled to rely on the minutes (and the recitals in the transaction documents) at [8689] was:
   … in the prevailing circumstances the banks did not have a reasonable basis for reliance on the recitals and minutes, without more, as confirmation that the directors had turned their minds to the existence in fact of a real and substantial benefit to individual companies. They had little or nothing in addition to the recitals and minutes. They were aware of facts that raised doubts about the presence of a real and substantial benefit and about the capacity of the directors properly to conclude there was such a benefit … Once again, form prevailed over substance.
   2390 This was not ‘an arms length’ commercial transaction, as the banks submitted. The Bell group, as both the banks and the directors knew, was in serious financial difficulties. The banks had the whip hand, a not unusual situation when banks are dealing with financially distressed customers. But they were in a particularly strong position in their dealings with the Bell companies. Aspinall, who played the key role in negotiations with the banks, considered that if the Bell group was to have any future, he had to get the banks ‘off his back’ [6038] in order to obtain the 12 months he believed he needed ‘to right the ship’ [6086]. Though he fought unsuccessfully for a better deal from the banks for the Bell companies, he was ultimately prepared to give the banks everything they wanted, which included the clause 17.12 regime, to get that time. That I think explains why Aspinall was prepared to leave it to the banks to have their solicitors prepare the minutes and resolutions that the directors would have to pass in order to implement the Transactions and get the time he wanted.
   2391 A good illustration of Aspinall’s attitude is provided by what he said in his letter of 18 December 1989 to Standard Chartered Bank in London in which he urged withdrawal of SCBAL’s then‑current notices of demand. Aspinall alluded to the possibility of competition in a liquidation between the banks and the bondholders and said: ‘One of the purposes of the extension of the existing facilities is to enable the banks to become secured creditors, a position all view as more preferable’. By ‘all’, Aspinall meant both the banks and Bell including himself. He was not interested in finding out whether the BGNV bondholders had a claim as creditors on TBGL that ranked equally with the claims of the banks. Further, Sly & Weigall, the solicitors acting for TBGL in connection with the Transactions, were not asked to and did not give the Bell directors any advice on corporate benefit with respect to the Transactions, something they recorded in their fax to TBGL on the eve of execution of the first lot of transaction documents on 24 January 1990.
   2392 Insofar as the minutes and resolutions prepared by the banks’ solicitors purported to evidence that the Bell directors considered entry into the Transactions to be in the interests of the various companies’ creditors, those within TBGL responsible for giving instructions to S&W apparently told S&W that the companies had no external creditors. As one of the banks’ solicitors, Perry of A&O said in his fax to P&P on 15 January 1990: ‘the assertion [by S&W] 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’. If the Australian directors had been permitted to sign minutes asserting that there were no external creditors of the Bell companies, that would have been singularly embarrassing to the banks when the securities were challenged. The intervention of the lawyers for Lloyds Bank prevented that.
   2393 His Honour found that the other Australian Bell directors, Mitchell and Oates, were motivated by the need to protect the failing BCHL from the crisis that would be precipitated by a liquidation of TBGL. They too wanted as much time as they could get from the banks. All three Australian Bell directors were, for their own differing reasons, compliant with the banks and gave them what they wanted by committing their companies to the Transactions in accordance with the minutes and resolutions prepared by the banks.
   2394 The banks contend that the minutes of the meetings of the directors of the Bell companies at which it was resolved to proceed with the Transactions were authored by TBGL’s own solicitors, S&W. The banks say the minutes were accepted by their solicitors at settlement, acting bona fide and honestly, as constituting satisfaction of the condition that the directors of the corporate respondents provide resolutions as to their belief in and fact of a real and substantial benefit to each corporate respondent.
   2395 I do not accept that. The minutes including the resolutions were the work of the banks’ solicitors. They were developed from the recitals in the main refinancing documents prepared by those same solicitors, following the advice of counsel [5578] ‑ [5580]. His Honour accepted the evidence of Watson, the member of S&W who prepared a first draft of the minutes and the resolutions. But it was based on the terms sheet given him by P&P, the solicitors for the Australian banks, at his meeting with Stow of that firm on 16 November 1989. Watson’s draft was quickly discarded by P&P [5714] who produced their own draft of minutes and resolutions for TBGL, BGF and WAN and sent it to S&W on 16 December 1989 for their comment [5715]. Working on P&P’s draft, S&W prepared minutes and resolutions for the other Bell security providers and returned all this to P&P, who approved them [5718]. As Morison of S&W said in his fax of 24 January 1990 to Simpson of TBGL, the substance of the minutes and resolutions he had forwarded to TBGL ‘have been provided by P&P and MSJL’.
   2396 Watson, who his Honour considered to be an experienced solicitor, also gave evidence to the effect 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 [5706].
   2397 There was a reason for Watson finding the documents novel. The banks’ solicitors drafted the relevant recitals in the financing agreements and the minutes of the directors’ resolutions to ensure that the banks would have evidence that would give them the best prospect of refuting any challenge to the securities, particularly by the liquidators of the Bell companies, whose appointments were readily foreseeable by the banks when the Transactions documents were negotiated and executed. In form, the documents could be thought to serve that purpose. But, as his Honour observed, form does not constitute substance: see [5760].
   2398 For the reasons given, his Honour was correct in fixing the banks with knowledge in January 1990 of the insolvency or near insolvency of the Bell group. I have also explained that the banks knew of the claims by the DCT, substantial having regard to the Bell group’s financial position, and by 25 January 1990 the banks were also concerned about the risk that the BGNV bondholders might be able to compete pari passu with the banks as unsubordinated creditors of TBGL in its liquidation. They cannot have had any belief that the minutes they had their solicitors prepare in those circumstances provided them with reason to think that the directors, in committing the Bell companies to the Transactions, were acting in the proper performance of their duties.
   2399 The appellants’ submissions at pars 1386 ‑ 1392 give a sanitised version of matters there dealt with. The appellants correctly submit that the Bell directors had plenty of time before 26 January 1990 to take advice on the issue of corporate benefit and knew about the significance of that to the propriety of their actions in committing the Bell companies to the Transactions. But the directors did not seek or take any such advice. I have referred to S&W’s confirmation of that.
   2400 Further, and contrary to their submissions in ground 91, Westpac and thus by imputation the Australian banks also knew that S&W did not think there was any corporate benefit for the companies who were yet to execute the subordination deeds: it received a copy of the S&W fax of 26 January 1990 that said that [8718]. P&P themselves expressed the same view to Westpac in the meeting of 3 January 1990 [8719]. As I explain in the next section, the banks had a wealth of advice from their solicitors warning them of lack of corporate benefit to the Bell companies from entry into the Transactions.
   2401 In par 1391 the appellants submit that in the period leading up to execution of the Transaction documents the banks saw nothing to indicate that the directors were not attending to the matters they had to resolve before they could properly execute the documents. For the reasons given, the banks had reason to believe that the directors had not considered the issue of corporate benefit. They knew sufficient about the financial condition of TBGL, the tax debts and the on‑loans to disentitle them to sit back and assume, without enquiry, that the directors were paying proper regard to those matters. They could not rely on their solicitors’ work to shield themselves from the consequences of that knowledge.
   2402 The banks also relied here on correspondence between the UK directors and Lloyds Bank. But that and other material which Lloyds Bank and Westpac received served only to show the care the UK directors were taking to deal with relevant issues including corporate benefit and the need to have regard to the interests of creditors. They received nothing comparable from the TBGL directors to indicate they were following a similar course.
   Bank knowledge of lack of corporate benefit
   2403 In ground 94, the appellants contended that his Honour erred in holding that what the banks’ solicitors had to say about the likely absence of corporate benefit for the Bell companies was justification for the finding of ‘knowing receipt’ he made against the banks. The banks contended that the legal advice they received was that the issue of corporate benefit was a matter for the directors and that they had advice that there was a rational basis for TBGL confirming a benefit to it from entry into the Transactions.
   2404 I have explained, in dealing with the ‘minutes’ issue, why the banks were not entitled to, and did not in fact rely on the proposition that the assessment of corporate benefit was a matter solely for the directors.
   2405 In response to a query from DG Bank, Cole of MSJL, in his letter of 5 December 1989 to Latham of Lloyds Bank, said there were grounds for considering that there was a corporate benefit for TBGL in giving its proposed confirmation of its existing guarantees [5680]. But that is as far as the comforting legal advices received by the banks went. Earlier and later advices to the banks warned of the risk there might not be a corporate benefit for various of the Bell companies from entry into the Transactions: see the MSJL letter of 27 September 1989 sent to Lloyds Bank and circulated to the syndicate banks; the third version of the joint memorandum by A&O and MSJ of 18 October 1989 sent to Lloyds Bank and Westpac and circulated to the Australian banks; the instructions to counsel to advise of 20 October 1989 sent to Lloyds Bank and Westpac; the letter sent by Cole of MSJ of 8 December 1989 to Lloyds Bank and circulated to Westpac; the letter sent by Cole of MSJ of 9 December 1989 to Lloyds Bank; the advice by P&P of 9 December 1989 to Westpac; the advice of A&O to Lloyds Bank of 12 December 1989 and the advice of MSJL of 18 December 1989 to Lloyds Bank, circulated to Westpac, in which Cole said, among other things: ‘As we have advised on many occasions, each security provider [i.e. other than TBGL itself] faces a real problem in establishing adequate “corporate benefit” in granting security under the restructuring’.
   2406 His Honour at [7294] made findings, not challenged by the appellants, that, 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.
   2407 His final finding at (c) that all the banks then knew of the connection between the inter-company lending and the establishment of corporate benefit was the subject of an express finding at [7276] that was not attacked by the appellants in their submissions. Further, it was an inference open to him from the other findings in [7294] and their supporting evidence. His further findings at [8715], [8726], [8745(11)] and [8746] that the banks knew that there was a real risk that all or many of the Transactions could be set aside for lack of corporate benefit for the companies providing the instruments and that, in the absence of such a benefit, the directors of those companies might be acting in breach of their fiduciary duties were well justified by the advices the banks received from their lawyers.
   Corporate benefit – time to restructure
   2408 The appellants also argued in both oral and written submissions that the Bell group obtained a corporate benefit from entry into the Transactions because that gave the Bell group that time that its directors and, in particular Aspinall, believed was a substantial benefit to the group by providing it with the opportunity to effect a restructure. It therefore followed that the directors did in fact exercise their powers to commit the companies to those Transactions in the bona fide belief that was for the benefit of the companies. Reliance was placed on his Honour’s acceptance of Aspinall’s belief to that effect at e.g. [5018] and at [5367], where his Honour accepted that Aspinall considered the agreement of January 1990 was the first step in the restructure essential to Bell group survival. It was said that it gave Aspinall the time he believed he needed to achieve that.
   2409 The time he gained from committing the Bell group to the Transactions was an illusory benefit. The critical thing for the Bell directors was to obtain the agreement of the Australian banks to convert their on‑demand facilities into fixed term ones. TBGL had to offer security to the Lloyds syndicate banks, in place of their unsecured fixed term facilities, to enable effect to be given to the agreement by the Australian banks to move to fixed terms.
   2410 It is difficult to see how the banks could assert a belief that the directors were acting properly for the benefit of the companies in so far as they sought and obtained time for a restructure the group.
   2411 Firstly, if the Bell group were to obtain any benefit from the extension of time for repayment of the Australian banks’ facilities, they had to be able to obtain access to the proceeds of the future sales of remaining Bell assets all of which they had to mortgage to the banks under the Transactions. But any benefit Aspinall thought he would get from converting the Australian banks’ unsecured on‑demand loans into secured loans not repayable until May 1991 was immediately destroyed by the banks’ insistence, over his objections, that the Transactions include the clause 17.12 regime. I have dealt with the consequences of that regime above.
   2412 Secondly, the banks could not, in the circumstances of this case, assume that the directors were acting properly by buying time to restructure without knowing something of how the directors planned to do that. That follows from the fact that they took control of the assets they knew that the group had to rely on if it were to survive. Though Aspinall committed the Bell companies to the Transactions because he believed the time thereby obtained from the banks was essential to enable a restructure to be implemented, it is a striking feature of the case that, as his Honour found at e.g. [8677] ‑ [8678], in January 1990 Aspinall had no plan for how the Bell group might survive as a going concern. Aspinall knew that any restructure had to involve concessions from the bondholders. But he moved very slowly in having a plan formulated and in approaching the bondholders. He started this process only at the insistence of the banks and in return for the waivers he obtained from them that enabled TBGL to pay bondholder interest in May and July 1990. The first time a committee of bondholders met to consider the proposal TBGL ultimately put to them was in January 1991. The chronology of Aspinall’s inaction in setting about implementing a restructure once he had got the banks ‘off his back’ at the end of January 1990 is set out in sections 4.7.1 to 4.7.4 of the judgment.
   2413 Lee AJA points out that his Honour’s criticism at [6088] of Aspinall for committing the Bell companies to the Transactions without having a restructure plan worked out do not in themselves constitute a finding that Aspinall thereby breached his fiduciary duties to the various Bell companies but that it supported his Honour’s conclusions that Aspinall had not given consideration to matters he needed to take into account before they could properly perform those duties.
   2414 However, the directors were prepared to enter into the Transactions, with the fetter of the clause 17.12 regime, in order to buy time to try to put the Bell group back on its feet. Yet they did not then have worked out, even in outline, how they might effectively use that time. Thereafter, Aspinall failed through much of 1990 to start work on the restructure that he and the other directors bought at such high price for the Bell group.
   2415 This all serves to emphasise just how insubstantial was the benefit that the banks say the Bell companies obtained by entering into the Transactions and how little basis there is for the banks to say that they believed the time the Australian banks gave to the Bell group in return from its entry into the Transactions demonstrated that the directors had acted properly.
   Conclusion on bank knowledge
   2416 I have dealt with what I think are the matters of importance raised in the appeal on the question of the banks’ knowledge of breaches of fiduciary duty by the Bell directors when they committed the Australian Bell companies to the Transactions. Although his Honour was in error in relying on the ‘no worse off’ thesis to support his conclusion that the banks had knowledge within Baden categories (iii) and (iv) of those breaches of duty, it was well justified by:
   (1) the evidence as to all the banks’ knowledge of the insolvency or near insolvency of the Bell group;
   (2) their knowledge that, without access to asset sales, the Bell group could not survive;
   (3) the insistence by the banks, over the Bell directors objections, in taking control through the clause 17.12 regime of all significant assets left in the Bell companies;
   (4) their knowledge of the absence of any significant corporate benefit to any Bell company from entry into the Transactions;
   (5) their knowledge that the Bell directors were acting to the prejudice or possible prejudice of the BGNV bondholders and the DCT, creditors of Bell companies, by committing the Bell companies to the Transactions without taking any action to protect those creditors from that prejudice i.e. the loss of the right to compete pari passu with the banks in liquidations of TBGL and BGF;
   (6) the banks’ control, through their solicitors, of the drafting of the resolutions by the Bell directors, which the banks insisted on having as evidence that they could rely on to show that they had no concern the directors might be acting improperly in committing the Bell companies to the Transactions, when their securities were challenged in the looming Bell liquidations.
   2417 Subparagraphs (2), (3) and (4) are not weakened by the fact that the banks waived their rights under clause 17.12 to the proceeds of the Bell Press sale and the ITC Entertainment sale. They did that to prevent liquidation action by the bondholders within the six months following execution of the securities that would have meant their avoidance.
   BGUK, TBGIL and BIIL – bank knowledge of directors’ breaches
   2418 I have expressed my agreement with the reasons of Lee AJA for holding that Bond and Mitchell breached their fiduciary duties as directors of the UK companies, BGUK and TBGIL, particularly by giving unfounded assurances to their fellow directors with respect to the solvency of TBGL and for also holding that the UK‑based directors of those companies, Edwards and Birchmore for BGUK and TBGIL, and Edwards and Whitechurch for BIIL, also breached their fiduciary duties to those companies: in particular, they committed their companies to the Transactions in reliance on the bare assurances of Bond and Mitchell as to TBGL’s solvency, notwithstanding the warnings they had received against doing that [5907] (BGUK and TBGIL) and 5950. BIIL was not a party to the proceedings but Owen J set aside the subordination deed that it executed.
   2419 His Honour went on to hold that the banks knew of those breaches of duty when they took the securities provided by those UK Bell companies. At [8754] his Honour concluded:
   …The banks knew that the UK directors were being ‘difficult’. They refused simply to roll over and do the bidding of either their parent (TBGL) or of the banks. Lloyds Bank (Latham in particular) was not shy in applying pressure to the UK directors to persuade them to fall into line. The banks knew that the BGUK group depended for its survival on the support of TBGL and the Australian Bell group companies. They knew of the problems confronting the Australian arm of the group and, as I have found, they knew of the breaches of duty by the Australian directors. I think these problems flow through to the BGUK group companies and to their directors. The banks knew what steps the UK directors were taking. Not without some hesitation I have come to the conclusion that the banks knew of the breaches of duty by the UK directors.
   2420 His Honour found at [5837]: ‘ultimately, however, it was the directors’ knowledge of TBGL’s financial position that would be critical in determining whether or not they should bring that BGUK group companies into the Transactions’. The directors of BIIL were in the same position [5929] and [5932]. He concluded at [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 UK‑based directors.’ At [8724(2)] and [8754] he said that Westpac and Lloyds Bank knew that the UK directors were aware that the BGUK group depended for its survival on the support of TBGL and the Australian Bell group companies. None of these findings were challenged by the appellants.
   2421 The banks did not have to rely on making their own assessment about the importance of the UK directors satisfying themselves about the solvency of TBGL before they could properly commit their companies to the Transactions. As his Honour said at [5822], at the meeting of 2 January 1990 attended by, among others, Edwards, Whitechurch and Latham of Lloyds Bank, express mention was made of the need for the directors of both BGUK and TBGIL to have not only a letter of comfort from TBGL but also information satisfying them of TBGL solvency before they could properly commit their companies to the Transactions. Latham passed on to Westpac what happened at this meeting as he did the various drafts proffered by Edwards to Latham preceding his letter of 18 January 1990 to Lloyds Bank, all of which emphasised that the UK directors were insisting on having enduring and legally binding letters of comfort from TBGL that it was able to continue to support the UK companies. Edwards’ letter of 18 January 1990 was circulated to all the banks as were a number of the drafts. All the banks therefore had actual knowledge that the UK directors believed it important for them to have a reliable assurance of TBGL’s solvency before committing their companies to the Transactions.
   2422 It must have been obvious to the banks, given what they knew or strongly suspected about TBGL’s near insolvent position and the UK directors’ need to rely on the support of TBGL for the survival of their own companies, that the UK directors would very likely be in breach of their fiduciary duties if they agreed to commit their companies to the Transactions. Notwithstanding this, the banks continued to put pressure on the UK directors to do that right up to 24 January 1990, when the directors ultimately acted: see [5827] ‑ [5828], [5870], [5899] and [5900]. The appellants did not challenge these findings and relied on them in other contexts.
   2423 I have already explained why Westpac and Lloyds Bank each had actual knowledge of how the UK directors dealt with the request for their companies to provide securities to the banks. As I have said, they passed on a lot of this information to the other banks, which included information identifying the importance the UK directors attached to being assured of TBGL’s solvency [5844] and [6490]. Given the knowledge possessed by all the banks of the precarious financial position of TBGL, and of the importance for the UK directors, in determining whether to commit their companies to the securities, of being able to rely on TBGL’s solvency, it was open to his Honour to find at [8754] that they knew that the UK directors were breaching their fiduciary duties by committing the companies to the securities. There was no need for his Honour to hesitate before making this finding.
   2424 The appellants contended that the only deficiency in the conduct of the UK directors found by his Honour was based on their acceptance of a private communication assuring them of TBGL’s solvency made by Bond and Mitchell at the board meetings on 24 January 1990, something of which the banks had no knowledge.
   2425 That is an oversimplification. The banks knew how important it was for the UK directors to be able to rely on the solvency of TBGL. The UK directors had received legal advice, set out by his Honour at [5866], about it being crucial for them to be sure, by diligent enquiry, of the ability of TBGL to honour its obligations to their companies, that a simple assurance from Australia would not suffice and that it was not simply a question of going through the motions to make it appear that the formalities were adhered to. They had also received detailed advice from Coopers & Lybrand on 4 January 1990 about the range of financial information they needed to obtain from TBGL before they could be sufficiently assured of its solvency. Despite repeated endeavours, they were not able to obtain any of that information from TBGL [5903] and [5905]. Edwards and Birchmore committed BGUK and TBGIL to the Transactions on 24 January 1990 knowing that the financial information about the TBGL situation that they had was inadequate, in reliance only on verbal assurances from Bond and Mitchell that had been told would be insufficient [5907]. The directors of BIIL, Whitechurch and Edwards, were given the same advice [5932] and [5941], and committed their company to the Transactions without receiving any of the necessary financial information [5940].
   2426 An issue that produced extensive submissions on appeal was whether a note of conversations between employees of Coopers & Lybrand in London and Perth on 22 January 1990 concerning TBGL’s financial position was passed on to the UK directors. His Honour was correct in finding at [5864] that even if those directors saw the note, it did not influence their decision to enter into the Transactions. The UK directors were each personally concerned, up to the very last moment before passing the resolutions committing their companies to the Transactions, about not having sufficient information about TBGL’s ability to support their companies upon which they could safely rely. They ultimately pressed Bond and Mitchell for oral assurances that all was well with TBGL and only passed the resolutions after getting them, even though they knew they were inadequate.
   2427 The appellants also contended that Owen J made his findings against the UK directors by impermissibly imposing on them an obligation to strictly follow legal and accounting advice concerning the financial information about TBGL that they should have before they committed their companies to the Transactions. This submission ignores the fact that those directors knew that it was essential to the proper performance of their fiduciary duties to have that information, that they continued to seek it up to the last minute, and that they finally acted without it.
   The Bell respondents’ ‘knowing assistance’ case
   2428 By their notice of contention, the Bell respondents challenged his Honour’s dismissal of its case against the banks that was based on the second limb of Barnes v Addy. His Honour rejected that case because of his understanding that in order to prove that the Bell directors engaged in a dishonest and fraudulent design when they committed their companies to the Transactions, the respondents had to prove that the directors acted with conscious dishonesty; having disavowed any such allegation, they necessarily had to fail. I have explained why I think Farah Constructions v Say‑Dee, supra, shows that his Honour applied an erroneous test here.
   2429 It might be thought odd to say that Aspinall, Mitchell and Oates worked a dishonest and fraudulent design upon the Bell companies in which they were directors when they got no personal advantages from what they did and when Aspinall thought that what he was doing was for the benefit of the Bell group and when Mitchell and Oates thought they were acting for the benefit of the parent Bond group. A similar comment can be made about the UK directors. But as I have explained, I think that a plaintiff relying upon a ‘knowing assistance’ case only has to show that the fiduciary’s conduct has passed quite a low threshold before it can be characterised as involving a dishonest and fraudulent design.
   2430 One focus of the Barnes v Addy case is upon the quality of the performance of the TBGL directors and in particular Aspinall in exercising their fiduciary duties to TBGL and the other Bell companies. Once it is seen that the directors, with knowledge of the financial problems facing the Bell group, committed TBGL and the other Bell companies to a scheme under which the banks took over control of all the worthwhile Bell assets, thereby prejudicing the interests of other Bell creditors, including the bondholders and the ATO, and obtained in return from the banks little of any worth for the Bell companies, the case cannot be characterised as involving ordinary or minor breaches of fiduciary duty or breaches that could properly be excused, even if it is accepted that the directors had acted honestly.
   2431 The UK directors breached their fiduciary duties by committing their companies to the Transactions when they knew they lacked the critical justification for doing that – a well‑founded confidence in TBGL’s solvency. That they were under heavy pressure from the banks and from TBGL at the time cannot excuse this major breach of duty.
   2432 For the reasons given, I think the directors of both the Australian and UK Bell companies committed breaches of their fiduciary duties to their companies that were sufficiently serious to show that they engaged in dishonest and fraudulent designs within the special meaning I think that expression has in this context. The knowledge that the banks had of these breaches, which I consider was sufficient for the purposes of the case of these respondents based on the first limb of Barnes v Addy, also suffices to show the requisite knowledge on their part of the directors’ designs.
   2433 The respondents’ third contention should be upheld.
   Bank knowledge of BGNV director’s breach
   2434 I have also agreed with Lee AJA, for the reasons he has given, that Equity Trust, the sole director of BGNV, breached its fiduciary duties to that company when Ruoff, the sole director of Equity Trust, committed BGNV to its subordination deed.
   2435 I add the following comments. The trial judge’s findings that Equity Trust did not breach its fiduciary duties to BGNV were based firstly, on what his Honour considered was the absence of evidence capable of indicating to Ruoff that TBGL might be insolvent ([5955] and [6026]) and the absence of anything in the deed proffered for BGNV’s execution that would have suggested that TBGL was insolvent [6027], and secondly, that he could not find that Ruoff knew, believed, suspected or ought to have known that the on‑loans were unsubordinated because that would be contrary to the fact as he had found it namely that the on‑loans were indeed subordinated [6028].
   2436 As to the first matter relied on by his Honour to exculpate Equity Trust, Ruoff knew when he committed BGNV to the subordination deed that TBGL and BGF and thus BGNV were in an insolvency context for the following reasons:
   (a) On or about 12 December 1989 Equity Trust (through Ruoff) received a copy of TBGL’s annual report (which included TBGL’s financial statements) for the year ended 30 June 1989 [5967].
   (b) Owen J found that ‘Equity Trust in performing its role as BGNV’s director relied on the information provided to it by TBGL, in particular the audited accounts’ [5970].
   (c) His Honour said at [6444] ‑ [6445] that it must have been readily apparent to any person with commercial experience that TBGL’s annual report disclosed the following: the Bell group was continuing to suffer heavy losses and 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:
   (i) realising the value of their shareholdings in BRL and JNTH;
   (ii) the valuation of WAN and that business’ ongoing growth; and
   (iii) being able to arrange a refinancing of bank debt.
   (d) Equity Trust also knew that, at the time it received TBGL’s financial statements, they were more than six months out of date and by the time that Equity Trust resolved to cause BGNV to enter into the BGNV subordination deed in July 1990, little reliance could sensibly be placed on TBGL’s 1989 financial statements for the purpose of assessing its solvency in July 1990. The evidence does not suggest that Equity Trust had any reason in July 1990 to think that there had been a turnaround in TBGL’s fortunes since June 1989. The contrary is the case.
   (e) Under the bond issue trust deeds, BGNV was required, at regular intervals and also on other occasions if required by LDTC, the trustee for the bondholders, to give certificates to LDTC confirming that BGNV had complied with all of its obligations under the trust deeds. LDTC had last received routine certificates from BGNV on 15 December 1989. As I have explained, the procedure was for TBGL to draft the certificates required by LDTC from BGNV and send them to BGNV for re‑engrossment and dispatch in its name to LDTC.
   (f) However, from January 1990, requests for certificates were made by LDTC on a frequent and urgent basis. On 22 January 1990, LDTC wrote directly to TBGL and requested, ‘[i]n view of recent events’, that TBGL provide it with certificates of compliance from BGNV with respect to all three bond issues. LDTC stated ‘we require those certificates to be in the usual form’. The certificates eventually provided by BGNV departed significantly from its usual form of an unqualified assurance.
   (g) Immediately prior to writing this letter, LDTC had been rebuffed in attempts, provoked by then‑recent publicity about the deteriorating financial position of BCHL and also TBGL, to obtain direct from TBGL financial information about its position [5285] ‑ [5290]. That pretty clearly constitutes ‘the recent events’ on which LDTC relied on 22 January 1990 to require certificates from BGNV out of the normal cycle. TBGL forwarded LDTC’s request of 22 January to Ruoff with draft certificates for BGNV to engross and send on to LDTC in the usual way, with the usual accompanying verification by TBGL to Ruoff.
   (h) Ruoff then departed from what had been his usual practice. He did not accept the confirmatory material that TBGL had sent and by his letter of 29 January 1990 to TBGL, he declined to provide certificates by BGNV to LDTC unless his company, Equity Trust, received certain protection in the event that TBGL’s certificates of solvency turned out to be unreliable. He told TBGL that Equity Trust was unable to judge for itself whether it could certify to LDTC about BGNV’s financial position on the information available to it as at January 1990. That necessarily implied concern by Ruoff about TBGL’s own financial position since BGNV’s ability to perform its obligations to the bondholders depended entirely upon TBGL being able to perform those obligations on BGNV’s behalf. Ruoff thus showed that he was not prepared to rely on the financial information about TBGL’s position that was available to him, which included the 1989 accounts and the certificates TBGL had sent to Equity Trust on 29 January, as evidencing TBGL’s solvency. The result of Ruoff’s concerns was that, at his insistence, Equity Trust had BGNV issue certificates to LDTC that, from early February 1990, included a new qualification to the effect BGNV’s certifications were based on assurances given to it by TBGL. Ruoff thereby sought to ensure that Equity Trust could absolve itself from liability to LDTC on its own certificates as to its own ability to discharge its obligations in respect of the trust deeds. In doing this, Ruoff was I think being more than merely cautious as his Honour said was the case in [6023]. This is clear evidence that by the end of January 1990, Ruoff harboured real suspicions about TBGL’s solvency.
   (i) Ruoff’s concerns can only have become sharper when he learned from Tagliaferri of TBGL on 22 May 1990 that, although he knew that TBGL had completed its refinancing arrangements with the banks back in February ([5994] ‑ [5995]), TBGL had failed to pay $17.5 million of bondholder interest due on 7 May 1990 and had only paid it on 11 May. (As I have explained, BGNV was obliged to pay bondholder interest but TBGL itself arranged for such payments to be made to LDTC, with the accounts later written up to show the payment by TBGL to BGNV and an on‑payment by BGNV to LDTC.)
   (j) The lawyers for Lloyds Bank raised a question about whether BGNV should amend its articles to ensure that it had constitutional authority to execute the subordination deed. Equity Trust’s lawyer, van Eps, wrote to TBGL on 1 June 1990 in that context and sought confirmation from TBGL that he was correct in his understanding
   that if the Company [BGNV] 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.
   The corporate benefit for BGNV that van Eps here postulated was based upon TBGL not then being able to meet its obligations to the banks. Simpson of TBGL in his response of 22 June 1990 evaded replying to van Eps’ request for that confirmation. Ruoff was keen to know what TBGL’s response to van Eps’ understanding was about a corporate benefit for Equity Trust in executing the deed [6006(a)] and he did receive a copy of Simpson’s reply of 22 June. As his Honour also noted at [5993] van Eps, like Ruoff, then knew that TBGL’s refinancing arrangement with the banks were already in place. What his Honour drew from this at [6007] was that Ruoff’s concerns were related to the issue of BGNV’s constitutional authority to execute the deed. But in my opinion, van Eps’ unanswered query went beyond that: here was more evidence warning Ruoff that TBGL’s financial position was very poor.
   (k) Simpson’s response of 22 June 1990 is also significant because of his statements that TBGL had rejected the banks’ demand to subordinate the BGNV on‑loans to bank debt, that the banks had accepted TBGL’s opinion that it was a matter for BGNV’s director to decide for itself whether BGNV should execute the deed and that the banks had accepted that all they could do was ask TBGL to use its best efforts to obtain the deed from BGNV. Simpson’s position was legally correct. But it departed from the way TBGL had hitherto dealt with BGNV. BGNV’s obligation to provide its own certificates to LDTC in addition to passing on certificates that LDTC required from TBGL and BGF was not in law satisfied by Equity Trust rubberstamping, without enquiry, what it was given by TBGL and passing that on to LDTC under the name of BGNV, though this is what it invariably did until 29 January 1990: it was for Equity Trust to satisfy itself that it was proper for it to give the certifications requested of it. His Honour said at [5970] that Equity Trust had no information other than that given it by TBGL on which to rely in performing its functions. That is understandable given the modest fees TBGL paid it and given that Equity Trust considered itself to be what it described as ‘a trust company only’. But that only serves to underline how significant was Simpson’s statement that, for the first time, Equity Trust could not rely on TBGL to tell it what to do but had to form its own opinion on whether to have BGNV execute the subordination deed. Ruoff knew that Equity Trust had to investigate for itself whether it was proper for it to commit BGNV to do so and that knowledge necessarily required him to form his own opinion on the status of the on‑loans and TBGL solvency.
   2437 The BGNV respondents submit that this exchange of correspondence between van Eps and Simpson does not show that Equity Trust executed the deed in the belief that there was the corporate benefit for BGNV identified by van Eps in his letter of 1 June 1990, as his Honour found at [6024]. Even if that submission is incorrect, such a belief could not excuse Equity Trust’s disregard for the claim to consideration the bondholders then had on it in performing its duties as the director of BGNV. The BGNV respondents also submit that if execution of the deed served to preserve BGNV’s assets by preventing the liquidation of TBGL and BGF, that benefitted only the banks and so inevitably involved Equity Trust in a breach of its duty to BGNV to have regard to the interests of BGNV’s creditors. Acceptance of that submission would I think require an examination of what Ruoff ought to have known about the surplus likely to be available in a liquidation for creditors other than the banks. That was not done at trial and cannot be done here.
   2438 His Honour was in my opinion in error in holding that Equity Trust did not have knowledge sufficient to cause it, at the least, to strongly suspect that TBGL was facing insolvency when it executed the BGNV subordination deed in July 1990.
   2439 The second matter on which his Honour relied to exculpate the banks was his finding that the BGNV on‑loans were subordinated. Like Lee AJA, I think his Honour’s finding was wrong. But his Honour’s conclusion at [6028] did not, as he thought, answer the question whether there was evidence that Ruoff believed or suspected that the on‑loans were unsubordinated.
   2440 Ruoff ought to have known that the on‑loans were unsubordinated or, at the very least, ought to have strongly suspected that. As Lee AJA demonstrates, Ruoff received the fax sent by Tagliaferri on 22 December 1989, on Aspinall’s instructions. She began by referring to TBGL records showing that the proceeds of the three BGNV bond issues had been on‑lent to TBGL and BGF; she asked him to check his records and minute book to ascertain whether or not those on‑loans were formally minuted and whether the terms and conditions of those loans were in any way documented. She asked him to fax her any documentation he might hold about the on‑loans as soon as possible. She told him why TBGL wanted this:
   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.
   2441 It is true that TBGL did not follow up that enquiry because the banks soon after ceased to press Aspinall for information about the on‑loans and he, for reasons I have explained, was not interested in investigating their status. But Ruoff was put on exact notice that the banks were concerned to know whether or not the on‑loans were subordinated to the debts owed by TBGL and BGF to the banks and was asked to search the records of Equity Trust and BNGV for any documents relating to the on‑loans. In his examination, Ruoff was asked about this fax enquiry in question 74. In his answer he referred to the filing system he maintained and said that, while he could not remember Tagliaferri’s query, he had no reason not to make the search requested.
   2442 It is clear that there was nothing of any relevance in the files of BGNV or Equity Trust about the status of the on‑loans: nothing was produced at trial and the parties were nothing if not exhaustive in trawling through everyone’s records. It can be inferred that Ruoff did make a search for documentation that might throw light on whether the on‑loans were or were not subordinated but found nothing.
   2443 Tagliaferri’s request coupled with his failure to find any documentation must have alerted him to it being a real possibility that the on‑loans might be unsubordinated. If he had given that possibility any thought at all he would have realised that the bondholders’ rights to repayment by TBGL of bond principal might rank equally with the banks’ rights against TBGL, something of the first significance for him as the director of Equity Trust if TBGL was facing insolvency. He could not therefore have properly performed his duty to BGNV without informing himself about the status of the on‑loans before committing BGNV to the subordination deed. For the reasons given, if he had made an attempt to do that, he would have discovered that the on‑loans were unsubordinated or, at the very least, would have come to the same view that the banks had by July 1990 that it was likely to be the position. Against this background, his failure to consider the interests of the bondholders as creditors of BGNV by failing to inform himself about the status of the on‑loans before he committed BGNV to the subordination deed was a serious one.
   2444 Owen J said at [8753]:
   Had I found that there was a breach by Equity Trust, I would also have found that the banks knew about the breaches. In fact, the case would have been a strong one. The critical date for that investigation would have been 31 July 1990, rather than 26 January 1990. By that time, the banks had been told that it was ‘most likely’ the bondholders would rank pari passu with them in a liquidation and they had the additional lessons of the May waivers.
   2445 His Honour was, in my opinion, correct in this assessment he made about the banks’ position, once Equity Trust is seen to have breached its fiduciary duties to BGNV by committing it to the subordination deed.
   2446 The banks cannot escape a finding that they had knowledge within Baden categories (iii) and (iv) of the breach, even if they did not have actual knowledge of the breach.
   2447 By May 1990 all the banks knew it was most likely that the on‑loans were unsubordinated. His Honour’s reasons for this conclusion, based largely on contemporaneous bank documentation, are set out in section 30.18.8. That was the chief reason they then insisted upon BGNV executing the subordination deed. Some banks stipulated that each’s agreement, which was essential to the release from the clause 17.12 regime of BPG sale proceeds that TBGL needed to pay bondholder interest in May 1990, was conditional upon TBGL actually obtaining the subordination deed from BGNV.
   2448 The banks also knew by July 1990 that TBGL was insolvent and heading inexorably towards liquidation. Bank interest in the millions of dollars was payable each month and more interest had to be paid to the bondholders in December. The banks then knew that TBGL had no assets of any value left to call in or sell, apart from the publishing assets and the BRL shares. Despite attempts to do so, as at July 1990, it had been unable to sell the publishing assets: problems kept emerging as negotiations for a sale of those assets continued. Nor was there any prospect in July 1990 of TBGL being able to sell the BRL shares in any reasonable timeframe either. Even if TBGL could arrange the sale of those assets, the banks’ securities would have hardened by early August 1990 and each bank knew that there was no chance of unanimous agreement to waive their right to apply all such sale proceeds to prepayment of bank debt. Once the banks knew that TBGL was facing insolvency, they must also have known that BGNV was in exactly the same position and that accordingly, its director could not properly commit BGNV to the subordination deed without taking action to protect its bondholder creditors, who had to rely on TBGL, through BGNV, to pay not only principal moneys on redemption but also periodic instalments of interest, substantial in amount.
   2449 The banks accordingly knew that performance by BGNV’s director of its fiduciary duty required it either to put BGNV into liquidation and so preserve any right the bondholders had to compete pari passu with the banks in TBGL’s own imminent liquidation or to negotiate with the banks for adequate protection for the bondholders or at the very least, to defer executing the subordination deed until Equity Trust could be assured that the banks and the bondholders had reached an agreement sufficient to permit it to commit BGNV to that deed. Equity Trust did none of those things, as the banks well knew. The banks knew there was no basis upon which Equity Trust could properly execute that deed.
   2450 The banks’ knowledge about the status of the on‑loans, coupled with their knowledge that BGNV was facing insolvency, fixed them with knowledge that, if Equity Trust committed BGNV to the subordination deed, it would be breaching its fiduciary duties to BGNV by imposing serious prejudice on the bondholder-creditors. Even if Equity Trust were ignorant of BGNV’s looming insolvency and ignorant of the likely status of the BGNV on‑loans and prepared, in that state of ignorance, to have BGNV execute the subordination deed in favour of the banks, that could not obliterate this compromising knowledge that the banksthen had. Irrespective of what Ruoff and thus Equity Trust knew, Equity Trust was under a legal obligation to properly protect the interests of BGNV creditors. The banks knew enough about the insolvency of TBGL and thus of BGNV and about the strength of the bondholders’ claims to know that Equity Trust was in breach of its fiduciary duties when it had BGNV execute the subordination deed.
   2451 No question arises here about whether the banks acted unconscionably. Their liability under Barnes v Addy flows from the knowledge they had about these two matters.
   2452 The case that the banks had the necessary knowledge for the purpose of the BGNV ‘knowing receipt’ claim is a strong one, as his Honour acknowledged. The prejudice caused to BGNV itself and to the bondholders by Equity Trust’s breach of fiduciary duty to BGNV is, as his Honour recognised at [4243], ‘unanswerable’.
   2453 The BGNV respondents’ appeal against dismissal of its claim under the first limb in Barnes v Addy should be allowed.
   BGNV’s knowing assistance case
   2454 In dealing with the Bell respondents’ ‘knowing assistance’ case, I have explained why his Honour was in error in dismissing it on the grounds he did. The same error infects his dismissal of BGNV’s ‘knowing assistance’ case.
   2455 For the reasons given, I think Equity Trust committed a breach of its fiduciary duty to BGNV that was sufficiently serious to show that it engaged in a dishonest and fraudulent design within the meaning I think that expression has in this context. The knowledge that the banks had of the breach, which I consider was sufficient for the purposes of BGNV’s case based on the first limb of Barnes v Addy, also suffices to show the requisite knowledge on their part of Equity Trust’s design.
   2456 The appellants contend that BGNV did not plead a ‘knowing assistance’ case. His Honour thought otherwise at [4628]. BGNV submits that the case was fought on that basis and that appears to be so: for example, the banks at trial put in final submissions of over 100 pages on this issue and a significant part of their reply of nearly 200 pages was also devoted to it. Even if his Honour was wrong in how to read the pleadings, and I do not suggest that to be so, it is too late, for the reasons I give in relation to ground 77 of the appellants’ appeal, for the appellants to get any advantage from the point now.
   2457 In my opinion, the BGNV respondents’ appeal of this ground should also succeed.
   No conscious dishonesty
   2458 The appellants contended that the case advanced by the respondents and accepted by Owen J in relation to breaches of duty by the Bell directors and in relation to bank knowledge under the first limb of Barnes v Addy infringed his Honour’s rulings that the respondents were not permitted to advance a case of dishonesty or conscious wrongdoing, ‘as defined by his Honour’, against the Bell directors (ground 55) or the banks (ground 85).
   2459 The trial was fought on the basis that the respondents could not allege dishonesty in the sense of conscious wrongdoing on the part of any of the directors, or bank officers or bank agents in support of any of their claims.
   2460 The respondents at the hearing that produced the 2001 judgment expressly disavowed any allegation of actual dishonesty (or conscious impropriety) against the Bell directors. See The Bell Group Ltd (in liq) v Westpac Banking Corporation [2001] WASC 315 [127] and main judgment [937]. In a ruling given during the trial, his Honour made it clear that the respondents’ pleadings did not permit them to make such an allegation against any bank representative either and no relevant amendment to the pleadings was thereafter sought. See The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 5] at [62] and main judgment [942] and [943]. (His Honour also noted in [9100] of the main judgment the disavowal by the plaintiffs’ senior counsel at ts 17431 ‑ 17433 of any case based on conscious wrongdoing in relation to the Bankruptcy Act claims as well as the Barnes v Addy claims and the equitable fraud claim.)
   2461 Just what were the consequences of the respondents’ disavowals at trial of any case based on conscious wrongdoing was a contentious matter on appeal. It was the subject of the very last words on the 40th, and last, day of the appeal hearing (by counsel for the appellants).
   2462 The respondents’ case at trial was that they could succeed on all their claims by showing that the relevant Bell directors and bank participants, though not guilty of conscious wrongdoing, had nevertheless engaged in behaviour which a Court of Equity would regard as dishonest. The respondents’ Barnes v Addy claims (and their equitable fraud claims and the statutory claims including that under s 121 of the Bankruptcy Act which requires proof of’ intent to defraud’) were all based on the proposition that such a state of mind was sufficient to satisfy the state of mind or knowledge requirement of each of these causes of action.
   2463 What his Honour understood by actual dishonesty or conscious wrongdoing, the subject of the respondents’ disavowals, is I think clear. The essential element of such conduct was a subjective awareness by the person that what he was doing was wrong.
   (1) 2004 WASC 273 [83], edited extract from the transcript of 2 December 2004 (ts 18228 ‑ 18231) scheduled to the judgment:
   In what I am going to say this morning, and unless the context otherwise dictates, I will use the phrases ‘dishonest’ or ‘dishonesty’ in the same way that I have used the phrases ‘conscious wrongdoing’ or ‘conscious dishonesty’ in past exchanges on this same topic; that is, that dishonesty includes a subjective element, namely, that the person appreciated that what he or she was doing was wrong.
   (2) Main judgment [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.
   (3) Main judgment [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.
   2464 On the approach his Honour took, conscious dishonesty caught only a narrow range of behaviour. This is illustrated by what his Honour said at [4823], when dealing with the second limb of Barnes v Addy, that something can be relevantly ‘dishonest and fraudulent’ without involving conscious and deliberate wrongdoing and at [8600], that a finding of a reckless failure to make enquiries which a reasonable and honest banker would have made did not imply a finding of conscious wrongdoing by any bank officer. A person can fall short of the objective standards implicit in these concepts without being consciously i.e. deliberately dishonest.
   2465 His Honour adhered to this understanding in the findings he made against both the directors and the banks. He repeatedly said he was not making any findings of conscious dishonesty against anyone, Bell directors – [6031]; banks or bank officers – [6202] and [6205] or the banks’ legal advisers – [5762] and [6208]. When his Honour delivered his decision on 28 October 2008 he said (ts 37107):
   I wish to make four points. First, the plaintiffs did not allege, and I do not find, that any director or any bank officer or anyone else involved in these events was guilty of dishonesty or conscious wrongdoing.
   2466 Senior counsel for the appellants submitted at appeal ts 882 that his Honour made express findings that everyone in the Transaction acted honestly. That cannot be accepted. The respondents never conceded that any participants, either in TBGL or in the banks, acted honestly. His Honour made findings that these participants had not acted dishonestly. But, with certain exceptions e.g. in relation to much of Aspinall’s conduct, his Honour did not make findings that participants acted honestly. His Honour saw a distinction between acting honestly and not acting dishonestly. In [83] of his judgment, [2004] WASC 273, his Honour said:
   I am also going to use as the antonym for dishonest the word or phrase ‘non‑dishonest’. This reflects the fact that in my view ‘honest’ and ‘dishonest’ are not absolutes and that something that is not found to be dishonest may not necessarily be honest.
   He adhered to that distinction throughout his judgment.
   2467 His Honour referred at [912] to the ‘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’. The close analysis to which his Honour’s reasoning has been subjected by the appellants’ submissions in support of these grounds of appeal demonstrates just how complicated his Honour’s task was in dealing with the Barnes v Addy case when he had to decide whether to make findings of breach of fiduciary duty by the directors and of relevant knowledge on the part of the banks, without making findings of conscious dishonesty against anyone. As the respondents submitted, his Honour was alert to the problem and warned himself of the need for care in making such findings. He refers to this in [2004] WASC 273 at [75] and following, finishing at [81] with this:
   I may well be in the position where I have to make discrete findings that would ordinarily be links in a chain of reasoning leading to a conclusion of conscious wrongdoing. But what I can say with certainty is that, in accordance with the pleadings as I have read them, there will be no conclusions of conscious wrongdoing directed at individuals.
   2468 There is no reason to doubt his Honour’s statements that he did not in fact make any findings of dishonesty or conscious wrongdoing on the part of any witness. Two examples are I think sufficient to confirm this.
   2469 As to the directors, the appellants contended that his Honour’s findings in [6110] necessarily involved findings that the directors had engaged in conscious wrongdoing or dishonesty insofar as his Honour found that the directors:
   (i) did not hold a ‘genuine belief’ that the Transactions were in the interests of each company;
   (ii) knew of the prejudicial effects of the Transactions;
   (iii) knew that the Transactions provided no prospect of benefit;
   (iv) Mitchell and Oates and Bond acted for an improper purpose namely to protect BCHL.
   2470 As to (i), I explain in what I have said about Directors’ Duties why his Honour did not here make a finding concerning the subjective state of mind of the directors: he was instead applying an objective test to determine whether directors had breached their fiduciary duties.
   2471 As to (ii) and (iii), the findings his Honour here made at [6110(4)] are that the directors:
   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.
   2472 Even if this finding, by referring to ‘knowing’ and ‘believing’, could be said to be a finding of subjective dishonesty or conscious wrongdoing, that would not invalidate his conclusions on the Barnes v Addy case: his Honour goes on to make findings, by reference to ‘suspicion’ and what the directors ‘ought to have known’, that are states of mind sufficient to support findings of breach of fiduciary duties without trespassing into the area of conscious wrongdoing. (Notwithstanding their submissions about this finding in relation to ground 55, the appellants in support of ground 27 submit that [6110(4)] should be understood as a finding that the directors ‘ought to have known’ the matters there set out and that, in making this finding, the trial judge erroneously relied on his own business judgment about the view the directors should have formed as to the situation facing them in January 1990.)
   2473 Insofar as his Honour found that the directors breached their fiduciary duties having regard to what they ‘ought to have known’ about the prejudicial effect of the Transactions on creditors and the lack of corporate benefit, he was I think saying that, quite apart from what they actually knew, the directors had failed to give any consideration to matters which they should have considered. For example, his Honour made specific findings at [6064] and [6065] that the directors did not consider the extent of external creditors of individual Bell companies and did not consider how those creditors would be affected by what was proposed. A director of a financially distressed company who does not give any consideration to how the grant of security to a preferred creditor may prejudice other creditors is just as culpable, as a fiduciary, as one who knows other creditors will be prejudiced but goes ahead and grants security anyway. Further, as his Honour found at [6050] and [6047] ‑ [6048], the directors knew about the existence of the tax debts and the possibility that the BGNV on‑loans might be unsubordinated but they failed to make the enquiries they should have made that would have showed that the DCT and BGNV might well be prejudiced by the Transactions: that is, they breached their fiduciary duties because they ought to have know that both creditors were likely to be prejudiced but went ahead and granted the securities to the banks anyway. His Honour also held at [6045] that the directors failed to gather the information which they needed in order to decide whether there was a corporate benefit in the Transactions for the various Bell companies. So though they may not have actually known there was no corporate benefit, they ‘ought to have known’ that and a finding of breach of duty can be justified on the basis.
   2474 But insofar as his Honour here found that the Australian directors ‘knew’ or ‘believed’ certain things, it does not follow that what they did with that knowledge necessarily tainted their actions with conscious dishonesty. This particular finding has to be read with the statement in [6031] with which his Honour introduced section 29 of the judgment in which [6110] is found: ‘in all that I am about to say the reader must bear in mind that the parties do not allege and I do not find, that any director was dishonest or guilty of conscious wrongdoing’. His Honour generally accepted Aspinall, the key Australian director, as holding the subjective beliefs he swore to, [4980], [5371] and [6086], including that there were benefits for the Bell companies from those Transactions: he took a commercial gamble in the belief he would be able to get the 12 months he considered he needed ‘to get the house in order’ [6057] and [6059]. In that context, the finding about knowledge and belief does not necessarily imply that Aspinall acted with conscious dishonesty. His Honour found that Mitchell saw his role in TBGL as limited [5374] and paid little attention to relevant issues [5396] and [5445] and [5453], showed no appropriate consideration by Mitchell as a director of TBGL to the future of that company [5431]. While his Honour had reservations about some of Mitchell’s evidence [6091] he did not reject him generally as a witness not worthy of credit: see [5441]. As to Oates, his Honour found that he had a better awareness than Mitchell of relevant matters such as TBGL’s precarious financial position and the need to gain access to asset sale proceeds to cover cash flow deficits [5485]. But he made nothing that could be said to be a finding that Oates behaved with conscious dishonesty.
   2475 As to (iv), the findings his Honour made at [6110(7)] about Mitchell and Oates are that they:
   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.
   2476 As to Mitchell, who gave evidence and Oates, who did not, his Honour found that their primary concern was the survival of the BCHL group rather than the interests of the Bell group [6869]. His Honour found that they obtained no personal advantage from their focus on the interests of BCHL [6127]. For them to commit the financially distressed Bell companies to the Transactions in the belief that that would assist the survival of the stressed parent BCHL group without considering in any detail the impact of the Transactions on the Bell group does not necessarily imply conscious dishonesty in their role as directors of the Bell group. The same comment applies to Bond, a Bell UK company director only, in respect of whom his Honour made the same findings.
   2477 As to the banks, the banks’ knowledge of the financially distressed condition of the Bell companies when the Transactions were entered into was relevant to the knowledge element of both the ‘knowing receipt’ and ‘knowing assistance’ cases. The appellants submit that his Honour, in making the finding in [6205] that supported his Honour’s conclusion in [8747] that the banks had Baden category (iii) knowledge of directors’ breaches because, among other things, they wilfully and recklessly failed to make enquiries which honest and reasonable persons would have made about the Bell companies’ financial condition, necessarily shows conscious dishonesty on the part of the banks. His Honour anticipated this contention in [8600] where he said that in finding there had been a reckless failure to make enquiries which a reasonable and honest banker would have made, he referred to ‘honest’ because it was a necessary element in the legal test but did not indicate that he had made a finding of conscious wrongdoing by any bank officer. The finding of a failure to make enquiries that an honest banker would have made is a finding that the respondent banks fell short of an objective standard: it does not necessarily involve a finding of dishonesty, in the sense of conscious wrongdoing, on their part. His Honour in his discussion in section 30.2.5, ‘Abstention from Enquiry’, concluded that both a deliberate abstention from enquiry and reckless indifference may indicate dishonesty but not necessarily. That is correct. Whether dishonesty is involved in such states of mind is a matter of inference dependent on the circumstances of the case. To determine to take a preference from a debtor whose financial condition is of concern without making full enquiry into its solvency does not necessarily involve consciously dishonest conduct. His Honour made it clear at [6205] that he was not finding such conduct on the part of the banks. He also appears to have found in [6206] (repeated in [8747]) that the banks had knowledge within Baden category (iv) of the directors’ breaches of duty based, in part, on the information they had indicating the insolvency of the Bell companies. Such a finding does not carry with it the implication of conscious wrongdoing, as his Honour observed: it involves the determination of the knowledge to be imputed to a defendant about the critical matter in issue by reference to an objective standard, irrespective of his own subjective state of mind.
   Pleading deficiencies
   2478 By their notice of appeal, ground 77, the appellants contended that, because of the plaintiffs’ failure to plead that the banks knew that the directors had breached their duties to the plaintiff Bell companies, it was not open to his Honour to allow the plaintiffs to advance a ‘knowing receipt’ case, with the consequence that he was in error in giving judgment for the plaintiffs.
   2479 His Honour held at [4836] that the plaintiff’s pleadings were adequate. It is unnecessary to investigate whether his Honour was correct. The case was conducted on the basis that the banks had the knowledge necessary to satisfy the requirements of the plaintiff’s claim under the first limb of Barnes v Addy. At [8751] his Honour listed the three key contentions of the banks in answer to this claim, the third being that ‘even if the directors breached fiduciary duties, the banks did not know of the contraventions’. His Honour said: ‘It is the third of the propositions and that has excited, at least in my mind, the most controversy’. His Honour did not exaggerate: at [8742] he referred to the difficulties he had in summarising the 500 pages or so of his judgment in which he dealt with what the banks knew about those matters.
   2480 Ground 77 is devoid of substance: in Gould v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490, Isaacs and Rich JJ said at (517), in a dictum repeatedly applied since then:
   But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly fought out, it is impossible for either of them to hark back to the pleadings and treat them as governing the area of contest.
   2481 The same kind of pleading objection is raised in the appellants’ submissions in support of other grounds of appeal e.g. grounds 76, 81 and 88, to which the same answer can be made.
   STATUTORY CLAIMS
   2482 The Transactions were entered into in January 1990 except for the BGNV subordination deed which was executed in July 1990.
   2483 The particular transactions challenged under s 121 of the Bankruptcy Act 1966 (Cth) and under the State equivalents of the Statute of Elizabeth are identified in [774] and [9067] of the judgment. Those challenged under s 120 of the Bankruptcy Act are identified in [775] and [9068]. The Transactions challenged by LDTC and BGNV in reliance only on the Western Australian and ACT equivalents of the Statute of Elizabeth are identified in [776]. Only the claims based on s 120 of the Bankruptcy Act succeeded at trial. His Honour’s decision here is appealed by the appellants while his rejection of all the other claims is appealed by the respondents.
   2484 As appears from [777] various of the Transaction instruments were challenged at trial on the basis that they are void against the liquidators as unregistered charges. His Honour’s refusal at [9240] to find that any of these instruments constituted charges has not been appealed.
   2485 On 24 July 1991 the first winding up order in respect of any of the Bell plaintiffs was made against TBGL. Others followed: see judgment Schedule 38.23. As his Honour noted at [637], the banks realised a total of about $283 million: $222.3 million from the sale in September 1991 of the publishing assets ‑ [641] and [644]; $59.9 million from the sale between March and May 1992 of the BRL shares – [646] and [647]; $732,000 in October 1996 by way of dividends from the winding up of Belcap Trading – [649]; and $146,000 in September 1995 from the winding up of Bell Bros Holdings – [650].
   2486 The parties filed an elaborate statement of agreed facts, some 200 pages long, showing so far as was possible the fate of the proceeds of the realisations by the banks of the Bell securities. As counsel for the banks pointed out, it is unnecessary to grapple with this document because the respondents, in their written submissions, acknowledged that: ‘it was common ground at trial that after receipt by the [banks], the proceeds of the securities were paid in such a way that shortly afterwards they ceased to be identifiable in the hands of the banks’. Senior counsel for the respondents pointed out (appeal ts 2417) that this is as far as common ground between the parties went. In particular, there was no evidence that any of the proceeds of realisation of the securities had been ‘dissipated’ in the sense of no longer being in the possession of or under the control of any of the banks in any form.
   2487 I have had the advantage of reading in draft the reasons of Lee AJA for holding that the various transactions attacked by the respondents under s 120 and s 121 of the Bankruptcy Act and the Western Australian and ACT equivalents of the Statute of Elizabeth are void as against the liquidators.
   Dispositions of property – the share mortgages
   2488 In my opinion, Owen J was correct in holding, in section 33.4.2 of the judgment, that the share mortgages were dispositions of property within s 120 and s 121 of the Bankruptcy Act and s 89 of the Property Law Act by TBGL and Ambassador Nominees as mortgagors. The share mortgages were not dispositions of property by the beneficial owners of the shares, as the appellants contended.
   2489 The question whether the share mortgages constituted dispositions of the legal and beneficial interests in the subject shares by TBGL and Ambassador Nominees can be answered by considering the position so far as it concerns the Dolfinne shares included in the TBGL mortgage of 1 February 1990.
   2490 By a simple declaration of trust on 30 June 1989, TBGL declared that it held over 112 million ordinary and preference shares in BRL on trust for Dolfinne. By cl 2(b), TBGL undertook to deal with the shares in such manner as Dolfinne might from time to time direct, thereby recognising Dolfinne’s absolute entitlement to the shares. TBGL and Dolfinne agreed that, as part of the Transactions with the banks, those shares would be mortgaged to the banks to secure payment of moneys owing by various Bell companies. Accordingly, by an Authorisation and Direction and Confirmation of 1 February 1990, Dolfinne as beneficial owner of the shares ‘authorises and directs and confirms having authorised and directed TBGL … for and on behalf of the beneficial owner to grant the Security over the Trust Property and execute the Security’. The document identified ‘the Security’ as the share mortgage dated on or about 1 February 1990 between TBGL as mortgagor and Westpac as agent for all the banks and the ‘trust property’ as that referred to in that Security.
   2491 By this mortgage, TBGL ‘as legal and beneficial owner’ charged and assigned by way of first legal mortgage to Westpac all the shares referred to in the mortgage, including the Dolfinne shares, and all TBGL’s ‘right, title and interest … under any contract, entitlement, arrangement or understanding with any person whatsoever to have or call for the transfer, issue or allotment of the shares’: cl 3. By cl 6.3, TBGL warranted to each bank that (b) ‘it has the power to enter into this mortgage and to perform the obligations specified herein in accordance with the terms hereof and has taken all necessary action to authorise entry into and performance of this mortgage’ and that (c) ‘this mortgage will, when duly executed, constitute legal, valid and binding obligations of itself, enforceable in accordance with its terms … and this mortgage will, when duly executed, effectively and validly create a first priority security interest over the assets expressed to be covered hereby free of prior or pari passu interests’.
   2492 TBGL did not mortgage the Dolfinne shares the subject of its 1989 declaration of trust, as trustee. In express terms, it mortgaged them as legal and beneficial owner and warranted that it had power to do that and had taken all necessary action to obtain that power. If TBGL only mortgaged the Dolfinne shares as trustee, TBGL would have been in breach of the warranties in cl 6.3(b) and (c) of the mortgage and the mortgage would have given a materially false understanding to anyone who searched the public register on which it was entered.
   2493 Owen J was, in my opinion, correct in holding that the share mortgages and the authorisations operated interdependently.
   2494 Dolfinne’s Authorisation and Direction and Confirmation operated, in my opinion, to confer on TBGL beneficial ownership of the shares for the purpose of mortgaging them to the banks. That authorisation was specific in doing that and cannot be read merely as an authorisation to TBGL to mortgage the shares as trustee for Dolfinne, as the appellants contended. It was by its express terms given to enable TBGL to grant the mortgage over Dolfinne’s shares as both legal and beneficial owner of those shares. Dolfinne’s Authorisation and Direction and Confirmation did not, however, terminate the original trust. The authorisation did not confer unfettered beneficial ownership of the shares on TBGL, only beneficial ownership for the specific purpose mentioned. In my opinion, the original declaration of trust would continue to operate, so far as it could, consistently with Dolfinne having vested beneficial ownership of the shares in TBGL for that limited purpose. If the mortgaged shares were redeemed (or sold by the banks under the mortgage with a surplus remaining after payment of the banks’ debts), TBGL would thus hold the shares (or any such surplus) for Dolfinne under that declaration of trust, rather than under a resulting trust, as the respondents suggested.
   2495 Dolfinne was absolutely entitled to the shares when it gave this authorisation to TBGL. As such a beneficial owner, it had extensive powers with respect to the trust that were not limited to terminating that trust completely. With the consent of the trustee, Dolfinne could declare new trusts of the shares: see Mowbray et al, Lewin on Trusts (18th ed, 2008) [24‑21]. A further example of the wide powers of a beneficiary, when absolute owner, to deal with the trust property is provided by Quinton v Proctor [1998] 4 VR 469, 474. Given this, there is no obstacle, in my opinion, to Dolfinne directing TBGL to deal with its interest in the shares as it did by the Authorisation and Direction and Confirmation. TBGL’s consent to Dolfinne altering the original trust in this way can readily be implied from what happened but it was in any event given expressly by cl 2(b) of the declaration of trust.
   2496 Dicta in DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431, relied on by the respondents for the proposition that the effect of the authorisations given by the beneficial owners of the shares was to merge the equitable interest in the shares in the legal interest, do not govern the situation here. TBGL, as legal owner, never had unfettered freedom to deal with the equitable interest in the shares in question.
   2497 In my opinion, Williams v Lloyd [1934] HCA 1; (1934) 50 CLR 341 has nothing of relevance to say with respect to the share mortgages. There, the question at (372 ‑ 375) was whether the beneficial interest in the subject matter of a mortgage could be treated separately from the legal interest in that subject matter for the purposes of the voluntary settlement provisions of the Bankruptcy Act. Here, the question is whether the beneficial owner of the mortgaged property has vested its beneficial ownership in the legal owner of that property so as to enable the latter, to the exclusion of the former, to make a disposition by way of mortgage as both legal and beneficial owner of that property that is voidable under the Bankruptcy Act.
   Dispositions of property – the guarantees
   2498 As to the guarantees, one essential feature of a settlement or disposition of property within s 120 and s 121 of the Bankruptcy Act is that the bankrupt must have divested himself of beneficial ownership of an item of identifiable property and have invested some other person with ownership of it: Williams v Lloyd (373). In Burns v Leda Holdings Pty Ltd [1988] 1 Qd R 214, 226, Dowsett J held that the release by a trustee of its claim to indemnity out of a trust fund by transferring the total fund to the beneficiaries, without any reservation in respect of the right to indemnity, was not a settlement or disposition of property within s 120: ‘the notion of the continued existence of the property is inherent in the section … that claim to indemnity was not disposed of in any sense to the beneficiaries, rather it was released or waived’. It is not a requirement of a disposition that the property provided by the bankrupt be received and kept in specie by the recipient. Money given by the bankrupt so that the recipient will use it to buy or obtain something to be retained for a time at least by the recipient will be a disposition of property and a settlement within s 120: Caddy v McInnes [1995] FCA 1464; (1995) 58 FCR 570, 580 ‑ 581.
   2499 As with settlements and dispositions of property within s 120 ‑ s 122 of the Bankruptcy Act, there will be an alienation of property within s 89 of the Property Law Act, where the owner of property, or of an interest therein, so acts as to divest himself of his interest or some lesser interest, and to vest the same in another person: Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 [65] ‑ [67].
   2500 When each guarantor executed its guarantee, it created for itself new contractual liabilities to the banks. Those liabilities did not attach to or fetter in any way any of the guarantor’s property. The banks’ entitlement to enforce those liabilities against the guarantor constituted a chose in action capable of amounting to ‘property’ within the wide definition of that term in s 5 of the Bankruptcy Act. See Official Receiver in Bankruptcy v Schultz [1990] HCA 45; (1990) 170 CLR 306, 314; Re Nguyen; Ex parte Official Trustee in Bankruptcy [1992] FCA 150; (1992) 35 FCR 320, 325. Such a chose in action is also ‘property’ within s 89 of the Property Law Act: see s 7. That chose in action only came into existence upon execution of the guarantee. As soon as that occurred, the banks became the owners of it. But at no time anterior to the creation of that property did the guarantor have any interest in that chose in action of which it could divest itself in order to vest ownership in the banks. It therefore cannot be said that by giving the guarantee to the banks the guarantor settled any property on the banks or disposed of any property to them within the meaning of those terms in s 120 and s 121 of the Bankruptcy Act or made any alienation of property within s 89 of the Property Law Act.
   2501 The position in bankruptcy is different now. Section 120 of the Bankruptcy Act, as amended in late 1996, strikes down ‘transfers of property’ and declares in s 120(7) that: ‘a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person’. Section 121(9) and s 122(8) are to the same effect. A guarantee given by a debtor to a creditor is a transfer of property within the new sections: Sutherland v Brien [1999] NSWSC 155 [15].
   2502 Clause 3.7(a) of each of the guarantees requires comment. Taking the TBGL guarantee as an example, cl 3.7(a) in effect provided that, until all the Bell indebtedness to the banks had been paid in full, TBGL should not, by virtue of any payment made by it under the guarantee on account of the liability of any Borrower or any Security Provider:
   (i) be subrogated to any rights, security or moneys held or received by Westpac or any other bank or be entitled to any right of contribution or any other right of a surety so as to diminish any distribution or payment which, but for that claim or proof, any bank would otherwise have been entitled to receive;
   (ii) except as provided in the Facility Agreements or Subordination Agreement, be entitled or claim to rank as a creditor or prove in competition with the banks in the liquidation of a Borrower or any Security Provider; or
   (iii) except as provided in the Facility Agreements or Subordination Agreement, receive, claim or have the benefit of any payment, distribution or security from or on account of any Borrower or any Security Provider.
   2503 Clause 3.7(b) required TBGL to hold on trust for Westpac as Security Agent for the banks and forthwith pay to Westpac any such payment and transfer to Westpac any such security received by it.
   2504 When TBGL executed its guarantee, BGF (a Borrower for the purposes of the guarantee) owed TBGL nearly $254 million. BGF which also provided a guarantee to the banks was then owned very substantial sums by a range of Security Providers: see [PLED.009.001.001], the particulars of the allegations in par 7C(a) of the plaintiffs’ ASC.
   2505 Under cl 3.7(a)(i) TBGL’s right to claim contribution from other Bell guarantors of the Secured Liabilities is postponed until those liabilities to the banks have been discharged in full. A right to claim contribution is a chose in action: Halsbury’s Laws of England (5th ed) vol 13 [6(18)]. The right is thus ‘property’ for the purposes of the avoidance provisions of the Bankruptcy Act. Given the insolvency of Bell guarantors, such as BGF, against whom TBGL could otherwise claim contribution, the postponement of the right reduces its value for TBGL and correspondingly enhances the ability of the banks to recover the Bell indebtedness as fully as possible in the circumstances. This postponement of TBGL’s right to claim contribution is I think capable of amounting to a disposition of the chose in action: see Caddy v McInnes (582).
   2506 The removal effected by cl 3.7(a)(ii) of TBGL’s right to prove in competition with the banks in the liquidation of a Bell borrower or security provider, for amounts paid by TBGL under its guarantee in reduction of the liabilities of such a borrower or security provider to the banks, is also capable of amounting to a disposition of property. The right to prove in a liquidation is a chose in action: Halsbury’s [7(14)] and Re Irving; Ex parte Brett (1877) 7 Ch D 419. Removal of TBGL’s right to prove in competition with the banks increases the value of the banks’ own right to prove in the same liquidation by decreasing the value of TBGL’s residual right of proof.
   2507 However, it would achieve nothing of significance for TBGL’s liquidator to have the guarantee set aside so far as it effects dispositions of property in these two respects. Clause 12.8 of the guarantee provides for the severance of any term found to be unenforceable. These two provisions are not so linked with the operation of the guarantee obligation in cl 2 that their avoidance would require its avoidance: they were no doubt a material part of the consideration provided by the guarantor but they were a subordinate part and are severable. Cf David Jones Ltd v Lunn (1969) 91 WN (NSW) 468, 477 and Brew v Whitlock (No 2) [1967] VR 803, 807 ‑ 808, on appeal, Whitlock v Brew [1968] HCA 71; (1968) 118 CLR 445, 461.
   2508 Owen J’s reasons at [9204] for holding that the guarantees were settlements within s 120, an essential step to his conclusion at [9219] that they were void against the liquidator, were confined to following the Queensland Full Court in Re Pacific Projects Pty Ltd (in liq) [1990] 2 Qd R 541, 543 and its acceptance by Nicholson J in Lyford v Commonwealth Bank of Australia [1995] FCA 1261; (1995) 130 ALR 267, 272, which he considered established that proposition. The appellants correctly submit that though the primary judge in the Pacific Projects case held that a guarantee was a settlement within s 120 of the Bankruptcy Act, that issue was not appealed. Neither the Full Court decision nor Lyford can therefore be regarded as any authority for the proposition that a guarantee is within s 120. The primary judge in the Pacific Projects case held that to be so for the reason that: ‘the guarantee … was also a settlement, as [it is] a disposition of a contingent interest in personal property to be held for the enjoyment of [the creditor] for an indefinite period of time’ (543). For the reasons given, the creation of a new, in contrast to the assignment of an existing, guarantee cannot amount to a settlement or disposition of the guarantee sufficient for the purposes of s 120 ‑ s 122 of the Bankruptcy Act, or to an alienation of property within the Property Law Act, even if it were correct to describe a guarantee as having the additional characteristics mentioned by the primary judge in the Pacific Projects case.
   2509 The guarantee of 1 February 1990 executed by BGF, taking it as an example, was one of an interrelated suite of documents that secured repayment to the Australian and Lloyds syndicate banks of the loans to TBGL and the other Bell borrowers in priority to the claims of all other creditors of Bell companies. To that end, it gave the banks control of all the Bell group’s assets. Other documents in the suite included mortgages over real property and over shares. Their interrelationship is shown by, among other things, the recitals in each of the guarantees and in the other documents, including recital N in each of the Australian Banks Supplemental Agreement and the Lloyds Supplemental Agreement Number 2.
   2510 At trial, the respondents described this suite of documents as a ‘Scheme’: see [685]. Its identified effects were said to have caused detriment and prejudice to various Bell companies and shareholders in other Bell companies and to the creditors of various Bell companies [883] ‑ [885]. That detriment and prejudice was a key element in the various claims the respondents made at trial against the banks: see section 19 of the judgment.
   2511 In Caddy v McInnes (582), upon which the respondents relied at e.g. appeal ts 2381/2, the Full Court accepted that a series of steps or transactions could together, in appropriate circumstances, constitute a single disposition for the purposes of s 121 of the Bankruptcy Act. The same position obtains with respect to s 89 of the Property Law Act: Cardile [66]. In Official Trustee in Bankruptcy v Baker [1994] FCA 1243, the bankrupt orchestrated in the course of a day six separate transactions involving himself and three companies that resulted in the conversion of an asset of his, a debt owed to him by one of those companies, into an asset of another of those companies to which he had access because he controlled that company. No sham was involved, but all these transactions were held to constitute a single disposition that was void against the trustee under s 121.
   2512 No comparable claim was made here. The respondents in their statutory claims did not seek to avoid the Scheme in its entirety as a single disposition. Nor did they attack every one of the transactions that were components of the Scheme: see [9070]. Instead, they focused on particular instruments, including the guarantees, which they said were part of the Transactions and the Scheme, and sought to avoid those particular instruments. Though the guarantees attacked here are part of what I have called an interrelated suite of instruments executed by the various Bell companies for the benefit of the banks, whether they are void under s 120 and s 121 of the Bankruptcy Act or s 89 of the Property Law Act therefore depends in my opinion upon whether each, among other things, is by itself a settlement or disposition or alienation of property within the relevant statutory provision. That is the basis upon which the respondents challenged them.
   Dispositions of property – conclusion
   2513 Save that I think the guarantees here in question must stand because they are not caught by any of the statutory provisions and subject to what I have said about the mortgages of shares that TBGL held in trust for the various Bell companies, I agree with Lee AJA’s reasons for holding that all the transactions, other than the guarantees, but including those mortgages, are void against the liquidators.
   Relief
   2514 Under s 1383(1) and (3) of the Corporations Act 2001 (Cth), where, as here, a proceeding was started in a court under the old corporations legislation of Western Australia before the commencement of the 2001 Act, a new proceeding equivalent to the old proceeding is, on the commencement of the 2001 Act, taken to have been brought in the same court under the provision of the 2001 Act that corresponds with the provision in the old State legislation under which the original proceeding was brought. It follows that on the commencement of the 2001 Act, these proceedings insofar as the statutory claims are concerned (except for the claims based on s 89 of the Property Law Act and the territories legislation) were transmuted into proceedings under s 565 of the 2001 Act, as his Honour correctly held at [9077].
   2515 Section 565 of the 2001 Act, headed ‘undue preference’, provides:
   A settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, before 23 June 1993, by a company that, if it had been made or incurred by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator.
   2516 As I have noted, all the transactions challenged by the respondents’ statutory claims occurred before 23 June 1993.
   2517 The heading to s 565 is not part of the enactment: s 13 of the Acts Interpretation Act 1901 (Cth). The wording of this section is apt to pick up settlements of property under s 120 of the Bankruptcy Act, fraudulent dispositions of property under s 121 and preferences under s 122. There is in my opinion no justification for confining s 565 only to transactions made void by s 122 of the Bankruptcy Act.
   2518 Importantly, there is nothing in the 2001 Act that deals with the remedies to be given for a transaction occurring before 23 June 1993 and made void by s 565. As noted in BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322 [107], the practice was for the court to declare the disposition to be void and leave it to the liquidator to claim consequential relief under the general law. The same position obtains in respect of the avoidance provisions of the Bankruptcy Act. In Re Ward; Thomas v LG Abbott & Co Ltd (1950) 16 ABC 214 (a decision approved by the High Court in NA Kratzmann Pty Ltd (in liq) v Tucker (No 2) [1968] HCA 44; (1968) 123 CLR 295, 298) the transaction attacked as a preference under s 95 of the Bankruptcy Act 1924 was a payment made by the debtor to a creditor under a contract between them. As Paine J observed (222), only the payment was challenged, the contract out of which it arose was not avoided by s 95 and remained intact. He continued (222):
   Further, and this distinction appears to me to be vital, neither s 95 nor any other provision of the Act gives any express right of action to the trustee, in whose favour the avoidance of the loan operates. In the result, the trustee is left to whatever right of action he would have, to whatever form of action he could bring, at common law. The form of action by which a trustee who has succeeded in establishing an undue preference under s 95 may sue will depend upon the nature of the transaction actually avoided. In the case of money paid, it will take the form of an action to money had and received. In the case of a transfer of chattels, he may resort to detinue or trover … If there has been a conveyance of land, he may have to sue for an order for re-conveyance, or possibly for damages. It is plain therefore, that the cause of action to recover moneys paid only arises partly from the effect of s 95, and for the rest must depend upon common law as it affects the result which the section brings about.’
   2519 Part 5.7B, Division 2 of the Corporations Law, replicated in the Corporations Act, deals with ‘voidable transactions’. It was described in Cook v Italiano Family Fruit Company Pty Ltd (in liq) [2010] FCA 1355; (2010) 190 FCR 474 [46], correctly in my opinion, as ‘a new self‑contained voidable transaction regime’. Reference to the Bankruptcy Act is no longer necessary to identify transactions by the insolvent company that can be set aside and it is no longer necessary to rely on the general law to give effect to a liquidator’s rights to recover in respect of voidable transactions by the company.
   2520 Only those transactions occurring after 23 June 1993 that are listed in s 588FE(2) ‑ (6A) are ‘voidable transactions’ and the wide new powers conferred on courts by s 588FF to make orders of the kind therein referred to are limited in their application to transactions of the kinds referred to in s 588FE. The changes effected by part 5.7B to the range of transactions antecedent to winding up now open to challenge by a liquidator and to the relief that can be granted to the liquidator were summarised in BP Australia by Spigelman CJ, Mason P and Handley JA agreeing, who said:
   106 … The new regime [now Pt 5.7B of the 2001 Act] recommended by the Harmer Report expanded the range of pre‑liquidation transactions which could be avoided and, significantly for present purposes, enhanced the armoury of liquidators in a number of ways, not least by enabling the court to make a wide range of rectifying orders. These were identified in s 588FF(1).
   107 That subsection represented a substantial change to the pre‑existing scheme. Prior to Pt 5.7B, the practice was for the court to declare a disposition to be void with the consequences left to the general law, together with some statutory powers of limited scope such as s 567 of the Corporations Law. Section 588FF(1) identifies a range of specific orders that can be made and which are more focused and more comprehensive than the orders that were hitherto available by way of relief under the general law or statute.
   108 The extension of the ability of liquidators to act on behalf of the general body of creditors, by broadening the range of antecedent transactions that were susceptible to avoidance, curing the pre‑existing uncertainty as to the applicability of provisions such as s 120 of the Bankruptcy Act (see Keay at 70) and clarifying the orders that can be made, was balanced by a requirement for greater expedition in the conduct of a liquidation.
   2521 The respondents are confined, in respect of their statutory claims, to relief available under the general law when transactions are set aside under s 120, s 121 and s 122 of the Bankruptcy Act and under the Statute of Elizabeth provisions. The court cannot, in my opinion, expand the form of relief available under the general law by having regard to part 5.7B of the Corporations Act. Nor, in my opinion, is it open to this court to make any of the orders provided for by s 588FF in granting such relief.
   Statutory avoidance – when does it occur?
   2522 The central contest between the appellants and the respondents in relation to relief available in respect of the statutory claims is whether the appellants are right when they submitted at appeal ts 1368, in reliance on Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322, that the banks had a good title to the impugned securities when they realised them and a good title also to the realisation proceeds, which ceased to be identifiable in the hands of any of the banks before the liquidator of any of the plaintiff companies elected to avoid the securities in reliance on the Bankruptcy Act and the Statute of Elizabeth; they submitted that such an election avoids transactions only prospectively, that is, from the date of the election to avoid (at appeal ts 3958 they accepted that avoidance under s 120 took effect upon the commencement of the bankruptcy or liquidation). Accordingly, no relief of any kind was available to the respondents even if the securities are open to avoidance under any of the statutory provisions relied on. The respondents’ submission is that these statutory provisions are enlivened by the commencement of the bankruptcy or here, by the winding up orders, not by the subsequent election of the liquidators to challenge the securities. Once enlivened, the statutory provisions operate in a retrospective way to deprive the banks of their title to deal with the securities, with the consequence that the banks must account to the liquidators for the proceeds of realisation: appeal ts 2418, 2435 ‑ 2436. The respondents also contend that the liquidators are entitled to an equitable charge over the assets of each of the banks: although the proceeds of realisation are no longer identifiable in the hands of any of the banks, those proceeds have not been shown by the banks to no longer exist in some form in each of the banks’ hands. The banks are therefore in the position that each holds a mixed fund made up in part of the security proceeds and in part of the bank’s other funds: appeal ts 2442 and 2446 ‑ 2447.
   2523 It may be that the case was fought at trial on the basis that avoidance of the transactions challenged under the relevant provisions of the Bankruptcy Act and the Statute of Elizabeth was triggered by the service by the liquidators on the banks of notices of avoidance of those transactions. I say ‘it may be’ because, as appears from [9647] ‑ [9649], his Honour had great difficulty in understanding this part of the respondents’ case. His Honour’s difficulty is understandable when it is realised that par 71(d) of the particulars to the plaintiffs’ eighth amended statement of claim, itself over 100 pages long, commences on page 422 of those particulars. In any event, as appears from [9650], his Honour treated avoidance as occurring on the date of service on the banks of the liquidators’ notices. I do not think the respondents are barred from now contending that avoidance under the Bankruptcy Act provisions occurs at the earlier date. The issue is one of statutory construction and no evidence additional to that tendered could be relevant: see Centronics Systems Pty Ltd v Nintendo Co Ltd [1992] FCA 584; (1992) 39 FCR 147, 189.
   2524 In Official Trustee in Bankruptcy v Mitchell [1992] FCA 521; (1992) 38 FCR 364 it was said that the Bankruptcy Act 1966, including s 121, was passed following the report of the Clyne Committee, which makes it plain that s 121 is derived from the Statute of Elizabeth and was intended to reflect generally the principles which have been worked out over the centuries, in relation to fraudulent dispositions, since the enactment in 1570 of that Statute. But in PT Garuda Indonesia Ltd v Grellman [1992] FCA 188; (1992) 35 FCR 515, the Full Court said [28]:
   Whilst the terms in which s 121 is expressed are strongly reminiscent of those of the earlier statutes, and whilst guidance may be obtained from the earlier law, the present statute must, in the end, be given effect according to its terms. In particular, effect must be given to s 6, a provision which was not contained in the recommendations of the Clyne Committee.
   2525 In Re Fiorino; Fiorino v Woodgate [1994] FCA 1023 Gummow J said [45]:
   The counterparts of the Elizabethan statute may be relied upon by a trustee in bankruptcy in a proceeding where he also relies upon s 120 or other provisions of the Act … but the statute operates upon the transactions which are impeached in a manner different to s 120 … the alienation is ‘voidable’ at the instance of ‘any person thereby prejudiced’, and the defeasance of the title of the disponee occurs differently to that brought about by s 120.
   2526 In my opinion, the operation of the avoidance provisions of the Bankruptcy Act differs in two respects from that of the Statute of Elizabeth. Firstly, it is the commencement of the bankruptcy or liquidation that brings about the avoidance of a transfer by the debtor/bankrupt under the Bankruptcy Act, not the decision by the trustee or liquidator to intervene, which is the event that brings about avoidance under the Statute of Elizabeth. Secondly, under the Statute of Elizabeth, dealings by a transferee with property received from the debtor, including dealings that involve the entire dissipation of that property, between the date of receipt of the property from the debtor and the date on which the creditor invokes the statute, will be valid. Under the Bankruptcy Act provisions, dealings by the transferee with the property received from the debtor will only be valid in the period between the date of receipt of the debtor’s property and the commencement of the bankruptcy (or liquidation). This may take place, as in the case of TBGL, long before the trustee in bankruptcy or the liquidator invokes those provisions.
   2527 The dicta in the cases dealing with when avoidance under s 120 ‑ s 122 of the Bankruptcy Act occurs can be read as saying that avoidance occurs at differing times.
   2528 There are statements in the cases to the effect that s 120 ‑ s 122 of the Bankruptcy Act are ‘activated by the trustee’s avoidance’ (Anscor Pty Ltd v Clout [2004] FCAFC 71; (2004) 135 FCR 469, 480 (Lindgren J). His Honour did not cite any authority for this particular proposition and the other members of the Full Court at (472 ‑ 473) reserved endorsement of his Honour’s statement of general principles); that ‘unless the trustee in bankruptcy exercises his right to avoid the settlement or disposition (as the case requires) before the disponee passes title to it by sale, the person dealing with the disponee obtains a good title’: Valoutin Pty Ltd v Furst [1998] FCA 339; (1998) 154 ALR 119, 148 ‑ 149 (Finkelstein J). His Honour referred in a general way only to Brady v Stapleton, which is concerned only with the Statute of Elizabeth, and Baker v Official Trustee in Bankruptcy [1995] FCA 1421, a bankruptcy case which does not however deal with this particular point, that ‘Until the title is defeased by the trustee in bankruptcy calling for delivery up … the donee may deal with the property as owner and is not required to account for any profit made’: Official Trustee in Bankruptcy v Alvaro [1996] FCA 483; (1996) 66 FCR 372, 426. The only authorities relied on by the Full Court for this proposition were Brady v Stapleton and Harrods Ltd v Stanton [1923] 1 KB 516, 520 ‑ 521. Both, however, were concerned only with the Statute of Elizabeth.
   2529 In Williams v Lloyd, Dixon J said (374) of the equivalent to s 120 the Bankruptcy Act:
   It makes the ‘settlement’ void against the trustee in the bankruptcy. Such a provision means voidable at the instance of the trustee as from the time at which his title accrues (In re Brall; Ex parte Norton [[1893] 2 QB 381]; In re Carter and Kenderdine’s Contract [[1897] 1 Ch 776]).
   2530 Nothing in either of these cases suggests that avoidance depends on an election by the trustee. In Re Brall; Ex parte Norton [1893] 2 QB 381, 384 Vaughan Williams J held that a voluntary settlement became voidable under s 47 of the English Bankruptcy Act from ‘the declaration of the trustee’s title’. In Re Carter & Kenderline’s Contract [1897] 1 Ch 776, the Court of Appeal held that a voluntary settlement was voidable from the commencement of the bankruptcy, the date of the act of bankruptcy to which the title of the trustee relates back: see (782) and (784).
   2531 In Barton v Official Receiver [1984] FCA 337; (1984) 4 FCR 380, 393 it was said of a transaction within s 120 and s 121 that: ‘It is voidable … only as against the trustee in the bankruptcy and from the date when his title accrues’. Re Brall, Re Carter, William v Lloyd and Re Cummins; Richardson v Cummins (1951) 15 ABC 185, 188 were relied on. In Re Cummins, Clyne J said: ‘a settlement within s 94 is voidable only as against the trustee … From the date when the trustee becomes entitled; the words in the section “becomes bankrupt” have been construed as meaning commits an available act of bankruptcy’. In O’Halloran v O’Halloran [2002] FCA 1305, Allsop J said [76] under s 120 and s 121 of the Bankruptcy Act, ‘the transfer is avoided as and from the date of the accrual of the trustee’s title – the commencement of the bankruptcy’. His Honour cited, among other cases, Brady v Stapleton (332 ‑ 335), Williams v Lloyd (374), Re Cummins (188), Barton v The Official Receiver (393), Official Trustee v Alvaro (426 ‑ 427) and Re Fiorino (18 ‑ 21).
   2532 Barwick CJ, with whom Windeyer J agreed, in NA Kratzmann Pty Ltd (in liq) v Tucker (No 1) [1966] HCA 72; (1966) 123 CLR 257 considered that the equivalent of s 120 operated upon the commencement of the bankruptcy (or the liquidation), and independently of the intervention of the trustee. This appears from what his Honour said (277):
   The matter can, however, in my opinion, be placed upon a more direct and a narrower ground. Whilst the bill of mortgage upon liquidation became void ab initio, it was for a period valid. For example, had the mortgagor sued for the ₤100,000 within three months of the date of the mortgage, he could have been successfully met at that time by his promise to forbear contained in the bill of mortgage, no liquidation having taken place. (emphasis added)
   2533 There is other authority that s 120 ‑ s 122 of the Bankruptcy Act, applied to corporations by provisions such as s 565 of the Corporations Law, ‘are only triggered by a winding up order and the appointment of a liquidator because the relevant transactions are expressed to be void ‘as against a liquidator”: Bank of New Zealand v Essington Developments Pty Ltd (1991) 5 ACSR 86, 89 (McClelland J) and Hamilton v Commonwealth Bank of Australia (No 2) (1992) 9 ACSR 90, 125 (Hodgson J).
   2534 A cause of action based on s 120 and s 122 of the Bankruptcy Act accrues to the trustee upon the making of the sequestration order: Re Lehrain; Official Receiver v Frankston Timber Pty Ltd (1975) 24 FLR 407, 410, and to the liquidator from the date of their appointment: Hamilton v CBA (125). Subsequent to the decision in Re Lehrain, ss 127(3) and (5) were inserted in the Bankruptcy Act to set a six‑year limitation period for such causes of action that runs ‘from the date on which the bankrupt became a bankrupt’ i.e. the date of the sequestration order: see s 43(2), not the date on which the bankruptcy is deemed to commence by relation back under s 115 of the Bankruptcy Act. That the limitation period runs, in respect of causes of action based on the avoidance provisions of the Bankruptcy Act (in conjunction with the general law), from the appointment of the trustee or liquidator indicates that their subsequent election to avoid is not an element of any of those causes of action.
   2535 There is nothing in the Statute of Elizabeth to trigger its operation unless and until a creditor invokes it, as Dixon CJ and Fullagar J noted in Brady v Stapleton (332 ‑ 333). In contrast to the position under the Statute of Elizabeth, each of s 120 ‑ s 122 of the Bankruptcy Act is, in my opinion, triggered by the commencement of the bankruptcy of the person who made the disposition in question. Subject to the qualification that s 120 and s 122 only apply to transfers of property made within the periods stipulated in those sections, each of these three sections in its terms comes into operation to avoid the relevant transfer of property if two conditions are satisfied: the transferor must become bankrupt and there must be a trustee in the person’s bankruptcy. Both conditions will be satisfied by the making of the sequestration order: see s 43(2) and s 156A(3). The Bankruptcy Act provisions do not in their terms require, as a further condition of their operation, that the trustee in bankruptcy or the liquidator take action e.g. by electing to challenge the transaction in question, before it will be avoided. Of course, unless the trustee or liquidator challenges a transfer of property that is within the avoidance sections of that Act, the transfer will, as a matter of practical reality, stand, though it will have been avoided by operation of the statute. Only the trustee (or the liquidator) has standing to rely on these statutory provisions. Such transfers are void ‘only against the trustee and not against anyone else’: Re Cummins (188).
   2536 In Brady v Stapleton, two groups of transactions were considered. The first comprised sales by a company to third parties of property which it had received from the bankrupt with notice of his fraudulent intent. The sales by the company were all made to bona fide purchasers before the trustee of the bankrupt sought to avoid those sales in reliance on the Statute of Elizabeth. The claim by the trustee under s 94 of the Bankruptcy Act 1924 failed at trial and there was no appeal (329). Pursuant to alternate claims under s 46 of the Mercantile Acts 1867, the bankruptcy trustee sought a personal remedy against the company by way of orders requiring it to pay to the trustee an amount equal to what it had received from the bona fide purchasers. Dixon CJ and Fullagar J said (331) that this first group of claims ‘is not put as a claim to ‘follow’ or ‘trace’ the property in question, but, in effect, as a claim for money had and received’. The question therefore was: ‘whether, in the case of a transfer that offends against the Mercantile Acts, the transferee is liable at law to pay to the defrauded creditors the amount of the proceeds of the sale made by him to a bona fide purchaser for value before any steps have been taken to set the transfer [by the bankrupt] aside’.
   2537 Dixon CJ and Fullagar J first dealt with the trial judge’s refusal to give a remedy against the company that was claimed on the basis that, the company must account to the trustee for any identifiable proceeds of sale remaining in its hands or pay an amount equal to the sale proceeds received, if they are not so identifiable. Their Honours accepted that if the proceeds of sale by the company of any of the property to a bona fide purchaser could be identified in the company’s hands, the trustee would be entitled to those proceeds (or any asset of the company which represented those proceeds of sale): the company would still have in its hands an asset representing property received by it from the bankrupt under a transfer, with notice of its fraudulent character, that had become retrospectively void at the instigation of the trustee. But no proprietary remedy was available against the company because the proceeds could not be identified (332 ‑ 333). Their Honours then added: ‘And it would seem contrary to principle to hold that there is any personal remedy against the company’.
   2538 They proceeded to explain why. Speaking of s 46 of the Mercantile Act 1867 (Qld), an exact copy of the Statute of Elizabeth, Dixon CJ and Fullagar J said (333 ‑ 334):
   [A]lthough the Statute uses… the word ‘void’, the courts have always treated a fraudulent assignment as effective unless and until a creditor or creditors intervene by levying execution or taking legal proceedings … There appears to be no authority which casts any doubt on the cases cited above. And, if the position created by the statute is that which is indicated in those cases, one can find no basis for a personal liability on the part of the company in the present case. It is only on the footing that the company sold something to which it had no title or that the sale was otherwise wrongful when made, that a personal liability on the part of the company could be based. But the company, when it sold the assets in question, sold something to which it had a title, albeit a defeasible title. The sale was not wrongful when made. If the company were selling something to which it had no title, it might well be that the trustee in bankruptcy could claim to stand in the shoes of the true owner, the bankrupt, and maintain money had and received. But this is not the position. The company had a title, though a defeasible title. The defeasance has, in the event, taken place, but it cannot relate back so as to make a sale by the company wrongful and impose a personal liability on the company.
   2539 The second group of transactions in Brady v Stapleton that were attacked by the trustee comprised a total of 32,280 shares in a company that were also transferred by the bankrupt in breach of the Statute of Elizabeth to a recipient with notice of the bankrupt’s fraud. However, the recipient mixed those shares with shares in the same company of his own and it was impossible to identify any particular shares as those received from the bankrupt. The primary judge declared that the recipient held the shares received from the bankrupt on trust for the bankrupt. He declined to give any proprietary remedy to the trustee in bankruptcy but ordered that the recipient pay to the trustee an amount representing the value of the shares received from the bankrupt. The trustee in bankruptcy pressed his claim to a transfer in specie.
   2540 Dixon CJ and Fullagar J held that because each share, as an item of property, was indistinguishable from any other share, it remained possible to abstract from the entire mass of shares held by the recipient, shares to the number received by him from the bankrupt. Accordingly, the trustee in bankruptcy was entitled, at his election, to an order by way of equitable relief that the recipient deliver to the trustee 32,280 shares from the mass of shares or to an order in equity charging the mass of shares with payment to the trustee of an amount representing the value of the 32,280 shares. If the recipient had sold all the shares and converted the proceeds into other property that remained in his hands, the trustee would then have necessarily been confined to an equitable charge over the entire property measured by the price received by the recipient for 32,280 shares: see (337 ‑ 338). Their Honours also said the same principles applied where a defendant mixed moneys of his own with trust moneys, either in specie or in a blended account, even though money paid into a bank account loses its identity as money (338):
   Equities are not defeated if a trustee mixes trust moneys with his own moneys and with a mixture purchases a grey horse and a black horse or grey horse alone. In such a case equity imposes a charge on the two horses or the one horse. But, where it is possible to give effect to the rights of a cestui qui trust by simply taking out so much money … The cestui qui trust may elect whether he will take the property in specie out of the mass or have a charge on the mass.
   2541 At (336), their Honours rejected the primary judge’s reason for refusing to make an order for delivery up of shares to the trustee that turned on the impossibility of identifying which of the shares held by the recipient had come from the bankrupt. They said: ‘in the present case its practical effect seems to be to place the burden of identification upon the wrong shoulders’. They illustrated the point with references to cases involving mixed funds of trust and non‑trust moneys. But those cases only go so far as to say that if a defendant holds such a mixed fund into which both trust moneys and moneys belonging to the defendant have been paid, it is the defendant who has the onus of proving that all the trust moneys have been dissipated. If he succeeds in doing that, that is the end of the plaintiff’s prospects of obtaining an equitable proprietary remedy. These cases are not authority for the proposition that if the defendant establishes that all the trust moneys have been dissipated, the plaintiff will still be entitled to a charge over what has been proven to be entirely the defendant’s own moneys.
   2542 I reject the respondents’ submission (at appeal ts 2418) that Brady provides any authority for the proposition that, even in the absence of an ability to trace the proceeds of realisation of the challenged securities into assets held by the banks when avoidance proceedings were commenced, equity’s auxiliary jurisdiction will provide a remedy by way of constructive trust, equitable charge or equitable account in aid of the statutory claims here in question.
   2543 Brady v Stapleton I think establishes that where a creditor or a trustee in bankruptcy, on behalf of the creditors, invokes the Statute of Elizabeth, the transfer by the transferor thereupon becomes retrospectively void ab initio, as against the creditors. The statute would be empty of much of its effect if, on being activated, it could not reach back and avoid the transfer made by the fraudulent transferor one, five or ten years before. But a fraudulent transfer may never be challenged under the Statute. Until avoidance occurs, a transferee (from the debtor) has a lawful, though defeasible title to the property, which it can deal with as it pleases. Avoidance of the original transfer, therefore, does not obliterate everything that may have taken place between the making of the transfer and the invocation of the Statute by the creditors. If the transferee has, in the exercise of his then lawful rights, already sold the property before avoidance occurs, the proceeds of that sale will have been received by him for his own use and not for the use of the transferor/bankrupt. No personal remedy will therefore be available against him. If the transferee has dissipated both the property and the proceeds of its sale before avoidance takes place, the creditors can have no proprietary claim in respect of the property transferred. If, however, when avoidance ab initio occurs, the transferee retains the property or some asset into which the proceeds of its sale are traceable, his previously lawful title is destroyed by the avoidance and that property thereupon becomes once again the property of the transferor/debtor and so becomes available to the creditors.
   2544 The Court of Appeal in Re Carter & Kenderline’s Contract, referred to in Brady v Stapleton (334), rejected the proposition that the English equivalent of s 120 of the Bankruptcy Act made a voluntary settlement void ab initio and held that it only made such a settlement void as from the commencement of the bankruptcy. The court considered that was necessary to protect dealings by third parties with the recipient of property from the debtor in the period between the making of a settlement and the commencement of the bankruptcy. That protection is achieved once it is recognised, as it was in Brady v Stapleton (333), that in that period, the recipient has a good title to deal with the property settled which the recipient can pass to third parties. As Pincus J pointed out in Re Tapp; Ex parte Official Trustee in Bankruptcy (1987) 15 FCR 117, 121, the English statute considered in Re Carter did not contain an equivalent of s 120(7) of the Bankruptcy Act.
   2545 Brady v Stapleton deals with the impact on transfers of property by a debtor that are voided under the Statute of Elizabeth upon the intervention of the trustee where the transferee has already sold the property received from the debtor and dissipated all the proceeds of the sale. In Price v Parsons [1936] HCA 5; (1936) 54 CLR 332, the court considered the operation of a statute on property received from a debtor, that the transferee continued to hold, which deprived certain transactions of any validity against a trustee in bankruptcy.
   2546 In that case, G in January 1934 made a disposition of his tools of trade by selling them to P for £299 who bailed them back to G under a hire purchase agreement. G then owed £299 to a creditor, for which P was guarantor. The transaction was not a simple sale and hire back, but in substance a loan of the £299 to G by P who took the goods as security for repayment. G was thus enabled to clear this debt and to remain in possession of the goods. A sequestration order was made in respect of G in October 1934. G’s bankruptcy commenced on 19 June 1934, by relation back. Under a New South Wales statute, G’s disposition of January 1934 to P was, as an unregistered bill of sale, of ‘no validity as against the trustee of the bankrupt estate’.
   2547 The case was complicated by the fact that prior to the bankruptcy, G surrendered the goods to P who, by a second and valid hire purchase agreement made on 18 June 1934, gave third parties possession of the goods and the right to become owners by paying all the hire charges. P received a total of £275 under this hire purchase agreement before the trustee claimed the goods. It did not appear that this was the full amount of the hire charges payable.
   2548 Rich, Dixon and McTiernan JJ said (347):
   Under the joint effect of s 5 of the Bills of Sale Act 1898 (NSW) and ss 90 and 91(i) the Commonwealth Bankruptcy Act 1924, an unregistered bill of sale is avoided from the commencement of the bankruptcy, that is, by relation back, when, but for the bill of sale, goods comprised therein would be the property of the bankrupt.
   2549 They added:
   The effect of avoiding a disposition by the bankrupt of his property as against the trustee is to leave the property, for the trustee’s purposes, in the same situation as if no such disposition had been made. It thus passes to the trustee as if property of the bankrupt. We think his title to it is given a relation back, just as his title to what is in truth the bankrupt property.
   2550 So the statutory avoidance brought into effect by the commencement of the debtor’s bankruptcy, extinguished ab initio the title to property given to the transferee by the debtor’s disposition of that property and operated retrospectively to treat the goods as the property of the debtor/bankrupt, as if he had never parted with it.
   2551 Their Honours considered three scenarios at (351 ‑ 352). Of the first they said:
   At the date when the second hire‑purchase agreement was made, there was no act of bankruptcy and the appellant had a title which had not become retroactively defeasible. If, therefore, on 18th June 1934, [P] had transferred the property in the goods to the three men, he would have given them a good title and could not afterwards have been considered retrospectively as having done any wrongful act. We do not think there is any principle upon which the appellant could, in that event, be held liable to account to the trustee either for the value or for the proceeds of the goods. But he did not on 18th June 1934 transfer the general property in the goods.
   2552 Of the second scenario, their Honours said:
   If, after the date when the bankruptcy commenced by relation back, the appellant [P] had transferred the goods for value, the purchaser would have obtained, as against the trustee, an indefeasible title … But the appellant would have dealt with property to which he had only a title that turned out to be void. He would, we think, have been liable to account for the proceeds of the property to the trustee when appointed.
   2553 Finally, they said:
   The question which arises upon the actual facts lies between these two positions … The general property in the goods, subject to the bailment, must be taken to have vested in the trustee. Retroactively the trustee is treated as having succeeded to the bailor’s title. This consideration, in our opinion, is enough to render the appellant accountable, that is, assuming that he can make no better title himself to the chattels he had bailed than the void bill of sale.
   2554 In dealing with a further argument raised at (354) their Honours said:
   The liability of the appellant is … a liability to account for the proceeds of property which formed part of the assets which must be considered, retrospectively, as belonging to the estate.
   2555 In addition to declarations in favour of the trustee, P was ordered, in accordance with the second scenario set out above, to pay the trustee the £275 he had received under the second hire purchase agreement made on 18 June 1934, after commencement of the bankruptcy the next day.
   2556 When their Honours at (352) said that the trustee was treated retroactively as having succeeded to P’s title to the goods, they captured three consequences of the statutory avoidance. First, the statute, as from the commencement of the bankruptcy, operated retrospectively to destroy the title P took to the goods under the January disposition and to revest the property in the goods in the bankrupt and so in his trustee. Second, the retrospective destruction of P’s title did not disturb the rights he created in others by the second hire purchase agreement, prior to the commencement of the bankruptcy when he still had a good, though defeasible, title to the property. Third, the retrospective destruction of P’s title made him accountable to the trustee for the moneys he received in respect of those goods after his title was defeased by the commencement of the bankruptcy: those moneys were received not for P’s own use but as moneys had and received for the use of the trustee.
   2557 The retrospective effect of avoidance operates independently of the bankruptcy doctrine of relation back, now contained in s 115 of the Bankruptcy Act. In Price v Parsons, the relation back provision of the Bankruptcy Act only pushed the date of commencement of the bankruptcy back in time from 31 October ‑ 19 June 1934. It did not alter the fact that what triggered the retrospective avoidance ab initio of G’s disposition of the goods to P was the commencement of G’s bankruptcy.
   2558 Subject to one qualification, the same position would have obtained in Price v Parsons if the debtor had been a company that was wound up on 31 October 1934. The qualification is this: in the personal bankruptcy, P’s title to the bankrupt’s goods was defeased from the commencement of the bankruptcy (from 19 June) by relation back. In a winding up on 31 October, P’s title to the bankrupt’s goods would have become defeased only on that date, since the bankruptcy doctrine does not apply in corporate liquidations, as I have explained. In a liquidation, P would not have had to account to the liquidator for so much of the £275 he received under the second hire purchase agreement between 19 June and 31 October: in contrast to the position in bankruptcy, in a liquidation P would, during that period, still have had a good title to the goods and to the income they generated.
   2559 Price v Parsons recognises that where a statute operates upon a certain event, such as the commencement of the transferor’s bankruptcy, to avoid a transfer of property that has taken place in the past, avoidance is necessarily retrospective in that, to have any avoiding effect, it must return ownership of the property to the transferor. But the avoiding event may never occur so such a statute may never come into effect with respect to particular property. The decision also recognises that dealings by the transferee, which are completed before avoidance occurs, cannot be undone because they were transacted when the transferee had a good title to the property. If the transferee however retains any rights in respect of the property after the avoiding event occurs, which was effectively P’s position, he will be under a personal liability to the trustee in bankruptcy to account for what he receives by reason of those rights.
   2560 Section 120 ‑ s 122 of the Bankruptcy Act 1966, in my opinion, have a similar operation. So when s 120, s 121 and s 122 declare that a transfer of property by a person who later becomes bankrupt is void as against the trustee in bankruptcy, the joint effect of each of those sections and s 116 of the Bankruptcy Act is that the avoidance is triggered by the commencement of the bankruptcy, that is, by the making of the sequestration order: see s 43(2). Commencement will be extended back, in personal bankruptcies, by relation back under s 115 to the earliest act of bankruptcy committed within six months prior to the petition on which the sequestration order was made. In company liquidations to which s 120 ‑ s 122 of the Bankruptcy Act apply, the winding up in a voluntary liquidation commences from the date of the resolution for winding up; and in a compulsory liquidation, from the date of the filing of the winding up petition. The Bankruptcy Act provisions therefore operate as from which ever of these dates is the relevant one to avoid the relevant transfer of property by the company. The avoidance, so triggered, operates retrospectively to make the subject matter of the transfer once again the property of the bankrupt and thus of the trustee or the liquidator, as if he had never parted with that property.
   2561 In Williams v Lloyd, Dixon J, McTiernan and Evatt JJ agreeing, held that a father had made a voluntary settlement of the beneficial interest in a mortgage on his daughter and described the retrospective operation of s 120 of the Bankruptcy Act 1924 on that settlement in the following way (374):
   To bring about this result it is enough if the provision includes and nullifies the transmutation of the beneficial interest, or in other words makes ineffectual every step taken by the bankrupt which would otherwise cause the beneficial interest to pass.
   2562 Dixon J here held that s 120 avoided the voluntary settlement of the beneficial interest in the mortgage ab initio. The steps taken by the bankrupt, which the provision made ineffectual, were all taken when he arranged for his borrower to grant the mortgage to his daughter in November 1929. The declaration his Honour made confirms that. Dixon J said (374 ‑ 375) that the primary judge’s order ‘is correct in substance’ but substituted for that order, which was limited to the mortgage proceeds, a declaration that the daughter’s title ‘to the beneficial interest in the mortgage … and to the moneys secured thereby … became void against the official receiver … and that she became and is a trustee of the mortgage and the proceeds thereof for the official receiver’.
   2563 In NA Kratzmann v Tucker (No 2), the High Court considered that the preference provision, s 95, of the Bankruptcy Act 1924, once triggered, had a retrospective operation. The court said (298):
   [T]here can be no doubt that the Court may, in an appropriate case, make not only a declaration but also afford consequential relief by an appropriate order [in respect of transactions within s 95 of the Bankruptcy Act]. And this it may do even if the grantee or transferee has been adjudged bankrupt before the declaration was made. In such a case the avoidance of the conveyance or transfer annihilates, as against the trustee, the title of the grantee or transferee and means that the trustee may assert his bankrupt’s original title and deny that the land or chattels form part of the estate of the bankrupt grantee or transferee. (emphasis added)
   2564 Barwick CJ, with Windeyer J agreeing, expressed a similar view in NA Kratzmann v Tucker (No 1) in the passage at (277) set out above to the effect that provisions of the Bankruptcy Act that apply in a winding up, under now‑repealed provisions such as s 565 of the Corporations Law, make transfers of property by the company void ab initio against the liquidator; though the property of an insolvent company passes on winding up into the custody of the liquidator but does not, in the absence of a court order under s 474 of the Corporations Law, vest in him.
   The consequences of avoidance
   2565 The operation of the avoidance provisions of the Bankruptcy Act is illustrated by the decision of Gummow J in Re Fiorino upon which the respondents relied. There, the debtor voluntarily settled a house property on his mother in December 1991. The sequestration order was made, and a trustee appointed, in October 1992. The bankruptcy commenced by relation back in August 1992. In May 1993, the mother sold the property to a bona fide purchaser. Later, in July 1993, the trustee in bankruptcy elected to avoid the settlement of December 1991 by the debtor in reliance on s 120 of the Bankruptcy Act. The trustee did not attempt to show that the mother retained in her hands any part of the proceeds of the sale of a house or any asset into which those proceeds had been converted. Nor did the trustee contend that Mrs Fiorino was bound in equity to account to the trustee to restore to him the equivalent value of the property. But he succeeded in obtaining an order that the mother pay to the trustee an amount equal to the net proceeds of sale which she had received. Gummow J said [42]:
   The effect of s 120, as of s 94 of the Bankruptcy Act 1924, is that a disposition of the description in the section is voidable at the instance of the trustee ‘as from the time as at which his title accrues’ and that the section makes ineffectual every step taken by the bankrupt which would otherwise cause the beneficial title to pass: Williams v Lloyd [1934] HCA 1; (1934) 50 CLR 341, 374.
   2566 His Honour then referred to the differences in operation between the avoidance provisions of the Bankruptcy Act and the Statute of Elizabeth. He then referred to what Dixon CJ and Fullagar J said in Brady v Stapleton (334) to the effect that the sale by the company was not wrongful when made and that the defeasance having taken place upon the trustee’s intervention, it could not relate back so as to make a sale by the company wrongful and impose a personal liability on the company. Gummow J continued [47] ‑ [48]:
   In the present case, at the time of the sale by Mrs Fiorino to the third parties, s 120 had operated to make ineffectual every step taken by Mr Fiorino which otherwise would cause the beneficial interest in the property to pass to Mrs Fiorino, with the result that at the time of the sale by her she was a trustee of the property for the trustee [in bankruptcy] … The trust was brought about by the interaction of section 120 and the general law … It follows that Mrs Fiorino came under a personal liability to the trustee to account for, as moneys had and received, the proceeds of the sale of a property by her, on the footing that she was selling something to which he had no title and that the trustee stood in the shoes of the true owner to maintain money had received.
   2567 If it was the intervention of the trustee, rather than the commencement of the bankruptcy, that brought s 120 into operation, no judgment could have been given against Mrs Fiorino. She had sold the property before the trustee intervened and the trustee accepted that she had also by then dissipated the sale proceeds. Once a sequestration order was made and a trustee appointed, the section operated automatically to bring about the retrospective avoidance of the transfer by Mr Fiorino of the house to his mother. It was because she sold the house after the bankruptcy had commenced, though before the trustee elected to avoid the transfer, that the mother received the proceeds of sale for the use of the bankrupt’s trustee and not on her own account.
   2568 It is because the transferee has a good, though defeasible title until avoidance occurs that he can be under no personal liability to the trustee in bankruptcy or the liquidator for the value of the property received from the debtor/bankrupt, if he has disposed of the goods before avoidance takes place. If, however, the transferee still holds the proceeds of his disposal of the property received from the debtor in specie, or in some other identifiable form, or if the proceeds can be traced into some other assets held by the transferee when avoidance occurs, those proceeds are treated, as a result of the retrospective effect of avoidance, as resuming their character as the property of the debtor/bankrupt. If traceable, the liquidators will have a proprietary (but not a personal claim) to those proceeds. In Evans v European Bank Ltd Spigelman CJ, Handley and Santow JJA agreeing, at [133] approved of a statement in Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102, 128:
   As Lord Millett has pointed out:
   ‘Tracing is … neither a claim or a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim.’
   2569 If the proceeds do not exist in specie or in some identifiable altered form but, when avoidance occurs, they can be traced into some other asset acquired by the transferee partly with those proceeds and partly with the transferee’s own funds, the trustee may be entitled to an equitable proprietary remedy, such as a charge over the transferee’s assets, to the extent of the traceable proceeds. If however, when avoidance occurs, it is no longer possible to trace the proceeds of the transferee’s disposal of the debtor/bankrupt’s property into some asset of the transferee, the trustee can make no claim on the transferee’s own assets. The proceeds of realisation of the securities received by the banks and paid by each into its own account, before the relevant winding up commenced, could never constitute part of a mixed fund of the kind that exists where trust moneys are mixed by the trustee with his own moneys. It is because the securities are void ab initio under the Bankruptcy Act provisions upon the commencement of the winding ups that a proprietary remedy will be available if the liquidators can show that a bank retains, in some form, any part of those proceeds.
   2570 This is in conformity with the view taken by Full Courts in Official Trustee v Alvaro [65] and Issitch v Worrell [2000] FCA 477; (2000) 172 ALR 586 [36]. Lindgren J expressed the same view in Anscor v Clout (480 ‑ 481). It is also consistent with the position under the Statute of Elizabeth as explained in Brady v Stapleton where, after avoidance by the creditors, the transferee still holds the property transferred by the debtor or some other asset into which that property can be traced.
   2571 I do not think that Lindgren J’s statement in Anscor v Clout (482) par (j) means that an equitable remedy, e.g. by way of charge over the defendant’s assets, is available where a defendant cannot be seen to be holding, in some form, the property originally disposed of by the bankrupt, to which the trustee in bankruptcy has become entitled. Lindgren J illustrates his proposition with cases that involve the acquisition by the transferee of specific property acquired by the transferee with a mixture of moneys from the bankrupt or from the realisation of property of the bankrupt and the transferee’s own moneys, that is, the kind of case referred to by Dixon CJ and Fullagar J in Brady v Stapleton (338) involving the purchase of a horse by a trustee with a mixture of trust moneys and his own moneys. The policy in Re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831 could be traced through the moneys raised by cashing it in, into the investment mortgage which secured to the defendant those policy moneys and the defendant’s own moneys. The mortgage was frozen in the defendant’s hands by an interlocutory order. In Issitch, the disbursement of the bankrupt’s moneys to the defendant could be traced into a house built by the defendant with those and her own moneys: the trustee obtained a charge over that house. A similar result occurred in O’Halloran where the disbursement of the bankrupt’s moneys to the defendant could be traced into a property purchased by the defendant with those moneys which property she still retained. In Trautwein v Richardson [1946] ALR 129, declarations were made in favour of the bankrupt’s trustee against the bankrupt’s son that, while certain properties stood in the son’s name, they belonged beneficially to the bankrupt. These properties had been sold and the proceeds dissipated before the bankruptcy commenced. The declarations did not impose any liability on the son in respect of those properties. But they were allowed to stand as steps in ascertaining the rights of the trustee against the son in respect of a wide range of complicated transactions relating to other properties. The other remedies given to the trustee in Trautwein were all in respect of properties still held in specie by the son purchased with moneys provided by the bankrupt.
   2572 In cases of fraud, equity in its concurrent jurisdiction can grant equitable remedies in personam, that are ‘more elastic’ than those available at law: see Nocton v Lord Ashburton (953 ‑ 954) and ‘which would not have been available to a court exercising purely common law jurisdiction’: see Demetrios v Gikas Dry Cleaning Industries Pty Ltd (1991) 22 NSWLR 561, 573.
   2573 When the question of the availability of equitable remedies arises in general in, for example, a case involving equitable rescission of a contract of sale, the plaintiffs can obtain the in personam remedy of equitable compensation designed to put him as nearly as possible in the position in which he would have been had there been no breach: McKenzie v McDonald [1927] VLR 134, 146 ‑ 147. But these remedies will be granted on equitable terms to ensure that the plaintiff is not overcompensated at the expense of the defendant: Demetrios v Gikas (574).
   2574 Prima facie, such equitable remedies should be available to a trustee in bankruptcy or a liquidator in avoidance proceedings because they are part of the general law upon which the trustee or liquidator must rely: see the statement by Paine J in Re Ward (1950) (222) set out above and NA Kratzmann v Tucker (No 1) (285) (Barwick CJ).
   2575 McTiernan J, in his dissenting judgment in Brady v Stapleton (342 ‑ 343), held that the trustee in bankruptcy, as the representative of the creditors in the Statute of Elizabeth claim, ‘has a right in personam against the company to recover a sum equivalent to the proceeds of sale’ even though the trustee could not trace into the hands of the company the proceeds received by its sale of the property it had received from the debtor ‘in the shape of money or in any other form’. This conclusion appears to follow from his Honour’s observations that the fraudulent transfers of property by the debtor to the company were voidable ‘from the beginning’ once the trustee in bankruptcy acted to impeach them, and that the company could not rely on any of the protective provisions of the Statute to answer the trustee’s demands on it. But that view has not prevailed, for what in my opinion is good reason.
   2576 I do not think equitable remedies in personam are available against the transferee of property from a debtor/bankrupt under s 120 ‑ s 122 of the Bankruptcy Act if the property transferred has been disposed of and its proceeds dissipated by the transferee before the commencement of the bankruptcy or the liquidation, when avoidance occurs. (The same position obtains under the Statute of Elizabeth, but with avoidance occurring upon the intervention of the creditor). To allow such a remedy would render nugatory the principle that the transferee receives a good title from the debtor/bankrupt which he can deal with as he chooses, until that title is defeased by avoidance. The event of avoidance can, in my opinion, provide no reason to fix the transferee’s conscience with liability to make payment, in respect of the property transferred, to the trustee or the liquidator for the benefit of the creditors when, prior to avoidance, the transferee disposed of the property and the proceeds of his disposal in accordance with his lawful entitlement.
   2577 In NA Kratzmann v Tucker (No 2), the court dealt with the special situation in which a debtor paid money in discharge of its indebtedness to a creditor which was later declared void as a preference within s 120 the Bankruptcy Act. The court said (298 ‑ 299) that the creditor could be ordered to pay the amount in question to the trustee, without suggesting there was any need for the initial payment to the creditor to be traceable into the funds it held when the declaration of voidance was made:
   In such a case the declaration in no way affects title to specific and identifiable property; it merely means that the money was not paid in discharge of A’s indebtedness to B and, if it is to be repaid, it must be repaid out of the estate of B. In Re Ward; Thomas v LG Abbott & Co Ltd (1950) 16 ABC 214 Paine J expressed the view that in the case of a payment avoided as a preference the right of the bankrupt’s trustee was equivalent to the right to maintain an action for money had and received and much the same was said as long ago as Marks v Feldman (1870) LR 5 QB 275. Again in NA Kratzmann Pty Ltd (In Liq) v Tucker (No 1) [1966] HCA 72; (1966) 123 CLR 257 the Chief Justice said (285):
   ‘Whatever rights the liquidator has in this respect must be derived from the general law which becomes applicable upon the avoidance of the company’s transaction. Of course, the liquidator may assert such rights in proceedings taken in the liquidation before the Supreme Court because of that Court’s general jurisdiction but the rights which are being asserted are rights, other than a right to a declaration of the avoidance of the debtor’s transaction, which must, as I have said, be found in the general law.’
   But, since the Court undoubtedly has authority to make orders affording relief consequential upon the making of such a declaration, we find it unnecessary to equate the right of a trustee to recover the equivalent of a payment declared to be void with the strict terminology of the common law; it is sufficient to say that in such a case the declaration does not affect the title of the respondent to any specific or identifiable property, that the claim of the trustee is not made with respect to any property to which he asserts title and that the appropriate consequential order in ordinary cases is for payment to the trustee of the amount in question.
   2578 The Court saw a distinction between the case of a payment subsequently avoided as a preference, where the transferee could be ordered to repay the amount in question to the trustee, and other cases, where no such order for a money payment could be made because the transaction avoided involved the transfer by the debtor to the transferee of specific property. It is difficult to discern the reason for the distinction between an initial money payment and a transfer of property, including property dissipated before avoidance, and why an order for repayment could be made in the case of a preference payment without any need to investigate whether the creditor still held the payment proceeds in traceable form when avoidance occurred. But NA Kratzmann v Tucker (No 2) does not purport to state a general principle that a personal remedy involving a money payment will always be available, whatever the nature of the property the subject of the transaction avoided and whether avoidance occurs under any of s 120 ‑ s 122 of the Bankruptcy Act or the Statute of Elizabeth.
   2579 It will be sufficient for present purposes, to illustrate by reference to the sale of the BRL shares, the consequences of my conclusions with respect to the operation of s 120 and s 121 of the Bankruptcy Act and s 89 of the Property Law Act.
   2580 The sale of the BRL shares is dealt with in sections 4.8.2 [695] and 35.5 [9591] of the judgment. TBGL held a total of approximately 205 million BRL ordinary shares as trustee for Dolfinne, Industrial Securities, Maranoa Transport and Neoma Investments and about 12 million shares as both legal and beneficial owner. TBGL held a further 74,000 ‘C’ class BRL shares as trustee for Neoma Investments and Industrial Securities and about 23 million BRL preference shares as trustee for Dolfinne. TBGL mortgaged all these shares to the banks by the mortgages of 1 February and 29 March 1990. Under these mortgages, Westpac took registered title to the shares, with registration being completed by August 1990. Between March and 21 May 1992, Westpac sold all these shares either on market or privately. It received on behalf of all the banks the net proceeds from the sale of the preference shares on 28 May 1992 and the net proceeds of the sale of the ordinary shares on 12 June 1992.
   2581 TBGL was wound up on 24 July 1991 on an application presented on 18 April 1991. Notices of avoidance of these mortgages were given by the liquidators on 7 December 1995.
   2582 Ambassador Nominees held a total of about 5 million ordinary BRL shares as trustee for Industrial Securities and Neoma Investments which it mortgaged to the banks by its mortgage 1 February 1990. Ambassador Nominees was wound up on 29 November 1995 on an application presented on 1 November 1995. Notice of avoidance of this mortgage was given by the liquidators on 7 December 1995.
   2583 A relatively small but still substantial number of BRL shares were mortgaged to the banks on 1 February 1990 by the following plaintiff Bell companies which went into liquidation on the dates shown. Shares Liquidation* Liquidators’
   notice
   Bell Equity Management Ltd 3.3m 9 May 1995 7 Dec 1995
   Dolfinne Securities Pty Ltd 4.99m 5 Dec 1995 3 Jan 1996
   Industrial Securities Pty Ltd 4.2m 1 Nov 1995 7 Dec 1995
   Neoma Investments Pty Ltd 0.02m 5 Dec 1995 4 Jan 1996
   Wanstead Securities Pty Ltd 3.8m 5 Dec 1995 3 Jan 1996

