close button

With the Benefit of Hindsight, Lenders not Hoodwinked by Arrium Employees – Part 3: Were the Individual Employees Personally Liable to the Lenders?

Introduction

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

The Lenders commenced proceedings alleging several drawdown and rollover notices (Notices) issued by the Employees to the Lenders on behalf of Arrium as borrower in the months prior to the administration contained false representations. The false representations were said to be that there had been no change in Arrium’s financial position constituting a “material adverse effect” and 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 the representations were false when they were made or that the Lenders relied on the representations.

Our first and second articles on the decision reviewed the Court’s analysis in relation to whether Arrium was insolvent and there was a material change in Arrium’s financial position.

In this third article, we review the Court’s analysis about whether the treasurer, CFO and Employees were personally liable to the Lenders.

Executive summary

The Lenders’ claims against the treasurer, CFO and Employees in negligence, for misleading and deceptive conduct and accessorial liability were all dismissed.

The Court found none of the individuals owed a duty of care to the Lenders when making the representations in the Notices. Their actions were internal to Arrium’s operations and they all acted as corporate organs, binding Arrium but not themselves individually.

Arrium’s board bore ultimate responsibility for the accuracy of the representations in the Notices. It was the directors of the board who owed a duty to Arrium, which included consideration of the Lenders’ interests if Arrium was approaching insolvency. As set out in our first and second articles, Arrium was not in fact insolvent and, as a result, the directors did not have an explicit duty to consider the Lenders’ interests at that time.

Employees

One group of lenders (the Anchorage plaintiffs, which included CBA) sought to hold the Employees liable in negligence for making the representations in the pro forma Notices, in effect as guarantors of Arrium’s obligations.

The Employees were:

  • an operations manager who reported to the treasurer and was responsible for assembling financial reports and forecasts, monitoring compliance with financial covenants and preparing drawdown and rollover notices; and
  • two others who reported to the group financial controller and were responsible for preparing and consolidating management accounts and financial statements, including signing drawdown and rollover notices when the treasurer was unavailable.

None of the Employees gave evidence, although each swore affidavits which were before the Court.

The Lenders argued the Employees owed them a duty of care when completing the Notices and breached that duty by failing to take reasonable care in checking the representations in the Notices were accurate e.g. by making adequate enquiries. 

It is possible for an employee to be personally liable when discharging their duties in the course of their employment. However, there is an exception where the employee’s action is “purely ministerial”. 

In this case, the Employees were not liable because the Court found they were acting in a purely ministerial way, i.e. the Employees were merely conduits by which the representations in the Notices were made by Arrium. The Employees were not taking personal responsibility for the representations in the Notices. In fact, it was not possible for the Employees to even know whether there had been a change in Arrium’s financial position or to make a determination about whether Arrium was solvent. 

The Notices were contractually required to be given in order for the drawdowns and rollovers to occur. The facility agreements set out what form the Notices had to take and the representations they had to contain. Whilst the Notices had to be executed by “Authorised Officers” to be binding on Arrium, it did not automatically follow that the Employees were making the representations in the Notices personally.

A duty of care would exist if the Lenders were able to prove:

  • the Employees knew the Lenders would place trust and reliance on their personal knowledge and expertise;
  • it was reasonable for them to have relied on the representations as representations made by the Employees personally; and
  • it was reasonably foreseeable to the Employees that the Lenders were likely to suffer loss if the representations were false.

The Court was not satisfied the Employees owed a duty of care to the Lenders because the representations were not made by them in their personal capacities and the Lenders were not relying on the Employees’ personal knowledge or expertise in making the representations.

Where the Court is asked to consider the scope of a duty of care to avoid economic loss, the vulnerability of the affected party is an important factor. In other words, could the Lenders take steps to protect themselves from a risk of loss? The Court found the Lenders were not vulnerable. They had the right to access information under the facility agreements and were receiving half yearly and end of year accounts. They were not relying on the representations in the Notices.

The Lenders were sophisticated parties who were quite capable of protecting their own interests by finding out information concerning Arrium’s financial circumstances themselves. As such, the Lenders were not vulnerable to the consequences of the Employees failing to take reasonable care in checking the representations in the Notices were accurate.

It was clear to the Court that the Lenders made their own assessment of Arrium’s financial position and what was in their best interests. Further, even if the representations were false, the Lenders had failed to prove the Employees knew that.

Claims were also brought against the Employees for misleading and deceptive conduct. These claims were also unsuccessful on the basis the Employees were acting as a corporate organ only, and their own conduct did not lead the Lenders into error.

Treasurer

A claim was also advanced by the Anchorage plaintiffs against the treasurer for negligence in respect of oral representations she allegedly made during a telephone conversation with Morgan Stanley (a lender) concerning the accuracy of representations made in one of the Notices and Arrium’s financial position.

The Lenders relied entirely on hearsay evidence, being a file note and internal email of the conversation made by representatives of Morgan Stanley. No one from Morgan Stanley gave evidence of what occurred and whilst the treasurer accepted the call occurred, she could not recall exactly what was said.

According to the Court, the most important representation was reported in the internal email which stated: “Not extremely helpful, but the treasurer did confirm they will be in compliance with the covenants on Dec 31 and that they are comfortable with all the reps made.”

