After 448 days in court, over 85,000 documents and more than 10 judgments, a special bench of the Western Australian Court of Appeal handed down its decision in Westpac Banking Corporation v The Bell Group Ltd (in liq) (No.3)  WASCA 157 (Bell Appeal Decision). The Bell Appeal Decision raises issues relating to the integrity of transactions with companies facing insolvency, which may create serious liability issues for company directors and lenders alike.
This appeal dealt with the collapse of Alan Bond’s Bell Group of companies in the early 1990s. Over 20 years, it has become one of the country’s longest running, most complex and most expensive pieces of litigation. In essence, the case centred on whether the Bell Group’s provision of further security to a syndicate of Banks in the face of its own insolvency contravened a variety of statutory and equitable principles.
The Court of Appeal’s decision, running 1026 pages, touches on a vast number of issues. Of particular concern for directors and lenders are the findings on:
- voidable transactions (under the Corporations Act 2001 (Cth) (Corporations Act) and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act)); and
- equitable fraud.
At trial, Justice Neville Owen found that the provision of security in the face of the Bell Group’s insolvency did not contravene sections 120 (‘Undervalued transactions’) and 121 (‘Transfers to defeat creditors’) of the Bankruptcy Act (incorporated into the Corporations Act by section 565). The Bell Appeal Decision, however, held that the provision of security did breach these sections, which resulted in the securities being void as against the Bell Group’s liquidator.
Proving dishonesty on the part of company directors in entering into voidable transactions was essential under the law as it stood in the 1990s. The Court had to determine how that dishonesty needed to be manifested. In doings so, the Court concluded that while dishonesty on the part of company directors in entering into a voidable transaction must be shown, it need not be conscious dishonesty. Rather, the test is satisfied by showing any conduct which falls short of fair dealing1 or by an intention to delay, hinder or otherwise defraud one group of creditors by preferring others.2 In this case, the Court held that the provision of security invalidly kept creditors other than the Banks out of property to which they were entitled.
The Court disagreed as to the overlap between directors’ obligations in insolvency and their duties generally. Acting Justice Carr was willing to conclude that directors could act in the best interests of a company by taking a ‘gamble’ on its continued survival, but that they would have to face the consequences of breaching statutory insolvency laws if the gamble didn’t pay off and the company was later placed into external administration.3 Acting Justice Lee, on the other hand, found that the directors had failed to discharge their duties by prejudicing the interests of the company’s creditors.4
Company directors should therefore be especially careful that in the course of trying to save a company that is near insolvency, they do not, whether consciously or not, enter into arrangements which have the effect of improperly preferring one group of creditors to others.
Also of interest was the divergence in the Bell Appeal Decision over whether the provision of security constituted an equitable fraud against the non-Bank creditors of the Bell Group.
When considering this issue, Acting Justice Lee found that where a creditor becomes aware of a debtor’s insolvency, the creditor is also presumed to be aware of the requirement that all creditors should be dealt with equally. The creditor is therefore bound not to take steps which would give it title over property that all creditors would otherwise be entitled to in the event of external administration. This interpretation of equitable fraud would have serious consequences for any lender dealing with insolvent (or near-insolvent) companies.
Thankfully for lenders, Acting Justices Drummond and Carr took a different view of the requirements for equitable fraud, holding that there was no basis at law to imply a relationship between creditors on the basis that their common debtor is near insolvency. Acting Justice Carr noted that to do so would add another layer of uncertainty to commercially justifiable dealings with an insolvent company.5
Whilst Acting Justice Lee was in the minority on this point, the divided judgment of the Court creates the possibility that His Honour’s reasoning may be revisited either on further appeal or in future decisions.
The Bell Appeal Decision is a dense judgment which touches on many issues of commercial significance. It highlights, in part, the complexities and difficulties for company directors and lenders when dealing with companies in or near insolvency. The Bell Appeal Decision considered the voidable transaction provisions from the Bankruptcy Act which previously applied to corporate insolvencies under the Corporations Act. However, the principles are still directly relevant to bankruptcies and provide guidance in corporate insolvencies as to the requirements of dishonesty, good faith and equitable fraud which remain relevant today. This decision also provides a basis for reopening the debate as to whether a general business judgment rule should be incorporated into our corporate insolvency law to provide directors (and indirectly their financiers) who act in good faith (and rationally) with some protection in endeavouring to implement a restructure or rescue plan rather than having companies placed prematurely into insolvency.