(*The date of presentation of the application on which the winding up order was made.)
2584 All these shares were included in the sales of the BRL shares made by Westpac between March and May 1992 that I have referred to.
2585 The mortgages by all these Bell companies, except those by TBGL, were all granted more than five years before the commencement of the winding up of each of these companies so the liquidators can make no claim against the banks under s 120(2) of the Bankruptcy Act. But claims are available under s 121 of the Bankruptcy Act and s 89 of the Property Law Act (WA).
2586 So far as concerns all the BRL shares mortgaged to Westpac on behalf of the banks by TBGL, those two mortgages became void against the liquidator as from 18 April 1991. Westpac therefore sold shares to which TBGL’s liquidator, not the banks, then had title. The banks received the proceeds of those sales as moneys had and received to the use of TBGL’s liquidator. The banks are each liable to account to the TBGL liquidators for all the moneys they received from the sale of the BRL shares mortgaged to them by TBGL.
2587 Since the proceeds of those share mortgage realisations were always the property of the TBGL liquidators, the respondents can, if able to trace those proceeds into the hands of any of the banks, claim an equitable charge over the assets of each of those banks. But the legal remedy the respondents have against all the banks is sufficient to vindicate their claims: all are well able to satisfy these claims. There is therefore no basis for equitable relief: Evans v European Bank [143] ‑ [148]; Bankstown City Council v Alamdo Holdings Pty Ltd [2005] HCA 46; (2005) 223 CLR 660 [11] and National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386, 544 ‑ 545. The need to consider the respondents’ claim to a charge, in the absence of an ability to trace, in reliance on the dictum in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1027, 1074, does not arise.
2588 So far as concerns all the other BRL shares mortgaged by the other Bell companies to Westpac on behalf the banks, they were all sold by Westpac as mortgagee prior to the commencement of the winding up of each of those companies and Westpac received all the proceeds of those share sales before those winding ups commenced. They comprise the proceeds of the sale of the BRL shares mortgaged to the banks by Ambassador Nominees, as trustee for Industrial Securities and Neoma Investments, and by Bell Equity, Dolfinne Securities, Wanstead Securities, Industrial Securities (4.2 million shares only) and Neoma Investments (0.02 million shares only), all as beneficial owners. These proceeds were therefore received by the banks as money for their own use and none are accountable in personam for those receipts to the liquidators. His Honour was in error in making the declaration referred to above insofar as it extends to these proceeds.
2589 Nor are the liquidators of these six companies entitled to any equitable proprietary remedy with respect to any of the proceeds of these share sales which may continue to exist in the hands of any of the recipient banks. The fiduciary relationship between each of these companies and the banks, when the proceeds were received by the latter, essential to the availability of an equitable remedy, was absent.
EQUITABLE FRAUD
2590 The respondents’ contention that LDTC and other non‑bank creditors have suffered an equitable fraud by imposition and deceit is based on the fourth head of equitable fraud described by Lord Hardwicke in Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125; 28 ER 82, a principle recognised by the High Court in Pilmer v Duke Group.
2591 At trial, the focus of the respondents’ case was, as his Honour noted at [4895], upon the non‑bank creditors not being aware of the arrangements between the Bell group companies and the banks and, at [8944] and [8974], upon the banks’ actions in deliberately concealing from those creditors, including LDTC, the trustee for the bondholders, what they were about. This deceit involved keeping from them relevant information about TBGL’s financial position and by also keeping from LDTC information about existing and likely future defaults by TBGL under the trust deeds. The respondents’ equitable fraud case failed at trial firstly, because his Honour was not prepared to find that LDTC was deceived in any material respect, [9027] ‑ [9030], and secondly, because his Honour was not prepared to find that the banks directed or encouraged the Bell directors to keep LDTC in the dark about the Scheme Transactions and trust deed defaults: see [9045] and [9046]. (His Honour examined whether the banks had so directed or encouraged the Bell directors because, as he said at [8967] and [8973], the banks were under no duty to make any disclosure themselves about the Transactions to LDTC or the other creditors.) He made findings in relation to the other non‑bank creditors at [9062] similar to those he made with respect to LDTC at [9045] and [9046].
2592 This element of the case at trial, though not abandoned on appeal, attracted less emphasis there. On appeal, the respondents in the six points they relied on at appeal ts 2291 ‑ 2292 to show that the Transactions were an imposition on LDTC and the other creditors mentioned only, in the third point, that the Bell directors and the banks were aware that LDTC was ignorant of TBGL’s default under the trust deeds constituted by its failure to pay the SCBAL demand and, in the sixth point, that LDTC had not disclosed the full details of the Transactions. On appeal the emphasis of the respondents’ argument was upon how the Transactions infringed relevant public utility, that is, public policy.
2593 In the opening words of the passage in Chesterfield dealing with the fourth kind of equitable fraud, which is set out in the judgment at [4860], Lord Hardwicke said:
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.
2594 In the closing words of this passage, the Lord Chancellor in my opinion summarised the essential elements of such a fraud when he said:
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.
2595 It was at trial and remains part of the respondents’ case that the non‑bank creditors including LDTC were not aware of the details of the arrangements between TBGL and the banks. But it is not I think an essential requirement that every agreement must be a clandestine one, if it is to come within this kind of fraud.
2596 Some of the examples of fraudulent agreement mentioned by Lord Hardwicke and McGhee J, Snell’s Principles of Equity (32nd ed, 2010) 285 ‑ 286 will necessarily involve underhand dealings between the contracting parties. The cases arising out of marriage arrangements are examples (though changes in social conditions have made the law about such arrangements obsolete). Secrecy is generally of the essence of the composition cases caught by this head: there is nothing improper in one creditor of a compounding debtor receiving an extra benefit from the debtor if that is made known to all creditors when the composition is entered into: see ET Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd [1940] HCA 42; (1940) 64 CLR 84, 104; Re Jacobs; Ex parte O’Connor [1984] FCA 31; (1984) 1 FCR 1, 7. But even here, there is modern authority, referred to by Owen J at [4894], that secrecy is no longer an essential element of this kind of case. So far as concerns other kinds of agreement, the contracting parties and the third party affected may have full knowledge of the circumstances but those agreements will still be fraudulent. By 1905, when Hermann v Charlesworth [1905] 2 KB 123 was decided, the ground on which marriage brokerage contracts were held void was because they contravened the public policy that marriages should be ‘on a proper foundation’: see (129 ‑ 131). As the facts of that case, set out at (123 ‑ 124) show, the men to whom the broker introduced his client were necessarily aware of the broker’s role. There was nothing clandestine about what the broker, who publicly advertised his introduction services, did and no one was misled or deceived. Snell includes, as an example of the fourth kind of fraud, contracts in unreasonable restraint of trade. There is no requirement for a clandestine element before such contracts will be held void.
2597 Once it is recognised that fraud or deceit is no longer an essential requirement of a case said to come within the fourth head of fraud in Chesterfield, but that conflict with some identifiable public policy is essential, there is substance in the submission by the appellants, based on Sheridan LA, Fraud in Equity (1957) 7 ‑ 9, that this kind of fraud has now been subsumed into the law dealing with illegality of contracts. Although there are references in Hall v Dyson (1852) 17 QB 785; 117 ER 1481 to the agreement to pay a creditor to withdraw a notice of opposition to the discharge of a bankrupt to the agreement being void as a fraud upon creditors, it was treated in Kearley v Thomson (1890) 24 QBD 742 at 745 as a contract that was illegal as interfering with the course of justice. In Farmers’ Mart Ltd v Milne [1915] AC 106, one creditor made an agreement with a professional trustee in bankruptcy to get more than a pari passu share in bankrupt estates indebted to the creditor and which were under administration by the trustee. There are references in some of the judgments to the agreement there in question being a fraud on the bankruptcy laws. But the agreement was held to be illegal and unenforceable. A possible exception to the requirement of conflict with some head of public policy is the cases involving rewards for influencing a testator. But as Sheridan points out at (8), such cases are now likely to be dealt with as involving the exercise of undue influence. That may have in fact been the basis for the decision in Debenham v Ox (1749) 1 Ves Sen 276; 27 ER 1029. Pilmer, however, stands in the way of my accepting this submission.
2598 But an essential feature of all agreements caught by the fourth head of fraud in Chesterfield is that they infringe some head of public policy, as his Honour recognised at [4865], [4883] and [8970]. Marriage brokerage contracts and other dealings of the kind referred to above with respect to marriage infringe the public interest in marriages being on a proper and open foundation: Hermann v Charlesworth (129 ‑ 131) and Debenham v Ox (277). Secret payments in composition cases are ‘fraudulent and opposed to public policy’: ET Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd (103); Scuderi v Morris [2001] VSCA 190; (2001) 4 VR 125 [3] and Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510 [238]. Agreements involving the exercise of influence in the appointment to public offices infringe the public interest in the integrity of public administration. They are ‘a fraud on the public’: Law v Law (1735) 3 P Wms 391, 393. An agreement imposing an unreasonable restraint of trade upon a party is void because it infringes the public policy against depriving a person of his liberty to engage in trade and commercial activity: Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126 [27].
2599 Snell includes, as an example of the fourth kind of fraud, rewards for influencing a testator in reliance on Debenham v Ox. The basis upon which the bond given in respect of an agreement to influence an elderly testator was invalidated is not I think clear. But in dealing with the question of costs, the Lord Chancellor referred to ‘the ingredient of public policy’ in the case that enabled the plaintiff to obtain relief although he was one of the contracting parties.
2600 Owen J concluded at [4885] that the term ‘mala fide’ as used in Chesterfield did not import an actual intention to deceive but the circumstances still had to be so offensive to public utility as to demand the intervention of equity. I think his Honour was correct for the reasons he gave at [4872] ‑ [4885].
2601 The elements that must be established to bring a case within the fourth head of equitable fraud are firstly, there must be an agreement that works an imposition or deceit on persons not parties to the agreement but who are in such a relationship with one or other of the parties that they will be affected by the agreement. There being no need to prove an actual intention to deceive, it is the impact of the contract upon third parties who are in that kind of relationship with the contracting parties that constitutes transacting mala fide in respect of third parties. It follows from this, I think, that it is not necessary to show that the fraudulent agreement has been kept secret from the third parties affected by it. The second and additional element is that the agreement must infringe some head of public policy so as to require equitable intervention.
2602 It is apparent from the judgment below that the respondents had difficulty in identifying a relationship between the Bell group companies and the banks, on the one hand, and the other creditors including LDTC on the other, that was sufficient to satisfy the first element of their equitable fraud claim and also had difficulty in identifying just how public policy was violated by the entry by the Bell participants into the Transactions with the banks, which was necessary to establish the second element of their claim.
2603 As his Honour noted at [4895] and [4900], the respondents’ case at trial relied heavily on the non‑bank creditors not being aware of the details of the arrangements between the Bell companies and the banks. The respondents relied on the composition cases by way of analogy to identify how the Transactions conflicted with public policy: see [4863]. They also appear to have relied on those cases to show how the relationship element of the fourth head of equitable fraud was satisfied in this case. At [4899] and [4900], his Honour correctly in my opinion identified the common dealing principle in the composition cases as sufficient to show that each creditor was in a relationship with the parties to the composition agreement (the creditors as a body and the debtor) that satisfied the first element in a case based on the fourth kind of fraud in Chesterfield. His Honour at [4886] and [8970] noted how the analogy fell down in this case: the Transactions were a private arrangement involving only the banks and the Bell companies whereas the composition cases were founded on all the creditors dealing on a common basis with each other and the debtor. At [4890] Owen J noted that while the common dealing basis in the composition cases created an obligation on the debtor to tell all creditors of the private arrangement, ‘where the parties are not dealing collectively there is a need for some additional element to render the situation actionable in equity’. He added at [4891] that a final ruling on that particular issue would have to wait detailed consideration of the facts.
2604 His Honour said at [4899] that he was concerned about extending this head of equitable fraud much beyond the situation of common dealing. At [4905] and [8972] he observed that a common dealing situation might be said to exist as between the Bell companies and all the creditors including the banks because ‘the financial predicament of the Bell group companies was so precarious that an obligation arose to bring all creditors into the arrangements’. He never however decided that this was sufficient to satisfy either the relationship element or the public utility element of the Chesterfield fraud case because he disposed of the equitable fraud case on other grounds, those referred to in [9046] and [9062], mentioned above.
2605 On appeal, the respondents advanced what I think are some new arguments designed to show why, because of the financial predicament of the Bell group companies in early 1990, public policy was contravened by the failure of those companies and the banks to involve all creditors before they concluded the Transactions. They dealt with whether there was a sufficient relationship to satisfy the first limb of their equitable fraud case only incidentally to dealing with the public policy element.
2606 In their written submissions [APPR.000.041, par 137], the respondents submitted that the public policy element in this kind of equitable fraud existed here because:
It is an equitable fraud, of the kind falling within the fourth head of Earl of Chesterfield v Janssen for some creditors to secretly obtain an advantage (eg security) from an insolvent debtor to the exclusion, and detriment, of other creditors. Such a transaction is against public policy … The statutory provisions on voidable antecedent transactions do not cover the field in relation to public utility. Nor is there a need for a ‘common dealing’ as in the composition cases, but even if it were required, such a ‘common dealing’ exists where the debtor is insolvent, and some creditors are placed at an advantage at the expense of others.
2607 The respondents also submitted at par 160 that:
Another aspect of public policy in the field of insolvency is that a debtor may not pay a creditor on the eve of his bankruptcy, with the intention of preferring that creditor over others – to do so is void as a fraud on the bankruptcy laws: Lord Mansfield in Alderson v Temple (1768); Thompson v Freeman (1786). The policy rationale is that a fraudulent preference aims at preventing that equal (pari passu) distribution among the creditors which has always been the object of the bankruptcy laws, and the doctrine of fraudulent preference is entirely for the purpose of distribution among the creditors generally, not for the benefit of any single creditor … The banks’ glib assertion that ‘individuals have the right to prefer one creditor to another unless that right has been taken away by Parliament’ is simply incorrect if such individuals are insolvent, as it ignores the equitable jurisprudence discussed above.
2608 Owen J refused to allow the respondents to attack the Transactions on the ground that they were a fraud on the bankruptcy laws: see his judgment, [2001] WASC 315, at [117] ‑ [118]. For the respondents to say that the Transactions involved equitable fraud because they infringed the public policy against preferences given by a debtor on the eve of bankruptcy as frauds on the bankruptcy laws comes close to ignoring his Honour’s ruling. But there are other more significant grounds for rejecting the respondents’ submissions.
2609 I do not accept that the fourth kind of fraud in Chesterfield extends to invalidating the Transactions even if the non‑bank creditors, including LDTC, were unaware of critical elements of the Transactions and even though those Transactions conferred a preference on the banks to the detriment of the other unsecured creditors at a time when TBGL was facing insolvency.
2610 One reason is that the pari passu principle, relied on explicitly by the respondents at par 160 and implicitly at par 137, cannot provide any justification for any form of equal treatment of creditors prior to winding up even where a company is in an insolvency situation. That principle has no application to transactions, not voidable under the Statute of Elizabeth and its modern equivalents, that are completed before a company is wound up: Re Smith, Knight & Co (1868) LR 5 Eq 223, 226. There, a company transferred its property to trustees for sale and conversion into money and payment therefrom of debts due to the creditors of the company. It was held that unpaid debenture noteholders could not rely on the pari passu principle to require allowance to be made, in calculating the distributions to be made to all the debenture noteholders by the liquidator, for the non‑preferential payments of dividend made to some debenture noteholders prior to winding up. Lord Romilly MR said at (226):
The Act of Parliament [section 133 the Companies Act 1862] unquestionably says, that everybody shall be paid pari passu, but that means everybody after the winding up has commenced. It does not mean that the court shall look into past transactions, and equalise all the creditors by making good to those who have not received anything a sum of money equal to that which other creditors have received. It takes them exactly as it finds them, and divides the assets amongst the creditors, paying them their dividend on their debts as they then exist.
2611 A further reason is that there has been no room for the public utility or policy element of the fourth head of fraud in Chesterfield to operate on transactions amounting to preferences by an insolvent company prior to winding up since the enactment of the statutory provisions of which s 122 of the Bankruptcy Act 1966 is an example. I think his Honour was in error when he held the contrary at [4910].
2612 Lord Mansfield held in Alderson v Temple (1768) 1 Wm Bl 660; 96 ER 384 that a preferential payment, if voluntarily made by a debtor to a creditor on the eve of the debtor’s bankruptcy, was void as a fraud on creditors generally because ‘it is defeating the equality that is introduced by the statutes of bankruptcy and the criminal (for the bankrupt is considered as a criminal) is taking upon himself to prefer whom he pleases’. As Lord Mansfield’s judgment in Thompson v Freeman (1786) 1 TR 155, 157; (1786) 99 ER 1026, 1028 shows, if the preference was not voluntarily made by the debtor but under pressure from the preferred creditor or from some other motive, it was valid: ‘A bankrupt when in contemplation of his bankruptcy cannot by his voluntary act favour any one creditor; but if under fear of legal process he gives a preference, it is evidence that he does not do it voluntarily’. A non‑voluntary preference was valid even though the rule led to the odd result that a creditor could secure preferential treatment from an insolvent debtor by being importunate.
2613 (In Alderson v Temple the other three judges, Lord Mansfield agreeing, disposed of the case in reliance on the doctrine of relation back which was well‑established by then: see Collett v De Gols (1734) Tal 65; 25 ER 665. The preferential transaction in question, endorsement by the debtors of a promissory note over to the creditor, was not complete until delivery and though endorsement preceded, by one day, acts of bankruptcy committed by the debtors, delivery did not occur until three days later, with the result that the transaction was ‘fraudulent and void’.)
2614 The respondents’ submissions at pars 137 and 160 are an accurate statement of the law as it stood prior to the enactment of the statutory preference provisions in the Bankruptcy Act 1869. That statute deemed a transfer of property to any creditor by a person unable to pay his debts ‘with a view to giving such creditor a preference over other creditors’ to be a fraudulent preference and void against the person’s trustee in bankruptcy if the person became bankrupt within three months of making the transfer. That statute and subsequent re‑enactments, including Australian equivalents, swept aside the old law that voluntary preferences by insolvent debtors were void as a fraud upon the bankruptcy laws. The appellants in my opinion are correct when they submit that determination of whether a preferential payment made by a debtor company facing insolvency is void is governed by the relevant legislation, here s 122 of the Bankruptcy Act 1966. There is no room for the fourth head of fraud in Chesterfield to operate on agreements between an insolvent debtor and one creditor that preference the latter to the detriment of the other creditors.
2615 In Bills v Smith (1865) 6 B & S 314; 122 ER 1211 Cockburn CJ said for the court (319):
It may not be unimportant to observe how the law as to fraudulent preference has arisen. The statutes relating to bankruptcy contained no provision invalidating payments made prior to the act of bankruptcy; but the Courts, from the time of Lord Mansfield, held that if a trader, in contemplation of bankruptcy, with a view to evade the bankrupt law, preferred a particular creditor, to the detriment of the rest, such a preference was a fraud upon the law and the transaction could not stand.
2616 In Ex parte Griffith (1883) 23 Ch D 69 Bowen LJ said (74):
Everybody knows that originally there was no express statutory enactment in regard to fraudulent preference. But from the time of Lord Mansfield down to 1869 the Courts considered that certain transfers of property were frauds upon the bankruptcy law, though there was no statutory enactment upon the subject. Then came the Bankruptcy Act of 1869, and in that Act it was for the first time explained what was meant by fraudulent preference, and the Act uses very definite language.
2617 Similar comments were made at (73) by Jessel MR and by Lindley LJ.
2618 In Re FP & CH Matthews Ltd (in liq) [1982] 1 Ch 257 the Court of Appeal observed at (262) that s 92 of the Bankruptcy Act 1869, which made void preferences by a debtor within three months of presentation of a bankruptcy petition, was enacted after the decision in Bills v Smith ‘and made a substantial alteration in the law’.
2619 That alteration was not accepted for a time and judges continued to apply principles developed at common law and equity prior to the 1869 Act which, as I have mentioned, struck down dispositions made ‘with a view to’ giving a creditor a preference. In Ex parte Tempest (1870) LR 6 Ch App 70, for example, it was expressly held that the 1869 Act did not alter the law with respect to fraudulent preferences so that only voluntary preferences made in contemplation of bankruptcy were invalidated, in accordance with the law developed by Lord Mansfield. Finally, it came to be recognised that the Act had indeed swept away all that earlier law. In Re Cohen [1924] 2 Ch 515, Pollock MR said (533):
I agree respectfully and fully with the observations of the members of the Court of Appeal in Ex parte Griffith. Jessel MR, Lindley and Bowen LJJ all affirm that in determining whether a transaction is a fraudulent preference of one creditor over the others, the Court now ought to have regard simply to the statutory definition contained in the current section. (references omitted)
2620 In Re Matthews Ltd, the Court of Appeal said (262 – 263):
It seems to us that, at a time when the law approached the question of fraudulent preference from the point of view whether the payment was made in contemplation of bankruptcy, the question whether the creditor made the payment with the intention of avoiding the operation of the bankruptcy law may have had a direct relevance.
After referring to Ex parte Griffith, the court continued:
What the court has to do [now] is to construe the statute and it does not seem to us that the statute directs any inquiry whether the debtor’s purpose was to disturb the operation of the bankruptcy law. The question under the statute is whether the payment was made ‘with a view of’ giving the creditor a preference over the other creditors.
2621 Muntz v Smail [1909] HCA 13; (1909) 8 CLR 262 was a decision on the Victorian equivalent of the UK Act of 1869. Shortly prior to his bankruptcy, the debtor made a payment to a creditor in the belief he was obliged by a prior dealing with the creditor to do that. Isaacs J, in dissent, in effect took the same view as the appeal court in Ex parte Tempest, holding that the statute had not altered the prior law, which commenced with Lord Mansfield’s decision in Alderson v Temple, and that the payment, not being voluntary, was not a fraudulent preference: see (292 ‑ 293) and (304). Griffith CJ rejected this approach. He said (271 ‑ 272):
Before the Act of 1869 the elements of a fraudulent preference were that the disposition should have been made in contemplation of bankruptcy, and should have been made voluntarily … It was, therefore, a sufficient answer to show that the disposition was not voluntary; and this might be done by showing that it was made in consequence of pressure or importunity on the part of the creditor preferred … In Ex parte Griffith; In re Wilcoxon, the Court of Appeal laid down the rule that in determining whether a transaction amounted to a fraudulent preference the Court ought to have regard simply to the statutory definition contained in s 92 of the Act of 1869. (references omitted)
2622 As Griffith CJ there noted, a number of cases, including Ex parte Tempest, which all held that a preference had to be voluntary to be void, ‘were cited to the Court [in Griffith] on behalf of the creditor, but in vain’. The Chief Justice, applying English decisions on the 1869 Act, held that a disposition was made by a debtor ‘with a view to giving a creditor a preference’, if that was a substantial object which he designed to achieve. Barton J expressed a similar opinion at (280 ‑ 281) as did O’Connor J who held at (289 ‑ 290) that, though the debtor believed himself under a legal obligation to make the payment, the evidence showed that his object in doing so was nevertheless to prefer the particular creditor over his other creditors.
2623 S Richards & Co Ltd v Lloyd [1933] HCA 26; (1933) 49 CLR 49 was decided under the preference provisions of the Bankruptcy Act 1924 (Cth) which made dispositions in favour of a creditor by a person unable to pay his debts void against his trustee in bankruptcy if the effect of the disposition was to give that creditor a preference over other creditors. The High Court rejected an attempt to revive the old rules by treating the Act as requiring proof of the debtor’s subjective intentions and exempting non‑voluntary preferences from its reach: see (59 ‑ 60) (Rich and Dixon JJ); (62) (Starke J); (64) (Evatt J).
2624 In my opinion, the appellants are correct in submitting that the statutory provisions governing voidable preferences have done away with the common law and equitable rules that had previously avoided preferences by insolvent debtors in contemplation of bankruptcy.
2625 The respondents on appeal submitted that there was an alternative basis upon which they could rely to show that the Transactions were within the fourth head of fraud in Chesterfield. They submitted at pars 161 and 162 that public policy operated more broadly than only striking down fraudulent preferences aimed at preventing the pari passu distribution of an insolvent debtor’s property among the creditors: public policy dictated that some creditors of an insolvent debtor could not secretly obtain an advantage, e.g. by taking security, from the debtor to the exclusion, and detriment, of other creditors. They submitted that this principle does not rest on pari passu distribution; that when the debtor is insolvent, it ought not cede control of its assets to some creditors to the disadvantage of other creditors and that these principles of public policy, which Lord Hardwicke recognised in Chesterfield, are unaffected by statute.
2626 The respondents developed this argument in oral submissions.
2627 Though they relied upon it at trial – see [4863] – the respondents at appeal ts 2327 expressly disavowed reliance by way of analogy on the composition cases in order to demonstrate why the Transactions were against public utility.
2628 The respondents’ case, as articulated on appeal, was based upon a number of propositions which counsel summarised at appeal ts 2290:
In our submission, at the time of the transactions the banks and the directors knew that the Bell Group companies were in need of financial restructuring … They knew also that as part of that it was necessary for there to be an agreement with the bondholders for debt defeasance … Instead of dealing with the bondholders, the banks and the directors first entered into the transactions the subject of these proceedings.
Those transactions substantially improved the position of the banks by giving them control over the timing in terms of any restructure. Indeed, it gave them control over all of the assets in priority to other creditors and fundamentally altered the landscape in which a restructure could be considered … It’s submitted that those aspects meant that the transactions were a deceit and imposition contrary to public utility.
2629 Counsel at appeal ts 2291 explained by reference to six points why the respondents submitted the Transactions were implemented in an underhand way and were therefore an imposition on LDTC, trustee for the bondholders, (and other creditors). The first point was that:
[T]he banks and the TBGL directors knew of the terms of the trust deeds, the events of default provided in those trust deeds, and the fact that the bondholders could be expected to take action to accelerate the bonds if there was an event of default. They knew that if that occurred, a restructuring would have to be negotiated with the bondholders in circumstances where the banks were not secured and there was uncertainty as to whether the on loans were subordinated.
2630 Three points turned on what the Bell directors and the banks knew at the time the Transactions were entered into about existing and probable future acts of default by TBGL under the bond trust deeds that would entitle LDTC to accelerate redemption of the bonds but which were unknown to LDTC. The fifth point was that the banks and the Bell directors knew that in order to avoid a real risk of the Transactions being set aside as a preference, at least six months had to pass from the date of the Transactions without default action being taken by the bondholders. The sixth point was that:
[W]ithout disclosure to the bondholders of the full nature of the transactions and the financial circumstances of the Bell group companies, the transactions were otherwise consistent with a refinancing of bank debt with further restructuring was not required.
2631 Then at appeal ts 2292, counsel further explained why the Transactions were contrary to public utility:
As to the element of public utility, the transactions were contrary to public utility because allowing … transactions of this kind to stand, would encourage clandestine arrangements to advantage a particular creditor in relation to undertaking necessary negotiations to restructure through agreement with other creditors. They are a type of agreement that makes restructuring less likely to occur because the creditor who in a clandestine way, or underhand way, has obtained comprehensive security at a time when restructuring is needed will then approach the negotiations on the basis that they can dictate the timing and terms of the restructure.
Restructuring, in our submission, is to be encouraged because of its benefits for employees and creditors and the avoidance of the costs and disruption of insolvency administration. Of course, liquidation may be appropriate if there can be no restructure but in this case, it was common ground that a restructure was necessary and, in our submission, possible. Underhand dealings which delay, hinder or preclude an available restructure and thereby push a company into liquidation are contrary to public utility.
2632 At appeal ts 2329 ‑ 2330 they accepted that, unlike the composition cases, a restructure of a distressed company, ultimately adopted, did not have to provide for equality of treatment of creditors. But they submitted that once the need to restructure a distressed company has been identified by one or more creditors, those knowledgeable creditors are not free to enter into a restructure agreement with the company without involving the ignorant creditors in the negotiations for the agreement. The knowledgeable creditors cannot make a private agreement with the debtor company because:
The nature of the concern about public utility is that there are here a class of people who, according to their general treatment in the law, are identified as parties who stand together, and agreements which tend to affect a dealing which reorganises their rights without them all knowing are an imposition and a deceit.
The class we have here, because there isn’t yet a composition or agreement between the various parties, does not have the characteristic of equality, we accept. Agreements can be made with one creditor that aren’t made with other creditors. That is generally an ability that the parties have but, in our submission, that is different to where one party realises there is a need for a restructure.
2633 It is clear enough, I think, from these submissions that the respondents’ case, insofar as the requirement to show a contravention of public utility or public policy is concerned, depends upon two propositions. Firstly, once the need for restructuring of a distressed company has been identified, all creditors must be treated equally to the extent that all have the opportunity to take part in negotiations for the restructuring of the company’s financial position. Secondly, by entering into a restructuring agreement without reference to the general body of creditors, the company and the favoured creditor contravene public utility because the law as a matter of public policy favours the restructuring of distressed companies over liquidation and such a clandestine agreement hinders or defeats an effective restructure i.e. one that involves all creditors. (The first proposition, if made out, would also satisfy the relationship element required by the fourth head of fraud in Chesterfield.)
2634 In my opinion, the respondents cannot establish either proposition. I do not accept the respondents’ submission that the Transactions were contrary to public utility as identified by the respondents, even if they involved an imposition on LDTC and other creditors.
2635 There is in my opinion no foundation for the proposition that, prior to winding up, the creditors of an insolvent company have any claim to equal treatment by the company for any purpose, whether or not a financial restructure is contemplated by the company and a particular creditor. The statutory preference provisions have displaced the old law that made voluntary preferences by a debtor in contemplation of bankruptcy void as a fraud on the bankruptcy laws.
2636 Far from being obliged to treat all creditors equally prior to winding up, an insolvent company can prefer one creditor over another.
2637 In Re Sarflax Ltd [1979] Ch 592, an insolvent company in the two years between ceasing to trade and going into liquidation realised its assets and paid its trade creditors from the proceeds without, however, making any payment to one major creditor. Proceedings were brought by the liquidator for an order that the directors personally pay an amount equal to what the major creditor would have obtained on a pari passu distribution among all the company’s creditors if the company’s assets had been retained instead of being distributed to the other creditors before the winding up. Oliver J struck out the application as disclosing no reasonable cause of action, holding at (600 – 602) that even though a debtor company reasonably suspected that it would not have sufficient assets to pay all its creditors in full, the mere preference of one creditor over another did not amount to an intention to defraud within the applicable Statute of Elizabeth provisions. At (602) Oliver J held that in the absence of statutory provision to the contrary, ‘a man may discharge his liabilities in any order he pleases’. One issue in Krtolica v Westpac Banking Corporation [2008] NZHC 1 was whether the bank financially supported a scheme operated by an insolvent company that continued to trade under which key trade creditors were paid, to the prejudice of the company’s other creditors. Stevens J held that the debtor company, though in an insolvent situation, was entitled to pay, in preference, whichever debts it chose, provided that there was not an alienation with intent to defraud creditors. In reliance on Sarflax, Stevens J held that the mere preference of one creditor over another did not amount to an intention to defraud within the Statute of Elizabeth.
2638 That is established law. An insolvent debtor that disposes of the whole of its assets to a creditor to whom the debtor is indebted to at least the value of the assets transferred, does not infringe the Statute even though the debtor intends to prefer that creditor over its other creditors. To be within the statute, the debtor must reserve some benefit for himself: see Glegg v Bromley [1912] 3 KB 474, 485; Abignano v Wenkart (1998) 9 BPR 16,765, 16,775 ‑ 16,778; Wentworth v Rogers [2004] NSWCA 430 [63].
2639 It follows that, until a winding up order is made, a company, even one facing insolvency, can deal effectively with its property and so can deal preferentially with some creditors, provided only that it does not do that with intent to defraud the company’s other creditors contrary to the Statute of Elizabeth (in WA, s 89 of the Property Law Act 1969).
2640 A transaction by an insolvent company that does not contravene that statutory provision may still be voidable at the instance of the company’s liquidator if winding up occurs sufficiently soon after the transaction, under s 121 and s 122 (and probably also under s 120) of the Bankruptcy Act 1966 which, except for s 122, are the provisions applicable in the winding up of TBGL and the other plaintiff companies. But there is in my opinion nothing to prevent a creditor, prior to winding up and who is prepared to take the risk that a liquidator may later successfully challenge the transaction, from taking security from a debtor company facing insolvency. Such security will be legally effective unless and until successfully challenged by a liquidator.
2641 The policy considerations underlying preference provisions such as s 122 recognise that. In the context of a corporate insolvency, the High Court in G & M Aldridge Pty Ltd v Walsh [2001] HCA 27; (2001) 203 CLR 662 said of the preference provisions in the Australian bankruptcy legislation [30]:
A primary objective is that of securing equality of distribution amongst creditors of the same class. The pursuit of that objective has the consequential effect of deterring the ‘race to the courthouse’ and that, in turn, enhances the prospect of enabling debtors to trade out of their difficulties without undue and discriminatory risk to creditors.
2642 In Ferrier and Knight v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28, the Full Federal Court decision relied on in Aldridge, there is an extensive discussion of the policy considerations to which provisions such as s 122 give effect. The court there said (at (43)) that what one might call the ‘deterrence’ rationale has been questioned and referred to the view that:
If [preference] recapture were absolutely certain, then deterrence might work … However, recapture is not a certainty, and the prudent creditor will discount that likelihood accordingly.
2643 The validity of that view is illustrated by the banks’ decision here to take the securities in the belief that they would be no worse off even if the Transactions were set aside.
2644 That one of the objectives of these provisions is to deter individual creditors from stealing a march on the other creditors by entering into a dealing with the distressed company advantageous to the particular creditor is recognition that there is no prohibition against doing that. The preference and avoidance provisions ameliorate the injustice suffered by creditors of an insolvent company when one creditor steals a march on them by obtaining a preferred position over the company’s assets. But those provisions can only have any effect once a winding up order has been made.
2645 The position has always been different in bankruptcy. Because of the doctrine of relation back, now embodied in statutory provisions such as s 115 of the Bankruptcy Act 1966, the hitherto absolute title of a person who commits an act of bankruptcy thereupon becomes fettered and remains contingent upon no petition being presented within six months of that act of bankruptcy. As the cases cited by Lee AJA show, relation back operates prior to bankruptcy to deprive a person who commits an act of bankruptcy of the ability to give a good title to his or her property to another. The entitlement of an insolvent company prior to winding up to give a good title to its property to others is not subject to any such contingent disability: Issitch v Worrell [36]. No doctrine of relation back comparable to the broad reach of this bankruptcy doctrine has ever applied in the winding up of corporations. The provisions of the Bankruptcy Act 1966 that made pre‑bankruptcy dealings by the bankrupt voidable at the election of the bankrupt’s trustee are applicable to the winding ups of the plaintiff Bell companies by reason of the legislation referred to by Owen J at [9076] ‑ [9078] which give effect to provisions like s 451(1) of the Companies Act 1981. But those kind of provisions do not pick up and apply to company liquidations the doctrine of relation back: O’Donovan J, MacPherson’s Law of Company Liquidation (3rd ed, 1987) 312 – 313. ‘That doctrine is peculiar to bankruptcy’: Re Carl Hirth [1899] 1 QB 612, 623 (Lindley MR); see also Burns v Leda Holdings Pty Ltd (218). (There is now a very attenuated form of relation back in a compulsory winding up: by s 565 Corporations Act, the winding up is deemed to commence on the date of lodgement of the application.)
2646 That an insolvent company (so long as it does not make a disposition of its property caught by the Statute of Elizabeth) is lawfully entitled, prior to winding up, to prefer some creditors over others and can give a good title to a purchaser shows in my opinion the absence of any justification for the submission that such a company must treat all creditors equally, or at least involve all creditors, when the question of a possible financial restructure of the company’s affairs arises.
2647 Breach by the directors of an insolvent company of their duty to take into account the interests of all creditors by e.g. failing to involve some creditors in restructuring negotiations, cannot provide a foundation for a claim by the excluded creditors to set aside the restructure as an equitable fraud on them.
2648 Where a company is in an insolvency situation, the directors in exercising the company’s powers and in performing their own fiduciary duties to the company must take into account the interests of creditors. If the directors of an insolvent company fail to take into account the interests of creditors in dealing with the company’s property, and creditors are prejudiced, that dealing will be voidable at the instance of a liquidator subsequently appointed: Kinsela v Russell Kinsela Pty Ltd (in liq). The consequence of directors of an insolvent or near insolvent company being bound to take into account the interests of creditors is that: ‘the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders’: Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler, cited in Spies v The Queen (636). This proposition I think evokes what was said by Street CJ, with the agreement of Hope and McHugh JJA, in Kinsela (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 … 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.
2649 These statements do not mean that the creditors either individually or collectively have a proprietary interest themselves in the assets of an insolvent company pending liquidation. They cannot be in a better position than shareholders who have no legal or equitable proprietary interest in the company’s assets: Re Webster [1975] HCA 22; (1975) 132 CLR 270, 287. Further, the directors of an insolvent company owe no independent duty to the creditors enforceable by them: Spies v The Queen (636 ‑ 637). The interests of creditors of an insolvent company can only obtain protection incidentally to the breach by directors of their duties to the company in proceedings brought by the liquidator (or by the company itself, if not in liquidation). The lack of any proprietary interest in the company’s assets and the incapacity of the creditors to take action themselves to protect such interest as they have in an insolvent company and its assets in my opinion is sufficient to show that they do not have any right in equity to fetter the company’s power to deal with its assets prior to winding up based on the principle in Kinsela.
2650 There is in my opinion no basis upon which a company can, prior to winding up but merely upon the onset of insolvency, be held to be subject to a fettered or qualified capacity to deal with its property.
2651 Counsel acknowledged that he could find no authority for the proposition that underhand dealings which delay, hinder or preclude an available restructure of a distressed company and so push it into liquidation are contrary to public utility i.e. public policy. This submission was based solely on the assertion that such existed. In Cattanach v Melchior [2003] HCA 38; (2003) 215 CLR 1 Kirby J said of how a head of public policy should be established at [152]: ‘Desirably, it should be founded on empirical evidence, not mere judicial assertion’. Judicial notice rather than traditional evidence will, I think, be the most likely source of proof of a new head of public policy.
2652 In my opinion there has never been an identifiable head of public policy favouring distressed company restructuring over liquidation that is the necessary foundation for the respondents’ submission that the requirement of public utility within the fourth limb in Chesterfield is satisfied here. The reverse is I think the case.
2653 Though the making of a winding up order is always discretionary, ‘[t]he authorities show that as a general rule a creditor who cannot obtain payment is, as between himself and the company that owes the debt, entitled to a winding up order as a matter of right’: IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417, 427 (Gibbs J, Stephen and Jacobs JJ agreeing). Whether the court is asked to approve a scheme of arrangement or to stay winding up proceedings, the same public policy considerations apply: Re Cascade Pools Australia Pty Ltd (1985) 9 ACLR 995, 996. One public policy consideration, referred to in Cascade Pools, that has been influential in this area, was identified by Street J in Re Denistone Real Estate Pty Ltd [1970] 3 NSWR 327, 330:
[T]he staying of proceedings in a winding‑up in a situation where a company is clearly insolvent is not consistent with the due preservation of the policy of the legislation and of the law that, in the public interest, an insolvent company ought to be wound up. It is not for the Court to take the initiative of launching into the community – as the applicant would have me do in this case – an insolvent company, in anticipation that it will in due course trade itself out of its insolvency.
2654 Far from there being any policy of encouraging the directors to risk allowing their company to continue to trade when in financial difficulty, in the expectation that the company’s fortunes will improve, directors have long been subject, as a protection for creditors, to stringent penalties for failing to prevent an insolvent company from incurring debts: see now s 588G of the Corporations Act.
2655 Until recently, the concern of the law with respect to distressed companies has been with the interests of creditors pretty well to the exclusion of the interests of the debtor company (and others, including its employees) in possible survival.
2656 Creditors willing to do so have always been able to enter into various contractual arrangements by way of compositions, moratoriums and swaps of debt for equity with a distressed company that avoid liquidation and allow the company to continue to trade. See Anderson C and Morrison D, Crutchfield’s Voluntary Administration (3rd ed, 2003) [10.340]. But that the law of contract allows such arrangements illustrates the long‑standing policy of freedom of contract: it does not show the existence of any public policy favouring corporate restructuring over liquidation.
2657 Companies legislation has long made provision for court‑approved schemes of arrangement under which distressed companies could sometimes avoid liquidation by entering into compromises of debts owing to creditors, with the advantage over private contractual arrangements, of being able to be made binding, on certain conditions, on dissenting creditors. From the early 1960s until recently, there was also provision in company legislation for a majority of creditors to appoint an official manager to take over control of a distressed company, but only where there was the prospect of full payment of all the company’s debts within a fixed period. If the official manager came to the opinion that this could not be done, the company had to be wound up. See Australian Law Reform Commission, General Insolvency Inquiry, Report 45 (1988) [50]. Both these procedures were little used: General Insolvency Inquiry [50]. Such procedures are, I think, directed to enabling creditors to improve the returns they can get from a distressed company over those obtainable in a liquidation rather than to giving effect to a policy of favouring corporate restructuring and possible survival over liquidation. Even if these two little‑used procedures should be seen as providing some encouragement to save distressed companies from liquidation, they do not in my opinion evidence, to the standard required by cases such as R v Young [1999] NSWCCA 166; (1999) 46 NSWLR 681, 700 and A v Hayden [1984] HCA 67; (1984) 156 CLR 532, 558 – 559, the existence of an established long‑standing public policy favouring reconstruction over liquidation that the court can recognise.
2658 That there exists no such policy capable of enlivening the fourth limb in Chesterfield is I think shown by statements in the General Insolvency Inquiry. It is only in recent times in Australia that public authorities have given attention to the concept of corporate rescue for insolvent companies as an alternative to liquidation. The General Insolvency Inquiry stated [52]:
The Commission is also concerned that, apart from conclusions that might be suggested by statistical evidence, the legislative approach to corporate insolvency in Australia is most conservative. There is very little emphasis upon or encouragement of a constructive approach to corporate insolvency by, for example, focusing on the possibility of saving a business (as distinct from the company itself) and preserving employment prospects.
2659 The Commission’s report led to the introduction in 1992 of what is now Part 5.3A of the Corporations Act which makes provision for a scheme of voluntary administration of a distressed company under court supervision which is run by an administrator appointed by the company under a deed of arrangement executed by the company and approved by the creditors. Section 435A of the Corporations Act identifies the object of Part 5.3A as being to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or, if that is not possible, to maximise the chances that it will result in a better return for the company’s creditors and members than would result from an immediate winding up.
2660 The impetus for the introduction of Part 5.3A in the General Insolvency Inquiry came from recognition in recent times of the need to provide a statutory means for insolvent companies to try to restructure and avoid liquidation in the interests not only of creditors and shareholders but also of third parties including employees. If there is a public policy to that effect, it was created by and exists only in specific and recent legislation designed to fill a gap that hitherto existed. The introduction of Part 5.3A in 1992 evidences the absence of any public policy of wide ambit that would be necessary to support the particular concept of public utility upon which the respondents’ equitable fraud case is based.
2661 There is, in my opinion, no basis for holding that because a company is facing insolvency, all creditors are thereby brought into a relationship with each other and the company sufficient to satisfy the first element of the fourth kind of equitable fraud referred to in Chesterfield. Nor is there any basis for holding that entry by such a company, prior to winding up, into an agreement preferring one creditor over the others contravenes any head of public policy so as to satisfy the second element of that equitable fraud claim.
2662 Because the respondents cannot establish either of the essential elements of their equitable fraud case, I do not consider it necessary to determine whether his Honour was in error in refusing to find that LDTC and the other non‑bank creditors were subjected to an imposition or deceit by the Bell directors and the banks.
Fraud by inequitable and unconscientious dealing
2663 It was also contended at trial, unsuccessfully, that the Transactions constituted an inequitable and unconscientious bargain and therefore an equitable fraud on each Bell company participant.
2664 Only the BGNV respondents have appealed this decision.
2665 I agree, for the reasons given by Lee AJA and Carr AJA, that BGNV’s cross‑appeal against dismissal of its equitable fraud claim based on unconscientious conduct by the banks should be dismissed.
Defences and relief
2666 I have had the advantage of reading the reasons of Lee AJA for dismissing the various defences raised by the appellants.
2667 I agree, for the reasons given by his Honour, that the question of the loss of the right to rescind the Transactions, insofar as the plaintiffs are entitled to succeed on the statutory claims, cannot arise.
2668 As to relief based on Barnes v Addy, I also agree that Owen J correctly held that the liquidators had not affirmed the Transactions and had not lost the right to rescind them.
2669 The appellants’ contention that the unavailability of restitution precluded rescission of the Transactions also fails.
2670 So far as the banks’ first argument is concerned, Lee AJA points out that the circumstances in which the moneys were released by the banks upon which this argument is based did not require the trial judge, in the proper exercise of discretion, to refuse rescission. The banks obtained the securities by conduct that contravened the equitable principles in Barnes v Addy. For the reasons I have given in dealing with the Waiver issue, the release by the banks to TBGL of those moneys was the price the banks decided to pay to achieve preference‑proofing of their securities. They released the moneys to preserve what they had obtained by their equitable misconduct.
2671 I also agree with Lee AJA, for the reasons he gives, that the banks’ second argument for attacking the trial judge’s rescission orders fails.
2672 I agree with Lee AJA’s reasons for rejecting the banks’ claim that the Bell shareholders consented to the Transactions and thereby ratified any breach of duty by directors in executing the Transactions.
2673 I also agree that none of the plaintiffs’ claims were time‑barred, for the reasons given by Lee AJA.
2674 For the reasons given by Carr AJA, the banks’ contention that BGF was not entitled because of its election to affirm the Transactions, must also be dismissed.
2675 The banks’ claim to having rights of set‑off against BGF and BGUK should also be dismissed, for the reasons given by Lee AJA.
2676 For the reasons given by Lee AJA, I also agree that the trial judge’s grant of relief to the plaintiffs by way of in personam orders against the banks should stand.
2677 His Honour’s declaration in relation to the BGNV subordination deed, based on his erroneous conclusion that the on‑loans were subordinated, must be set aside and an order made rescinding that deed as between BGNV and the banks.
2678 Contrary to the respondents’ contentions, his Honour was entitled, for the reasons given by Lee AJA, to award equitable compensation to them and deny them the right to elect for an account of profits. As Lee AJA shows, the measure of equitable compensation appropriate in this case is the amount received by the banks from the realisation of the securities together with a component for interest, calculated on a basis that will provide for disgorgement by the banks of profits gained from having the use of those moneys. This requires interest to be calculated on a compound basis on monthly rests at the rates proposed by Lee AJA, in substitution for the rate selected by his Honour, and without regard to the income tax that interest should be deemed to attract each year in the hands of the plaintiff companies.
2679 I also agree with Lee AJA that his Honour was in error in not restraining the banks from enforcing the instruments which non‑plaintiff Bell companies had executed in favour of the banks.
2680 I differ from Lee AJA and Carr AJA as to the extent of relief available to the plaintiffs under the statutory claims. But the orders proposed by Lee AJA give effect to my reasons in relation to the subordination issue, the Barnes v Addy claims of the plaintiffs and, as to costs, the equitable fraud claim of the plaintiffs and to the other issues his Honour has dealt with, in reasons with which I have expressed my agreement. I therefore agree with the orders his Honour proposes.

