Insurance & Reinsurance
In the case of Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2)  NSWSC 1025 (Anchorage v Sparkes), the Supreme Court of NSW considered the obligations of company officers to sophisticated commercial lending entities, and whether company officers could be personally liable for making misleading statements.
While this case dealt with a myriad of complex insolvency issues, which are not the subject of this article, it was important in confirming that a director or officer of an organisation will not be held personally liable for broad representations made on behalf of the organisation where they could not be expected to have any particular knowledge or expertise relevant to the representations – in such circumstances directors and officers are “merely acting as a corporate organ”.
This case arises from the collapse of Arrium Ltd and a number of its subsidiaries (together, Arrium Group) commencing from about mid-2016.
Proceedings were brought by lenders and assignees of debts (Lenders) on various facility agreements with Arrium Group entities. The facility agreements differed in their terms but all included clauses to the effect that the person drawing down on the facility made:
These representations were allegedly created by the conditions precedent of a drawdown, which included that:
The representations and warranties included that: Arrium’s accounts are true; no material adverse change in financial position of the Group, no event of default or potential event of default had occurred, and the Arrium entity was solvent.
In June 2015, Arrium Group undertook a strategic review to address its debt position. As a result, company officers received a directive to draw down all available amounts under the facilities to keep cash on hand to be allocated to enact strategies around the debt position. The Company officers had not received any information that the Arrium Group was not solvent, and they considered that the Group was compliant with the documents and it was within Arrium’s right to drawdown. As a result, the Company officers made the instructed drawdowns.
The Lenders claimed that they suffered harm because they relied on the representations made by the Company Officers in the drawdown notices in advancing money to and rolling over loans owed by Arrium.
The Lenders alleged that the signatories owed and breached a duty of care to them and/or engaged in misleading or deceptive conduct because the representation and warranties contained were false when the drawdown notices were signed.
His Honour Ball J referred to the circumstances in which a party owes a duty to take reasonable care, noting that where a representor gives information or advice on a serious or business matter, intending to induce the representee to act, the representor is under a duty of care if:
The next relevant question was whether the signatories owed the duty of care personally or merely on behalf of the entity seeking the drawdown or roll-over.
His Honour noted that an individual could be personally liable if the tort is committed in the course of the individual’s employment, but an exception is where the conduct can be regarded as ‘purely ministerial’. The relevant question being whether the person “merely acted as a corporate organ, binding the company but not the person individually”.
His Honour identified that the drawdown notices could be and were signed by persons who could not have been expected to have any particular knowledge or expertise to make broad representations concerning Arrium’s financial circumstances. Relevant to this question was the fact that the drawdown notices stated that “We give you irrevocable notice that [the name of the company] wish to draw down under the Facility Agreement…” The use of “we” was considered as a reference to the entity on behalf of the notice given, which is made clear because the notices are signed ‘for and on behalf of’ that entity.
His Honour found that:
In circumstances where the Lenders were not able to articulate what actions the signatories should have undertaken, or failed to do, his Honour considered that, even if the signatories owed a duty of care, they had not breached it. In addition, the erroneous notices were not causative of the Lenders’ alleged loss.
Similarly, in the Lenders claim in misleading or deceptive conduct, his Honour held that it was a case where the signatories merely acted as a corporate organ. There was nothing about the relationship of the signatories to the Lenders that suggested they were making some representation to the Lenders personally.
Directors and officers of organisations can take comfort following this decision that in making representations on behalf of their organisation, that they will not be held personally liable for those representations where they could not be expected to have any particular knowledge or expertise relevant to the representations.