The Court accepted the treasurer owed Morgan Stanley a duty of care in making any representations during the telephone conversation. This was because she regarded the conversation as important and it was reasonable for Morgan Stanley to rely on what it was told given her seniority and her responsibility for issuing the notice. Importantly, it was also reasonable for Morgan Stanley to expect she would either know or be able to find out, the additional information it wanted and it had no other means of finding out the information itself. As such, the Lenders were vulnerable to a lack of reasonable care on the treasurer’s part.

However, absent any other evidence, the Court held the references to “they” in the internal email were references to Arrium. Consequently, at most the treasurer said words to the effect that Arrium believed it could make the representations in the notice and had reasonable grounds for that belief.

In any event, the Court was not prepared to conclude Morgan Stanley in fact relied on anything the treasurer said. In particular, the reference in the internal email to the conversation being “Not extremely helpful” was thought to be an understatement and suggested Morgan Stanley had learned very little from the treasurer as a result of the conversation.

The Lenders also made accessorial claims against the treasurer for several types of breach of duty by Arrium. They all failed.  

In particular, the case that the treasurer procured a breach of duty on Arrium’s behalf failed, principally because there was no reason to recognise a duty of care owed by Arrium to the Lenders any more than there was a reason to recognise a duty of care owed by the Employees. According to the Court, there was no reason to graft a different set of rights onto those agreed by the parties in the facility agreements.

Similarly, the case that the treasurer was knowingly concerned in Arrium’s breaches of the statutory misleading or deceptive conduct provisions failed, principally because even if the representations were false, the Lenders had failed to prove the treasurer actually knew that.

The Lenders inferred the treasurer knew the representations were false because she knew Arrium’s financial position had changed and its ability to perform its obligations under the facility agreements had reduced as a result. On the evidence presented, the Court did not accept the treasurer appreciated the change was material, particularly given it would involve the formation of an opinion based on an analysis of a substantial amount of financial information.  

CFO

A claim was also advanced by the Anchorage plaintiffs against the CFO for negligence in directing Arrium’s treasury group to drawdown all available funds under Arrium’s loans in the months prior to its administration.

The CFO did not deny he gave the instruction, and it was consistent with what Arrium subsequently did. It was also apparent to the Court that the direction was consistent with the wishes of the board and legal advice obtained by the CFO.

Again, the real question for the Court was whether the CFO owed the Lenders a duty of care when giving the instruction he did. In the Court’s opinion, he did not.

The Court concluded the CFO’s direction was an instruction given as part of Arrium’s internal operations and that, as such, the CFO did not owe a duty to the Lenders to take reasonable care to avoid causing them economic loss arising from the direction, even if that loss was reasonably foreseeable.

It was difficult for the Court to see why the CFO should be held liable for the Lenders’ losses in circumstances where they had advanced the funds in response to drawdown notices made in accordance with the facility agreements and had failed to prove they relied on the representations in those notices.

Again, the Court held the Lenders were not vulnerable to the consequences of a lack of reasonable care on the part of the CFO because it was open to the Lenders to agree another process by which drawdowns and rollovers were to occur.

The Court explained that directors owe the company, and not creditors, a duty to consider the interests of creditors where the company is approaching insolvency. The Court considered it might reasonably be thought the CFO owed a duty to Arrium to give the direction in circumstances where it was in accordance with the wishes of the board and consistent with legal advice he had obtained.

The claims against the CFO based on accessorial liability failed for the same reasons as the similar claims against the treasurer.

In particular, the case that the CFO was knowingly concerned in Arrium’s breaches of the statutory misleading or deceptive conduct provisions failed, principally because the CFO did not have any practical involvement in the decision to serve the Notices e.g. by selecting which loans should be drawn on at which times.

The Lenders said the CFO was involved because he was the executive with overall responsibility for managing the financial aspects of Arrium’s business under the supervision of the CEO and the board. The Court disagreed and held the board bore ultimate responsibility for drawing down funds and the accuracy of the representations in the Notices and the Lenders had not shown the CFO had personally taken, or failed to take, some action expected of him in relation to the notice.

Key takeaways

  • It is unreasonable to rely on representations made outside the scope of the representor’s particular knowledge or expertise.
  • Misrepresentation cases require sufficient evidence of the making of, falsity of, and reliance on the representation.
  • Directors owe a duty to the company, and not to the creditors, to consider the interests of creditors where the company is approaching insolvency. However, employees do not owe a duty to creditors to take reasonable care to avoid economic loss arising from actions they took that were internal to the operations of a company. In particular, employees do not incur personal liability by signing, or breach their duties as employees by refusing to sign, notices on behalf of a corporate entity that they had been requested to sign in accordance with the terms on which they were employed.
  • If an employee becomes aware of facts or forms an opinion, that suggests a matter for which the board is responsible is false, it is incumbent on them to bring that to the board’s attention.
  • Employees are entitled to rely on those in authority (senior management and the board) in respect of matters for which they are responsible.
  • Internal emails and file notes of a conversation are a poor substitute for testimony of a person who participated in the conversation. Without more, it is not possible to be satisfied the documents accurately record the conversation, rather than just summarise the author’s recollection of the effect of what was said.
  • A party intending to rely on oral representations must prove to the Court that the conversation actually occurred.
  • Vulnerability plays an important part in determining whether it is appropriate to impose a duty of care to avoid pure economic loss.

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


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