CARR AJA’S REASONS

Introduction 734
The basic facts 735
The appeal, cross‑appeals and notices of contention 741
Are the relevant duties fiduciary? 742
My reasoning 743
In causing the companies to enter into the respective Transactions (including giving securities over all worthwhile assets) did the directors breach the duties they owed to the Bell group companies? 750
My reasoning 752
The Australian directors 752
Aspinall 759
The Directors’ Choice 774
A Bad Bargain? 780
Failure to carry out investigations and failure to make plans 785
The ‘Group’ Approach – Whether the interests of a corporate group may be relevant to each member of that group 793
The Charterbridge Test 797
Mitchell and Oates 803
A pleading point 808
Mitchell and Oates, improper purpose and the ‘but for’ test 810
Conclusion in relation to the Australian directors 822
The United Kingdom directors 823
Conclusion 832
Conflict of interest 832
The primary judge’s reasoning 832
The main respondents’ notice of contention 833
My reasoning 834
Conclusion 836
In causing BGNV to enter into the BGNV Subordination Deed, did Equity Trust (its only director) breach the duties it owed to BGNV? 836
My reasoning 837
Conclusion 849
Barnes v Addy 850
Were the Banks liable under either of the heads on which the equitable fraud claims were based? 853
Earl of Chesterfield 853
My reasoning 854
Unconscientious conduct 864
My reasoning 864
Were the Banks liable under either of the two species of statutory claims, namely, dispositions done with intent to defraud creditors, or voidable settlements? 866
Are the claims under s 121 of the Bankruptcy Act, and the State and Territory provisions similarly based on the Elizabethan statute, precluded on the pleadings? 868
Section 121 of the Bankruptcy Act 870
Identifying the relevant transactions 870
The directions and authorisations and consequent BRL share mortgages 871
The subordination deeds 874
The Principal Subordination Deed 875
The BGNV Subordination Deed 876
The guarantees and indemnities 877
The floating component of the mortgage debentures 880
The main refinancing documents 882
Intention to defraud 882
Intention to defraud; BGNV 886
Did the appellants acquire the relevant property in good faith and for valuable consideration? 886
Good faith 886
Valuable consideration 889
Section 89 of the Property Law Act 1969 (WA) 890
Section 120 of the Bankruptcy Act 890
Conclusion 892
Has the horse bolted so far as relief under the statutory provisions is concerned? 893
A Postscript 898
Were and are, the holders of convertible subordinated bonds (after taking into account the effect of the on‑lending within the group of the bond issue proceeds) effectively subordinated behind the claims of unsubordinated creditors including the Banks? 899
The contract case 899
My reasoning 903
Key evidentiary matters 914
The rate of interest paid on the on‑loans 945
The Negative Pledge Reports 946
The put option premium in the third bond issue 949
How the conversions actually occurred 950
The undertaking not to create unsubordinated debt 951
The three documented subordinated loans 953
The BGNV Subordination Deed 956
Certainty 957
Conclusion 959
Whether the Banks are entitled to enforce the subordination term in the contracts of on‑loan 959
Whether the on‑loan contracts expressly in their terms purported to confer a benefit directly on a person not named as a party to those contracts 960
Does s 11(2) apply only to written contracts? 964
Conclusion 969
The appellants’ counterclaim for orders against BGNV 969
My reasoning 971
Was there anything in the myriad of defences raised in the litigation disentitling the plaintiffs or the defendants (in their counterclaim) to relief? 975
The facts 976
My reasoning 976
Election 977
Impossibility of restitution 979
My reasoning 981
Set‑off 981
Non-party Transactions 982
My reasoning 983
To what (if any) relief were the plaintiffs/respondents (or any of them) entitled? 986
The relevant principles 990
Excising the compounding effect of tax liability 996
Costs 1002
Costs as between the appellants and the main respondents 1002
Costs as between the appellants and the sixth and twenty‑ninth respondents 1004
Orders 1004
Sale proceeds of the publishing and communication assets 1011
Sale proceeds of BRL shares 1011
Interest 1012
Costs 1013
As between the appellants and the sixth and twenty‑ninth respondents 1014
As to costs generally 1014
SCHEDULE A 1015
SCHEDULE B 1018
SCHEDULE C 1019

CARR AJA:
2681 This appeal and two cross‑appeals are from a judgment of Owen J. His Honour ordered the appellants to pay, in varying shares to various of the respondents, amounts which came to a total of $1.6 billion. He also made declarations and consequential orders setting aside securities which most of the respondents had granted to the appellants.
Introduction
2682 The appellants comprise some 20 banks. It is convenient to regard them as falling into two groups, namely, ‘the Lloyds Syndicate Banks’ and ‘the Australian Banks’. When I refer to all of them collectively, they will be ‘the Banks’. The respondents also fall into two groups. The first group (known as ‘the main respondents’) comprises:
• 23 companies (in liquidation), one of which also sues as trustee for four of those companies, and two liquidators of some of the companies in what was known as ‘the Bell group’ which carried on business in Australia and borrowed money from the Australian Banks; and
• one of the Bell group companies (also in liquidation) which carried on business overseas, mainly in the United Kingdom and borrowed money from the Lloyds Syndicate Banks.
2683 The second group of respondents comprises a Netherlands Antilles company and its liquidator who represent the interests of the (largely overseas‑based) holders of subordinated convertible bonds (‘the bonds’) issued by the Bell group in 1985 and 1987. The (incorporated) trustee for those bond issues is also a respondent. It is convenient to regard it as being part of the second group. The funds raised by the issue of the bonds were on‑lent to two companies in the Bell group. Those loans were known as ‘the BGNV on‑loans’ or simply ‘the on‑loans’. BGNV stands for Bell Group NV, the Bell group company which was incorporated in the Netherlands Antilles for the purpose of issuing the bonds in the Eurobond market and on‑lending the proceeds to companies in the Bell group. Its sole (incorporated) director was also a defendant in the proceedings below but took no steps in those proceedings or in the appeal.
2684 It is common ground that, as between the holders of the bonds and BGNV, on a winding‑up of that company the bonds were subordinated to the entitlements of all its unsubordinated creditors. Not only were they subordinated but they were unsecured save for a similarly subordinated guarantee from the parent company in the Bell group, The Bell Group Limited (‘TBGL’). A major issue in the case is whether the BGNV on‑loans to the two respective Bell group borrowers were subordinated.
2685 Until early 1990 the loans from the two groups of banks were also unsecured but supported by negative pledges. At the heart of this case is whether certain securities which the two groups of banks jointly took in the first seven months of 1990 were voidable.
The basic facts
2686 The following recitation of the basic facts is taken largely from the reasons for judgment of the learned primary judge.
2687 TBGL was a listed public company controlled by interests associated with the late Mr Robert Holmes à Court (‘RHàC’). It was the holding company of a large corporate group. One of TBGL’s many subsidiaries was BGNV. Another TBGL subsidiary was Bell Group (UK) Holdings Ltd (in liquidation and in administrative receivership) (‘BGUK’), a company registered in the United Kingdom. In addition to its wholly‑owned subsidiaries, TBGL owned about 39% of the shares in Bell Resources Ltd (‘BRL’) which was a listed company in its own right but whose affairs (until December 1989) were managed by, and under the effective control of, TBGL. Another subsidiary of TBGL was Bell Group Finance Pty Ltd (in liquidation and receiver and manager appointed) (‘BGF’) which acted as the treasury entity for the Bell group.
2688 In the mid‑1980s TBGL and BGF had loan facilities of one sort or another with (among others) the Australian Banks. In 1986 BGUK established a loan facility with the Lloyds Syndicate Banks.
2689 Between December 1985 and July 1987 the Bell group raised about $585 million through five separate bond issues: three by BGNV in the open (Eurobond) market and one each by TBGL and BGF to other interests associated with RHàC. The proceeds from the three BGNV bond issues (about $435 million) were instantaneously on‑lent by BGNV to TBGL or BGF. The proceeds from the other two issues ($150 million) went directly to TBGL or BGF.
2690 Following the stock market crash of October 1987 the Bell group, which had hitherto expanded very rapidly and had a very high level of borrowing, embarked on a programme of asset sales and reduction of debt to more comfortable levels. By April 1988 the Bell group held a considerable amount of cash; in excess of $1 billion.
2691 In April 1988 RHàC sold his interests in TBGL to Bond Corporation Holdings Ltd (‘BCHL’) and the State Government Insurance Commission (‘SGIC’). At about the same time the bonds that had been issued to RHàC’s interests by TBGL and BGF were transferred to SGIC. By August 1988 BCHL held approximately 75% of the ordinary shares of TBGL on issue. By the end of 1988 the boards of both TBGL and BRL consisted entirely of persons associated with BCHL.
2692 During 1988 and 1989 there was public speculation about the financial health of BCHL and, through it, the Bell group. Following the BCHL takeover, some of the Australian Banks 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 its programme of asset sales to reduce debts. Between October 1987 and May 1988 the wider Bell group (including BRL) raised over $5 billion mainly from the sale of shares and surplus properties: see Owen J’s reasons at [344] and [345]. Officers of TBGL and BCHL told the Australian Banks that the indebtedness of the Bell group to them would be cleared. But by the middle of 1989 it become apparent that TBGL and BGF could not repay the loans. Negotiations began in earnest to restructure those facilities. The essential part of those negotiations was the provision of securities over the main assets of the Bell group, namely its publishing assets and its BRL shareholding. Because of the negative pledges given to the Lloyds Syndicate Banks, it was necessary to include those banks in the negotiations.
2693 By the end of 1989 TBGL and BGF between them owed the Australian Banks about $131.5 million all of which was payable on demand. The balance owing by BGUK to the Lloyds Syndicate Banks stood at approximately £60 million (then equivalent to about $131 million) which was due for repayment on 19 May 1991. Thus the total amount outstanding to the Banks as at 26 January 1990 was $262.5 million or thereabouts. In addition, there was a $5 million overdraft facility with one of the Australian Banks. A small parcel of the bonds issued by BGNV in 1985 had been converted into shares in TBGL but the face value of the outstanding bonds (which were due to mature between 1995 and 1997) was about $546 million.
2694 The negotiations to restructure the two sets of banking facilities on a secured basis were successful. On 26 January 1990 the major refinancing and security documents were executed by various companies in the Bell group and the two groups of banks. Further security documents 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 documents (‘the Transactions’) evidenced, amongst other things, the following arrangements:
• the Australian Banks’ facilities and the Lloyds Syndicate Banks’ facilities were extended so as to be repayable on 30 May 1991;
• if during the currency of the facilities the Bell group sold assets, the proceeds from the sale were to go to the Banks pro rata in reduction of the debt;
• all intra Bell group indebtedness (except for debts owed to BGNV and another Bell group subsidiary, Bell International Investments Ltd (‘BIIL’)) was subordinated behind the claims of the Banks; and
• TBGL was to use reasonable endeavours to have BGNV and BIIL execute deeds subordinating the debts due to them.
TBGL did not directly own any significant assets. They were held by some of its subsidiaries. I think it is fair to say that the purpose of the Transactions, from the Banks’ viewpoint, was to take security effectively over those assets in return for continuing the loans.
2695 It was not long before these arrangements started to come unstuck. In February 1990 the Banks received from the Bell group, cash flow documents which one bank officer described as making ‘fairly grim reading’. In the same month the Banks had taken control of about $24.3 million from sale proceeds of one of the publishing group assets. That amount should, according to the terms of the relevant Transaction document, have been available to reduce bank debt but TBGL immediately asked the Banks for access to those funds. TBGL proposed to use part of the funds to pay stamp duty and legal costs in respect of the refinancing documents and interest due to the Banks at the end of that month and the balance to assist with the payment of interest due on the bonds in May 1990. Despite some initial resistance to those proposals, the Banks eventually agreed to the moneys being thus deployed.
2696 On 31 July 1990 BGNV executed a deed subordinating the debts of other Bell group companies to it so that the bondholders (if they were not already subordinated) would effectively rank behind all its other creditors and in priority only to its shareholders.
2697 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 were granted in January, February and March 1991. In December 1990 interest payments of about $14.9 million were due to the bondholders. Those payments were not made.
2698 During 1990 the management of TBGL considered various financial restructure proposals. Central to most of those proposals was the injection of additional capital by a sale of or joint venture in relation to the remaining publishing assets. Another proposal was to negotiate moratorium arrangements with the bondholders. In December 1990 and January 1991 meetings were held with the bondholders but nothing came of them. In March 1991 there was a further financial restructure proposal, one element of which was for the Banks to advance money to BRL to subscribe for shares in TBGL. The Banks declined to do this and on 16 April 1991 they issued formal notices of demand on TBGL and BGF in respect of unpaid interest.
2699 On 18 April 1991 TBGL applied to the Supreme Court of Western Australia for the appointment of a provisional liquidator. The court made such an appointment on that day. Over the ensuing years insolvency administrations of one sort or another were installed in other Bell group companies, some at the behest of the Banks.
2700 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.
2701 In 1995 the liquidators commenced proceedings against the Banks and the Bell directors challenging the way in which the securities were given and taken, 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 with the result that the Banks became the only remaining defendants against whom relief was sought.
2702 At the heart of the claims by the companies, the liquidators and the trustee was the contention that at the time when the securities were given and taken, the main companies in the group were insolvent. The plaintiffs contended that:
• 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 only some 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 Commissioner of Taxation – who were prejudiced by the giving of the securities;
• by giving the securities the directors breached fiduciary duties that they owed to the companies; and
• 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 fiduciary duties to the companies.
In those circumstances, the plaintiffs contended that the Banks were liable to disgorge the proceeds from the realisation of the securities or otherwise compensate them for losses suffered because:
• the Banks had received the proceeds from the realisation of the securities knowing of the breach of duties and had knowingly participated in the breach by the directors of their duties to the companies;
• the conduct of the Banks amounted to an equitable fraud on the companies and on the trustee; and
• the securities were void or voidable under various provisions of the Bankruptcy Act 1966 (Cth) and other statutes.
2703 The plaintiffs asked the court to declare that the securities either had been or should be set aside and also asked for monetary compensation in the region of $1.5 billion.
2704 The Banks’ position was as follows. They denied liability and said that the companies were not insolvent at the relevant time or, if they were, they had no knowledge of that state of affairs. The directors of the various Bell group companies believed that unless the securities were given, the facilities would be called up and the companies would be placed in liquidation. In those circumstances, 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 that the group could continue in business as a going concern and avoid liquidation. The Banks believed that the directors held 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 trustee were estopped from asserting 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 came within the statutory provisions relied on.
2705 His Honour formulated the following list of questions which he answered in his reasons:

1. Were the Bell group companies insolvent as at 26 January 1990?
2. Did the directors know the companies were insolvent?
3. In causing the companies to enter into the respective Transactions (including giving securities over all worthwhile assets) did the directors of the Australian Bell group companies (‘the Australian directors’) breach the duties they owed to those companies?
4. In causing the companies to enter into the Transactions did the directors of the UK Bell group companies (‘the UK directors’) breach the duties they owed to those companies?
5. In causing BGNV to enter into the various Transactions, did its (only) director, Equity Trust (Curacao) NV (‘Equity Trust’) breach the duties it owed to BGNV?
6. Were the duties that were found to have been breached fiduciary in nature?
7. Were the Banks liable under the first limb of Barnes v Addy (1874) LR 9 Ch App 244, that is, did they receive trust property knowing that it arose from the breach of the directors’ fiduciary duties?
8. Were the Banks liable under the second limb of Barnes v Addy, that is, did they knowingly assist in the breach of the directors’ fiduciary duties?
9. Were the Banks liable under any of the heads on which the equitable fraud claims were based?
10. Were the Banks liable under any of the three species of statutory claims, namely, transactions done with intent to defraud creditors, voidable settlements or because some of the securities were unregistered charges?
11. Were, and are, the holders of the bonds (after taking into account the effect of the on‑lending within the group of the bond issue proceeds) effectively subordinated behind the claims of unsubordinated creditors including the Banks?
12. Was there anything, in the myriad of defences raised in the litigation, disentitling the plaintiffs to relief?
13. To what (if any) relief were the plaintiffs (or any of the parties) entitled?
    The appeal, cross‑appeals and notices of contention
    2706 I will deal with the issues raised by the above questions in a slightly different order to that set out by his Honour. I will summarise his Honour’s findings and conclusions on each matter.
    2707 Many of the findings and conclusions are challenged in the appeal. There are further numerous such challenges in two cross‑appeals and three notices of contention. I had intended to summarise the various grounds upon which those challenges are based and the submissions of the various parties, but I have decided that, with some exceptions, it is neither practical nor useful to do so. That is because there are 799 grounds of appeal, 301 grounds in the cross‑appeals, 79 grounds in the notices of contention, 3,813 pages of written submissions and sundry other supplementary documents that were filed before and during the hearing of the appeal. That hearing lasted 44 days and the transcript of those proceedings runs to 3,810 pages.
    2708 His Honour’s answer to the first question listed above can be dealt with quite briefly. His Honour found that the Bell group companies were insolvent as at 26 January 1990. He reached that finding by conducting a meticulous review of the evidence of contemporaneous events focussing on three main aspects – cash flow, continuing losses and the balance sheets. He described the financial position of the Bell group companies as ‘… one of insurmountable endemic illiquidity’. The companies’ ability to pay their debts as and when they fell due was dependent on the cash flow from the ongoing business operations of the publishing assets. The companies faced a recurring annual deficiency of about $60 million. They could only meet their commitments from the proceeds of asset sales. His Honour’s conclusion on this matter was not challenged on the appeal. I now turn to the issues in the appeal.
    Are the relevant duties fiduciary?
    2709 I mentioned above that I would deal with the issues raised in his Honour’s list of questions in a slightly different order to that set out by him. I have moved the question of whether the relevant duties are fiduciary slightly up the list. I have done this because I think that consideration of that question, before his Honour’s findings of breach, helps in assessing whether those findings amounted to error of law. In my view, the decided cases where directors have been found to breach fiduciary duties help one to understand the content of such duties and to illuminate the line between entrepreneurial conduct permitted under the general law and that which breaches such a duty.
    2710 His Honour made an extensive review of the relevant authorities on the question whether, under the general law, directors’ duties to act bona fide in the interests of a company and to exercise powers for proper purposes were fiduciary. He noted that it was common ground that the relationship between a director and the company of which he or she is a director was a fiduciary one. He also noted that not all duties owed by a director were fiduciary duties.
    2711 The learned primary judge then applied two tests. The first was to ask whether 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?’. He concluded that both duties did.
    2712 His Honour accepted that Australian law only recognises as fiduciary duties those that are proscriptive in character to the exclusion of those that are prescriptive. That led to the second test – were the two duties proscriptive? The judge found that they were. He did this by deciding that the duties could be phrased in the negative with no damage to the language. The duty to exercise powers properly was reformulated at [4580] thus:
    [D]irectors 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.
    2713 The reformulation of the duty to act in the interests of the company became at [4581]:
    [T]he 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.
    His Honour then said this at [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 … The exercise of a fiduciary power contrary to those strictures is a breach of a fiduciary duty.
    My reasoning
    2714 As I have mentioned, it was common ground between the parties that the relationship between a director and the company of which he or she is a director is a fiduciary relationship. The issue is whether the duties found by his Honour to have been breached were fiduciary duties capable, in this matter, of supporting relief of the Barnes v Addy type.
    2715 It may be helpful to note, as his Honour acknowledged at [4375], that a director’s duty to exercise care and skill is not a fiduciary duty. The distinction is, in my opinion, an important one in this matter: Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 239 and the authorities there cited. The respondents have never pleaded a breach of the duty of due care and skill.
    2716 There does not seem to be a decision binding on this court (even prima facie binding such as a decision of another intermediate court of appeal) which holds, as part of its ratio decidendi, that a company director’s duties to act in the interests of the company and to exercise powers for proper purposes are fiduciary duties. There are, however, some cases at that level of precedent which assume that such is the law.
    2717 If, as must be the case, some of a company director’s powers when exercised do not involve assuming a fiduciary duty but others do, how is the line drawn between the two types of powers? It may be by exercising what might be described as judicial policy either to intervene with proprietary equitable relief (or other equitable relief) or not to do so.
    2718 A useful starting point is the often‑quoted passage from Millett LJ’s reasons for judgment in Bristol & West Building Society v Mothew [1998] Ch 1, 17 ‑ 18:
    Although the remedy which equity makes available for breach of the equitable duty of skill and care is equitable compensation rather than damages, this is merely the product of history and in this context is in my opinion a distinction without a difference. Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution.
    This leaves those duties which are special to fiduciaries and which attract those remedies which are peculiar to the equitable jurisdiction and are primarily restitutionary or restorative rather than compensatory. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. 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 the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations (1977) p 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.
    2719 But when is it appropriate to extend such relief against a company director? In my view, one clear case would be where a director steals an asset of the company. Another would be where a director without proper consent diverts an opportunity available to the company to another entity in which the director is interested. To confine proprietary equitable relief to these types of situations would be to limit the extent of fiduciary duties to the two duties referred to in Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 i.e. not to obtain any benefit, unless properly authorised, from the relationship and not to be in a position of conflict. But in Breen, Mr Williams was sued in his capacity as a surgeon for refusing access to a patient’s records. The case was not concerned with the duties of a company director. Their Honours explicitly recognised that a surgeon has some fiduciary duties. For example, if a patient makes a substantial gift to a surgeon he or she bears the onus of proving that it was not made under undue influence, if the gift is not to be set aside.
    2720 It is possible to discern from the High Court’s reasoning in Breen that it was not considered appropriate to impose a fiduciary obligation on Mr Williams because there were other adequate and effective remedies available to the appellant such as an action or suit for discovery of documents. It is probably trite to point out that this is one of equity’s traditional grounds for holding back. But on the other hand it would be courageous to suggest that Breen is the High Court’s last word on the reach and content of fiduciary duties. Where should the line be drawn in this case?
    2721 At one stage of considering this question I formed the view that the learned trial judge erred in elevating these two well‑accepted duties (possibly one composite duty) which a company director must observe to the status of being fiduciary duties, the breach of which will give rise to remedies of a proprietary nature. First, because there are other remedies at least one of which is equitable. Subject to standing, an anticipated breach can be remedied by injunction. A consummated breach can be compensated for by an award of damages or equitable compensation of the first type referred to by Millett LJ in the above passage. Secondly, the consistent theme running through the fiduciary duty cases is that the fiduciary is ‘… under an obligation not to promote his personal interest by making or pursuing a gain in circumstances where there is a conflict or a real or substantial possibility of a conflict between his personal interests and those of the persons whom he is bound to protect’: Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 103; Breen (113).
    2722 In this matter, putting the notice of contention to one side for the moment, there is no suggestion that the Bell directors promoted their personal interests or made or pursued a gain for themselves or others in circumstances of conflict of interest. His Honour’s express findings, summarised below, are to the opposite effect. The Bell directors made no gains at the expense of the companies which entered the Transactions. That is, they did not exercise powers which might have enabled them to prefer their interests, or the interests of others, to those of the company. Initially my provisional opinion was that in those circumstances no fiduciary duties could have been breached when the Bell directors caused the respective companies to enter into the Transactions. I return to the authorities.
    2723 In Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 the High Court made a brief reference to the question whether the first limb of Barnes v Addy applies not only to persons dealing with trustees, but also to persons dealing with other types of fiduciaries. It said that in recent times this had been assumed to be the case, ‘but rarely, if at all decided’. The court made no further comment other than to say:
    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.
    2724 Owen J also noted that since the decision in Farah, the Court of Appeal of New South Wales had considered this question in Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 25 ACLC 1094. The Court of Appeal reviewed the authorities in which the first limb had been applied to a breach of fiduciary duty by a director of a company. Giles JA said [159] those authorities represented a ‘… line of authority [which] should be followed until the High Court says otherwise’. Owen J said that was what he proposed to do. But I think that it is important to note that in Kalls the facts were that Mr Kalls, the director in question, simply took the money from the relevant company (the Court of Appeal found that there was no loan of it to him) and used it to satisfy a debt owed by him and his brother to a third party.
    2725 Five cases were referred to in Kalls as being among those in which the first limb of Barnes v Addy had been applied to breaches of fiduciary duties by a director. The first was Rolled Steel Products Ltd v British Steel Corporation [1986] Ch 246, 298, 307, 309. That was a very clear case of abuse by two directors (Mr Shenkman and his father) of their fiduciary powers by causing the plaintiff company to execute a guarantee and a debenture. Mr Shenkman had a personal interest in the transaction because it would reduce his exposure under an existing guarantee. In short, he had a conflict of interest. The transaction was not even considered to be for the benefit of the company (307D). At (309) Lawton LJ observed:
    What Mr Shenkman and his father did on 22 January 1968 by giving the guarantee was a misfeasance and British Steel Corporation knew it was.
    2726 The next case in the quintet referred to in Kalls was Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580. Stripped of its convoluted facts, that was also a very clear case of misfeasance. Mr Goldberg and his son‑in‑law had taken money, $207 million, from the plaintiff amounting to 77% of its assets (with considerable hesitation Southwell J was able to find that the transaction was a loan). The whole of the money was used to buy publicly listed shares, in the name of a company controlled by the Goldbergs and having only $2 paid‑up capital, which were to be held on trust for Goldberg family interests with no security being given to the plaintiff. At (622) Southwell J found that the impugned directors had ‘masterminded’ the transaction which was:
    [D]esigned to preclude and did preclude the lender from obtaining security in the acquired asset, and … designed to ensure that the benefits of ownership of that asset would flow not to the lender but to the private family interests of the directors.
    2727 I do not think it would be too controversial to regard Linter as being a case in which directors misappropriated an asset of the company to benefit themselves.
    2728 The next case mentioned in Kalls was Farrow Finance Co Ltd (in liq) v Farrow Properties Ltd (in liq) (1997) 26 ACSR 544. In that case common directors of two related companies in the Farrow/Pyramid group caused one of the companies to make a loan to the other company without giving any consideration to the question whether the transaction provided a benefit to the lender. Their purpose was to assist another company in the group (Pyramid Building Society) to avoid reporting a bad or doubtful debt. Two of the directors indirectly owned and controlled all the companies in the Farrow/Pyramid group. The group was found to have been in ‘dire circumstances’ (583, line 44). Hansen J found that the loan was made consequent upon a breach of the directors’ fiduciary duty to act for proper purposes and did not find it necessary to decide whether the loan was, to the knowledge of the directors, not in the best interests of the company. I would place this authority in the category of the Barnes v Addy cases which were decided in the context of a conflict of interest; the conflict being between the lending company on the one hand and Pyramid Building Society on the other, each being related corporations and each being indirectly owned and controlled by the directors concerned. There was also the conflict between their own financial interests in maintaining an appearance of group solvency and the interests of the lending company.
    2729 The next case in this series of five was Bank of Credit & Commerce International (Overseas) Ltd v Akindele [2001] Ch 437. That was another clear case of fraud. Three directors fraudulently procured the claimant company to pay US$16.679 million to the respondent as part of a scheme to boost the perceived capital of the bank in the eyes of regulators, depositors and the public at large. Effectively, they stole the company’s money by paying it away to the respondent who was found not to have knowledge of the fraud. The case was not concerned with breach of duty (that was common ground) only with the question of knowledge.
    2730 The final case in this series, Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286, was another case of conflict of interest. The directors in that matter caused ‘an improper diversion’ of the company’s money to gain advantage for themselves as major shareholders of the recipient company.
    2731 It might fairly be said that all of these cases where proprietary equitable relief was granted fell quite clearly within the principles explained in Barnes v Addy, but were very different cases to the present. As Gleeson CJ and Callinan J observed, in a very different context, in Bridgewater v Leahy [1998] HCA 66 [47]; (1998) 194 CLR 457, 472:
    Of course it is the principles enunciated in those cases, and not their particular facts, which are of importance. The facts, however, illustrate the practical content of the principles; and they are a long way removed from the facts of the present case.
    2732 The cases reviewed above involved either obvious fraud or conflict of interest. They were also decided on a basis consistent with what the High Court said in Breen about the content of fiduciary duties. The principles are reflected in s 181 of the Corporations Act 2001 (Cth) and the cases decided under that section and its predecessors. For a recent decision under that and related sections see Australian Securities and Investments Commission v Somerville [2009] NSWSC 934, another case of obviously wrongful conduct, namely stripping assets out of a company in a phoenix scheme. On that view, the learned primary judge may have gone too far in elevating the duties, which he found the Bell group directors had breached, into fiduciary duties.
    2733 However, I agree with what Giles JA said in Kalls as mentioned above. On the present state of the authorities I am not prepared to hold that the duties were other than fiduciary the breach of which may give rise to liability under the first limb of Barnes v Addy. Before moving to consider whether those duties were breached in the present matter it may be useful to assess whether the case law relating to s 181 and its predecessors has any part to play in the disposition of this appeal.
    2734 I do not think that the cases decided before the enactment of s 181 are particularly useful for present purposes for at least two reasons. First, because the language of the predecessors to s 181 (s 124(1) of the Companies Act 1961; s 232 of the Corporations Law) does not mirror the terms in which these equitable duties are usually expressed. I acknowledge that in Marchesi v Barnes [1970] VR 434, 438 Gowans J said that the expression ‘act honestly’ in s 124 referred to ‘… acting bona fide in the interests of the company in the performance of the functions attaching to the office of director’. However, earlier on the same page his Honour expressed the view that ‘… the section is not concerned with the conduct of a director in relation to creditors or other persons dealing with or concerned with the company or anybody else but the company itself …’.
    2735 Secondly, the pre‑s 181 cases were almost evenly divided on the question whether there was a need to prove conscious dishonesty – see for example Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261 [a case decided partly under s 229 of the Companies Code (SA)]; Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503; Southern Resources Ltd v Residues Treatment & Trading Co Ltd (1990) 56 SASR 455; Feil v Corporate Affairs Commission (Vic) (1991) 9 ACLC 811; and Fitzsimmons v The Queen (1997) 23 ACSR 355.
    2736 Unfortunately the debate has continued in cases decided under s 181 of the Corporations Act. I note that in Re S&D International Pty Ltd (No 4) (2010) 79 ACSR 595, 656 Robson J, in applying s 181, adopted Owen J’s summary of the relevant law at [4619] of his reasons. With respect, I agree generally with Owen J’s summary in that paragraph. There is no need to refer any further to cases decided under s 181, other than to give a reference to Holyoake Industries (Vic) Pty Ltd v V‑Flow Pty Ltd [2011] FCA 1154 [149], [150].
    In causing the companies to enter into the respective Transactions (including giving securities over all worthwhile assets) did the directors breach the duties they owed to the Bell group companies?
    2737 His Honour held that all directors of each Bell group company (except BGNV) (the directors) breached their duties to act in the best interests of the company and for proper purposes. However, his Honour expressly found that none of the Bell group directors:
    • had been dishonest or was guilty of conscious wrongdoing [6031];
    • (including Mitchell, Oates and Bond) acted in their own interests in causing the relevant companies to enter into the Transactions [6125], [6127];
    • exercised their powers as a means to entrench their position of control of TBGL [6127];
    • exercised their powers as a means to protect their financial interest in BCHL and other BCHL companies [6127]; or
    • breached the duty to avoid conflicts of interest [9745].
    2738 It is, I think, important to note from the outset that not only did his Honour make the finding in the first bullet point above (in particular) but also, as his Honour noted in [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 …
    2739 His Honour found, in respect of all of the directors, that they breached their duties by concentrating on the interests of the Bell group (i.e. as a group), by failing to have regard to the effect of the Transactions on each individual company as a whole (including all of its present and future creditors and shareholders) and by causing some of the companies to incur obligations to the Banks they did not previously have, being obligations in respect of companies that were in an ‘insolvency context’. His Honour used the expression ‘insolvency context’ as shorthand for ‘insolvent, nearly insolvent or of doubtful solvency or would inevitably become insolvent’ [6383]. In particular, the directors had 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 out of that Transaction.
    2740 In relation to the Australian directors, his Honour held that, in essence, their breaches lay in three areas. First, concentrating on the interests of the Bell group and failing to look at the interests of individual companies. Secondly, by causing the Bell companies to enter into the Transactions as the first step in a plan to restructure the financial position of the Bell 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 Bell companies could survive in the meantime. Thirdly, two of the directors, Mitchell and Oates, were concerned about the interests of the BCHL group rather than the interests of the Bell group companies.
    2741 His Honour saw a ‘marked contrast’ when assessing whether the UK directors had breached their duties. He described them as having gone to great pains to draw up lists of creditors who might be affected by the Transactions and having taken steps to ensure that the interests of those creditors were protected. However, as his Honour put it, they ‘fell at the last hurdle’ by relying on:
    (a) an assurance, in a letter of comfort from the TBGL directors, that TBGL was solvent and would be able to meet its commitments under the Transactions; and
    (b) a further comfort letter from the TBGL directors regarding their plans for the business and operations of the Bell Publishing Group.
    2742 His Honour held that it was not reasonable for the UK directors to rely solely on those assurances, and that they could not have bona fide formed a view that they were acting in the best interests of the UK companies or that the Transactions were of real and substantial benefit to those companies, because there was ‘no objective information’ available to them to satisfy the corporate benefit test.
    My reasoning
    The Australian directors
    2743 The board of each of the relevant Australian Bell group companies comprised Mitchell, Oates and Aspinall. It was their conduct which was held to have been in breach of the fiduciary duties of a director. I propose to discuss the judge’s findings in relation to that conduct.
    2744 But first the context needs briefly to be set in place. At different times in 1989, two of the Australian Banks had withdrawn from the lengthy (they extended over six months) negotiations for refinancing and had called up their loans. They were eventually persuaded to withdraw their demands for repayment and to continue with the proposed refinancing. In addition to those demands, another bank, the National Australia Bank Ltd (‘NAB’), had on several occasions reminded the Bell group that its loan to them was on demand and that it reserved the right to make such a demand.
    2745 The only assets of any significant value owned by member companies of the Bell group were the publishing assets and nearly 218 million fully‑paid ordinary shares in BRL (‘the BRL Shares’). The BRL Shares were shown in the TBGL accounts as at 31 December 1989 as being worth $1.80 per share. His Honour found that the ability of TBGL to realise funds in the short term by mortgaging or selling the BRL shares was negligible [1798.5]. This was largely due to the siphoning off from BRL of about $1 billion in cash by BCHL. But BRL’s rejuvenated (in the sense that BCHL no longer controlled it) board had applied considerable pressure on BCHL to rectify that wrong. This forced BCHL to come up with what eventually proved to be a partial solution. It contracted to sell its Australian brewing assets to BRL with the $1.2 billion ‘loan’ being treated as a deposit. This was known as ‘the Brewery transaction’. The Bell directors believed that if the Brewery transaction were completed it would add considerably to the value of the BRL shares. If their value had been restored to, say, $1.20 that would have covered the total indebtedness to the Banks. The Brewery transaction became protracted but eventually reached fruition, though only after the Bell group went into liquidation. The BRL Shares were sold in May 1992 for nearly $60 million [1797]. In January 1990 Aspinall did not regard the BRL Shares as representing a source of funds in the short term, but that given time they had the potential to be a valuable and realisable asset.
    2746 The UK Bell companies had virtually no assets. As Mr N Young QC, senior counsel for the respondents, put it (appeal ts 1465):
    The English group was effectively a shell, and his Honour found that. All of the money had been sucked out of the English group and upstreamed to BCH and they had no cash flow and no assets worth securing …
    2747 Until July 1989 negotiations between TBGL and the Banks had been conducted on behalf of TBGL by Oates, Farrell and Devries all of whom were officers of BCHL [386]. The fact that they were officers of BCHL and were so identified by the Banks has, I think, some significance. They were Bond Corporation people. The Banks were aware that Bell group money was being siphoned up to the Bond group. There was evidence that some of the Banks were keen to sever their connection with the Bond group. The Banks had become disenchanted with dishonoured promises from the BCHL officers to reduce the indebtedness of the Bell group to them. This did not help TBGL in its negotiations with the Banks. Aspinall had been appointed Chief Executive of TBGL on 3 October 1988. He too had had difficulties in that capacity in dealing with the treasury people at BCHL who were ‘sweeping’ the funds generated by the publishing companies into a pool into which funds from other companies in the group were also ‘swept’. The problem, from Aspinall’s perspective, was that not enough funds were being made available from the pool to operate TBGL properly [4992] ‑ [4993]. He made his views known at a very high level of BCHL, namely to Beckwith and Oates.
    2748 Aspinall was aware of the negotiations with the Banks which were conducted during the first half of 1989, but took no personal part in them. In July 1989 Aspinall formed the view that the only way for the Bell group to survive was to ‘de‑Bond’ it, i.e. to disassociate the Bell group from BCHL and ‘untangle the web’. His Honour found that this was an important element in understanding the Bell group directors’ conduct [4989]. It is also useful here to refer to [5074] where his Honour most emphatically found that Aspinall did not prefer the interests of the BCHL group to the interests of the Bell group. This was one of the few points in relation to which demeanour of a witness was relied upon by the judge. His Honour said this:
    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.
    5075 … it was my impression … that Aspinall was telling the truth. I accept his evidence. [That is, Aspinall’s evidence on this particular issue.]
    2749 At [5367] his Honour made what I consider to be an important finding about what Aspinall was seeking to achieve by causing the companies to enter the Transactions:
    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.
    2750 In July 1989 Beckwith (one of the top four BCHL executives) had told Aspinall to get involved with the Banks. Beckwith told him that he would receive information from Oates and be assisted by Simpson who had been Aspinall’s personal assistant since October 1988 and was a lawyer. In summary, Simpson took over the day‑to‑day negotiations with the Banks for refinancing of the facilities provided by both the Australian Banks and the Lloyds Syndicate Banks. Aspinall oversaw Simpson’s work in that regard and on various occasions took a direct part in the negotiations and correspondence with the Banks ([5014] and following). I think that it is most useful to appreciate that so far as the refinancing was concerned it was Aspinall who was in charge on the TBGL side. At executive level his was the relevant mind and will of the Bell group in the negotiations with the Banks. He was appointed as a director and managing director of TBGL on 13 October l988 and remained as such until December 1991. For the same period he was a director of most, if not all, of the subsidiary companies in the Bell group [4983].
    2751 Mitchell and Oates, the two non‑executive directors of the Bell group companies, had a two hour meeting on 19 January 1990 [TBGL.07214.166] with Watson (a partner in Sly & Weigall, solicitors retained by the Bell group to advise in relation to the Transactions) and Simpson during which they went through the Transaction documents. The trial judge accepted, in his reasons, that these non-executive directors had built up a store of knowledge about the Transactions and the documents during the negotiations with the Banks [5604] and [5605].
    2752 The decisions taken by TBGL, BGF and West Australian Newspapers Limited (‘WAN’) to enter into the Transactions were made at board meetings held on 25 January 1990. The execution of the main refinancing documents then followed on 26 January 1990. On 31 January 1990 there were 26 board meetings of the directors of the Australian ‘security providers’ at which similar decisions were made, followed by execution of the securities on 1 February 1990. Then on 12 February 1990 there were 42 meetings of the remaining ‘subordinated creditors’ (i.e. all the other ‘Australian Participants’ which had not yet executed their respective Transactions) at which similar decisions were made, followed by execution of the Principal Subordination Deed on 15 February 1990. The three directors of each of the Australian companies, namely, Aspinall, Mitchell and Oates, were each at the end of a telephone in a different location. The appellants relied on the ‘identical’ minutes of each meeting and the fact that it was common ground on the pleadings that the directors authorised entry into the Transactions by passing a resolution in the following terms:
    IT WAS RESOLVED
    That the execution by the Company of the Securities and the Subordination Agreement would be:
    (a) in the best interests of the Company as a whole after taking into account its members’ and creditors’ interests;
    (b) something of real and substantial value to the Company.
    2753 As his Honour noted at [5579], 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.
    2754 The Transaction documents stipulated that as a condition precedent the companies had to pass resolutions in the above terms.
    2755 The minutes were drafted jointly by the Banks’ solicitors and the Bell group solicitors. His Honour found that the minutes were ‘… a triumph of form over substance’. But, in my opinion, that does not mean that they lacked any substance. His Honour recognised that at [5590] where he said this:
    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.
    2756 The evidence was that the three directors had these draft minutes in front of them when they resolved that the various Bell companies should enter into the Transactions. There was no allegation that the directors had acted dishonestly in any respect. The benefits minuted do not seem, on their face, to be far‑fetched. They reflect, basically, the facts as found by his Honour. The minutes were evidence of the truth of the matters recorded: Australian Securities and Investments Commission v Hellicar [2012] HCA 17 [7], [72], [206] and [212]. As indicated in the above passage, his Honour proceeded on the basis that the directors meetings were held (otherwise there would have been no foundation for the respondents’ case). His Honour did not make an express finding that the directors did not discuss the benefits which would flow from the execution of the Transaction documents.
    2757 The appellants also relied on unanimous shareholders’ resolutions to enter the Transactions passed by each of the plaintiff companies other than TBGL, BGUK and BGNV.
    2758 Given the basis on which the case was conducted (as to which see [2738] above) it would not have been open to his Honour to find that these resolutions were passed dishonestly or fraudulently.
    2759 His Honour found [418], [1828], [1881], [4966], [5018], [5434] and [6035] that at the date when the Bell directors caused the various Bell group companies to enter into the main Transactions, 26 January 1990, they believed the position to be as follows:
    • 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;
    • if either TBGL or BGF were wound up each other company in the Bell group would be or might be wound up;
    • if any one of the Australian Banks had demanded repayment of its loan it was 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 a default under the Lloyds Syndicate Banks’ Facility Agreement and would probably have precipitated a call by the Lloyds Syndicate Banks for repayment of their loans;
    • had such a demand been made, neither BGUK nor BGF (assuming that it had a liability under that agreement) nor TBGL (as guarantor) could, then and there, have met the demand; and
    • if the demands had not been met and no other steps had been taken, it was probable that the Bell companies would have been wound up.
    2760 The above summary reflects his Honour’s findings at [418]. However, in the last bullet point there is an important qualification: ‘… and no other steps had been taken’. That qualification does not occur in [1881]. In that paragraph his Honour noted:
    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).
    2761 See also lines 4 – 6 of [6070] where his Honour recognised that a failure by TBGL to do a deal with its bankers would result in the collapse of the Bell group.
    2762 It is worth noting that in par 33B of 8ASC the respondents pleaded that, as at 8 January 1990 (the commencement date of what the respondents called the ‘Scheme period’), unless the Bell companies ‘were able to enter into a valid and effective restructuring of their financial position’ they would have been wound up or their assets liquidated. In pars 122(e) and (f) of their reply the respondents effectively admitted that the Bell directors believed that it was necessary to consider and implement a restructuring of the financial position of each company in the Bell group and that ‘provided it was a valid and effective restructuring conformable with paragraph 33B of the Claim’ the Bell directors were entitled to hold that belief and an honest and intelligent person would have held such a belief.
    2763 It is important to appreciate that the respondents’ case below was conducted on the basis of an express disavowal of any allegation of conscious dishonesty or conscious wrongdoing on the part of the Bell directors: The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 5] [2004] WASC 273 [40] and the judgment below at [937].
    2764 As Mr Bathurst QC succinctly submitted on the appellants’ behalf (appeal ts 391), the result of the above is that his Honour found that the Bell directors believed that liquidation of the Bell group was the only alternative to the Transactions and, acting honestly, caused the companies to enter into them.
    2765 I now turn to some more of his Honour’s findings and to discuss what I consider should have resulted from them. My reasoning relates mainly to the duty to act bona fide but, to the extent that the duty not to act for an improper purpose overlaps with the former duty, my reasoning will relate to both those duties.
    Aspinall
    2766 I think that it is useful to quote the following passages from his Honour’s reasons for judgment:
    6084 … 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 [my emphasis, because, as I discuss below, I do not think that is the law].
    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.
    2767 Earlier in his reasons his Honour had said this:
    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.
    …
    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.
    …
    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.
    2768 A few paragraphs later his Honour referred to an important part of Aspinall’s evidence without expressing any disbelief in it. I think that in the circumstances it is reasonable to conclude that his Honour believed this evidence. Paragraph [5082] of the judge’s reasons was as follows:
    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.
    2769 On 18 September 1989 Garven caused a seven year financial forecast for the Bell Publishing Group to be prepared [WANH.20.0002]. That document predicted a very substantial increase in earnings before interest and tax up to the year ending 30 June 1994. Aspinall’s evidence was (see [5118] of his Honour’s reasons) that he thought, at the end of 1989 and the beginning of 1990, that the forecast was accurate if not a little conservative. Although it was too late for the Bell group to benefit, the evidence of what eventually transpired was [TBGL.04998.006] that the actual profit for the year ended 30 June 1994 ($60.617 million) was about 79% greater than Garven’s estimate for the then current year ending 30 June 1990 ($33.8 million). His estimate for 1993/94 was only $11.7 million out.
    2770 There are other important parts of Aspinall’s evidence where the judge accepted the genuineness of his beliefs, for example (at [5100]) his belief that the value of the newspaper business was between $500 million and $600 million, given reasonable time for its disposal. However, at [5124] his Honour criticises Aspinall for being optimistic and not providing any discount or reservations for adverse factors or events.
    2771 At [5371] his Honour said this:
    I have no reason to doubt Aspinall’s integrity. I think he held most of the beliefs 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.
    2772 In my view, this encapsulates his Honour’s error in dealing with, at the very least, the duty to act bona fide in the best interests of the company. The authorities show that, in the absence of irrationality, the test is not whether the director’s belief is based on reasonable grounds. It is a subjective test. In this matter, did Aspinall, not acting irrationally (in the Hutton v West Cork Railway Company (1883) 23 Ch D 654, 671 sense), honestly believe that entering into the Transactions was in the best interests of each of the companies in the Bell group? His Honour found, several times over, that he did.
    2773 I pause here to refer to a piece of evidence. On 22 January 1990 (the proximity to the dates of the Transactions is worth noting), Legg of C&L (auditors to the UK companies who had been advising the directors about the steps which they should take to comply with their duties) made a telephone call to his counterpart in Perth, Montgomery. His purpose in doing so was to check on the current overall financial position of the Bell group. Legg made a contemporaneous note of their conversation. That note was in evidence. Sometimes a contemporaneous note of a conversation between two auditors working in the same firm can provide a very useful insight. I think that it does so here. I think it is fair to his Honour to say that he downplayed the significance of Legg’s diary note only because he was not prepared to infer that its contents had been passed on to the UK directors. But in my view, Legg’s file note is revealing as a composite view of two matters. First, the London auditor’s opinion that the survival of the UK companies was dependent on the financial position of the Australian parent. Secondly, the Perth auditor’s recitation of the substance of his discussions with Aspinall and his endorsement of Aspinall’s financial plans. Montgomery’s views about the right steps to take coincided precisely with those of Aspinall. An auditor’s opinion is not something to be dismissed lightly. For those reasons I think it is worthwhile to set out the following extract from Legg’s file note [TBGL.04753.034]:
    PRIVATE 22 January 1990
    FILE NOTE – BELL GROUP UK HOLDINGS
    I have spoken to Frank Montgomery of C&L Perth this morning (22 January 1990) in connection with the additional security that BG(UK)H is proposing to give to Westpac and Lloyds. Frank was unaware that a refinancing exercise was taking place and C&L Perth apparently have no involvement. I briefly outlined the position.
    I explained that the purpose of my call was to get a view from Frank as to the situation as regards The Bell Group in Australia since the solvency of the UK Group and the value of its investment in Western Interstate were dependent on the financial position of the Australian parent.
    Frank referred to the June 1989 accounts of Bell which show net assets of some AUS$450 million (subject to audit qualifications), and said that he was unaware of any significant changes from this position. He did not believe there would be a problem on solvency and referred to the profits generated by the publishing business, options for disposal of parts of that business above net book value (including Murdoch) and options for realising the investment in Bell Resources as reasons to support this.
    Frank referred to conversations he had had with David Aspinall which indicated that Bell had plans to become a more efficient newspaper operator and to consolidate in this business and pay off the group’s borrowings after disposal of the Bell Resources stake. Frank’s view was that this approach would generate more value for Bell’s shareholders (and creditors) than appointment of a receiver and a forced disposal programme. This is consistent with the UK [directors’] assessment of the position.
    We also discussed whether Bell could stand alone from Bond Corporation and Frank confirmed that this was indeed the position. There is only a relatively low level of intergroup borrowing.
    This is all consistent with Michael Edwards’ assessment of the position and with the information that Bell Group (UK) Holdings are receiving from its parent company. Nothing arises which suggests that Michael Edwards would be ill advised to approve the granting by BG(UK)H of additional security on the basis of the advice he has been given. (emphasis added)
    2774 On 26 January 1990 Duffett of LDTC was in Australia and had a meeting in Perth with Aspinall and Simpson. Duffett made a diary note of that meeting of which the following are what I consider to be relevant extracts [TBGL.04524.016]:
    I met with David Aspinall, Managing Director of BGL and (name to follow) his Assistant and until recently PA to Alan Bond.
    · I explained our role as trustee to the bondholders. He was not aware of any particular bondholders and had not been contacted by any.
    · …
    He was very conscious that the investment in BRL was one of the main assets of BGL. At present they believed BRL could have value restored to it. They would value it at ‘market’ in their accounts. However, he was not clear that it was an asset they would necessarily wish to retain although selling 39% of BRL at fair value would not be simple. He was quite defensive on my questions regarding to value of the contract to buy the brewing assets. He felt it had good value and that the reasons for loss of share were not necessarily poor management and declining brand image – they blamed a new brewery in Queensland for taking market share! He blamed press speculation (sitting in the offices of the ‘Western Australian’).
    …
    · Regarding the future. He has consolidated all his bank facilities into a single facility of 19 largely European banks. This facility expires in May 1991. His current strategy is to replace these with a long term funding commitment so he can then turn his attention to developing and expanding the business. (Incidentally Rees of SGIC felt that the banks were achieving important priorities here. In view of the subordinated position of our bondholders I cannot see the significance of this.)
    · David Mitchell [sic – probably a reference to Aspinall] said that they were confident that BGL was well isolated from the activities of other Bond Group companies, and would not be affected by cross defaults from other Bond Group companies or BRL. The SGIC confirmed that this was their analysis also.
    · The Western Australian is ahead of budget for the year (the budget was an 8 ‑ 9% uplift on the 1988‑89 year). Depreciation charge in the accounts has been increased to over $10 million – double the previous year reflecting new equipment purchases. However, it is in cash terms just paying its way. The $183 million shown on the balance sheet at 30th June was for Bryanston Insurance. Agreement has been reached to sell this. Actual cash levels are about $1 million.
    …
    · I suggested the independence of BGL from other Bond companies would be strengthened and enhanced if there were an independent Chairman. This suggestion was not rejected out of hand.
    2775 At [1135] his Honour said this:
    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. …
    2776 In similar vein, at [1822] of his reasons, the learned primary judge made these findings:
    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.
    2777 The paragraphs which I have set out above amount, in my view, to clear findings that Aspinall was acting in good faith in what he believed was in the best interests of the Bell group. I deal below with the asserted omissions referred to in [6088] and again in [6089]. In both those paragraphs his Honour adopts the language of ‘reasonableness’ ostensibly to judge whether Aspinall was acting in accordance with his fiduciary duties – ‘… it was not reasonable for him …’. This may well stem from the judge’s view, expressed in an entirely different context, at [819]:
    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.
    Much later, at [5176], addressing Aspinall’s expectation that the Banks would allow access to proceeds of sales of assets, he said this:
    Nor can it be said that the directors were entitled to hold a reasonable expectation in that regard.
    There are similar observations in relation to the reasonableness of the beliefs of the United Kingdom directors at [5907] and [5926] and again in relation to the Australian directors at [5175], [6059], [6085] and [6088].
    2778 In [6089] his Honour, in my view, incorrectly applied the law by superimposing on a director’s belief not only the requirement that the belief be actually held (the correct test) but also that it be somehow ‘genuinely held’. The word ‘genuine’ slipped into his Honour’s test almost unannounced. This was not the testing of self‑serving evidence with a view to rejecting it as being false or based on reconstruction. This was the imposition of a standard of reasonableness. Aspinall had not carried out the two steps identified in 6088 and (b). As to the alternative referred to in [6089] his Honour’s language is not sufficiently clear (he used the word ‘if’) for me to conclude that he was saying that there were no reasonable grounds on which to base the belief, cf Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9. But what is clear from the rest of the paragraph is that all of the findings of breach are based not on any mala fides or disloyalty but upon the legal impermissibility of a group approach and his Honour’s view of what was reasonable in the circumstances. I deal with the matter of a group approach below.
    2779 It would seem that his Honour had forgotten what he said at [4598] where, in my respectful opinion, he described the correct test:
    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 …
    2780 I think that it is helpful to go straight to the exceptions referred to by his Honour at [4981] above because it is, in my opinion, clear that his Honour was not questioning Aspinall’s honesty. Referring to the recitals in the minutes of the meetings held on 25 January 1990, the learned primary judge said this:
    5066 Aspinall said in evidence that these meetings [sic. Aspinall’s evidence referred to ‘minutes’ not ‘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 in 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. [His Honour set out the relevant portions of the transcript and continued]
    …
    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.
    2781 With great respect to the trial judge, if, as his Honour found, Aspinall honestly believed that what he was doing was in the best interests of the Bell group companies, both individually and as a group, in my opinion it did not matter that he did not properly understand the legal concept of corporate benefit. The term ‘corporate benefit’ was used in these proceedings as shorthand for the duty of a director to act bona fide in the best interests of the company as a whole. The use of such a shorthand expression tends to hide the essentially subjective nature of the duty. Furthermore, in the extract of cross-examination set out by his Honour in [5067] Aspinall quite clearly referred to the directors’ concern at all material times about ‘…each individual company and the benefits for those companies within the total group’.
    2782 Mr Young, in oral submissions (appeal ts 1511) contended that in the sentence in [5066], beside which I have placed an asterisk above, his Honour found that Aspinall had not turned his mind to the best interests of each of the companies in the Bell group. I disagree. His Honour was dealing with one discrete topic (‘First’), namely what the legal test of corporate benefit entailed. His Honour was expressing the view that he was not at all sure that Aspinall knew precisely what the legal test of corporate benefit entailed or that he had turned his mind to that test.
    2783 His Honour criticised Aspinall’s optimistic assessment that, despite the stringent conditions imposed on the application of the proceeds of asset sales by cl 17.12 of the respective Facilities Agreements, the Banks could be prevailed upon to release such funds to meet pressing commitments rather than let the Bell group go into liquidation. At [6059] of his reasons he said this:
    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.
    2784 In my opinion, this reasoning does not reflect commercial common sense. To start with, the relevant period was not to last ‘indefinitely’. The loans had to be refinanced by May 1991. During that period, in order to protect their security, it was very much in the Banks’ interests to release proceeds of asset sales, thus keeping the Bell group operating rather than allowing it to go into insolvent liquidation. Hindsight shows that this was pretty much what happened, plus deferment of interest.
    2785 At [5175] his Honour went so far as to state that, in relation to obtaining access to the proceeds of asset sales despite cl 17.12:
    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. (emphasis added)
    2786 Fully conscious of the restraint required of an appellate court, I think that the learned primary judge was wrong to discount so heavily Aspinall’s beliefs about the manner in which the cl 17.12 regime was likely to be applied. The question was whether Aspinall was entitled (without being completely irrational) to believe that he would get access to sale proceeds to keep the group going. At [5168] his Honour said that Aspinall’s expectation in that regard was ‘not supported by any contemporaneous documents or any other evidence’. In my opinion there are two errors in that observation. First, the question was: What was Aspinall’s belief at the relevant time? Secondly, the observation is factually inaccurate. There is such evidence.
    2787 His Honour made no reference to the evidence from some of the bankers that the purpose of the clause was to prevent any more money being skimmed off to the Bond group. Latham’s (Lloyds Bank) evidence at par 338 of his witness statement [WITD.020.010] was that the Lloyds Syndicate Banks were prepared to be reasonable in the matter of access to sale proceeds (see appeal ts 585 and thereabouts). Then there is the evidence, referred to by his Honour, that on no less than five occasions during 1990 the Banks granted access to the asset sale proceeds, albeit during what was referred to as ‘the hardening period’ (i.e. the six month period following 26 January 1990). There was also Latham’s letter dated 9 May 1990 to Aspinall [TBGL.03523.116] where it is revealed that the unanimity requirement of cl 17.12 was insisted upon, during the drafting stage, by only one of the Lloyds Syndicate Banks. The whole tenor of Latham’s letter is consistent with the Banks being willing to grant access to sale proceeds providing they were not going to be used for asset purchases, or investment, or for on‑lending to the Bond group. Paragraph 192 of Weir’s (Westpac) statement [WITD.007.013] was to similar effect. There is no reason to think that this willingness did not exist in late January 1990 when the Transactions were entered into.
    2788 TBGL’s directors were not found to be dishonest. His Honour found expressly to the contrary, see for example [6031]. There are contemporary records of their belief that the refinancing presented an opportunity to trade out of the Bell group’s difficulties.
    2789 One such contemporary record (and there were many) was Simpson’s letter dated 22 August 1989 (which he signed as ‘Executive Assistant to D R Aspinall’) to Lloyds Bank as leader of the Lloyds Syndicate Banks which, omitting formal parts, read as follows [334.05.0035]:
    We refer to your letter of 18th August to Mr Oates, which he has asked me to respond to on his behalf.
14. The Bell Group Ltd currently has domestic borrowings of $131.5 million with six banks and an offshore facility of GBP 60 million with the Lloyds syndicate. The Lloyds syndicate facility is repayable on 19 May, 1991. The position with the domestic borrowing is that with the exception of one bank, whose facility falls due at the end of September 1989, the remaining monies are at call.
    With respect to the non publishing assets of the Bell Group it is our intention to use the proceeds from the asset sales in an amortisation of the domestic lenders position and to use any remaining monies for working capital purposes and payment of the subordinated debt.
15. Given the background outlined in 1 above it is quite clear to us that the Bell Group’s current banking arrangements need to be placed on a medium term basis to allow the group to get on with running its businesses in the knowledge that its banking arrangements are settled.
    To that end we have proposed the securing of the Bell Publishing Group assets, the value of which gives to lenders a handsome margin on value and also provides sufficient interest cover from its present cash flow.
    This will enable the Bell group to put in place, by May 1991, a new medium term facility to take out your syndicate and the other existing lenders. This new facility will obviously be structured around plans for the long term growth of the Group.
    We do not believe it unreasonable for all banks to have reached agreement in principle, subject only to documentation, by the end of August.
16. Attached for your information is the 7 year forecast for the Bell Publishing Group. Also attached is an estimated unaudited balance sheet for Bell Publishing Group as at the 30th June, 1989.
    With respect to Bryanston, a sale agreement has now been signed, which is subject only to DTI comment, and which calls for the purchaser to pay $20 million cash on completion. The intercompany debt of $3 million owing to Bryanston by Bell Group International, which is shown in the cash flow that has been provided to you will not be called for repayment within 2 years from completion.
17. Your comments are noted. You should also be aware that a number of the domestic lenders have suggested that the borrower, under the proposed secured facility, should be the Bell Publishing Group. As they are the owner of the assets to be charged this is a suggestion which we would agree with. The facility would remain guaranteed by the Bell Group Ltd.
18. The Whitlam Turnbull valuation, of $626 million for the assets to be secured, a copy of which we understand has been forwarded to you by Richard Raeburn contains the relevant information with respect to the assets to be charged.
19. Noted but in view of the timing of our obligations to the other lenders you can understand why such a proposal is necessary.
    We trust the attached information is of assistance to you and will enable you to reach a decision by the end of the month.
    2790 At a TBGL board meeting held on 17 October 1989 (see appeal ts 818) the directors approved the terms of a statement [158.03.0036.2] to be issued to shareholders which included the following paragraphs:
    FUTURE PROSPECTS
    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.
    The Group has a number of key strategies and objectives in the short term which are geared to increasing profitability and expanding the publishing and media revenue base. These include:-
    • The lifting of advertising revenues through aligning with other major comparable publications.
    • Further improvement in operating efficiencies as a consequence of the introduction of new equipment.
    • Increasing the throughput on the Group’s major presses by accepting major contract printing work.
    2791 On 13 November 1989 there was a further TBGL board meeting at which the terms of the Annual Report for the year ended 30 June 1989 were approved. On page 5 of that document [054.02.0002] the above statements were repeated.
    2792 The transcript [TBGL.00400.024] of the TBGL Annual General Meeting, held on 21 December 1989, shows that a shareholder asked Oates (Chairman of the meeting) about this refinancing announcement. Oates’ response included the following:
    Lets deal with the financing issues because that is a position that we had anticipated at last year would be in a very much better position than it currently is and the primary reason for that just so that you have a clear picture is that the debt was intended to be reduced further than it is as a result of the sale of the Caterpillar franchise held by Wigmores. Those of you who are in Australia will have read probably with as much disappointment as we did the attitude of the owners of Caterpillar franchise and the resultant write‑down in the value of your company’s asset. That had the effect of leaving a larger amount of debt being the residual debt after the sale of all of the other assets within The Bell Group so that the current debt stands slightly above $240 million. It is that debt which is in the last days of being re‑negotiated with the banks to be [sic] it onto a term basis. It is also the intention of this board that wherever possible where there are non‑profit producing assets retained within the group that those also will be sold so that the group can concentrate on its principal activity, which is the newspaper publication through the West Australian.
    2793 One further, perhaps small, piece of evidence of Aspinall’s belief in the possibility of a successful restructure of TBGL’s finances and its survival was as follows. On 27 April 1990 Aspinall bought, on market and in his own name, 54,047,346 shares in TBGL. That amounted to 16.57% of its issued capital. The gross purchase price was $546,145.51 [TBGL.03700.054; TBGL.00092.004]. In corporate terms that may not have been a very large sum. But, taking into account the real value of that sum in the dollars of 22 years ago it was, I think, a substantial personal investment by Aspinall. From that I think it is reasonable to infer that at least as at 27 April 1990 Aspinall had a bona fide and honest belief that the Bell group was going to trade out of its difficulties. There do not appear to have been any events between 26 January 1990 and 27 April 1990 which would have caused such a belief to come into existence as a newly‑held one. To the contrary in his Honour’s view, the Bell group’s financial position started to become gloomier from about the beginning of February 1990.
    2794 Aspinall obtained legal advice shortly after he bought those shares and on 1 May 1990 he sold nearly all of them to Robert Maxwell for the same price as he had paid for them.
    The Directors’ Choice
    2795 I think that it would be useful to start with a brief statement of principle from a fairly recent authority, Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 [120] where Jonathan Parker J said this:
    The duty imposed on directors to act bona fide in the interests of the company is a subjective one (see Palmer’s Company Law para 8.508). 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. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.
    2796 It might seem strange that in today’s sophisticated commercial world so much is made of a subjective test that a director will not be held to have breached this particular duty if:
    • he or she honestly believes that the particular conduct is in the best interests of the company as a whole; and
    • the decision taken is not one which no reasonable board of directors could think was in the interest of the company (a very different concept to mere unreasonabless, since directors may honestly differ over what is reasonable).
    2797 It might be thought that a purely objective standard, such as that applied to trustees, should be the touchstone. But the underlying policy of the rule is quite easily understood. There are other duties, both at common law and statutory, which provide remedies in cases of fraud and negligence. Directors are not trustees; they are entrepreneurs and the general law gives them considerable leeway in the conduct of a company’s affairs: Mills v Mills [1938] HCA 4; (1938) 60 CLR 150, 185 ‑ 186 (Dixon J). They are thus given encouragement to exercise, rather than stifle, their entrepreneurial skills when they act honestly and not irrationally. Otherwise, company directors might, in circumstances such as the present matter, feel constrained to take the safe and easy option of putting into liquidation companies which had a chance of trading out of their financial difficulties. At the relevant time, the alternatives to liquidation were very limited, a subject to which I return below. As Ipp J observed (in relation to the different but related matter of a director’s duty of care) in Vrisakis v Australian Securities Commission (1993) 9 WAR 395; (1993) 11 ACSR 162, 212:
    Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.
    2798 Boiled down to the essentials, the parties were not all that far apart on their description of the choices with which the Bell directors were faced. The respondents’ case was that without a valid and effective restructuring the Bell group companies would have gone into liquidation. The Banks’ case was that there were only two alternatives: refinancing by means of the Transactions or liquidation.
    2799 It needs to be borne in mind, and his Honour so found, that the Australian directors had tried, unsuccessfully, to obtain extensions of the Australian loans first on a totally unsecured basis [5019] and then on the basis of security over only part of the assets of the Bell group [5023] and [5600]. In relation to those negotiations his Honour described Simpson as being ‘quite feisty’ and Aspinall as ‘no shrinking violet’ [8979]. In the overall scheme of things, this ‘rump’ of bank debt (about $260 million) was relatively not enormous. As his Honour noted, at [344] and [345], the wider Bell group (including BRL) had, between October 1987 and May 1988, realised over $5 billion mainly from the sale of shares and surplus properties.
    2800 In my view, to find that the directors breached their fiduciary duties by entering into the Transactions necessarily implies that they should either have done nothing at all and thereby let the Bell group go into insolvent liquidation, or that they should have taken some other course and that one of those two alternatives would have been in the best interests of the relevant company as a whole.
    2801 The judge’s findings are to the effect that if the directors had done nothing all the Bell group companies would have gone into liquidation. The respondents’ own expert, Norman, gave evidence, at [1809], that that would have resulted in a forced sale loss in respect of the publishing assets alone of about $100 million from their value as at the time of the Transactions. This was the difference between Norman’s mid‑point valuation of the publishing assets as a going concern of $344 million and his assessment that on a forced sale the net realisable value would be $244 million.
    2802 The appellants’ expert evidence (his Honour had one reservation, [1835] to [1839], but did not reject the balance of that evidence) was that the publishing business could have been sold for between $459 million and $503 million with a mid‑point of $481 million [1811]. On Norman’s forced sale figure the loss in value would have been $237 million. Aspinall’s evidence [5092] was that he considered the publishing assets to be worth between $500 million and $600 million [5102]. But this had to be reduced by BPG’s debt which was approximately $100 million [5096]. Aspinall’s net range was thus $400 million to $500 million with a mid‑point of $450 million. Those figures would reflect a forced sale loss, again on Norman’s forced sale figures, of $206 million.
    2803 TBGL’s balance sheet as at 30 June 1989 showed the publishing assets at $626 million (based on the Whitlam Turnbull valuation of 17 March 1989). The auditors qualified those accounts and in particular expressed the considered view that the value of the publishing assets was overstated by about $125 million [1805] and [6446]. Their value, as at 30 June 1989, was thus about $500 million.
    2804 In the present context there is no need to attempt to be precise. In fact to do so smacks of the legally impermissible procedure of looking over the directors’ shoulders as they made the business decision. It is sufficient to infer that if the directors had chosen to put the Bell group into liquidation they would have destroyed its asset value by at least about $100 million and quite possibly double that figure. And the directors were very well aware of that fact when they made their choice. It was at the core of Aspinall’s evidence.
    2805 I accept the submission made by Mr Bathurst QC (at appeal ts 397) that when his Honour came to consider the propriety of the Bell group entering into the Transactions he did not consider (the likely consequences of) liquidation as an alternative. His Honour did not take into account the factor that if the Transactions had the possibility of averting a forced sale of the newspaper assets that could be a benefit in a very substantial amount for the Bell group, and of course its creditors. Another, very important, factor which I discuss below was the fact that liquidation would have prevented the Bell group from benefitting from any increase in the value of its shares in BRL if the group had immediately been put into liquidation.
    2806 If the directors had chosen to put the Bell group into liquidation rather than enter into the Transactions the potential for the BRL shares to increase in value over time would have been lost. See the auditor’s view expressed in the file note set out above at [2773]. On those figures it could not, in my opinion, be said that the Transactions offered no prospect of a benefit (cf Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1, 7).
    2807 The judge also accepted Aspinall’s evidence about his beliefs in relation to this situation. On 11 December 1989 SCBAL had served its s 364 notice on TBGL seeking payment of $15.04 million within 21 days. His Honour [5050] said this about what Aspinall believed and what he did:
    This is one area where demeanour plays a part in the fact‑finding exercise … 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. …
    and he added this at [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. …
    2808 His Honour gave very brief consideration to alternative courses of action. He pointed at [4303] to the following:
    • the appointment of a provisional liquidator; or
    • a scheme of arrangement, whether formal or informal.
    2809 Four paragraphs later, at [4307], in his reasons for judgment the judge said this:
    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.
    2810 In my view, his Honour erred in law in reaching that conclusion. The question was not whether the ‘Transactions had a prejudicial and detrimental effect’ when viewed in isolation. From one viewpoint, mortgaging all of one’s assets and handing control of their proceeds to a group of banks is prejudicial and detrimental. But the directors faced a dilemma; they had to make a choice and their backs were against the wall. The issue, and it was an issue arising in the context of the exercise of their management powers, was whether the directors in making the decision were in breach of these two fiduciary duties? The respondents were asserting that the choice was not between the Transactions or liquidation but that there were other valid and effective restructures which the directors could and, presumably, should have considered and adopted.
    2811 I do not think that it is sufficient to point to possible legal alternatives. In my view, the burden fell on the respondents to prove that in the circumstances there was a commercial likelihood that the Bell directors would be able to come to a specific alternative arrangement with the required majorities of creditors and shareholders in the time available. The respondents did not even attempt to do this. With due respect to his Honour, company directors should not be found guilty of breaches of fiduciary duty because they chose one commercial path in the absence of proof that, at the very least, there was a commercially realistic and more appropriate alternative. There may have been other ‘legal means available’ but the question is not some theoretical legal availability but whether the directors were so much in error in making the choice which they did that they breached their fiduciary duties. The respondents expressly eschewed any assertion that any particular steps should have been taken. The judge, at [4303], observed:
    Speaking generally, the evidence establishes that the Bell group companies had an asset and debt structure capable of being considered for a reconstruction … (emphasis added)
    2812 In my opinion, the respondents were obliged to prove that, on the facts, there was a reasonable prospect of an alternative reconstruction. They might also have had to prove that the prospect was an immediately available one. It was not enough that the companies had an asset and debt structure ‘capable of being considered’ for such an alternative.
    2813 Given the evidence of the Australian Banks pressing for repayment of their loans at an early stage of the refinancing negotiations and two of them [CBA in September 1989 and SCBAL three months later] going so far as to serve notices of demand on the debtor companies and TBGL as guarantor followed by SCBAL serving a notice under s 364 of the Companies Code on BGF and TBGL on 7 December 1989, I think that at the least there was an evidentiary burden on the respondents to prove there was, in those circumstances, an alternative course, in practical terms, open to the directors.
    2814 And if the Banks did not consent, any scheme of arrangement would have been impossible, given the amount owed to them. The case was fought by the respondents on the basis that there was a viable alternative to liquidation which came to be described as a ‘valid and effective restructure’. But none of the bank officers who gave evidence was asked whether their bank would have been prepared to compromise its rights in any way. His Honour found that the respective directors believed that liquidation was the only alternative and that when they caused the companies to enter into the Transactions they were acting without conscious dishonesty. In my view, the contrast between the facts of the cases, reviewed above, where company directors were found to be in breach of their fiduciary duties, and the facts of this case is very marked indeed.
    2815 I appreciate that the question of breach of duty to act in good faith in the best interest of a company is largely one of fact. But I think it is worth referring to Richard Brady Franks Ltd v Price [1937] HCA 42; (1937) 58 CLR 112, a case, which despite the respondents’ vigorous submissions to the contrary, I regard as being very nearly on all fours to this matter. In that case the company was insolvent and some of the directors and their associates had made unsecured loans to it. One such person had guaranteed the company’s overdraft. In order to stave off demands for immediate repayment of those loans and to secure repayment of any moneys which might have had to be paid out by the guarantor, to obtain 12 months’ ‘breathing space’ (127) and to give the company an opportunity of weathering the Depression, the board resolved to secure repayment of the loans and the obligation to the guarantor by granting debentures to those persons, redeemable in 12 months’ time. At first instance, Long Innes CJ in Eq found that in those circumstances it would be impossible to find that the action of the directors was ‘not in any way in the interests, or for the benefit, or in any way for the purposes of the company’.
    2816 On appeal to the High Court, Latham CJ, at (136), said this:
    The company was in a difficult position. It was necessary to take some action to prevent creditors descending upon it with the not improbable result that the company would have been forced into liquidation. 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. In my opinion the finding of the learned judge upon this question is supported by evidence and should be upheld.
    A Bad Bargain?
    2817 His Honour found that the 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’. Central to his Honour’s conclusion on this point was his view that (see [4305] and [4309]) the security taken by the Banks was inappropriately comprehensive, stringent and all‑encompassing. He referred to this as ‘… the particularity of the Transactions and their terms’ [4306]. In particular his Honour was most concerned about the strictness of the cl 17.12 regime.
    2818 There are at least two problems with the judge’s conclusions on this matter. First, in my view, he was looking over the directors’ shoulders and applying a business judgment. The judgment was that the Transactions should not have been entered into on these terms because they favoured one class of creditors (the Banks) over the other unsecured creditors. The UK directors had bargained harder and won some concessions for their creditors. It was wrong, so the judge reasoned, for the Australian directors to put the Banks in such almost‑complete control over the business and assets of the Bell companies and it was wrong to put the Banks in a position of bargaining strength vis א vis the bondholders. The implicit suggestion is that there was a duty not only to consider the interests of the bondholders but also a duty to protect their interests. That is contrary to very high authority, including Spies v The Queen [2000] HCA 43; (2000) 201 CLR 603 which his Honour expressly acknowledged [4389]. See also Walker v Wimborne where the High Court held that directors in discharging their duty to an insolvent company must take into account the interests and its shareholders and its creditors. As Gummow J pointed out in Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (No 2) [1994] FCA 1117; (1994) 51 FCR 425, 444 the ‘restriction’ resulting from failure to take into account the interests of creditors, in the absence of such a right by statute, did not confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors. His Honour held that the duty was merely a restriction on the right of shareholders to ratify breaches of the duty owed to the company.
    2819 I think that it is important to keep in mind that the duty is to act bona fide in the best interests of the company and for a proper purpose. That duty does not change. As Mr Bathurst submitted (appeal ts 710), a transaction designed to deprive the company of funds that would otherwise be available to creditors would be a breach of the duty to act for a proper purpose. However, if the directors bona fide believe that a transaction is in the best interests of the company and will in fact improve its financial position and that is in fact their purpose, there will be no breach of fiduciary duty merely because the transaction will not enable all creditors to be dealt with pari passu or because there is a prospect of the directors being wrong and creditors suffering as a result. Those matters are dealt with by the insolvency statutes.
    2820 Secondly, the evidence clearly showed that the directors had bargained very hard with the Banks during the negotiation period between July 1989 and January 1990. Sometimes they were able to get better terms, but eventually the Banks dug their heels in and rebuffed the Bell requests, especially in the context of the cl 17.12 regime. Furthermore, it made very good commercial sense for the Banks to ring‑fence what was left of the Bell group assets given the pillaging carried out by the Bond group in the previous 18 months.
    2821 The commercial reality was that the Bell group owed their bankers about $260 million which they could not immediately pay. The Bell group was in no position to bargain with a view to retaining complete control of their business and assets. That option was no longer available.
    2822 So far as getting better terms was concerned, there was a very clear difference between the position of the UK Bell group companies and their ability to obtain some concessions to secure payment for their unsecured creditors and the position of the Australian Bell group companies. The UK Bell group companies [6676] were financial shells with no significant assets worth securing; the Bond group had bled them dry. The Australian Bell group companies had very substantial assets, in particular the publishing assets, which the Bond group had not yet managed to get their hands on. Those assets gave them a chance to trade out of their financial predicament. In my view it was the directors’ call whether to take that chance.
    2823 Strictly speaking, as the relevant tests focus on questions of honest belief and proper purpose, the business merits or otherwise of the Transactions are irrelevant other than to test credibility or to apply the test in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62. However, I propose to deal with one matter upon which the respondents (and indeed his Honour) relied quite heavily, namely the alleged prejudice which the relevant Transactions entered into by BGF worked on that company. The proposition was that BGF was not indebted or liable to the Lloyds Syndicate Banks before it entered into the Transactions. The respondents contended that by entering into the Transactions BGF assumed a liability, in the amount of £60 million, to the Lloyds Syndicate Banks that it did not previously have.
    2824 The question is, as his Honour stated at [2116] whether, immediately before 26 January 1990, BGF had a liability to the Lloyds Syndicate Banks in respect of their facility.
    2825 It may be useful to summarise the factual history, none of which is controversial. On 19 May 1986 BGF and TVW(UK) Ltd (which I shall refer to as ‘BGUK’) as borrowers entered into a loan agreement with those of the Banks which then comprised the Lloyds Syndicate Banks whereby those Banks agreed to make available to the borrowers a loan facility of £60 million.
    2826 Although BGUK and BGF were both parties to the 1986 Loan Agreement and were described in it as ‘the Borrowers’, only BGUK actually borrowed by drawing down moneys from the facility. It drew the full £60 million. BGF was entitled to draw funds down but did not do so.
    2827 On 27 August 1987 BGF and BGUK as ‘Borrowers’, TBGL as guarantor and the Banks who were then members of the Lloyds Syndicate Banks entered into LSA No 1. The purpose and effect of that document was to amend and restate the 1986 Loan Agreement and to make TBGL a party to that agreement as guarantor.
    2828 On 28 September 1987 BGUK received £60 million from BIIL. It passed those moneys over to Lloyds Merchant Bank Ltd (which was later replaced by Lloyds Bank) as agent for the Lloyds Syndicate Banks in satisfaction of the existing facility and immediately drew down the same sum £60 million under LSA No 1 and RLFA No 1.
    2829 The Loan Agreement and its restatement in LSA No 1, in their description of the parties, referred to BGF and BGUK as ‘the Borrowers’. In the definitions clause there appeared the following:
    ‘Borrower’ means either Finance [BGF] or TVW [BGUK] and ‘Borrowers’ means Finance and TVW.
    2830 Clause 6 of those documents provided as follows:
20. REPAYMENT
    The Borrowers will repay (subject as otherwise herein provided) the Loans in full at the close of business on the Repayment Date.
    2831 In the definitions clause there was also this definition:
    ‘loan’ means the principal amount of each Loan by [sic] the Borrowers hereunder or (as the context requires) the principal amount thereof from time to time outstanding.
    2832 His Honour describes the issue and sets out the respective arguments of the parties in section 10.8 of his reasons for judgment. It is not necessary to recite the content of that section. It is sufficient to say that the essence of the respondents’ argument was that BGF was not, as a matter of commercial fact, a borrower and that as a matter of the proper construction of the documents BGF was only a ‘Borrower’ if it actually borrowed. His Honour accepted the respondents’ arguments.
    2833 It seems clear that his Honour was strongly influenced in reaching that conclusion, see [2133] ‑ [2136], by what he thought was the application of s 58 of the Law of Property Act 1925 (UK), English law being the governing law of the documents in question. The relevant part of 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 …
    2834 His Honour construed s 58 (noting that it was in similar terms to s 16 of the Property Law Act 1969 (WA)) as permitting the use of documents that are supplemental to an original agreement as an aid to construing the original agreements, as his Honour put it, to ascertain the intention of the parties from the language they have used. He cited two authorities for that proposition, namely Plumrose Ltd v Real and Leasehold Estates Investment Society Ltd [1970] 1 WLR 52, 55 and PW & Co v Milton Gate Investments Ltd [2004] Ch 142, 179.
    2835 These two cases do not support the proposition advanced. They are to the reverse effect. The tail does not wag the dog.
    2836 Section 58 of the Law of Property Act was not expressly referred to in Plumrose. It can be taken to have been impliedly referred to in the last paragraph on page 55 of the report by the reference to what was common ground because of the use of the word ‘supplemental’. But it is quite clear that the section was used to construe the supplemental document, in that case the 1963 lease by reference to the 1957 lease which was incorporated into it. Foster J most definitely did not use s 58 to construe the earlier document.
    2837 Likewise, in PW & Co, where s 58 was expressly referred to, the subsequent document (in fact there were several such documents) was a licence which was described as being ‘supplemental to’ the earlier head lease. Thus, applying s 58, the provisions of cl 5(6) of the earlier head lease were treated as being set out in the subsequent licences. That assisted in determining the effect of the later documents.
    2838 In this matter the parties chose their own ‘dictionary’ and defined ‘Borrowers’ in a clear and unambiguous manner. In those circumstances, it does not matter if there could be arguments about whether the meaning attributed to the defined terms ‘Borrower’ and ‘Borrowers’ would fall within its ordinary English meaning; the parties are stuck with the meanings they chose: Re Sassoon; Inland Revenue Commissioners v Raphael [1932] Ch 858. In my opinion, the plain meaning of cl 6 when read with the definition of ‘Borrowers’ is that each of BGF and BGUK was jointly liable to pay the Lloyds Syndicate Banks regardless which of them had borrowed moneys. His Honour fell into error by construing the documents by reference to subsequent documents because he misunderstood the operation of s 58 of the Law of Property Act.
    2839 The evidence was that BGF’s accounts did not disclose this indebtedness as a contingent liability. As his Honour noted in [2142] that was irrelevant to the construction question. In the light of the view which I have taken in applying the relevant tests for breach of duty this whole question is simply a side issue.
    2840 It needs to be remembered that the Bell group survived for about 14 months after entering into the Transactions. There is a lot of evidence about the efforts made during that period to sell the publishing assets or form a joint venture to operate those assets. There were interested parties both in Australia and overseas [5231]. At one stage the English Mirror group entered into a ‘Conditional Letter of Intent’ to buy 50% of the issued shares of BPG [5280] for $175 million in cash plus $75 million assumption of debt and the provision of a credit facility to repurchase the convertible bonds at a discount [5293].
    2841 If one of these attempted part‑sales of or joint ventures in relation to the publishing assets had been completed, or the BRL Brewery transaction had come to fruition earlier than it eventually did, Aspinall’s judgment would have been vindicated. There was also the interest expressed in about June 1990 by the Chicago Tribune group and Stokes in purchasing Bell group convertible bonds and then exchanging them for shares in TBGL, see [5280]. With the benefit of hindsight, the Bell directors can be seen to have made the wrong call. But, in my opinion, that does not mean they breached any fiduciary duties; they were not disloyal to any of the companies which comprised the Bell group, each of which was dependent on the survival of that group.
    Failure to carry out investigations and failure to make plans
    2842 His Honour expressed the view that the directors had made the decision to enter into the Transactions with what he regarded as insufficient information and, because of that, they had failed to act bona fide in the best interests of the respective companies.
    2843 At [6033] he said this:
    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. …
    2844 I accept the appellants’ submission that a failure to investigate so as to ensure a corporate benefit is not a proper basis upon which to find an improper purpose or a lack of bona fides. (His Honour repeated this error at [6043]). It would be, however, a relevant factor (but even then not decisive) when considering the question whether the directors had exercised reasonable care in carrying out their duties. But that was not the issue in this case. In terms of fiduciary duties, there is also the legal error of imposing a positive prescriptive duty to carry out ‘the necessary investigations’.
    2845 And at [6040] his Honour added:
    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.
    2846 The judge had reached a similar conclusion at [5605] in these terms:
    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. …
    2847 Similarly, in my opinion, his Honour erred in law in finding that the Australian directors had breached their fiduciary duties because they had failed to investigate and arm themselves with, what the judge considered to be, sufficient objective information on which they could be satisfied that it was in the interests of the Bell group to enter into the Transactions. If they had failed to get that information, that was not a matter of disloyalty to the companies of which they were directors. His Honour, correctly in my view, discerned that loyalty is the foundation of fiduciary duties: see Bristol & West Building Society v Mothew (18), a passage from which I have set out above. Shortly after that passage, on the same page, Millett LJ said:
    Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty.
    2848 Failure to investigate and obtain information is not, on the authorities to date, to be equated with bad faith; instead it sounds in negligence. It would be otherwise if there were a finding that the directors had no information before them on which a reasonable director could conclude that the Transactions were in the company’s best interests. His Honour did not make such a finding.
    2849 At first instance, none of the plaintiffs pleaded that the Bell directors, by causing the relevant companies to enter into the Transactions, breached their equitable duties of care and diligence or that such duties were fiduciary. Nor did they seek to raise such allegations in the cross-appeals or notices of contention.
    2850 At [6064] his Honour went so far as to hold that, in relation to each company in the Bell group, the directors were obliged, in the course of taking into account the interests of its creditors, to trace the effect of the Transactions on:
    … indirect creditors, that is, creditors of debtor companies and debtors of creditor companies within the group … 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.
    2851 With due respect to the trial judge, I find it very hard to distinguish this asserted obligation from conduct which assesses the interests of the Bell companies as a group, which of course is what the directors did. I pause here to point out that so far as trade creditors were concerned, his Honour said that he had no difficulty accepting Aspinall’s evidence that they would be paid [5006]. His Honour also accepted Aspinall’s evidence that he believed the bonds and the on‑loans were subordinated, [5060], and found that they were. Putting BGNV to one side for the moment, the only companies relevant to the bondholders were TBGL and BGF. In terms of commercially significant external debts, that left only the Commissioner of Taxation whose assessments had been under objection and then appeal for many years. If the appeals were successful the Commissioner would cease to be a creditor. The Bell group had advice that the appeals would succeed, see [2064] and [2065] of his Honour’s reasons. The advice was qualified on the basis that RHאC would give evidence and be believed. There had never been any provision made for these assessments in the Bell group consolidated accounts; only a note referring to the directors being confident that the objections would be successful. The case was fought below, and had to be so fought given his Honour’s ruling on the relevant pleadings, on the basis that there were only three creditors external to the Bell group who needed to be taken into account; the Commissioner of Taxation and the two other creditors identified by his Honour at [2096 (d) and (e)].
    2852 Although from time to time the amounts owing to the bondholders are referred to in his Honour’s reasons and various submissions as totalling about $585 million, I think that it is important, when assessing the Bell directors’ conduct, to appreciate that the market did not value the bonds at anywhere near that amount. The evidence was that the bonds were selling at 20% of their face value in January 1990 i.e. a total of about $117 million [SECL.08.0041, page 2] and the Bell directors were aware of that fact. To regard the indebtedness to the bondholders as debts of full face value at that time would not have been commercially (or, in my view, legally) realistic.
    2853 I accept the appellants’ submission that his Honour’s observations about the effect of the Transactions on the non‑debtor (to the Banks) companies ignored the fact that they were equally subject to have their assets used in a liquidation as were the companies which were already indebted. The only difference would be that the money would flow to the holding companies and hence to the creditors (relevantly the Banks) by virtue of an intermediate return of capital as distinct from a direct repayment of debt. The end result would have been precisely the same (appeal ts 433). The only qualification to the foregoing analysis might have been where a subsidiary company owed a debt to the Commissioner of Taxation. There were only three such subsidiaries. There were no other significant external creditors. To the extent that the tax appeal of that subsidiary was unsuccessful, moneys might have flowed to the Commissioner of Taxation. I say ‘might’ because from my reading of the evidence it was not immediately apparent that, at the time of entering into the Transactions, any of those companies was in a position to pay the amount for which it was assessed without calling up Bell inter‑company loans and probably triggering liquidations of their debtor companies. In any event, the evidence was that the Bell directors honestly believed (and his Honour did not find to the contrary) that the tax appeals would be successful. See, for example, the notes to the TBGL accounts as at 30 June 1989, Simpson’s letter dated 30 August 1989 to Evans at Lloyds Bank and Oates’ letter to the same person earlier that month [5160].
    2854 At [5161] his Honour, having referred to Aspinall’s evidence of his awareness of the tax disputes and the two letters just referred to, (each copied to Aspinall) in which confidence was expressed that the tax disputes would be resolved in favour of the Bell companies, said:
    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.
    2855 I would make two points. First, it was for the respondents to prove that the directors did not take the tax claims into account, not for the appellants to prove that they did. Secondly, the evidence was that the tax disputes were being managed by Pepper, the Bell group tax expert (aided by C&L) and external solicitors and senior counsel. At their level in the scheme of things, the Bell directors could not, in my view, be expected, as a matter of fiduciary duty, to be familiar with matters of technical detail. There was plenty of evidence that they took the tax claims into account. Apart from the evidence to which I have referred immediately above, there was the directors’ statement in the annual accounts for the Bell companies concerned as at 30 June 1989 (signed by them in November 1989) to the effect that they were confident that the objections to income tax assessments would be successful.
    2856 It cannot, in my opinion, be the law that the Bell directors, having such beliefs in relation to the tax assessments, would be in breach of fiduciary duties unless they declined to enter into the Transactions. Transactions which they regarded as being in the best interests of the Bell companies because they provided an alternative to immediate liquidations and losses of asset values to the detriment of all concerned including the creditors. I think that it is helpful to stress that this was not a case of giving security simply and merely to avoid liquidation of the Bell group; it was to avoid those liquidations and the consequent very substantial losses of asset values discussed above. The Bell directors’ decision cannot, in my view, be characterised as irrational in the Charterbridge sense.
    2857 As to the matter of failure to have a ‘plan’, his Honour reasoned as follows:
    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 …
    …
    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.
    2858 With due respect to his Honour, there is nothing in the authorities which requires company directors to have identifiable plans as part of their fiduciary duties. In any case, at [5364] he described what Aspinall had in mind as ‘… really a consistent strategy, rather than an identifiable plan’. I can see no difference between a consistent strategy and a plan. Planning, and the degree, nature and extent of such planning as company directors might decide to make are, in my opinion, matters for their business judgment. All that they are required to do, as fiduciaries, is to make decisions which they believe, bona fide, are in the interests of the company. There is no superimposed requirement that their conduct involve reasonableness or taking reasonable care. Furthermore, as his Honour recognised, fiduciary duties are proscriptive in nature not prescriptive.
    2859 In my opinion, his Honour erred in law when he concluded that the directors breached their fiduciary duties by (a) not carrying out what he regarded as necessary investigations, and (b) not having worked out a plan to deal with the longer term problems of the companies.
    2860 In my view, those are quite clearly prescriptive and positive steps which his Honour required of the directors. Imposition of prescribed steps is contrary to the statements of principle in Breen (113, 137 ‑ 138) and Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165, for example at 214 (Kirby J). See also P & V Industries Pty Ltd v Porto [2006] VSC 131; (2006) 14 VR 1; Gibson Motorsport Merchandise Pty Ltd v Forbes [2006] FCAFC 44; (2006) 149 FCR 569; Wilden Pty Ltd v Green [2009] WASCA 38; (2009) 38 WAR 429; and Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 191 FCR 1, 20.
    2861 It is, I think, useful to set out what Gummow J said in Breen at 137 ‑ 138:
    … 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.
    2862 Furthermore, despite an acknowledgement that the need to take the interests of creditors ‘into account’ did not entail treating creditors pari passu [6080] (see above), his Honour still seemed to prescribe pari passu treatment as the standard that the directors should have observed, for example at [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.
    2863 In my opinion, the evidence shows, and his Honour so found, that all the directors took the view that if the securities were not granted by each company then all the Bell group companies, whether currently indebted to the Banks or not, would be wound up and their assets sold by the liquidators at very substantial losses in real asset values including, in my opinion, a most important factor, the abandonment of the prospect of appreciation in value of the BRL shares. The evidence of Hewson and Hill (directors of BRL) was that at the relevant times they thought (see appeal ts 836 ‑ 837) that the Brewery transaction would be completed and BRL’s financial problems would be resolved. They were proved to be correct in their assessment and the Bell group’s BRL shares were eventually sold for $60 million a few months after the group went into liquidation.
    2864 His Honour held that by causing companies which did not have a pre‑existing indebtedness to the Banks to undertake such an obligation the directors placed those companies’ assets in jeopardy in the interests of borrowers and guarantors that were themselves insolvent, nearly insolvent or of doubtful insolvency. The companies would themselves, if not already insolvent, inevitably become so. That, so his Honour held, constituted an improper purpose for which the directors had exercised their powers.
    2865 With due respect to his Honour, that is not a description of an improper purpose. It is a description of what the directors did, akin to a statement in any of the takeover cases to the effect that the directors have issued new shares. The question is what was the purpose of the conduct? Furthermore, in my view, the facts as found by the trial judge do not justify these conclusions.
    2866 In my opinion, Owen J fell into three further basic errors of law in deciding that the Bell directors breached their duties to act bona fide in the interests of each Bell company and not to act for an improper purpose.
    2867 First, there is now a very respectable line of authority that, depending on the circumstances, it is not necessarily a breach of duty to concentrate on the interests of a group of companies. Secondly, his Honour did not apply the test in Charterbridge. Thirdly, in relation to improper purpose, the learned judge should have applied what may be described, albeit colloquially, as the ‘but for’ test: Mills v Mills (185).
    The ‘Group’ Approach – Whether the interests of a corporate group may be relevant to each member of that group
    2868 His Honour found [6039], rightly in my view, that the Australian directors concentrated on the interests of the Bell group. In the same sentence as that finding he adds ‘… and failed to look at the interests of individual companies’. I put the second finding (which I think must be consequent upon and dependent upon the first finding) to one side for the moment.
    2869 There are several cases in which this sort of problem has been considered. Although it is not part of the ratio decidendi in Northside Developments Pty Ltd v Registrar‑General [1990] HCA 32; (1990) 170 CLR 146, 183 Brennan J said this:
    For example, it may be for the benefit of solvent companies within a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group.
    2870 In Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, 146 ‑ 147 a majority of the New South Wales Court of Appeal, after referring to the above passage observed:
    It may be accepted, therefore, that actions carried out for the benefit of the group as a whole may, in particular circumstances, be regarded as benefiting as well one or more companies in the group. This may occur even where, for instance, a company is providing a guarantee for its holding company or another company in the group. Similarly a transaction carried out for the benefit of one of the companies in the group, company A, may be seen to be for the benefit of another company in the group, company B.
    2871 Again, in Maronis Holdings Ltd v Nippon Credit Australia Ltd [2001] NSWSC 448; (2001) 38 ACSR 404 [185], Bryson J having considered Charterbridge and the views about that case expressed, obiter, by the majority in Equiticorp said:
    … If directors take a company into a transaction in the interests of a group of which it was part, or of a parent company, or of a subsidiary company, and what they did was, objectively viewed, in the interests of the company, they incurred no liability.
    2872 In Neat Domestic Trading Pty Ltd v AWB Ltd [2003] HCA 35 [47]; (2003) 216 CLR 277, McHugh, Hayne and Callinan JJ observed:
    … The central duty of the board of AWBI was to observe its constitution and to pursue the interests of the company as expressed in that document. As a wholly owned subsidiary of AWB those duties would, no doubt, have required the board of AWBI to pursue the interests of its parent (and thus, its parent’s shareholders) to the extent that those interests were compatible with other obligations of AWBI. In fact the interests of the two companies coincided.
    2873 In Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2004] NSWSC 608 [124] ‑ [126]; (2004) 208 ALR 385, Palmer J accepted that a transaction which promised a direct benefit for one company in a group of companies (in that case a group of family companies but the principle is the same) also provided an indirect benefit for another. The Court of Appeal endorsed that view: Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243 [148] ‑ [149]; (2005) 219 ALR 555.
    2874 The following observations in Groups of Companies edited by C M Schmitthoff and F Wooldridge (1991), London, Sweet & Maxwell at 59-60 are, in my opinion, apposite to the present matter and were cited with approval by Kirby P in Equiticorp (98):
    Undoubtedly, it will often be the case that the interests of a company, which is a part of a group, will be so inextricably bound up with the welfare of the group, that what is in the interests of the group is in the interests of the company. This will almost invariably be the case with respect to a parent as regards its subsidiary. A subsidiary may not have the same compelling interest in preserving the other members of a group, but where a subsidiary is threatened by the failure of one of the members of a group then it will have an interest in preserving it.
    2875 It may be time for the courts to give greater recognition to the fact that corporate groups are a commercial commonplace. The traditional approach of focusing on the particular company in a group as contrasted with the group as a whole seems to be based, at least in part, on the proposition that creditors extend credit on an assessment of whether that individual company in a group will pay its debts as and when they fall due, rather than an overall assessment of the credit‑worthiness of the group as a whole. The validity of that proposition may well depend on the particular facts of the corporate group concerned. In this matter there was nothing to suggest that the Bell group was considered by its creditors as anything other than a corporate group.
    2876 So far as the conduct of the Bell directors was concerned, they can be seen, on the evidence, to have regarded the interests of the numerous subsidiaries in the Bell group and the interests of the Bell group itself as being one and the same.
    2877 Even his Honour, when it came to judging the Bell directors, did not do so on a company‑by‑company basis. In my opinion, it would have been most unreasonable to expect him to do so, given the number of Bell Participants in the Transactions. But I think that, assuming the interests of the individual Bell companies should have been considered separately, there is some merit in the appellants’ submission (appeal ts 361) that his Honour should have separately assessed the Bell directors’ alleged breaches of duty in relation to the two main parent companies, TBGL and BGF who were directly liable for the bank debts. His failure to do so, in my view, simply highlights the commercial unreality in this case of requiring the interests of each company to be considered on an individual company‑by‑company basis.
    2878 The evidence in the present case is that there were 70 companies in the Bell group which took part in the Transactions. Despite that number, it would not have been difficult to assess the position of the group and its constituent companies simultaneously. The operating businesses of the group (both in Australia and overseas) had all been sold off save for one. The only operational business within the Bell group was the publishing business. The BRL shares were worthless but had the potential to become quite valuable if the Brewery transaction came to fruition. These constituted, essentially, ‘the affairs of the group’. They were the only assets worth securing and were owned by a relatively small number of Bell companies. The Australian directors (there were only three of them) knew this very well. It simply cannot be the law that in those circumstances, contrary to commercial reality, they were obliged solemnly to sit down and work their way through the balance sheets of some 70 subsidiaries nearly all of whom were basically shells. From the Banks’ viewpoint, due to the very complex interlocking of shareholding, the intra‑group indebtedness and the rapacious track record of the Bond group, it was impractical to quarantine that small number of asset‑holding companies from the rest of the Bell group or the Bond group without taking a group approach to the obtaining of security.
    2879 Given his Honour’s own findings about the choices facing the Australian directors, (namely immediate liquidation of the whole Bell group and very substantial asset value losses, the Transactions, or some hypothetical scheme of arrangement, or provisional liquidation) they should not have been held to have breached their fiduciary duties by deciding to consider simultaneously the interests of each member of the Bell group and the Bell group itself. The commercial circumstances were such that, in my view, they were clearly entitled to make that choice and thereby give all of the companies a reasonable chance of survival. As the trial judge found, correctly in my respectful opinion, the bondholders’ interests, including the on‑loans, were subordinated. The tax assessments were under challenge in the Federal Court. If that court accepted RHאC’s evidence that the relevant shares had not been purchased with the purpose of re-sale at a profit (as Commissioner von Doussa had accepted in his separate enquiry) then those assessments would have been set aside. The remaining amounts owing to external creditors by members of the Bell group were, relatively, minimal and his Honour found it likely that all trade creditors would have been paid in any event.
    2880 Counsel for the appellants and for the respondents took us through very detailed and comprehensive charts which showed the inter‑company shareholding, structure and indebtedness of the Bell group of companies. Among other things those charts showed, in my opinion, that it was impossible or at the very least totally unrealistic commercially to isolate the interests of one company in the group from another. In my view the Bell directors did not breach any fiduciary duties when they decided that if the Bell companies did not enter into the Transactions each company would go into liquidation and there would be very substantial asset value losses.
    The Charterbridge Test
    2881 In Charterbridge Pennycuick J considered, admittedly not as part of the ratio decidendi in that case, what a court should do if it found that directors of a group of companies looked to the benefit of the group as a whole and did not give separate consideration to the benefit of the relevant individual corporate member of that group. His Lordship, at (74), said this:
    Each company in the group is a separate legal entity and the directors of a particular company are not entitled to sacrifice the interest of that company. This becomes apparent when one considers the case where the particular company has separate creditors. The proper test, I think, in the absence of actual separate consideration, must be 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 transaction was for the benefit of the company.
    2882 Owen J reviewed the then current (and so far as I am aware still current) status of Australian authority on the applicability of Pennycuick J’s approach, but he did not state whether or not he was going to apply it. It is useful to revisit the cases.
    2883 In Reid Murray Holdings Ltd (in liq) v David Murray Holdings Pty Ltd (1972) 5 SASR 386, Mitchell J had to decide whether the directors of a subsidiary company had breached their duty to act in the best interests of that company when they (retrospectively) authorised it to execute a deed of guarantee. The deed guaranteed the present and future indebtedness to the plaintiff company (the holding company of the Reid Murray group) of a number of companies in the group. Her Honour found that two of the directors believed that it was in the interests of the company to execute the deed (to avoid a qualification from the auditors of the plaintiff), one had no belief whatsoever and she was unable to say what was the belief of the other directors. In those circumstances her Honour applied the Charterbridge test (referring to it with approval twice) and at (402) said:
    I do not believe that the directors could have had a belief that the transaction as it was set forth in the guarantee was for the benefit of David Murray had they applied their minds to the whole of the circumstances.
    2884 Her Honour then severed those portions of the deed other than those which guaranteed the moneys already advanced at the time of its execution. (This was easily done as there were separate schedules to the deed.) In doing this Dame Roma, as she later became, applied Charterbridge (at 404):
    Had the guarantee been limited to a guarantee of past indebtedness by the companies concerned then it seems to me that an intelligent and honest man in the position of a director of David Murray could reasonably have believed that the giving of the guarantee was for the benefit of David Murray.
    2885 I have dealt with this case in some detail because in Maronis [187] Bryson J distinguished Charterbridge and declined to apply Pennycuick J’s test, on the basis that his Lordship was dealing in that case with an ultra vires issue not one of whether the directors were in breach of duty. He also rejected Reid Murray as authority on the issue by saying ‘Reid Murray Holdings is an ultra vires case’.
    2886 With respect to Bryson J, I disagree with his characterisation of each of those two cases. Pennycuick J’s proposed test was obiter dicta because he had disposed of the ultra vires claim. In my opinion, when he turned to the alternative contention he was considering the matter of the appropriate test for directors’ breach of duty where they have not separately considered the interests of the relevant company. Bryson J also declined to follow some further obiter dicta from Giles JA in Linton v Telnet Pty Ltd [1999] NSWCA 33; (1999) 30 ACSR 465, 472 where his Honour said this:
    In the circumstances, where the Charterbridge test has been applied many times (eg, 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), and Telnet did not seek to depart from its approach but adopted it, I consider that the present case should be decided by the application of the Charterbridge test.
    2887 Bryson J revisited the question in Challenge Foundation of New South Wales Ltd v Windgap Foundation Ltd [2002] NSWSC 313. After saying that Charterbridge had been ‘unfortunately but repeatedly cited in this context’ (breach of directors’ duties) his Honour observed [14]:
    In my opinion the objective test – how would an intelligent and honest man have acted? – has a place in cases where breach of the fiduciary duty of directors in exercise of powers is alleged only because establishing that an intelligent and honest man could not have reached the conclusion which the directors reached is a means of proof that they were not (because they could not have been) honestly acting in exercise of their powers in the interests of the company; it is a means of demonstrating that the directors could not have had the relevant state of mind.
    2888 [In all fairness to Bryson J, the issue may be one of mere semantics; the legacy question of what was meant by ‘ultra vires’.]
    2889 In Spedley Securities Ltd (in liq) v Greater Pacific Investments (1992) 30 NSWLR 185, Cole J accepted and applied the Charterbridge test, possibly as a primary test rather than a test in default of actual individual company consideration. In Equiticorp (97 ‑ 100), Kirby P (in dissent) appeared to disagree with Giles J’s application of that test on the facts of that case. I say ‘appeared to’ because his Honour used the expression ‘… intelligent and honest person in the position of a director’ on several occasions and disagreed with Giles J’s conclusions on six aspects of the test. Kirby P also relied quite heavily on Walker v Wimborne which he saw as authority requiring, in a situation of vulnerable liquidity, ‘… that group approaches give way to the duties severally owed by the directors to the separate and independent legal entities to which they are appointed’. Subsequently, the High Court has suggested that Mason J’s comments in Walker v Wimborne may have been misunderstood – see Spies v The Queen (635 ‑ 636); and New World Alliance.
    2890 The majority in Equiticorp (Clarke and Cripps JJA) noted that all parties in the appeal had submitted that the Charterbridge test should be applied. Their Honours did so, but not without expressing a reservation about introducing an objective test. They suggested, obiter, that (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.
    2891 Their Honours concluded their remarks by stating that the approach adopted by the parties both at first instance and on appeal required the Charterbridge test to be applied and absolved the court from further consideration of ‘… this tantalising question’.
    2892 In Farrow Finance (581), Hansen J expressed the view that the reservation which the majority felt in Equiticorp was because the Charterbridge test might involve the substitution of an objective test for the traditional subjective test. I respectfully agree with Hansen J’s assessment – it was a reservation that the Charterbridge test might make commercial life unduly more onerous for directors. But his Honour applied Charterbridge because there was no evidence of the directors’ thought processes, saying:
    I have no evidence before me which would indicate that Farrow or the other directors honestly thought at any time that the making of the loan was in the best interests of FFC. Consequently, whether or not the transaction was in breach of Farrow’s (or any directors) fiduciary duty to act in the best interests of FFC is to be answered by applying the Charterbridge test.
    2893 It is quite clear from a passage, at (584), that Hansen J applied that test by requiring the plaintiff not only to prove that the directors failed to consider the interests of FFC but also that an intelligent and honest director in their position would have concluded in the face of all the relevant facts and circumstances, that the loan was not in the best interests of that company. See also Linter.
    2894 As I have mentioned above, Owen J reviewed all of those authorities. However, his Honour did not express any conclusion as to whether or not he would apply the Charterbridge test. The nearest he got was in [4618] and, possibly [4619(8)]. In my respectful opinion he should have reached and expressed a view as to whether or not he was going to apply the test.
    2895 Despite this, it seems clear enough that he did not apply the test. As the appellants submitted, in particular 39A(c) of the respondents’ particulars they pleaded that ‘no honest and intelligent director could have reasonably formed the view that the Transactions and the Scheme were in the best interests of that company as a whole’. At [4357] his Honour, in describing what he called ‘[t]he gist of the allegation that the directors failed to act in the interests of the companies’, set out a list of the particulars in particular 39A including sub‑particular (c) in which he included the words which I have italicised. In [6110] Owen J set out his findings on ‘some of the core allegations’ which in his view had been made out, by repeating, almost verbatim, particular 39A(c). But at [6110.3] he did not include the words italicised above. The only relevant finding was that the directors did not hold a genuine belief that the Transactions and the Scheme were in the best interests of the relevant company as a whole. In my opinion, having found at [6039] that the Australian directors had failed to look at the interests of individual companies, his Honour was required, as a matter of law, to consider whether the decisions to cause the Australian companies to enter into the Transactions were such that an intelligent and honest director could have reasonably believed, in the whole of the existing circumstances, that the Transactions were in the best interests of that company.
    2896 I think that, for the reason given by Pennycuick J in Charterbridge, in cases where there is no evidence that the directors in a group gave consideration to the interests of an individual company in a group (or a finding that they did not do so), the Charterbridge test should be applied. Otherwise, decisions which were in the interests of the individual company would be set aside. Furthermore, notwithstanding Bryson J’s assessments, the weight of authority in Australia is that Charterbridge should be followed. It is true that there is no High Court authority on the matter, but until that changes, there is sufficient judicial acceptance throughout Australia, in my view, for its application.
    2897 The Charterbridge test fits comfortably with the underlying settled law relating to the relevant breaches of directors’ fiduciary duties. Courts do not sit on appeal from directors’ decisions if honestly made in the interests of a company. Assertions of honest consideration and belief can be tested by reference to objective circumstances for the purposes of making a finding of fact about whether such evidence is to be believed. If the facts are found against the directors, then the transactions are voidable. If they are believed, then the transactions stand. So much is quite clear on the authorities.
    2898 But if there is no evidence of what consideration the directors may have given to the interests of the company (recognised in the cases as not being likely to happen very often) there needs to be a rule. In my opinion the Charterbridge rule has great utility and is consistent with high and well‑established authority. It does not involve a court looking over the shoulders of the directors, second‑guessing and substituting its own opinion for theirs in a commercial environment where there is room for intelligent and honest persons to differ. It is an objective test, but only in default of any actual consideration by the directors. And it has a great deal of leeway which is also consistent with binding company law authority concerning directors who act honestly. As Brennan J observed in Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459, 469 ‑ 470:
    … in 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. (footnotes omitted)
    2899 The test is analogous to the rule concerning judicial review of administrative action where administrative decisions are alleged to have been made unreasonably. Mere unreasonableness is not enough. There is something comforting and rational in a consistent approach to judicial review of the decisions of public administrators and those of company directors where each have to exercise discretions. Their functions and the often disparate interests which they serve, are sufficiently comparable for the application of a similar rule. Each body of law recognises the very significant difference between decision‑making which is unreasonable and decision‑making which is so unreasonable that no intelligent and honest person would engage in it. It might be useful in these days of statutory judicial review to remember that Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 involved a corporation, albeit a municipal one.
    2900 As Owen J did not apply the Charterbridge test it falls to us to do so on the facts which he found, or were common ground between the parties, or should have found. I do not take issue with his Honour’s findings of fact other than those which I have identified above.
    2901 In summary, on the facts found by the judge, the Australian directors were faced, (after more than six months of hard negotiations with their bankers and service by two of the banks of notices of demand and a winding‑up notice), with the choice of granting the securities or allowing the Bell group to be wound up in insolvency, with the likelihood of a fire-sale of the publishing assets (involving a loss of value of at least $100 million and possibly as much as $200 million) and no prospect of restoring any value to the BRL shares.
    2902 The Transactions provided the opportunity to continue in business and allowed some time in which to achieve a restructure of the Bell group. In my opinion, for the reasons which I have expressed in the pages above, it cannot be said that the decisions to enter the Transactions were such that no intelligent and honest director could have made them in the interests of each company in that group.
    Mitchell and Oates
    2903 Mitchell, called by the Banks, gave evidence but Oates did not. His Honour found that they both breached their duties to act bona fide in the interests of the relevant companies and not to act for an improper purpose. The basis upon which the judge found the first of those breaches was (subject to all the allegations of Bond‑centricity dealt with below) essentially the same as applied to Aspinall: see [6110]. For the reasons which I have set out above, I consider that the judge erred in law in his conclusions in that regard.
    2904 At [5475] his Honour listed some 17 matters, which he described as being ‘important, even critical to TBGL and the Bell group, throughout late 1989 and into 1990’ about which Mitchell said he had no knowledge. In fairness to Mitchell, at least four of these matters were failures of recollection. At [5476] his Honour said:
    A consistent theme of [Mitchell’s] evidence was that these matters were not within his executive responsibility. … 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.
    2905 His Honour’s conclusion might well be justified if the breach of duty alleged were a duty of care. Mitchell was never an executive of any Bell company; he was entitled, within reason, to rely on the information which he was given, particularly by Aspinall. Mitchell knew about the essentials i.e. the indebtedness to the Banks, the subordinated bondholders, the ATO appeals, the publishing assets and the brewery deal. Mitchell’s sins (if they be sins) are very similar to those discussed in Daniels v Anderson (1995) 37 NSWLR 438 and Australian Securities and Investments Commission v Healey [2011] FCA 717; (2011) 196 FCR 291, both of which were, of course, cases which concerned negligence on the part of non‑executive directors.
    2906 The second last of the 17 matters referred to above was:
    • There was no evidence that he considered the best interests of the individual companies within the Bell group.
    2907 That is simply wrong. There was such evidence. The first pieces of such evidence are referred to in [5433] and [5436] of his Honour’s reasons which I set out below. See also his Honour’s further reference, at [5469], to Mitchell’s evidence on this matter. It is helpful also to refer to what his Honour said at [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.’
    2908 It is, of course, important to examine precisely the evidence given by Mitchell about his beliefs concerning the benefits to the Australian Bell companies in entering into the Transactions and the extent to which (and the precise basis upon which) his Honour accepted or rejected that evidence. It is also necessary to bear in mind his Honour’s findings in favour of all of the Bell directors (about honesty, lack of conflict of interest and the like) some of which I have set out above, particularly at [2737]. In relation to Mitchell (and probably in relation to most if not all of the witnesses who were cross‑examined) it was his Honour’s habit to state in clear terms when he rejected any evidence: see, for example, at [5426] ‘I do not accept this evidence’ (which was evidence relating to certain restructuring plans), and [5431] ‘I do not accept that’ (Mitchell’s evidence that he did not recall that BCHL was in a mood of ‘crisis and desperation’ between July 1989 and January 1990).
    2909 His Honour, by contrast, set out the following extracts from Mitchell’s evidence without rejecting their contents:
    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.
    2910 I think that it is important to note that neither Aspinall nor Mitchell was cross‑examined to the effect that they did not hold the beliefs which they swore they had held. With the exception of what his Honour said at [6090] and [6091], which I set out below at [2944], he did not reject Mitchell’s evidence as to his beliefs. That exception, although worded as an example, was confined to Mitchell’s beliefs about the solvency of the group.
    2911 The judge’s reliance on Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 in relation to Oates was misplaced, in my view. It was based on his assessment that it was the Banks rather than the respondents who would be expected to call Oates (see Glass JA in Payne v Parker [1976] 1 NSWLR 191, 201 ‑ 202). His Honour’s reasoning on the point was very short [5478]:
    As the banks were able to call Aspinall, Mitchell and Studdy I assume they could have adduced evidence from Oates.
    2912 But the plaintiffs had called one of the directors, Whitechurch, against whom they had made allegations of breach of fiduciary duty. The liquidators had the opportunity of compulsorily examining Oates but did not do so. They had discontinued that part of the proceedings by which they were suing Oates and the other directors.
    2913 I do not overlook the fact that the Banks had filed a witness statement given by Oates and that their counsel had said on three occasions that the Banks would call Oates. However, in my view, the situation was such that it could not be said that Oates was ‘in the camp’ of either of the sets of parties. I think it was equally to be expected that either the appellants or the respondents would call Oates.
    2914 Furthermore, if my view is wrong, the Jones v Dunkel rule was not correctly applied by his Honour. The rule enables an inference from matters in evidence to be more confidently drawn. As Fullagar J pointed out in Department of Health v Arumugam [1988] VR 319, 330:
    If all that is proved, by inference or otherwise, in the absence of explanation, is less than all the elements of proof required for the complaint to succeed, neither a total absence of explanation nor a non‑acceptance of an explanation can by itself provide an element of proof required. It can enable already available inferences to be drawn against dishonest explainers with greater certainty, but that is all.
    2915 The evidence concerning Oates upon which his Honour relied was only this [5485], [5486]:
    • that Oates must have had an appreciation of the cash flow and general financial problems of the group;
    • Oates’ senior executive position within the BCHL group, and in particular his membership of the ‘inner cabal’;
    • 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.
    2916 In my view, given the seriousness of an allegation that a director has breached fiduciary duties (Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336) and given the respondents’ disavowal of a case based on conscious dishonesty and given, further, that there was no evidence from Oates, the above evidence was too sparse upon which to found an inference that Oates breached his fiduciary duties.
    A pleading point
    2917 The Banks contended that on the pleadings the respondents had made two very relevant admissions in this area which his Honour had neglected and not referred to in his reasons. That submission stems from some of the particulars of par 48A(c) of the defence which, relevantly, was in the following terms:
    48A. … insofar as the Directors caused the companies … to enter into each transaction which those companies entered into …
    (c) in entering into those transactions they formed the view that in so doing:
    (i) they were acting in the best interests of those companies as a whole;
    (ii) the transactions were of real and substantial benefit to such companies;
    (iii) they were providing such companies with the opportunity to carry on business in the expectation that such companies would be able to continue to carry on business.
    2918 This was followed by seven pages of particulars, most but not all of which commence with the words ‘the Directors believed …’. Particular (j) read as follows:
    The Directors also believed that it was possible to restructure the financial position of the Bell Group so that the companies in the Bell Group could meet their obligations as and when they fell due.
    2919 The appellants submitted that the respondents, in their reply:
    • admitted particular (j);
    • admitted that an honest and intelligent director would have held the belief referred to in that particular; but
    • ‘otherwise denied’ par 48A.
    2920 For present purposes I shall assume, without deciding, that as a matter of pleading, it is permissible to deny a paragraph of an opponent’s pleading but to admit the particulars. The respondents say that by so doing their admission was that the directors believed that it was possible to restructure the financial position of the Bell group so that the companies in that group could meet their obligations as and when they fell due. They say that that was not an admission that they did so ‘in entering into the Transactions’.
    2921 I do not think that there is much benefit to be obtained by dwelling on this point. But in case it is important I will express this view. I think that the appellants are right and that there was an admission that the directors, when they entered into the Transactions, had the belief pleaded in particular (j). The belief was not something standing on its own. The only relevant context for the belief was entering into the Transactions. Technically, a strict reading of par 122(f) of the reply would be that the respondents also admitted that an honest and intelligent director would have held the belief particularised.
    2922 His Honour made no reference to these admissions in his reasons although in their closing written submissions the Banks had referred to them, among several other admissions, as being significant and collectively fatal to the respondents’ claim [SUBD.009.001, pars 282 ‑ 283]. Obviously they were very significant admissions going to the root of the respondents’ case on alleged breach of directors’ duties. Not only do they go to the root of that case but if I am right in my rejection of the respondents’ ability to rely on their hypothetical ‘valid and effective restructures’ alternatives, they totally destroy their case. But, it is not necessary to rely on this pleading point. His Honour’s findings of fact suffice.
    Mitchell and Oates, improper purpose and the ‘but for’ test
    2923 The authorities show that, as is the case with the duty to act bona fide in the interest of the company, the test for whether directors have acted for an improper purpose is primarily subjective. But if directors act in good faith for a purpose which is beyond their powers or is for a collateral purpose their decision will be invalid in the sense of being voidable. See, for example, these well‑known passages from the speech of Lord Wilberforce, giving the Privy Council’s advice in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 832 and 835; [1974] 1 NSWLR 68, 74 and 77 ‑ 78:
    Their Lordships accept that such a matter as the raising of finance is one of management, within the responsibility of the directors: they accept that it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management’s decision, on such a question, if bona fide arrived at. 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.
    But accepting all of this, when a dispute arises whether directors of a company made a particular decision for one purpose or for another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships’ opinion, 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.
    …
    Having ascertained, on a fair view, the nature of this power, and having defined 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 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 …
    2924 The decided cases show that the first step in determining whether a board of directors has acted for an improper purpose in exercising their power is to identify, as a matter of law, the purposes for which the power may be used. The cases also show that a distinction is drawn between powers the exercise of which is part of general management of a company (into which category the powers exercised by the directors in this case clearly fall, in my opinion) in relation to which the courts traditionally take a broad view, and those powers which are non‑managerial in nature: Mills v Mills (185 ‑ 186) (Dixon J), approved by the Privy Council in Howard Smith Ltd.
    2925 Owen J examined the nature and scope of the powers which had been exercised in relation to the Transactions in sect 20.4.2 of his reasons. He did so in respect of TBGL, BGF, BPG, BGUK and BGNV in some detail, they being the main corporate plaintiffs. He also referred, by way of examples, to the articles of association of Belcap Enterprises Pty Ltd and Bell Equity Management Pty Ltd, neither of whom had an objects clause in their respective memorandum of association. In relation to the first group of companies, his Honour gave a description of their businesses. As to TBGL he pointed out that in the narrative sections of its annual reports there was little mention of a ‘business’ being carried on by TBGL. Eighty per cent of its total assets were represented by ‘investments’, being shares in and net advances to subsidiaries, [4474], of which there were over 180 companies. His Honour said at [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.
    2926 With respect, I agree with what his Honour said in the quotation immediately above. The cases show, I think, that directors’ management powers (possibly all directorial powers) are conferred for use which will benefit or be to the advantage of the company in whatever business or activity it may legally be engaged in at the relevant time.
    2927 His Honour found that the business of BGF was to borrow money for the Bell group and to lend that money to member companies of the Bell group as required. He described the business of BGUK in terms of film production and distribution, the operation of theatres and theatrical productions, insurance activities and a UK property portfolio [4488]. BGNV’s business [4493] was ‘… to make the bond issues and deal with the proceeds’.
    2928 In respect of the other two (sample) companies he noted that they, like BGF, had an article which authorised the directors 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.
    2929 His Honour observed, at [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.
    2930 There does not appear to be any controversy about what was the relevant power. The relevant power, conferred by the article referred to above and similar articles in the case of the other companies, was to charge or give any other security for the debts, liabilities or obligations of the company or of any other person.
    2931 It seems to be common ground between the parties to these proceedings that the relevant powers had to be used for the purpose of furthering or advancing the company’s business or interests and not for some ulterior purpose (appellants’ submissions 485). As Dixon J pointed out in Richard Brady Franks Ltd v Price (143) (a case which, despite the respondents’ vigorous assertions to the contrary, I have earlier in these reasons suggested is very similar to the present matter):
    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.
    2932 In the third sentence of [6089] his Honour appears to be expressing the view that directors are required to hold a genuine belief that they are exercising powers for proper purposes. It is perhaps a small point, but in my opinion the authorities do not impose such a duty. They suggest that such a belief is not determinative at all; it is their actual purpose which counts.
    2933 His Honour, at [6110], summarised some of the ‘core’ allegations against the directors which in his view had been made out. The list was preceded by the use of the word ‘include’ which raises a concern that perhaps there are other core findings. However, the list appears to be a comprehensive one. That paragraph is an important one so I set it out in full:
    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).
21. 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.
22. 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.
23. 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.
24. 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.
25. Exercised their powers in a way which 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.
26. Exercised their powers for an improper purpose, namely, to cause that company to enter into its Transactions and give effect to the Scheme.
27. 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).
    2934 Items 1 ‑ 4 of [6110], referred to in sub‑paragraph 5 above, particularised the breaches of the duty to act bona fide in the interests of the company. That is quite consistent with the overlap of the two duties. Sub‑paragraph 6 has a similar overlap.
    2935 For the reasons which I have set out above, I consider that his Honour erred in law in reaching the conclusions listed in items 1 ‑ 4 of [6110] and expressed in sub‑paragraphs 5 and 6 as breaches of the duty not to exercise powers for an improper purpose.
    2936 Furthermore sub‑paragraph 5 incorrectly states the law, as I understand it. The directors may exercise their powers for ‘any purpose or advantage of the company’: Richard Brady Franks Ltd v Price (143) (Dixon J). Proper purposes are not confined to matters which are reasonably incidental to and within the scope of carrying on that company’s business. That was the test for deciding whether a particular course of action was ultra vires: see Hutton v West Cork Railway Co which his Honour seems to have drawn upon when he wrote [4472] of his reasons, a paragraph redolent with ultra vires concerns.
    2937 Traditionally, in the cases of directors exercising their powers for an improper purpose, there is a finding which identifies the improper purpose. To take a classic example, in the takeover battle cases the improper purpose, when established, is usually found to be the directors’ operative purpose of maintaining control of the company in their own hands.
    2938 But, as the appellants point out (Appeal Ground 29), in this case his Honour failed to determine the operative purpose for which the directors acted, save perhaps for the purpose found in sub‑paragraph 7 above.
    2939 As I have mentioned elsewhere, sub‑paragraph 6 is not a finding of operative purpose; in my view it is simply a description of what the directors did, equivalent to a description, in the takeover battle cases, of the directors causing new shares to be issued. It says nothing about purpose.
    2940 The finding, in sub‑paragraph 7, in relation to the Australian companies is confined to Mitchell and Oates. In the course of these proceedings, both at first instance and on appeal, this allegation of improper purpose was given the short and convenient description of ‘Bond‑centricity’. His Honour most emphatically dismissed the ‘Bond‑centricity’ claims against Aspinall with a very strong credibility finding in his favour on this point [5069] ‑ [5075]. But, as the judge noted, [6070], Mitchell and Oates were two of three directors of the relevant companies and ‘Their conduct was therefore causative of a breach of duty owed by the directors of the companies concerned’.
    2941 Mitchell became a director of TBGL on 2 August 1988 shortly after its takeover by BCHL, an event with which he was very involved, as his Honour found. Mitchell was one of the top four executives of the BCHL group and was only a non‑executive director of TBGL and its subsidiaries. His Honour accepted Mitchell’s evidence about his state of mind concerning the bond issues and the on‑loans, i.e. that they were subordinated.
    2942 His Honour carried out a detailed review of Mitchell’s evidence in [5372] ‑ [5477] concluding in that last paragraph:
    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 the interests of the Bell group companies of which he was a director.
    2943 This conclusion sits somewhat uneasily, in my view, with his Honour’s conclusion at [6039] that the Australian directors (which included Mitchell and Oates) concentrated on the interests of the (Bell) group and failed to look at the interests of individual companies. I note the specific reference at the end of [6039] about their further sins.
    2944 His Honour returned to his conclusions about Mitchell later in his judgment where he dealt with both of the duties, starting with the duty to act bona fide in the best interests of the company:
    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. [(a) was identifying the creditors of each company in the group and considering what effect the Transactions might have on the creditors and shareholders of that company. (b) was failure to have worked out a plan – see [6088].] 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.
    2945 As Mr Bathurst QC submitted (appeal ts 640), it was never put to Mitchell in cross‑examination that his involvement with BCHL meant that he did not hold the belief that it was in the interests of the Bell group to enter into the Transactions or that his actual purpose was to assist BCHL (ts 31533). His Honour had expressly warned counsel for the plaintiffs (ts 31536) that eventually he would have to put that squarely to Mitchell, but counsel did not do so.
    2946 As to [6091] there are three things that I must say. First, the functions in (a) and (b) were described by his Honour in the relevant paragraph, [6088], in terms of what was ‘not reasonable’. That is not the language of fiduciary duty. Secondly, his Honour appears (doubtless by a momentary lapse) to have reversed the onus of proof. In my view, his Honour fell into the same error in relation to Oates in [5603] where his Honour said this:
    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.
    2947 It was for the respondents to prove the allegation that Oates lacked what his Honour saw as required knowledge on Oates’ part. Thirdly, if Mitchell held the requisite beliefs it did not matter whether he did so ‘reasonably’. That was not the test required by the decided cases. The test, for good policy reasons, is not so stringent.
    2948 His Honour’s conclusion about Oates acting for an improper purpose, being a Bond‑centric purpose, was expressed in [5486] and [5487] of his reasons:
    5486 There is evidence from which I could draw an inference that in January 1990 Oates [sic] 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.
    2949 I have already set out above the text of [6088] of his Honour’s judgment where he expressed the opinion that it was not reasonable for Aspinall to commit the companies to the grant of securities without (a) identifying the creditors of each company in the group; and (b) having a plan worked out. His Honour revisited those matters in relation to Oates:
    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 [sic] him in accordance with (a) and (b) above and, like Mitchell, his involvement was ‘Bond centric’. This constitutes a breach of his fiduciary duties.
    2950 At [6039] his Honour stated his view that the essence of the breaches of duty so far as the Australian directors were concerned lay in three areas. First, concentration on the interests of the group. Secondly, not having a plan. He then explained the third area:
    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.
    His Honour returned to this:
    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.
    2951 The purpose which his Honour identified as being improper boils down to ‘… protect[ing] BCHL, by removing a threat to its continuing survival’. The first point which I would make is that his Honour did not find that Mitchell and Oates focussed or concentrated on the survival or interests of the BCHL group to the exclusion of the interests of the Bell group companies.
    2952 Furthermore, nowhere in his reasons does his Honour find that the purpose of Mitchell and Oates, when they caused the relevant Bell companies to enter into the Transactions, was to advance the interests of the Bond group to the disadvantage of the Bell companies. Nor could his Honour have so found. The judge’s own findings, hardly controversial, ([5572] and [6070]) were that the interests of the two groups were interdependent. A major consequence of the Bond group going into liquidation would have been that the Brewery transaction would be very unlikely to have proceeded. In those circumstances, it would have been extremely unlikely that a Bond liquidator would credit BRL with its loan/deposit of some $1.2 billion thereby effectively allowing BRL to recover 100 cents in the dollar. If the Brewery deal had fallen through, the BRL shares would have remained worthless. The Bell group would have lost the potential and, later, the actual very substantial enhancement in the value of the BRL shares. If the Bell group had gone into liquidation that would have caused a cross‑default by the Bond group vis א vis its financiers. As the Bond group was not in a position to repay its loans it would have gone into insolvent liquidation.
    2953 The potential enhancement in value of the Bell group’s shareholding in BRL was a very relevant factor. As at 31 December 1989 the BRL shares were shown in TBGL’s balance sheet as being worth $1.80 each (or about $392 million). Due to the corporate rapaciousness of the BCHL executives who had ripped out about $1 billion from BRL’s treasury into the BCHL treasury, that was an unrealistic valuation. But, thanks to Mr Spalvins and the new BRL board, value was in the course of being restored to BRL through the Brewery transaction which eventually came to fruition. As I have mentioned earlier, if the BRL shares had gone back up to $1.20 that would have taken care of the Bell group’s indebtedness to the Banks. The Bell group would have had a very profitable publishing business, with an enviable cash flow, free of current liability debt, with which to do battle with the ATO over a comparatively minor amount of about $30 million. The publishing assets produced a cash flow of approximately $32.4 million per annum, interest payable to the bondholders was about $48 million per annum and about $2.3 million per annum was required for corporate overheads – see pars [1929] and [1934] of his Honour’s reasons. The cash flow shortfall would have been $17.9 million per annum. This would have been a radical improvement on the financial position of the Bell group as at 26 January 1990 and a situation in which the prospects of doing a deal with the bondholders, or some other capital re-arrangement, would have been considerably enhanced. The Bell directors were well aware of this and were, in my view, not disloyal to the Bell group when, to some extent, (in addition to preventing an immediate fire sale of the publishing assets) factoring the chances of restoring value to the BRL shares into their decision‑making process of avoiding immediate liquidation.
    2954 In relation to Mitchell the evidentiary basis for his Honour’s finding seems to be the following:
    • he was a member of the group of four top BCHL executives (the others were Bond, Beckwith and Oates) known as the ‘inner cabal’ or ‘kitchen cabinet’ at BCHL;
    • he, as a member of that group, had access to all BCHL information including secret accounts which became known as ‘the second set of accounts’;
    • he appeared to pay little regard to the affairs of the Bell group; and
    • the relevant restructure plans which he prepared or caused to be prepared (‘in which he was involved’) were Bond‑centric and did not deal in a meaningful way with the separate interests of the Bell group companies.
    2955 For the purpose of resolving this aspect of the appeal, it is not necessary for me to decide whether this was a sufficient evidentiary basis on which to find Mitchell was acting for an improper purpose. But I will say three things. First, Mitchell was not an executive of any of the Bell group companies; he was a non‑executive director. That, of course, would not excuse him if he were charged with failure to exercise reasonable care by reason of having little regard to the affairs of the Bell group. But neglect is a different kettle of fish to acting with an improper purpose. As a non‑executive director, there was no obligation on Mitchell (let alone a fiduciary duty) to be involved in the day‑to‑day operation of the Bell companies.
    2956 Secondly, although the restructure plans were Bond‑centric, many of them included reconstruction steps which involved the Bell group in major respects. Given the fairly prominent part which the Bell group played in the BCHL empire, that would be expected.
    2957 Thirdly, BCHL was scarcely an unrelated company; it owned about 75% of the issued share capital of TBGL, the parent company of the Bell group. Just as there was community of interests between the many companies in the Bell group, there was a community of interest (i.e. survival) between the two corporate groups.
    2958 In my view, his Honour’s factual findings, taken at their highest, did not amount to an improper purpose on Mitchell’s part. The factual situation in this case was very similar to that in Maronis. Bryson J’s observations and references to authorities in [189] ‑ [192] are, in my respectful opinion, most apposite.
    2959 In my opinion, his Honour also erred in law in finding Oates to have acted for an improper purpose. His Honour found that Oates played a far greater part in the management of TBGL than Mitchell and in particular in relation to the refinancing of the debts to the Banks.
    2960 In relation to his findings on improper purpose, in my opinion, his Honour fell into a basic error of law. In briefest summary, Owen J did not find that there was an improper purpose which was the substantial purpose forming the real basis for the relevant Bell directors’ decision to cause the companies to enter into the Transactions. His Honour did not find that but for the allegedly improper or collateral purposes which he attributed to the Australian directors ([6040], [6068], [6080], [6110], [6112] and [6113]) they would not have caused the relevant companies to enter into the Transactions.
    2961 When, at [6070], his Honour said:
    … 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.
    his finding simply reflects, in my view, the mechanics of the voting at the various board meetings. It was not the type of finding required, on the authorities, to establish improper purpose.
    2962 I accept the appellants’ submission that in relation to the so‑called Bond‑centric motivations of Mitchell and Oates, the respondents did not establish on the evidence that but for such motivation they would not have voted in favour of the Bell companies entering the various Transactions and would have allowed the Bell group to be placed in insolvent liquidation. There was no finding to that effect. In the absence of such a finding (i.e. a finding of causation) the complaint has no substance: Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285, 293 ‑ 294; Richard Brady Franks v Price (142).
    2963 The fact that the course taken might also have benefited BCHL does not put the Australian directors in breach of their fiduciary duties: Mills v Mills (185 ‑ 186); Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483, 493.
    Conclusion in relation to the Australian directors
    2964 For the above reasons, I consider that the appellants have made good their grounds of appeal in relation to his Honour’s findings that the Australian directors were in breach of their fiduciary duties to act bona fide in the interests of the relevant companies and not to act for an improper purpose.
    The United Kingdom directors
    2965 The UK companies and their directors were as follows:
    BGUK and TBGIL: Edwards, Birchmore, Mitchell and Bond
    BIIL: Edwards and Whitechurch.
    TBGIL and BIIL are not parties to these proceedings, so the focus must, in my opinion, be on BGUK.
    2966 The TBGIL and BGUK board meetings were held in that order (one immediately after the other) in London on 24 January 1990. Edwards, Birchmore and Whitechurch (as company secretary of each company) were present in person. Bond and Mitchell were on speakerphone. BIIL held two directors’ meetings to authorise entry into its Transactions on 13 and 15 February 1990. The latter was a ‘paper meeting’, i.e. no formal meeting was convened. The basis of his Honour’s findings against the directors of BIIL and the other two UK companies was identical [5950]. As TBGIL and BIIL were not parties to these proceedings it is hard to understand the relevance of his Honour’s findings against their directors.
    2967 BGUK executed the Lloyds Supplemental Agreement No 2 (‘LSA No 2′), a guarantee of the Australian Bell companies’ debts to the Australian Banks, mortgages over its shares in Western Interstate Ltd and the BIIL Subordination Deed. BGIL entered into a limited guarantee of the debts owed to the Banks. BIIL entered into the BIIL Subordination Deed which subordinated the debt owed to it by BGUK to the debts of the Banks.
    2968 In the weeks leading up to the two meetings at which BGUK and BGIL resolved to enter their respective Transactions, Edwards, with assistance from Whitechurch and Breese (Financial Controller of the UK group of companies) had obtained, at a series of meetings in London, both written and oral advice. The advice concerned the duties of the UK directors in a situation where there were questions about the solvency of the UK companies (other than BIIL) and the ability of TBGL to provide financial backup to the UK group. At the time of the release of the BGUK annual financial reports for the year 1989, TBGL had issued a comfort letter, referred to in the first paragraph of the extract from his Honour’s reasons set out below, confirming that it would provide financial support to the UK group. The advisers comprised Legg of Coopers & Lybrand’s London office (whose diary note of 22 January 1990 I have set out above), two solicitors from the UK companies’ lawyers (Messrs Slaughter & May), and Mr David Richards, a barrister at the commercial bar who specialised in company law and who took silk in 1992 [5792].
    2969 Part of that advice was that it was essential to establish the financial position of TBGL [5838]. At [5839] ‑ [5841] his Honour summarised Richards’ advice to each of the three above‑named companies as follows:
    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 [sic] 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 [sic] 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.
    2970 The relevant Transactions were amended so that TBGIL could have access to the Bryanston proceeds in order to meet its obligations to its creditors.
    2971 Part of C&L’s advice was that the UK directors needed to have [5833]:
    (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.
    2972 As events transpired, all that the UK directors were able to obtain from TBGL, before the UK board meetings, were two further letters of comfort which I have described earlier in these reasons.
    2973 The context for his Honour’s conclusions may be set by reproducing the following paragraphs from his reasons where he summarised some of the events which took place at the BGUK board meeting:
    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.
    2974 His Honour summarised his conclusions in relation to the UK directors in the following terms:
    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.
28. The legal advice the UK directors received from S&M was meticulous. So, too, in the main, was the advice from C&L.
29. 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.
30. They took steps to identify the issues that might affect the solvency of the BGUK group companies.
31. 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 [sic] 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).
    2975 It is important to remember that his Honour’s findings as to the directors’ beliefs, all of them exculpatory in nature, which I have summarised above [2737], apply to all of the Bell directors (including Bond and Mitchell) not just the Australian directors. They apply equally to the UK directors.
    2976 Furthermore, his Honour’s findings in relation to the UK directors are, in summary, that they acted bona fide in the interests of the UK companies in every respect save that, at the last hurdle, they failed to obtain more reliable financial information as to the solvency of TBGL. The judge’s assessment was that it was not reasonable for them to rely on the information provided by Bond, Mitchell and Simpson; they should have insisted on cash flows and the like.
    2977 Not only was that a tough call (as his Honour described it), but in my view it was wrong in law. The test is not one of reasonableness. It is a question of what the directors honestly believed to be in the best interests of the relevant company as a whole. The judge did not find against the UK directors on that score. In the passages of his reasons which I have set out at [2766] above his Honour added a requirement that honest and genuinely held beliefs had to be based on reasonable grounds. He did the same, in my view, in the paragraphs set out immediately above.
    2978 At [6088] ‑ [6089] his Honour equated unreasonableness with impropriety both as a matter of bona fides and as a matter of improper purpose in the traditional sense. In my opinion, by taking that approach he fell into a fundamental error of law which affected his reasoning in relation to the Australian and the UK directors alike.
    2979 To the extent that his Honour’s findings that the UK directors acted for improper purposes were based on more than the matters which founded his conclusions on failure to act in good faith in the best interests of the relevant companies, the sin was essentially the same as in the case of the Australian directors. The sin was Bond‑centricity. The findings, in [5876] and [5924] were that Bond and Mitchell were focusing on the survival of BCHL and Dallhold (the company Bond controlled and through which he controlled BCHL and the Bell group) rather than on ‘the separate and distinct interests’ of the BGUK companies.
    2980 His Honour dealt with the allegations against Bond in what I consider to be, with respect, a fairly summary manner:
    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.
    2981 I do not think that these findings were a sufficient basis upon which to hold that Bond acted for an improper, Bond‑centric, purpose.
    2982 I incorporate here my reasoning above in relation to the errors of law which, in my opinion, infected his Honour’s conclusion of improper purpose on the part of the Australian directors. In my view, they apply equally to Bond. In particular, I refer to the group interdependence of the Bell group and BCHL for survival (to which can be added the total dependence of BGUK on the survival of TBGL and hence recovery in value of BGUK’s very substantial investment in Western Interstate), the absence of any finding that Bond‑centricity disadvantaged the Bell group and failure to apply the ‘but for’ test. I would like to add what I consider to be two very apt quotations.
    2983 The first is from a judgment of Jonathan Parker J in Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 [127]:
    In considering the evidence in the context of Regentcrest’s contentions I bear in mind the danger of applying hindsight … It is all too easy to analyse the course of the struggle for the survival of Regentcrest after the event, and to pick over specific decisions taken at the time, without making proper allowance for the exigencies of the moment. It seems to me that the dangers of so doing are particularly great in the instant case, given the atmosphere of crisis which existed in Regentcrest in early September 1990.
    2984 The second is from Lewison J in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) [1643]:
    Whether there was a need for Northstar to grant the debenture; and whether there were alternatives that could have been explored is not, in my judgment, the point. As both sides acknowledged the relevant test is what the directors believed was in the interests of Northstar; not what a court might believe. Since, in my judgment, the directors of Northstar believed that the grant of the debenture was necessary to ensure continuing supplies of aluminium, and that a continued supply of aluminium was in Northstar’s best interests, I find that it was not granted for an improper purpose. (Original emphasis)
    Conclusion
    2985 I think that the appellants have established that his Honour erred in concluding that the Australian and United Kingdom Bell directors breached their duty to act bona fide in the interests of each of the relevant companies as a whole. I think he also erred in finding that they acted for improper purposes. In my opinion, his Honour applied the wrong tests on each issue.
    Conflict of interest
