With the benefit of hindsight, lenders not hoodwinked by Arrium employees – Part 1: Was Arrium insolvent?


The Supreme Court of New South Wales has dismissed proceedings1 commenced by the lenders of collapsed mining and steel giant Arrium against the treasurer, CFO and three other employees.

In June 2015, Arrium commenced a strategic review of its debt position against a backdrop of a rapidly declining iron ore price and the maturity of $1.125 billion of debt between July and December 2017. As shown in the below chart, we now know the iron ore price at that time was at a 10-year low.


By December 2015, the strategic review had identified few viable options open to the group, and according to the lenders, as summarised in the judgment:

  1. there was no reasonable basis to expect that the group could refinance the maturing debt;
  2. the group could not repay the maturing debt from operating profits;
  3. there was no reasonable basis to expect Arrium could undertake a successful capital raising;
  4. having regard to those matters, the only way Arrium would be able to repay the maturing debt was through the sale of one of its successful operations, i.e. its mining consumables business; and
  5. it was apparent by at least 7 January 2016 that the group would not obtain a sufficient price for the mining consumables business to enable it to repay the maturing debt and have enough cash left over to continue as a viable business.

Arrium’s lenders were initially willing to provide additional liquidity to avoid Arrium going into administration. However, their attitude changed, and they lost confidence in the board, after Arrium made substantial drawings on its existing loans in January and February 2016 and then put forward, and apparently insisted on, the implementation of a proposal that would see the lenders recover only 60 percent of the face value of their loans, including the money they had just lent. The lenders rejected that offer, advised they no longer supported the Arrium board and the group then appointed voluntary administrators, owing more than $2.8 billion to creditors.

The lenders commenced proceedings alleging that several drawdown and rollover notices issued by the individual signatories to the lenders on behalf of Arrium as borrower in the months prior to the administration contained false representations. The lenders claimed that the signatories were liable for the false representations which were to the effect that there had been no change in Arrium’s financial position constituting a “material adverse effect” and that Arrium was solvent at the relevant times.

In a 245-page judgment, the Honourable Justice Michael Ball emphatically concluded the lenders had failed to prove either that the representations were false when they were made or that they had relied on the representations.

The following three important issues flow from the decision, and will be discussed in a series of articles:

  1. Was Arrium insolvent between when the first notice was issued and the last drawdown was advanced?;
  2. Had there been a change in Arrium’s ‘financial position’ constituting a ‘material adverse effect’ on Arrium’s ability to comply with its obligations under its loans?; and
  3. If so, were the individual employee signatories personally liable for making those representations in the notices?

Was Arrium insolvent between when the first notice was issued and the last drawdown was advanced?

One group of lenders (the BOC plaintiffs, which included Westpac) argued that Arrium was insolvent between when the first notice was issued and the last drawdown was advanced because it had no way of repaying the debt totalling approximately $871 million which was due to mature approximately 18 months in the future, in July 2017. 

When the drawdown and rollover notices were issued in January and February 2016, Arrium was paying all its debts as and when they fell due, and its cashflow forecasts and budgets indicated it would continue to be able to do so up until the maturity of the loans. The lenders relied heavily on the fact that Arrium ultimately did go into voluntary administration a few months after the drawdowns as evidence that Arrium was insolvent at the time the drawdowns were made.

The Court confirmed the correct approach to the question of solvency is to make a realistic commercial assessment of the company’s financial position taking into account what resources are available to meet liabilities as they fall due, if not by cash, then by way of sale or borrowing upon security, and by when such realisations are achievable.  

None of the evidence before the Court indicated that Arrium would run out of cash prior to the loans falling due. In fact, the evidence showed Arrium was exploring several possibilities that had reasonable prospects of satisfactorily dealing with its loans. Importantly, the Court found that the fact that a lender may be prepared to accept less than 100 cents in the dollar for it to maximise its return on the debt does not necessarily mean the group was insolvent. 

The Court found the correct legal test was accurately set out in the following legal advice given to Arrium: “A company will be insolvent now if it can be said with certainty, or practical certainty, that there is no way it will be able to deal with a debt falling due at some future date”. The onus was on the lenders to prove that in early 2016 Arrium was certainly or practically certainly unable to repay its loans due in July 2017. The lenders failed in their efforts to prove this.

The Court held, based on previous conduct, Arrium could have expected to rollover or refinance its loans for working capital as they became due for repayment on an ongoing basis, rather than repay those loans in full. As such, the onus was on the lenders to prove that they would not be prepared to extend their loans on some basis. In this regard, the position of the lenders (which were in the business of providing loans of this nature) was distinguished from that of trade creditors, who expected to be paid when their debts were due, and which debts Arrium was able to pay.

The lenders also sought to rely on the fact that Arrium appointed administrators in April 2016 as evidence of its insolvency at the earlier dates of the drawdown notices in January to March 2016. However, the Court pointed out that the appointment of administrators by the directors without more, only indicated that the directors were of the opinion that Arrium was or was likely to become insolvent; this opinion did not of itself prove Arrium was in fact insolvent at those earlier dates.

Key takeaways

  • The test for solvency when considering whether a company can pay a future debt requires certainty or practical certainty the company will be unable to pay the debt, but the analysis is to be undertaken at the relevant time without the benefit of hindsight.
  • The further into the future the debt is due to be paid, the more uncertainty there is, given the range of possibilities for the company.
  • Consider carefully who bears the onus of proving insolvency and the date on which insolvency is alleged.

We will discuss the other two key aspects of the decision in articles coming soon:

  1. Had there been a change in Arrium’s ‘financial position’ constituting a ‘material adverse effect’ on Arrium’s ability to comply with its obligations under its loans?; and
  2. If so, were the individual employee signatories personally liable for making those representations in the drawdown notices?

For a more detailed discussion of the decision or its impacts, please contact Mark Schneider, Nick Edwards, Brit Ibanez, Zina Edwards and John Poulsen.

1Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2) [2021] NSWSC 1025.

2Trading Economics, Iron Ore (Web Page, 22 August 2021) <https://tradingeconomics.com/commodity/iron-ore>.