Banks not misled in $2.8bn Arrium collapse: court

A consortium of banks have failed to prove that executives of steel giant Arrium misled them when drawing down debt ahead of its $2.8bn collapse.

The steelworks at Whyalla. Picture: Simon Cross

Lenders to failed steelmaker Arrium have failed to prove senior executives misled bankers while drawing down credit lines ahead of the company’s spectacular $2.8bn collapse, the NSW Supreme Court has ruled.

On Tuesday Justice Michael Ball dismissed dual proceedings brought by two groups of lenders to the former operator of the Whyalla Steelworks in the wake of it entering voluntary administration in 2016, saying claims the company was insolvent when it was drawing down debt lines required “an impermissible use of hindsight”.

The first consortium, including CBA and Deutsche Bank and led by Anchorage Capital, began proceedings in 2018. The second, led by China’s Bank of Communications (BOC) and backed by Westpac and Spanish bank BBVA, commenced proceedings a year later.

The Anchorage group alleged former Arrium CFO Robert Bakewell, Arrium group treasurer Delia Sparkes and employees who were signatories to the debt drawdowns engaged in deceptive and misleading conduct in contravention of the Australian Consumer Law (ACL) and the Corporations Act.

This was because Mr Bakewell and Ms Sparkes were allegedly drawing down on debt facilities extended to them based on assurances signed by employees that Arrium was both solvent and had not changed its financial position, constituting a “material adverse effect” while knowing the opposite was true, making them personally liable.

The BOC group also alleged Mr Bakewell and Ms Sparkes engaged in misleading and deceptive conduct in violation of the ACL in relation to the solvency and financial position assurances.

Arrium’s mining and steel divisions were acquired by Sanjeev Gupta’s GFG Alliance in 2017. Picture: AAP

But Justice Michael Ball ruled on Tuesday the lenders failed to prove Arrium’s financial position had been misrepresented, while the conclusion that Arrium was not solvent at the time required impermissible use of hindsight. He said there was no indication the company would “run out of cash” before the debts came due, causing loss to the lenders.

“Essentially, the case is that because of the decrease in the price of and demand for key commodities, particularly iron ore and steel, Arrium was making unsustainable losses that meant that it faced an increased risk that it would run out of cash before it could sell assets for a sufficient price to enable it to repay the facilities,” Justice Ball said.

“The BOC plaintiffs rely heavily on the fact that Arrium did go into voluntary administration on 7 April 2016, which was said to be evidence that Arrium was insolvent at that time and insolvent at the time the drawdowns were made. Neither of those propositions is correct.

“The fact that Arrium was insolvent on 7 April 2016 (if it was a fact) may be evidence that, as at January or February 2016, Arrium was likely to become insolvent … But it is not evidence that Arrium was insolvent in January or February 2016.”

Justice Ball also ruled the employee signatories to the agreements relating to the Anchorage proceeding did not personally owe the lenders any duty of care, while in relation to the BOC proceeding, Mr Bakewell and Ms Sparkes did not act personally.

“In my opinion, this is a case where the signatories merely acted as a corporate organ, and their own conduct could not be said to have a tendency to lead the Lenders into error,” he said.

A cross-claim by Mr Bakewell against law firm Herbert Smith Freehills was also dismissed.

Arrium’s mining and steel divisions were acquired by Sanjeev Gupta’s GFG Alliance in 2017.

Earlier this year the BOC party reached a settlement with Sarah Pearce, who succeeded Ms Sparkes as Arrium’s group treasurer in early 2016, while Arrium’s liquidators KordaMentha settled a third action against a number of former directors in May.

A shareholder action against Arrium’s board and auditor KPMG was filed in the Victorian Supreme Court earlier this year.

Originally published as Banks not misled in $2.8bn Arrium collapse: court