    The primary judge’s reasoning
    2986 The appellants and the main respondents accepted his Honour’s statement of the legal principles applicable to a director’s duties in relation to conflicts of interest. It is not necessary to review them here. His Honour declined to find that any of the relevant directors, i.e. Bond, Mitchell and Oates, had breached the conflict of interest rule in causing the Bell companies to enter into the Transactions. His Honour found [9745] that there was no breach of the duty to avoid conflicts of interest.
    2987 His Honour also found that Mitchell, Oates and Bond had not acted in their own interests [6125] and that Mitchell, Oates and Aspinall had not acted to entrench their directors’ position of control of TBGL or to protect their financial interest in BCHL and other BCHL companies [6126] and [6127].
    2988 That left, so his Honour reasoned, the main respondents’ plea that Mitchell, Oates and Bond had preferred and acted in the interests of BCHL and other BCHL companies. His Honour held that in the absence of a case where the directors’ interests lay in benefitting a third party (here the BCHL group), the action of a director in benefitting a third party is to be dealt with under one or both of the duties to act in the best interests of the company and the duty to exercise powers properly. Accordingly, the judge declined to consider further the matter of conflict of interest as a separate item of the alleged breaches by the three directors concerned of their fiduciary duties.
    The main respondents’ notice of contention
    2989 The relevant ground (ground 2) in the main respondents’ notice of contention was to the effect that the declarations and orders made by his Honour ought to be upheld on the further ground that Mitchell, Oates and Bond had (contrary to his Honour’s finding) acted in a position of conflict of interest in authorising entry into the respective Transactions with which they were concerned.
    2990 The respondents submitted that the trial judge ought to have found that the interest of each of these directors in the continued survival of the BCHL group was a non-pecuniary personal interest for the purposes of establishing a breach of the conflict of interest rule as pleaded by them. Additionally, Bond’s family company, Dallhold, was a 52.5% shareholder in BCHL and the ‘beneficiary’ of a $75.1 million loan from JNTH which was at risk. His Honour, so it was submitted, should have found that Bond acted from a position of financial conflict of interest.
    2991 As senior counsel for the main respondents explained, this matter was important to them in the event that they were unsuccessful in the appeal on the issues of the two types of breaches found by his Honour in their favour or if those two duties were held not to be fiduciary. It was common ground that the duty not to act in breach of the conflict of interest rule was a fiduciary duty.
    2992 The main respondents contended (appeal ts 1672.10 ‑ 1675) that his Honour should have found that the motivating interest which Mitchell, Oates and Bond had in ensuring the survival of BCHL fell within the conflict rule as a non‑pecuniary interest by way of business connection or association. The same evidence which, so the main respondents submitted, established a BCHL improper purpose also established this breach of the conflict rule (appeal ts 1675(.6)).
    2993 The appellants’ response to this contention was first to refer to their submissions in the appeal on the findings of breach of duty. If those findings should not have been made, they submitted that there was no basis for any findings based on conflict of interest. The respondents’ submissions, so it was put, overstated the trial judge’s findings. The case now asserted was not pleaded at first instance and the respondents should not be allowed to put this case on appeal. In any event, the directors had no ‘non‑pecuniary’ interest, or any such interest was, on the authorities, so feeble, remote and theoretical as not to suffice for the ‘no-conflict’ proscription. Further, any such interest did not conflict with the fiduciary duty of the directors, the interests of the BCHL and the Bell group companies being co‑terminous in relation to the refinancing.
    My reasoning
    2994 I refer to my reasoning above which led to my conclusion that the main respondents had not proved that Mitchell, Oates and Bond had acted for improper purposes. I think that that reasoning also leads to the conclusion that they did not breach the conflict of interest rule.
    2995 In my view, there simply was no conflict of interest between the Bell group and the BCHL group in relation to the matter of the various member companies of the Bell group entering into the Transactions. If the BCHL group had gone into liquidation that would have caused, for the reasons set out above, the BRL shares to remain almost worthless. Apart from the publishing and broadcasting businesses, the BRL shares were the only assets with the potential to revive the Bell group fortunes.
    2996 In my opinion, Bond, Mitchell and Oates were not in a position of having an actual conflict of interest. They could, and I think did, fulfil their obligations to the Bond group without failing in their obligations to the Bell group.
    2997 The non‑pecuniary interests of Bond, Mitchell and Oates upon which the main respondents relied [APPR.000.037, par 27] amounted to:
    • an association with BCHL which was long‑standing, dating back to the 1960s in the case of Mitchell and Bond;
    • the management structure of the BCHL group with the decision‑making resting with Bond, Beckwith, Mitchell and Oates;
    • Bond, Mitchell and Oates were deeply concerned with the survival of the BCHL group to the exclusion of the interests of the Bell group companies of which they were directors; and
    • they were intimately involved in the development of ‘Bond‑centric’ restructuring plans which did not deal in a meaningful way with the interests of the Bell group of companies.
    2998 The authorities show that there must be ‘a real and sensible possibility of conflict’: Boardman v Phipps [1967] 2 AC 46, 124; or a ‘sensible, real or substantial possibility of conflict in the necessary sense’: Clay v Clay [2001] HCA 9; (2001) 202 CLR 410, 436. As Santow J pointed out in Australian Securities and Investments Commission v Adler [2002] 20 ACLC 576 [735]:
    In order to assess whether or not there is a real sensible possibility of conflict one must adopt the position of the reasonable person looking at the relevant facts and circumstances of the particular case (authorities cited).
    2999 Given his Honour’s findings of fact in relation to the other aspects of the relevant directors’ alleged conflict of interest, I do not think that a reasonable person would regard the association relied upon by the main respondents and described above as sufficient to establish a sensible, real or substantial possibility of conflict.
    3000 That leaves the contention in respect of Bond. There is no doubt that Bond, through Dallhold, had a substantial financial interest in BCHL. But he was not a director of any of the Australian Bell companies. The only respondent of which he was a director was BGUK. There was no real possibility of a conflict of interest between its interests and the interests of BCHL. It was very much in BGUK’s interests to support TBGL by entering into the Transactions because if the Bell group went into insolvent liquidation one of BGUK’s major assets – its preference shares in Western Interstate – would have been worthless.
    Conclusion
    3001 For the above reasons, I would reject the second ground in the main respondents’ notice of contention.
    In causing BGNV to enter into the BGNV Subordination Deed, did Equity Trust (its only director) breach the duties it owed to BGNV?
    3002 On 31 July 1990 BGNV, TBGL, BGF and Westpac (as Security Agent) executed the BGNV Subordination Deed. By that deed the parties agreed that the liabilities of each of TBGL and BGF (i.e. the on‑loans and TBGL’s guarantee obligations and the rights of BGNV in respect of those liabilities) were subordinated to any liabilities of the respondent Bell companies to the Banks.
    3003 At the time of the Transactions, Equity Trust was the sole director of BGNV. The sole director of Equity Trust was Ruoff, a lawyer. His Honour inferred that Ruoff was its directing mind. That was common ground. Equity Trust was a wholly‑owned subsidiary of a Dutch company, Equity Trust Co NV, which in turn was wholly owned by a firm of lawyers in Amsterdam, Messrs Trenitי van Doorne. I mention the name because the advice of a lawyer in Curacao figures quite prominently in this matter. The name of the firm in which he practised was Promes, Trenitי Van Doorne. This appears to be another association of the interests of the lawyers and the trust company in Amsterdam and the law firm and Equity Trust in Curacao.
    3004 His Honour found [6102] that there was insufficient evidence from which to conclude that Equity Trust (through Ruoff) breached its duties as a director of BGNV by causing it to enter into the BGNV Subordination Deed. Critical to the judge’s reasoning was his conclusion that the on‑loans were subordinated [6028], that the bondholders were BGNV’s only creditors [6103] and that they were not relevantly prejudiced by BGNV entering into the BGNV Subordination Deed because they already ranked behind the Banks.
    3005 Ruoff did not give evidence in these proceedings, but a transcript of his examination under oath before a judge in Rotterdam (under a rogatory commission from an examining judge in the Netherlands Antilles) was in evidence (MISP.00035.048). In that examination Ruoff described Equity Trust as ‘a trust company … involved in the usual trust activities’. At the relevant time, he said, it ‘managed’ between 250 and 300 companies including BGNV.
    My reasoning
    3006 I think that the learned primary judge was right in holding that there was insufficient evidence to conclude that Equity Trust breached its duties to act bona fide in the interests of BGNV and not to act for an improper purpose.
    3007 Whether a director has breached those duties depends very much on the particular facts and circumstances of the case: see Dixon J in Birtchnell v Equity Trustees, Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384, 408, in particular his Honour’s reference to the ‘course of dealing’. I acknowledge that his Honour was referring to the course of dealing within the partnership in that case, but the course of dealing within the Bell group is, I think, sufficient to make that passage apposite Equity Trust and BGNV were in a most unusual situation. BGNV’s sole shareholder was BGF. BGF (via TBGL the ultimate parent company of the Bell group) was requesting it to enter the BGNV Subordination Deed if BGNV felt it had the power to do so in accordance with the laws of the Netherlands Antilles. BGNV was told that TBGL had undertaken to use its best endeavours to cause BGNV to enter into that deed. BGNV’s only creditors were the bondholders. His Honour held, and I agree with him, that the on‑loans were subordinated in any liquidation of TBGL or BGF. For that matter, so were the rights of the bondholders under the guarantee from TBGL. The only other possible creditors of BGNV were LDTC in respect of its fees for acting as trustee under the trust deeds and Equity Trust for its fairly modest director’s fees. There is some evidence that the practice was for BGF to pay those fees.
    3008 BGNV had been incorporated for the sole purpose of borrowing money on behalf of TBGL, its ultimate parent company. Article 2(1) of its ‘Articles of Incorporation’ read as follows:
    The purpose of the company is to finance directly or indirectly the activities of the companies belonging to the concern of Bell Group Limited, a corporation organized and existing under the laws of the State 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 interestbearing debts however denominated and in any and all forms, as well as the borrowing and lending of monies.
    3009 In fact, as I discuss much later in these reasons, the money which it raised from the bondholders went nowhere near BGNV, let alone into its own bank account in the sense of a bank account which it controlled. Papers were signed and shuffled between (at least) London, New York and Perth whereby, sometimes but not always, at the direction of BGNV the funds raised by the BGNV bond issues were transferred from the financiers who organised the bond issues into the bank accounts of TBGL and, later, BGF. Only on the occasion of the first Eurobond issue were the proceeds placed in a bank account in New York in BGNV’s name and then only for a weekend. BGNV’s accounting records were not kept by it. They were kept in Australia, in what looks like an exercise book, by officers of TBGL Perth. The annual reports, comprising balance sheets, profit and loss statements and the like information, were prepared in Australia and sent to BGNV in Curacao. There they would be certified as correct by Coopers & Lybrand Netherlands Antilles acting as auditor of BGNV by an arrangement with Coopers & Lybrand Australia, auditors for the Bell group. The only evidence that BGNV had a bank account for more than three days was the item ‘cash at bank $12,000’. That represented the amount subscribed as its share capital when BGNV was incorporated. That figure did not change from one year to the next. The only ‘business’ which it might be said BGNV conducted was to receive interest from TBGL and BGF and cause it to be distributed to the bondholders. BGNV played no organisational part in those transactions. They were all arranged by executives of TBGL in Australia who caused the necessary funds to be deposited in the bank accounts maintained for that purpose by LDTC as trustee for the bondholders.
    3010 Senior counsel for BGNV criticised Ruoff for describing Equity Trust, in its capacity as sole director of BGNV, as being a trustee and for acting upon the instructions of its ‘principal’ embodied in the senior management of TBGL.
    3011 I do not accept this as a valid criticism. The trustee/beneficiary analogy, although technically not a valid one, is not too far wide of the mark in the particular circumstances of the relationship between BGNV, TBGL and BGF. BGF owned all the issued share capital in BGNV and itself was a subsidiary of TBGL. It is worth remembering that the interests of the company BGNV included the interests of its sole shareholder: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, 291, approved in Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425, 438, Gaiman v National Association for Mental Health [1971] Ch 317, 330. As to accepting instructions from its ‘principal’ it will be seen from the discussion below that, in relation to the request to enter the BGNV Subordination Deed, Ruoff sought legal advice from Messrs Promes, Trenitי Van Doorne in Curacao. He also had the benefit of legal advice from Netherlands Antilles lawyers (based in New York) appointed to act for the Banks. It is clear from Simpson’s letter dated 24 January 1990 to Ruoff that he was not issuing instructions.
    3012 BGNV’s involvement in the matter of executing the BGNV Subordination Deed began with that letter dated 24 January 1990 from Simpson to Ruoff. His Honour summarised its contents and Ruoff’s response [5978] ‑ [5979] as follows:
    … 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.
    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’.
    3013 The matter, so far as BGNV was concerned, appears to have remained in limbo until Simpson wrote to Ruoff on 11 April 1990 enclosing a copy of the Principal Subordination Deed (without the schedules to it) which, as his Honour noted [5980], showed that it had been executed on 15 February 1990 by all the relevant parties including Westpac as the Security Agent. Simpson asked Ruoff to have the document reviewed by one of the major law firms in Curacao and then advise ‘… whether Bell Group NV is able to subordinate its inter‑company loan in favour of third party creditors of Bell Group’.
    3014 Ruoff retained a Mr van Eps of the law firm, Promes, Trenitי Van Doorne (to which I have referred above) to advise BGNV. Neither Ruoff nor van Eps was called to give evidence. There is no evidence of the precise terms of the retainer. On 9 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.
    3015 A few days later (by letter dated 15 May 1990), Allen & Overy, acting for the Banks, retained another firm of Netherlands Antilles lawyers, Messrs Smeets & Thesseling, to advise of the circumstances in which a subordination deed, a draft of which they enclosed with their letter, if executed by BGNV, ‘might be rendered invalid or unenforceable under Netherlands Antilles law’. The lawyer handling the matter at Smeets & Thesseling was Mr Frank Zeven, then based in New York.
    3016 Part of Mr Zeven’s advice, by letter dated 22 May 1990, was that execution of such a deed would probably be ultra vires BGNV’s articles of association and that its articles should be amended to allow it to grant security for the obligations of third parties (which was how Mr Zeven perceived the proposed deed). He confirmed that advice on 23 May 1990 and recommended ‘reconfirmation’ from Promes, Trenitי Van Doorne. Ruoff referred the matter again to van Eps. On 1 June 1990, van Eps responded to the proposal that BGNV’s articles of association be amended (he having previously taken and expressed the view that execution of the deed would be within power). His letter included the following paragraphs, the first of which is, in my view, of considerable importance in assessing whether Equity Trust breached its fiduciary duties to BGNV:
    It was and is my understanding that if the Company would not cooperate with the subordination of the intercompany debts, the intercompany 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.
    3017 Senior counsel for BGNV strongly criticised his Honour’s treatment of this letter and in particular his refusal to infer that van Eps would not have written that letter if he thought the debts were already subordinated. Counsel went so far as to submit that every part of the following reasoning [5989] was wrong:
    Without more evidence I am not able to draw such an inference. In fact, it is possible to drew [sic] 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).
    3018 Mr O’Bryan SC submitted that it was not possible to form the view that, in giving the above advice, van Eps proceeded upon an assumption that the debts were already subordinated because otherwise the whole question that he was addressing in his letter would be, so it was submitted, moot.
    3019 I do not accept that submission. In my opinion, it was clearly open to his Honour to decline to draw the inference which he had been invited to make. Mr O’Bryan relied heavily on a letter dated 22 June 1990 from Simpson to van Eps which (appeal ts 3003), he submitted, made it clear to van Eps that his assumptions were unfounded and that they were not a justification for the Subordination Deed. Mr Simpson’s letter was in the following terms:
    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.
    3020 In my view, Simpson did not make it clear that van Eps’ assumptions were unfounded. His Honour held the same view when, at [5993], he said that he did not understand why Simpson did not properly answer the question posed by van Eps.
    3021 It may have been the case that van Eps’ assumption expressed above as his understanding was not soundly based, i.e. that if BGNV did not cooperate and execute the BGNV Subordination Deed then, under the securities already granted, the Banks could take actions which would render the inter‑company loans worthless. But, as his Honour inferred [5993], this was the basis of van Eps’ advice to Ruoff about Equity Trust’s position in causing BGNV to enter into the BGNV Subordination Deed.
    3022 That is why, in my opinion, the understanding which van Eps expressed is, as his Honour well appreciated, a very important factor in the assessment of whether Equity Trust breached its fiduciary duties to BGNV. It must always be remembered that the basis of those duties is loyalty, not a standard of reasonable care.
    3023 It also needs to be remembered that TBGL and BGF were contractually committed to using their best endeavours to procure BGNV’s execution of the BGNV Subordination Deed although Simpson did not explain this to van Eps until his fax of 22 June 1990. A contractual commitment to use best endeavours is a real one and it may easily be inferred that, as a lawyer, van Eps would be aware of this. At the very least he was entitled to take the view, as he did in his letter of 1 June 1990, that if TBGL was unable to procure BGNV’s cooperation in executing the BGNV Subordination Deed that might well put the security relationship between TBGL and the Banks in jeopardy and in turn potentially affect its ability (and that of BGF) to repay the on‑loans.
    3024 To the extent that objective factors are relevant in the assessment of Ruoff’s conduct, it is worth noting that by May 1990, on the insistence of three of the Banks, it had become a condition for the release of the Bell Press proceeds of sale that the Bell group procure BGNV’s execution of the BGNV Subordination Deed. TBGL, BGNV’s ultimate owner, had resolved to give the Banks an undertaking to that effect. It is true that there is no evidence that either Ruoff or van Eps was aware of this undertaking but it is an objective factor consistent with Ruoff’s knowledge that the Banks were concerned about having BGNV execute the deed and van Eps’ understanding referred to above.
    3025 At the foundation of BGNV’s plea that Equity Trust breached its fiduciary duties was the allegation that it knew or ought to have known that BGNV was insolvent, nearly insolvent or of doubtful solvency. This is, of course, basic to the existence of an obligation of a director to consider the interests of the company’s creditors.
    3026 In that regard, there was a very important piece of evidence upon which his Honour, in my view quite correctly, relied. The evidence was as follows. On 6 December 1989 TBGL in Perth sent a draft of the annual accounts for BGNV to Ruoff. They had been prepared as part of the Bell group accounts [5967]. The director’s statement supporting the BGNV 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. TBGL asked Ruoff to take the BGNV draft annual accounts to Coopers & Lybrand Curacao to obtain the audit report which supported the accounts. As his Honour noted, Ruoff clearly did that because there was in evidence a letter dated 13 December 1989 from Melvin, an accountant at Coopers & Lybrand Curacao, to Coopers & Lybrand in Perth. In that letter, Melvin asked Coopers & Lybrand Perth to advise him if there was any reason to doubt that BGNV could repay its borrowings when they fell due. On 15 December 1989 Montgomery at Coopers & Lybrand Perth replied by fax to the effect that Coopers & Lybrand had no reason to doubt that BGNV would be able to repay its borrowings when they fell due.
    3027 There is also in evidence a handwritten memorandum dated 13 December 1989 made by Ruoff which shows that he took the matter of the veracity of BGNV’s accounts quite seriously. The memorandum read as follows:
    Jan Melvin called. Before he will sign accounts, he is to receive some more confirmations from Australia. There seems to be some action from a minority shareholder against the group which might seriously influence NV’s ability to pay back.
    3028 Following the receipt of Montgomery’s fax, Melvin, on 19 December 1989, forwarded copies of the audited accounts of BGNV to Equity Trust. The auditor’s report stated:
    We have examined the financial statements of Bell Group NV for the year ended 30 June 1989.
    In our opinion, based on our examination, the accounts present fairly the financial position of Bell Group NV at 30 June 1989 and the results of its operations for the year then ended.
    3029 His Honour held [5969] that in those circumstances it was not possible to say that by reason of the accounts (the TBGL accounts for the year ended 30 June 1989) Equity Trust suspected, ought to have known or recklessly disregarded the alleged insolvency of BGNV. He added [5969] ‑ [5970]:
    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 …
    … 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.
    3030 BGNV, in its submissions, repeatedly complained that Equity Trust should not have relied upon financial information which was so out of date. If its claims were based on negligence, the point might be well made. But in my view, it was not a breach of fiduciary duty to rely upon this accounting information.
    3031 BGNV also complained that his Honour did not refer to Ruoff’s letter dated 29 January 1990 to TBGL which, it asserted, showed that Ruoff had undergone a change of attitude so far as assuming that the Bell group was solvent. Furthermore, so BGNV contended, the judge should have drawn an inference (referred to below) from a series of requests by LDTC to BGNV for certificates of its compliance with the terms of the trust deeds. BGNV in turn asked for assurances from TBGL, received them and passed on those certificates of compliance to LDTC on numerous occasions. BGNV suggested that his Honour should have found that the frequency of these requests should have alerted BGNV to the possibility that it would not be able to meet its obligations to its creditors.
    3032 His Honour found to the contrary [5971] and held that there was no reason why Equity Trust would do otherwise than rely on those certificates. In my view, his Honour was quite right in so finding.
    3033 Furthermore, at least three of the certificates, copies of which TBGL forwarded to Ruoff, were accompanied by certificates addressed to Equity Trust (under its former name) to the effect that TBGL was able to pay its debts and meet its obligations under the relevant trust deed and that the realisable value of TBGL’s assets exceeded the amount of its liabilities including prospective liabilities [TBGL.02125.019; TBGL.08041.117; TBGL.08041.096].
    3034 The letter dated 29 January 1990, in my view, simply shows that Ruoff was protecting himself. He was being asked to sign certificates about matters of which he had no direct knowledge. On legal advice, he qualified those certificates by referring to them as being based on the confirmations from TBGL to LDTC. The trial judge was not, in my opinion, obliged to draw an inference from that letter that Ruoff had changed his view one way or another on the subject of the solvency of the Bell group.
    3035 As to BGNV’s complaints that his Honour did not apply the same principles to assess Equity Trust’s conduct as he had applied to the UK directors (i.e. they breached their duties because they relied on assurances from TBGL and its directors and failed to make their own enquiries to satisfy themselves that TBGL could meet its obligations), there are two answers. First, for the reasons given above, I think that his Honour erred in law in holding that the UK directors breached their fiduciary duties by falling ‘at the last hurdle’. Secondly, the circumstances of the UK companies and those of BGNV were very different. The UK companies had a range of various external creditors. BGNV had only the subordinated bondholders, Equity Trust’s director fees and possibly LDTC for its trustee fees (all of which fees BGF was in the habit of paying).
    3036 The key principle which should have been applied to the UK directors and which, in my view, applies in the case of Equity Trust, was that the fiduciary duties were proscriptive and not prescriptive. Fiduciary duties preclude a director from stealing a company’s money or from misappropriating it in favour of a third party in such a way as to benefit that director either immediately or in the future. The current state of the authorities is that they also extend to the duties to act bona fide in the interests of the company and to exercise powers for a proper purpose. In those cases too the obligations are, in my opinion, proscriptive. The High Court of Australia has, I think, made it quite clear that fiduciary duties are proscriptive. Where a duty of care is concerned, the very concept of care carries with it, on occasion, a duty to take certain steps to protect the person entitled to that care. But fiduciary duties are about what fiduciaries must not do. See also Gibson Motorsport Merchandise Pty Ltd v Forbes [11] – 12.
    3037 The matter can be further tested by asking the following question as a matter of practical commercial reality. Assuming the duties include the positive duties to investigate and enquire, just how far would these overseas directors of wholly‑owned Bell group subsidiaries be expected to go? His Honour thought, in the case of the UK directors, that they should have insisted on being provided with cash flows and the like. Cash flows are by their very nature predictive and based on matters of opinion. The Australian Bell directors gave assurances to the UK directors which may have been overly optimistic, given the position in which the Bell group found itself in late January 1990. His Honour was somewhat critical of the cash flows being circulated within the Bell group at that time ([6046] and [6087]). The tender of cash flows to the relevant overseas directors in those circumstances would not, in my opinion, be significantly more reliable than ‘mere assurances’. They have the same subjectivity at their bases. It might be said that the answer to that problem would have been to insist on an auditor’s opinion or certificate. That, in my view, only emphasises that such a requirement sounds in the director’s duty of care, not his or her loyalty to the company.
    3038 I turn next to consider BGNV’s submission that even if the on‑loans were subordinated the BGNV Subordination Deeds effected a deeper and more onerous form of subordination. This was said to be because:
    • under the Deed, subordination was immediate and effective before a liquidation whereas the on‑loans subordination was a liquidation‑only subordination;
    • under the Deed, subordination extended to all liabilities whatsoever of TBGL and BGF to BGNV, i.e. it was not confined just to the on‑loans;
    • under the Deed, subordination extended to the liability to pay interest whereas, under the on‑loan subordination, interest was not subordinated until liquidation;
    • under the Deed, the subordination was in favour of the Banks only, whereas the on‑loans subordination was in favour of all unsubordinated creditors;
    • under the Deed, in the event of a liquidation of TBGL or BGF the Banks would rank ahead of BGNV in respect of post‑liquidation interest whereas under the on‑loan subordination, post‑liquidation interest was expressly excluded with the result that BGNV would rank pari passu in respect of such interest;
    • under the Deed, BGNV gave up various rights which were not the subject of the on‑loans subordination such as rights of contribution, subrogation, indemnity and set‑off and the like (see par 1737 of BGNV’s submissions).
    3039 BGNV asserted that the trial judge had accepted their submission that the BGNV Subordination Deed effected a deeper form of subordination. This was because his Honour observed at [9723] that:
    By pursuing and then taking the benefit of the BGNV Subordination Deed the banks are no longer relying on the rights they had (but about which they were not certain) prior to the refinancing.
    3040 BGNV argued that the above observation was in the context of whether the Banks had elected to have their position governed by the terms of the BGNV Subordination Deed rather than under the on‑loans subordination regime.
    3041 BGNV contended that because it was central to making good their election argument to make good the deeper subordination submission, his Honour’s observation meant that he must have accepted the deeper subordination argument.
    3042 I do not agree with that construction of what his Honour said. He had found that the Banks lacked standing to enforce the inter se contracts of subordination. He also refused the Banks any relief in respect of the estoppel which he had found. His reason for doing so was because the on‑loans were in fact subordinated. He was simply dismissing the Banks’ counterclaim. At [9720] his Honour noted that the on‑loans were from inception subordinated, that that was the position as of 26 January 1990 and remained the position, and that the BGNV Subordination Deed had not been set aside in so far as it related to or affected BGNV.
    3043 In my view, in the passage set out above his Honour was not finding a deeper subordination.
    3044 It seems to me that at [6103] his Honour was implicitly finding to the opposite effect when he said:
    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.
    3045 However, for the purposes of argument I will assume (without deciding) that the terms of the BGNV Subordination Deed have the various consequences set out in the six bullet points above. BGNV’s complaint was that Equity Trust breached its fiduciary duties by failing to consider (par 1605 of BGNV’s submissions) how ‘… the deeper and more onerous subordination regime under the Deed benefited BGNV over and above the pre‑existing subordination regime’.
    3046 On his Honour’s own findings the only practical alternatives, other than for the Bell group to enter into the Transactions, were either liquidation or to arrange what became known as a ‘valid and effective restructure’. As I have observed above, the respondents did not establish that there was a reasonable probability of all interested parties entering into a valid and effective restructure such as a scheme of arrangement. They expressly declined to take on that task. That left the prospect of a liquidation in which the bondholders would have been subordinated and would not have received any principal or interest [4287].
    3047 More importantly, the alleged deeper subordination would have been a matter of judgment for the director concerned (in this case Ruoff’s judgment). The existence of these allegedly more onerous terms does not mean that Equity Trust failed to act bona fide in the interest of BGNV or that it acted for an improper purpose. Equity Trust did not thereby become any less loyal to BGNV. His Honour summarised the position, in my respectful opinion, most aptly at [6024]:
    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.
    3048 BGNV submitted that LDTC was prejudiced by the terms of the BGNV Subordination Deed in its capacity as a creditor for its trustee fees. The argument was based on the proposition that under the on‑loan subordination regime any funds received by LDTC from BGNV were to be held on trust by LDTC subject to a three‑tier priority ‘waterfall’ with its fees being in the first tier of priority. But under the BGNV Subordination Deed any funds received by BGNV were to be held on trust by it for the benefit of the Banks until the Banks’ debts had been paid in full.
    3049 I accept the appellants’ submission that such a case was not pleaded or particularised or run below. It should not have any place in the appeal.
    3050 Furthermore, the evidence shows that it was BGF which assumed liability for and paid LDTC’s fees. The fees were very small in the scheme of things. Ruoff is not to be criticised if he did not consider LDTC’s interests for its fees separately to its interests as trustee for the bondholders when he exercised his powers.
    Conclusion
    3051 For the foregoing reasons, I think that BGNV’s cross‑appeal in relation to the conduct of Equity Trust should be dismissed. I think that his Honour was quite right to dismiss the claims that Equity Trust acted in breach of its fiduciary duties to BGNV in causing that company to enter into the BGNV Subordination Deed.
    Barnes v Addy
    3052 As I have found that none of the Bell group directors breached their fiduciary duties and that his Honour was right to find that there was insufficient evidence on which to conclude that Equity Trust breached its fiduciary duties to BGNV, the question arises whether I am obliged to consider the Barnes v Addy grounds in the notices of appeal and notices of contention, including the issue of whether, so far as knowing receipt is concerned, the principles explained in that case extend beyond dealings with trustees. Those grounds are, of course, totally dependent on findings that the relevant directors were in breach of their fiduciary duties.
    3053 The leading authority on this question appears to be Kuru v State of New South Wales [2008] HCA 26; (2008) 236 CLR 1 where, in the majority judgment of Gleeson CJ, Gummow, Kirby and Hayne JJ at [12], their Honours said this:
    This Court has said on a number of occasions that, although there can be no universal rule, it is important for intermediate courts of appeal to consider whether to deal with all grounds of appeal, not just with what is identified as the decisive ground. If the intermediate court has dealt with all grounds argued and an appeal to this Court succeeds, this Court will be able to consider all the issues between the parties and will not have to remit the matter to the intermediate court for consideration of grounds of appeal not dealt with below. (footnotes omitted)
    3054 Kuru was a relatively straightforward matter. The District Court of New South Wales had awarded the appellant substantial damages for trespass. The State appealed to the Court of Appeal of New South Wales asserting that it was not liable to the appellant and also challenging the amount of damages awarded. The Court of Appeal allowed the appeal on the basis that the State was not liable. It did not deal with the question of whether the damages awarded at first instance were excessive. The judicial effort in carrying out that task would probably not have been very great even though the primary judge had awarded aggravated and exemplary damages.
    3055 In my view, this matter is very different. When one adds up the grounds in the appeal, the cross‑appeals and the notices of contention, the total number of grounds is about 1,179.
    3056 From Kuru one can discern that the purpose of the rule referred to in that case is to enable the High Court to consider all the issues between the parties. I do not think that there will be any difficulty for the High Court, if it has to deal with the Barnes v Addy issues, to do so. In Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; (2009) 73 NSWLR 653 [829] Ipp JA made a similar distinction between the circumstances of that case and those in Kuru. Everything that his Honour said at [826] ‑ [832] applies, in my view, to the present matter. See also Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd [2010] VSCA 355 at [103]; SKA v The Queen [2001] HCA 13; (2001) 205 CLR 1 (where the Court of Criminal Appeal of New South Wales failed to make a critical determination in relation to the date upon which the offences were alleged to have occurred); Kimberly‑Clark Australia Pty Ltd v Arico Trading International Pty Ltd [2001] HCA 8; (2001) 207 CLR 1 [34] (where the High Court conceded that plainly there can be no general principle that a court of first appeal should determine all the questions which have arisen); Lockwood Security Products Pty Ltd v Doric Products Pty Ltd [2004] HCA 58; (2004) 217 CLR 274 [105]; Cornwell v The Queen [2007] HCA 12; (2007) 231 CLR 260 [105].
    3057 The High Court has very recently revisited the matter in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Rec and Mgrs Apptd) [2011] HCA 18; (2011) 277 ALR 243 at [56] where their Honours said this:
    This Court has said on more than a few occasions that it is important for intermediate courts of appeal to deal with all grounds of appeal, not just that which is identified as the decisive ground, to overcome the need for remittal where a decision on that ground is the subject of a successful appeal. (footnotes omitted)
    3058 The two footnotes to that paragraph include Kuru, so I do not think that the High Court should be taken to have converted the rule into a universal one.
    3059 The dimensions of the present case far exceed those described by Ipp JA in Ingot Capital and, just as his Honour found in that case, and for similar reasons I do not think that it is in the interests of justice for me to generate some lengthy essays on the principles explained in Barnes v Addy and the application of those principles, all of which would be by way of obiter dicta. Accordingly, save for the few paragraphs immediately below, I will not consider the Barnes v Addy grounds in the notices of appeal and notices of contention.
    3060 In my opinion, what the Bell group directors did that was legally unacceptable was to prefer one group of creditors, the Banks, to the rest of the Bell group creditors in circumstances where, as events turned out, the latter suffered prejudice.
    3061 If the directors’ hopes had been realised, the Bell group would have survived, the unsecured creditors would have been paid and the Transactions would not have been challenged.
    3062 However, the directors’ hopes were not realised and eventually the Bell group went into liquidation. As recent case law, at the highest Australian level shows, that means that the Transactions must be set aside under the provisions of s 565 of the Corporations Act when read with s 121 of the Bankruptcy Act. But, in my view, that does not mean that the Bell group directors are to be tarnished with a finding that they breached their fiduciary duties when they granted security to the Banks over the Bell group’s assets. The insolvency regime to which I have just referred provides adequate protection for the unfavoured creditors. There is no need, in my view, to stretch Barnes v Addy to provide them with a remedy. In fact, in my opinion, that would be counter‑productive.
    3063 Where, as in this case, the directors were not dishonest but, with the benefit of hindsight, are judged to have made a commercial mistake, in my opinion the insolvency laws should be deployed to do their work untroubled by 19th century equitable principles derived from the law of trustees.
    3064 The Bell group directors were not trustees; they were entrepreneurs whose role, on behalf of investors in the group, included the taking of measured risks in the interest of deriving profits. Those investors, of course, rank after the creditors in the liquidations. They have lost everything. This case is not about them, it is about how the remnants of the assets of the Bell group are to be shared out between the creditors; creditors who could (and did) choose between being secured or unsecured, subordinated or unsubordinated depending on their appetite for risk.
    3065 From a commercial viewpoint, in my opinion, honest company directors of an illiquid enterprise which they are trying to keep afloat should not be unduly restricted in their choices of how to keep the creditors at bay.
    3066 If, by granting security to its bankers, they buy enough time for the enterprise to survive, that would be in the interests of all concerned. If their choice turns out to be the wrong one, the insolvency laws provide the necessary remedy of equal treatment among all creditors. Otherwise the law might discourage honest entrepreneurship in favour of bureaucratic cautiousness. In simple terms that is what is at stake. This of course, has nothing to do with the conduct of dishonest directors or the duty of directors to take reasonable care. As I have mentioned elsewhere, none of the respondents’ claims was based on allegations of negligence.
    Were the Banks liable under either of the heads on which the equitable fraud claims were based?
    3067 The respondents advanced two types of equitable fraud claims. One was based on the fourth category of fraud identified in Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125; 28 ER 82. The other was a claim of unconscionable conduct on the part of the Banks.
    Earl of Chesterfield
    3068 The respondents’ case at first instance was put on the following basis. The Transactions and the various documents, including minutes, that were prepared in relation to the Transactions constituted a scheme (‘the Scheme’) by virtue of which the Banks were given security over all significant and worthwhile assets of the Bell Participants in priority to the claims of all other creditors or future creditors of those companies. The Scheme, so the respondents contended, was an imposition and deceit on LDTC as trustee for the holders of the five convertible bond issues and also on the other non‑bank creditors of the Bell group companies within, or by analogy to, the fourth category of fraud identified in Earl of Chesterfield. That is, imposition and deceit amounting to fraud in equity. The main elements of the imposition and deceit were the following allegations:
    • Before and as a consequence of the entry into the Transactions, events of default occurred under the terms of the BGNV bonds;
    • The banks had relevant knowledge, both directly and as imputed through their agents, Westpac and Lloyds Bank and their lawyers, of the events of default;
    • LDTC was imposed upon and deceived because the Scheme, by its nature, breached the covenants in the BGNV trust deeds. LDTC was ignorant of the events of default. Had it been aware of them it could or would have taken steps available to it under the BGNV trust deeds or otherwise to protect the bondholders and, indirectly, the other non‑bank creditors. Property held by LDTC on behalf of the bondholders was damaged and prejudiced. The banks took advantage of LDTC’s ignorance both in proceeding with the Scheme in January/February 1990, in the knowledge that LDTC was ignorant of the nature and effects of the Scheme and the events of default under the BGNV trust deeds, and in acting to protect the Scheme in the period from February to July 1990.
    3069 His Honour held that this equitable fraud claim was available to the respondents on the pleadings and was not legally hopeless. However, he found on the facts, on two bases, that the claims were not made out. First, at all material times LDTC knew that the bonds and the on‑loans were subordinated and ranked behind the Banks. In the second half of 1989 LDTC was on notice of the financial difficulties facing the Bell group, and by 26 January 1990 was on notice that the securities had been given and taken, regardless of whether or not it knew of all the details of that security. Duffett, the managing director of LDTC felt that there was little LDTC could do about it. Neither the Banks nor TBGL, BGNV or BGF were obliged to inform LDTC about the refinancing or the securities. This was particularly so in relation to those three Bell companies because there were no negative pledges in the trust deeds [9027]. Secondly, ([4294] and [9027]) the respondents had not established that there had been a resolve on the part of the Banks deliberately to conceal information from LDTC or the other creditors. This was, so the trial judge held, necessary to constitute an imposition and deceit. Public utility did not require the intervention of equity.
    My reasoning
    3070 In this section of my reasons I refer to equitable fraud as being the fourth category of fraud identified in Earl of Chesterfield. I will deal separately with the cross‑appeal grounds based on allegations of unconscionable conduct.
    3071 There is considerable merit in the appellants’ oral and written submissions (appeal ts 3157 ‑ 3158; APPA.000.129) that the respondents’ equitable fraud case was very different (the phrase senior counsel used was ‘bears no resemblance’) to their case at first instance. This is perhaps best illustrated by pars 115 and 115A of the respondents’ amended grounds of cross‑appeal [APPR.000.056], when compared with his Honour’s helpful summary of the bases on which the respondents put their case of equitable fraud. In their submissions, the appellants argued that the respondents should not be entitled to rely upon the new equitable fraud grounds. In view of my conclusion that the learned primary judge did not err in his handling of the respondents’ equitable fraud claims, I shall confine myself to noting, but not deciding, that there is considerable merit in what the appellants say. On the other hand, were I to engage in deeper analysis of this pleading cum tactical point, it may well simply show a change of emphasis on the respondents’ part. It does look as though at first instance the respondents relied very heavily on their proposition that the appellants had actively tried to keep LDTC (and any other creditors) in the dark. On appeal, their focus seems to have shifted to the matter of public utility. I shall concentrate on the merits, or otherwise, of their amended cross‑appeal grounds rather than devote precious time to the appellants’ preliminary objections.
    3072 In their written submissions the main respondents paraphrased [APPR.000.041] (at par 159) the public policy as being ‘… against a transaction which is in bad faith in respect of third parties who may be affected by the transaction or its consequences’.
    3073 Although, in the same paragraph, the main respondents had quoted Lord Hardwicke more fully, their paraphrase (ostensibly re‑wording what I shall call, in the interests of brevity, ‘the fourth category’) conveniently omits the reference by Lord Hardwicke to ‘such a relation’ to the parties to the transaction sought to be impugned. His Lordship was not referring to any third party but to ‘… other persons, who stand in such a relation to either as to be affected by the contract or the consequences of it; …’ (100 ‑ 101).
    3074 In Bell [No 1] his Honour rejected an application by the respondents to amend the statement of claim to add, as one of the bases of their equitable fraud cause of action, a fraud on the bankruptcy laws. As his Honour explained in [4901] of his main reasons below:
    I did so for the simple reason that the Transactions either are, or are not, caught under the nominated provisions of the Bankruptcy Act.
    3075 The respondents have not appealed against his Honour’s ruling in Bell [No 1]. Their appeal in relation to equitable fraud was not based upon any allegations of fraud on the bankruptcy laws. There were no written or oral submissions advancing a case based on fraud on the bankruptcy laws, although the respondents, having described ‘the relevant aspect of public policy identified in Chesterfield’ in par 159, referred (in par 160) to fraud on the bankruptcy laws as ‘another aspect of public policy in the field of insolvency’.
    3076 The respondents were unable to cite any authority which was directly in point or even anywhere near directly in point to support their equitable fraud claim. As his Honour was well aware, [4864] that was not fatal to the claim. But there have been hundreds, possibly thousands, of cases concerning unsecured creditors taking security from a person or company in an insolvency context. None has been decided in any court on the basis of the fourth category. Most have been disposed of under the traditional statutory regimes.
    3077 Basically the respondents’ equitable fraud case is that the Banks ‘stole a march’ on LDTC by ‘keeping it in the dark’ about certain alleged defaults (defaults under the terms and conditions of the bonds). Their basic submission was that the Bell directors and the Banks knew that there had to be a financial restructuring of the Bell group. They also knew, so it was put by the respondents, that as part of the restructuring there would have to be an agreement with the bondholders to waive payment of part of the debt owed to them. The Transactions gave the Banks control over all the Bell assets in priority to the other creditors and ‘… fundamentally altered the landscape in which a restructure could be considered’ (appeal ts 2290). They gave the Banks the means of controlling the timing and terms of any restructure. In my view, even if those facts are made out, they are not such singularly exceptional circumstances of creditor opportunism as to put this case into the rare category of a case of first impression.
    3078 I think the fact that this case is put forward as one of first impression sounds a slight warning bell of caution. So too, in my view, is the novel legal basis upon which the respondents rest their claim. The public utility which they identified came down to (appeal ts 2327 ‑ 2330) what was said to be the public utility in preventing agreements which delay or compromise the prospect of a valid and effective restructure. The respondents’ basic assertion was that once the Banks knew that there were insufficient funds to meet all of the interest payments ‘… that meant that there had to be a restructuring of the bonds’. Taking security over all the available assets first delayed a valid and effective restructure and, secondly, changed ‘… the character of the circumstances in which the restructuring will be considered to such an extent that they actually make it unlikely that there will be a restructure’. Taking security in those circumstances was said to be contrary to public utility. When asked whether there was any authority for this type of public utility, Mr Colvin SC, for the main respondents, frankly answered ‘No. We have to reason from general principle’. Although at first eschewing (appeal ts 2327) reliance, by analogy, on the secret composition cases, he contended that there was an element of the composition cases upon which the respondents relied to a certain extent. Mr Colvin described that extent as follows:
    … the nature of the concern about public utility is that there are [sic] here a class of people who, according to their general treatment in the law, are identified as parties who stand together, and agreements which tend to affect a dealing which re‑organises their rights without them all knowing are an imposition and a deceit.
    3079 As the main respondents explained in their written submissions, (par 157, [APPR.000.041]) the expression ‘public utility’ is now known as ‘public policy’.
    3080 The authorities show that it is not the function of the courts to create public policy but to recognise it. Spigelman CJ (citing Isaacs J in Wilkinson v Osborne (1915) 21 CLR 89, 97) said in R v Young [1999] NSWCCA 166; (1999) 46 NSWLR 681, 700:
    It is only appropriate for the courts to recognise a category of public policy which is capable of precise statement, and which reflects so widely held an opinion, that the court’s reasoning can be described in terms of ‘recognition’ rather than ‘creation’.
    3081 His Honour, on the same page, referred to the need for ‘… a definite principle which the community as a whole has plainly adopted, for a significantly lengthy period to suggest permanence’. See also Mason J in A v Hayden [1984] HCA 67; (1984) 156 CLR 532, 558 ‑ 559.
    3082 The respondents were unable to point to any relevant public policy other than that referred to above, i.e. the so‑called public policy of preventing agreements which delay or compromise the prospect of a valid and effective restructure. I am not aware of any such public policy and we were not taken to any publication in which it is mentioned. In those circumstances, in my opinion, it is impossible, given the authorities referred to above, for a court to ‘recognise’ it as a basis for setting aside the Transactions. That would be to put the cart before the horse. The public policy must first exist, and very clearly exist, before it is applied by the courts. To do otherwise would amount to an attempt at judicial legislation.
    3083 The next matter is to consider whether there was any other basis, founded in the cross‑appeals, to support the respondents’ equitable fraud case as one which fell within the principle explained in the fourth category and whether his Honour erred in not so finding. That is, on the pleadings, the evidence and the manner in which the case was conducted below, was the conduct of the appellants, in the circumstances in which the Transactions were entered into, such that a court of conscience, applying the fourth category, should interfere and set those Transactions aside? The question may usefully be rephrased: Was the appellants’ conduct an imposition and deceit on LDTC and other non‑bank creditors even if they may not have intended to impose upon or deceive them?
    3084 French J, in rejecting the application of the fourth category in Re La Rosa; Ex parte Norgard v Rocom Pty Ltd (1990) 21 FCR 270, 288, acknowledged that the circumstances in which equity will provide relief to third parties were not closed. He conveniently listed the examples of equitable fraud which Lord Hardwicke had set out, namely:
    • marriage brokage contracts;
    • payment to a parent to consent to the marriage of a child;
    • private agreements between a compounding debtor and one of his creditors;
    • payments agreed to be made for preferring or recommending someone to a public office or employment.
    As his Honour noted, later authority had added to this list:
    • loans to a woman to swell her dowry and thus deceive her husband;
    • rewards for influencing a testator; and
    • contracts in restraint of trade.
    3085 French J had to consider a transaction between the debtors and a third party which gave the third party a substantial benefit within a very short period of time and which his Honour described as ‘improvident’. The debtors became bankrupt about three months later. But the evidence, so his Honour held, did not:
    … establish any relationship between the transactions and the position of actual or prospective creditors of the [debtors] such that [the third party] could, in equity, be called to account for the benefit which it has obtained.
    3086 Owen J was obliged to examine the nature and the circumstances of the Transactions, the Scheme and the conduct of the parties both before and after the Transactions, in particular during the six month hardening period. In my respectful opinion, he did so most assiduously and did not, save possibly in one respect, err in the conclusions which he drew. The one possible respect was the matter of construing the relevant covenants in the bonds and trust deeds as requiring knowledge by the directors of insolvency, not the mere existence of insolvency, for there to be default. But that would not, in my view, make any difference to the outcome of the cross‑appeal. My reasoning assumes, without deciding, that TBGL and BGF were, at the relevant times, in breach of the relevant conditions in the trust deeds or the bonds themselves (or both), and that the appellants knew of this via the respective firms of solicitors acting for them in putting together the Transactions.
    3087 As his Honour found, the facts did not establish the requisite deceit on the part of the appellants. His Honour held [4885] that the respondents did not have to prove an intent to deceive on the appellants’ part. The appellants challenged that in their notice of contention, but it is not necessary to decide that issue. It is not necessary because, in my view, no matter what the banks knew about whether or not the Bell group companies were in default of conditions in the trust deeds or the bonds, they were under no obligation to inform the other creditors of the circumstances. Even as far back as Countess of Strathmore v Bowes (1789) 1 Ves Jun 22; 29 ER 51 there had to be an obligation (even an implied one) arising out of a relationship to disclose the relevant circumstances before non‑disclosure became equitable fraud. There was simply no such relationship here.
    3088 In section 22.2.2.3 of his reasons and in particular at [4899], his Honour expressed concerns about extending the imposition and deceit cause of action by analogy to the composition cases much beyond the situation of common dealing. As the judge observed at [4900], 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 which brings in the obligations of good faith. He acknowledged [4905] that one way of looking at the respondents’ case was that it was a common dealing case. This was on the basis that the financial predicament of the Bell group companies was so precarious that an obligation arose to bring all creditors into the arrangement. This was not done but the consequences of dealing solely with the Banks were the same. His Honour said that he would return to that matter in the course of dealing with the factual matrix. He did revisit the matter at [8969] and following, but in the relevant sections, 32.5 and 32.6, where he drew his conclusions on imposition and deceit, I do not think that he dealt with this point. The appellants, in their notice of contention (ground 20), contend that his Honour should have held that the fourth category did not apply unless the respondents could show a common dealing. I think that his Honour’s failure to so find was a mere oversight. He gave every indication that he was going to so find. As he did not do so, and as the appellants have so contended, the issue must be dealt with.
    3089 In my view, there was no deceit on LDTC, or the other creditors for that matter, because there was not the sufficient nexus between the appellants and the other creditors in relation to the rights which they had against the various members of the Bell group. This was the sort of lack of nexus to which French J referred, in slightly different terms, in La Rosa. No meeting of creditors, whether formal or informal, had been convened or was foreshadowed. There was no relationship as between the two or three sets of creditors to give rise to the equitable obligations found in the composition cases.
    3090 I do not think that the precarious financial predicament of the Bell group was sufficient to give rise to an obligation to bring all creditors into the arrangements which the Bell group was planning to make with its bankers. There is no authority to suggest that such a situation creates such an obligation. The composition cases show that the obligation arises at a later stage when the creditors are negotiating together with a view to reaching a composition or other like arrangement with the debtor. Only then is there created a relationship inter se the creditors where equity will intervene to set aside clandestine bargains by one or some creditors with the debtor which work a fraud on the rest of the creditors. The attempt by the respondents to apply to the present case, by analogy, the equitable fraud principles of the compositions cases must, in my view, be rejected and his Honour should have so found. In fairness to him, as I have mentioned above, his reasoning suggests that he intended to do so.
    3091 The learned primary judge found [9027] that the imposition and deceit case advanced by LDTC failed on the facts and that LDTC was not imposed upon, nor was it deceived. In my view, not only was that finding open to his Honour but, with respect, he was quite right so to find. The first of the judge’s findings was that at all times both before and after 26 January 1990, LDTC knew that the bonds were subordinated and it knew that the on‑loans were likewise straightforward, subordinated loans which ranked behind the loans made by the Banks. The respondents challenged this latter finding and I think they have something of a point. The point is that Duffett did not know the on‑loans were subordinated; he simply assumed that to be the case. As I read the transcript of Duffett’s evidence (ts 15187 ‑ 15188; 15232), he had not specifically turned his mind to the question whether the on‑loans were subordinated. The evidence suggests that nobody else had done so either. He simply assumed that to be the case and had drawn no distinction between the subordinated position of the debt owed to the bondholders and the position of BGNV as on‑lender to TBGL and BGF of the moneys raised from the bondholders. I do not think that it matters whether the judge correctly found Duffett’s state of mind on this point because, in my opinion, the on‑loans were at all times subordinated as a matter of inferred contract as I discuss below. Duffett’s assumption was soundly based.
    3092 I agree with the judge that LDTC was not deceived, for the reasons given by his Honour in section 32.6.4 of his reasons for judgment which I have summarised above. The main point, as I see it, was that the conduct of which the respondents complain was not sufficiently surreptitious or clandestine for the principles of equitable fraud to have any application. The key facts in that matter were, in summary, as follows:
    • In the second half of 1989 LDTC was on notice of the financial difficulties facing the Bell group. His Honour recites the evidence and his conclusions at [8777] to [8841]. In accordance with its trustee duties, LDTC monitored the financial press and became aware of the $900 million ‘loan’ from BRL to BCHL. It engaged London solicitors to advise it in relation to the effect that might have on the Bell group (ts 15115) and what steps LDTC could and ought to take to investigate the circumstances of the loan and the financial position of TBGL [8779];
    • On 7 July 1989 Roberts (Linklaters) gave some advice to LDTC. In that advice he referred, as his Honour found [8843], to the strong possibility that the re‑organisation in which the Bell group was taking part was being dictated by the bankers. Roberts specifically advised LDTC that ‘such leverage as you are able to acquire should clearly be aimed at achieving a standstill in repayments and the taking of security’;
    • On 20 October 1989 TBGL sent LDTC the preliminary final statements with dividend announcement (no dividend) for TBGL and on 13 November 1989, it sent to LDTC a copy of TBGL’s annual report for the year ended 30 June 1989. Both those documents contained statements in identical terms that the Bell group was engaged in refinancing arrangements ‘on a secure basis’;
    • On 26 January 1990 in London, Aspinall told Duffett that the refinancing with the two groups of banks involved the Bell group giving security. His Honour did not accept Duffett’s denial of this and so found at [8857]; and
    • On 7 May 1990 Aspinall told Potter of LDTC that non‑payment of the interest then due was because a waiver had yet to be obtained (to enable access to the A$17 million proceeds of sale of the printing assets) from four members of the banking syndicate.
    3093 His Honour’s conclusions about LDTC’s state of knowledge about the refinancing arrangement can be found in section 31.4.6 of his reasons and they are based, with respect, squarely on the relevant evidence.
    3094 I think that there are two further points to be made. First, it would not have been difficult for LDTC to have gauged the extent of the security obtained by the Banks, in terms of the assets so secured. The only substantial assets were the publishing assets and the BRL shares. Secondly, the complaint that LDTC was unaware of the stringency of the conditions imposed by the Transactions is mainly a reference to the cl 17.12 regime. His Honour found that LDTC was informed about how that regime worked when Aspinall told Potter this at their meeting on 7 May 1990.
    3095 That leaves BGNV’s complaint in its cross‑appeal that the judge had erred by adopting a group approach to the respondents’ causes of action, had referred to the position of BGNV very little and had nowhere addressed its separate circumstances and complaints. In my opinion, his Honour did not err in those respects. The case below on equitable fraud was fought on a group basis and all of the reasons for his Honour’s rejection of the equitable fraud (on the basis of imposition and deceit) case apply equally to the arguments advanced by BGNV.
    3096 I agree, respectfully, with Drummond AJA (and, to the extent that such a view is contrary to those of Lee AJA on this point, disagree, equally respectfully, with those views) that there is ‘… nothing to prevent a creditor, prior to winding up and who is prepared to take the risk that a liquidator may later successfully challenge the transaction, from taking security from a debtor company facing insolvency. Such security will be legally effective unless and until successfully challenged by a liquidator’. Apart from the guidance provided by the more modern (if Edwardian may still be regarded as modern) authorities, to hold otherwise would be to add another layer of uncertainty to commercially‑justifiable dealings with an insolvent company. There is no need for Equity, given the availability of the statutory remedies if the company fails, to stifle such entrepreneurial initiative. If Aspinall’s honest optimism had been fulfilled and the Bell group (as he hoped) had survived, Equity would have had no role to play. As events have turned out differently, the insolvency statutes take care of the situation. Again, there was no role for Equity.
    3097 In my view, the respondents’ cross‑appeals in relation to the matter of equitable fraud (on the basis of imposition and deceit) should be dismissed and the appellants’ notice of contention on the point discussed above should be upheld. I now turn to the question of unconscientious conduct, or unconscionable dealing.
    3098 As I mentioned above, the main respondents did not cross‑appeal against his Honour’s dismissal of this aspect of their claims but BGNV cross‑appeals on the basis that his Honour misapplied the legal principles to the facts of this case.
    Unconscientious conduct
    My reasoning
    3099 BGNV is quite right to state that the trial judge did not separately address its position and had not referred to BGNV or Equity Trust otherwise than on a global basis i.e. by referring to all Bell Participants. However, in my opinion his Honour did not err in the respects complained of by BGNV in its cross‑appeal and submissions.
    3100 The relevant pleading is par 65MA of the amended statement of claim [PLED.008.002.001, 61 ‑ 62] which reads:
    65MA Further, or alternatively, the Scheme and the Transactions effected under the Scheme constituted an inequitable and unconscientious bargain upon each Bell Participant and thereby was an equitable fraud entitling some or all of the first to twelfth plaintiffs to the relief claimed in the prayers for relief.
    3101 The particulars given in relation to par 65MA dealt with the situations of the Australian Bell Participants and BGNV separately [PLED.009.001.001, 406 ‑ 407]. Both those sets of particulars referred almost word for word to the fact that the companies were under the control and dominion of their directors, who had breached their respective duties whereby the companies suffered the disadvantage of not having the benefit, to which they were entitled, 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. The changes made by the draftsperson to the particulars in relation to BGNV were to accommodate the fact that it had Equity Trust as its sole director and that its decision was ‘whether to enter its Transaction (the BGNV Subordination Deed) and the Scheme’.
    3102 On those pleadings I have come to the view, with considerable hesitation, that had BGNV run its separate case of an ‘inequitable and unconscientious bargain’ constituted by the Scheme and the Transactions including the BGNV Subordination Deed that might just have fallen within the pleadings. (The merits are of course another matter.) But that was not how the case was fought at first instance.
    3103 The case was fought by the respondents at first instance not on a separate company‑specific basis, whereby the position of each company was assessed in terms of whether it was at a special disadvantage. The case was advanced both orally and in written submissions in terms of the Bell Participants as a whole. The nearest BGNV got to a special mention was in par 20 of the plaintiffs’ closing submissions where there was reference to ‘Most of the Bell Participants (including BGF, BG(UK), BGNV and TBGL) were at a special disadvantage …’.
    3104 In my opinion, in those circumstances, it would not only be unfair to the learned primary judge to hold him to be in error for not dealing individually with the position of BGNV, but it would be to work an injustice upon the appellants. The respondents chose to run their case on a group basis rather than have the position of each individual Bell Participant assessed in terms of special disadvantage.
    3105 In any event, his Honour’s reasoning applies equally to the specific situation of BGNV. In terms of special disadvantage, BGNV was even less at a disadvantage on his Honour’s findings, because Equity Trust did not breach its duties to it. At appeal ts 3118 senior counsel conceded that BGNV’s special disadvantage case was based on the allegation that it was under the control of a director who was abdicating responsibility for the proper performance of his duties. That basic premise was found not to be the case and his Honour was quite right to find that Equity Trust was not in breach of its duties to BGNV. The evidence shows that BGNV was indeed able to make a worthwhile judgment about what was in its best interests. It also had the advantage of legal advice from three different sources. Those were:
    its own lawyers in Curacao;
    the Lloyds Syndicate Banks’ lawyers in Curacao; and
    through TBGL, and on occasion directly, S & W in Sydney.
    3106 I appreciate that access to legal advice does not of its own prevent a person from being in a position of special disadvantage but it is clearly a relevant factor: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 [15].
    3107 We were not referred to any case in which a corporation was held to have been under a special disadvantage in the context of an unconscionable conduct claim. In Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37 [61] Wheeler J was prepared to assume that what her Honour referred to as ‘”Amadio” unconscionability’ would be an available cause of action in respect of a corporation in some cases. But she did so with a great deal of reservation and hesitation and found that, on the facts, there was no relevant special disadvantage. The Full Court dismissed an appeal, also on the facts, without considering the legal point: Ridout Nominees Pty Ltd v Commonwealth Bank of Australia [2003] WASCA 158. It is not necessary for me to decide the question because I do not think that there is any substance in the submission that BGNV was under a special disadvantage.
    3108 In my opinion it would be commercially unrealistic to assess BGNV’s position without taking into account where it stood in the Bell group. It was a wholly‑owned subsidiary of BGF and was managed, except for certain formalities, by TBGL. Such facilities and advantages as were at TBGL’s disposal were available also to BGNV. The bargaining power of the Bell group as a whole was available to BGNV but the truth of the matter was that it did not need it. BGNV did not negotiate or bargain with the Banks. All of that was done on its behalf by TBGL until it came to the time when BGNV had to decide whether it would execute the BGNV Subordination Deed. I have already referred to Ruoff’s prudential approach to that matter, including obtaining advice from accountants and lawyers. The cases recognise that a special disadvantage does not arise merely out of one party being in a superior bargaining position: Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447, 462; Berbatis [14]. In any event, as his Honour found, there was not such a gross inequality of bargaining power between the Banks and the Bell Participants as to amount to special disadvantage.
    3109 The combination of those factors and the fact that Equity Trust did not breach its duties leads, in my view, inevitably to the conclusion that BGNV was not under a special disability. Its cross‑appeal should be dismissed.
    Were the Banks liable under either of the two species of statutory claims, namely, dispositions done with intent to defraud creditors, or voidable settlements?
    3110 I turn first to his Honour’s decisions in relation to the respondents’ claims that the Transactions which they challenged were done with intent to defraud creditors within the meaning of s 121 of the Bankruptcy Act, s 89 of the Property Law Act and 13 Eliz c.5 in force under Part 7 of Schedule 2 of the Imperial Acts (Substituted Provisions) Act 1986 (ACT). The last Act (‘the Territory legislation’) mentioned has potential application only in respect of BGNV, which was registered as a foreign corporation in the Australian Capital Territory on 4 April 1996 [MISP.00020.008], and its entry into the BGNV Subordination Deed. Two elements common to each of those three pieces of legislation are a disposition (or alienation which the parties were content to treat as meaning the same as a disposition) of property and that the disposition was made with intent to defraud creditors. His Honour dismissed the respondents’ claims because he held that, on the authorities, they had to prove that the disponor had a real and actual (i.e. a dishonest) intention to defraud creditors. That intention could be established by inference. But for the respondents to succeed, they had to establish an actual dishonest intent by direct evidence or by inference from the circumstances. The respondents had not pleaded, and had expressly disavowed any allegation of, a dishonest intention on the part of the directors of the companies concerned. Accordingly their claims under s 121 failed.
    3111 The outcome was different in respect of the claims based on the relevant Transactions being voidable settlements within s 120 of the Bankruptcy Act. His Honour held that the relevant deeds of guarantee and indemnity, the Principal Subordination Deed, the share mortgages (and directions and authorisations given by some of the shareholders in relation to those mortgages) and the mortgage debentures (fixed and floating charges) entered into by TBGL, BGF, BPG and Wigmores Tractors were settlements within the meaning of s 120. Retention of the property in some form rather than its immediate dissipation or consumption was contemplated. His Honour further found that the weight of evidence showed that the Banks knew or suspected that the effect of the settlements was to disadvantage other creditors. They had therefore not established good faith as required by the section. There was valuable consideration. The Australian Banks converted an on‑demand facility to a fixed one and the Lloyds Syndicate Banks enlarged the time for repayment of its facilities. It was common ground that each of the Transactions impugned came into operation within the relevant statutory periods. As the Banks had to show both that they gave valuable consideration and that they acted in good faith, their failure to establish good faith meant that the settlements were void against the liquidator.
    3112 His Honour did not see any need to make orders under s 120 because he granted the relief sought under the principles explained in Barnes v Addy.
    3113 As Lee AJA helpfully reminds us, and as the learned primary judge explained at [9076] ‑ [9078], the sources of rights (‘substituted rights’) for claims in the nature of claims under s 120 and s 121 of the Bankruptcy Act were s 1400, s 1401 and s 1371 when read with s 565 of the Corporations Act. As a matter of convenience they have been referred to as claims under s 120 and s 121 of the Bankruptcy Act.
    3114 However, for reasons which are referred to below, it is, I think, useful to bear in mind that s 565 of the Corporations Act does not merely pick up those Bankruptcy Act provisions. Section 565 itself does the actual work of avoiding certain pre‑23 June 1993 transactions and in this case may give rise to the relevant respondents’ entitlement to relief. Apart from the present matter, there does not appear to be a reported decision concerning a s 120 or s 121 type claim under s 565 of the Corporations Act. DM Cannane v J Cannane Pty Ltd (in liq) [1998] HCA 26; (1998) 192 CLR 557, the last significant appellate decision of this kind, was decided under s 565 of the Corporations Law.
    Are the claims under s 121 of the Bankruptcy Act, and the State and Territory provisions similarly based on the Elizabethan statute, precluded on the pleadings?
    3115 In relation to this pleading point, I will consider s 121 of the Bankruptcy Act and the State and Territory provisions based on the Elizabethan statute together. I will also deal separately with s 121 as, in my view, thanks to s 6 of the Bankruptcy Act, it operates differently from the other provisions. The difference to which I refer is in respect of a transaction which is impeached on the ground merely that it constituted a preference of a particular creditor by his debtor: see Glegg v Bromley [1912] 3 KB 474.
    3116 His Honour delivered his main reasons for judgment in this matter nearly two and a half years before the High Court of Australia decided Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 546. Were it not for that decision, I would have respectfully agreed with his Honour’s conclusion that, on the pleadings, the respondents could not rely on s 121 of the Bankruptcy Act and its State and Territory counterparts. His conclusion that these sections required proof of an actual subjective dishonest intention to defraud, i.e. to cheat, deceive or swindle, was based on a comprehensive review of the relevant authorities to that date and, in particular, Cannane.
    3117 But in Marcolongo the High Court explained that:
    • the Elizabethan statute was to be understood as if it read ‘delay, hinder or [otherwise] defraud’;
    • it should receive a liberal construction in effecting its purpose of suppressing fraud;
    • it was unnecessary to show that the debtor wanted creditors to suffer a loss or that the debtor had a purpose of causing loss;
    • it was necessary to show the existence of an intention to delay, hinder or defeat creditors and in that sense to show that, accordingly, the debtor had acted dishonestly (citing Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 with approval for this and the immediately above principle); and
    • (citing Farah Constructions) 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.
    3118 The court had earlier, at (642), twice made the distinction between ‘constructive fraud, with notions of constructive knowledge or notice as understood in equity’ and ‘the purely equitable doctrine of constructive notice or constructive knowledge’ on the one hand and ‘actual knowledge which is inferred’ on the other. When Brennan CJ and McHugh J referred in Cannane to ‘the onus of proving an actual intent’ the word ‘actual’ was added as a ‘periphrasis’ (a circumlocution or roundabout way of speaking) ‘to emphasise that, while the existence of the intent might be inferred from the evidence, it was to be found as a fact’.
    3119 It might well be argued that these statements were all obiter dicta because, as Heydon J held, whatever the precise test required by s 37A of the Conveyancing Act (NSW), the relevant conduct in Marcolongo was enough to satisfy it. ‘It was as “actual” and “dishonest” an intent as it is possible to have’ (653).
    3120 In my view, whether obiter dicta or not, the joint observations of the four other judges in Marcolongo make it sufficiently clear that Owen J erred in ruling that because the respondents would have to show conscious dishonesty, they were shut out by their pleading, and their disavowal of a case based on conscious dishonesty, from their Elizabethan statute case.
    3121 As the respondents have appealed against his Honour’s ruling, it now falls to us, as his Honour at [9149] foresaw might be the case, to decide whether some or all of the Transactions were dispositions of property which fell within the section.
    Section 121 of the Bankruptcy Act
    Identifying the relevant transactions
    3122 His Honour conveniently describes the three categories of security documents subject to challenge under the various statutory provisions at [9067] ‑ [9069]. The third category, said to be charges unregistered under the Corporations Law, may be disregarded. His Honour’s conclusion, that they were not charges, is not challenged in this appeal.
    3123 The first category of securities comprised those challenged under s 121 of the Bankruptcy Act. The second category, challenged under s 120(1) or s 120(2), included the same instruments as were in the first category but only insofar as they might have been settlements by four of the plaintiff Bell companies, i.e. TBGL, BGF, BPG and Wigmores Tractors.
    3124 This part of my reasoning is concerned with the application of s 121 of the Bankruptcy Act but some of the questions which arise are common to both categories of securities. For example, whether they amount to a disposition.
    3125 As his Honour points out [9070] none of the Transactions of BGUK is attacked under the statutory claims, not all of the Transactions are the subject of a statutory claim and relief under the statutory provisions is claimed only by the plaintiff Bell companies, not the broader category of Bell participants.
    3126 His Honour identified the Transactions under statutory challenges as being:
    • various deeds of guarantee and indemnity;
    • mortgage debentures (fixed and floating charges);
    • share mortgages (and directions and authorisations given by some of the BRL shareholders in relation to some of those share mortgages);
    • the Principal Subordination Deed;
    • the BGNV Subordination Deed;
    • ABFA (the Australian Banks Facilities Agreement);
    • ABSA (the Australian Banks Supplemental Agreement); and
    • LSA No 2 (the Lloyds Supplemental Agreement No 2 with the Restated Lloyds Facility Agreement No 2 as an appendix).
    3127 The four agreements referred to in the last three bullet points above were described as ‘the main refinancing documents’.
    3128 At first instance [9196] and in the appeal the Banks conceded that the share mortgages (other than those executed by TBGL and Ambassador as trustees) and the fixed components of the mortgage debentures were, relevantly, dispositions. It is convenient to deal first with the share mortgages executed by TBGL and Ambassador as trustees, as the point is a short one.
    The directions and authorisations and consequent BRL share mortgages
    3129 These claims were brought by TBGL as trustee for Dolfinne, Industrial Securities, Maranoa and Neoma (each of which was a beneficial owner of BRL shares) to set aside legal mortgages which TBGL had, with their authority and at their direction, granted to the Banks. The four beneficial owners made similar challenges in relation to the directions and authorisations. There were also similar claims in relation to a legal mortgage granted by Ambassador to the Banks of BRL shares which it did not own beneficially.
    3130 The Banks’ position was that when TBGL and Ambassador executed mortgages of the BRL shares pursuant to the directions and authorisations and on behalf of the beneficial owners of the BRL shares, they were mortgages of only the legal title to the shares. The legal title to the shares was not property potentially divisible among their creditors and the mortgages did not amount to a disposition of property for the purposes of the avoidance provisions.
    3131 Owen J gave that argument short shrift. The totality of his reasoning was as follows [9200]:
    I do not accept that argument. It seems to me that the directions and authorisations and the share mortgages, while independent documents, are in fact interdependent. The former would have no effect without the latter, and the trustee was reliant on the former in executing the latter. Take the position of Industrial Securities and Neoma as examples. Suppose all other elements of the statutory causes of action had been made out and the only question was whether there was, relevantly, a disposition. If the banks’ argument is correct, the share mortgages granted by Industrial Securities and Neoma over the shares in which they had both legal and beneficial title would be vulnerable but those executed by their trustee at their direction would not. In my view, that would not make commercial sense and cannot be what the legislature intended.
    3132 With all due respect to his Honour, I think his conclusion is wrong in law. I agree that the directions and authorisations and the Share Mortgages are interdependent and that each trustee was reliant on the former in executing the latter. But the upshot of the combined Transaction was, in my view, that the beneficial owners of the shares disposed of their interest in those shares, by way of mortgaging that interest to secure the relevant Bell indebtedness to the Banks, by directing and authorising their trustee (TBGL or Ambassador as the case may have been) to transfer them by way of mortgage to Westpac. The legal title thereby passed to Westpac. The beneficial owners would, by the directions and authorisations, have been estopped from denying to Westpac or its successors in title full ownership as mortgagee of the shares when it exercised its power of sale. If there had been no default in paying off the Banks, Westpac would, on discharge of the Bell group’s indebtedness, have been obliged to retransfer (Westpac had registered the shares in its name) to TBGL or Ambassador the legal title to the shares and the relevant trustee would have resumed its role as trustee for the beneficial owners.
    3133 In the example given by his Honour in the above paragraph, the Share Mortgages granted by Industrial Securities and Neoma over the shares in which they had both legal and beneficial title and also the directions and authorisations by which they caused the shares in which they had only beneficial title to be mortgaged were all vulnerable as both fraudulent dispositions under s 121 of the Bankruptcy Act (and the State and Territory provisions based on the Elizabethan statute) and also as settlements under s 120 of the Bankruptcy Act. Not only does that make commercial sense but, in my view, it is precisely what the legislature intended.
    3134 The respondents submitted that by operation of the directions and authorisations and by the use of the words ‘as legal and beneficial owner’ in the legal share mortgages, equitable title to the shares had passed from the beneficiaries and had merged into the legal title held by the trustee, thereby ceasing to exist. I reject that submission. That is not the way the direction and authorisation documentation was worded. It was worded in terms of the trustee executing the share mortgages for and on behalf of the beneficial owners. There was no merger of title. The main respondents relied on DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431 but, in my view, that case is clearly distinguishable on the facts from the present matter. Here there was never a transfer from the beneficial owner to TBGL or Ambassador. The expression ‘as legal and beneficial owner’ in the mortgage is simply a well‑known conveyancing mechanism for incorporating the covenants set out in Part III of the Third Schedule of the Property Law Act via s 45 of that Act.
    3135 In my opinion, the directions and authorisations do not constitute dispositions of property by TBGL or Ambassador. They were dispositions made by the four companies which were the beneficial owners of the shares.
    3136 The directions and authorisations are similar in their effect to the transaction described by Dixon J in Williams v Lloyd [1934] HCA 1; (1934) 50 CLR 341, 372 ‑ 374 whereby the bankrupt caused a mortgage to be granted to his daughter by someone who was indebted to him. The bankrupt’s request to the debtor, coupled with the bankrupt’s intention (an intention presumed due to the father and daughter relationship) to give the beneficial interest to his daughter operated as a settlement that excluded the resulting trust which would otherwise have arisen.
    3137 In the present matter the beneficial owners of the BRL shares, by executing the directions and authorisations to the legal owners to mortgage the shares to the Banks, with the obvious intent that the Banks would hold beneficial title to the shares subject only to the equity of redemption in the mortgage, effectively vested that interest in the shares in the Banks. It is that transaction (i.e. the directions and authorisations and the consequent mortgage) upon which the avoidance provisions operate.
    3138 In both Williams v Lloyd and the present matter the relevant intention and hence the relevant party from whom each ‘disposition’ or ‘settlement’ moved was the beneficial owner.
    3139 In their final written submissions at trial (par 296) the Banks admitted that the dispositions by the BRL shareholders of their beneficial interest in the BRL shares were dispositions within the meaning of s 121(3) of the Bankruptcy Act. They submitted that the main respondents could not establish the requisite intent to defraud and for that reason the allegations under s 121 had to fail. I deal with the matter of intent, in the light of Marcolongo, below. In short, I find the requisite intent existed.
    The subordination deeds
    3140 His Honour also dealt fairly briefly with the question of whether the subordination deeds (the Principal Subordination Deed and the BGNV Subordination Deed) caused a disposition of property. This was in the context of s 120 of the Bankruptcy Act but it was not argued that the test was any different under s 121 of the Bankruptcy Act and the State and Territory provisions based on the Elizabethan statute. His Honour’s reasoning on this point, in full, was as follows [9202] ‑ [9203]:
    In Caddy v McInnes (582) the Full Court of the Federal Court approved the dictum of Drummond J in an earlier hearing when his Honour said:
    It is true that a disposition of property will occur immediately the owner divests himself of a right in that property by transferring it or by diminishing his interest in the property e.g. by encumbering it. (emphasis added)
    In Re NIAA Corporation Ltd (358), Santow J described a subordinated debt as a ‘flawed asset’. A creditor who agrees to stand behind other claimants of previously equal (or even inferior) ranking is diminishing his property. On this basis I think it is difficult to argue otherwise than that subordination is a disposition of property for these purposes.
    3141 Under the Principal Subordination Deed the corporate plaintiffs subordinated their rights of repayment of inter‑company loans to the rights of the Banks to repayment of their loans. Under the BGNV Subordination Deed, BGNV subordinated its rights of repayment of the loans made by it to TBGL and BGF to the Banks’ right to repayment of their loans to those companies.
    3142 Under each of those two subordination deeds, there was a relevantly identical trust in favour of the Banks over any moneys which the subordinating companies might receive in respect of the subordinated debts.
    3143 The combined effect of the provisions of each subordination deed was, in each case, thus:
    (a) a postponement of the right of the subordinating company to receive payment of its debts until the Banks had been paid in full;
    (b) a surrender of its right to prove in liquidation of the relevant debtor companies, on its own behalf, for its debts until the Banks had been paid in full;
    (c) a conferral on Westpac of the right to request the subordinating company to prove for the benefit of Westpac;
    (d) an authority for Westpac itself to prove i.e. effectively an assignment to it of the right to prove; and
    (e) the creation of a trust in favour of the Banks over any moneys received by the subordinating company from the relevant debtor companies whether under liquidation or otherwise.
    The Principal Subordination Deed
    3144 I shall deal separately with each subordination deed because in my view the application of the relevant law leads to outcomes which differ as between them due to differing factual circumstances.
    3145 The definition of ‘property’, in s 5 of the Bankruptcy Act, is extremely wide. It means real or personal property of every description and includes any interest, whether present or future, arising out of or incident to such real or personal property.
    3146 The debts owing to the subordinating companies are quite clearly personal property; they are choses in action. One of the incidents of such property, arising out of the bankruptcy legislation and the companies legislation, is to prove in a bankruptcy or a winding up. The right to a dividend consequent upon the lodgement of a proof in bankruptcy is also a chose in action capable of equitable assignment: Re Irving; Ex parte Brett (1877) 7 Ch D 419, 422.
    3147 In my opinion, the contractual right to priority of payment in a winding up and the declaration of trust over any dividends in a winding up are interests arising out of, or incident to, the personal property constituted by the subordinated debt. Furthermore, by cl 4(b) of the Principal Subordination Deed the subordinating companies granted to Westpac the right to prove in the relevant liquidation. As Mr Young QC submitted, (appeal ts 2398) that involved effectively the disposition or assignment to Westpac of a right to prove. The grant of those rights by the subordinating creditors to the Banks amounted to a disposition of property within the meaning of s 121(1) of the Bankruptcy Act. In my opinion, for reasons which differ only slightly from those of his Honour, Owen J was right to hold that subordination was a disposition of property.
    The BGNV Subordination Deed
    3148 The appellants submitted that, as his Honour had found, the on‑loans were at all material times subordinated. Accordingly, any rights of BGNV with respect to those receivables had already been subordinated to the rights of other creditors of TBGL and BGF. The appellants contended that, in those circumstances, the execution by BGNV of the BGNV Subordination Deed did not effect any disposition of property and so did not enliven the operation of s 121. The appellants argued that the effect of the deed was ‘… neutral on the pre‑existing position’ [APPA.000.091, par 72].
    3149 BGNV’s response to these submissions was two‑fold. First that the on‑loans were not subordinated. In my view, for the reasons expressed below, they were subordinated. BGNV’s alternative submission was that if the on‑loans were subordinated, the BGNV Subordination Deed involved a ‘deeper subordination’, a ‘further diminution and subtraction from BGNV’s rights’ and therefore effected a disposition and alienation of BGNV’s property. The learned primary judge summarised some of the aspects of the deeper subordination contended for by BGNV at [9381] of his reasons for judgment. BGNV listed others at par 1059 of their written submissions [APPB.000.008]. They included matters which I have listed at [3038] above.
    3150 It is not necessary for me to decide whether the extra rights said to amount to deeper subordination constitute ‘property’ within s 5 of the Bankruptcy Act. That is because:
    • in terms of s 121 [and the Territory equivalent of s 89 of the Property Law Act (WA)], I have reached the conclusion, for reasons given below, that BGNV via Equity Trust and Ruoff, did not have the requisite intention to defraud;
    • BGNV made no challenge to the BGNV Subordination Deed under s 120; and
    • under the terms of the BGNV Subordination Deed it is quite clear, in my view, that neither TBGL or BGF disposed of any property.
    The guarantees and indemnities
    3151 The impugned guarantees and indemnities were granted by TBGL, BGF and BPG. Once again, his Honour’s reasoning on the question whether those guarantees and indemnities were settlements of property (it will be remembered that his Honour had no cause to consider the question of dispositions of property under s 121 but that it was common ground that settlements of property were the same as dispositions of property) was brief [9204]:
    There are at least two cases in which it has been held that guarantees can be settlements within the meaning of s 120: Re Pacific Projects Pty Ltd (543); Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267, 272. I harbour doubts on this issue. But Re Pacific Projects Pty Ltd is a decision of the Full Court of the Supreme Court of Queensland. The doubts that I have are not sufficiently refined to enable me to say that the decision is plainly wrong and I should therefore follow it: Farah Constructions [135].
    3152 With respect, his Honour’s assessment of the state of the authorities and hence his (reluctant) sense of being bound to follow them are, in my opinion, wrong in law.
    3153 The chain starts with Demack J in Re Pacific Projects Pty Ltd (Unreported, QSC, 11 November 1988) at first instance. There were two separate documents in contention, a mortgage and a guarantee. It was conceded that the mortgage was a settlement within the terms of s 120 of the Bankruptcy Act. His Honour gave short reasons (at 14 ‑ 15) for accepting that to be the case. He then turned to the question whether the guarantee was also a settlement. He referred first to the very wide definition of ‘property’ in s 5 and noted that, in terms taken from Halsbury’s Laws of England (4th ed) vol 20 [102], by the guarantee, Natwest was ‘secured from loss arising from’ the principal debtor’s debt. His Honour then reasoned:
    For the duration of the Guarantee, Pacific Projects has assumed liability for debts owing by John Geaney to Natwest. In my opinion, the Guarantee is also a settlement, as it is a disposition of a contingent interest in personal property to be held for the enjoyment of Natwest for an indefinite period of time.
    3154 It seems clear from the opening words of the next paragraph that the question had not been debated before Demack J. The issues which fell for decision concerned ‘good faith’ and ‘valuable consideration’. That was exactly the same position when the matter came before the Full Court. Nothing was said by their Honours about whether a guarantee was a settlement.
    3155 Demack J’s conclusion on the point was obiter dictum without the benefit of any argument. Had his Honour enjoyed that assistance, I think it would have been very likely that he would not have decided as he did but would have held that a guarantee does not settle any contingent interest in property despite the very wide wording of s 5 of the Act. That leaves Lyford v Commonwealth Bank of Australia [1995] FCA 1261; (1995) 130 ALR 267, 272 where Nicholson J simply noted, almost in passing, that
    … a deed of guarantee and indemnity being a disposition of a contingent interest in personal property is a settlement for the purposes of s 120 of the Act: Re Pacific Projects Pty Ltd [1990] 2 Qd R 541, 543 [a reference to the Full Court’s judgment]. This has not been disputed by the parties.
    3156 In my opinion, a guarantee is a contractual promise, a personal obligation to pay enforceable by action which does not create any interest in the guarantor’s property.
    3157 As Sackville J observed, in a different but analogous context, in Wily v St George Partnership Banking Ltd [1999] FCA 33; (1999) 84 FCR 423 [7]:
    … I think there is much to be said for the view that a useful test for determining whether a particular interest is proprietary in character, at least where the interest is created by agreement, is whether the holder is able to enforce the interest against third parties (as distinct from the other contracting party or parties).
    3158 There may be a degree of circularity in the contentions, i.e. no enforcement against the third party if the interest is not proprietary; if rights are enforceable against the third party the interest must be proprietary. Even so, we were not taken to any case where a guarantor was restrained by virtue of the existence of the guarantee alone from dealing with its property or where, on the same basis, a person entitled to a guarantee was, on that basis alone, able to claim title over the guarantor’s property in priority to a third party. The earliest point at which the guaranteed creditor might obtain an interest in the guarantor’s property would be on levying execution after obtaining judgment. But the interest would (for example on registration of a writ of execution on a certificate of title or seizure of goods by a sheriff) be based on the judgment, not the guarantee. In my opinion, the position is correctly stated in Sykes and Walker, The Law of Securities (5th ed) 11:
    The guarantor’s obligation certainly forms an added support to the personal obligation of the debtor, but no interest in a res is created. The transaction merely super‑adds one personal obligation to another and the personal obligation of the guarantor in itself is merely enforceable by action of debt in the same manner as the obligation of the original debtor.
    3159 As I have mentioned above, the relevant provisions of the Principal Subordination Deed involved effectively the disposition or assignment of a right to prove in the insolvency. That right to prove was enjoyed contingently by the Bell parties before entry into the deed. It was property with which the Bankruptcy Act is concerned. Although the guarantees (here I refer only to the essentially guarantee provisions) created contractual rights in favour of the Banks capable of being the subject of a trust: Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, 189, 198; they were not rights previously enjoyed by the Bell companies and, in my opinion, did not constitute their property for the purposes of the Bankruptcy Act.
    3160 See also the doubts expressed by Powell J in Re Jaques McAskell Advertising Freeth Division Pty Ltd (in liq) [1984] 1 NSWLR 249, 256 as to whether a guarantee constituted a dealing with, or an act relating to, property for the purposes of s 293(1) of the Companies Act 1961 (NSW).
    3161 In my respectful opinion, Owen J erred in law when, despite expressing doubts, he held that the guarantees and indemnities could be settlements. For the above reasons, in my opinion, they were neither dispositions nor settlements, except to the extent to which I refer immediately below.
    3162 I have had the advantage of reading Drummond AJA’s reasons in draft form. I refer to his observations and conclusions in relation to Clause 3.7(a) in each of the guarantee and indemnity deeds. I agree generally with him. I had some reservations about severability but I agree that the provisions are severable. They deal with related but separate subject matters. Nonetheless I think that they should be set aside and appropriate orders made to prevent the relevant operation of any other clauses by which the rights conferred by Clause 3.7(a) might be availed of (for example the Power of Attorney Clause).
    3163 I have also had the advantage of reading Lee AJA’s reasons in draft form. While I differ, respectfully, with his conclusions about whether the guarantee provisions constituted settlements and on the question of severability, I agree with his conclusions on the operation of Clause 3.7 which are relevantly similar to those of Drummond AJA referred to above.
    The floating component of the mortgage debentures
    3164 I have mentioned the brevity of some of Owen J’s conclusions in this area of his reasons for judgment. I meant no criticism; quite the opposite. His shortest conclusion was this [9210]:
    I will consider in turn each of the elements of the section. First, it is clear that the documents that were mortgage debentures and share mortgages constituted settlements of property. …
    3165 Perhaps his Honour took this course because he was led to believe, see [9193], that apart from the directions and authorisations given by the BRL shareholders, there was no dispute that each of the impugned Transactions involved ‘property’. There was also a reference at [9196] to the Banks having conceded that the share mortgages, but not the directions and authorisations, and the fixed component of the mortgage debentures were, relevantly, dispositions. But in the same paragraph his Honour noted that whether the other species of transactions constituted dispositions was controversial.
    3166 In any event, the question whether the floating components of the mortgage debentures were settlements or dispositions of property was very much a live one in the appeal.
    3167 It was a live question but only in the context of s 120. None of the parties to the appeal made any submissions as to whether the floating components of the mortgage debentures were dispositions of property within s 121. Nor were any of the grounds in the cross‑appeal by the main respondents or the notice of contention on the part of the appellants, directed to the point. The reason for that may have been that it is obvious that, assuming all other requirements of the section are satisfied, a floating charge is caught because of the provisions of s 121(3) which reads:
    In this section ‘disposition of property’ includes a mortgage of property or a charge on or in respect of property.
    3168 In my opinion the floating charge components of the mortgage debentures were charges in respect of property within the meaning s 121(3). The words ‘in respect of’ ‘… have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer’: Trustees Executors & Agency Co Ltd v Reilly [1941] VR 110, 111 (Mann CJ).
    3169 The terms of those documents were so stringent in the extent to which they prevented the mortgagors from dealing with the assets charged and the extensive rights they conferred on the mortgagees were such that they may well have amounted to equitable fixed charges conferring proprietary rights on the mortgagees, but it is not necessary to decide that in relation to the application of s 121. I return to that matter below in the context of s 120.
    3170 The floating components of the mortgage debentures are thus, in my view, dispositions of property.
    3171 The appellants, by ground 137 of their notice of appeal (two particulars of which were abandoned), contended [par 1745 ‑ 1748 APPA.000.084.002] that his Honour had erred in fact by finding that there were dispositions by way of fixed charges in the BGF Mortgage Debenture. Their point was that one clause (cl 3.1) purported to be a fixed charge over property irrelevant to these proceedings and another clause (cl 3.2) purported to charge certain shares listed in a schedule, but the schedule did not refer to any shares. The appellants also submitted that [par 1749] cl 3.2 of the BPG Mortgage Debenture charged, relevantly, only shares of nominal value. They did not dispute that the clause thus comprised a fixed charge over those shares and comprised a disposition of property, but said it should be severed leaving the floating charge in place.
    3172 As the main respondents point out, Owen J ordered rescission of the entire BGF Mortgage Debenture and the entirety of the BPG Mortgage Debenture. The appellants are seeking to revive clauses which either have no effect when revived or which have not been shown to work any prejudice to the appellants whatsoever if not revived. There are many important issues, several involving hundreds of millions of dollars, to be resolved in this appeal. In my opinion, it is not in the interests of justice for judicial time to be expended on these sorts of minutiae. The appellants have not pointed to anything of benefit to them which might be achieved by our doing so.
    The main refinancing documents
    3173 These were the four agreements listed in the last three dot points at [3126] above. The learned primary judge held that, with the exception of the cl 17.12 regime which he said ‘might be amenable to severance’, the main refinancing documents were not dispositions of property. They created new contractual rights on which a commercial relationship was intended to operate and did not involve the diminution of rights in existing property. Neither side of the appeal challenged his Honour’s conclusion.
    Intention to defraud
    3174 The next question is whether the relevant Bell companies intended to ‘delay, hinder or (otherwise) defraud’ creditors within the meaning of s 121 of the Bankruptcy Act? The intent to be imputed to them is that of the Australian directors, Aspinall, Mitchell and Oates.
    3175 His Honour found [6035] that the Bell directors knew that the Bell group was of doubtful solvency or that it was nearly insolvent at the time when they caused the companies to enter into the Transactions. The evidence is quite clear that they also knew they were causing security to be granted to the Banks over all the worthwhile assets of the Bell group. Their intent in doing so was to avoid immediate liquidation of all the companies in the group and a fire sale of the group’s assets in the hope of achieving a solution beneficial to all concerned. That was the choice which the directors, particularly Aspinall, the main director concerned, felt that they had to make. The debt to the Australian Banks was payable on demand. Two of the Banks had made formal demands for repayment. There were no funds immediately available to repay the bank loans. There were other creditors but they did not present a threat to the survival of the Bell group at that time. The debt to the bondholders was subordinated. The tax assessments were under appeal and the Commissioner was not pressing for payment. There were some Bell inter‑company loans. There were also some relatively minor (in comparison to the amounts owing to the Banks) amounts owing to trade creditors. Not only were the debts owed to the trade creditors small in comparison to the bank loans, but they were likely to be paid out of the operating cash flow of the publishing businesses. In terms of fiduciary duties, the directors did not owe them (or the other creditors for that matter) any duty other than to take their interests into account as part of the best interests of each relevant company as a whole. By deciding to keep the publishing businesses operating, I think the directors can be taken to have appreciated (i.e. taken into account) that they were taking steps which would most probably cause the trade creditors to be paid. Otherwise supplies would dry up. I have not overlooked the likelihood that those debts would be replaced by more trade debts in respect of future supplies. Then there was the interest payable on the bonds. Aspinall was confident that the Banks would allow access to the proceeds of asset sales to enable the interest due on the bonds to be paid. His confidence was well‑placed for the first and second tranches of bondholder interest which fell due.
    3176 The whole purpose of the Transactions, from the viewpoint of the Bell companies, was to get the Australian Banks (the Lloyds Syndicate Banks debt was not on‑demand) off their backs and to buy some time to try and achieve a financial restructure. The evidence of that being Aspinall’s intention, including contemporaneous memoranda made by others, is convincing and the learned primary judge accepted it.
    3177 As events transpired, the plan did not work. The sale of the printing assets provided the source of funds needed for the first few months. His Honour described how the efforts to sell (or put into joint ventures) some or all of the publishing assets were prolonged and frustrated.
    3178 Is it possible, in those circumstances, to find that, on the one hand, the Australian Bell directors did not breach the fiduciary duties which as directors they owed to the relevant companies but that, on the other hand, in the context of ensuing liquidations, their conduct can be deemed sufficiently dishonest judged by the standards of ordinary decent people for the Transactions to be set aside under s 121 of the Bankruptcy Act?
    3179 After some considerable hesitation I have reached the conclusion that it is possible to do so. The fiduciary duties of directors are based on the principles of loyalty to the company. They are proscriptive and, for reasons of policy (encouragement of entrepreneurship) to which I have referred earlier in these reasons, provide company directors with considerable room to manoeuvre. Providing directors act bona fide in the interests of the company as a whole then, subject to Charterbridge, they will not be in breach of their fiduciary duties. The Charterbridge proviso is potentially very significant. It involves an assessment of whether any intelligent and honest director could have so acted. But the honesty referred to here is honesty of faithfulness to the company as a whole. The purpose of s 120 of the Bankruptcy Act is ‘… to ensure that the bankrupt’s property is fairly shared amongst his creditors’: Wansley v Edwards [1996] FCA 704; (1996) 68 FCR 555, 563. In my view, the purpose of s 121 is similar. The contrast between the two situations is perhaps best demonstrated by the High Court’s rejection, in Spies v The Queen, of the idea that directors owe fiduciary duties to creditors. The focus of the statutory provisions is, of course, very much on the interests of creditors.
    3180 Section 6 of the Bankruptcy Act provides the following guidance in that regard:
32. A reference in this Act to an intent to defraud the creditors of a person or to defeat or delay the creditors of a person shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors.
    3181 There is thus, in the context of s 121, no need to consider the line of authorities relating to the Elizabethan statute to the effect that a transaction cannot be impeached on the ground merely that it constituted a preference of a particular creditor by his debtor: see PT Garuda Indonesia Ltd v Grellman [1992] FCA 188; (1992) 35 FCR 515, 525 and Cannane 39.
    3182 The context of honesty in the bankruptcy regime is whether the favourable treatment accorded to one set of creditors, compared to the treatment which was accorded to other creditors, was dishonest judged by the standards of ordinary decent people. The standards of such people would include an assessment of dishonesty where the prohibited intent is a composite one; ‘delay, hinder or (otherwise) defraud’. The genus includes such delay or hindrance as is sufficiently offensive to amount to dishonest treatment (the defrauding) of a creditor or group of creditors. The question is whether the action was ‘… not honest in the context of the relationship of debtor and creditor’: Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387, 1390 (Russell LJ).
    3183 Under the general law of directors’ fiduciary duties, the Bell directors are not to be found in breach of duty for taking a calculated gamble on survival rather than go into immediate liquidation. The Transactions may be voidable under the statutory bankruptcy rules, but if the Bell directors’ plans had worked, no circumstances would have arisen to provide the need for avoidance. The directors will not to be penalised under the fiduciary duties regime just because the calculated gamble for survival did not pay off. (The directors may have been liable in negligence, but as I have earlier noted, no claims have been made in negligence.)
    3184 I do not see inconsistency, as a matter of law, between that situation and the consequence that if the gamble fails the Transactions may be avoided under the statutory bankruptcy rules, if the facts show the necessary intent.
    3185 In the present case, I think that the facts do show such an intent. The Bell directors were experienced businessmen. They understood that if the planned financial restructure failed to eventuate, the Bell companies would go into liquidation and the proceeds of the sale of the only worthwhile assets (the publishing businesses and the BRL shares) would not be shared pari passu among the creditors. The Bell directors knew that the non‑bank creditors, including future creditors (see Garuda) would not receive any dividends until the Banks had been paid out in full. Those creditors would be delayed and hindered and thus relevantly defrauded. It was not necessary to show that the Bell directors appreciated that this was dishonest judged by the standards of ordinary decent people.
    3186 As the Supreme Court of New Zealand held in Regal Castings at [54]:
    Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause them loss.
    3187 This passage was cited with approval in the joint judgment in Marcolongo [32].
    3188 Well‑meaning as the Bell directors were, in my opinion, in the circumstances of this case and for the purposes of s 121 of the Bankruptcy Act they so preferred one group of creditors (the Banks) at the expense of the other creditors that it must be inferred that they (and through them the Bell companies) intended to delay, hinder and otherwise defraud the latter.
    Intention to defraud; BGNV
    3189 In my opinion the situation with BGNV was different. Ruoff did not know that the Bell group was in an insolvency context. On the contrary, he had assurances from C&L about the group accounts and assurances (via a series of certificates prepared by TBGL) that TBGL and BGF were in a position to meet their commitments in respect of the on‑loans. The bondholders were already subordinated. Execution of the BGNV Subordination Deed was, as his Honour found at [6024], considered by Ruoff to be an act that paid proper regard to the interests of its only creditors – the bondholders.
    3190 In those circumstances, I do not think Ruoff’s conduct in causing BGNV to enter into the BGNV Subordination Deed can be adjudged to have been dishonest by the standards of ordinary decent people. Whether or not that deed worked a deeper subordination, it would be wrong to infer that Ruoff had an actual intention to delay, hinder or defeat BGNV’s creditors.
    Did the appellants acquire the relevant property in good faith and for valuable consideration?
    Good faith
    3191 His Honour expressly referred, in [9166], to the fact that his conclusion in relation to the pleaded case under s 121 meant that it was not strictly necessary to investigate the protective aspects of s 121. But he proceeded to do so. In relation to lack of good faith, his Honour said this:
    9167 Any enquiry as to a lack of good faith under s 121 puts the onus on the party seeking to avoid the transactions in question to show that the receiving parties had knowledge of, or were privy to, the intent by the debtor to defraud creditors. This ‘privy to fraud’ test has been adopted in a series of authorities including Re Barnes; Ex P Stapleton (240); Re Pacific Projects Pty Ltd, Geroff v National Westminster Finance Ltd [1990] 2 Qd R 541, 545; PT Garuda (529); Caddy v McInnes (587); Wansley v Edwards (563); and Official Trustee v Pastro [1999] FCA 1631 [62].
    9168 To make a finding of a lack of good faith under s 121, the court must first consider the conduct of the debtor and decide if that conduct is fraudulent. If the fraud of the debtor is proved, then the court looks at the conduct of the receiving party to determine whether or not the recipient of the property was privy to that fraud or had knowledge of that intention to defraud.
    3192 His Honour did not make a finding on good faith under s 121. His finding on that subject (that the Banks had failed to establish good faith) was in relation to claims under s 120. The appellants did not challenge his Honour’s rejection of good faith in the s 120 context which was based on the Banks having a suspicion of insolvency. But they submitted that there was a different test so far as s 121 was concerned (appeal ts 1375).
    3193 The appellants (appeal ts 1393) accepted that his Honour’s approach to the question under s 121 was ‘correct and orthodox’ and submitted (appeal ts 1390) that to establish want of good faith it was necessary to show knowledge of the debtors’ dishonest intent to defraud creditors. The appellants pointed out that it had not been put below to the bank officers that they knew of the Bell debtors’ intent.
    3194 On the evidence before Owen J did the respondents show that the Banks had knowledge of, or were privy to, the intent of the Bell group companies to defraud (in the sense discussed above) creditors?
    3195 In my view the answer is quite clearly yes. His Honour found [8600] that, as at 26 January 1990, the Banks knew that the Bell companies were of doubtful solvency. His Honour’s review of the evidence which led him to that conclusion shows, in my opinion, that it was a well‑founded conclusion. The July 1989 and September 1989 cash flows, the TBGL financial reports for the year ended 30 June 1989, the failure to meet the SCBAL and CBA demands for repayment of the debts owing to them and the publicity about the problems with BRL would, in my view, have been enough to fix the Banks with knowledge of the doubtful solvency of the Bell group. Furthermore, I think that the evidence established that the key factors which had hitherto underpinned the Bell group’s ability to meet their recurring obligations had, to the Banks’ knowledge, ceased to exist by late 1989. That is, there were no longer to be any dividends or management fees from BRL or JN Taylor, with the result that there was to be an annual cash flow deficiency for the Bell group of at least $40 million. His Honour’s review of the evidence of the financial affairs of the Bell group and the Banks’ knowledge of those affairs (both globally and on a bank‑by‑bank basis) was very thorough. Both groups of banks had for many years received, pursuant to the requirements of the negative pledge agreements, detailed statements of the net asset position of the Bell group. This was not a situation of two groups of bankers lending money to a corporate group about whose financial affairs they had limited knowledge. The Banks had made their respective loans several years previously. The Bell group were longstanding customers of both the Australian Banks and the Lloyds Syndicate Banks. The evidence and his Honour’s conclusion about the Banks’ state of knowledge coincide with what would be expected in a commercial context such as this. The takeover of the Bell group by the Bond group and the subsequent pillaging of Bell group and BRL cash (and other assets, but mainly cash) by the Bond group were very well publicised. This was a very major change to the financial landscape and the Banks were unsecured. It would be expected that they would inform themselves as to the ability, or lack of such ability, of the Bell group to pay its debts as and when they fell due. His Honour found, and the finding is not challenged in the appeal, that the Bell group was insolvent as at 26 January 1990. It is not a very large step, and one which the evidence clearly supports, to conclude that the Banks had a strong suspicion that this was likely to be the case and his Honour was justified in taking that step.
    3196 The current state of the authorities seems to be that if the disponee is privy to the intention of the disponor, in this case, to delay, hinder or otherwise defraud creditors, that will be sufficient knowledge of a relevant intention to negate good faith for the purposes of s 121: see the cases considered in Wansley v Edwards (560 ‑ 564) and in particular those involving s 121 (as distinct from s 120) or both s 120 and s 121 there discussed, especially Garuda at (527) as approved by another Full Court (the case then being en route to the High Court) in Cannane v Official Trustee in Bankruptcy (1996) 65 FCR 453.
    3197 As to knowledge of intent, all that is required is knowledge of the Bell group companies’ intent to delay, hinder or otherwise defraud the non‑bank creditors. That was the whole point of the exercise so far as the Banks were concerned. The Banks knew that the only substantial assets were the publishing assets (the only remaining operating business) and the BRL shares which were of negligible value. The evidence also shows that the Banks’ lawyers acquired sufficient knowledge of the Bell inter‑company indebtedness to design the scheme of the various documents for the Transactions including debenture mortgages, charges over shares and other assets plus the two subordination deeds. I have no doubt that the Banks had knowledge of and were privy to the intent of the Bell group companies to defraud (in the requisite sense) the non‑bank creditors and that his Honour would have so found had he been required to deal with the issue.
    3198 This was, of course, knowledge of a different type and content to the knowledge upon which the respondents relied for their Barnes v Addy case.
    3199 Strictly speaking, that conclusion means that it is not necessary to consider whether there was valuable consideration for the securities given by the Bell group companies, as the tests for the protective provisions are cumulative. But I shall do so.
    Valuable consideration
    3200 His Honour reviewed the authorities on valuable consideration in the context of s 120 and s 121 of the Bankruptcy Act at [9175] ‑ [9187]. He appreciated that the consideration had to be more than nominal, trivial or colourable. It had to be something of economic worth, something of greater commercial value than the nominal consideration which would support a common law contract. His Honour’s conclusion was expressed, at [9214], in these terms:
    Thirdly, there was valuable consideration, within the terms of the statute, provided by the banks. The Australian banks converted an on‑demand facility to a fixed one; and the Lloyds bank syndicate enlarged the time for repayment of its facilities.
    3201 In my view, his Honour’s conclusion was correct. The Australian Banks clearly gave consideration in the manner described by him. The Banks had demanded security and, even without the express extension of time to repay in the Transaction documentation, such a forbearance would be inferred – see the authorities discussed in Re Hyams; Official Receiver v Hyams (1976) 19 FLR 232, 254.
    3202 I am inclined to think that the extension granted by the Lloyds Syndicate Banks (11 days) would have been merely nominal on its own. But the assessment of whether there was valuable consideration, as his Honour appreciated [9175], requires examination of the entire commercial context. The Transactions were a composite scheme. Furthermore, the Lloyds Syndicate Banks waived their rights under the negative pledge arrangements and allowed the Bell group to grant security to the Australian Banks. In my view that constituted valuable consideration either on its own or as part of the composite scheme.
    3203 His Honour did not, in my opinion, err in relation to the matter of valuable consideration. However, the Banks lacked the requisite good faith and s 121 applies to avoid those of the Transactions which constituted dispositions.
    Section 89 of the Property Law Act 1969 (WA)
    3204 In view of the foregoing conclusions, there is no need to consider the application of s 89 of the Property Law Act.
    Section 120 of the Bankruptcy Act
    3205 The reasoning above as to whether the various Transactions were dispositions of property applies equally to the question of whether they were settlements within the meaning of s 120 save in relation to what were described as the floating charges. I decided that issue by applying the definition of ‘disposition of property’ in s 121(3). There is no comparable definition in s 120.
    3206 The issue is whether the particular documents in this matter, which have been described as floating charges, each amount to a ‘settlement of property’ within the meaning of s 120? Are the rights conferred by those particular documents ‘property’ or are they merely contractual? In my view, this is a more appropriate question than simply asking whether a floating charge confers property rights on the chargee.
    3207 I agree that the current state of the authorities is that a conventional floating charge does not confer an immediate equitable interest on the chargee before crystallisation. The most important considered decision is that of Nicholson J in Lyford. Owen J did not consider Lyford other than in the context of whether a guarantee constituted property. Nicholson J, in relation to the two equitable mortgages concerned in Lyford, held that to the extent that they were fixed charges they constituted settlements of property for the purposes of s 120, but to the extent that they were floating charges they did not do so. His Honour founded his decision on a long line of authority starting with Evans v Rival Granite Quarries Ltd [1910] 2 KB 979. The line includes two unreported refusals of special leave applications: Norgard v DCT (P21 of 1986) and Tricontinental v DCT (B46 of 1987).
    3208 There are some cases which precede Lyford and hold to the opposite of Nicholson J’s conclusion. The main such authority would seem to be Landall Holdings Ltd v Caratti [1979] WAR 97 a decision (by majority) of a Full Court of this court.
    3209 The weight of authorities seems to be that, in general, a traditional floating charge i.e. where the chargor is free to dispose of the assets charged in the ordinary course of trade, does not confer an equitable interest. But in this case we are not dealing with conventional floating charges. They are custom made, with very tight restraints on dealing with the charged property. They were so designed probably to prevent proceeds of sale being swept up into the Bond Corporation ‘Treasury’. The restraints on dealing are described in pars 2028 ‑ 2031 of the main respondent’s amended submissions in response to the appellant’s grounds of appeal [APPR.000.043]. In my view, the true characterisation of the so‑called floating component of the Mortgage Debentures is that of a fixed charge: see the discussion in Re Spectrum Plus Ltd [2005] 2 AC 680, 716 ‑ 725, 729 ‑ 733. The rights conferred on the Banks were immediate and extensive. In terms of the test of whether they conferred rights enforceable in equity against third parties, as discussed by Sackville J in Wily (referred to above) I think that they do. They are, in my view, equitable rights of property.
    3210 For the above reasons, the so‑called floating components of the Mortgage Debentures together with the other Transactions which I have identified above are, in my opinion, voidable under s 120 as settlements so far as they may affect TBGL, BGF, BPG and Wigmores Tractors, just as they are under s 121 as dispositions with intent to hinder delay or otherwise defraud creditors.
    3211 As mentioned earlier, it is not correct to say that those Transactions are avoidable under s 120 and s 121. The true position is that that work is done by s 565 of the Corporations Act which is the source of that right. As his Honour noted [9076] ‑ [9077], this was also the case under the former legislation i.e. s 451 of the Companies Code and s 565 of the Corporations Law.
    3212 It was common ground that under the various statutory avoidance provisions the impugned transactions were not avoided until the relevant liquidator served formal notice of avoidance or applied to the court for an order to that effect. The parties were in disagreement about whether avoidance took effect from that time or dated back to the commencement of the bankruptcy or winding up. There is no need for me to consider this point as it applied (potentially) only to the BRL shares owned by TBGL and Ambassador as trustee for other Bell Group companies. In my opinion the Transactions which dealt with only the legal interests in those shares were neither dispositions nor settlements, for the reasons which I have given above.
    3213 However, in relation to the Transactions avoided by virtue of the application of s 121 of the Bankruptcy Act, I think that the authorities are to the effect that they are avoided from the time that the relevant liquidator served notice of avoidance or issued proceedings to obtain an order declaring such avoidance, whichever is the earlier; see Anscor Pty Ltd v Clout [2004] FCAFC 71 [43]; (2004) 135 FCR 469 [43]; Official Trustee in Bankruptcy v Alvaro [1996] FCA 483; (1996) 66 FCR 372, 426, and the authorities there discussed. The orders which I propose below will reflect that principle.
    Conclusion
    3214 For the foregoing reasons I would declare that, as against the liquidators of those Australian respondents who were parties to the Transactions listed below, those Transactions are void on the basis of the application of s 121. Were it necessary to do so (which, given the application of s 121, it is not) I would make similar declarations in the case of the so‑called floating charges, on the application of s 120 of the Bankruptcy Act (in respect of the liquidators of TBGL, BGF, BPG and Wigmores Tractors). The Transactions are:
33. the mortgage debentures (both the fixed and floating charges);
34. the share mortgages effected by the beneficial owners of the shares; and
35. the Principal Subordination Deed.
    Has the horse bolted so far as relief under the statutory provisions is concerned?
    3215 The main respondents, in their cross‑appeal, sought orders for the relevant Transactions to be set aside under the statutory avoidance provisions. The appellants argued that no monetary relief should be granted under the avoidance provisions to recover the moneys realised from the securities as moneys had and received or any other ground at common law or equity. They relied on ‘… the principle set out in Brady v Stapleton (1952) 88 CLR 322’.
    3216 The appellants had two main points. The first point was an evidentiary matter. The onus, so it was submitted, [APPA.000.090, par 240] was on the respondents to establish that, at the date of avoidance, there was an identified fund, funds or assets, which were identifiable with, or were the identifiable product of, the relevant funds received by the Banks. The appellants had served 23 witness statements in relation to the identification issue including one from each bank testifying to the fate of the funds received by it and their disposition well prior to the winding‑up of any of the relevant companies or the avoidance of the relevant transactions. It became unnecessary to call any of those witnesses because the facts relevant to the identification issue were agreed between the parties. In particular, so it was submitted, it was agreed that the relevant funds were no longer identifiable in the Banks’ hands at the relevant times. The respondents relied on the proposition that at all times since receipt of the funds by the Banks up to the time of avoidance, the assets of each bank exceeded the funds received by such bank. However, the respondents led no evidence in support of that aspect of their case. The onus, so the appellants contended, was on the respondents: Official Trustee v Alvaro (390). The respondents, not having led any evidence on this matter must fail on the identification issue.
    3217 I do not totally accept the appellants’ submissions on this point. Given the agreed fact that the relevant funds were no longer identifiable in the Banks’ hands at the relevant time they have, of course, no onus of proof on that matter. But, in my opinion, to escape personal liability the Banks had to go further. In my view, it was for the Banks to prove, if it were the case, that at some point the assets of the particular bank concerned did not exceed its share of the proceeds received when the Banks’ securities were realised, i.e. that the proceeds have been dissipated. In my opinion, the Banks were in the position of disponees of property with knowledge of the s 121‑type fraud. That was the fraud upon which the avoidance was based. If that property had still been in existence in the form in which it was received then it would, as from the avoidance, have become the property of the relevant liquidator by operation of law.
    3218 The appellants’ second main point, in the alternative, was that at the time of avoidance of the relevant transactions they had disposed of the funds of which they were disponees and that at the times when they did so, they were entitled to do so, such funds having been their own property. This was because the Transactions were voidable not void. The appellants distinguished equitable relief where Barnes v Addy applied (and thus the funds received by breach of fiduciary duties were trust property in the hands of the knowing recipient or knowing assistant), from the situation where the bankruptcy provisions applied. In the latter situation, no trust arose at the time of avoidance unless the funds or the identified product of the funds were identifiable. The appellants relied on the decision of the High Court of Australia in Brady v Stapleton (in relation to the first group of properties involved in that case).
    3219 In my opinion, Brady v Stapleton can be distinguished from the present case. In Brady v Stapleton the first group of properties disposed of, [initially to Canadian Pacific Tobacco Co Ltd (‘the Company’) which had knowledge of the bankrupt’s fraud, and which on‑sold them], comprised four pieces of real estate, four motor vehicles and £4,950 worth of tobacco. They were held to have been sold to bona fide purchasers for value without notice. It can be seen from page 331 of the report that the trustee in bankruptcy had abandoned an equitable claim (made in the alternative to the claim under the Elizabethan statute) based on following or tracing the property in question to the proceeds of sale in the hands of the Company. The trustee’s claim was a purely common law claim for money had and received. The High Court held, by majority, (334) that as, at the time of the on‑sales, the Company had title (though a defeasible title), the sale was not wrongful and did not impose a personal liability on it. There could thus be no claim at common law for money wrongly had and received.
    3220 In my opinion, the situation here is different. The relevant question in this case, as I see it, is whether equity’s jurisdiction is attracted to provide an effective remedy in personam in aid of the bankruptcy statute?
    3221 A careful reading of McTiernan J’s reasons for judgment (in dissent) in Brady v Stapleton (343) shows that his Honour, relying on Re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831, 834 ‑ 5, found that the trustee in bankruptcy had an equitable right in personam against the company to recover a sum equivalent to the proceeds of sale. That his Honour regarded that right as being equitable can be seen from his use of the word ‘also’ in the sixth last line on page 343. His Honour was not in disagreement at this point with the majority (Dixon CJ and Fullagar J) because their Honours did not use the same reasoning process as McTiernan J; they dealt only with what they saw as simply a claim at law for money had and received. McTiernan J built upon the trustee’s equitable right in personam to find also that at law an action for money had and received would lie against the company. Whether this was procedurally fair in view of the trustee’s abandonment of the equitable claim is, in my view, not to the point. The point, as I see it, is that McTiernan J would have held the company liable in personam in equity for a sum equivalent to the proceeds of sale even though tracing was not possible. See also the reasoning of Dixon CJ and Fullagar J in relation to the second category of dispositions, the shares, at (337 ‑ 338).
    3222 In that regard McTiernan J can be seen to have anticipated the approach of Gibbs CJ in National Commercial Banking Corporation of Australia Ltd v Batty (1987) 162 CLR 221, 268. In that case the Chief Justice explained the underlying principle upon which a claim for money had and received will succeed in these terms:
    … the emphasis on justice and equity in both old and modern authority on this subject supports the view that the action will not lie unless the defendant in justice and equity ought to pay the money to the plaintiff.
    3223 In this case (unlike in Brady v Stapleton), however, the respondents are most definitely relying on equitable principles and seek equitable relief. As I have found against them on their Barnes v Addy claim, I must ignore so much of their submissions as is based on receipt of trust property prior to avoidance and concentrate on the interaction of equitable principles and the operation of s 120 and s 121 of the Bankruptcy Act. But the principles are not too dissimilar.
    3224 If the liquidators had been appointed before the receivers exercised their power of sale over the publishing assets and the BRL shares and they had moved immediately to avoid the securities, it seems to me very likely that they would have obtained an interlocutory injunction to restrain the sales. After trial, the securities would have been set aside and title to the publishing assets and the BRL shares would have been restored to the Bell companies and vested in the liquidators as from the dates of avoidance. Even if no interlocutory injunction had been granted the result would have been the same because the proceeds would have been fixed with a trust from the times of avoidance.
    3225 The appellants took their legal title to the assets which were mortgaged or otherwise assigned to them and the proceeds of sale of those assets with notice that the dispositions were fraudulent in the relevant sense. The proceeds were received in the form of a bank cheque in respect of the publishing assets. The evidence is not clear about whether the proceeds from the sale or realisation of the other assets took the form of a bank cheque or an ordinary cheque. I do not think that that matters. The proceeds were paid initially to Westpac who, having kept its share, caused the rest to be distributed to the other Banks. The moneys received became part of the general assets of the Banks. They may not be specifically identifiable but on the state of the evidence below, they were still in the hands of the Banks.
    3226 What equitable principle is there that says that because the Banks mingle those proceeds with their own assets they are not liable to account to the liquidators? Re Mouat [1899] 1 Ch 831, a case which has consistently been cited with approval over the years, denies the existence of any such proposition. See, for example Official Trustee v Alvaro (373). The purpose of the protective provisions in s 121 and s 120 is to protect bona fide purchasers for value without notice. That purpose has no role in the present case. It might have played such a role if (and to the extent that) the asset position of any relevant bank had sunk below its respective share of the proceeds of sale when the securities were realised. Only then could it be argued, in my view, that the proceeds of sale had been dissipated and hence may have been beyond the reach of equity. But here there is no contest with other creditors. In a different context, Lord Dunedin’s words in Sinclair v Brougham [1914] AC 398, 436 encapsulate, I think, the basis upon which equity steps in to assist the liquidators in the present matter:
    This comes to this, that having got hold of property which does not belong to you, if only you are wise or lucky enough to change its form you may enjoy the proceeds unmolested. Such a plea on the face of it seems only worthy of the Pharisee who shook himself free of his natural obligations by saying Corban. In the words of technical equity it is unconscionable.
    3227 As Lindgren J explained in Anscor Pty Ltd v Clout [43] (j):
    If, at the commencement of the bankruptcy, property the subject of a transfer made void by s 120 exists neither in specie nor in an identifiable substitute form, equitable relief founded in equity’s auxiliary jurisdiction may nonetheless be available to the trustee in bankruptcy. This may occur where, for example, the property, such as money, can be ‘followed’ or ‘traced’ into, other property which is not, however, simply an identifiable substitute for it: cf Mouat at 834‑835; Trautwein v Richardson [1946] Arg LR 129; Issitch at [36]; O’Halloran at [80] per Allsop J and works cited by his Honour. In such a case an equitable charge over that other property in favour of the trustee in bankruptcy for the amount of the value of the property, or the amount of money which the debtor/bankrupt transferred plus interest, will often be found to be an appropriate remedy: for a recent illustration, see Fodare Pty Ltd v Official Trustee in Bankruptcy [2000] FCA 1721.
    3228 This is entirely consistent with the exposition of principles to be found in a series of decisions starting with Re Ward; Thomas v LG Abbott & Co Ltd (1950) 16 ABC 214. In that case, at 222, Paine J explained that the avoidance provision itself does not give any express right of action to the trustee. Having established, in that case, an undue preference the transaction is avoided against the trustee. The trustee’s rights thereafter ‘… depend upon the nature of the transaction actually avoided’. Re Ward was cited with apparent approval in NA Kratzmann Pty Ltd (in liq) v Tucker (No 2) [1968] HCA 44; (1968) 123 CLR 295, 298 ‑ 299 by McTiernan, Taylor and Menzies JJ where their Honours also referred to NA Kratzmann Pty Ltd (in liq) v Tucker (No 1) [1966] HCA 72; (1966) 123 CLR 257, 285 where Barwick CJ at 285 had explained that those rights ‘… must be derived from the general law which becomes applicable upon the avoidance of the company’s transaction’. Their Honours, after referring to the making of a declaration of the avoidance of a transaction, said this:
    But, since the Court undoubtedly has authority to make orders affording relief consequential upon the making of such a declaration, we find it unnecessary to equate the right of a trustee to recover the equivalent of a payment declared to be void with the strict terminology of the common law; it is sufficient to say that in such a case the declaration does not affect the title of the respondent to any specific or identifiable property, that the claim of the trustee is not made with respect to any property to which he asserts title and that the appropriate consequential order in ordinary cases is for payment to the trustee of the amount in question. In other words he has no higher right than that of an unsecured creditor and, if the payee is also bankrupt, the trustee is relegated to proving in his bankruptcy.
    3229 Because there is so much else to be dealt with in this matter, I do not think that this is the place to take part in the debate about whether in Australia law and equity are fused in more than their mere administration – see the discussion, for example, in Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298. Nor do I wish to be dogmatic on the question whether equity’s role in providing an in personam remedy in this matter is an exercise of its auxiliary, as distinguished from its concurrent, jurisdiction. If it is the former then it can be taken as providing an appropriate remedy (coupled with declaratory relief) to support the legal statutory rights conferred on the relevant liquidators by the insolvency statutes. If it is the latter, then it is attracted and based on the unconscionability, or perhaps mere ‘fraud’ in equity, of the type referred to in Regal Castings. Its lineage is long and respectable, stretching back at least to White v Sansom (1746) 3 Atk 411; (1746) 26 ER 1037 (albeit obiter). In Hobbs v Hull (1788) 1 Cox 445, 445 ‑ 446; (1788) 29 ER 1242, 1242 Lord Kenyon observed:
    Courts of Equity have most certainly been in the habit of exercising a concurrent jurisdiction with the Courts of Law on the statutes of Elizabeth respecting fraudulent conveyances …
    3230 An emphatic exercise of that jurisdiction can be seen in Blenkinsopp v Blenkinsopp (1850) 12 Beav 358, 568, 587 ‑ 588; (1850) 50 ER 1177, 1185, affirmed on appeal: Blenkinsopp v Blenkinsopp (1852) 1 De GM & G 495; (1852) 42 ER 644.
    A Postscript
    3231 I have read Lee AJA’s draft reasons in relation to the application of s 565 and the significance of its statutory context, namely Part V of the Corporations Act. I agree with him, respectfully, that we should read s 565 as contemplating the use of all appropriate remedial orders including those that would be regarded as appropriate in equity. If, which I doubt for the reasons given above, Brady v Stapleton may previously have stood in the way of granting relief to the relevant respondents, the relatively new statutory regime of substituted rights, set as it is in the context of Part V which provides a wide range of remedial orders for post 23 June 1993 transactions strongly suggests that a court should not take a narrow view of the remedies available for transactions occurring before that date, particularly where no third party interests are involved.
    3232 The result, as I see it, is that Equity will mould such in personam consequential relief as will restore the trustee or its equivalent to the position it would have been in the absence of the transaction avoided vis‑א‑vis the payee or assignee concerned. However, this would be subject to the rights of a bona fide purchaser for value without notice (or other like person protected under the statute). For recent examples of these principles being applied – see Official Trustee v Alvaro (427) and Regal Castings, a decision of the Supreme Court of New Zealand approved by the High Court in Marcolongo. In Regal Castings Tipping J (with whom Blanchard and Wilson JJ agreed on this point) proposed, at [158] ‑ [163], an equitable in personam remedy by way of the imposition of a remedial constructive trust, at the same time being particularly conscious of the need to protect the interests of innocent third parties and not to undermine or subvert ‘… other recognized principles and priorities’. In my opinion the same approach should be taken in this matter but without there being any need to impose a remedial constructive trust. It will be sufficient to award monetary relief to the main respondents by way of equitable compensation.
    Were and are, the holders of convertible subordinated bonds (after taking into account the effect of the on‑lending within the group of the bond issue proceeds) effectively subordinated behind the claims of unsubordinated creditors including the Banks?
    The contract case
    3233 The wording of the above heading is taken straight from his Honour’s list of questions referred to earlier in these reasons. I had thought of simplifying the heading to read ‘Were the on‑loans subordinated?’. But I decided not to do so because his Honour’s wording throws the problem into stark relief, especially by using the word ‘effectively’. That is, if the on‑loans are held not to be subordinated, the bondholders (via their trustee LDTC) may effectively shed or sidestep their subordination vis א vis BGNV by causing that company to go into liquidation and prove in the liquidations of TBGL and BGF on an unsubordinated basis. By way of contrast, if the bondholders had instead chosen to call on TBGL direct to honour its obligations as co‑obligor or its guarantee to them, they would have been subordinated creditors in the winding‑up of TBGL.
    3234 There was some criticism in the respondents’ submissions (as there is in the majority judgments) about the use of the term ‘effective subordination’. In my opinion, it is a very useful expression. Subordination only came into effect in the liquidations of BGNV, TBGL (in respect of its direct obligations to the bondholders as co‑obligor with BGNV and as guarantor) and BGF. BGNV never had, nor was it intended to have, any significant creditors other than the bondholders, or any significant assets other than its loans to TBGL and BGF of the moneys subscribed by the bondholders. Subordination of the bondholders’ debt to the claims of other creditors of BGNV was a matter of insignificant commercial importance. Subordination of their claims to the creditors of TBGL and BGF, however, was of very great importance. The terms of the trust deeds showed that TBGL was the holding company of the Bell group. If the bondholders, through the liquidation of BGNV, could obtain distributions in the winding up of TBGL of the proceeds of the on-loans on an unsubordinated basis it would be grossly misleading to regard or describe their entitlements in the documentation as ‘subordinated’. In those circumstances, the so‑called subordination of those entitlements would be ineffective, not only as far as the Banks were concerned but vis א vis any other ordinary (i.e. unsubordinated) creditors.
    3235 His Honour found that the on‑loans were the subject of contracts of loan between BGNV on the one hand and TBGL and BGF respectively on the other (‘the contracts inter se’). There was no dispute between the parties about that. The question was whether there were terms in those contracts that the on‑loans would be subordinated to all other unsubordinated creditors and, if so, whether the content of those terms was sufficiently clear?
    3236 The contracts which his Honour found to exist were informal. He made a very careful, painstaking, analysis of the documentary records of what took place at the time of each of the three relevant bond issues. They fell into about twenty categories ranging from memoranda, letters, board minutes, annual reports and telexes, to spreadsheets forming part of the Bell group business records. His Honour also heard evidence from Griffiths, Graham, Williams and Studdy. He accepted their evidence that, from the viewpoint of the Bell companies, it was a primary consideration to be able to have the bond issues treated as equity. This accorded ‘in sufficient measure’ with the contemporaneous documents [2818].
    3237 I should mention here the degree to which his Honour felt satisfied that the parties intended the on‑loans to be subordinated. At [4245] he referred to the common experience of a trier of fact feeling differing levels of conviction or confidence on particular issues. His Honour said this:
    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.
    3238 In my view, his Honour had a very considerable advantage over anyone else who has had anything to do with this case, including a judge sitting on appeal from his judgment. That advantage was not based simply on matters such as the demeanour of a witness but also on the factors referred to, for example, by the High Court of Australia in Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 [23]. The hearing lasted 404 days, 86,340 documents (318,819 pages) were tendered [956], and 166 individuals gave evidence [957]. The transcript ran to 37,105 pages and the parties filed 36,933 pages [960] of closing submissions, of which about 10,000 pages were devoted to the issue of subordination of the on‑loans [4242]. His Honour had charge of the case between 2001 and 2009 and wrote several interlocutory judgments of considerable substance. In those circumstances, his conclusion, reached with ‘complete conviction’ that the parties intended the on‑loans to be subordinated deserves, in my opinion, to be regarded with a great deal of respect unless clearly shown to be misguided.
    3239 Under the negative pledge agreements with the Banks the Bell group was obliged to keep its borrowings and other liabilities below 65% of the value of tangible assets. If the bond issues were treated by the Banks as not being debt but as a form of equity for negative pledge purposes then the group could borrow far more money. In fact there was a two‑fold effect. The cash raised by the bond issues bolstered the level of tangible assets and thus reduced the debt ratio so that even more money could be borrowed without breaking the negative pledges. This was variously described during the proceedings as a form of alchemy or ‘the double whammy’.
    3240 His Honour saw ‘[a] troubling feature’ about whether the on‑loan contracts contained a subordination term at the time they were made. This was the fact, as he so found, that at the time when the on‑loans were made no‑one actually thought through the mechanics of the on‑loans. At [3379] the learned primary judge asked himself three questions:
    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?
    There is no point in attempting to summarise his Honour’s answers. The best way to communicate them is to set out the following two paragraphs from his reasons:
    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.
36. The relevant persons involved in one way or another in the making of decisions, particularly RHאC, Griffiths, Cahill, Studdy and Newman knew the bonds per se were to be subordinated.
37. 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.
38. 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.
39. 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.
40. 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.
41. 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 a 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.
    3241 His Honour held that as the Banks were not party to the on‑loan agreements containing the subordination terms they were unable to enforce those terms, either under s 11(2) of the Property Law Act or otherwise. He also held that the Banks had not made out their argument that contracts came into existence between the Banks and the relevant Bell group companies in relation to the subordination of the on‑loans (what his Honour called the contracts inter partes).
    My reasoning
    3242 In my view, his Honour’s conclusion that a term was to be inferred into the on‑loan contracts that those debts were subordinated was the correct one. In my opinion, commercial people would regard a conclusion that those debts were unsubordinated as totally lacking in commercial reality. Such a conclusion would also, by a side wind, confer an enormous windfall bonanza on the bondholders at the expense of all the unsubordinated creditors of TBGL and BGF.
    3243 Those factors would perhaps be irrelevant if the legal position was simply that the evidence was not sufficiently clear to infer a subordination term. The law throws up some quirky results from time to time. But quirky results are not usually the stuff of commercial law. The real stuff of the law, in a commercial context such as this, is usually a result which makes good commercial sense.
    3244 As Allsop J (with Drummond and Mansfield JJ agreeing) observed in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 [408]:
    The law of contract is built on honest commercial common sense. As Steyn LJ (as his Lordship then was) said in First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 at 196 (cited with approval by Handley JA in Saad v TWT Ltd):
    ‘The theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or a principle of law. It is the objective which has been and still is the principal moulding force of our law of contract. It affords no licence to a Judge to depart from binding precedent. On the other hand if the prima facie solution to a problem runs counter to the reasonable expectations of honest men, this criterion sometimes requires a rigorous re‑examination of the problem to ascertain whether the law does indeed compel demonstrable unfairness.’
    3245 In a case concerning an inferred term in inferred and informal contracts the search starts with the initial question – what was the commercial purpose of the on‑loan contracts? See the authorities cited at [3267] below. This involves examining exactly what were the factual circumstances in which the loan transactions took place.
    3246 In my view, the factual circumstances, as his Honour found, point inexorably to an inferred term that the on‑loans were subordinated, otherwise there would have been no point in having the Eurobond issues subordinated. That subordination cost the Bell group additional interest. The fact that the funds obtained by the on‑loans were, or may have been, subsequently disbursed as inter‑company loans within the Bell group on an unsubordinated basis is, in my opinion, neither here nor there. The important question is whether the on‑loans were subordinated in a winding up of TBGL or BGF?
    3247 The details of the bond issues and the relevant provisions of the documentation are contained in Lee AJA’s reasons for judgment (which I have had the benefit of reading in draft form) and I am grateful to him for sparing me the task of reciting or summarising them. However, it may be helpful briefly to refer to the five relevant convertible subordinated bond issues. They were as follows:
    • December 1985:
    (i) AUD$75 million of subordinated bonds issued by BGNV on the Eurobond market (with the proceeds on‑lent to TBGL), with TBGL guaranteeing and assuming primary liability as co‑obligor for repayment of interest and principal on a subordinated basis [wherever appearing in these reasons the term ‘subordinated’ is to be taken as meaning subordinated in a winding up unless expressly stated to be otherwise]; and
    (ii) AUD$75 million of subordinated bonds issued by TBGL to Heytesbury Securities (RHאC’s company);
    • May 1987:
    (iii) AUD$175 million of bonds issued by BGNV on the Eurobond market, (this time the proceeds being on‑lent to BGF) with TBGL again guaranteeing and assuming primary liability as co‑obligor for repayment of interest and principal on a subordinated basis; and
    (iv) AUD$75 million of subordinated bonds issued by BGF to Heytesbury Securities; and
    • July 1987:
    (v) £75 million of subordinated bonds issued by BGNV on the Eurobond market with the proceeds being on‑lent to BGF and with TBGL again assuming primary liability as co‑obligor and guaranteeing repayment of interest and principal on a subordinated basis.
    3248 The two issues [issues (ii) and (iv) above] were made to Heytesbury Securities to avoid dilution of RHאC’s interest in TBGL in the event of the Eurobond holders converting their bonds into shares.
    3249 I make some initial points. First, the rights of the bondholders to be paid principal and interest in each of the five issues were subordinated. Secondly, the three Eurobond issues were guaranteed by TBGL. All of the rights of the bondholders under those guarantees were subordinated. Thirdly, where TBGL granted guarantees, it also undertook liability as a co‑obligor not merely as a surety. Those obligations as a co‑obligor were also subordinated. Fourthly, TBGL’s obligations under the Conversion Bonds, including the obligation to repay the 1 cent per $1,000 paid up on those bonds if the (Finance) Bonds were redeemed without conversion were directly subordinated. Fifthly, in the other two bond issues [nos. (ii) and (iv) above] there was, of course, no guarantee from TBGL because that company issued the bonds (‘the domestic bonds’) directly to Heytesbury Securities, but again they were issued on a subordinated basis. The documentary evidence, referred to below, shows that the domestic bonds were issued simultaneously with and on relevantly the same terms, expressly including subordination, as the Eurobonds.
    3250 The point is neatly summarised in this exchange (on 10 and 11 February 1987) between Extel Financial Limited, a London financial news provider, and TBGL’s Company Secretary [TBGL.00090.095; TBGL.00090.94] which, omitting formal parts, reads as follows:
    Could you please confirm that the conversion and redemption terms of your Company’s unlisted 11% bonds are the same as those of the listed bonds.

