A Case Summary: Anchorage Capital Master Offshore Ltd v Sparkes  NSWCA 88
In the recent case of Anchorage Capital Master Offshore Ltd v Sparkes  NSWCA 88, lenders to the collapsed Arrium Group have failed in their appeal to hold the CFO and Group Treasurer personally liable. The NSW Supreme Court initially rejected the lenders’ claims, and the Court of Appeal has upheld that ruling.
Below is a summary of the key elements of the case, as well as a number of implications for both company executives and financial institutions.
In a decision with ramifications for banks, lenders and creditors, the NSW Court of Appeal dismissed appeals against a judgment finding Arrium Limited’s CFO (Bakewell) and Group Treasurer (Sparkes) were not negligent and did not engage in misleading or deceptive conduct regarding Arrium’s financial position.
Arrium operated mining related businesses. A fall in iron ore prices put pressure on Arrium’s debt position. A 2015 debt review considered options including recapitalising and selling its MolyCop business. A strategy to drawdown all unsecured facilities involved issuing drawdown notices from late December 2015 to mid-February 2016.
Arrium did not accept offers for MolyCop and by April 2016 lenders rejected a recapitalisation proposal and the Board resolved to place the company into administration.
Following Arrium’s liquidation, lenders issued proceedings for loss and damage suffered by reliance on incorrect representations about Arrium’s financial position. The drawdown notices containing representations about Arrium’s financial position were a focus.
Change in Financial Position / Material Adverse Event (MAE)
Whether a change in financial position constituted an MAE required it to materially increase “the risk of inability to perform obligations under the facility arrangements.”  Assessing a change in financial position involved comparing the company’s accounts (financial statements and notes) notionally prepared at the date of a drawdown with accounts for the last accounting period.
While the unsuccessful sale of MolyCop did not represent such a change, a Going Concern Notice, adopted by the Board on 11 February 2016, represented a change in financial position. The Notice, disclosed in the accounts, cast significant doubt over Arrium’s ongoing viability and constituted an MAE. Any representation prior to 11 February 2016 was not rendered false.
The drawdown notices contained a representation that Arrium was solvent, and plaintiffs maintained Arrium was unable to repay banking facilities due July 2017. In considering the definition of insolvency, the Court considered that it depended on the individual facts as to how far into the future a company needed to be able to meet its debts.
Finding that Arrium was not insolvent in early 2016, Arrium had “balance sheet solvency” , had paid its debts as they fell due and could arrange finance to meet facilities due in July 2017.
Assuming the representations were misleading, the Court considered whether Arrium breached a duty of care and whether Sparkes and Bakewell were liable as accessories. Factors which give rise to a duty of care did not arise between a borrower and lender. This relationship is one where interests are “inherently adverse” , lenders are not vulnerable, are not reliant on borrowers, and can make informed commercial judgments.
The Court endorsed the conclusion that accessorial liability is not available for negligence. Liability could only be found if Sparkes and Bakewell were joint tortfeasors. Where a “director or officer or employee is the instrument by which the breach of the company’s duty is initiated or committed” they will not be liable unless they owe a personal duty of care. 
Misleading and/or Deceptive Conduct
Assuming the representations were misleading, for Sparkes and Bakewell to be accessories “it was necessary that they be shown to have actual knowledge of the falsity of the relevant misrepresentation.”  Finding they had no knowledge the MAE Representation was false, the Court concluded such a finding required an opinion based on substantial financial information. Endorsing the trial judge’s finding that neither Bakewell or Sparkes were personally engaged in misleading and/or deceptive conduct, the Court found the statements containing representations were not made in any personal capacity.
Again, assuming the representations were misleading, the Court was critical of the lenders conflating reliance on the notices with reliance on the truth of the representations. Causation was not established as “[t]he advances were made because the contractual requirement was satisfied, not because the lenders were misled.”  Significantly, the lenders did not read the representations and made their own assessments of Arrium’s finances.
Banks, lenders and creditors need to be vigilant. Despite Arrium’s deteriorating financial situation, it is unlikely Courts will protect banks or lenders in dealings with borrowers through imposing a duty of care. If notices relating to facilities include misrepresentations, it is incumbent on banks or lenders to establish any loss was caused by reliance on the misrepresentation.
For creditors, even if a company is in financial difficulty, there is a high bar to establish an MAE and involves more than a change in financial position. Where a company is balance sheet solvent and has refinancing options, future debts are less likely to render it insolvent.
The decision provides comfort for officers and employees acting for companies because, in the absence of acting in any personal capacity, they will likely be protected against claims in negligence or misleading and/or deceptive conduct.