The Western Australian Court of Appeal has today delivered its judgment in the appeal of Westpac Banking Corporation v The Bell Group Ltd (in Liq)  WASCA 157 ( The Bell Appeal ). The Court substantially rejected the appeal. The decision has important implications for directors, financiers and bondholder investors. It is a salutary reminder for financiers of the consequences of "knowingly receiving" a benefit from a breach of directors' duties.
The Bell Group was a group of companies operated by Robert Holmes a' Court. The group's holding company was Bell Group Limited ( BGL ) and included Bell Resources Limited ( BRL ), Bell Publishing Group Pty Limited ( BPG ) and a finance company Bell Group Finance Pty Ltd ( BGF ).
Through the 1980's the Bell Group obtained finance from twenty banks. These banks, who were all parties to the appeal, lent to the Bell Group on an unsecured negative pledge basis.
In 1985 the Bell Group raised a total of $585 million further finance through a series of 5 convertible subordinated bond issues. Three of these issue were by a company incorporated in the Netherlands Antilles, Bell Group NV ( BGNV ), a subsidiary of BGL. The proceeds of these bonds were on-lent by BGNV to BGF and BGL. These intra group loans were not documented. It was therefore unclear if, like the bonds themselves, the intra group loans were subordinated to the banks' facilities.
The Collapse and Restructure of the Bell Group
In 1988 the Bell Group was sold to entities associated with Bond Corporation Holdings Limited (BCHL). In mid-1989, it became clear that the group had insufficient funds to pay its debts to the banks and restructure negotiations commenced. During these negotiations it was suggested to a bank that the intra group loans may not be subordinated and if so the banks would rank pari passu with the bondholders (who would recover through BGNV). Companies within the Bell Group then gave security to the banks and BGNV executed a subordination deed, postponing its claims under the intra group loans to those of the banks.
On 18 April 1991 having failed to make a financial recovery BGL applied for provisional liquidation. Receivers and managers were then appointed by the banks under their security, recovering $283 million.
The liquidators sued to recover these funds from the banks. The liquidators argued that:
at the time the securities were given the Bell Group of companies was insolvent;
prior to the execution of the subordination deed, the intra group loans were not subordinated;
in giving the securities, the directors of the Bell group breached their fiduciary duties to act in the best interests of the company and for proper purposes;
the banks received securities as knowing recipients of this breach and should disgorge the proceeds;
the securities were void under bankruptcy law; and
the banks acted fraudulently in receiving the securities.
The Primary Judgment
In the primary judgment, Justice Owen found for the liquidators.
First, Justice Owen found that the Bell Group was insolvent at the time the banks took their security. His Honour found that the intra group loans, like the bonds, were fully subordinated. This meant that the banks’ taking of security did not alter their position vis-à-vis the bondholders. This finding strengthened the banks’ case that giving the securities was not a breach of directors’ duties by the Bell Group directors.
However, Justice Owen also found that, by giving security to the banks, the directors of relevant Bell Group entities breached their fiduciary duties. Justice Owen found that, when the directors of the Bell Group gave the securities, there was no realistic or reasonable plan for the survival of the group of companies.
His Honour found that, by receiving the proceeds of this breach of fiduciary duties, the banks were liable as accessories (under the doctrine of knowing receipt). He therefore ordered that the banks repay the money they had realised upon enforcement of their securities.
Finally, and although it did not affect the result, Justice Owen held that the securities were void (as against the liquidators) under section 120 of the Bankruptcy Act 1966 (Cth). He rejected the argument that the banks had acted fraudulently in taking their security.
The Issues on Appeal
The banks did not appeal Justice Owen’s finding that the Bell Group of companies was insolvent at the time the securities were given. The banks appealed each of Justice Owen’s other findings.
The Decision on Appeal
On Appeal, the Court made the following major findings.
(a) Justices Lee and Drummond found that the intra-group loans were, in fact, unsubordinated. This meant that, at the time of giving the securities, the bondholders were effectively in the same position as the banks. Justice Carr dissented on this point.
(b) Justices Lee and Drummond upheld the finding that the giving of the securities was a breach of the directors' fiduciary duties. Justice Carr dissented on this point.
(c) Justices Lee and Drummond upheld the findings that the banks received the securities as knowing recipients of this breach. They went further than Justice Owen had gone and also found that the banks had sufficient knowledge to have "knowingly assisted" in the breach. At least this aspect is likely to be the subject if an appeal to the High Court.
(d) Were it necessary, Justice Carr would have held that certain of the transactions were void against the liquidators on the application of certain provisions of the Bankruptcy Act. Justice Carr agreed1 with Justice Lee2 that, in respect of these transactions, relief could be awarded under certain provisions of the Corporations Act. Justice Drummond did not agree that relief could be awarded under these provisions.3
The main points to bear in mind are as follows:
(a) This decision upholds Justice Owen's slightly more objective approach to the content of the fiduciary duty to act for proper purposes. 4 This means that when fulfilling this duty, it might not be enough for a director to simply act in a way which he or she honestly believes to be correct.
(b) Intra-group loans should be documented as each company in a corporate group is a separate legal entity. If it is intended that an intra-group loan be made on the same terms as or on different terms from an external financing the directors should ensure that it is properly documented to achieve this purpose.
(c) The test of the requisite knowledge of a party in the banks' position in this case to be considered to have "knowingly assisted" in a breach of directors' duty was applied less onerously by the appellate court than the judge at first instance and may lead to a broader application by the Australian courts of this doctrine.
If you would like to know more about this decision, please contact George Harris or Maria O'Brien.
1 See [ 3231 ]-[ 3232 ].
2 See [ 743 ]-[ 744 ].
3 [ 2521 ]
4 See [ 2027 ]. Justice Lee's judgment also takes a more expansive approach – refer to [ 834 ]-[ 908 ]. And refer particularly to [ 923 ] and [ 928 ].