---

There are minor variations in the terms of the listed and unlisted 11% bonds purely to take account of the differences between the application of Australian tax legislation to Australian bond holders and overseas holders. However, the net effect is virtually the same for all practical purposes, which is the intent of those variances.
3251 If the respondents succeed on their cross‑appeal on this point, the domestic bondholders will have to stand behind BGNV (and other unsubordinated creditors of course) before they can claim. In my view, that would be a very curious, even extraordinary, commercial outcome for the securities originally subscribed for by the controlling shareholder of the Bell group. The evidence shows that RHאC was a shrewd businessman. It would not have been very businesslike on his part to cause TBGL, a company which he effectively controlled and of which he was Executive Chairman, to pay a premium to subordinate the debts of the Eurobond holders (and indeed the ones to which he, through Heytesbury Securities, subscribed) if, so far as the Eurobond holders were concerned, that subordination could so easily be by‑passed due to the interposition of BGNV in the flow of funds.
3252 An analogous issue arose in the context of a corporate insolvency dispute in the United States of America between subordinated and senior unsecured creditors in Matter of Envirodyne Industries, Inc, 29 F 3d 301 (7th Cir, 1994). In that case the appellants argued that the wording of the relevant subordination clause meant that because, under the terms of the Chapter 11 plan of reorganisation, the senior creditors were to receive stock rather than any other asset, the subordinated creditors were not to be subordinated. Read literally, that is what the subordination clause said, as the Circuit Court of Appeal (Posner CJ delivering the court’s opinion) acknowledged:
[12] A better argument for the appellants is that if the draftsmen had wanted to subordinate all securities received by the junior creditors to the claims of the senior creditors, they easily could have said so clearly. It was not necessary to specify shares of stock and securities separately. Or they could have said ‘shares of stock and other securities’ if they wanted to emphasize that there was no exception for stock. On balance the appellants have the better of the purely semantic argument. But their interpretation makes no sense once the context of the terminology being interpreted is restored.
…
The purpose of the clause as we have explained it bears no relation to the interpretation for which the appellants contend, under which the senior creditors’ priority would depend entirely on the form of the distribution. The appellants concede that if the distribution took the form of new notes rather than of stock, the junior creditors would be subordinated. But if the distribution took the form of stock, they argue, the junior creditors would be pooled with the senior creditors, destroying the latter’s seniority. We cannot understand why the form in which rights in the assets of the reorganized firm are allocated among the creditors should determine the creditors’ priority – and specifically why a distribution in the form of stock should erase the priority of a senior class of creditors. To make priority depend on the form of distribution in this way would, moreover, give senior creditors an incentive to press for liquidation, contrary to the purpose of Chapter 11, since then there would be no distribution of stock and hence no chance for the junior creditors to achieve parity with the seniors. (original emphasis)
Envirodyne has been followed in a number of cases at United States Circuit Court of Appeal level and cited with approval in many other cases.
3253 In the present matter, if the respondents are successful, the Eurobond holders’ rights in the liquidations will be subordinated if they prove against TBGL under the clauses of co‑obligation or guarantee but unsubordinated if they use another form of recovery by proving in BGNV’s liquidation and causing BGNV to prove against TBGL for the same money.
3254 During the hearing of the appeal, Drummond AJA (appeal ts 2574) asked Mr Young QC for the main respondents what advantages there might have been for the Bell group in having the bonds subordinated, other than the advantage of ensuring that the issues would be regarded as quasi‑equity. Mr Young’s initial response was that debt subordination provided a company with greater flexibility to operate. Later, at appeal ts 2612, Mr Young added that subordination meant, from the bondholders’ viewpoint, a higher interest rate in view of the increased risk. There was evidence [TBGL.00854.106] that there was a risk premium of 2% per annum for a subordinated bond issue as at March 1987.
3255 I find it impossible to understand why the Bell group would pay a higher rate of interest on the bonds to obtain subordination of the debt at the bondholder level if the on‑loans of those moneys were not also to be subordinated. As his Honour found, BGNV was only a conduit for the money to flow from the bondholders to TBGL. We were not given any particulars about the asserted ‘greater flexibility to operate’. Given that BGNV was a wholly‑owned single‑purpose subsidiary, the greater flexibility to operate is not readily apparent. Nor was it the subject of any evidence. Furthermore, any other ‘operation’ not involving back‑to‑back on‑lending would not comply with s 128F(6) of the Income Tax Assessment Act 1936 (Cth) and would have caused the interest payable on the Eurobonds to be subject to withholding tax.
3256 Subordination only took effect in a winding up. From TBGL’s point of view, as a going concern, there was no benefit, other than having the on‑loans treated as quasi‑equity for negative pledge ratio purposes, in having the debts arising out of the bond issues subordinated, but there was the detriment of an increased interest rate.
3257 The evidence which was before his Honour and to which I refer below, makes it quite clear that TBGL caused the bonds to be subordinated so that the Banks would not treat them as debts for the purposes of calculating the negative pledge asset to liability ratios. The evidence, in my opinion, quite clearly demonstrates a real and objective intention that a term of the on‑loans was that they (like the bonds themselves) were subordinated.
3258 The learned primary judge found [2828] that the same commercial purpose and general structure of the 1985 bond issues were carried forward into, and repeated in, the two sets of bond issues in 1987. This was not seriously challenged on appeal.
3259 In relation to the use of BGNV his Honour found as follows [2838], [2842]:
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.
…
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.
3260 His Honour also made the following important findings [2825]:
… 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:

1. The Bell group had an ongoing need to raise funds.
2. 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.
3. 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.
4. 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.
5. 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. [His Honour repeated this finding of the commercial purpose at [2828], [3097], [3105] and [3169]].
   3261 There is, I think, an air of unreality about the manner in which this question of subordination of the on‑loans falls to be decided. It appears necessary to fit what happened into the form of a contract between two legal personalities. One, BGNV, was a company specially incorporated in the Netherlands Antilles, a month before the first subordinated bond issue, to raise money for TBGL. It was a wholly-owned subsidiary of TBGL initially and then a wholly-owned subsidiary of BGF. Executives of TBGL wavered back and forth about whether BGNV should be brought into existence at all. They wanted the arrangements to be as simple as possible. Eventually the TBGL executives decided that BGNV had to be incorporated as a wholly‑owned subsidiary to act as a conduit for the funds to be raised from the Eurobond issues. That was, as his Honour found (and the finding is not challenged) purely for the purposes of Australian income tax law. There is no suggestion of any impropriety in relation to that. In commercial terms BGNV had no creditors (save for fees to its Curacao director and the modest fees of the trustee, all of which were borne by BGF) other than the bondholders and no debtors other than, initially, TBGL and later BGF. I think it is helpful to bear in mind that it was never contemplated that BGNV would have any unsubordinated creditors of any consequence. What then would be the point of subordinating its obligations to the bondholders unless that subordination carried through to the on‑loans? The bondholders had been informed in the offer documentation that that was the purpose of the exercise, i.e. to provide loan funds for TBGL by the first issue and for BGF by the second and third issues. By no stretch of the imagination could it be said that the bondholders, when making their investments, would have placed any reliance on BGNV for payment of interest and repayment of principal. TBGL and BGF were the intended destinations of their money and they must be assumed to have been content to rely on TBGL as guarantor and co‑obligor (both on a subordinated basis) to repay it with interest or to issue them shares if they chose to convert. BGNV was only the cash conduit assuming liabilities which, on its own, it could not meet. As Anthony Stranger‑Jones, one of the Banks’ Eurobond experts, put it in [WITD.030.004] at [46]:
   Since the vehicle itself would not be creditworthy, no (or very little) reliance would be placed by bondholders or managers or underwriters on it as a source of repayment of the bonds or for payment of the coupons. Instead they would examine the standing and creditworthiness of the parent company of the tax haven company which guaranteed the bonds.
   3262 As will be seen below, the evidence shows that the administrative decisions in 1985 about:
   • setting up BGNV;
   • causing it to issue the bonds;
   • how the funds were to flow from Europe to New York for a weekend; and then
   • using an offsetting process within the NAB in Australia, which would cause an equivalent amount to be deposited into TBGL’s bank account in Perth,
   were made and orchestrated by executives of TBGL and TBGIL.
   3263 As I have said, I think that there is an air of unreality in fitting these facts into a contract. But it was common ground between the parties that there were contracts of on‑loan, initially one between BGNV and TBGL and subsequently two between BGNV and BGF.
   3264 The main respondents asserted that his Honour’s finding that nobody turned their minds to the matter of whether the on‑loans were subordinated was a complete answer to the contractual claims. The authorities show that the main respondents are wrong in that submission. See, for example, Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539, 569 ‑ 570 and Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [369] and the cases there cited. The respondents’ reliance on Griggs v Noris Group of Companies [2006] SASC 23; (2006) 94 SASR 126 and Ozecom Ltd (in liq) v Hudson Investment Group Ltd [2007] NSWSC 719 is in my opinion misplaced. In Griggs the court did not hold that a term could not be inferred unless the parties had consciously considered the subject matter. White J (with whom the other members of the court agreed) at (135) was prepared to infer several terms as being actually intended without finding that the parties had turned their minds to those terms. In Ozecom, despite what McDougall J referred to at [128] as an ‘immediate difficulty’ that the parties had not turned their minds to the question of extension of the date in question, it is clear from [159] that his Honour would have been prepared to infer a term extending time if evidence had been adduced that the parties had conducted themselves on the basis that the underwriter’s obligations remained extant. That evidence had not been called, and the plaintiff had not dealt with this mode of analysis, or the cases on which that analysis was based, in its submissions.
   3265 Millions of contracts are made every day where the parties do not turn their minds to the terms upon which they are contracting. One has only to think of retail purchases of goods and the purchase of personal transport services. There would be little difficulty in inferring terms into such contracts if an occasion gave rise to the question of doing so: see Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110.
   3266 The question is whether the evidence is sufficiently clear that a subordination term should be inferred or, alternatively, implied? It is easier, in my opinion, to answer that question if one understands the commercial purpose of the relevant contracts. In that context I think it is useful to quote Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 [8]:
   In giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market. This is a case in which the Court’s general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes its meaning [also see McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, 589].
   See also Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen‑Tangen [1976] 1 WLR 989, 995 ‑ 996:
   In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.
   See also Codelfa Constructions Pty Ltd v State Rail Authority of NSW (350) and Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 [82].
   3267 Before I turn to the evidence of the genesis of these transactions, the background and the market, I think it is important to explain the roles of the key persons involved. At the very top was RHאC, the Executive Chairman, whose interests effectively controlled the Bell group. The evidence was that RHאC called the shots, whether at board level or anywhere else, about matters of policy and indeed matters of detail where detail was important (see, for example, the memorandum dated 10 June 1987 – TBGL.01032.146). The learned primary judge made a finding to that effect at [100]. In relation to the first Eurobond issue his Honour made the following finding [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 RHאC, acting on the advice and recommendation of Griffiths, and was endorsed by the directors.
   3268 Alan Newman was RHאC’s deputy in an executive capacity, based in London. His title varied. He was Managing Director of the TBGIL group and RHאC’s right hand man.
   3269 There was an ‘Office of the Chairman’ in both Perth and London in which, among other senior Bell executives, were located the staff who carried out all the treasury, financial planning, administrative, legal, secretarial, research and investment functions of the group, see [2714] of his Honour’s reasons. Griffiths, the Group Treasurer, was based in the Perth Office of the Chairman. Graham and Williams were Treasury executives in the London Office of the Chairman and became directors of BGNV on its incorporation. They reported to Newman. There was a lot of communication about the subordinated bond issues between the Treasury executives in Perth and those in London, particularly Graham. Also involved in that ‘loop’ were John Corr, John Cahill and Connie Chapman (all of whom were Assistant Group Treasurers – see [98]) based in the Perth Office of the Chairman.
   3270 As will be seen from the documents referred to below, the Treasury executives orchestrated each move that the Bell group made into the Eurobond market. His Honour found, and it was clearly open to him to do so on the evidence, that the terms of the on‑loans were not set by the Bell accounting department but by the Bell Treasury which was intimately involved in the arrangements for the fundraising, including appointing from among themselves those who would be directors of BGNV and the arrangements whereby the bond issue proceeds ‘… having come into BGNV made their way into the NP group’ see [3258].
   3271 On the matter of the significance, or otherwise, of the book entries in the accounts of the respective companies to the question of whether the on‑loans were subordinated, it is useful to remember the High Court’s decision in Manzi v Smith [1975] HCA 35; (1975) 132 CLR 671. In that case the High Court held that book entries of themselves do nothing to create an agreement. For book entries to have any effect they must represent the agreement between the parties involved. See also Electrical Enterprises Pty Ltd v Rodgers (1988) 15 NSWLR 473, 489.
   3272 In relation to the appointment, on 28 November 1985, of Graham, Williams and Burghard as additional managing directors of BGNV, as Drummond AJA points out, its deed of incorporation operates so as to impute the knowledge of any one of them, relevant to the activities of BGNV, to the company.
   3273 The evidence which has to be reviewed went far beyond the handful of documents upon which the respondents tended to focus. There were many more to which his Honour also referred. I shall be as brief as the importance of the matter of subordination will allow, but the evidence relevant to the first bond issue, in summary, is as follows:
   Key evidentiary matters
   26 September 1984
   3274 By this stage TBGL and most of its Australian subsidiaries were parties to the negative pledge agreement with various banks which required the NP group to maintain a debt‑asset ratio of no more than 65%. On this date SBCIL sent a telex to Newman at Associated Communications Corporation plc (which became TBGIL in 1986) in London with a copy to RHאC in Perth. This was the genesis of Bell group’s entry into the Eurobond market. SBCIL suggested, and offered to assist with, the issue of US$60 million convertible bonds with a maturity of 10 years. The recommendation included that the issuer be a company to be called ‘Bell Group NV’ or another suitable off‑shore vehicle, with TBGL as guarantor and the bonds being convertible into shares in TBGL. The suggested ‘status of the bonds’ was as follows:
   The bonds would constitute 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 the guarantor (subject to statutorily preferred exceptions).
   27 May 1985
   3275 As his Honour noted, [2720] consideration of the consequences of participation in the Eurobond market had by this date advanced to include questions such as balance sheet treatment. On this date, under cover of an internal memorandum, the balance sheets of Elders IXL Ltd, National Australia Bank Ltd and Bridge Oil Ltd were circulated within the Office of the Chairman in Perth. These three companies had issued convertible bonds. The memorandum noted that the Elders bonds were included in its balance sheet as ‘Shareholders equity and convertible bonds’, the National Australia Bank Ltd showed its bonds in the balance sheet separately from shareholders equity and minority interests, whereas Bridge Oil Ltd showed the bonds which it had issued under ‘Total Liabilities’. The concluding paragraph of the memorandum read:
   For statutory purposes convertible bonds are not treated as shareholders equity. A review of the above companies indicates that the uniqueness of these convertible bonds allows one scope to treat them as ‘shareholders funds and convertible notes’ or as ‘total liabilities’.
   30 May 1985
   3276 Messrs Northrop and Groen of SBCIL sent a telex to Griffiths in which they referred to a telephone conversation earlier in the week. In that telex they discussed various bond and equity fundraising alternatives and again offered to assist with whichever issue was chosen. In relation to the three alternative convertible bond issues, the alternatives being in Australian dollars, US dollars or Swiss francs, their recommendation was that the bonds be subordinated and guaranteed by TBGL.
   5 June 1985
   3277 The minutes of the TBGL board meeting held on this date contained the following:
   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.
   10 June 1985
   3278 Griffiths sent a memorandum to RHאC, copied to Newman, discussing the ‘general parameters’ of a foreign convertible bond issue in an amount equivalent to A$100 ‑ A$150 million. He described the status of such an issue as ‘unsecured and subordinated’.
   11 June 1985
   3279 Cutler of Westpac made a diary note of a telephone conversation he had with Griffiths. They must have discussed subordinated debt raising because Cutler notes:
6. Subordinated debt – must be truly subordinated, both in nature and in term. The concept must be there in case BGL 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.
   3280 The evidence shows that BRL made a Eurobond convertible subordinated issue at about this time.
   1 July 1985
   3281 SBCIL sent a telex to Newman with a copy to Griffiths which referred to a telephone conversation and set out indicative terms for a TBGL dual Australian dollar convertible/Euro equity issue. It suggested as issuer ‘A suitable offshore financing vehicle to be agreed’, the guarantor to be TBGL and the status of the bonds as:
   The bonds would constitute subordinated obligations of the issuer ranking after all unsecured and unsubordinated obligations but equally with all other present or future subordinated obligations of the issuer and the guarantor.
   3282 The suggested total amount of the bonds was A$65 million.
   2 July 1985
   3283 Another Swiss bank, this time Soditic, sent a telex to TBGL marked for the attention of RHאC and Griffiths. It referred to a meeting between RHאC, Newman and Soditic’s chairman on 13 June 1985 and various conversations which had taken place in the meantime. It also referred to an offer Soditic had made on 29 May 1985 of a subordinated Swiss franc convertible bond issue.
   9 July 1985
   3284 The board minutes of this date under ‘Review of Operations’ recorded the following:
   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.
   22 August 1985
   3285 As his Honour noted, the board of TBGL met again on this date. There was further discussion about approaching the Banks, making changes in the calculation of Negative Pledge ratios, and in particular including intangible assets in that calculation. The minutes include the following:
   The Board believed that the group required approximately $200m in additional capital and should aim for a ‘AA’ credit rating.
   3 September 1985
   3286 Griffiths sent a memorandum to RHאC. His Honour referred to this memorandum in his reasons for judgment no less than 10 times. In the memorandum Griffiths proposed that Bell should conclude negotiations with SBC, Soditic and Citibank with a view to awarding a mandate to raise moneys in Europe in an amount of A$75 ‑ A$100 million by way of 10 year convertible bonds. In his summary of the proposal, he described the status of the bonds as ‘subordinated, unsecured’. Under the headings of ‘Issue Process’ and ‘Discussion’ Griffiths said this:
   The bonds would be issued by an offshore subsidiary of Bell Group and guaranted [sic] by Bell. The instrument would be listed on the London Exchange.
   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 10 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 from becoming too high.
   3287 Lee AJA in his reasons suggests that the reference to subordination in this memorandum is to a different concept of subordination i.e. current subordination, not subordination in a liquidation. With respect, initially I found that to be quite a persuasive suggestion. However, as I see it, Griffiths was making an assessment of how long the Banks would be prepared to regard the bond moneys as being quasi‑equity for debt ratio calculation purposes. Subordination describes the place in which a creditor stands in the queue for repayment vis‑א‑vis other creditors. In my opinion, there was no possibility of current ‘subordination’. These were debts, not, for example, preference shares. The only relevant subordination was subordination in insolvency. Subordination governs a creditor’s ranking; a matter of considerable importance to a lender. In his evidence at first instance (ts 19890) Griffiths explained:
   I meant that the existing banks, if it was a 10‑year term and they’re lending three to four years, should be comfortable that it was subordinated to them for the term of their loan.
   23 September 1985
   3288 SBIC faxed a letter to Griffiths, at that time in London, setting out indicative terms and conditions for an Australian dollar convertible issue combined with a Euro equity issue. The convertible issue was to be in the amount of A$75 ‑ A$100 million. Once again the issuer was to be ‘a suitable offshore financing vehicle to be agreed’, the guarantor was to be TBGL and the status of the bonds was described as follows:
   The bonds would constitute subordinated obligations of the issuer ranking after all unsecured and unsubordinated obligations but equally with all other present or future subordinated obligations of the Issuer and the Guarantor.
   7 October 1985
   3289 SBCIL sent a telex to Griffiths, then back in Perth, with a copy to Newman in London. It referred to a conversation on the previous Friday and discussions with Paribas and then set out indicative terms for an Australian dollar convertible issue combined with a Euro equity issue. It contained the following:
   We have assumed an amount of A.Dlrs 150 million for the convertible issue, allowing for A.Dlrs 75 million of the issue to be purchased by Mr Holmes א Court, as proposed. However, the terms of the issue would be identical for an amount of A.Dlrs 75 million, to be placed entirely on the open market with no preplacement.
   3290 Once again the issuer was described as a suitable offshore financing vehicle to be agreed and the guarantor as TBGL. Furthermore, the status of the bonds was described as subordinated in precisely the same terms as the status described in the fax letter of 23 September 1985. The telex concluded with a suggestion that documentation for the issue, including the prospectus, should be started as soon as possible.
   8 October 1985
   3291 The TBGL board met. It had before it the usual treasury report plus a summary of the terms of the proposed convertible note issue and equity placement. The respondents made much of the fact there was no mention of subordination in this summary. His Honour at [3145] said that he had no doubt that the proposal outlined on 23 September 1985 and 7 October 1985 formed the basis of the treasury report which included the terms of the proposed issue. He said that he did not share the respondents’ concern that neither the terms of the proposed issue as summarised nor the board resolution mentioned that the issue was to be subordinated. His Honour noted that all of the communications from May 1985 to October 1985 were in respect of a subordinated issue and that Griffiths was well aware of that. The relevant board minute was as follows:
   The Board discussed the details provided by the Group Treasurer in regard to the $150 m Convertible Note Issue which was being arranged through Swiss Bank and Paribas … A shareholders’ meeting would be convened to approve the Convertible Note Issue and the issue, by way of a placement, of $50 m of ordinary shares, based on current market prices at the date of issue. The Board RESOLVED to recommend the approval of the proposed issue and offered its congratulations to the Group Treasurer for having arranged this finance on these terms.
   3292 His Honour found, and it was clearly open to him to do so, that the award of the mandate to SBCIL could only be explained sensibly on the basis that the directors had given in‑principle approval for the terms proposed by SBCIL. It is also worth noting that the summary omitted other salient matters such as the issue of $75 million convertible bonds to RHאC.
   3293 At [2805] his Honour referred to part of Griffiths’ evidence. It seems reasonably clear that his Honour accepted Griffiths’ evidence:
   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].
   October 1985
   3294 His Honour found that a document headed ‘Amalgamation of Bell Groups Banking Structure’ was prepared in October 1985. The respondents challenged that finding. They said that neither its provenance nor its date was established and it referred only to redeemable preference shares.
   3295 The document formed part of a tender of the business records of TBGL and was identified in a file dated 1 June 1985 to 29 November 1985. In those circumstances, and given its proximity in time to a document headed ‘Possible Amalgamation of Banking Groups’ (prepared by Graham) bearing the date ‘8/10/85’ and a telefax from Newman to Griffiths headed ‘Amalgamation of Bell Group’s Banking Structure’ of the same date, I think that his Honour was entitled to rely, to some extent, on this document as a business record of TBGL at about the relevant time. There were two significant passages:
   (d) The banking agreements and pledge do not cope with several important concepts including a suitable definition of subordinated debt and an agreed means of treating intangible assets such as television licenses, music catalogues or film libraries.
   Recommendation:
   For the above reason it is recommended that Bell proceeds to renegotiate the banking structure position with its principal bankers on the basis that any change must enhance Bell’s current borrowing potential.
   …
7. Any clearly subordinated debt or redeemable preferred share will be treated as equity for the purpose 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% of issue [sic] capital including the subordinated issue. Any amount in excess of this will be treated as debt.
   …
   Achievement of the third point would allow Bell to raise in excess of $100 million in subordinated debt, which would mean that the gross increment in funds from this exercise would be $330 million.
   8 October 1985
   3296 On the same date as the TBGL October board meeting Graham sent a telefax from London to Griffiths in Perth, being the document referred to immediately above. It referred to various discussions which they had had in London, to a proposed borrowing structure and also to documentation. Under the latter heading was the following:
   Bell would therefore need to take the lead in drawing up documentation. As we discussed this could be agreed in outline form with the major lenders and then negotiated from a position of strength with the others. We should aim for documentation that has the following core standard clauses:
8. Definitions Total Borrowings
   Net Capital Resources, Tangible Net Worth, etc
   Subordinated debt
   Tangible Asset
   Total Liabilities
   9 October 1985
   3297 The day after the abovementioned board meeting, Griffiths sent a telex to SBCIL, the opening paragraph of which read:
   Further to our conversation of 8 October 1985 we confirm that the Bell Group Ltd accepts the proposal as presented. Mr Holmes א Court has agreed to participate in the issue of convertible notes for an amount of AUD75 million provided Heytesbury is paid its (2.5%) full entitlement for front end commission and any on going fees which may be due.
   This is part of the evidence that RHאC was a shrewd businessman.
   17 October 1985
   3298 TBGL sent its shareholders notice of a general meeting to be held on 12 November 1985. The letter convening the meeting stated that the purpose of the meeting was to seek shareholder approval for a new convertible note issue of $150 million on terms and conditions summarised in the annexure to the notice. The annexure to the notice was a letter dated 17 October 1985 from C&L to TBGL which summarised the terms of the notes to be issued and included this description:
   (a) Subordinated to all other secured and unsecured liabilities of Bell Group.
   (Bell Group was identified earlier in C&L’s letter as TBGL). The covering letter to shareholders stated as follows:
   The convertible note issue is believed to be the first issue of its kind to be made by an Australian Company. The notes will be marketed in Europe and quoted in Luxembourg. Similarly, the share issue will be placed in Europe but quoted in Australia.
   Both issues will provide additional working capital to the Company and lead managers to the issues are Swiss Bank Corporation International Ltd and Banque Paribas Capital Markets.
   31 October 1985
   3299 Ms Chapman, as Assistant Treasurer of TBGL, wrote to the manager of CBA in Perth. The letter was headed ‘Negative Pledge Report’. It enclosed audited consolidated balance sheet and profit and loss statements together with the auditor’s calculation of the negative pledge ratios. The letter continued:
   We will be contacting banks in the coming months to discuss such matters as the appropriate treatment of the proposed convertible note issue of which you were recently advised.
   3300 Cutler annotated this passage with the note ‘i.e. should look at it as equity not debt?’.
   12 November 1985
   3301 At the TBGL board meeting held on this date a treasury report was tabled which contained the following:
   The Negative Pledge group is currently maintaining a relatively high level of money market borrowings ($53 m at 31 October), which is reflected in its present deficiency ($9.7 m) in undrawn committed facilities. The maturities on the majority of these borrowings compares [sic] with the proceeds of $200 m receivable in late December, 1985 from the proposed Swiss equity and convertible note issues. The borrowing capacity of the Negative Pledge group will increase by approximately $143 m from the $50 m equity raised by this issue. This will increase by a further $428 m when we have the banks [sic] consent to treat the subordinated notes as equity for banking purposes. The Treasury is awaiting board approval to proceed with its approach to the Banks concerned with this matter.
   12 November 1985
   3302 A general meeting of shareholders of TBGL was held. Cutler (Westpac) made a diary note of his attendance. He noted that one of the reasons for calling the meeting was to seek shareholder approval for a new convertible note issue of $150 million. He also noted the following in respect of comments made by RHאC about the terms of the Convertible Notes [2742]:
   Term of convertible notes is 10 years (interest 10% p a). Notes can be converted at any time up to maturity or can be redeemed at maturity. They are subordinated, ie. stand behind the existing borrowings.
   3303 His Honour found [3246] that at this meeting RHאC explained that approval was sought from TBGL’s shareholders for him to subscribe up to 50% of the note issue ‘on exactly the same terms as offered to the public’.
   14 November 1985
   3304 SBCIL sent Griffiths a letter dealing with various matters but including the following:
   With regard to the issue itself, I would be grateful if you would confirm that you have a suitable offshore finance vehicle available to issue the bonds. The need for this arises out of the conversion right attached to the bonds …
   15 November 1985
   3305 Griffiths had obtained some in‑house legal advice to the effect that an offshore vehicle might not be needed. On this date he wrote to SBCIL making this request:
   Will you please ask your Australian lawyers to confirm whether or not this is the case. If our understanding is correct, no offshore vehicle is needed and we can issue direct from the Bell Group Limited.
   18 November 1985
   3306 SBCIL sent TBGL a fax and a telex, the former of which enclosed a copy of some legal advice in relation to a convertible note issue by Elders IXL. It is apparent from the fax and telex that SBCIL considered that the Australian legal advice was to the effect that an offshore vehicle was required. In the telex SBCIL advised TBGL to apply for withholding tax exemption through the normal tax channels.
   20 November 1985
   3307 Rendall, an officer in the TBGIL treasury, sent a memorandum to Newman discussing the two banking structures operating within the Bell group. One of the recommendations he made was as follows:
   (2) The negative pledge banks should be asked to accept a 70% ceiling on liabilities. Also, agreement should be obtained to exclude subordinated debt and redeemable preference shares from liabilities for the percentage calculations.
   21 November 1985
   3308 Johnston sent a memorandum to Griffiths (who was then in London with RHאC) attaching a draft letter requesting tax clearance which C&L was expected to approve that day. He also said:
   The letter has not been sent because I am still unsure why an offshore vehicle is required. David Cullen and Peter Patrikeos can see no taxation and company law requirements. For accounting purposes the vehicle complicates matters, as the note issuer and rights to conversion are made by separate entities.
   Arrangements for the incorporation of the vehicle, if required can either be made by ourselves or SBIC.
   …
   It would appear that Bell Group Finance NV would be an appropriate name and can see no reason why the vehicle could not be a wholly owned direct subsidiary of the Bell Group Limited.
   21 November 1985
   3309 This was a long handwritten fax which Graham (who was in London and working with RHאC and Griffiths on the bond issue) sent to Liddel. It deals with over a dozen matters, some of considerable substance and others of detail. It again demonstrates the high level of control which RHאC and the senior treasury officers exercised over the bond issues.
   22 November 1985
   3310 SCBIL provided TBGL with a copy of advice from its solicitors to the effect that an offshore vehicle was essential to overcome problems that the conversion terms might not strictly comply with s 82SA(1)(D)(xi) of the Income Tax Assessment Act. In the advice, the flow of funds through ‘the offshore “tax haven” subsidiary’ is described as ‘back to back payments’.
   22 November 1985
   3311 Liddel sent a memo to Griffiths and Graham in London. It dealt with the dozen matters of substance and detail (referred to above) relevant to the TBGL offering circular and the letter to the ATO. It is clear that RHאC was maintaining a close interest in these matters because the last item in Liddel’s memorandum reads:
9. Chairman will speak to D Griffiths tomorrow re this.
   3312 Later that day, in a further fax to Griffiths in relation to the offer document, he noted:
   Advised David of Chairman’s reverting mock‑up to B Reuter.
   3313 On this date Ms Chapman sent a memo to Ms Burghard [TBGL.00124.030] the material parts of which read as follows:
   Bell Group is considering setting up a Netherlands Antilles subsidiary to issue the Convertible Bonds recently approved by shareholders – I believe you have a copy of the Stock Exchange announcement setting out the broad terms of the proposed issue.
   At this stage, full details of the mechanics of the proposal are not finalised. We wish to make enquiries, however, to ensure there is no impediment to setting up such a company very quickly should the decision be made to proceed. We might wish to make the new company a subsidiary of an Australian Bell Group company or a subsidiary of a Hong Kong subsidiary of Bell.
   …
   Oliver Graham in London has details of the proposed structure of the Bonds (they will be in bearer form, be US dollar (I think) denominated, have interest coupons etc and have a Conversion Bond attached which will be initially paid up to 1 cent). Please phone Oliver today to discuss the present state of play – he leaves this weekend to go to Europe with David Griffiths.
   As stated, we do not wish to proceed with incorporation at this stage, merely to make enquires [sic].
   25 November 1985
   3314 TBGL’s company secretary wrote to the Australian Taxation Office to obtain ‘taxation clearance’ for the creation of the proposed financing structure. This letter is discussed in considerable detail in Lee AJA’s draft reasons for judgment. It is in the same terms as the draft letter Johnston sent to Griffiths and Graham in London. I will set out two paragraphs from the letter:
   It is proposed that the funds raised from this issue will be lent by Bell Group NV to the Bell Group Ltd 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. (emphasis added)
   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 the Bell Group Ltd to Bell Group NV. It is proposed that Bell Group NV have an issued capital of US$10,000.00.
   3315 This letter serves to elucidate, in my view, two things. First, the identity of the money being subscribed in Europe with the money being on‑lent to TBGL – if in fact there were any doubt on that point.
   3316 Secondly, the word ‘annual’ does not qualify the words ‘any redemption payments’. There were no annual redemption payments. The reference to redemption payments would include the 1 cent per $1,000 of each Conversion Bond which TBGL would have to pay to a redeeming bondholder who chose not to convert. It would also extend, in the same circumstances, to any repayment made by TBGL to BGNV of on‑loans to enable the latter to pay out the redeeming bondholder. That is, a redemption payment of part of the on‑loan. If that is to be made on the same terms as the issue, then it would be quite clearly, in my opinion, a subordinated debt being so discharged.
   3317 Just over 12 months later, by letter dated 5 December 1986, C&L wrote to the Commissioner of Taxation requesting the issue of a withholding tax exemption certificate under s 128F(iv) of the ITAA in respect of the first BGNV bond issue. The relevant parts of that letter (which his Honour quoted at [2771]) were as follows:
   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)
   25 November 1985
   3318 Katherine Burghard (in‑house counsel for the Bell group in New York) sent a fax to Williams at the Bell group office in London and Ms Chapman in Perth. She confirmed retaining Smeets for the purpose of incorporating BGNV. She also confirmed that the name Bell Group NV had been cleared as the name for the new subsidiary and asked for quick responses to questions as to whether it was to be a directly wholly‑owned subsidiary or a subsidiary of another intermediate subsidiary and whether its fiscal year should end on June 30. Ms Burghard also asked for a wire transfer of US$12,000 to be the subscription for the initial capital of BGNV.
   3319 I mention this letter as it exemplifies the control over the matter of the Eurobond issue which was exercised by the group of executives in the Office of the Chairman.
   27 November 1985
   3320 BGNV was incorporated in the Netherlands Antilles. The purpose clause, as stated in its Deed of Incorporation, is set out at [3008] above.
   28 November 1985
   3321 SBCIL’s Australian lawyers advised TBGL that although there was no reference to the use of an offshore financing subsidiary in the resolution approving the bond issue at the general meeting of shareholders, there was no problem because:
   … we believe that the substance of the resolutions will be implemented provided that the proceeds of the Bond issue flow to the Company (as stated in ‘Use of Proceeds’ in the Offering Circular).
   29 November 1985
   3322 A telephone conference was held between Johnston at the Bell group in Perth, Cullen of C&L, Northrop of SBCIL in London and SBCIL’s solicitor in Melbourne. It was agreed that by making two separate loan raisings on virtually identical terms, one to non‑Heytesbury interests and the other to Heytesbury Securities, both issues could be made directly by TBGL without using the Netherlands Antilles subsidiary. However, it would seem that events had overtaken matters to some extent because on 28 November 1985 there was a meeting of the Board of Managing Directors of BGNV. The sole business of that meeting was a resolution passed in these terms:
   RESOLVED that the Company issue a series of       per cent Guaranteed Convertible Subordinated Bonds due 1995 unconditionally guaranteed by, with non‑detachable Conversion Bonds issued by, and convertible into Ordinary Shares of, the Bell Group Ltd, pursuant to the terms of that certain Preliminary Offering Circular dated …
   FURTHER RESOLVED to publish and distribute the Preliminary Offering Circular.
   3323 That meeting was orchestrated from the London Office of the Chairman. Graham, Williams and Ms Burghard executed and sent proxy letters to Curacao Corporation Company NV being the fourth board member [see TBGL.08017.015]. The fact that the rate of interest was left blank and no date was inserted for the Preliminary Offering Circular suggests that the resolutions were sent in draft form to Curacao or were possibly taken from the proxy letters themselves in which there were the same blanks.
   3 December 1985
   3324 Cullen of C&L records in a diary memo that as a result of further research and a further telephone conference between the parties mentioned above (under the heading 29 November 1985) it was decided that it would still be necessary to use the Netherlands Antilles subsidiary for the European portion of the bond issue as originally planned. This was for tax purposes.
   3 December 1985
   3325 In the minutes of the TBGL Board meeting held on this date there appears the following:
   The Board noted that the Group would have approximately $1 billion in spending power when all proposed facilities were in place. It was expected that the $150m Convertible Note Issue would be oversubscribed but only $30m of shares were to be issued rather than $50m.
   December 1985
   3326 Documentary evidence in December 1985 shows that the terms of the Eurobond issue and the documentation for that issue were directed by Raubenheimer of SBCIL London. Griffiths, Johnston, Corr, Ms Chapman and Liddel carried out the necessary work from the Office of the Chairman in Perth and Graham did similar work in London.
   4 December 1985
   3327 Edward of SGAL met with Griffiths, Cahill, Staehr and Ms Chapman of TBGL. Edward’s note of the meeting includes:
   Bell Group have raised $180 million equity and convertible notes in December. The convertible notes are subordinated to all other creditors. This capital raising and record profits have substantially enhanced the borrowing capacity of the group.
   3328 Graham sent a telefax to Ms Burghard which included the following paragraph:
   Given that we shall be receiving US$, is there an account set up for these to be paid into? We need an account in the name of Bell Group NV. S CI need to know account details by December 16th at the latest. (Westpac, New York?)
   10 December 1985
   3329 The Offering Circular was issued for $75 million worth of bonds at 11% per annum and the issue of 2,620,00 ordinary shares of TBGL at a price of $11.80 per share.
   11 December 1985
   3330 TBGL wrote to each of the Banks lending to the Negative Pledge Group advising them that through a foreign finance subsidiary, Bell Group NV, it would issue into the European markets A$75 million Convertible Subordinated Bonds to mature in December 1995. It also advised that interests associated with RHאC would take up a further A$75 million Convertible Subordinated Bonds with a December 1995 maturity which would be issued by TBGL. The letter contained the following:
   As you have previously been advised The Bell Group Ltd will through its financing subsidiary Bell Group NV issue into the Euro market $A75 million Convertible Subordinated Bonds which will mature in December 1995.
   At the same time interests associated with Mr M.R.H. Holmes a’ Court will take up a further $A75 [sic] Convertible Subordinated Bonds with a December 1995 maturity which will be issued by The Bell Group Ltd.
   The two issues will with the exception of issuers and minor variations due to different domiciliary laws be identical.
   …
   Based on price performance of the Bell Group Ltd’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, the Bell Group Ltd considers that the issues should be regarded as equity when considering balance sheet ratios for the purposes of its banking covenants.
   …
   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.
   In due course, all of the relevant Banks complied with that request.
   3331 His Honour discusses this letter in [3231] ‑ [3239] (he may also discuss it elsewhere). I agree, respectfully, with his conclusion that the author of that letter must have been referring to the on‑loans when he referred to A$75 million being raised on the Euro market. There would be no need to seek equity treatment of BGNV’s obligations to the bondholders, because BGNV was not a member of the negative pledge group. It is true that the summary enclosed in the letter referred to the fact that the bonds were guaranteed by TBGL. But that was purely part of the description as was the reference to the likelihood of conversion. It is also true that, if anyone had given any thought to the matter, TBGL’s subordinated contingent liability under that guarantee (including its subordinated liability as co‑obligor) was also a liability which would need to be taken into account in the NP ratio calculations unless the Banks were prepared to treat that liability as equity. But it is quite clear, in my view, that the letter itself is referring only to the two issues of bonds (see the references to ‘the two issues’, ‘the issues’) and does not refer to any contingent liability. Its subject matter is the imminent, immediate and present liability of TBGL in respect of the money raised in Europe ‘through its financing subsidiary Bell Group NV’. In my opinion this letter demonstrates that TBGL (and hence BGNV which authorised it to make all the necessary contractual and other arrangements on its behalf including the terms of the on‑loan) made no distinction between BGNV’s liabilities under the Eurobonds and its own liabilities under the on‑loans (nor for that matter between those liabilities and its liabilities to the RHאC interests). They were, in the eyes of all concerned, all subordinated. The meaning of the third paragraph set out above needs no construction. It is, in my opinion, quite clear.
   3332 I diverge from chronological order at this point to refer to his Honour’s finding about the agreement between TBGL and Heytesbury Securities which was entered into on 20 December 1985. His Honour referred to that agreement, at [2767], in these terms:
   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.
   12 December 1985
   3333 Raubenheimer (SCBIL) sent a fax to Liddel in Perth attaching draft cross receipts for Bell Group NV and the Bell Group Ltd to execute in anticipation of receipt of the bond moneys.
   13 December 1985
   3334 Liddel faxed Graham in London. The material parts of that fax read as follows:
   We have received today the following ‘NV’ documents from John Raubenheimer:
10. Closing certificate.
11. Cross receipt.
    Following our review these will ultimately be signed by you in London. Perhaps you could confirm that the necessary resolutions are in place to allow you to do this. You probably already have this in hand – in which case my apologies; it is not clear from J.R’s fax whether he is copying you with all documents.
    16 December 1985
    3335 Corr wrote to the Foreign Exchange Department, NAB Melbourne. The relevant parts of that letter read as follows:
    As discussed on the telephone, could you please arrange the settlement of USD funds on December 23, 1985 as follows:
12. US$49,364,900 will be remitted to you from Swiss Banking Corporation, London, the contact there is John Raubenheimer (phone: 01 600 0844).
13. An account will be opened by NAB New York in the name of Bell Group NV. The US$49,364,900 will be paid into this account on which it will incur [sic] interest at the going commercial rate. Please advise us and Swiss Banking Corporation of the account name and number immediately (SBC telex 01 6000 844).
14. On Friday December 20, 1985 NAB NY will inform Mr Peter Wallace of NAB, Perth; John Corr of the Bell Group Ltd Perth (telex 93370); Oliver Graham of ACC, London (telex 51 261 807) and yourself of the receipt of the US$49,364,900 and the amount of interest due on these funds for three days.
15. On Monday December 23, 1985 NAB Perth will deliver a cheque for the A$ equivalent (at 0.6754) of US$49,364,900, plus the interest accrued over the weekend, to John Corr at the Bell Group Ltd, Perth.
    …
16. On Monday December 23, NAB New York will receive the funds from the Bell Group NV account, including interest, as the payment for the $A funds paid to the Bell Group Ltd, Perth.
    Could you please tell me the person I can contact at NAB, New York (home and work numbers). Could you also pass these numbers to Oliver Graham in London.
    If there is any problem regarding these funds, please instruct NAB New York to contact me at home on (09) 367 3269 or Oliver Graham on London 262 8040 immediately such a problem arises.
    3336 The steps outlined above, as will be seen below, were carried out precisely in accordance with Corr’s instructions. There is no evidence of any resolution by BGNV to make a loan of $75 million to TBGL or that it was consulted about the matter. The net proceeds of the bond issue were paid into a US$ account with NAB New York in BGNV’s name. There is no evidence that BGNV played any part in the opening of that account, other than, possibly, Graham’s telefax of 4 December 1985 in relation to which it would seem that he was acting for both TBGL and BGNV. Those US$ funds were not remitted to TBGL in Perth. What took place was a ‘mirror’ transaction whereby NAB Perth paid an amount equivalent to the US$ net proceeds of the bonds and interest in Australian dollars to TBGL Perth and, NAB’s New York branch having taken the US$ funds from the New York bank account, presumably closed that account.
    3337 Although, nominally, the funds stood in a New York account to the credit of BGNV over the weekend 20 December to 23 December 1985, the journal entries of TBGL show that TBGL received the interest paid on that account ($47,266.18) for those three days and also a foreign exchange gain of $66,173.29, TBGL having entered into a foreign exchange hedging contract in anticipation of receiving the funds.
    3338 In my opinion the evidence shows that the 1985 Eurobond issue and the on‑loan to TBGL of the funds so raised were regarded by the Bell group as one commercial event. The interposition of BGNV into that event was done reluctantly at virtually the last moment on tax advice.
    3339 In similar fashion the two 1987 Eurobond issues and the on‑loan of the funds to BGF were each regarded as one commercial event. The funds raised by those two further issues did not even find their way into a BGNV bank account; they went straight into accounts in the name of BGF. One of those deposits was pursuant to an authority signed on BGNV’s behalf in London. But for the other there was not even that degree of involvement on BGNV’s behalf. The line separating the European fund‑raisings and the on‑loans was a very fine one.
    3340 To the extent that BGNV played its part in those three transactions, it did what it was told by the relevant officers in the London and Perth Offices of the Chairman.
    3341 As further examples of the manner in which the Office of the Chairman orchestrated the movement of these funds I refer to some, but not all, of the communications which took place in the lead up to their receipt in Perth.
    17 December 1985
    3342 The Chief Manager, Global Foreign Exchange at NAB Melbourne telexed Corr and Graham:
    Re settlement of USD on Friday 20 Dec. Your point of contact in New York will be Mr Arnold Kroner Senior Vice President North American Treasury of Nationalaustralia [sic] Bank Ltd work telephone number (212) 916 9575 home telephone number (718) 447 7494.
    3343 Corr was obviously concerned, for exchange purposes, to lock in the exchange contracted rate (for TBGL’s benefit) because on 17 December 1985 he sent a telex to NAB Melbourne:
    Could you please telex confirmation that our contract due on December 20 is now due December 23 at 0.6754.
    17 December 1985
    3344 Corr sent a telex to Kroner at NAB New York. The material part of that telex reads as follows:
    The one piece of information that I urgently require is the name, number etc of Bell Group NV’s account so that I can direct Swiss Bank to remit funds to that account.
    17 December 1985
    3345 Graham sent a fax to Corr which read:
    The contact at NAB NY is Nicaldo Soares tel no. (212) 916‑9525. Arnold Kroner is apparently on holiday!
    Soares knows about the deal and gave the following payment instructions which have been relayed to SBCI –
    ‘Pay N.A.B. N.Y. a/c N.A.B. Grand Cayman favour Bell Group N.V.’
    18 December 1985
    3346 Corr sent a telex to Soares at NAB New York which read:
    Please remit all details of the account into which the USD49 mio is to be paid on Friday. Have you notified Swiss Bank International? Is anything else required from our end?
    19 December 1985
    3347 As part of the financial procedures provided for in the subscription agreement for the Eurobonds, two organisations, Euro‑clear Operation Centre and Cedel S.A., received the moneys subscribed by investors for the bonds which were deposited to their account with Morgan Guarantee Trust Company of New York, London office. In return for temporary global bonds issued by BGNV and at the direction of SBCIL, Euro‑clear Operation Centre and Cedel remitted US$49,364,900.00 to the NAB account opened in BGNV’s name in New York.
    20 December 1985
    3348 Graham signed all of the bond issue documentation on behalf of both TBGL and BGNV. He sent a fax to Corr and Liddel which read:
    All documents signed and US$49,364,900.00 confirmed as being in Bell’s a/c with National Bank of Australia invested over the weekend.
    20 December 1985
    3349 NAB New York sent a telex to Corr which read as follows:
    Re USDLRS 49,364,900 stop Please be advised funds were received in good order and placed on deposit with our Gradcayman [sic] from Dec 20 to Dec 23 at 7.875. On December 23 we will credit our Melbourne head office.
    20 December 1985
    3350 A cross receipt, in the same terms (save for one exception) as the cross receipt forwarded by Raubenheimer on 12 December 1985 for the proceeds of the bond issue was signed on behalf of Bell Group NV by Graham. The draft had been pre‑dated 20 December 1985 and the signed copy bore that date. Whoever had retyped the document made a mistake, because the receipt was for USD29,364,900, not USD49,364,900. The counterpart of that cross receipt, executed by the payor, SBCIL, contained the correct figure.
    3351 A journal voucher of TBGL for December 1985 records the receipt of the net proceeds of the Eurobond issue. Under the heading ‘Account description’ there appears ‘NAB – M/M deposit’. It was common ground that ‘M/M’ stood for ‘Money Market’. Under ‘Detail’ there appeared this:
    Being proceeds rec’d from Swiss Bank 20/12/85 re issue of 75M convertible bonds for Bell Group NV $73,138,439.47.
    3352 The journal voucher shows that the underwriting fee, management fee, selling concession and legal fees of the issue were borne by TBGL and, as I have mentioned above, the interest on the deposit in New York over the weekend and the foreign exchange gain were credited to TBGL. The same entry credits the full gross amount of $75 million to Bell Group NV.
    3353 BGNV’s journal and general ledger were not kept (in the sense of maintained) in Curacao. They were maintained at TBGL’s head office in Perth in handwritten form (in what looks very much like an exercise book with ‘Collins Red Circle’ on the front) and in US dollars [TBGL.00088.074 and TBGL.00088.004 respectively].
    3354 In the BGNV journal (Journal No 06100) for December 1985 there is this entry:
    Account Description Detail Amount

