The Federal Court recently handed down another decision arising from the collapse of Babcock & Brown. In its decision, it clarified how continuous disclosure obligations intersect with insolvency.

The case was brought by various shareholders against Babcock & Brown Limited and its liquidator. Amongst other things, the shareholders claimed that:

  1. the company failed to disclose that it was insolvent as of 29 November 2008;
  2. this constituted a breach of the company's continuous disclosure obligations; and
  3. the shareholders suffered loss as a result.

In contrast, the company and its liquidator argued that solvency was a matter of opinion, and the directors were not required to disclose opinions which they did not hold.

Justice Perram disagreed with both arguments. He acknowledged that insolvency was a matter about which some people, including directors, are required to form an opinion but held that whether a company is solvent or insolvent at any given time nevertheless remains a question of fact which can be determined. He disagreed with the proposition that directors are not required to disclose opinions simply because they do not themselves hold those opinions. Instead, it was held that disclosure was required when:

  1. the directors actually knew of the company's insolvency; or
  2. the directors should have known of the company's insolvency; or
  3. the directors were aware, or should have been aware, of an opinion that the company was insolvent.

In relation to the third category, Justice Perram gave the hypothetical of an opinion from senior counsel that a company was insolvent being included in the company's board papers. He held that such an opinion expressed in such a way would mean that the company was aware of the opinion and it would most likely require disclosure, even if they disagreed with that opinion. This contrasts with a situation where the directors should have, but did not, realise the implications of information of which they were aware, which would not engage the continuous disclosure obligations.

The full decision is available here: Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149.