Bell Group Ltd Being issue of A$75,000,000 50 700 000:00
Convertible bonds payable in US$ @
Subordinate Bonds 0.6760 50 700 000:00 CR
3355 As the 1985 bonds were denominated in Australian dollars this appears to be the primary record (from BGNV’s point of view) of its on‑loan to TBGL of A$75,000,000. This is confirmed when one sees the ‘movement’ of this transaction to BGNV’s ledger. The relevant ledger account is headed ‘Loan Account – Bell Group Ltd’. The first entry in that account is cross‑referenced to ‘Jnl 06100’ and the amount in the debit column is 50,700,000.00. An exchange fluctuation (as between US$ and A$) ‘from the date of issue to 31/12/85’ was similarly recorded in both the BGNV journal and BGNV ledger. What this shows, in my opinion, is that those responsible for recording, from BGNV’s point of view, the loan which it had made to TBGL, saw no distinction between the bonds and the on‑loan.
3356 When one turns to TBGL’s accounting records [TBGL.00917.240 and TBGL.00917.241] one finds a similar lack of concern to distinguish the BGNV bonds from the on‑loan. The entry in the second document, headed ‘The Bell Group Ltd’ shows under the sub‑heading ‘Bell Group N.V.’:
Date Ref Opening Balance ………………………… 0.00
20 Dec 85 6103 ISS 75000 Conv Bonds ………… 75000000.00
This can only be a reference to the on‑loan. It is a fair inference, in my opinion, that ‘Iss’ is an abbreviation for ‘Issue’.
3357 On the previous page of that document under the heading ‘Share Capital’ appears:
Date Ref
20 Dec 85 724 Heyts-Euronote 75000000.00
3358 This, of course, records, on the same date, the receipt of the funds subscribed by Heytesbury Securities for the bonds issued to it on a subordinated basis. Also, as discussed below, on this one date is recorded the receipt of A$750 for the subordinated Conversion Bonds issued by TBGL to the European bondholders (all of the money raised in Europe net of expenses, which TBGL paid, found its way to TBGL within three days so it must have included that A$750), plus the receipt of A$75 million of funds representing the subordinated debt to Heytesbury Securities and the on‑loan from BGNV all with no concern about distinguishing (from TBGL’s point of view) the bond proceeds from the on‑loan.
3359 It may not be a major matter in the scheme of things, but I think it is of some significance that these journal entries show that, notwithstanding the fact that the moneys spent the weekend in a New York bank account in the name of Bell Group NV, the proceeds were treated as having been received by TBGL from Swiss Bank on 20 December 1985. Perhaps the only point which can be made is that, if it were necessary to pinpoint a time at which the Eurobond moneys passed from being the subject merely of subordinated debt owing by BGNV to the bondholders, to being (on the respondents’ case), in addition, unsubordinated debt owing from TBGL to BGNV, it would be quite difficult to do so. It might seem a little odd that interest earned on, and a foreign exchange profit based on the use of, moneys standing to the credit of a subsidiary are paid to the parent company and recorded as being the parent’s entitlement. But, in my view, that serves to clarify what TBGL was effecting from a commercial point of view. It was borrowing $75 million on a subordinated basis for its own commercial purposes on the Eurobond market.
3360 As I have mentioned, the journal voucher referred to above served to record the receipt by TBGL of a very small amount of money ($750.00) which quite clearly and beyond argument represented a subordinated debt. This was the amount (1 cent per $1,000) paid up on the Conversion Bonds issued by TBGL simultaneously with the BGNV issue. This was the amount referred to in the third paragraph of Ms Chapman’s memo dated 22 November 1995 to Ms Burghard which I have set out at [3313] above. The relevant trust deed [clause 6(B)(2)] provided that moneys owing under the Conversion Bonds were subordinated. The whole of the net amount of the moneys raised on the Eurobond market was lumped together and found its way into TBGL’s bank account in the manner described above. The net sum of $73,138,439.47 thus included the $750 paid up on the Conversion Bonds. We were not taken to any evidence that this amount was separately treated in the accounts of TBGL.
3361 If this amount of $750 was not included in the net sum of $73,138,439.47, these questions arise:
(a) What consideration did the bondholders give for the Conversion Bonds?
(b) Could TBGL be heard to say that it was not liable in debt for the paid up amount on the Conversion Bonds because no consideration was given for them?
3362 When one turns to the Offering Circular, Clause 5(A) provided:
(A) Conversion Bonds
Rights of conversion into Ordinary Shares of the Guarantor will be conferred by interest‑free conversion bonds (the ‘Conversion Bonds’) which will be issued by the Guarantor. One Conversion Bond will be attached to and non‑detachable from, each Bond. The Conversion Bonds will be issued in the same aggregate principal amount and respective denominations as the Bonds, and A$0.01 per A$1,000 principal amount will be paid up on each Conversion Bond upon issue thereof. (emphasis added)
3363 Clause 6(G) of the Offering Circular read:
(G) Redemption of Conversion Bonds
On redemption of any Bond in any circumstances in which the relative Conversion Bond is not correspondingly paid up and converted into Ordinary Shares, that Conversion Bond shall simultaneously be redeemed at the amount actually paid up thereon, and all references herein to redemption of Bonds in such circumstances are to be read as including such simultaneous redemption of Conversion Bonds. (emphasis added)
An identical clause [also numbered 6(G)] appeared on the reverse of the Finance Bond.
3364 The (temporary) Global Conversion Bond described itself in these terms:
This Bond is a temporary global conversion bond (‘Global Conversion Bond’) in respect of a duly authorised issue of Conversion Bonds of The Bell Group Ltd. (‘Bell Group’), designated as specified in the title hereof (the ‘Conversion Bonds’), limited to the aggregate principal amount of seventy‑five million Australian Dollars (A$75,000,000) paid up as to A$750 … (emphasis added)
3365 The Conversion Bond itself on its face contained this clause:
Subject as aforesaid, Bell Group for value received hereby promises to pay to the bearer on 10 December, 1995 or on such earlier date as the principal sum hereunder mentioned may become repayable in accordance with the Conditions enclosed herein the principal amount of A$[0.01][0.05] being the amount paid up on this Conversion Bond. (emphasis added)
3366 I respectfully differ with Drummond AJA’s construction of the work which the words ‘… in accordance with the Conditions enclosed herein …’ do in the above clause. I think they merely govern or define the ‘earlier date’ when the principal sum becomes repayable. In my opinion they do not qualify the subordinated obligation of TBGL to pay the sum paid up on the Conversion Bond.
3367 On the reverse of the Conversion Bond there appeared the following:

3. (A) Unless previously redeemed or converted as herein provided or purchased and cancelled, the Conversion Bonds will be redeemed on 10th December, 1995 at the principal amount paid up thereon.
   (B) On redemption of any Bond in which the relative Conversion Bond is not correspondingly paid up and converted into Ordinary Shares (as defined in Condition 6(A) below) of Bell Group, the relative Conversion Bond attached thereto shall simultaneously be redeemed at the amount paid up thereon and the redemption price shall be inclusive of such amount.
   3368 The expression ‘redemption price’ is not defined. In my view it means the face value of the Finance Bond plus the amount paid up on the attached Conversion Bond.
   3369 The gross amount subscribed by the European bondholders was $75 million. It was certainly not $75,000,750. The only amounts deducted from the gross amount were the costs of the fund raising including commission. The whole of the rest was paid first into BGNV’s New York bank account and, via the back‑to‑back banking transaction described above, that amount found its way into TBGL’s bank account. But $750 of that amount already belonged to TBGL. It was simply not capable of being lent by BGNV to TBGL. It was TBGL’s money because for the total moneys subscribed by the European bondholders they each received a TBGL conversion bond paid up to one cent per thousand dollars. That sum (in total $750) must have come out of the total amount subscribed by the European bondholders – the $75 million referred to above. They also received from BGNV Finance Bonds fully paid with a total face value of $75 million. In my view, the appropriate characterisation of those circumstances is that BGNV effectively issued its finance bonds at a very small discount of one cent per thousand dollars. I think that this is confirmed by what would have happened if all the European bondholders elected to convert all of their Finance Bonds into shares in TBGL.
   3370 If all of the bondholders elected to convert all of their Finance Bonds into shares in TBGL the terms of the Conversion Bond would have required BGNV to apply A$75 million less $750 (1 cent per $1,000) in payment of the balance owing on the Conversion Bonds. That 1 cent per $1,000 was described in Clause 6(c) of the Conversion Bond as a ‘commission’ but the inference is, in my opinion, very strong that the deduction was not really a commission but a device to balance the books. That is, to discharge the full A$75 million of BGNV indebtedness and also simultaneously, on completion of the conversion transaction, to discharge the $750 owed by TBGL on the Conversion Bond. When real commissions were paid, they were payable at much higher rates – see Clause 14(A) and (B) of the Paying and Conversion Agency Agreement.
   3371 In my view the appropriate inference from all of the above was that $750 of the subscription moneys paid by the European bondholders formed part of the consideration for the Conversion Bonds issued by TBGL and that very small sum was paid over by BGNV as part of the $73,138,439.47 which TBGL received on 20 December 1985.
   3372 That still leaves the conundrum of what would have happened if none of the bondholders elected to convert but all exercised their right to redeem the full amount of A$75 million? Would they have been entitled to repayment of A$75 million from BGNV plus A$750 from TBGL? In my opinion the answer is yes. As TBGL, in practical terms, had to provide the funds to BGNV for such a redemption this was another, very small, cost of having documentation which complied with s 132(2) of the Companies Code [see TBGL.00095.252].
   3373 The Trust Deed clearly provides that the moneys owing by TBGL to the Eurobond holders are owed directly to them and are subordinated. That money cannot be part of BGNV’s proof of debt in the liquidation of TBGL.
   5 December 1986
   3374 C&L wrote to the ATO seeking a withholding tax exemption certificate in respect of the first BGNV bond issue. This was just before the first payment of interest fell due. I have referred to that letter above.
   3375 Similar letters were sent by C&L to the ATO on 15 April 1988 in respect of the two subsequent BGNV bond issues except that they referred to the on‑loans as having been made (as, of course, was the case) to BGF.
   3376 Legally, the relationship between BGNV and TBGL (and subsequently BGF) may well have been a relationship between two ‘separate’ legal entities. But the evidence referred to above shows, in my opinion, that everything which was transacted between the parties and the terms of those transactions were decided by the executives of TBGL operating from the Office of the Chairman. In my view, his Honour was fully justified in making findings to that effect, for example in [3096], which I have set out above.
   3377 His Honour also found, correctly and not surprisingly in my view, that TBGL had BGNV’s authority to set the terms of the on‑loan contract as its agent, [3274] ‑ [3278]. The appellants pleaded that ‘TBGL had implied actual authority to determine the terms of the on‑loans’ [par 11EE(1) of the defence – PLED.010.001]. In closing submissions at first instance, counsel for the respondents conceded 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’ [3257]. This concession was in the context of the submission that:
   (i) the terms of the on‑loans were set by the Accounts Department not by the Treasury;
   (ii) the standard course of lending within the Bell group was unsubordinated;
   (iii) there was no express statement that the on‑lending was subordinated; and
   (iv) the on‑loans were thus made on an unsubordinated basis.
   3378 In my opinion the evidence, in particular the evidence summarised above, shows that TBGL, and in particular, its Treasury executives had BGNV’s implied actual authority to determine the terms of the first on‑loan. They were quite clearly in charge of both sides of the transaction. What they did was done on behalf of both TBGL and BGNV. What little was done in Curacao was organised and directed by them with the acquiescence of BGNV. There was really no evidence to suggest that their authority was fettered so as only to bind BGNV to an unsubordinated loan.
   3379 The transaction of which the on‑loan was a most important part was scarcely a normal course of lending. The same applies, in my view, to the on‑loan. This was the first time the Bell group had used this method of raising funds. This was not a ‘normative’ inter‑company loan within the Bell group and his Honour was, in my opinion, quite right to reach that conclusion. BGNV had been specially set up to borrow $75 million on a subordinated basis and to on‑lend it. It may well be that normal inter‑company lending within the Bell group was done on an unsubordinated basis. But, as his Honour found, correctly in my view, there was a special purpose underlying this borrowing transaction, i.e. is to raise money on such terms that the Banks would treat the subordinated debts not as liabilities but as quasi‑equity.
   3380 In my view, his Honour approached the question of whether a subordination term should be inferred in the on‑loan contract in an uncontroversial manner and in accordance with the authorities, some of which I have referred to above. He looked at a great deal of evidence of what the relevant parties had said and done in order to identify the purpose of the contract. He was not obliged to narrow his focus only to the on‑loan in isolation. The on‑loan was, as I have said, a part (a very important one) of the overall transaction whereby the money subscribed on the Eurobond market for TBGL’s use was received by it. The purpose which his Honour identified, correctly in my view, was to inject into the NP group (via TBGL) funds ‘… that while actually borrowings would be treated as equity for NP ratio calculations’.
   3381 Everyone concerned knew that BGNV was not a party to the negative pledge agreements. As Mr Ryan SC, for the appellants, pointed out (appeal ts 3468), in slightly different terms, there was no sensible basis upon which equity treatment could be based on the primary subordinated liability of BGNV to the Eurobond holders. As BGNV was not in the negative pledge group and was not an Indemnifying Subsidiary, whether its debts to the Eurobond holders were subordinated made no difference at all to the Banks. However, in contrast, whether the on‑loans from BGNV to TBGL and then BGF (central companies in the NP group) were subordinated made all the difference in the world so far as the NP ratios were concerned. The TBGL treasury executives, acting in both their TBGL and BGNV capacities as they obviously were, must be taken to have been very well aware of that circumstance, given the abundant evidence of their financial acuity and commercial shrewdness. The concession which TBGL was so carefully planning to obtain from the Banks cannot, in my view, sensibly be characterised as a concession in relation to the Eurobond debts of BGNV. They were simply not part of the equation. But the on‑loans most certainly were.
   3382 I do not think that it matters that the Bell group could probably have achieved the purpose that the Banks would treat the Eurobond funds as equity simply by the application of the rather benevolent definition of ‘Total Liabilities’ in the NP Agreements. Benevolent in the sense that if the auditors were prepared, for the purposes of the Audited Consolidated Balance Sheet, to accept exclusion of liabilities to redeem the bonds from the total of liabilities in those accounts (as it appeared C&L were prepared to do) they would not have to be taken into account for NP ratio purposes. The point is that TBGL wanted to ensure that the Banks would accept such an exercise. From the documentary evidence it is clear that that was a very important matter for TBGL. It is also clear that the subordinated status of the relevant debts (the only relevant debts for ratio purposes being the on‑loans) resulting from the issue of the bonds was material to the Banks’ acceptance of them as quasi‑equity for the NP ratio calculation. It is worth noting that it was apparent to all concerned that redemption of the bonds could only occur via TBGL repaying the on‑loans to BGNV.
   3383 The ‘mechanics’ of the means by which the funds raised by the second and third Eurobond issues found their way to BGF were very similar to those which dealt with the funds raised by the first Eurobond issue. On each occasion the documentation was orchestrated from the Bell Treasury department in Perth with assistance (usually at Perth’s direction) from their opposite numbers in the Office of the Chairman in London. One significant difference was that in respect of each of the two further Eurobond issues the net proceeds of the issues were remitted direct into BGF’s own bank account. In the case of the May 1987 issue the funds were remitted direct from the Morgan Guaranty Trust Company of New York’s account with Australia and New Zealand Banking Group Limited in Melbourne into BGF’s account with Westpac also in Melbourne. The funds were never in a bank account in the name of BGNV. In the case of the July 1987 Eurobond issue, the net proceeds were paid direct to BGF’s account with Westpac in London. On each occasion those responsible for arranging settlement or closure of the second and third issues arranged for Ms Burghard in New York to send an authority on behalf of BGNV for the funds to be so deposited.
   The rate of interest paid on the on‑loans
   3384 Another piece of objective evidence indicating that the terms of the bond issues and the on‑loans (including subordination) were, so far as possible, the same, was that the rate of interest payable and paid by TBGL and BGF to BGNV in respect of the on‑loans was identical to the rate of interest payable by BGNV to the bondholders who subscribed the moneys which were on‑loaned. I do not suggest that such a factor is decisive on the question of inferring a term of subordination into the on‑loans, but I think that it deserves some weight in making the overall assessment on this issue. It is consistent with the Transactions being made back to back, almost instantaneously and on the same terms.
   The Negative Pledge Reports
   3385 Under the relevant clauses of the Negative Pledge agreements (and after their replacement by the NP guarantees, under those guarantees) TBGL was obliged to provide to the Banks, at specified intervals, negative pledge reports (NPRs) signed by the auditors. The half‑yearly reports had also to be signed by two TBGL directors. NPRs were required to set out calculations of the amounts of Total Liabilities, Total Secured Liabilities and Total Tangible Assets (all defined terms) and the calculations of ratios, including the ratio of Total Liabilities to Total Tangible Assets. It will be recalled that there was a covenant in the Negative Pledge agreements that the ratio was not to exceed 65%.
   3386 It is helpful to remember, as his Honour pointed out at [2927] ‑ [2928] that:
   • the Bell parties to the Negative Pledge group (NP group) did not encompass all of the companies in the Bell group;
   • because the arrangements to protect the lending banks were limited to NP group companies there had to be a mechanism to identify assets and liabilities of those companies separately from the assets and liabilities of the global Bell group; and
   • BGNV was not a party to the NP agreements and was thus not an Indemnifying Subsidiary (another defined term). Accordingly its liabilities as issuer of the convertible subordinated bonds did not come within the definition of Total Liabilities. But any liability of TBGL (being a party to the NP agreements) or an Indemnifying Subsidiary such as BGF to BGNV (i.e. the on‑loans) was within the definition and had to be included in the calculation of Total Liabilities.
   3387 In addition to the NPRs, TBGL was obliged to furnish the Banks with a copy of its annual report, a copy of the duly audited consolidated balance sheet and profit and loss account of TBGL and the Indemnifying Subsidiaries. That latter obligation and a half‑yearly obligation to furnish a copy of the unaudited half‑yearly consolidated balance sheet and profit and loss account for the same group of companies meant, potentially, that a completely separate (separate from the consolidated accounts of the Bell group) set of accounts would have to be prepared for the relevant (NP) group together with separate ratio reports. In practice the auditors (to whom was delegated the task of preparing these documents for TBGL Board approval) worked from the consolidated accounts gutting out (and often adding back in) various amounts, including those concerned with BGNV, as part of the exercise of preparing the separate set of figures.
   3388 His Honour identified four categories of NPRs. The first category comprised only the report dated 30 April 1986 for the half year ended 31 December 1985 i.e. not long after the first Eurobond issue.
   3389 His Honour’s description of the accounting processes which the auditors applied to the Consolidated Accounts (apparently adopting Stephen Scudamore’s – the Bank’s expert – analysis) starts at [2942]. The first deduction from liabilities was the total of the liabilities of non‑indemnifying subsidiaries. That seems uncontroversial. That meant, among other things, that BGNV’s liabilities on the Eurobonds ($75 million) was deducted. Then, because on consolidation the liability of TBGL to BGNV in respect of the $75 million on‑loan had been eliminated, that sum had to be added back so as to be shown as a liability (non‑current) of the NP group. The final adjustment (a composite of two amounts) was the crucial one. It was a deduction of $150 million. The auditors’ annotation of it was as follows:
   Less – $75,000,000 Convertible Note borrowings of The Bell Group Limited plus $75,000,000 Convertible Note borrowings of Bell Group N.V. on‑lent to The Bell Group Ltd treated as equity.
   3390 His Honour, at [2946], said he was satisfied that that description meant what it said and he held:
   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.
   3391 The main respondents submitted (appeal ts 2586) that it was ‘… far from clear that the meaning his Honour thinks attaches to the reference does in fact attach’. I reject that submission. The auditors’ note is, in my opinion, crystal clear. The first $75 million deducted is obviously the amount of the direct bond issue to Heytesbury Securities. The second $75 million is equally obviously the on‑loan by BGNV of an identical amount to TBGL. It simply could not have been BGNV’s liability to the Eurobond holders. That sum had been deducted as the first deduction described above.
   3392 The main respondents submitted that this deduction, made after the on‑loan contract had been entered into, should not have been treated as having any significance in an objective assessment of the surrounding circumstances.
   3393 Again I disagree. It was part of the continuum of events which started the previous year when the Bell treasury executives in the Offices of the Chairman in London and Perth initiated the contractual arrangements, eventually acting on behalf of both BGNV and TBGL, to raise $150 million on a subordinated basis which because of that factor (among other factors such as convertibility and the 10 year term) would be treated by the lending banks as quasi‑equity, not liabilities. It was not the end of the continuum – that happened when the lending banks accepted the debt to tangible asset ratio reflected in the first NPR after the first Eurobond issue. In my opinion, it forms part of the evidence of the mutual objective intention that the on‑loans were to be subordinated. Also, given his Honour’s finding that the second and third issues had the same commercial purpose as the first, it forms part of the objective circumstances relevant to the contracts for the second and third on‑loans.
   3394 As to the second category, his Honour noted in [2955] the confusion which arose from the double deduction of the liabilities of TBGL and BGF in respect of the on‑loans. He held [2956] that the amount representing the Total Liabilities of TBGL and the Indemnifying Subsidiaries did not include, relevantly, 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). His Honour made similar findings in respect of the third [2961] and fourth [2967] categories of NPRs. There is no need here to examine the detailed analysis made by his Honour. It is sufficient to say, as I do, that I do not think that the respondents have demonstrated any error on his Honour’s part in reaching those conclusions.
   3395 In my opinion, treatment of the on‑loans in the NPRs as not being liabilities is further objective evidence of a mutual assent or intention that the on‑loans were made on the same basis as the bonds i.e. subordinated. Mutual because the executives responsible for both the transactions, in each of the three fund‑raisings, acted simultaneously for BGNV and TBGL.
   The put option premium in the third bond issue
   3396 Another objective factor which, in my opinion, adds weight to the proposition that BGNV and the on‑loan borrowers (TBGL and BGF) regarded the bonds and the on‑loans as being part of the one transaction is the manner in which the put option premium in relation to the third Eurobond issue was accounted for in the books of BGNV and BGF. As his Honour explained, at [330], in the third Eurobond issue (but not in the other two) the bondholders had an additional right. That was to require BGNV to redeem the bonds at 23.125% more than their face value. This required giving notice of intention to exercise that right not more than 45 nor less than 30 days before 14 July 1992.
   3397 It will be recalled that BGNV’s books were kept by TBGL officers in Perth. It would seem that when preparing the financial reports for the year ended 30 June 1988 they formed the view that a provision had to be made for the additional cost if the put option were exercised. Senior counsel for the main respondents suggested (appeal ts 2719), and I agree with him, that this was because, following the November 1987 share market crash, it became likely, for the first time, that the put option might be exercised. That is made quite clear by Note 6 on page 10 of BGNV’s 1988 Accounts [TBGL.00420.015]. What the TBGL officers did was to assess the amount at US$29,831,850 (see the two items of unamortised put premium on convertible bonds shown on page 4 of BGNV’s balance sheet and the amortisation of put premium charge shown in Note 2 on the next page). The put premium was thus shown in BGNV’s books as an asset to be ‘amortised’. The extra amount which would, on exercise of the put option, be payable to the bondholders was clearly subordinated vis‑א‑vis BGNV, and TBGL (as co‑obligor and guarantor). As senior counsel for the main respondents suggested (appeal ts 2723(.10); APPR.000.075) and again I agree, the amortised portion of this put option liability was included in BGF’s balance sheet as at 30 June 1988 under the heading ‘Non‑Current Liabilities – Creditors and Borrowings’ in the item ‘Amounts owing to subsidiary companies ($)353.3 (million)’.
   3398 This amortised portion of the put option liability was treated as a further on‑loan. But no further moneys were in fact on‑loaned by BGNV to BGF. In reality what happened was that BGNV recognised a further potential liability to the bondholders. That was clearly subordinated. BGF assumed the liability for the same amount and everyone concerned was content to fold that amount into BGF’s on‑loan account without any thought of differentiating it from the existing on‑loan balance to which it was added. There could be no possible basis for treating the extra liability assumed by BGF as being unsubordinated. The inference is that like was being added to like i.e. all was subordinated.
   3399 In my opinion the inclusion of the amortised portion of the put premium (clearly a subordinated obligation if it crystallised) within the pre‑existing on‑loan from BGNV to BGF without any distinguishing note shows two things. First, that the moneys raised by the bonds and the money on‑loaned by BGNV to BGF were regarded as all being part of the one transaction. Secondly, all of the loan money so lumped together was subordinated debt. This was not merely a provision. One fifth of it had been treated as an expense in BGNV’s books and added to the on‑loans to BGF.
   3400 Incidentally, the Global Bonds were only temporary pending the issue of the individual (Finance) Bonds and Conversion Bonds anticipated in early 1986.
   How the conversions actually occurred
   3401 The secretarial records of TBGL show that on some 44 occasions between 10 January 1987 and 10 November 1987 holders of bonds in the 1985 issue converted their bonds into shares in TBGL. As might be expected, the Trust Deed for that issue and the terms and conditions of the Conversion Bonds provided formally for the procedure on conversion. The procedure included an obligation on BGNV’s part to redeem the (Finance) Bond and apply the proceeds in paying up in full the principal amount of the Conversion Bond (less a ‘commission’ of A$0.01 per A$1,000 principal amount redeemed). TBGL’s obligation was then to issue the requisite number of shares.
   3402 TBGL’s secretarial and accounting records disclose that that procedure was not followed. What happened was that, on being formally notified of the exercise of the right of conversion and surrender of the (Finance) Bond, TBGL simply deducted the relevant amount from its on‑loan to BGNV and credited that amount to share capital. As part of the exercise, TBGL officers instructed C&L to issue the requisite number of new share certificates. There was no mention of the Conversion Bonds. TBGL’s officers, in their capacity as keepers of BGNV’s books, simply recorded the reduction of the on‑loan to TBGL and the reduction of the amount outstanding by it in respect of the (Finance) Bond. As previously mentioned, this was done in Australia but in American dollars. The total amount so converted was about A$15 million.
   3403 In my opinion, this is yet another, perhaps small, piece of objective evidence which demonstrates the common intention of the parties (BGNV and TBGL on this occasion) that the proceeds of the bond issue and the on‑loans were one and the same. The on‑loans were to be applied, when conversion occurred, to causing the TBGL shares to be paid up with BGNV playing no part in the process other than to credit TBGL’s loan account in its books; books kept and maintained on its behalf by TBGL in Perth. The result was that BGNV’s subordinated debt to the relevant holders of the (Finance) Bond was extinguished.
   The undertaking not to create unsubordinated debt
   3404 In the offering circulars for each of the three Eurobond issues and also in the conditions of each of the bonds there was the following undertaking (I use the offering circular condition as an example):
   3 Undertaking
   The issuer undertakes that it will not create or have outstanding and the Guarantor undertakes not to create or have outstanding or guarantee any other indebtedness for borrowed money convertible into the equity of the Guarantor unless such indebtedness shall be subordinated and rank equally in all respects with or junior to the Bonds or the guarantee thereof by the Guarantor (as the case may be). (emphasis added)
   3405 The issuer was, of course, BGNV and the guarantor was TBGL. The Banks submitted, and I think it is a perfectly valid submission, that on its proper construction this undertaking, if complied with, would preclude TBGL from creating or having outstanding any other indebtedness (other in the sense of other than to the bondholders) for borrowed money convertible into TBGL shares unless that indebtedness was subordinated.
   3406 In my opinion, this undertaking referred to the on‑loan from BGNV to TBGL because that on‑loan was potentially convertible into TBGL shares. It also applied to the on‑loans from BGNV to BGF. That was the only way BGNV could pay to TBGL the balance of the face value of the Conversion Bond (the full principal of which TBGL had to apply as payment for the issue of the shares to the relevant bondholder). Everyone concerned knew that BGNV would have to use the on‑loans for that purpose each time a bondholder elected to convert. BGNV had no other source of funds and it was not its function or purpose to have any such other source.
   3407 Even in terms of strict legal interpretation, the words ‘… indebtedness for borrowed money convertible into the equity of the Guarantor’ would, in my opinion, in the particular circumstances of this matter, extend to the on‑loans to TBGL and BGF. My point is that there is no need to read ‘convertible’ as if it meant ‘convertible by BGNV’. Conversion, when it took place, involved BGNV redeeming the bondholders’ entitlement to repayment of principal and applying the proceeds (converting them) into equity of TBGL. The proceeds, as all concerned were aware from the outset, were destined to be on‑loaned to TBGL. In the hands of TBGL, and from the perspective of TBGL, the on‑loans could most fairly be described as ‘borrowed money convertible’ into its equity. And that was precisely how the conversion transactions were documented in the accounts of the two companies involved, namely BGNV and TBGL.
   3408 His Honour reasoned, in my opinion correctly, at [3005] that the respondents’ own submissions involved the conclusion that it was a term of the on‑loans that they be convertible into shares in TBGL. That was because the respondents had submitted that the reference in the letters dated 25 November 1985, 5 December 1986 and 15 April 1988 to the Australian Tax Office to the on‑loans being ‘on the same terms as the issue’ was limited to the conditions set out in those letters that were required to obtain a tax exemption certificate. His Honour did not accept the thrust of that submission. But had he done so it was clear that one such condition was the convertibility of the money borrowed as on‑loans into shares in TBGL.
   3409 If I am wrong in my assessment that the correct legal position is that the on‑loans were convertible into TBGL shares, I do not think that matters for present purposes. In commercial terms, as the appellants submitted, the on‑loan money was convertible into shares in TBGL. That is how the on‑loan money was used and (as described immediately above) that is how it was recorded for accounting purposes in the books of BGNV and TBGL when conversion took place. That is also how TBGL understood the undertaking – see par 3(c) of Ms Chapman’s memorandum dated 26 August 1987 [TBGL.00090.055].
   3410 In my opinion this is one more relevant contextual matter to be taken into account when assessing whether, as a matter of contract between BGNV on the one hand and TBGL and subsequently BGF on the other, the on‑loans were subordinated. Failure by TBGL to comply with the undertaking would involve not only a breach of the bond conditions but also a breach of the Trust Deeds. It may be true to say that this only applied in relation to the second and third bond issues and accompanying on‑loans but there was no evidence that those on‑loans were any different in nature to the on‑loan of the funds raised by the first bond issue and his Honour, correctly in my opinion, found that all three of the on‑loans were relevantly on the same terms, i.e. subordinated.
   3411 It may not be conclusive but I think that this undertaking, given three times in two sets of the Eurobond documentation, weighs heavily in support of his Honour’s conclusion that the on‑loans were subordinated. His Honour recognised that at [3006] of his reasons for judgment.
   3412 There were several other contemporary documents upon which his Honour relied in reaching his conclusion that the on-loans were subordinated and that that was an important factor in persuading the Banks to accept the bonds and the on-loans as quasi‑equity rather than debt for the purposes of calculating NP ratios. I will only refer to three more (although one was a group) of such documents. They are: (a) the two memoranda, dated 9 January 1987 [3198] and 13 March 1987 [3199]; and (b) a series of spreadsheets prepared either weekly or fortnightly between 15 January 1988 and 23 December 1988 [3209] in each of which the convertible bonds were included as ‘subordinated borrowings’ of the NP group. My point is that as BGNV was not a member of the NP group, it is a fair inference that this item included the on‑loans.
   The three documented subordinated loans
   3413 The respondents pointed to three instances of loans which were subordinated and had been expressly so described in the contracts of loan and in the Bell group accounts. This was said to support their submission that when inter‑company loans in the Bell group were made on a subordinated basis, that condition was documented. However, in my view, each of these can be seen, when viewed in their context, to be special, extraordinary transactions too, not normal inter‑company lending.
   3414 The BGUK to TBGIL loan (evidenced by a deed dated 30 June 1987 comprising five clauses on one and a half pages – TBGL.07043.068) was for £100 million, interest‑free for a term of 19 years. It could not be repaid before the expiry of that period without the consent of all TBGIL’s bank lenders for the time being. Furthermore BGUK had the right to convert all or part of the loan into ordinary shares in the capital of TBGIL. It was to be expected that these terms and the subordination condition would be well‑documented. The history of the transaction, in summary, was as follows.
   3415 On 30 November 1986 Newman prepared a document headed ‘Review of the Adequacy of the Capitalization of Bell Group International (BGI)’ for the Board meeting of TBGIL held on 9 December 1986 [TBGL.00955.041]. He referred to a forecast that by 30 June 1987 TBGIL would owe its bankers (a group separate from TBGL’s bankers) in excess of £150 million and that both the ratios of total borrowings to shareholders’ funds and interest payable to gross profit (which were the subject of covenants to TBGIL’s banks) were close to the limits. He then made the following recommendation:
   It is recommended that £100m be injected into the Company, by way of a form of interest‑free subordinated loan from The Bell Group. This method of providing additional capital would avoid the payment of capital duty (1%), and because of its repayment ranking should allow the Company’s bankers to treat it as capital equivalent.
   3416 The minutes of the TBGIL Board meeting held on 9 December 1986 [TBGL.07212.003] show that Newman’s recommendation was accepted. On 21 January 1987 Graham wrote to TBGIL’s bankers advising them that in‑principle agreement had been reached to inject £100 million of equity into TBGIL in the form of a subordinated loan. He enclosed a draft of what became the deed dated 30 June 1987 and sought the bankers’ approval to this subordinated debt being included within the definition of ‘Net Capital Resources’. The banks gave their approval to this in February 1987 being the same month in which the TBGL Board decided to go ahead with the second convertible subordinated Eurobond issue [2780]. That second bond issue was organised by the same Bell treasury officers who had just succeeded in obtaining approval from TBGIL’s bankers to treat the £100 million subordinated loan as equity for ratio purposes. At least one of those banks (NAB) conditioned its approval ‘… on the terms of the subordination being fully documented …’ which is doubtless why this commendably short deed was executed. This was not a normal Bell inter‑company loan.
   3417 The £100 million loan transaction gives emphasis to the importance which the Bell group and its bankers put on subordination in the context of the ratio covenants, an importance which was not confined only to the Eurobond issues.
   3418 The other two loans upon which the respondents relied were closely linked to each other and scarcely run‑of‑the‑mill. The 17 August 1987 arrangement was a highly‑conditioned and potentially very profitable (to Heytesbury Securities) facility made available to BGF initially for $500 million and then reduced to $145 million. It was ‘unwound’ so far as Heytesbury Securities was concerned in the two days before the announcement that RHאC had sold 19.9% of the issued capital of TBGL to each of BGHL and SGIO. This transaction looks like a very special deal whereby RHאC interests on‑lent moneys at a margin of 2% per annum to TBGL and expressly accepted subordination at the time. Quite understandably, on the eve of selling‑out, RHאC extracted himself from being a subordinated creditor. BRF was good enough to take his place. These were, in my opinion, very special transactions which one would expect to be documented.
   3419 The fact that nobody among the group of very senior executives in the Bell group Office of the Chairman gave any thought to documenting the on‑loans as being subordinated suggests very strongly that they did not distinguish, or see the need to distinguish, the characteristics of the money subscribed for the bonds and the money which found its way into TBGL’s and BGF’s bank accounts. That would support his Honour’s assessment that in the Bell group ‘bonds’ were synonymous with ‘proceeds’.
   3420 His Honour, at [3266], referred to Griffiths’ evidence that, so far as he could recall, the only documentation in respect of most agreements, or decisions or 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 it was necessary for tax purposes or to show to someone outside the Bell group. In the same paragraph his Honour also referred to a memorandum which Ms Wilson (in‑house Bell lawyer) sent on 13 February 1987 stating that in the light of changes to the Stamp Act 1921 (WA) it was essential 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. His Honour said that this might explain why the second and third BGNV on‑loans were not documented (noting that there was no evidence that they were minuted either) but the explanation did not apply to the first BGNV on‑loan.
   3421 The loan agreement dated 30 June 1987 was executed only by the borrower, TBGIL, presumably in England and was unstamped. The Heytesbury Securities loan was evidenced by a Board resolution which referred to a letter dated 17 August 1987. The original of that letter was not in evidence although an unexecuted copy of it was in evidence [TBGL.00572.010]. However, the written ‘restatement’ on 27 November 1987 of that letter of offer, also dated 17 August 1987, would appear [from TBGL.04817.099] to have been accepted by BGF via an attorney acting on its behalf. The exhibit bears a handwritten notation ‘Signed document in London’. Only if the signed document had physically ever been in Western Australia would it have attracted stamp duty. The inference is that some care was taken to keep it in London.
   3422 His Honour’s observation that the absence of documentation for the on‑loans may have been related to stamp duty might well have not been mere speculation.
   The BGNV Subordination Deed
   3423 BGNV submitted that the trial judge had erred by not taking into account the significance, in the context of the inferred term debate, of the entry by BGNV, TBGL and BGF into the BGNV Subordination Deed on 31 July 1990. This was, so BGNV contended, post‑contractual conduct which was inconsistent with the on‑loans having been made on a subordinated basis from inception. BGNV referred to the fact that the BGNV Subordination Deed was entered into as a result of TBGL discharging its contractual obligations to the Banks, under cl 17.6(d) of ABFA and RLFA No 2, to use reasonable endeavours to procure BGNV to ‘convert’ the on‑loans into subordinated debt. Those debts, so it was put, could only be converted to a subordinated status if they were unsubordinated to begin with. The terms of the BGNV Subordination Deed spoke of the relevant liabilities as being ‘hereby subordinated’ and there was no reference to any pre‑existing subordination. BGNV relied upon Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd [2009] VSCA 238; (2009) 25 VR 411 and other similar authorities.
   3424 In my view, those submissions are misplaced. First, it is clear that his Honour considered the matter – see [2703], [7180], [7183] and [7225]. He concluded that ‘not too much should be read into the wording’. At [7225] his Honour found that the actual status of the on‑loans still had not been determined by the Banks at the time when the BGNV Subordination Deed was executed.
   3425 In my view, there was no inconsistency of the type alleged by BGNV. The reality was that the Banks did not know whether the on‑loans were, as a matter of law, subordinated. Thus, they insisted that TBGL accept a commitment to use its reasonable endeavours to procure that BGNV convert the on‑loans into subordinated debt. This was scarcely a matter of choice for TBGL. In my opinion, it was not inconsistent with the inferred term in each of the on‑loan contracts that the on‑loans were subordinated. The Banks can be seen to have procured the execution of the BGNV Subordination Deed with a view to making certain that the on‑loans were subordinated. Atco Controls is distinguishable. In that case the inconsistency identified by the Court of Appeal was entry (voluntarily) into a debenture transaction. The giving of security by Newtronics and the taking of security by Atco were totally inconsistent with the terms of the letters of support which were said to evidence the inferred contract.
   Certainty
   3426 His Honour held [3286]:
   … 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.
   3427 His Honour considered the respondents’ submissions that the subordination terms were illusory, too vague and too uncertain to be enforceable [3297]. He acknowledged that the provisions of the bond issue trust deeds were complex [3313] but added:
   But complexity does not, of itself, mean there could not be a tacit understanding about a purported term.
   He concluded that there was sufficient certainty to permit contractual efficacy [3324].
   3428 At [4255] his Honour said this:
   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. [It would appear that his Honour intended to refer also to TBGL in the second line above but omitted to do so.]
   See also [3381] which I have set out at [3240] above.
   3429 The main respondents and BGNV cross‑appealed against his Honour’s conclusion that the subordination terms were sufficiently certain to be enforceable. Both sets of respondents contended that it was not possible for the subordination terms of the bond issues to be mirrored in the on‑loan contracts. They pointed to the difficulties in transposing terms mutatis mutandis. Several clauses in the bond trust deeds were singled out to exemplify the difficulty which would result from applying the terms of those documents to the subordination of the on‑loans.
   3430 In my view, the respondents exaggerated the difficulties. His Honour did not infer the subordination terms of the trust deeds into the on‑loan contracts on a mutatis mutandis basis. He found that the parties intended that the subordination terms so inferred would mirror, so far as was possible, [emphasis added] the terms which were in the bond issue documentation.
   3431 In my opinion, the respondents, despite lengthy written and oral submissions, have not shown that the learned primary judge fell into error in holding that the inferred subordination terms were sufficiently certain. As his Honour observed, at [3321]:
   Courts entertain constructions [sic] 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.
   3432 His Honour dealt with the crux of the construction problems at [3323] ‑ [3326]. He identified three different courses which a liquidator might take. However, as his Honour noted, whichever course was taken the claims of the bondholders and hence BGNV would be postponed. In my view, the grounds of cross‑appeal which are based on uncertainty are not made out.
   Conclusion
   3433 In my opinion, it was well and truly open to his Honour to find that the evidence revealed a sufficient manifestation of a mutual assent or intention that the on‑loans be made on the same terms so far as was possible as the bond issues, including subordination. That is, that the contracts of on‑loan included an inferred term to that effect. I would uphold that finding on the objective documentary evidence alone i.e. without the evidence from the various witnesses concerned about what was their purpose. But that is not to suggest that that evidence was inadmissible. In my view it was admissible as evidence to show the commercial purpose of the transaction as a whole and his Honour was right to give it some weight.
   Whether the Banks are entitled to enforce the subordination term in the contracts of on‑loan
   3434 As I have mentioned above, his Honour held that s 11(2) of the Property Law Act did not operate so as to enable the Banks to enforce the subordination term which he found to have been inferred into the contracts of on‑loan. This was because he construed the word ‘contract’ in that sub‑section as meaning ‘written contract’ and the on‑loan contracts were not written but informal inferred contracts.
   3435 Section 11 of the Property Law Act provides as follows:
4. Persons taking who are not parties
   (1) A person may take an immediate or other interest in land or other property, or the benefit of any condition, right of entry, covenant or agreement over or respecting land or other property, although he is not named as a party to the conveyance or other instrument that relates to the land or property.
   (2) Except in the case of a conveyance or other instrument to which subsection (1) applies, 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, subject to subsection (3), 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.
   (3) Unless the contract referred to in subsection (2) otherwise provides, the contract may be cancelled or modified by the mutual consent of the persons named as parties thereto at any time before the person referred to in that subsection has adopted it either expressly or by conduct.
   3436 In ground 141 of their notice of appeal the Banks challenged this holding. In the particulars to that ground they contended that as unsubordinated creditors of TBGL and BGF they were intended by the terms of the on‑loan contracts to be the beneficiaries of the promise that the on‑loans were subordinated and that his Honour erred in holding that s 11(2) did not apply to the Banks because the on‑loans were not in writing.
   3437 His Honour accepted the Banks’ case in relation to each of the elements of s 11(2) in respect of the on‑loan contracts except their contention that the sub‑section applied to oral contracts. I shall refer first to those other elements.
   Whether the on‑loan contracts expressly in their terms purported to confer a benefit directly on a person not named as a party to those contracts
   3438 The main respondents conceded that his Honour was ‘probably correct’ in holding [3365] ‑ [3366] that while s 11(2) required the third party to be identified, it was not necessary for the third party to be named so long as it could be ascertained by reference to an existing and identifiable class. However, the main respondents pointed out two difficulties with his Honour’s view that the Banks would have been sufficiently identified because they were ‘unsubordinated creditors’ of the Bell group. They pointed out, correctly in my view, that his Honour appears to have been influenced by the proposition, in two authorities cited to him, that entities answering the description of ‘shareholders’ or ‘subsidiaries’ are sufficiently identified [3365]. I accept the main respondents’ submission that the two authorities upon which his Honour relied are not really authorities for the above proposition. In Toal v Aquarius Platinum Ltd (No 2) [2004] FCA 550, as the main respondents pointed out, the parties had agreed between them that the relevant contract expressly conferred a benefit on the third party as ‘shareholders of Aquarius Australia’ within the meaning of s 11(2). French J, the trial judge in that matter, did not express any view on that point. But his Honour’s preparedness to accept the parties’ agreement on the point deserves some weight. The second authority, Leighton Holdings Ltd v HIH Casualty & General Insurance Ltd [2001] WASC 34 was, again as the main respondents pointed out, a strike‑out application, but at least the point was regarded by the Master as reasonably arguable.
   3439 Nevertheless, in my view his Honour was correct. The sub‑section does not require the person to be named and there is no reason why a benefit cannot be conferred on a person identified by membership of a class. A person may be identified just as effectively by membership of a class as by name. That frequently happens in trust deeds and wills for example.
   3440 This leads to the second difficulty raised by the main respondents. This was that the unsubordinated creditors of TBGL and BGF comprised a constantly changing class of persons whose rights in respect of the money owed to them would have varied depending upon the contractual or other arrangements pursuant to which those liabilities were incurred. In my opinion, that difficulty was also exaggerated. The relevant time for ascertaining the class would be at the time of liquidation of the companies. The class of unsubordinated creditors would have to be identified in any event for winding up purposes. The main respondents cited the example of the entitlement of a person entitled to compensation for personal injuries. That person’s claim would also have to be categorised as at the date of winding up. If the claim had crystallised into a judgment debt, there might be little difficulty (though I am not to be seen as deciding the point) in treating him or her as an unsubordinated judgment creditor.
   3441 BGNV contended that the contracting parties did not intend to confer a benefit on a third party. It cited Trident General Insurance Co Limited v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107, 122 ‑ 123, a case on which his Honour also relied. BGNV’s point was that neither it nor TBGL or BGF could have intended to confer a benefit on a third party if they never turned their minds to the existence of the third party or the contractual terms of subordination. In my opinion, that submission has no merit. It confuses the subjective intention of the parties with the ‘contractual intention to benefit a third party’ to which Mason CJ and Wilson J were referring in Trident v McNiece. The question is an objective one, i.e. ‘whether the contract expressly in its terms purports to confer a benefit directly on a person …’.
   3442 Next, BGNV submitted that there was no benefit to confer but that, if there was, it was not conferred directly on the third party. I do not accept either submission. The benefit is quite clearly the benefit of priority to payment upon a liquidation, i.e. a place in the queue ahead of BGNV. In relation to the word ‘directly’, as I understand the distinction, it is between a benefit which is indirect or incidental (see the examples in par 1027 of BGNV’s submissions) and one that is direct. In my view the whole point of the subordination term was to benefit unsubordinated creditors of TBGL and BGNV and thus secure more favourable treatment for the Banks as members of that class. The benefit of a place ahead of BGNV in the queue in the event of a liquidation was sufficiently direct, in my opinion, to fall within the sub‑section.
   3443 This has been recognised, in the context of unsubordinated creditors being able to enforce subordination agreements to which they are not a party, in the United States of America for a long time. In that country ‘third party beneficiary rights’ have been enforced since 1859: Lawrence v Fox, 20 NY 268 (1859). In an article in The Yale Law Journal, vol 70, p. 376 ‘Subordination Agreements’ at 391 Dee Martin Calligar Esq of the New York Bar observed:
   The third party beneficiary concept has developed into a rule of law of such consequences as to assure that unilateral subordination agreements, intended to benefit then existing or subsequent senior creditors, will be enforced in virtually all jurisdictions.
   3444 In Re Credit Industrial Corporation, 366 F 2d 402 (2d Cir 1966) [expressly followed in Re Weis Securities Inc, 605 F 2d 590 (2d Cir 1978)] the Court of Appeal for the Second Circuit rejected the claims of subordinated creditors to rank pari passu with unsubordinated creditors (promissory noteholders) in the insolvency of that company. The court held that the senior creditors did not need to show that in making their loans they had relied on the subordination of the promissory note debts. The court noted (at 408) that the higher interest return paid to the subordinated noteholders was the consideration for that subordination, and (at 409 ‑ 410) said this:
   To permit the noteholders at this late date to engraft a condition of reliance onto their subordination agreements would result in granting them a windfall which has no justification in reason, equity or logic. Cf Calligar, supra at 391 n 38. A bankruptcy court, in order to effectuate its duty to do equity, must enforce lawful subordination agreements according to their terms and prevent junior creditors from receiving funds where they have ‘explicitly agreed not to accept them’. Henson, Subordination and Bankruptcy; Some Current Problems, 21 Bus Laws, 763, 764 (1966). Moreover, it is not without significance that subordinated debt such as that involved here is widely employed today in financing commercial enterprises. See generally Everett, supra; Golin, Debt Subordination as a Working Tool, 7 NYLF 370 (1961). To deprive lending institutions of the right to enforce lawful subordination agreements and require them to prove in each instance that they relied on such agreements in advancing funds to businesses would not only place in jeopardy literally billions of dollars of outstanding loans, but in all probability would prompt lending institutions to reconsider, and possibly curtail, their subordinated debt‑financing activities to the detriment of the entire business community.
   3445 The Law Revision Committee, in par 45 of its 1937 report (referred to below), made a similar policy point in relation to the desirability of the seller of goods being enabled to enforce rights of payment against the bank party to Bankers’ Commercial Credits although being a stranger to the contract thus constituted between the bank and the buyer. It referred to it as ‘… a commercial contract of such importance …’ as to warrant third party enforceability.
   3446 BGNV then submitted that s 11(2) could not apply to the on‑loan contracts because those contracts were governed by English law and not Western Australian law. His Honour had found that the on‑loans were ‘made on the same terms as the bond issues’ [3381] and that the terms of the on‑loans ‘would mirror, so far as was possible, the terms set out in the bond issue documentation’ [4255]. BGNV’s reference to [4255] is misleading. It is quite clear that in that paragraph his Honour is referring only to subordination terms. When one reads [3381] and [4255] together I think it is sufficiently clear that his Honour was referring to the subordination terms in the on‑loans being, so far as was possible, the same as the subordination terms in the bond issues.
   3447 Whether the on‑loans were governed by English law or Western Australian law was not, so far as I have been able to ascertain, an issue raised in the proceedings. It should not be a question in the appeal.
   3448 The next question is whether the on‑loan contracts expressly in their terms purported to confer the above benefit. His Honour, at [3367], said this:
   … 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.
   3449 With respect, I think his Honour was quite right in so holding. The inferred term was precisely that i.e. inferred not implied. It was actual and its expression was to be found in the subordination terms of the Eurobond trust deeds so far as it was possible to adapt them for the purposes of the on‑loans.
   3450 Furthermore, as his Honour points out at [3368] ‑ [3370], the phrase ‘expressly in its terms’ was adopted from the Sixth Interim Report of the English Law Revision Committee (cmd 5449, 1937). The phrase ‘expressly in its terms’ was used by that Committee to address the possibility that ‘incidental beneficiaries’ might seek to enforce such a provision, contrary to the intention of the contracting parties.
   Does s 11(2) apply only to written contracts?
   3451 That brings me to the question whether s 11(2) applies only to written contracts.
   3452 His Honour said, at [3348], that he was unable to find any authority which answered directly the question whether s 11(2) applied only to written contracts or whether it can apply to an informal contract such as the on‑loan contracts. I am in the same position.
   3453 His Honour referred to three texts, one of which (Cheshire and Fifoot’s Law of Contract in Australia (8th Aust ed, 2002) [7.16]) in a footnote, said that arguably the section referred only to contracts in writing. Another, (Greig and Davis, The Law of Contract (1987) 1045) that it removed ‘… the restraints of privity in respect of all promises in writing’ and another (Bradbrook, MacCallum, Moore, Australian Real Property Law (3rd ed, 2002) [18.02]) in which the authors did not deal with the question but suggested that the Western Australian legislation was somewhat limited in its application.
   3454 I think it is fair to say that the following factors caused his Honour to decide that ‘contracts’ in s 11(2) means ‘written contracts’:
   • the heading ‘Deeds and Other Instruments’ to Part II of the Property Law Act being the Part in which s 11(2) sits. Section 32(1) of the Interpretation Act 1984 (WA) ‘constrained’ his Honour (as he put it) in the interpretation of s 11(2). He added that the heading ‘cannot be ignored’;
   • the fact that an ‘Instrument’ is something reduced to writing;
   • every section in Part II deals with written ‘agreements’ (his Honour used this word in [3355] but may have meant ‘documents’);
   • 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.
   3455 Section 32(1) of the Interpretation Act requires a court to take the heading of a Part into account when construing a provision within that Part: Yates v Western Australia [2008] WASCA 144 [24]. But several matters cause me to conclude that his Honour placed too much weight on this factor.
   3456 In K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd [1985] HCA 48; (1985) 157 CLR 309 the High Court was faced with a very similar issue, namely, should s 133 of the Motor Vehicles Act 1959 (SA) be constrained by the scope of the other provisions of and the heading of, Part IV of that Act? Deane J, with whom Gibbs CJ and Brennan and Dawson JJ agreed, found that the natural meaning of the words of s 133 was not so constrained, despite the fact that the natural meaning was somewhat incongruous with Part IV. The incongruity was the statutory voiding of a clause excluding liability for property damage in that Part which was headed ‘Third Party Insurance’. The appellant contended that the section was confined by its context to cases of death or bodily injury. Deane J said (322 ‑ 323):
   The fact that the operation of the plain words of a statute extends beyond the requirements of the particular legislative scheme which provided the context and occasion of their enactment provides of itself no sufficient warrant however for refusing to give effect to the words which the legislature has seen fit to use. This is particularly the case where the proposed confinement of those plain words would exclude applications of the words actually used to circumstances to which their application would be neither unexpected nor surprising …
   3457 In Jones v Bartlett [2000] HCA 56; (2000) 205 CLR 166, 208 Gummow and Hayne JJ observed that ‘… s 11(2) speaks broadly of “a contract” and “a benefit” and does not use the language of conveyances and interests in property’. Their Honours assumed, without deciding, that the phrase in s 11(2) ‘expressly in its terms’ included the text of provisions implied by statute, such as, in that case, the Residential Tenancies Act 1987 (WA).
   3458 I note that s 8 includes reference to a contract that is ‘made or comes into operation’, not just one that is executed.
   3459 As his Honour recognised, these provisions are intended to be remedial. Section 11(2) can be seen as reflecting the policy of remedying, subject to conditions, the general common law rule that a person who was not a party to a contract by which a benefit was intended to be conferred on him or her could not sue to enforce the contract. Section 11(2) should thus be construed beneficially. The word ‘contract’ should be given a construction that would promote the purpose or object which underlies it: s 18 of the Interpretation Act. There was no legal requirement that the on‑loans contracts be in writing and no good policy reason for construing the word ‘contract’ as meaning only a written contract.
   3460 As noted above, the origins of s 11(2) can be traced to the deliberations of the English Law Revision Committee’s Sixth Interim Report in 1937 [AUTD.01227]. In Beswick v Beswick [1968] AC 58, 72 Lord Reid described that Committee as a ‘strong law revision committee’. The Committee’s recommendation, at par 48, was in these terms:
   … that where a contract by its express terms purports to confer a benefit directly on a third party, the third party shall be entitled to enforce the provision in his own name.
   3461 In the Explanatory Memorandum to the Property Law Act, at pages 3 ‑ 4, there is reference to ‘ample authority’ to justify a measure of law reform which substantially adopted the wording of the Law Revision Committee’s recommendation. It is, I think, clear that the Western Australian parliamentary draftsman relied heavily on the Law Revision Committee’s recommendation in drafting s 11(2).
   3462 Similar reforms to those worked by s 11(2) were adopted in Queensland in 1974 (Property Law Act 1974 (Qld), s 55), New Zealand in 1982 (Contracts (Privity) Act 1982 (NZ)), the United Kingdom in 1999 (Contracts (Rights of Third Parties) Act 1999 (UK)), the Northern Territory in 2000 (Law of Property Act 2000 (NT), s 56) and Singapore in 2001 (Contracts (Rights of Third Parties) Act 2001 (Sing)). Although those provisions were similar to s 11(2), some had important differences. The New Zealand Contracts and Commercial Law Reform Committee, Privity of Contract (1981) at 8.2.2 reported that:
   We considered the question whether the reform should be confined to promises evidenced by writing. This suggestion arose from a natural caution against applying a new rule to oral contracts, where the parties may not have expressed themselves adequately or with precision. We saw no sufficient reason to require writing in relation to contracts where writing is not a requirement of existing law. Accordingly, our recommendation is that the reforms should apply to all contracts, however made or evidenced, subject to the ordinary law.
   3463 The result was that, in the Contracts (Privity) Act, ‘contract’ was defined in s 2 as including, ‘a contract made, by deed or in writing, or orally, or partly in writing and partly orally or implied by law’.
   3464 The closest comparison to s 11(2) of the Property Law Act is the United Kingdom equivalent which provides:
5. Right of third party to enforce contractual term
   (1) Subject to the provisions of this Act, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a term of the contract if – (a) the contract expressly provides that he may, or (b) subject to subsection (2), the term purports to confer a benefit on him.
   (2) Subsection 1(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.
   3465 In pars 7.28 ‑ 7.44 of their report which recommended this amendment (The Law Commission, Privity of Contract: Contracts for the Benefit of Third Parties, Law Com No 242, 1996), the Law Commission (UK) gave examples of hypothetical situations in which their recommended amendment would enable enforcement of contracts by third parties. A number of those examples involved informal contracts.
   3466 I acknowledge that there have been cases where courts have declined to apply a literal interpretation to a statute where, for example, a literal interpretation would produce a capricious and irrational operation. See, for example, Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297. In that case, Stephen J, at (310), said:
   [I]f literal meaning is to be departed from, it must be clear beyond question both that the literal meaning does not give effect to the intention of the legislature and that some departure from literal meaning will fulfil that intent.
   Statute law, the direct product of the legislature, is perhaps the least appropriate field of all in which to indulge in judicial law‑making.
   3467 The court, by a majority, held that it was evident that there had been an oversight on the part of the draftsman. Aickin J was in dissent. At (336) his Honour said this:
   No doubt the courts in recent years have taken a somewhat less strict view of reading words into statutes where the words actually used produce, for instance, an absurd result. It is however not permissible to rely on a supposed failure to express the real intention by reliance on what the reader thinks the Parliament or the draftsman should have intended or should have said.
   3468 The word ‘contract’ is not a difficult one to understand. It means an enforceable agreement. It is not ambiguous and, in my view, is not made ambiguous by its context. Its sense or intent is transmitted more clearly by momentarily disregarding the opening words of exception in the sub‑section (which have no application in this matter) so that it commences ‘… where a contract …’. It is a sub‑section of very wide application to something which Parliament has chosen to call ‘a contract’. It would have been easy for Parliament to have inserted the word ‘written’. It did not do so and in all the circumstances I think that his Honour was, with respect, in error notionally to do so.
   Conclusion
   3469 For the foregoing reasons I would dismiss so much of the cross‑appeals as assert that the learned primary judge was wrong in holding that there was an inferred contractual term of subordination in each of the on‑loans. I would allow those grounds of appeal which challenge his Honour’s conclusion that the appellants are not entitled to enforce those inferred terms. In those circumstances I do not propose to consider the implied term issue, the matter of whether there was a contract between the Negative Pledge group of companies and the Banks containing a subordination term, the estoppel case, or the claims under the Trade Practices Act 1974 (Cth).
   3470 If I am wrong in my conclusion concerning s 11(2) of the Property Law Act, I think that the appellants should be granted declaratory relief. There should be a declaration to the effect that the on‑loans between BGNV on the one hand and TBGL and, later, BGF on the other hand are subordinated in the terms referred to above as found by his Honour.
   3471 The appellants have, in my view, the necessary standing as creditors in the liquidations of TBGL and BGF. The matter of the status of the on‑loans and hence the question of priority as between the appellants and BGNV (and the liquidators) has been fully litigated in these proceedings. It seems to me to be in the interests of justice that a declaration be granted to determine that as between BGNV and TBGL and BGF the on‑loans are subordinated. His Honour granted such a declaration in par 2.2 of his final orders and, with respect, its terms are precisely apposite. I would dismiss so much of the cross‑appeals as challenges the making of that declaration. The affairs of those companies should be administered accordingly.
   The appellants’ counterclaim for orders against BGNV
   3472 His Honour, having found that the BGNV Subordination Deed was valid and effectual as between BGNV and the Banks, declined to grant any of the relief which the Banks, by their counterclaim, sought against BGNV, other than a declaration to the above effect. By grounds 138 and 139 of their appeal the Banks challenged his Honour’s refusal to grant them orders:
   (a) requiring BGNV and Trevor as its liquidator to hold on trust for the benefit of the Banks pursuant to the terms of the BGNV Subordination Deed any dividends received in the liquidations of TBGL and BGF; or alternatively
   (b) requiring BGNV to withdraw the proofs of debt which it had lodged in the liquidations of TBGL and BGF without the consent of Westpac and thus in breach of the terms of that deed.
   3473 His Honour’s reasons for refusing to make those orders were as follows:
   • he did not wish to grant any relief that would make the liquidations unworkable or unnecessarily difficult [9725];
   • relief which required BGNV to withdraw its proof would unnecessarily interfere with the liquidations of TBGL and BGF (relief judgment [141]);
   • he did not wish to destroy the efficacy of the remedies granted to the respondents [9725];
   • quia timet relief should not be granted as there was no threat by BGNV to refuse to comply with the BGNV Subordination Deed (relief judgment [140] adopting par 120 of the respondents’ written submissions);
   • the mere fact that the liquidators of TBGL and BGF sought relief in respect of the BGNV Subordination Deed was not a basis for inferring that the liquidators, including Trevor as an officer of the court, would fail to act consistently with the findings of the court (relief judgment [140] adopting par 121 of the respondents’ written submissions);
   • the issue should be dealt with in the winding up of BGNV and not resolved by the court (relief judgment [139]); and
   • the orders sought by the Banks were intended to stifle any future dispute in the Netherlands Antilles and as a matter of comity the court should not pre‑empt the laws and insolvency processes of the Netherlands Antilles (relief judgment [140]).
   My reasoning
   3474 I think it is useful to review how the issue of the validity of the BGNV Subordination Deed came to be decided in these proceedings. In summary, the relevant events were as follows:
6. On 3 January 1995 at an extraordinary general meeting of the shareholders of BGNV held in Curacao it was resolved that the company be dissolved ‘as of January 3, 1995’ and that Troika Holdings BV (‘Troika’) be appointed as liquidator of the company. It is apparent from the minutes of that meeting that Woodings as liquidator of BGF, which held all of the issued shares in BGNV, authorised the two persons at that meeting to vote on his behalf.
7. On 18 December 1995 the action which is now the subject of the present appeal was commenced in the Federal Court of Australia. The plaintiffs at that time included BGNV as sixth applicant and Troika as tenth applicant.
8. On 21 March 1996 Troika applied to this court for orders that BGNV be wound up in insolvency and that Trevor be appointed liquidator of the company pursuant to s 583 of the Corporations Law.
9. On 4 April 1996, pursuant to an application made the previous day by Troika, BGNV was registered as a foreign company by the Australian Securities Commission.
10. On 24 April 1996 Troika applied to this court for an order that Trevor be appointed liquidator of BGNV under s 350(14)(b) of the Corporations Law on the basis that BGNV was being wound up in the Netherlands Antilles.
11. On 19 July 1996 this court appointed Trevor as liquidator pursuant to s 350(14)(b) of the Corporations Law.
12. On 16 October 1996 Troika gave notice of discontinuance in the Federal Court proceedings and ceased to be an applicant.
13. On 23 January 1997 the relevant court in the Netherlands Antilles appointed Troika and two individuals as curatoren (equivalent to liquidators) of BGNV.
14. On 26 March 1997 this court ordered that BGNV be wound up as an insolvent Part 5.7 body pursuant to s 583 of the Corporations Law and appointed Trevor as liquidator. Trevor thus has the distinction of two Supreme Court orders appointing him as liquidator of BGNV.
15. On 4 February 1998, by consent, the Federal Court joined Trevor as an applicant in the proceedings below.
    3475 Bell Group NV (in liquidation) was the sixth plaintiff and Trevor, in his capacity as liquidator of the sixth plaintiff, was the twelfth plaintiff in the proceedings at first instance.
    3476 As such plaintiffs BGNV and Trevor joined with the other plaintiffs in challenging the validity of the BGNV Subordination Deed. At first instance BGNV and Trevor were unsuccessful as his Honour held that deed to be valid as between them and the Banks.
    3477 Notwithstanding the findings made by his Honour (in the main judgment) against the sixth and twelfth plaintiffs in relation to the BGNV Subordination Deed as mentioned directly above, the sixth plaintiff, at the subsequent relief hearing, sought declarations that the Banks were not entitled to enforce or rely on or assert the validity of the Subordination Deed against it or to take any step to require it to perform or comply with the BGNV Subordination Deed or to rely on or assert an entitlement to payment or receive any payment from the sixth plaintiff under or by reason of the BGNV Subordination Deed. Perhaps unsurprisingly, his Honour declined to make any such orders (relief judgment [141]).
    3478 In March 2000 the curatoren of BGNV served notice of demand on some of the Banks. In those notices the curatoren referred to the litigation which comprised these proceedings at first instance and demanded payment of large monetary sums and damages and other relief in relation to, inter alia, the execution and delivery of the BGNV Subordination Deed. They renewed those claims in writing on 28 January 2005.
    3479 It is common ground that BGNV has lodged proofs of debt with TBGL and BGF for repayment of the balance of the on‑loans and did so without the consent of Westpac as Security Agent under the BGNV Subordination Deed. That is, it is common ground that BGNV is in breach of cl 6(v) of that deed. The terms of that deed include a clause whereby the parties submitted to the jurisdiction of the courts of Australia.
    3480 As I see the situation, BGNV chose to litigate the validity or otherwise of the BGNV Subordination Deed in this court. As a consequence, the Banks obtained leave, unopposed, to proceed with their counterclaim to enforce the terms of that deed.
    3481 The stance taken by BGNV and its liquidator and the absence of any undertaking from the liquidator to comply with the subordination terms of the deed suggests to me that there is a very real risk of further non‑compliance.
    3482 I think that this is confirmed by par 124 of the respondents’ submissions below that the orders sought by the Banks are intended to stifle any future dispute in the Netherlands Antilles. They assert that whether BGNV should be allowed to prove and whether it should hold any dividends on trust for the Banks should now be resolved according to the laws of the Netherlands Antilles and the legal processes of that jurisdiction.
    3483 I think it is important to remember that the rights and conduct which are the subjects of the proposed injunctions sought, in the alternative, by the Banks in their counterclaim will all exist and take place, respectively, in Western Australia. In my opinion, no question of comity arises. Trevor’s obligation under s 601CL(15)(c) of the Corporations Act is to recover and realise BGNV’s property in Australia and to pay the net amount so recovered to the foreign liquidator i.e. the curatoren. Under Australian law, in my opinion, that net property should not include the on‑loans until the appellants have been paid in full. The parties have chosen to litigate this matter in Western Australia and, in my opinion, the rights of the appellants to enforce the terms of the BGNV Subordination Deed should not be the subject of further litigation elsewhere before the liquidations in Australia of the plaintiff companies can be brought to an end.
    3484 His Honour was well aware of the problem but, in my respectful opinion, did not address it properly. Referring to the Banks’ position at [9724] he said:
    9724 … They are ordinary unsecured creditors but they rank ahead of the bondholders. If that is not the situation there is a very real question whether they are being restored substantially to their former position. I am not ruling on matters raised in the LDTC action.
    9725 The banks may be entitled to some relief to preserve that position. But I am not minded to do anything that will make the administration of the liquidations unworkable or unnecessarily difficult. I will not, for example, grant relief that would prevent companies under the BGNV Subordination Deed or the Principal Subordination Deed or the BIIL Subordination Deed from proving in the liquidations. I would take this view even if, on a strict reading of the documents, the relevant companies are not entitled to prove unless and until the banks have been paid in full. It is one thing for equity to recognise the relative rankings of creditors. It is quite another for equity to assist someone to use those rankings to disrupt the carrying out of statutory responsibilities and to destroy the efficacy of remedies the court has pronounced in favour of affected parties.
    3485 In my opinion, the making of the orders sought in the counterclaim would not ‘destroy the efficacies of remedies the court has pronounced in favour of affected parties’ and his Honour did not demonstrate how this could occur. Nor for that matter did the respondents. The monetary and declaratory relief granted to the successful respondents will remain unaffected by the grant of the orders sought by the Banks in their counterclaim.
    3486 But perhaps the most important aspect of this issue is his Honour’s conclusion:
    The fate of moneys distributed to the liquidator of BGNV and questions about inconsistent trusts affecting those funds (a matter on which I express no opinion) will have to be decided in the liquidation of BGNV and in the light of circumstances existing at that time.
    ([139] of the relief judgment).
    3487 In my opinion those questions have been decided in these proceedings. On my reasoning, as between BGNV and the appellants, the appellants have been successful in relation to the validity of the BGNV Subordination Deed. BGNV should be held to its contract. It is in breach of that contract by lodging the relevant proofs of debt without the consent of Westpac as Security Agent. In my view that circumstance, when coupled with the further facts referred to above, including the demands of the curatoren, entitles the appellants to equitable relief, see Turner v Bladin [1951] HCA 13; (1951) 82 CLR 463, 472. There should be an order that any distribution, dividend or other payment to be made to BGNV in the liquidation of TBGL and BGF be made to Trevor as the Australian liquidator of BGNV and is to be held on trust by him and by BGNV pursuant to the terms of the BGNV Subordination Deed and that such sums are only to be dealt with by Trevor and BGNV in accordance with the terms of that deed.
    Was there anything in the myriad of defences raised in the litigation disentitling the plaintiffs or the defendants (in their counterclaim) to relief?
    3488 The appellants raised a number of defences at first instance which were mostly equitable in nature. His Honour rejected them. Those rejections are under appeal. The defences were, in summary, limitation, limitation by analogy, affirmation, laches, waiver, abandonment, election, ratification, clean hands and impossibility of restitution. There was also a defence of set‑off.
    3489 I have found against the respondents in their breach of directors’ duties case and also on subordination. I have found in their favour in respect of nearly all their statutory claims. I have also found that the appellants may enforce the contracts of on‑loan by reason of the application of s 11(2) of the Property Law Act. Having so decided on the contractual subordination issues, I took the view that I did not need to consider the estoppel claims. Thus it is not necessary for me to consider any of the respondents’ defences to the estoppel counterclaim. That means I am only obliged to consider such of the appellants’ defences as are relevant to the statutory claims.
    3490 His Honour did not make any orders in relation to the statutory claims [2009] WASC 107 [11] ‑ [13]. His orders were based on the respondents’ Barnes v Addy case. All the relevant transactions which were rescinded by his Honour’s orders were rescinded ab initio; they were not avoided as a result of the liquidators taking steps under the statutory provisions. But I think that it is sufficiently clear from his Honour’s reasons that, save in relation to s 121 of the Bankruptcy Act, he would have granted similar relief under the statutory claims to the plaintiff companies which claimed such relief had he not found in the respondents’ favour on their Barnes v Addy claim. I am content to proceed on the basis that the challenges raised in the appeal, the cross‑appeals and the notices of contention against all of his Honour’s conclusions in relation to the statutory claims are procedurally in order. The cross‑appeals against the dismissal of the claims under s 121 of the Bankruptcy Act are, of course, clearly in order.
    3491 The appellants’ submissions on their (mainly) equitable defences were not expressly addressed to the statutory claims. But it is reasonably straightforward to identify those which are not relevant to those claims. The limitation, limitation by analogy, waiver, ratification and clean hands defences are, in my opinion, only relevant to the Barnes v Addy case and the ‘new equitable claims’ (see [9244] and [9245]). I am uncertain whether it is fair to say the same about laches and abandonment, so I shall consider them. I will deal with them together as they are based on what the appellants submit was undue delay by the liquidators. I will also consider the matters of whether his Honour should have held that the Banks had made good their impossibility of restitution, election and set‑off defences.
    The facts
    3492 Totterdell and Woodings took control of the plaintiff Bell companies in 1991 and 1993 respectively [9315]. By early 1995 they had secured funding and instructed BDW to investigate the Transactions. Shortly thereafter they obtained court orders to gain access to a very substantial number of documents that were in the possession of the Banks and other parties. Those documents were reviewed and lengthy court examinations took place for the purpose of assessing potential causes of action. The proceedings which currently form the subject matter of this appeal were instituted in the Federal Court of Australia on 18 December 1995.
    My reasoning
    3493 There is English Court of Appeal authority, in the context of the Elizabethan statute, to the effect that mere delay in taking proceedings is no defence unless it continues long enough to bar, under the statute of limitations, the legal right: Re Maddever, Three Towns Banking Company v Maddever (1884) 27 Ch D 523, 530 ‑ 532.
    3494 For the reasons given by his Honour in [9326], I do not think that there has been unreasonable delay in bringing these proceedings so far as they are based on the statutory claims. The affairs of the plaintiff companies were extremely complex.
    3495 In my view his Honour did not err in reaching those conclusions. That disposes of the defences of laches and abandonment.
    Election
    3496 On 9 November 1995 BGF filed a petition in the High Court of Justice in London seeking to wind up BGUK. The appellants submitted below, and in the appeal, that by instituting and prosecuting those winding up proceedings BGF had sought to enforce rights under the guarantee and mortgage debenture which it entered into on 1 February 1990 and that this amounted to an election by affirmation of the validity of those instruments.
    3497 The appellants contended that BGF’s standing to petition for the winding up was founded, inter alia, on a debt of $104 million owing by BGUK to BGF. They contended that the debt from BGUK to BGF existed by virtue of an implied indemnity in the contract of guarantee.
    3498 The factual circumstances which gave rise to this debt were not in dispute. When the receivers and managers of BGF caused the publishing assets to be sold and the proceeds became available they directed that $104 million (about £52 million) be paid (via Westpac) to the Lloyds Syndicate Banks in reduction of moneys owing by BGUK. The total sum was precisely $104,695,835 and was credited to BGF in the books of BGUK by two entries dated 31 December 1991 [MISP.00017.005, par 6.7].
    3499 At first instance, but not I think on appeal, the appellants also relied on the fact that BGF paid the sum of $104 million to BGUK (via Westpac) as being an exercise of rights under the BGF mortgage debenture. Just in case that issue is still live in the appeal, I should say that I agree wholeheartedly and respectfully with Owen J’s conclusion [9371] that BGF in making that payment was not electing to exercise rights under the mortgage debenture, it was an act, as his Honour said, to satisfy the obligation under the mortgage debenture, which instrument was valid and effective until avoided. I might add that the payment was made at the direction of managers and receivers acting on instructions from the appellants. It would be very odd, in those circumstances, in my opinion, for that to form part of an election upon which the appellants could rely. I return to the main basis for the appellants’ election submission.
    3500 It may be helpful in understanding this point to know that the reason why BGF’s liquidator lodged this petition in London was because he wanted a liquidator of BGUK to investigate its affairs and decide whether or not to bring a claim to set aside the debenture executed by that company on 15 February 1990. Westpac had appointed administrative receivers of BGUK thus putting that company under the de facto control of that bank [APPR.000.043, par 1792]. Westpac and the administrative receivers opposed the petition. Indeed, between the date upon which the petition was presented and the date upon which Chadwick J heard it, Westpac, as attorney for BGF, executed a deed of assignment assigning all legal title to BGF’s debts to itself as security agent.
    3501 It is quite clear from the evidence and from Chadwick J’s reasons for judgment that, far from affirming the guarantee and mortgage debenture, BGF lodged the petition as a preliminary step in a course of action designed to elicit the cooperation of any liquidator appointed to BGUK in challenging the security documents granted by BGF and BGUK.
    3502 The appellants argue that the election occurred at the time when the petition was filed and that events subsequent to that date could not change the nature or significance of that filing. That surely cannot be right, in my view. For example, the petition could have been withdrawn before hearing (presumably with leave). In my opinion, the whole of BGF’s conduct in relation to the petition needs to be assessed to decide whether there was an election. That is what the learned primary judge did. When that is done, it can be seen that any reliance on the mortgage debenture (and I am inclined to think that there was no such reliance whatsoever) was temporary in order to obtain, eventually, the setting aside of that very instrument.
    3503 I doubt whether BGF’s right of indemnity was implied into the contract of guarantee, although it is not necessary to decide that point. I think the preferable view is that the right of indemnity arose out of the fact that BGF paid $104 million of BGUK’s indebtedness to the Lloyds Syndicate Banks. That very circumstance gave rise, in my view, to a right of indemnity.
    3504 However, I respectfully agree with all of his Honour’s reasons for rejecting the appellants’ claim that BGF affirmed the guarantee and mortgage debenture. It was not unequivocally affirming that transaction in a manner which was inconsistent with a right to rescind. Furthermore, its standing to bring the winding up petition was not based solely on the debt just mentioned. The evidence showed that a debt was owed by BGUK to BGF in the sum of about £6 million. Chadwick J’s reasons show that the winding up order was granted on the basis of that debt and also on the basis that it was just and equitable that BGUK be wound up so that an investigation of its affairs could be made.
    3505 The appellants advanced, somewhat faintly, an argument that in the absence of the guarantee and mortgage debenture it was not clear that BGF would have a debt claim against BGUK on the basis of money had and received. There was even a suggestion that the payment may have been a voluntary one. In my view, the evidence does not support those contentions; it is all the other way.
    3506 As his Honour pointed out [9377], the doctrine of election is designed to prevent a party from taking the benefit of rights conferred under a contract and, at the same time, seeking to rescind or avoid that contract.
    3507 As Stephen J explained in Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634, 646:
    The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other …
    3508 By filing and prosecuting the winding up petition BGF was not, in my view, so conducting itself. It did not make an unequivocal choice between two alternative and inconsistent rights. I would reject this defence.
    Impossibility of restitution
    3509 We were not referred to any authority where a court has considered whether relief under the relevant insolvency statutory provisions could be denied on the basis that the defendant disponee could not be restored to its original position. Nor have I been able to find any such authority. The matter of impossibility of restitution is usually raised as a defence in the context of a plaintiff seeking equitable relief where its equitable rights exist pre‑judgment.
    3510 However, it may be that the relevant grounds of appeal and submissions in relation to those grounds should be taken as being addressed also to the final orders which declared a remedial constructive trust. I will consider the appellants’ defence in that context.
    3511 The defence arises out of the manner in which the Banks realised their securities i.e. the sale of the publishing assets and also some assignments of debt which occurred after the sale of the publishing assets had been completed. The agreement for that sale was referred to in the reasons for judgment as the Harlesden sale agreement.
    3512 A useful summary of the mechanics of the steps taken pursuant to the Harlesden sale agreement can be found in [639] ‑ [644] of his Honour’s reasons. It is not necessary to repeat that here.
    3513 In summary the appellants say that, in accordance with the terms of the Harlesden sale agreement, they released securities which they held over the publishing assets. Furthermore, as part of those releases, the Banks released Albany Advertiser and WAN from their obligations under the Principal Subordination Deed. But for those particular releases, Albany Advertiser and WAN would not have been able to assign three debts totalling approximately $170 million, which they did for nominal consideration. If the assignor companies had been wound up before that assignment those debts would have formed part of the flow of funds that would have benefitted, inter alia, the Banks. The appellants referred to evidence that the assignees of those debts (purchased for $10.00) had proved in the liquidations of BPG and BGF (being the relevant debtors) and had been admitted to proof in a substantial amount. In summary, the appellants argued that the status quo ante to which they were entitled to be restored was that in which they had securities over the publishing assets. They contended that the release of the Harlesden securities, which remain unrescinded, involved an unalterable change of position by the appellants which could not be undone. The Harlesden companies never elected to rescind their Transactions and only they could have done so. The court could not provide those securities. The appellants submitted that no form of restoration (substantial or otherwise) was possible. It was simply not possible, so it was put, to restore the appellants to the position in which they would have been in the absence of the impugned Transactions. They had, in reliance on the Transactions, unalterably changed their position. Doing practical justice, the court should have moulded its orders so that no remedy was available to the respondents in respect of the publishing assets proceeds. It will be recalled that, apart from about $60 million realised on the sale of the BRL shares, the publishing asset proceeds represented the bulk of the money recovered by the Banks.
    My reasoning
    3514 I think it is useful to remember that this is not a case, for example, of rescission by reason of innocent misrepresentation. The plaintiffs’ rights are statutorily‑based. In my view, the question is whether, in that context, it would be unjust to enforce the statutes.
    3515 In my opinion, it is quite clear that it will not be unjust to allow the statutory provisions to operate by recognising the plaintiffs’ right to have the Transactions declared void as against them and to award them consequential relief.
    3516 As the main respondents point out, the Banks chose BGF as the entity to recover the proceeds from the sale of the publishing assets. Those proceeds were received by the Banks at the direction of BGF and in reduction of BGF’s liability to them. BGF’s liability to the Banks arose as a result of the Transactions and the payments received by the Banks were gains arising from their participation in the Transactions. The Harlesden sale agreement was devised and implemented by receivers and managers appointed by the Banks. Before the Transactions the Banks had no security over the Harlesden companies.
    3517 In my view, the fact that the subsidiary companies which owned the publishing assets have not sought to set aside their Transactions has no bearing on whether it would be unjust to grant declaratory and other consequential relief arising out of the avoidance of those of the Transactions which fell within the terms of the statutory provisions. I would reject this defence.
    3518 I have read that section of Lee AJA’s draft reasons in which his Honour discusses and rejects the appellants’ argument that relief should be refused on the basis that the funds which they released in order that interest could be paid to the bondholders were irrecoverable and that accordingly restitution was not possible. I agree, respectfully, with his Honour’s own (as contrasted with those of Owen J) reasons for rejecting that ground of appeal, assuming that it has any relevance in the context of the conclusions which I have reached on the basis of the appellants’ liability.
    Set‑off
    3519 I have had the advantage of reading Lee AJA’s reasons in draft form. I am grateful to him for making it unnecessary to set out here the relevant legislative provisions. With respect, I agree with his conclusion that before the winding up or liquidation of BGF and BGUK no mutual credits, debts or dealings existed between the Banks and those companies.
    3520 Furthermore, for reasons similar to those explained by Lee AJA, I consider that equity, whether in its concurrent or its auxiliary jurisdiction in aid of the insolvency statutes, would not countenance the claim by the Banks to a set‑off.
    Non-party Transactions
    3521 By ground 132 of their cross‑appeal the main respondents appealed against his Honour’s refusal to grant them declaratory and injunctive orders which would have had the effect of preventing the Banks from enforcing provisions of two of the voided Transactions against Bell participants who were not parties to these proceedings. Those Transactions were the Principal Subordination Deed and the BIIL Subordination Deed. BGNV played no part in this issue.
    3522 At the relief hearing his Honour had before him evidence from the liquidators as to the likely flow of funds in the liquidations of the numerous companies in the Bell group. This included evidence that, by reason of inter‑company indebtedness and rights to distributions in liquidations as shareholding companies within the Bell group, substantial funds might well be payable to some 14 Bell companies which were not plaintiffs but who were parties to those two deeds. The terms of the deeds would enable the Banks to demand that those sums be paid to them and held on trust for the Banks until such payment. The main respondents sought, as against the Banks, declarations and injunctions which would prevent that from happening.
    3523 The main respondents argued that unless those orders were made, moneys which would otherwise flow to them would not do so and they would thus be denied the full benefit of the orders requiring the Banks to disgorge the moneys which they received pursuant to the Transactions. They maintained that their rights would be adversely affected and such orders were required to preserve the integrity of the orders to which they were otherwise entitled [APPR.000.03, pars 12, 16 and 65]. Without those orders they would not be fully restored to their pre‑Transaction positions.
    3524 The main respondents maintained that the orders which they sought did not have the effect of setting aside or interfering with non‑party Transactions other than to prevent the Banks from prejudicing the main respondents by enforcing the Banks’ rights under the two subordination deeds against the relevant non‑plaintiff parties.
    3525 The only reason tendered by the main respondents for these Bell companies not being plaintiffs was that nearly all of them had been deregistered. There are 14 companies concerned and 13 of them have been deregistered.
    My reasoning
    3526 It seems to be common ground that the court has power, as a matter of discretion, to make orders which may affect the interests of non‑parties. The authorities show this to be the case: Pegang Mining Co Ltd v Choong Sam [1969] 2 MLJ 52; Ibeneweka v Egbuna [1964] 1 WLR 219, 226; News Limited v Australian Rugby Football League Ltd [1996] FCA 870; (1996) 64 FCR 410.
    3527 However, it would seem that the principle to be applied is that an order which directly affects a third person’s rights against or liabilities to a person should not be made unless the person is joined as a party: News Limited v Australian Rugby Football League (524) cited with approval by McHugh J in Victoria v Sutton [1998] HCA 56; (1998) 195 CLR 291 [78]. The main respondents contend that the principle is somewhat narrower, i.e. that for the rule to apply it has to be shown that the proposed orders would have an adverse or deleterious effect on the non‑party, not just a direct effect. The main respondents argue that they are not seeking relief either against or in favour of a non‑party.
    3528 The authorities do not appear to support the main respondents’ argument that the principle is so narrow as only to apply when the proposed orders would have a direct and adverse effect on the non‑party. This may appear to be surprising, given that the underlying principles are the rules of natural justice – see McHugh J in Sutton at [77]. But, as his Honour noted in that paragraph, the ‘invariable practice’ of requiring joinder where there is an arguable possibility that a person may be affected by the making of an order is also to avoid duplication of hearings and inconsistent decisions by courts or judges of the same court. In Pegang the Privy Council, at (56), expressed the test for joinder of a party in these terms:
    A better way of expressing the test is: Will his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action?
    3529 In News Limited the Full Court of the Federal Court struck out orders made by Burchett J at first instance which would have restricted the non‑party players’ and coaches’ freedom to choose the employer for whom they would work. But the court expressed the test, at (524E), in the wider terms used by the Privy Council.
    3530 As I have mentioned above, the only reason tendered by the main respondents for these Bell companies not being plaintiffs was that they had been deregistered. But the main respondents had chosen to obtain reinstatement of some of the deregistered Bell companies. As his Honour noted in the relief judgment at [121], the main respondents had caused five of the six companies which were added as the seventh plaintiffs to be reinstated to the Register and placed in liquidation before such joinder.
    3531 It was reasonably clear on the pleadings from a relatively early stage that the Banks were taking the position that no relief could or should be granted in relation to Bell companies which were not parties to the litigation. The main respondents were clearly on notice about the issue. As his Honour observed, the main respondents made a forensic decision not to reinstate the 13 non‑plaintiff Bell companies and thereafter take the necessary steps to join them as plaintiffs. His Honour took the view that to grant this relief to the main respondents would amount to ‘rescission through the back door’: see the relief judgment at [109].
    3532 His Honour considered the possibility that if the non‑plaintiff companies had been joined, there may have been defences available to the Banks which had not been available as against the main respondents. His Honour considered that unlikely but said that it was a possibility.
    3533 In view of the findings which I have made in relation to the appeal and cross‑appeal, i.e. rejection of the Barnes v Addy and the other equitable claims, I do not need to consider those of the main respondents’ submissions which were based on disgorgement and unjust enrichment claims. My conclusions are that the main respondents are entitled to relief only under the statutory insolvency provisions. I think that weighs, to some extent, against making the further orders which the main respondents seek.
    3534 In my opinion, if the main respondents wanted to obtain the relevant moneys which they now see as possibly leaking back to the Banks, they should have obtained orders restoring the relevant companies to the Register, put them into liquidation and arranged for the liquidators to apply to the court for an order setting aside the subordination deed so far as it affected those companies. As I understand the main respondents’ submissions, the orders by which they seek to restrain the Banks would, in some unexplained fashion, remove the necessity for these steps to be taken so the liquidators could simply pay over the money to the relevant Bell party. How the non‑plaintiff companies and their liquidators would not be bound, for example, by the contractual trusts in the subordination deed was not explained. The main respondents fear that in the absence of the orders which they seek, the Banks might well obtain orders restoring these non‑parties to the Register and then enforce their rights against them under the subordination deed unless, at that point, the non‑party companies were put into liquidation and the liquidator moved to set aside those deeds.
    3535 In my opinion, this analysis demonstrates that his Honour was quite right in exercising his discretion not to grant the orders sought. Such orders would amount to direct interferences with the obligations of the non‑parties and also, to a significant extent, substitute court orders for decisions which properly lie in the remit of the non‑party companies or their liquidators.
    3536 There is no need for me to consider this cross‑appeal ground so far as it relates to the BIIL Subordination Deed because, on my reasoning, it should not have been set aside on Barnes v Addy grounds and the Australian statutory provisions do not apply to it.
    3537 Declaratory and injunctive relief is ordinarily granted to support and enforce an established right. On my findings, the only rights which the main respondents established were:
    • to have certain Transactions, including the Principal Subordination Deed, set aside as against their liquidators under the statutory insolvency provisions; and
    • to obtain specified monetary payments pursuant to the orders requiring the appellants to repay amounts equivalent to the sums which they received or which the main respondents were caused to pay pursuant to the terms of those securities.
    3538 In my opinion, those rights were not diminished by his Honour’s refusal to grant these declarations and injunctions.
    3539 As the appellants point out [852] there was no finding that they are liable to the non‑plaintiff companies in relation to these two non‑party Transactions (the Principal Subordination Deed and the BIIL Subordination Deed) and those Transactions have not been set aside as against them.
    3540 Once the appellants have paid to the main respondents the amounts specified in the court orders their rights will have been satisfied. Thereafter their entitlements will depend upon the application of the distribution rules laid down under the Corporations Act and other legal or equitable rules.
    3541 In my view, it has not been shown that his Honour’s discretion miscarried. I would dismiss this part of the cross‑appeal.
    To what (if any) relief were the plaintiffs/respondents (or any of them) entitled?
    3542 For the reasons which I have given above, I would allow the appeal to the extent that I would set aside those of his Honour’s orders which were based on the main respondents’ Barnes v Addy claim. I would dismiss BGNV’s similarly based cross‑appeal. However, I would allow the respondents’ cross‑appeals in relation to most of the statutory claims and make orders declaring the three categories of Transactions referred to below to be void as against the liquidators of the relevant respondent companies. I will refer to the Transactions so set aside as ‘the voided Transactions’.
    3543 Consequent upon those orders there should, in my opinion, also be orders for repayment to the relevant respondent companies of the moneys paid pursuant to the respective voided Transactions. Those orders, in my view, would constitute equitable relief based not on any of the principles of tracing (for on the agreed facts that would be impossible) but on the basis of equity being employed in aid of enforcing the statutory insolvency provisions by recognising a personal liability on the Banks’ part.
    3544 The next question is the amounts which the Banks should be ordered to repay. In my opinion his Honour’s monetary judgment was, with all due respect to him, grossly excessive. I shall explain below, in some detail, why I hold that view. But first I think that it is important to appreciate that, putting the bondholders to one side as subordinated creditors, the amounts owing to the Banks formed the vast bulk of the moneys owing to the Bell group creditors. At [4287] of his Honour’s reasons he set out in Table 35 what he described as a back of the envelope calculation of the Bell group’s financial position as at the time of the Transactions, ‘… based on findings I have made and other evidence’. The calculation:
    • treated the Bell group as a group;
    • assumed that the trade creditors would be paid from (or pass to the purchaser of) the publishing business [I interpose to say that this seems an eminently sensible assumption in respect of the sale of a going concern. The result is that the figure of $269 million below is reached after deducting the amounts owing to trade creditors of that business The evidence suggests they would constitute almost all of the trade creditors of the Bell group.];
    • ignored the bondholders; and
    • assumed that the BRL shares (at that time suspended from trading) were worth the price for which they were eventually sold i.e. $60 million.
    3545 The relevant parts of Table 35 were as follows:

Assets
Publishing assets $269 million
BRL shares $60 million
Total: $329 million

Liabilities
Banks $260 million
External creditors $35 million
Provisions $38 million
Total: $333 million

Deficit $4 million

3546 At first instance and on appeal the Banks relied on Table 35 as demonstrating that if the Transactions had not been entered into and the Bell group had been wound up on 26 January 1990 the Banks would have received, save for immaterial amounts, repayment of the entirety of their debts.
3547 In his relief judgment at [56] his Honour said that this submission attaches too great a significance to his ‘… back of the envelope calculation’. He gave reasons for that view which I regard as unconvincing. They include the fact that ‘the exercise’ was ‘necessarily restricted to evidence led, largely from the books and records of the companies, concerning the position in January 1990’. In my view, that is quite a respectable evidentiary provenance in the absence of any evidence that the books were faulty.
3548 I think that it is important to point out that the respondents have not filed a notice of contention seeking to challenge Owen J’s findings as to the extent of the external creditors of the Bell group.
3549 His Honour made the above calculation having much earlier in his reasons carried out a meticulous review of the evidence relevant to the question whether the Bell group was insolvent. That reasoning occupied at least 335 pages of his Honour’s reasons (229 ‑ 564). At 10.6.4, which was headed ‘External creditors: conclusion’, his Honour made this finding [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.
His Honour repeated these findings at [9056].
3550 The figure for external creditors in his Honour’s first calculation was $35 million. In his second calculation the relevant total comes to $34,764,206. His Honour must have rounded up that figure to reach $35 million.
3551 To this sum should be added $38 million for Provisions. The evidence was that these were estimates of liabilities which would accrue on liquidation in respect of matters such as leases of property and plant.
3552 I appreciate that the tax assessments were under appeal, but RHאC died on 2 September 1990. His evidence was crucial to success in those appeals and the relevant Bell companies bore the onus of proof. If the liquidations had occurred in late January 1990 there would have been a chance that the appeals would have been heard before RHאC died. But the interlocutory processes had not been completed in the Federal Court, there were then only two resident judges in Perth, and the challenges to the tax assessments had a history of proceeding at a glacial pace. I note that the liquidators have admitted the Commissioner’s proofs of debt but that is by no means determinative of what might have happened had the liquidations occurred, say 14 months earlier than they did. All in all, I think his Honour was correct in including, as part of his assessment of the position, the tax debts. In my view practical justice will be done if the interest payable by the appellants is calculated on an amount of $73 million (being the total of the external creditors listed plus $38 million ‘Provisions’) as a reasonable estimate representing what the other unsubordinated creditors would have received in a winding up of the Bell group commencing in late January 1990.
3553 I think that the Banks have made good their point that the vast bulk of the distributions which the liquidators would have made in liquidations of the Bell group (absent the Transactions) would have been to themselves. That is hardly surprising as, apart from the funds raised by issuing the subordinated bonds, the Bell group relied largely on the Banks (and had done so for some years) for their sources of credit. The Banks’ argument is that as they would have received such a large proportion of the moneys distributed by the liquidators it is unjust to make them pay compound interest, with monthly rests, on what would have largely been their own money. In my opinion, they are quite right and a serious injustice has been done to them.
The relevant principles
3554 As I have mentioned above, the principles to be applied are equitable principles in aid of the statutory insolvency provisions. The actual money taken by the Banks cannot be restored in the same manner as would be the case in respect of real or personal assets (or their traceable proceeds) still in their hands. Thus a remedy has to be moulded which does ‘what is practically just’ between the parties: Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216, 223 ‑ 224; Spence v Crawford [1939] 3 All ER 271, 288 citing with approval Lord Blackburn in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1278 ‑ 1279; Nelson v Nelson [1995] HCA 25; (1995) 184 CLR 538, 608 (McHugh J) referring to Lord Stowell’s observation in The Juliana (1822) 2 Dods 504; 165 ER 1560, 1567:
A Court of Equity … looks to every connected circumstance that ought to influence its determination upon the real justice of the case.
3555 It seems to me that the real justice of this case is that, upon the relevant Transactions being avoided, the parties should be restored as nearly as reasonably possible to the situation in which they would have been in the absence of the impugned Transactions. In my opinion there are no problems of causation. The loss sustained by the respondents was directly linked to their entry into the Transactions: see the cases cited in Young, Croft and Smith, On Equity at [16.1200]. My view of this case is that it is in essence an ordinary, common or garden matter of lenders taking securities from insolvent companies. As is usual in such matters the insolvency statutes operate to set aside the impugned Transactions by which such securities were obtained.
3556 Once that is appreciated, it becomes relatively simple to mould appropriate relief. The respondents have no right to damages for losses of profits (or any other sort of loss) nor (save to a limited extent) to disgorgement, account of profits or the like. In the absence of the Transactions, they were destined for winding up and should be regarded merely as conduits for the distribution of their net assets to their respective unsubordinated creditors. Unsubordinated creditors because, as his Honour found, there were insufficient assets for the bondholders to receive anything. It is those creditors, through the relevant respondents, whose interests, on the facts of this matter, equity has to protect and restore.
3557 As the appellants point out, Owen J’s orders have the effect that instead of the subordinated bondholders being in a position where they would not have received any distribution in respect of their debts, they will receive distributions entirely funded by the Banks’ payment of compound interest largely on amounts that the Banks would have received in the liquidations. One has only to compare the amount of the judgment, $1.6 billion, to the amount of the proceeds received by the Banks on realisation of the securities, about $283 million ([42]), to appreciate that point.
3558 His Honour recognised this at [72] of his relief judgment but dismissed the Banks’ submission by saying:
It may well be that the interest award forms the bulk of the fund from which (after the priority claims recognised in the relevant legislation have been satisfied) distributions or payments might be made to ordinary creditors and (perhaps) to subordinated creditors and (perhaps also) to litigation funders (if successful in applications under s 564). But that is a consequence of the peculiar circumstance of this case and does not, in my view, require either the withholding of part (or all) of the primary monetary relief or a capping or other diminution in the award of compensatory interest to which the plaintiffs would otherwise be entitled.
3559 In my opinion, his Honour’s focus exclusively on what the plaintiffs would otherwise be entitled to receive was wrong. The plaintiffs were all in liquidation. There was no prospect of the shareholders receiving anything. The real persons interested were the creditors – the subordinated bondholders and the rest of the creditors being mainly unsubordinated. The Banks were, in my opinion, entitled to a better set of reasons (if any exist) for their interests being subjugated to those of the subordinated bondholders than the very brief remarks which I have set out above. In my view, a very serious injustice will be done to the Banks if the monetary judgment against them is allowed to stand in its full amount.
3560 I accept the submissions made by Mr Bathurst QC on this point on behalf of the appellants (appeal ts 1330 ‑ 1332). In essence the orders made below, by reason of the compound interest awarded, gave the relevant plaintiff companies far more money than they would otherwise have been entitled to receive. The companies being in liquidation in, say 1990, would have been obliged to distribute the proceeds of the asset sales pro rata to the unsubordinated creditors. There would not have been quite enough money to pay those creditors in full and there certainly would not have been any distribution to the subordinated bondholders as his Honour concluded not just in his back of the envelope calculation but also at [52] of the relief judgment:
Be that as it may, it is undeniable that had the Transactions not occurred and had the companies gone into liquidation shortly after 26 January 1990 it is unlikely the bondholders would have received a return on their investments. To that extent, anything they now receive might be termed a ‘windfall’ in a more idiomatic understanding of the word.
3561 As the appellants submitted below at the hearing on relief [MISD.00024.008 at par 36] in relation to this aspect, when Owen J at [9715] said this
… At the time of the Transactions the plaintiff Bell companies would have had limited opportunity to make the most beneficial use of the money. On the other hand, had the money been invested pending distribution to creditors in what the plaintiffs regard as the inevitable liquidation, it could have been earning compound interest. It would then have been distributed to creditors and put to use by those entities. On balance I think I should proceed on the basis that compound interest is the appropriate method of calculation. (emphasis added)
his Honour was only contemplating that those creditors who would have received distributions should be compensated for the non receipt of those distributions. His Honour was not contemplating that creditors who would not have received a distribution be so compensated. It would appear that by the time he came to framing the orders for relief his Honour changed his mind. In so doing, I think he fell into error of law.
3562 The appellants accepted that the other unsubordinated creditors should be compensated by way of interest. I think that Mr Bathurst was justified in submitting, with respect, that his Honour’s orders were oppressive to the appellants (appeal ts 1332 and 1343). Those orders fly in the face of authorities such as Henderson v Miles [2005] NSWSC 710 [34]; Repatriation Commission v Tsourounakis (2007) 239 ALR 491 [161]; and Harris v Digital Pulse Pty Ltd [51], all of which were cited to his Honour.
3563 In their written submissions [APPR.000.043 at pages 325 ‑ 328] the main respondents challenged the proposition that in the absence of the Transactions it was inevitable that the Bell group of companies would be wound up. They argued that there was the prospect of a valid and effective restructure. BGNV made similar submissions [APPB.000.010 at pages 283 ‑ 285]. I have already dealt with this matter earlier in my reasons above. As the Banks submitted [APPA.000.084.002 at pars 1610 ‑ 1617], the purpose for which the respondents relied on their valid and effective restructure was different at two key stages of the disposal of the case. First, they relied on it as part of their case of breach of fiduciary duty i.e. that the Bell directors were not faced with inevitable liquidation of the Bell companies. Secondly, to avoid the argument that his Honour’s monetary relief gave the subordinated creditors a windfall because if the Transactions had not been entered into the Bell companies would have gone into liquidation and they would have received nothing. For whichever purpose the respondents relied upon when they advanced the likelihood of a valid and effective restructure, in my view, they bore the burden of proving that outcome as a likely alternative outcome to liquidation as at 26 January 1990. They did not even try to discharge that burden and the evidence pointed all one way – if the Bell group did not enter into the Transactions they would have been faced with further demands for payment from the Banks which they could not meet and liquidation was inevitable.
3564 If there had been no Transactions the other (non‑Bank) unsubordinated creditors would have received their distributions within a reasonably short time even allowing for the very large number of Bell subsidiaries and their somewhat complex financial interrelationships. According to Table 35, the other unsubordinated creditors (like the Banks) would have received 98.8 cents in the dollar (4/333 = 1.20%). The liquidators would not have been troubled about the question of whether the other unsubordinated creditors would be entitled to interest. Even those with a contractual entitlement to interest would not have been entitled to post liquidation interest.
3565 But about 17 years elapsed between the date upon which the winding up order was made in respect of TBGL and his Honour’s final orders below. In my opinion, and I would not have thought this to be controversial, that is a most important factor.
3566 Assuming for the moment that we are exercising equity’s jurisdiction to implement the statutory insolvency provisions, it seems to me that ‘full justice’ (Lord Goff’s words in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 697) requires us to make orders which would put into the hands of the liquidators of the plaintiff companies an appropriate amount to represent, without pretending to be a precise equivalent, the financial prejudice which the Transactions have caused to the other unsubordinated creditors. That might conceptually be regarded as being in the nature of compensation. But I think that it is also necessary to recognise and take into account the fact that the Banks are essentially money lenders and have had the use not just of the principal amount of the funds which would have been distributed to the other unsubordinated creditors, but also the use of the interest earned from time to time (depending on what would be the appropriate rest periods) on that principal. Restitutionary considerations are thus brought into play and in particular whether there should be an award of compound interest.
3567 Wallersteiner v Moir (No 2) [1975] QB 373, cited with approval by Mason CJ and Wilson J in Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125, 148, is Court of Appeal authority for the proposition that the equitable right to interest exists independently of statute. It is also authority that, if the interests of justice so require, such interest may be awarded on a compound basis. When, at the same passage in Hungerfords, their Honours referred to this having been done in cases of money obtained and retained by fraud and money withheld or misapplied by a trustee or fiduciary, they were, I think, only providing examples (they used ‘e.g.’) rather than an exhaustive list: see Edelman J, ‘Claims to Compound Interest in Restitution: Awakening the Sleeping Giant’ (1999) 27 ABLR 211 at 220; see also Sempra Metals Ltd v Inland Revenue Commissioners [2008] 1 AC 561. In my opinion, given the very long period involved and the business in which the appellants were engaged, his Honour was quite right to award compound interest. See also Biala Pty Ltd v Mallina Holdings Ltd (1993) 13 WAR 11, 85. The next question is whether he erred in his choice of interest rate. The essence of his Honour’s reasoning was at [9718]:
I have looked at the rates applied to judgment debts from time to time under s 32 of the Supreme Court Act 1935 (WA) and s 8(1) of the Civil Judgments Enforcement Act 2004 (WA). I have compared those rates with the Westpac business indicator rate. Interest at 1 per cent below the business indicator rate would be approximately the mid-point between the judgment debt rate and the business indicator rate. I do not pretend that there is much science in that line of reasoning. My task is to do practical justice. For want of any better measure, and in the interests of a firm, summary means compensating the plaintiffs I think the business indicator rate less 1 per cent is fair. It does practical justice.
3568 On first reading, there seemed to me to be a resonance of commercial reasonableness and practical common sense in the reasoning expressed in the above paragraph. There would be few people of commerce who would quibble if a busy judge so dealt with the matter of interest when handing down judgment in a run‑of‑the‑mill commercial dispute. But this was not such a case. The court was engaged in the task of awarding interest as an equitable remedy. The amount of interest at stake was, by any standard, enormous.
3569 At [9717] his Honour had inferred that the plaintiff Bell companies would have invested the moneys on interest bearing deposit (as to which there was no evidence of typical deposit rates in the period since 1990) but it was unlikely that they would have achieved a rate as high as the business indicator rate.
3570 His Honour chose the business indicator rate less 1%, amongst other things, ‘for want of any better measure’.
3571 In my opinion there was a better measure, namely the official rate fixed by the Reserve Bank of Australia plus 1%. That was the comparable rate applied by the Court of Appeal, in my opinion, in Wallersteiner. I say in my opinion because at the hearing of this appeal senior counsel for the main respondents suggested that the Court of Appeal, when it referred to ‘the official bank rate’ was referring to a retail rate charged by the trading banks. I do not think that is correct. The official bank rate was, in those days, well known in the City as a reference to the rate which the Bank of England charged to trading banks and other like institutions for overnight money. Slicer J took a similar view in iWave Pty Ltd v Break O’Day Business Enterprise Board Inc [2004] TASSC 43 [43] where, after referring to Wallersteiner his Honour said:
The appropriate interest award ought to be 1% over the rates fixed by the Reserve Bank calculated at yearly rests.
See also Cremer v General Carriers SA [1974] 1 WLR 341, 357A.
3572 In my view, as I have found against the respondents on the Barnes v Addy claims and their other equitable claims, (a context very different to that in which his Honour had to choose a rate of interest) an appropriate rate of interest would be 1% over the official rate fixed by the Reserve Bank of Australia from time to time. As a matter of strict principle this rate might perhaps seem to be on the high side. That is because, as the Court of Appeal in Wallersteiner explained, they chose that (comparable) rate because the company director in question had improperly profited from his fiduciary position and benefited himself at the company’s expense. Here the Banks were not errant trustees or fiduciary wrongdoers, in my opinion. For that reason I would also substitute yearly rests for the monthly rests ordered by the learned trial judge. See Southern Cross Commodities Pty Ltd v Ewing (1988) 91 FLR 271, a case which involved fraudulent misappropriation but in which yearly rests were ordered for compounding purposes. See also Hillig v Darkinjung Pty Ltd [2006] NSWSC 1371 [10]; (2006) 205 FLR 450. All in all, I think that this award of interest gives due weight to the relevant factors of the long period of time for which the plaintiff companies and their creditors were out of their money and the nature of the Banks’ business in which those funds were employed, on the one hand and the absence of fiduciary wrongdoing on the other.
3573 The next question is whether his Honour should have ordered that, in the compounding calculations, the incidence of taxation should be taken into account. On the conclusions which I have reached above, this falls to be decided only in relation to those Australian Bell companies whose Transactions will be avoided as against their liquidators under the statutory insolvency provisions.
Excising the compounding effect of tax liability
3574 The Banks do not argue [see APPA.000.084.002, par 1681] (and did not argue below, relief judgment [26]) that the monetary sums awarded to the main respondents should be reduced to take into account what they would have been obliged to pay in income tax on those sums over the relevant 17 year period. Rather they say that such income tax liability (at either 39% or 30% depending on the years in question) should have been notionally deducted from the interest accrued when compounding to calculate the principal amount for each ensuing year. Otherwise the Banks say they will be paying interest on a compound basis on moneys which the plaintiff companies would never have kept. The appellants say that his Honour’s failure to do this has added some $300 million to the award against them.
3575 Phillips J, in Deeny v Gooda Walker Ltd (No 4) [1995] STC 696, 702, drew the distinction in this context between damages and interest when he said:
Damages are awarded to compensate for the loss of money, or its equivalent. Interest is awarded to compensate for the loss of use of money … it does not follow that the plaintiff should receive an award of interest which compensates not only for his loss of use of money but in addition for the loss of use of the share which should have been received by the Revenue.
3576 At [31] of the relief judgment his Owen J said:
I do not have to decide whether or not the amount payable to the plaintiffs will be subject to tax. Nor do I need to enter into the complex task of determining whether losses are available to offset any tax that might be payable and, if so, the extent of the offset … (emphasis added)
3577 His Honour then proceeded to carry out, see [32] ‑ [35] of the relief judgment, the very task which he had eschewed in the passage which I have emphasised above.
3578 The learned primary judge rejected the Banks’ submissions by reasoning as follows:
[36] I accept that this would not be a sufficient evidentiary base on which to make findings as to the exact tax position of the company. For example, it does not answer the question whether there have been, since 1990, other calls on the available tax losses of BGF. But that is not the exercise I have to perform. The question is whether there are circumstances of sufficient gravity to require a reduction in the level of compensation to which the plaintiffs would otherwise be entitled. I can approach it using the ‘rough and ready’ approach [a reference to dicta of Stephen J, on which the Banks relied, in Atlas Tiles Ltd v Briers (1978) 144 CLR 202 at 231].
[37] In Australia the company tax rates have varied between a high of 39 cents in the dollar (January 1990 to 30 June 1993) to a low of 30 cents in the dollar. Had the 39 cent rate carried through for the entire period, the companies would have been able to earn assessable income up to about $1.5 billion before the future income tax benefit had been fully utilised. As a matter of mathematics, as the rate declines the level of assessable income the losses can sustain increases.
[38] I believe the material in the BGF accounts as at 30 June 1989 and 5 October 1990 is sufficient to enable me to draw a reasonable inference that if the receipt or accrual of compensatory interest attracted (or attracts) a liability to tax, the available tax losses in BGF would have covered (or would cover) its liability. By virtue of the group relief system, BPG and the seven BRL shareholders would have been able to take advantage of BGF’s carry forward losses.
3579 There are two questions. The first is whether equity would, in the present circumstances, require the incidence of taxation to be taken into account at the compounding stage of assessing the amount of equitable compensation. His Honour assumed that the answer was yes, but did not decide the question.
3580 The main respondents submitted that we should decline any attempt to factor in taxation. First, they argued that to do so would give ‘a spurious air of precision to a process founded upon a variety of imprecise assumptions or estimates’, quoting Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd [1981] HCA 3; (1981) 145 CLR 625,663 ‑ 664 (Stephen J). I do not accept that submission. To start with, there is not ‘a variety of imprecise assumptions or estimates’ in this matter. Secondly, our task is to restore the parties, so far as reasonably possible, to the position in which they would have been in the absence of the Transactions. In my opinion, there is nothing spurious in attempting to achieve that outcome as accurately as the practicalities of the matter admit.
3581 Next the main respondents contended that the proposed adjustment for taxation was ‘entirely artificial and piled hypothesis upon hypothesis’. They gave the following reasons why they said this was so.
3582 The first was that they had been refused an election between an account of profit and interest on public policy grounds. Had they successfully elected to have an account then, so it was put, the argument about taxation could not have arisen. In my view, there is no merit in that submission. I should say, in fairness to his Honour, that the only hypothesis which he applied was that the Bell plaintiffs would have had the use of the money taken by the Banks over the nearly 18 years in question. But there is a more basic flaw in this aspect of the main respondents’ reasoning. That is because, in my opinion there was no entitlement to elect for an account at all, because the Barnes v Addy and other equitable claims were not made out.
3583 Secondly, the appellants contended that if there had been no breach of fiduciary duties then the companies ‘may not have been wound up but would have engaged in a valid and effective restructuring’. I have dealt with this argument above and there is no need to revisit it.
3584 Thirdly, the main respondents submitted that if it were appropriate to hypothesise that the plaintiff companies would have been wound up, the award of interest would still be premised upon a fiction, namely that the companies would have invested the money in an interest‑bearing investment for many years. In fact, so it was put, but for the decision of the Banks to retain the money, it was unlikely that the liquidators would have simply retained it for up to 18 years but would have distributed it to creditors who would have been able, so it was argued, to employ the money in their business at (presumably) a higher rate of return than could have been earned by the liquidators. The main respondents argued that to ‘curtail’ the interest awarded to the respondents would work an injustice on those creditors. I do not accept that submission. His Honour’s hypothesis forms the foundation for the award of any interest to the plaintiff companies by way of equitable compensation. Without that foundation the plaintiffs would not be receiving this very substantial amount. The submission boils down to a complaint about the rate of interest. I have dealt with that matter above.
3585 Fourthly, the main respondents argued that the plaintiff companies would have had significant tax deductions arising out of their obligations to pay interest on their banking facilities and their liabilities to bondholders. I do not think that is the case. Interest would not have been payable to the Banks or the bondholders in the relevant liquidations until all creditors had been paid. The evidence is that all creditors would not have been paid.
3586 In my view, for the reasons given above, equity would require the incidence of taxation to be taken into account at the compounding stage of assessing the sum of money to be paid by way of equitable compensation to the relevant respondent companies calculated by reference to the notional interest which they did not receive over the 18 year period in question.
3587 The next matter is whether the relevant Bell plaintiff companies would have been liable to income tax in respect of the receipt of such notional interest.
3588 There was a debate between the parties as to whether the decision in Federal Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) [2005] HCA 20; (2005) 220 CLR 592 had the effect that upon liquidation of the Bell companies they ceased to satisfy the ‘continuity of ownership’ test for carrying forward losses under s 79E, s 80A and s 80E of the Income Tax Assessment Act 1936 (Cth). There was a similar debate in relation to whether the Bell companies in liquidation would have satisfied the ‘same business test’ provided for in those sections. I return to that latter point below.
3589 On the question of continuity of ownership, the appellants submitted that upon the appointment of TBGL’s liquidator, TBGL’s voting power in its subsidiaries would no longer have been controlled by Bond, who before TBGL’s liquidation was capable of controlling (see s 80A(3)(a) of the Income Tax Assessment Act) the voting power of TBGL and its subsidiaries because BCHL held 68% of the shares in TBGL and BCHL was controlled by Bond through Dallhold which held 52.5% of BCHL. On that basis, BGF’s pre‑liquidation losses would have failed the continuation of ownership test upon the liquidation of TBGL.
3590 The respondents argued that the amendments to the Income Tax Assessment Act made by the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005 (Cth) reversed the effect of Linter and reinstated what had previously been considered to be the law i.e. that in the present circumstances, and on his Honour’s hypothesis, the continuity of ownership test would have been satisfied and the tax losses would have been available.
3591 As Lee AJA points out, the two tests of continuity of ownership and continuity of business, are not cumulative. As he also points out, the application of the relevant provisions depends upon significant undetermined issues (which in the circumstances he did not need to identify). Those undetermined issues, in my opinion, included the taxation circumstances of the relevant companies and the likely taxation treatment of the relevant notional receipts at the times when they would have been received.
3592 The point to be proved, in my view by the respondents, was that over a period of nearly 18 years the relevant companies would have received the interest on term deposits free of tax.
3593 In my opinion, the evidentiary basis upon which Owen J concluded that BGF would be entitled to carry forward some $1.5 billion in tax losses was not sufficient to support his Honour’s conclusion.
3594 The prima facie inference, in my view, is that tax would be paid on the notional interest received by the relevant respondents on the term deposits.
3595 Financial accounts do not necessarily show the same position as the position which would be disclosed in tax returns. There were no tax returns or notices of assessment in evidence to show the figure of accrued or carried forward losses for tax purposes.
3596 In my opinion, the respondents bore the onus of proof on that issue (the issue that all those interest payments would be set‑off for tax purposes by accrued or carried forward losses) and they did not discharge it. See West Suffolk County Council v W Rought Ltd [1957] AC 403, 413.
3597 In those circumstances it is not necessary for me to consider the somewhat complex statutory provisions which were said to have reversed the decision in Linter.
3598 Nor is it necessary for me to decide whether the relevant Bell plaintiff companies would have satisfied the ‘same business’ test. But, so it seems to me, the relevant Bell plaintiff companies would not have satisfied the ‘same business’ test. As the appellants submitted, the word ‘same’ imports ‘identity and not merely similarity’: Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation [1971] HCA 17; (1971) 124 CLR 97, 105. Before its liquidation BGF was the treasury entity for the group, borrowing money and on‑lending it to various Bell companies. After its liquidation, on his Honour’s hypothesis, it would have simply held cash on deposit and would not have been carrying on any business. Similarly, TBGL would not have been carrying on any business. The same would apply to the BRL shareholders, if they were ever carrying on any business.
3599 For the foregoing reasons I consider that the compound interest payable by the appellants should be calculated by first deducting the income tax which the relevant respondents would have been obliged to pay on those receipts. That will be at a rate of 39% or 30% depending on the years in question. If there is any dispute about those rates, that matter should be assessed by the Master. The result would be that the appellants will not be paying compound interest on moneys which would never have remained in the Bell plaintiff companies’ pockets.
3600 There would need to be an order which quarantines this interest from distribution back to the appellants. The appellants will, of course, be entitled to prove for the principal amounts of the Bell group’s debts to them and interest on those amounts calculated at the rates set out in the Negative Pledge Guarantees until the respective liquidation dates but any interest received by the appellants pursuant to the Transactions should, in my opinion, be credited to the relevant respondent companies in the process of calculating any such distribution.
Costs
3601 Order 66 r 10(2) of the Rules of the Supreme Court 1971 (WA) relevantly provides that we have power to deal with the costs of the proceedings below as well as the costs of the appeal. The general rule is, of course, that costs follow the event i.e. the successful party will have the benefit of a costs order against the unsuccessful party: see O 66 r 1(1).
Costs as between the appellants and the main respondents
3602 I have found for the main respondents in relation to their statutory claims. To that extent they can be seen as the successful parties. But I have found against them in relation to their claims based on their allegations of breach of directors’ duties (and hence their claims based on Barnes v Addy), equitable fraud, subordination and, in relation to relief, their claims not only to hold onto the moneys awarded below, but to elect for an account and, in the alternative, for disgorgement interest at a higher rate than awarded by the trial judge. Under the terms of the judgment which I propose, the total monetary amount to which I think the main respondents are entitled (including interest) is about $394 million compared to about $1.6 billion awarded below.
3603 If the general costs rule to which I have referred above were to be applied, the costs order below would not be varied and the appellants would be ordered to pay the main respondents’ costs in the appeal.
3604 The question is whether there are special circumstances which warrant exercising my discretion not to make the costs orders as between the appellants and the main respondents in accordance with the general rule? In my opinion there are such special circumstances.
3605 The causes of action and issues in respect of which the main respondents were unsuccessful loomed very large in the scheme of the proceedings both at first instance and on appeal.
3606 They comprised very major matters which occupied a great deal of time at the respective hearings. Judging by the extent of the pleadings and written submissions, they also must have taken up the bulk of the time spent in preparation for the hearing below and for the appeal.
3607 One of the general rules as to costs, O 66 r 1(3), is in these terms:
(3) Where a party though generally successful in an action has, by the introduction of some issue or issues on which he has failed, increased the costs the Court may order such party to pay the costs of such issue or issues.
3608 Assuming that sub‑rule applies to appeals, I think it should be applied to this matter. Even if that assumption is incorrect, I think that the principle embodied in the sub‑rule should be applied here. There can be no doubt that the issues on which, in my opinion, the main respondents have failed, very substantially increased the costs below as well as the costs of the appeal.
3609 In Quick on Costs [4.2730(7)] it is suggested that the principle reflected in the rule is qualified by a requirement that those issues should have ‘no immediate connection with the issues upon which the party has succeeded’, but the sub‑rule is not expressly so qualified.
3610 In Hughes v Western Australian Cricket Association Inc [1986] ATPR 48,134, 40‑748 Toohey J observed:

3. A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the party’s costs of them. In this sense, ‘issue’ does not mean a precise issue in the technical pleading sense but any disputed question of fact or law. (references omitted)
   3611 That passage has been cited with approval in many cases over the years. For example, it has been cited with approval in three fairly recent judgments of the New South Wales Court of Appeal: James v Surf Road Nominees Pty Ltd [No 2] [2005] NSWCA 296 [33]; Turkmani v Visvalingam (No 2) [2009] NSWCA 279 [9]; and Griffith v Australian Broadcasting Corporation (No 2) [2011] NSWCA 145 [16]. These authorities, and see also Elite Protective Personnel Pty Ltd v Salmon (No 2) [2007] NSWCA 373 [9], suggest that a successful party may be deprived of costs and ordered to pay the other party’s costs in respect of an issue lost by the successful party, where that issue was clearly dominant or severable (sometimes referred to as ‘separable’). In my opinion, in this matter the issues upon which the respondents were unsuccessful were relevantly severable or separable. It would not be unfair, in my opinion, to describe them as large, free‑standing cases each having an almost independent existence.
   3612 I think that, in the special circumstances of this case, it would be appropriate to make such an order in the exercise of the general costs discretion without implying such a qualification into the rule and even in the absence of the sub‑rule.
   Costs as between the appellants and the sixth and twenty‑ninth respondents
   3613 The sixth and twenty‑ninth respondents (‘the BGNV respondents’) were not separately represented below. That will need to be reflected in the costs orders. On my findings, the BGNV respondents are unsuccessful parties in the appeal. In my view, the appropriate costs order should be that the BGNV respondents pay the appellants’ costs in the appeal in relation to the relief which the appellants sought in their counterclaim against them and also pay the appellants’ costs in relation to the BGNV respondents’ cross‑appeal.
   Orders
   3614 I would propose the following orders:
4. The appeal be allowed in part.
5. The cross‑appeals be allowed in part.
6. The orders made by Owen J on 30 April 2009 be set aside and the following orders substituted therefor. In these orders, the expression ‘the main respondents’ means all of the respondents other than the sixth respondent, the twenty‑ninth respondent and the thirtieth respondent.
7. The court declares and orders that:
   4.1 As against the liquidator of the first respondent:
   (a) the share mortgage dated 1 February 1990;
   (b) the share mortgage dated 29 March 1990;
   (c) the Principal Subordination Deed;
   (d) the JNTH share mortgage dated 1 February 1990;
   (e) the four sets of directions and authorisations each dated 1 February 1990 between the first respondent and the first appellant and (in the case of each respective document) the eleventh respondent, the fourteenth respondent, the sixteenth respondent and the twenty‑second respondent respectively; and
   (f) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.2 As against the liquidator of the third respondent:
   (a) the mortgage debenture dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.3 As against the liquidator of the fifth respondent:
   (a) the mortgage debenture dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.4 As against the liquidator of the seventh respondent:
   (a) the BRL share mortgage dated 1 February 1990;
   (b) the JNTH share mortgage dated 1 February 1990;
   (c) the Principal Subordination Deed;
   (d) the direction and authorisation between the fourteenth respondent, the seventh respondent and the first appellant dated 1 February 1990;
   (e) the direction and authorisation between the twenty‑second respondent, the seventh respondent and the first appellant dated 1 February 1990; and
   (f) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.5 As against the liquidator of the eighth respondent, the Principal Subordination Deed is void as from 7 December 1995.
   4.6 As against the liquidator of the ninth respondent:
   (a) the Western Interstate share mortgage dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.7 As against the liquidator of the tenth respondent:
   (a) the BRL share mortgage dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.8 As against the liquidator of the eleventh respondent:
   (a) the Principal Subordination Deed; and
   (b) the direction and authorisation between the eleventh respondent, the first respondent and the first appellant dated 1 February 1990,
   are void as from 7 December 1995.
   4.9 As against the liquidator of the twelfth respondent, the Principal Subordination Deed is void as from 7 December 1995.
   4.10 As against the liquidator of the thirteenth respondent, the Principal Subordination Deed is void as from 7 December 1995.
   4.11 As against the liquidator of the fourteenth respondent:
   (a) the BRL share mortgage dated 1 February 1990;
   (b) the JNTH share mortgage dated 1 February 1990;
   (c) the Principal Subordination Deed;
   (d) the direction and authorisation between the fourteenth respondent, the first respondent and the first appellant dated 1 February 1990;
   (e) the direction and authorisation between the fourteenth respondent, the seventh respondent and the first appellant dated 1 February 1990; and
   (f) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.12 As against the liquidator of the fifteenth respondent, the Principal Subordination Deed is void as from 7 December 1995.
   4.13 As against the liquidator of the sixteenth respondent:
   (a) the Principal Subordination Deed; and
   (b) the direction and authorisation between the sixteenth respondent, the first respondent and the first appellant dated 1 February 1990,
   are void as from 7 December 1995.
   4.14 As against the liquidator of the seventeenth respondent:
   (a) the JNTH share mortgage dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 3 January 1996.
   4.15 As against the liquidator of the eighteenth respondent, the Principal Subordination Deed is void as from 7 December 1995.
   4.16 As against the liquidator of the nineteenth respondent, the Principal Subordination Deed is void as from 3 January 1996.
   4.17 As against the liquidator of the twentieth respondent, the Principal Subordination Deed is void as from 3 January 1996.
   4.18 As against the liquidator of the twenty‑first respondent:
   (a) the BRL share mortgage dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 3 January 1996.
   4.19 As against the liquidator of the twenty‑second respondent:
   (a) the BRL share mortgage dated 1 February 1990;
   (b) the Principal Subordination Deed;
   (c) the direction and authorisation between the twenty‑second respondent, the first respondent and the first appellant dated 1 February 1990;
   (d) the direction and authorisation between the twenty‑second respondent, the seventh respondent and the first appellant dated 1 February 1990; and
   (e) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 4 January 1996.
   4.20 As against the liquidator of the twenty‑third respondent, the Principal Subordination Deed is void as from 3 January 1996.
   4.21 As against the liquidator of the twenty‑fourth respondent:
   (a) the BRL share mortgage dated 1 February 1990;
   (b) the JNTH share mortgage dated 1 February 1990;
   (c) the Principal Subordination Deed; and
   (d) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 3 January 1996.
   4.22 As against the liquidator of the twenty‑fifth respondent:
   (a) the JNTH share mortgage dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 7 December 1995.
   4.23 As against the liquidator of the twenty‑sixth respondent:
   (a) the mortgage debenture dated 1 February 1990;
   (b) the Principal Subordination Deed; and
   (c) cl 3.7(a) of the deed of guarantee and indemnity dated 1 February 1990 and any other clauses by which the rights purportedly conferred by cl 3.7(a) might be availed of,
   are void as from 17 January 1996.
8. In relation to the sixth respondent and to the subordination of the on‑loans, the court declares that:
   5.1 As between the first, third, sixth and twenty‑ninth respondents and the appellants, the BGNV Subordination Deed is valid and effectual.
   5.2 The loans made by the sixth respondent to:
   (a) the first respondent on or about 20 December 1985;
   (b) the third respondent on or about 7 May 1987; and
   (c) the third respondent on or about 14 July 1987,
   were respectively subordinated on the terms and conditions applying per se to the bonds issued by the sixth respondent on or about each of those dates.
   5.3 Subject to par 8.5 hereunder, any distribution, dividend or other payment to be made to the sixth respondent in the liquidations of the first respondent and the third respondent be made to the twenty‑ninth respondent as the Australian liquidator of the sixth respondent and is to be held on trust by the sixth respondent and the twenty‑ninth respondent pursuant to the terms of the BGNV Subordination Deed and such sums are only to be dealt with by the sixth respondent and the twenty‑ninth respondent in accordance with the terms of that Deed.
   Sale proceeds of the publishing and communication assets
   6.1 The appellants respectively pay the amounts listed next to their name in Schedule A under the column titled ‘Principal amount received’ in the total amount of $222,291,022.22 to the third respondent.
   6.2 The appellants respectively pay the amounts listed next to their name in Schedule B under the column titled ‘Principal amount received’ in the total amount of $641,000 to the fifth respondent.
   Sale proceeds of BRL shares
9. The appellants respectively pay the amounts listed next to their name in Schedule C under the column titled ‘Principal amount received’ in the total amount of $59,876,063.57 to the following respondents:
   (a) to the tenth respondent: the amount of $830,042.23;
   (b) to the eleventh respondent: the amount of $28,043,076.14;
   (c) to the fourteenth respondent: the amount of $5,906,887.21;
   (d) to the sixteenth respondent: the amount of $19,539,625.41;
   (e) to the twenty‑first respondent: the amount of $1,246,281.07;
   (f) to the twenty‑second respondent: the amount of $3,366,939.22; and
   (g) to the twenty‑fourth respondent: the amount of $943,212.29.
   Interest
   8.1 The appellants do pay interest calculated upon the sum of $73 million at the official rate fixed by the Reserve Bank of Australia from time to time plus 1% compounded (in the manner referred to below) at annual rests to the respective respondents apportioned as between such respondents in the same proportion as each such respondent is entitled to the total of the moneys payable pursuant to orders 6 and 7 above and apportioned as between the appellants in the same proportion as each such appellant is obliged to make payment of the moneys payable pursuant to orders 6 and 7 above.
   8.2 The abovementioned interest shall be calculated from 31 January 1990.
   8.3 For the purposes of calculating interest in respect of each annual period from 31 January 1990 and on each anniversary thereafter, there shall be deducted an amount representing a notional calculation of income tax calculated at the rate payable by corporations from time to time under the Income Tax Assessment Act. That notional amount of income tax shall be deducted from the interest to be carried forward for the purposes of compounding.
   8.4 Such interest shall be calculated to 29 May 2009.
   8.5 The liquidators of the respective respondents entitled to payment of interest pursuant to this paragraph shall hold such interest in separate accounts (‘the separate accounts’). No part of the funds from time to time standing in the separate accounts shall be taken into account in calculating any entitlement of the appellants to any distribution in the relevant liquidations or be applied in making such distributions to the appellants but otherwise may be applied or distributed in accordance with applicable laws and par 5.3 above shall not apply to such distribution, dividend or other payment.
10. In the event that there is any dispute about the relevant official rate of interest published by the Reserve Bank of Australia or about the rate of income tax payable by corporations from time to time under the Income Tax Assessment Act, such rates shall be fixed upon enquiry by the Master who may make such directions as are required to resolve such disputes as speedily as possible.
    Costs
11. All limits on costs prescribed by any applicable scale or fixed in any applicable statutory determination be removed.
12. The appellants pay the main respondents’ costs at first instance and on appeal arising out of or in relation to the following issues:
    • insolvency of the Bell group (only at first instance);
    • the issues (other than the issues listed in par 12 below) raised in the defence; and
    • whether the Transactions, which have been declared on appeal to be void as against the relevant liquidators, were void by the application of s 121 of the Bankruptcy Act,
    such costs to be taxed.
13. The main respondents and the sixth, twenty‑ninth and thirtieth respondents pay in relation to the issues referred to hereunder in this paragraph the costs of the appellants at first instance and the main respondents pay the costs of the appellants in relation to those issues in the appeal. Those issues are as follows:
    (a) all issues arising out of or in relation to whether the Bell group directors breached their fiduciary duties, including all issues relating to the application of Barnes v Addy;
    (b) equitable fraud including unconscionability;
    (c) all issues arising out of or in relation to whether the on‑loans were subordinated, whether contractually or otherwise including the estoppel and the Trade Practices Act claims; and
    (d) the issues in the appeal relating to whether his Honour should have granted the main respondents further relief.
    As between the appellants and the sixth and twenty‑ninth respondents
14. To the extent that such costs are not the subject of any other orders herein, the sixth and twenty‑ninth respondents pay the appellants’ costs in relation to the relief which the appellants sought in their counterclaim against them both at first instance and on appeal and also pay the appellants’ costs in the sixth and twenty-ninth respondents’ cross‑appeal.
    As to costs generally
15. Save as ordered above, each party shall bear and pay their own costs.
16. All previous costs orders made between the parties in the proceedings in this court or the Federal Court of Australia are vacated, except to the extent that the costs payable pursuant to any such orders, being orders made before the judgment at first instance, have been paid.
17. All security for costs provided by, or on behalf of, the respondents shall remain released in accordance with the terms of order 7.4 of the orders made by Owen J on 30 April 2009.

SCHEDULE A
SALE PROCEEDS OF THE PUBLISHING AND COMMUNICATION ASSETS – BGF RECEIPTS

Bank Date received Principal amount received
Tranche 1
Westpac Banking Corporation 31 December 1991 $18,643,319.26
Commonwealth Bank of Australia 31 December 1991 $10,092,057.46
HSBC Bank Ltd 31 December 1991 $19,941,694.79
National Australia Bank Ltd 31 December 1991 $19,064,740.25
Standard Chartered Bank 31 December 1991 $12,165,299.15
SG Australia Ltd 31 December 1991 $24,244,976.44
Lloyds TSB Bank 31 December 1991 $1,113,477.38
SEB AG 31 December 1991 $1,113,477.38
Banco Espirito Santo SA 31 December 1991 $1,113,477.38
Bank of Scotland plc 31 December 1991 $1,113,477.38
Credit Agricole SA 31 December 1991 $1,113,477.38
Bank Austria Creditanstalt AG 31 December 1991 $1,113,477.38
Credit Lyonnais 31 December 1991 $1,113,477.38
Dresdner Bank AG 31 December 1991 $1,113,477.38
KBC Bank Verzekerings Holdings NV 31 December 1991 $1,113,477.38
Skopbank 31 December 1991 $779,434.19
DZ Bank AG Deutsche Zentral-Genossenschaftsbank 31 December 1991 $668,086.45
The Gulf Bank KSC 31 December 1991 $668,086.45
Gentra Ltd 31 December 1991 $668,086.45
Calyon 31 December 1991 $556,738.71
Lloyds TSB Bank 2 January 1992 $7,611,175.52
SEB AG 2 January 1992 $7,611,175.52
Banco Espirito Santo SA 2 January 1992 $7,611,175.52
Bank of Scotland plc 2 January 1992 $7,611,175.52
Credit Agricole SA 2 January 1992 $7,611,175.52

Bank Date received Principal amount received
Bank Austria Creditanstalt AG 2 January 1992 $7,611,175.52
Credit Lyonnais 2 January 1992 $7,611,175.52
Dresdner Bank AG 2 January 1992 $7,611,175.52
KBC Bank Verzekerings Holdings NV 2 January 1992 $7,611,175.52
Skopbank 2 January 1992 $5,327,822.86
DZ Bank AG Deutsche Zentral-Genossenschaftsbank 2 January 1992 $4,566,705.31
The Gulf Bank KSC 2 January 1992 $4,566,705.31
Gentra Ltd 2 January 1992 $4,566,705.31
Calyon 2 January 1992 $3,805,587.76
Total recovery available from tranche 1 $208,847,922.22
Tranche 2
Westpac Banking Corporation 18 March 1992 $1,382,200.95
Commonwealth Bank of Australia 18 March 1992 $589,779.08
HSBC Bank Ltd 18 March 1992 $1,189,811.51
National Australia Bank Ltd 18 March 1992 $1,133,298.61
Standard Chartered Bank 18 March 1992 $714,060.25
SG Australia Ltd 18 March 1992 $1,421,922.04
Lloyds TSB Bank 18 March 1992 $505,738.13
SEB AG 18 March 1992 $505,738.13
Banco Espirito Santo SA 18 March 1992 $505,738.13
Bank of Scotland plc 18 March 1992 $505,738.13
Credit Agricole SA 18 March 1992 $505,738.13
Bank Austria Creditanstalt AG 18 March 1992 $505,738.13
Credit Lyonnais 18 March 1992 $505,738.13
Dresdner Bank AG 18 March 1992 $505,738.13
KBC Bank Verzekerings Holdings NV 18 March 1992 $505,738.13
Skopbank 18 March 1992 $354,016.70
DZ Bank AG Deutsche Zentral-Genossenschaftsbank 18 March 1992 $303,442.88

Bank Date received Principal amount received
The Gulf Bank KSC 18 March 1992 $303,442.88
Gentra Ltd 18 March 1992 $303,442.88
Calyon 18 March 1992 $252,869.06
Total recovery available from tranche 2 $12,500,000.00
Tranche 3
Westpac Banking Corporation 23 July 1992 $104,402.42
Commonwealth Bank of Australia 23 July 1992 $44,671.48
HSBC Bank Ltd 23 July 1992 $89,471.61
National Australia Bank Ltd 23 July 1992 $85,603.86
Standard Chartered Bank 23 July 1992 $53,693.09
SG Australia Ltd 23 July 1992 $107,316.27
Lloyds TSB Bank 23 July 1992 $38,161.96
SEB AG 23 July 1992 $38,161.75
Banco Espirito Santo SA 23 July 1992 $38,161.75
Bank of Scotland plc 23 July 1992 $38,161.75
Credit Agricole SA 23 July 1992 $38,161.75
Bank Austria Creditanstalt AG 23 July 1992 $38,161.75
Credit Lyonnais 23 July 1992 $38,161.75
Dresdner Bank AG 23 July 1992 $38,161.75
KBC Bank Verzekerings Holdings NV 23 July 1992 $38,161.75
Skopbank 23 July 1992 $26,713.24
DZ Bank AG Deutsche Zentral-Genossenschaftsbank 23 July 1992 $22,897.06
The Gulf Bank KSC 23 July 1992 $22,897.06
Gentra Ltd 23 July 1992 $22,897.06
Calyon 23 July 1992 $19,080.88
Total recovery available from tranche 3 $943,100.00
Total recovery available from tranches 1, 2 and 3 $222,291,022.22

SCHEDULE B
SALE PROCEEDS OF THE PUBLISHING AND COMMUNICATION ASSETS – BGF RECEIPTS

Bank Date received Principal amount received
Westpac Banking Corporation 23 July 1992 $70,959.55
Commonwealth Bank of Australia 23 July 1992 $30,362.02
HSBC Bank Ltd 23 July 1992 $60,811.48
National Australia Bank Ltd 23 July 1992 $58,182.67
Standard Chartered Bank 23 July 1992 $36,493.76
SG Australia Ltd 23 July 1992 $72,940.02
Lloyds TSB Bank 23 July 1992 $25,937.66
SEB AG 23 July 1992 $25,937.53
Banco Espirito Santo SA 23 July 1992 $25,937.53
Bank of Scotland plc 23 July 1992 $25,937.53
Credit Agricole SA 23 July 1992 $25,937.53
Bank Austria Creditanstalt AG 23 July 1992 $25,937.53
Credit Lyonnais 23 July 1992 $25,937.53
Dresdner Bank AG 23 July 1992 $25,937.53
KBC Bank Verzekerings Holdings NV 23 July 1992 $25,937.53
Skopbank 23 July 1992 $18,156.27
DZ Bank AG Deutsche Zentral-Genossenschaftsbank 23 July 1992 $15,562.52
The Gulf Bank KSC 23 July 1992 $15,562.52
Gentra Ltd 23 July 1992 $15,562.52
Calyon 23 July 1992 $12,968.76
Total recovery available $641,000.00

SCHEDULE C
SALE PROCEEDS OF THE BRL SHARES

Bank Date received Principal amount received
Tranche 1
Westpac Banking Corporation 28 May 1992 $637,030.59
Commonwealth Bank of Australia 29 May 1992 $272,488.10
HSBC Bank Ltd 29 May 1992 $524,373.67
National Australia Bank Ltd 29 May 1992 $521,695.67
Standard Chartered Bank 29 May 1992 $328,652.73
SG Australia Ltd 29 May 1992 $655,632.99
Lloyds TSB Bank 29 May 1992 $234,707.70
SEB AG 29 May 1992 $234,707.70
Banco Espirito Santo SA 29 May 1992 $234,707.70
Bank of Scotland plc 29 May 1992 $234,707.70
Credit Agricole SA 29 May 1992 $234,707.70
Bank Austria Creditanstalt AG 29 May 1992 $234,707.70
Credit Lyonnais 29 May 1992 $234,707.70
Dresdner Bank AG 29 May 1992 $234,707.70
KBC Bank Verzekerings Holdings NV 29 May 1992 $234,707.70
Skopbank 29 May 1992 $164,295.38
DZ Bank AG Deutsche Zentral-Genossenschaftsbank 29 May 1992 $140,824.61
The Gulf Bank KSC 29 May 1992 $140,824.61
Gentra Ltd 29 May 1992 $140,824.61
Calyon 29 May 1992 $117,353.84
Total recovery available from tranche 1 $5,756,366.07
Tranche 2
Westpac Banking Corporation 12 June 1992 $5,985,452.97
Commonwealth Bank of Australia 12 June 1992 $2,561,153.22

Bank Date received Principal amount received
HSBC Bank Ltd 12 June 1992 $5,122,381.46
National Australia Bank Ltd 12 June 1992 $4,915,493.28
Standard Chartered Bank 12 June 1992 $3,072,056.25
SG Australia Ltd 12 June 1992 $6,146,582.99
Lloyds TSB Bank 12 June 1992 $2,193,048.12
SEB AG 15 June 1992 $2,193,048.12
Banco Espirito Santo SA 15 June 1992 $2,193,048.12
Bank of Scotland plc 15 June 1992 $2,193,048.12
Credit Agricole SA 15 June 1992 $2,193,048.12
Bank Austria Creditanstalt AG 15 June 1992 $2,193,048.12
Credit Lyonnais 15 June 1992 $2,193,048.12
Dresdner Bank AG 15 June 1992 $2,193,048.12
KBC Bank Verzekerings Holdings NV 15 June 1992 $2,193,048.12
Skopbank 15 June 1992 $1,535,133.66
DZ Bank AG Deutsche Zentral-Genossenschaftsbank 15 June 1992 $1,315,828.85
The Gulf Bank KSC 15 June 1992 $1,315,828.85
Gentra Ltd 15 June 1992 $1,315,828.85
Calyon 15 June 1992 $1,096,524.04
Total recovery available from tranche 2 $54,119,697.50
Total recovery available from tranches 1 and 2 $59,876,063.57

ATTACHMENT 1
(SCHEDULE 38.1)
Glossary part 1: entities

ABBREVIATION DESCRIPTION
A&O Allen & Overy
Academy Academy Investments No 2 Pty Ltd
Albany Advertiser Albany Advertiser Pty Ltd
Albany Broadcasters Albany Broadcasters Ltd
Ambassador Ambassador Nominees Pty Ltd
ATO Australian Taxation Office
Australian banks The six Australian banks involved in the January 1990 refinancing
Banco Espírito Bank Espírito Santo SA
BBHL Bond Brewing Holdings Ltd
BCHL Bond Corporation Holdings Ltd
BDW Blake Dawson Waldron
Belcap Enterprises Belcap Enterprises Pty Ltd
Belcap Trading Belcap Trading Pty Ltd
Bell Bros Bell Bros Pty Ltd
Bell Bros Holdings Bell Bros Holdings Ltd
Bell Equity Bell Equity Management Ltd
Bell Press Bell Group Press Pty Ltd
BfG BfG Bank
BGF Bell Group Finance Pty Ltd
BGF(ACT) Bell Group Finance (ACT) Ltd
BGNV Bell Group NV
BGUK Bell Group (UK) Holdings Ltd
BIIL Bell International Investments Ltd
BoS Bank of Scotland
BPG Bell Publishing Group Pty Ltd
BRF Bell Resources Finance Pty Ltd
BRL Bell Resources Ltd
Bryanston Bryanston Insurance Company Limited
CBA Commonwealth Bank of Australia
Citibank NA Citibank
C&L Coopers & Lybrand
Crédit Agricole Caisse Nationale de Crédit Agricole


Crédit Lyonnais Crédit Lyonnais
Creditanstalt Creditanstalt Bankverein
Dallhold Dallhold Investments Pty Ltd
DCT Deputy Commissioner of Taxation (sometimes Australian Taxation Office or Federal Commissioner of Taxation)
DG Bank DG Bank AG
Dolfinne Dolfinne Pty Ltd
Dolfinne Securities Dolfinne Securities Pty Ltd
Dresdner Dresdner Bank AG
Equity Trust Equity Trust (Curacao) NV
Gentra Royal Trust Bank
Godine Developments Godine Developments Pty Ltd
Group Color Group Color (WA) Pty Ltd
Gulf Bank Gulf Bank KSC
Harlesden Finance Harlesden Finance Pty Ltd
Harlesden Investments Harlesden Investments Pty Ltd
HHL Heytesbury Holdings Ltd
HKBA Hong Kong Bank Australia Ltd
Hocking Hocking & Co Pty Ltd
Heytesbury Securities Heytesbury Securities Pty Ltd (later GFH)
Indosuez Banque Indosuez
Industrial Securities Industrial Securities Pty Ltd
ITC ITC entertainment Holdings Ltd and the ITC group of companies generally
JNTH J N Taylor Holdings Ltd
Kredietbank Kredietbank NV
LCAS Lloyds Corporate Advisory Services Pty Ltd
LDTC The Law Debenture Trust Corporation plc
Linklaters Linklaters & Paines
Lloyds Bank Lloyds Bank plc
Lloyds syndicate banks The fourteen non‑Australian banks involved in the January 1990 refinancing
Maradolf Maradolf Ltd


Maranoa Transport Maranoa Transport Pty Ltd
MSJA Mallesons Stephen Jaques (Australia)
MSJL Mallesons Stephen Jaques (London)
NAB National Australia Bank Ltd
NCSC National Companies and Securities Commission
Neoma Neoma Investments Pty Ltd
P&P Parker & Parker
Q‑Net Q‑Net Pty Ltd
RHàC Robert Holmes à Court
S&M Slaughter & May
S&W Sly & Weigall
SCB Standard Chartered Bank
SCBAL Standard Chartered Bank Australia Ltd
SGIC Insurance Commission of Western Australia
Skopbank Skopbank
SocGen Societe Generale Australia Ltd
Soditic SA Soditic
South West Printing South West Printing and Publishing Co Pty Ltd
SBCIL Swiss Bank Corporation International Ltd
TBGIL Bell Group International Ltd
TBGL Bell Group Ltd
W&J Investments W & J Investments Ltd
WA Broadcasters WA Broadcasters Pty Ltd
WAN West Australian Newspapers Limited
Wanstead Wanstead Pty Ltd
Wanstead Securities Wanstead Securities Pty Ltd
WAON WAON Investments Pty Ltd
Western Interstate Western Interstate Pty Ltd
Western Mail Western Mail Pty Ltd
Western Transport Western Transport Pty Ltd
Westpac Westpac Banking Corporation
Wigmores Tractors Wigmores Tractors Pty Ltd

ATTACHMENT 2
(SCHEDULE 38.2)
Glossary part 1: miscellaneous

ABBREVIATION DESCRIPTION DOCUMENTARY REFERENCE
1986 Loan Agreement The original loan agreement between the Lloyds syndicate banks and BGUK and BGF as borrowers, dated 19 May 1986 [353.09.0017]
8ASC Amended eighth amended statement of claim dated 1 December 2004 with amendments to 30 August 2006. [PLED.008.002.001]
ABFA Australian Banks Facilities Agreement dated 26 January 1990 [TBGL.00001.002]
ABSA Australian Banks Supplemental Agreement dated 26 January 1990 [TBGL.00072.002]
ADC Amended defence and counterclaim dated 15 February 2005 [PLED.010.001]
Australian directors David Aspinall, Peter Mitchell and Antony Oates, the directors of the Australian Bell group companies
Bell group (the) The entire group of companies (in Australia and overseas) of which TBGL was the ultimate holding company
Bell Participants 71 Bell group companies that were party to one or more of the Transactions
BGF bond issue The issue of bonds by BGF in May 1987
BGNV bond issues The three BGNV bond issues (together)
BGNV on‑loans The three BGNV on‑loans (together)
BGNV Subordination Deed (the) A deed dated 31 July 1990 by which BGNV subordinated intra‑group indebtedness [TBGL.00001.001]
BGUK group (the) The sub‑group of the Bell group comprising UK companies and of which BGUK was the intermediate holding company


BIIL directors Michael Edwards and Peter Whitechurch, the directors of BIIL
BIIL Subordination Deed A deed dated 14 May 1990 by which BIIL subordinated intra‑group indebtedness [TBGL.03594.145]
BPG group The sub‑group holding the publishing assets and of which BPG was the intermediate holding company.
BRL shareholders Bell group companies who held shares in BRL (referred to in the pleadings as ACIL shareholders)
BRL shares The ordinary and preference shares held by Bell group companies in BRL (referred to in the pleadings as ACIL shares)
five convertible bond issues (the) The three BGNV bond issues and the domestic bond issues, collectively
CPDD Corporate Planning and Development Department of BCHL
domestic bond issues (the) The TBGL bond issue and the BGF bond issue, collectively
first BGNV bond issue The issue of bonds by BGNV in December 1985
first BGNV on‑loan The loan by BGNV to TBGL of the proceeds of the first BGNV bond issue
Harlesden sale agreement Share sale agreement between BPG, the receivers of BPG (vendors) and WANH (purchaser) dated 5 September 1991. [TBGL.03300.031]
Information Memorandum Information Memorandum dated April 1986 sent by Lloyds Bank to prospective members of the Lloyds syndicate [333.02.0081]
ITAA Income Tax Assessment Act (Cth) 1936
LSA No 1 Lloyds Supplemental Agreement No 1 (with RLFA No 1 as an appendix) dated 27 August 1987 [TBGL.03595.011]
LSA No 2 Lloyds Supplemental Agreement No 2 (with RLFA No 2 as an appendix) dated 26 January 1990 [TBGL.03635.003]


NP agreements Negative Pledge agreements (existing before July 1987) between Bell group companies and banks [199.07.0002]
[TBGL.03785.011]
NP group companies Bell group companies bound by an NP agreement or an NP guarantee
NP guarantees Negative Pledge guarantees (existing after July 1987) between Bell group companies and banks in substitution for the NP agreements. [199.07.0033]
[TBGL.03593.012]

NP ratios Financial ratios contained in the NP agreements and NP guarantees
plaintiff Bell companies 25 Bell group companies (all Bell participants) that are named as plaintiffs in this action
PP Particulars to the amended eighth amended statement of claim dated 1 December 2004 [PLED.009.0001.001]
PR Reply to amended defence and defence to counterclaim [PLED.012.001]
pre-Transactions insolvency The contention that Bell group companies were insolvent prior to 26 January 1990
Principal Subordination Deed A deed dated 15 February 1990 by which most of the Bell participants subordinated intra‑group indebtedness [TBGL.00002.013].
publishing assets The assets of the BPG sub‑group, referred to in the pleadings as the Publishing and Communications assets
RLFA No 1 Form of Restated Lloyds Facility Agreement No 1, an appendix to LSA No 1 dated 27 August 1987 [TBGL.03593.012]
[TBGL.03595.013]
RLFA No 2 Form of restated Lloyds facility Agreement, an appendix to LSA No 2, dated 26 January 1990. [TBGL.03635.004]
Scheme The scheme constituted by the Transactions and having the effect pleaded in 8ASC par 19A
Scheme Period The period 8 January 1990 to on or about 31 July 1990.
second BGNV bond issue The issue of bonds by BGNV in May 1987


second BGNV on‑loan The loan by BGNV to BGF of the proceeds of the second BGNV bond issue
TBGL bond issue The issue of bonds by TBGL in December 1985
Territory legislation (the) Part 7 of Schedule 2 of the Imperial Acts (Substituted Provisions) Act 1986 (ACT)
third BGNV bond issue The issue of bonds by BGNV in July 1987
third BGNV on‑loan The loan by BGNV to BGF of the proceeds of the third BGNV bond issue
Transactions The various documents brought into existence during (and as part of) the 1990 refinancing arrangements [MISP.00031.039]
UK directors Michael Edwards, Peter Mitchell, Alan Birchmore and Alan Bond, the directors of BGUK and TBGIL